2017 (6) TMI 454 - AT - Income Tax

Disallowance of interest on loan - lesser rate of interest - income from other sources - Held that - Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Limited (2009 (1) TMI 4 - BOMBAY HIGH COURT) wherein held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In the instant case it is not in dispute that assessee was having her own interest free funds of ₹ 1,51,65,341/- which she advanced to her husband and which she is not supposed to charge any interest. The Revenue Authorities wrongly presumed that assessee should have charged interest on the entire amount of loan given to the husband irrespective of the fact that assessee was having her own interest free funds which was given without interest to her husband. Thus no merit for disallowance / addition to the income of the assessee under the head Income from Other Sources . - Decided in favour of assesse

Summary

Issues: Disallowance of interest on loan

Analysis:
The appeal was filed against the CIT(A)'s order under section 143(3) of the IT Act, specifically challenging the disallowance of interest on a loan amounting to ?11,04,676. The assessee, a partner in a firm, had received a loan from the firm, which was utilized to provide a loan to another individual. The AO contended that the interest charged by the assessee on the loan was lower than what should have been charged, resulting in the addition of ?11,04,676 to the assessee's income under "Income from Other Sources."

The CIT(A) upheld the AO's decision, leading to the appeal before the ITAT. During the assessment proceedings, it was revealed that the assessee had her own interest-free funds available, which were utilized for various purposes. The AO accepted these facts, acknowledging the presence of the assessee's interest-free funds. Additionally, it was noted that the assessee had charged interest to the individual to whom the loan was provided at a rate of 13.27%, which was higher than the interest rate paid on the loan taken from HDFC Bank.

Referring to relevant legal precedents, including a decision by the Bombay High Court, it was emphasized that when interest-free funds are available and investments are made, a presumption arises that the investments are funded by the interest-free funds. In this case, the assessee had sufficient interest-free funds, and it was deemed inappropriate for the Revenue Authorities to presume that interest should have been charged on the entire loan amount given to the husband.

Ultimately, the ITAT allowed the appeal, citing the decision of the Bombay High Court and concluding that there was no merit in the disallowance or addition of ?11,04,676 to the assessee's income under "Income from Other Sources."

In summary, the judgment addressed the issue of disallowance of interest on a loan, highlighting the presence of the assessee's interest-free funds and the incorrect presumption made by the Revenue Authorities. The decision was based on legal precedents and factual analysis, leading to the allowance of the appeal and the rejection of the addition to the assessee's income.