2021 (6) TMI 303 - AT - Income Tax

Disallowance of interest u/s. 36(1)(iii) - amount advanced which was computed @15% on the monthly balances - year of assessment for advances and borrowings - HELD THAT - As outstanding debit entries do not pertain to the assessment year under consideration and the assessee had sufficient interest free capital to meet these advances during the years when these advances were made. The authorities below have neither given any cogent reasons for rejecting the contention of the assessee based on the audited books of account nor brought on record any evidence to rebut the contention of the assessee. There is no evidence on record to arrive at the conclusion that the advances in question were made during the year relevant to the assessment year under consideration and the assessee had utilized the interest-bearing funds for giving interest free loans to the above five parties. Hence, we find merit in the arguments of the Ld. Counsel for the assessee that the impugned order is not sustainable in law. Further, we are of the considered view that the impugned order is contrary to the evidence on record and also against the settled principles of law. Accordingly, we set aside the impugned order passed by the Ld. CIT(A) and direct the AO to delete the addition made on account of disallowance u/s. 36(1)(iii) - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest u/s. 36(1)(iii) amounting to ?39,04,797.

Analysis:
The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2013-14, where the disallowance u/s. 36(1)(iii) of the Income Tax Act, 1961 was partly allowed. The assessee challenged the disallowance of interest amounting to ?39,04,797 made by the Assessing Officer (AO). The Commissioner partly allowed the appeal reducing disallowance on certain expenses but upheld the disallowance of interest. The assessee contended that the partners had sufficient non-interest-bearing funds to cover the advances made. The Counsel argued that the advances were made from reserve capital of the partners and were outstanding since earlier accounting periods. The Counsel relied on various court judgments to support the contention that the disallowance was not justified. The Departmental Representative supported the CIT(A)'s order, stating that the assessee failed to substantiate its claim during proceedings. The Tribunal examined the contentions and evidence presented. It noted that the outstanding debit balances did not relate to the assessment year in question and that the assessee had enough interest-free capital to cover the advances during the relevant years. The Tribunal found merit in the assessee's arguments, stating that the CIT(A)'s order was not sustainable in law. It concluded that the order was contrary to the evidence and legal principles, directing the AO to delete the disallowance of ?39,04,797 made under section 36(1)(iii) of the Act.

This detailed analysis highlights the key arguments, legal principles, and evidentiary considerations leading to the Tribunal's decision to set aside the CIT(A)'s order and direct the deletion of the disallowance of interest.