2020 (2) TMI 67 - AT - Income Tax

Disallowance of interest u/s 24(b) - whether there is no interest free advances to the directors during the year? - HELD THAT - Issue of re-payment of loan and settlement of account was over at the end of the financial year 2007-08. Similarly in case of Smt. Jai Mala Agarwal, the loan amount was ₹ 70,80,000/- whereas the AO has wrongly mentioned as ₹ 45,00,000/- and repayment was made by the assessee at ₹ 65,80,000/-, therefore, there is no excess payment in that case. We find from the ledger account that the account of Smt. Jai Mala Agarwal was settled before the end of the financial year 2007-08 and there was no excess payment or outstanding. Once the accounts of these three directors were settled before the end of the financial year 2007-08 by utilizing the loan taken from the ICICI Bank, no disallowance on account of interest expenditure for the assessment years 2010-11 and 12-13 is called for. Since the entire loan amount availed by the assessee from ICICI Bank was finally utilized for repayment of the loans taken from the Directors before the end of the financial year 2007-08, then the issue was no more survived thereafter and consequently for the assessment year under consideration no disallowance is called for on account of interest expenditure. Accordingly, in the facts and circumstances of the case, we delete the disallowance made by the AO on account of interest payment under section 24(b) of the Act - Decided in favour of assessee.

Summary

Issues:
Challenging reassessment order passed under section 147 of the IT Act.
Disallowance of interest under section 24(b) of the IT Act.

Analysis:
1. Challenging reassessment order: The assessee challenged the reassessment order passed under section 147 of the IT Act. The first ground raised was regarding the confirmation of the action of the AO in passing the order under section 143(3)/147 of the Income Tax Act, 1961. The assessee did not press this ground before the ITAT, and it was dismissed for not being pressed.

2. Disallowance of interest under section 24(b): The second ground was related to the disallowance of interest under section 24(b) of the IT Act. The AO disallowed the deduction claimed by the assessee on account of interest on borrowed capital, as the borrowed fund was not utilized for acquiring the house property against which the deduction was claimed. The AO found that a portion of the loan amount was not utilized for loan repayment but for excess payment to some Directors, leading to a proportionate disallowance of the interest deduction. The CIT (A) upheld this disallowance, stating that certain amounts were utilized for excess payments to Directors. However, the ITAT found discrepancies in the AO's calculations and noted that the accounts were settled before the end of the financial year 2007-08. As the entire loan amount from ICICI Bank was utilized for repayment of loans from Directors, no disallowance on interest expenditure for the assessment years 2010-11 and 2012-13 was warranted. Consequently, the ITAT deleted the disallowance made by the AO under section 24(b) of the Act for both assessment years.

In conclusion, the ITAT allowed the appeals of the assessee, emphasizing that the disallowance of interest expenditure under section 24(b) was unjustified given the utilization of the loan from ICICI Bank for repayment of loans from Directors before the end of the financial year 2007-08.