2017 (10) TMI 769 - AT - Income Tax

Disallowance of interest expenditure u/s 36(1)(iii) - Held that - Undisputedly, the Assessing Officer has disallowed part of interest cost amounting to ₹ 14,53,423, on the reasoning that assessee has advanced interest free loans to various parties from borrowed funds. However, from the assessment stage itself, the assessee has pleaded that sufficient interest free fund was available with the assessee to advance interest free loans. In fact, the Assessing Officer also to some extent has accepted assessee s plea by observing that interest free loan of ₹ 74,03,683, was out of interest free funds available with the assessee. It is the claim of the assessee that as on 31st March 2007, the assessee was having interest free funds of ₹ 2,82,13,694, whereas, interest free loans advanced by the assessee stood at ₹ 2,49,75,541. In our considered opinion, the aforesaid contention of the assessee requires verification. In case, the assessee is able to establish the fact that sufficient interest free funds was available to advance interest free loan, no disallowance under section 36(1)(iii) of the Act can be made. In view of the aforesaid, we restore the issue to the file of the Assessing Officer for fresh adjudication in terms with our direction herein above Addition made under section 68 - Held that - the assessee deserves an opportunity to prove the loan transactions through all the legal means available to it. If the assessee can prove the genuineness of the loan transactions by producing any witness, the assessee must be allowed to do so. As far as the contention of the learned Departmental Representative that learned Commissioner (Appeals) should not have deleted the loan standing in the name of Avtar Singh Sethi, as his creditworthiness was not proved, we must observe, in the remand report the Assessing Officer while examining this particular loan transaction has verified the bank account of the said loan creditor and found that the amount of ₹ 2 crore was advanced to the assessee a deposit of ₹ 1.99 crore was made in the account of the creditor. He has also stated that the assessee filed copy of account of the creditor to indicate that the said amount of ₹ 1.99 crore came from the over draft account. In our view, this fact also requires further verification by the Assessing Officer. In case, it is proved that the loan of ₹ 2 crore originated from ₹ 1.99 crore in the over draft account of the creditors, then, there will be no case for addition of the said amount. However, in our view, further enquiry has to be conducted by the Assessing Officer to establish availability of nexus or otherwise between the two amounts. With the aforesaid observations, we restore the matter back to the file of the Assessing Officer for considering afresh.

Summary

Issues Involved:
1. Disallowance of interest expenditure under section 36(1)(iii) of the Income-tax Act, 1961 for A.Y. 2007-08.
2. Addition under section 68 of the Act for unexplained cash credits for A.Y. 2008-09.
3. Addition under section 68 of the Act for unexplained cash credits for A.Y. 2009-10.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure (A.Y. 2007-08):
The assessee, a partnership firm engaged in the business of developing and trading TDR, filed its return declaring an income of ?63,02,700. The Assessing Officer (AO) disallowed ?14,53,423 of interest expenditure under section 36(1)(iii) of the Act, reasoning that interest-free loans were advanced to various parties from borrowed funds. The assessee contended that sufficient interest-free funds were available, and a portion of the interest-free loan was given to a subsidiary for business purposes. The Commissioner (Appeals) upheld the AO's decision. However, the Tribunal found the assessee's claim of having sufficient interest-free funds required verification. The case was restored to the AO for fresh adjudication, directing verification of the availability of interest-free funds and the nature of the advance to Isha Infotech Pvt. Ltd.

2. Addition under Section 68 (A.Y. 2008-09):
During assessment, the AO added back unsecured loans of ?3,70,95,486 as unexplained cash credits due to the assessee's failure to furnish loan confirmations and prove the creditworthiness of creditors. The Commissioner (Appeals) deleted ?2,17,26,615 of the addition after remand report verification but sustained the balance. The Tribunal noted the assessee's claim that loans were arranged through brokers, and some creditors had filed court cases for recovery. The Tribunal admitted additional evidence and restored the matter to the AO for fresh adjudication, allowing the assessee to produce further evidence and witnesses to prove the genuineness of loan transactions. The AO was directed to restrict verification to disputed loan transactions and afford the assessee a fair opportunity to present its case.

3. Addition under Section 68 (A.Y. 2009-10):
The AO treated unsecured loans of ?46.75 lakh as unexplained cash credits and disallowed interest of ?27,71,355. The Commissioner (Appeals) accepted loans amounting to ?21.75 lakh as genuine and allowed interest payment of ?3,09,024, sustaining the addition for the balance loan amount. The Tribunal found the facts similar to the previous year and restored the issue to the AO for fresh adjudication with similar directions as for A.Y. 2008-09, allowing both parties to present their cases and produce necessary evidence.

Conclusion:
The Tribunal allowed all appeals for statistical purposes, directing the AO to re-examine the issues with specific instructions to verify the genuineness of the loan transactions, the availability of interest-free funds, and the nature of advances. The AO must provide the assessee with a reasonable opportunity to present further evidence and witnesses.