2020 (1) TMI 961 - AT - Income Tax

Disallowance u/s 36(1)(iii) out of interest payment on the ground that borrowed funds has not been utilised for business purpose - contention of the assessee is that the amount was not given in the year under consideration - HELD THAT - Question of genuineness, creditworthiness and business expediency is to be verified in the year when this advance was given. Contention that if genuineness, creditworthiness and business expediency is not proved in that year, in that event, the A.O. would be at liberty to make addition in this year as relying on ACIT Vs. Auto Light (India) Ltd 2016 (7) TMI 1557 - ITAT JAIPUR merits acceptance. This Tribunal in the case of ACIT Vs. Auto Light (India) Ltd. (supra), has observed that assessee was required to prove whether on the date of making investment or giving the interest free amount to the sister concern, the assessee was having sufficient interest free funds available with it. For that purpose, the assessee should demonstrate from its cash flow statement and bank account that it has date-wise availability of interest free funds on the date of making advances to the sister concern. What is provided u/s 36 of the Act the deduction on the amount of interest paid on the capital borrowed for the purpose of business or profession, the provision is made applicable on the capital borrowed and has not restricted to the capital borrowed during the year. Therefore, the Tribunal did not accept the contention that restricting disallowance only for the amount borrowed during the assessment year. Therefore, in the light of above, we hereby set aside the assessment order and restore the assessment to the file of the A.O. on this issue for deciding it afresh after verifying whether on the date of making advance or giving the interest free amount to the sister concern, the assessee was having sufficient interest free funds available with it and also whether such amount was given out of any business expediency. In case the A.O. finds that there was no business expediency or availability of interest free funds when the advances were given, he would be free to sustain the impugned addition. Difference in the interest as disclosed by the assessee accrued on FDR and as reflected in form 26AS - HELD THAT - Considering the contention of the assessee that the fixed deposit was matured in the first quarter of financial year 2012-13 relevant to assessment year 2013-14, the A.O. would verify the interest related to the year under consideration and decide this ground afresh - Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest payment under section 36(1)(iii) for non-business purpose.
2. Disallowance of advances to SKIPL.
3. Disallowance of undisclosed interest income.

Issue 1: Disallowance of Interest Payment under Section 36(1)(iii) for Non-Business Purpose:

The appeal challenged the disallowance of ?45,11,593 under section 36(1)(iii) due to borrowed funds not being utilized for business purposes. The Assessing Officer (A.O.) made the disallowance based on discrepancies in interest payments and advances. The CIT(A) upheld the disallowance, prompting the appeal to the Tribunal. The Tribunal noted that the amount in question was not advanced in the relevant year, emphasizing the need to verify genuineness, creditworthiness, and business expediency when the advance was given. Citing a similar case, the Tribunal ruled that the A.O. must ascertain the availability of interest-free funds and business expediency when the advances were made. The assessment order was set aside, directing the A.O. to reevaluate the issue based on the mentioned criteria.

Issue 2: Disallowance of Advances to SKIPL:

The second ground of appeal contested the disallowance of advances to SKIPL. The A.O. questioned the advances made to M/s. S.K. Infrastructure Pvt. Ltd., leading to the disallowance. The CIT(A) affirmed the A.O.'s decision. During the Tribunal hearing, the assessee argued that the amount was not advanced in the relevant year, which required verification of genuineness and business expediency at the time of the advance. Relying on a previous case, the Tribunal set aside the assessment order, instructing the A.O. to reassess the issue considering the availability of interest-free funds and business expediency during the advance.

Issue 3: Disallowance of Undisclosed Interest Income:

The third ground of appeal challenged the addition of ?1,38,437 as undisclosed interest income due to differences in reported interest income and Form 26AS. The A.O. added the difference to the assessee's income, which was upheld by the CIT(A). The Tribunal, considering the maturity of a fixed deposit during the relevant year, directed the A.O. to verify the interest related to the assessment year and review the issue afresh. Consequently, the appeal was allowed for statistical purposes.

This judgment highlights the importance of verifying the genuineness, creditworthiness, and business expediency of financial transactions to determine the tax implications accurately. The Tribunal's decision to set aside the assessment orders in both issues 1 and 2 underscores the need for a thorough examination of the circumstances surrounding advances and interest payments to ensure compliance with tax laws.