2021 (8) TMI 126 - AT - Income Tax

Disallowance u/s 36(1)(iii) - assessee has paid interest on secured loan more whereas it has given interest free advance less - HELD THAT - AO, in the instant case, without considering the interest earned by the assessee, has disallowed an amount of ₹ 13,41,068/- being the proportionate interest on interest free advances of ₹ 1,12,03,500/-. In the instant case, disallowance, if any, can be made on the interest free advances of ₹ 17,40,000/- given to Mr. Nazuk Jindal since the same is admittedly for non-business purposes - while computing the proportionate disallowance of interest free advances, the AO has to consider the interest earned on government securities and short-term deposits which was shown separately by the assessee as Income from other sources from the total interest deposited in the Profit Loss Account to the tune of ₹ 27,11,471/-. For computing the proportionate disallowance of interest on the interest free non-business advance of ₹ 17,40,000/-, the AO is directed to set off the interest income of ₹ 9,15,626/- and, thereafter compute the proportionate disallowance. To this extent, the order of the CIT(A) is modified and the ground raised by the assessee is partly allowed. Appeal filed by the assessee is partly allowed.

Summary

Issues:
- Disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act
- Disallowance of interest free advances for non-business purposes

Analysis:
1. The appeal was against the order of the CIT(A) relating to the assessment year 2015-16. The AO disallowed an amount of ?27,11,471/- as interest paid on a secured loan, citing that interest-free advances of ?1,12,03,500/- were given. The CIT(A) upheld this disallowance based on precedents.

2. The assessee argued that the interest paid was justified due to commercial expediency, supported by own interest-free funds of ?75.58 lakhs. The AO, however, disallowed the interest. The Tribunal noted the discrepancy between interest-free advances and own funds, leading to the disallowance under sections 36(1)(iii) and 37(1) of the Act.

3. Grounds raised by the assessee included challenges to the CIT(A)'s order on various aspects. The counsel argued that the interest paid had a direct nexus with business expediency and should not be disallowed. They referenced decisions to support their case.

4. The Tribunal considered the arguments and evidence presented by both sides. It noted that out of the total interest-free advances, only a portion was for non-business purposes. The Tribunal found merit in the assessee's contentions and modified the order. It directed the AO to set off interest income earned by the assessee against the proportionate disallowance of interest on non-business advances.

5. Ultimately, the Tribunal partly allowed the appeal, modifying the disallowance to account for the interest income earned by the assessee. The decision was pronounced on 03.08.2021, providing relief to the assessee on the disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act.