2024 (12) TMI 1210 - AT - Income Tax

Disallowance of interest expenditure - interest income from advances made to group concerns, claimed deduction for interest expenditure - HELD THAT - Borrowed funds have been utilized by the assessee for advancing loans to certain parties from whom interest income has been indeed earned by the assessee. Hence, one-to-one nexus has been proved beyond doubt. Accordingly, the interest expenditure paid by the assessee on the unsecured loans becomes an allowable expenditure for the purpose of earning interest income in terms of section 57(iii). Accordingly, we direct the AO to grant deduction on account of interest paid and ground no. 1 raised by the assessee is hereby allowed. Addition of unsecured loans received - Loan received from Mr Piyush Kumar, was repaid and thereafter fresh loan was received from the said party. AO in the assessment had added both old as well as the fresh loans. Once the second loan of Rs 5 lakhs is accepted as genuine and found to be satisfactory, there is no case for treating the earlier loan of Rs 20 lakhs from the same party to be non-genuine. Hence we direct the learned AO to delete the addition of Rs 20 lakhs received from Mr Piyush Kumar. Addition on account of unsecured loans was made by the learned AO u/s 69A - Mentioning of wrong section - onus to prove - For section 69A the basic pre-condition is that assessee should be found to be the owner of any money, bullion, jewellery, etc. for which assessee was not able to explain the source thereon or the explanation found given by him was not found to be satisfactory in the opinion of the AO. In the instant case, no such satisfaction per se has been recorded by the learned AO or by the learned CITA that assessee was found to be the owner of any money, bullion, jewellery, etc. On the contrary, assessee has merely received loans from certain parties - CIT-A sought to examine the veracity of the loans from the angle of section 68 of the Act by asking the assessee to prove the three ingredients of section 68. Though mentioning of wrong section may not be fatal to the addition that is being made, the burden of proof clearly shifts from assessee to the department when provisions of section 69A are being invoked. There is a huge difference between burden and onus of proof in terms of section 68 and 69A of the Act. This being not satisfactorily explained by the revenue in the instant case, we hold that no addition could be made in the hands of the assessee for the loans received from certain parties u/s 69A of the Act. Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest expenditure
2. Addition of unsecured loans received

Analysis:

1. Disallowance of interest expenditure:
The appeal addressed the disallowance of interest expenditure by the Assessing Officer (AO) and the subsequent confirmation by the Commissioner of Income Tax (Appeals) (CIT(A)). The appellant challenged the disallowance of interest expenditure of Rs 1,50,045. The appellant, an individual deriving income from various sources, primarily interest income from advances made to group concerns, claimed deduction for interest expenditure restricted to Rs. 28,74,126. The AO disallowed the entire interest expenditure, but the CIT(A) restricted the disallowance to Rs. 2,10,045. The Tribunal found a clear nexus between the borrowed funds and the utilization for advancing loans, leading to interest income. Consequently, the interest expenditure was allowed as a deduction under section 57(iii) of the Income-tax Act, 1961. The ground raised by the appellant was allowed.

2. Addition of unsecured loans received:
The issue revolved around the addition of Rs 36 lakhs as undisclosed income under section 69A of the Act, concerning unsecured loans received during the year. The AO treated the entire amount of unsecured loans as undisclosed income, but the CIT(A) admitted additional evidence provided by the appellant. The CIT(A) found compliance with the three ingredients of section 68 of the Act in respect of certain loans, thereby restricting the addition to Rs 36 lakhs. The Tribunal noted discrepancies in the AO's approach, emphasizing the distinction between burden and onus of proof under sections 68 and 69A of the Act. As the revenue failed to establish the appellant's ownership of undisclosed assets, the addition under section 69A was deemed unwarranted. The Tribunal directed the AO to delete the addition of Rs 20 lakhs and allowed the appellant's appeal against the addition of unsecured loans.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the decisions on both issues.