2014 (1) TMI 238 - AT - Income Tax

Disallowance of interest on interest free loan - Held that - The assessee has not placed any documents to establish the fact that the interest bearing funds from financial institutions were not taken during the year and was not utilised for interest free advances given to the sister concern - There is nothing on record to show that the entire term loan taken was utilised for the construction of the house property - The issue was restored for fresh adjudication - If the assessee is able to establish with supporting evidence the fact that the loan taken from the bank on which interest was being paid was utilised for the purpose of construction of the house property and has no nexus with the interest free advances made to sister concerns then no disallowance should be made from the interest payment.

Summary

Issues Involved:
Disallowance of interest on interest-free loans advanced to sister concerns.

Analysis:
The appeal pertains to the disallowance of interest amounting to Rs.35,59,820/- by the Assessing Officer due to interest-free loans given by the assessee to sister concerns. The assessee contended that the loans were given out of commercial expediency and not from borrowed funds. The CIT (A) upheld the disallowance, stating that the assessee failed to establish a nexus between interest payments and the interest-free loans. The CIT (A) reasoned that had the interest-free advances not been made, the interest expenditure would have been lower. The CIT (A) also noted the lack of proof regarding the commercial expediency of the loans. The assessee argued that the interest-free loans were made from surplus funds, not borrowed funds, and requested a remittance to the Assessing Officer for verification.

The ITAT observed that the assessee had not shown any business income but declared income from house property, claiming interest deduction under section 24 of the Act. The ITAT noted that the interest-free loans were given to closely related parties and questioned the nexus between interest payments and the loans. The ITAT found that the assessee did not provide evidence that borrowed funds were not used for interest-free loans. Consequently, the ITAT decided to remit the matter to the Assessing Officer for further examination. The Assessing Officer was directed to consider all factual aspects and allow the deduction if the borrowed funds were used for the house property and not for interest-free loans. The ITAT allowed the appeal for statistical purposes, emphasizing a fair opportunity for the assessee during the reassessment.

In conclusion, the ITAT's judgment focused on establishing a clear link between interest payments and interest-free loans. The decision highlighted the necessity of providing concrete evidence regarding fund utilization to support deduction claims. The case underscores the importance of thorough documentation and substantiation of financial transactions to avoid disallowances and ensure tax compliance.