2021 (9) TMI 391 - AT - Income Tax

Disallowance of interest paid on loan - interest expenditure nexus to the interest income earned - HELD THAT - Major amount of loans were taken in the preceding years and amount advanced to M/s Sneha Medicare Pvt. Ltd. The assessee is consistently claiming interest expenditure against the interest income. There is a positive interest income at the end of the year. Nexus of amount received during the year to the amount advanced to Sneha Medicare Pvt. Ltd. is also appearing from record. The details filed before us including the ledger account of Sneha Medicare Pvt. Ltd. complete details of unsecured loans taken by the assessee including the details of opening balance, addition, repayment, interest and rate of interest and also the date-wise details of interest received during the year and also considering the fact that no abnormal rate of interest has been paid on the loans taken during the year and thus are inclined to hold that the alleged claim of interest expenditure has nexus to the interest income earned from Sneha Medicare Pvt. Ltd. and thus deserves to be allowed u/s 57(iii). Unexplained cash credit u/s 68 - Disallowing unsecured loan - HELD THAT - The confirmation of accounts has also been filed which contains the complete address and PAN No. of the cash creditor. Non-filing of return in a particular year cannot be held to be a sole basis to treat the cash credit as unexplained. All these documents filed by the assessee stand un-rebutted by the Departmental Representative as no contrary material is placed before us. Also no independent inquiry has been conducted by both the lower authorities to controvert the submissions made by the assessee at the time of assessment proceedings and appellate proceedings. Considering the documents filed before us including copy of ledger account, bank statements, confirmation of account, copy of the PAN and Address, are of the considered view that the assessee has been successful to prove the identity and credit worthiness of Vanleela P. Mehta and genuineness of the alleged transaction. We thus delete the addition made u/s 68. Disallowance of business expenditure claimed to have been incurred wholly and exclusively for the purpose of business - HELD THAT - As alleged disallowance made by the AO has not been made on the basis of any irregularity found in the documents and books maintained. The expenditure claimed by the assessee are normal business expenditure. Though they have been incurred in cash but they are incidental for earning commission income. The total expenditures of ₹ 1,08,105/- has been claimed against the commission income of ₹ 1,65,000/- leaving behind the positive income of ₹ 68,895/- - The alleged disallowance prima facie seems to be an ad-hoc disallowance which in our considered view was not called for. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest paid on loan
2. Disallowance of unsecured loan
3. Disallowance of business expenditure

Issue 1: Disallowance of interest paid on loan
The assessee challenged the disallowance of interest paid on a loan taken, claiming it was paid against interest income earned. The ITAT observed the interest income included income from a company to which the loan was given. Detailed analysis of ledger accounts and transactions showed a nexus between the interest expenditure claimed and the interest income earned. Considering the details provided, the ITAT allowed the claim under section 57(iii) of the Income Tax Act, deleting the disallowance of ?13,49,531.

Issue 2: Disallowance of unsecured loan
The assessee contested the addition of ?5,00,000 as unexplained cash credit under section 68 of the Act. The ITAT examined documents including bank statements, PAN details, and income tax return filings of the creditor. It was noted that the creditor had a history of filing returns, and the transactions in the bank account were regular. As no contrary evidence was presented by the Revenue, and considering the documents provided by the assessee, the ITAT concluded that the identity and creditworthiness of the creditor were established. Consequently, the addition under section 68 was deleted.

Issue 3: Disallowance of business expenditure
The additional ground raised by the assessee challenged the disallowance of business expenditure of ?1,08,105. The ITAT found no irregularities in the documents and books maintained by the assessee. The claimed expenditures were considered normal business expenses, essential for earning commission income. Despite being incurred in cash, the expenses were deemed legitimate and necessary. The ITAT held that the disallowance made by the Assessing Officer was ad-hoc and unwarranted. Therefore, the ITAT allowed the additional ground raised by the assessee, deleting the disallowance of business expenses.

In conclusion, the ITAT allowed the appeal filed by the assessee, overturning the decisions of the lower authorities on all three issues. The judgment highlighted the importance of establishing a clear nexus between income and expenditure, verifying the creditworthiness of creditors, and ensuring the legitimacy of business expenses for tax purposes.