2019 (3) TMI 1155 - AT - Income Tax

Addition of notional interest - availability of non-interest bearing funds - whether advance given for business exigencies? - appellant is not in the business of money lending - HELD THAT - Assessee had availed cash credit facility long back and that the sums advanced were made during the relevant previous year as such there was no nexus between sums borrowed with funds advanced to M/s Dashmesh Steel Hypermart. It is also claimed the advance was given for business exigency i.e to avail a discount of 10% on the purchases made from M/s Dashmesh Steel Hypermart and on total purchases of ₹ 41.10 lakh a discount of ₹ 3,98,920.00 has been received. Thereafter, due to supply chain issues with M/s Essar Steel, the assessee was given to understand that discount further shall not be given by M/s Dashmesh Steel Hypermart, as such purchases were stopped. Further that a part of advance was returned back aggregating to ₹ 1.22 Crores. In this regard the in the case of Reliance Utilities & Power Pvt. Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT held that the disallowance out of interest expenditure is not called for when the assessee has got sufficient own funds. Where the assessee has own funds as well as borrowed funds, a presumption can be made that advances given for non business purposes have been made out of own funds. A similar view has been held by the Hon ble Supreme Court in Munjal Sales Corporation vs. CIT 2008 (2) TMI 19 - SUPREME COURT . Therefore, the contention of the Assessee that no disallowance of interest was called for as it had non-interest bearing funds available in its capital account was not found to be justified by the CIT(A). As pointed out by the AO, the Assessee had only funds to the extent of ₹ 1,02,54,062/- as on 31/03/2QJ0 in the partner s Capital account, therefore only to this extent it can be considered that non-interest bearing funds were available, accordingly on balance funds (Rs 3,43,00,000/- less ₹ 1,02,54,062/-) the disallowance of interest was valid. Therefore, the AO was rightly directed to recompute the disallowance of interest by the Ld. CIT(A) - decided against assessee.

Summary

Issues Involved:
- Disallowance of notional interest on advance given for business exigencies

Analysis:
1. The Assessee filed an appeal against the Order of the Ld. CIT(A) regarding the disallowance of notional interest amounting to ?19,95,638. The Assessee argued that the Ld. CIT(A) erred in confirming the additions without considering the facts. The Assessee contended that the advance given was from its own funds, not from a cash credit account, and that the notional interest disallowed was legitimate. The Assessee also claimed that the impugned order was not in line with natural justice.

2. The case revolved around the assessment year 2010-11, where the Assessee's return declared a total income of ?6,08,991 as a firm. The assessment was completed under section 143(3) of the Income Tax Act, 1971, with total income assessed at ?7,21,050. The scrutiny revealed transactions with a sister concern, leading to the disallowance of notional interest on an interest-free advance given. Despite the Assessee's explanations, the AO disallowed ?19,95,638 as proportionate interest, resulting in an increased assessed income of ?11,62,630 under section 147/143(3) of the Act.

3. During the hearing, the Assessee argued that the disallowance was unjustified as the advance was for business exigencies and not money lending. The Assessee highlighted that the funds were from its capital account, not a cash credit account. The Assessee presented written submissions and financial statements to support the claim. However, the Ld. CIT(A) partly allowed the appeal, directing the AO to recompute the disallowance.

4. The Tribunal considered the issue of disallowance of notional interest on the advance to the sister concern. It noted that the funds were from the Assessee's capital account, not borrowed funds. The Tribunal cited precedents stating that when an assessee has sufficient own funds, disallowance of interest is not warranted. However, as the Assessee had limited non-interest bearing funds, the disallowance of interest was upheld. The Tribunal affirmed the Ld. CIT(A)'s decision to recompute the disallowance, leading to the dismissal of the Assessee's appeal.

5. In conclusion, the Tribunal upheld the Ld. CIT(A)'s order on the disallowance of notional interest, emphasizing the availability of non-interest bearing funds from the Assessee's capital account. The Tribunal rejected the Assessee's grounds and dismissed the appeal, affirming the recompute directive by the Ld. CIT(A) for the disallowed interest amount.

6. The Appeal of the Assessee was ultimately dismissed by the Tribunal, and the decision was pronounced on 19-03-2019.