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2024 (3) TMI 517 - AT - Income TaxDisallowance of interest expenses u/s 37 - AO noted that assessee has advanced total loans/advances to outside parties at less than 4% of charged interest rate - HELD THAT - We note that assessee s own funds are more than the interest free advances, therefore no disallowance should be made in the hands of the assessee, hence, we delete the addition. Addition on account of notional rent - Fair rent determination - HELD THAT - We have gone through the findings of the AO and noted that assessee has been using these houses for self-purposes and therefore no notional rent has arisen, therefore, based on this factual position, we delete the addition. Appeal filed by the assessee is allowed.
Issues Involved:
1. Disallowance of interest expenses claimed u/s 37 of the Income Tax Act, 1961. 2. Addition on account of notional rent. Summary: Issue 1: Disallowance of Interest Expenses u/s 37 The assessee challenged the disallowance of interest expenses amounting to Rs. 52,30,972/- claimed u/s 37 of the Income Tax Act, 1961. The Assessing Officer (AO) noted that the assessee had advanced loans amounting to Rs. 25,48,87,911/- but reported an interest income of only Rs. 96,40,693/-, which was less than 4% of the charged interest rate. The AO found that the assessee had given interest-free advances totaling Rs. 12,02,24,485/- and claimed interest expenses of Rs. 66,05,801/-. The AO disallowed Rs. 52,30,972/- of the interest expenses, determining that 79.18% of the interest-bearing funds were diverted to interest-free advances. On appeal, the CIT(A) upheld the AO's decision, stating that the assessee failed to prove that the borrowings were for commercial expediency. The assessee argued that it had sufficient own funds to cover the interest-free advances, as evidenced by the balance sheet showing own capital of Rs. 27.91 crores against loans and advances of Rs. 25.48 crores. The assessee also provided a chart showing consistent interest income and expenses over previous years, which had been accepted by the department. The Tribunal found that the assessee's own funds exceeded the interest-free advances, relying on precedents from the ITAT and the Gujarat High Court, which held that when interest-free funds are available in excess of the advances, no disallowance should be made u/s 36(1)(iii). Consequently, the Tribunal deleted the addition of Rs. 52,30,972/- and allowed the appeal on this ground. Issue 2: Addition on Account of Notional Rent The AO added Rs. 3,04,000/- as notional rent for two properties owned by the assessee, which were not shown as self-occupied. The AO determined the annual lettable value (ALV) based on fair market value and average rent in the locality. The CIT(A) upheld this addition. The assessee contended that both properties were self-occupied and no notional rent should be added. The Tribunal reviewed the submissions and found that the properties were indeed used for self-purposes. Therefore, the Tribunal deleted the addition of Rs. 3,04,000/- and allowed the appeal on this ground. Conclusion: The appeal filed by the assessee was allowed, with both the disallowance of interest expenses and the addition on account of notional rent being deleted. The order was pronounced on 27/02/2024 in the open court.
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