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Income Tax Appellate Tribunal, “SMC” BENCH MUMBAI
Before: SHRI PAVAN KUMAR GADALE & SHRI RIFAUR RAHMAN
आदेश / ORDER
PER PAVAN KUMAR GADALE - JM:
1. This appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC)/CIT(A), Delhi passed u/s 250 of the Act. The assessee has raised the following grounds of appeal:
A Grounds of Appeal: -
1. In the facts and the circumstances of the case and in law, the learned Assessing Officer erred in disallowing Rs 4.09,439/- (Rs.1.91.939/- and Rs. 2,17.500/-)/- u/s 57(iii) on account of interest expenses claimed by the Appellant on advances.
2. The AO wrongly charged interest u/s 234 AB. & C.
IB Relief Prayed: - The appellant therefore prays Your Honor:
To delete the disallowance of Rs 4.09,439/- (Rs.1.91.939/- and Rs. 2.17.500/-)/- u/s 57(iii) on account of interest expenses claimed by the Appellant on advances.
2. To delete interest charged u/s 234 A, B, & C.
C General:-
The appellant reserve rights to add alter or delete any portion of this appeal before its conclusion.
This appeal is filed in time and may please be allowed in full.
A Detailed paper book along with case laws will be submitted at the time of hearing
The brief facts of the case are that the assessee is a partner in the Partnership firm M/s Arjan Nongha bhai &Co and claimed the share of profit exempted U/sec10(2A) of the Act and also the assessee receives interest income disclosed under income from other sources. The assessee has filed the return of income for the A.Y 2013-14 on 24.07.2013 disclosing a total income of Rs. 8,06,454/-. Subsequently the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act are issued. In compliance to notice, the Ld. AR of the assessee has appeared from time to time and submitted the details. The AO on perusal of the financial statements found that the assessee has received interest from the parties of Rs.26,73,744/- and claimed deduction of interest expenditure of Rs.18,25,810/- and the net interest of Rs.9,13,243/- was offered under the head income from other sources and the details were called to justify the claim. The assessee has submitted the details vide letter dated 9.02.2016, whereas the A.O was not satisfied with the submissions and find that the assessee was paying interest at an average rate of @15% p.a., whereas the interest received @12% p.a. from two parties (i)Rasiklal B Dedhia and (ii)Euro Office Systems Ltd on the Loans advanced. The assessee has filed the explanations mentioning that the Mr Rasiklal B Dedhia is a brother of the assessee and lower rate of interest is charged and in respect of Euro Office Systems interest is charged@12% being a family concern. The A.O was not satisfied with the submissions as the assessee has obtained loans and paying interest to parties at the average rate @ 15%p.a. The AO is of the opinion that interest is deemed to be received @ 15% which worked out to Rs. 8,09,695/- and after set of the interest received from the above two parties of RS,6,17,756/-the remaining balance amount of Rs.1,91,939/- was taxed 3. (ii) on the second disputed issue, the A.O found that the assessee is paying higher rate of interest expenditure and has not charged the interest on loans advanced in respect of three parties and dealt at 5.4 of the order as under: 5.4 It is further seen from the details on record that the assessee while paying huge interest expenditure, has not charged any interest on the following advances made by her:-
(a) Umakant Sharma Rs14,50,000 (b) Krishna Satra Rs1,20,000 (c) Anju V Daga Rs12,60,000 On being asked about non-charging of interest, it has been submitted by the AR his letter dated 07.3.2016 that in the case of Anju Daga, no interest has n charged as the advances made towards the end of March 2013 and in the case of Krishna Satra, after netting off advances received & paid the assessee has paid interest of Rs.16,179/-. In respect of Umakant Sharma, it has been submitted by the AR that he is a friend of the assessee and hence no interest charged.
5.5The submission of the assessee has been considered but found to be not acceptable in the case of Krusha Satra and Umakant Sharma for the following reasons:
5.6 In respect of Krusha Satrathe assessee has claimed interest expenses of Rs.16,179/- being interest paid to her after netting off advances made received. However, it is seen from the Ledger A/e. of the party that there was an opening balance of Rs.12,50,000/- which was repaid on 25.6.2012 The assessee has not charged any interest on this advances for 3 months. The interest @ 15% on these advances for 3 months alone comes to Rs.46,875/- whereas the assessee claims that she has paid interest of Rs.16,179/- after netting offTherefore, this interest of Rs.46,875/- is also being disallowed from the total interest expenses claimed by the assessee.
5.7 In the case of Umakant Sharmait is the submission of the assessee that he is a friend and hence no interest charged. On one hand the assessee is borrowing money at a huge interest and claims it against interest income received as an expenditure. At the same time, she is diverting such borrowed money to make interest free advances to friends. It is evident from the assessee's own submission that the borrowed fund has also been utilized for not earning any income The interest@ 15% on advances of Rs. 14,50,000/- comes to Rs.2,17,500/- and the same is being disallowed u/s.57(iii) from the interest expenses claimed by the assessee.
5.8 Thus, the total disallowance of interest u/s.57(iii) comes to Rs.4,56,314/- (1,91,939+46875+2,17,500).
On the third disputed issue, the AO found that the assessee has received dividend income of Rs1,562/- and claimed exempt and also Rs.32,835 as a share of profit from the firm and claimed exempt U/sec10(2A) of the Act. Since the assessee has not made the disallowance u/s 14A r.w.r 8D of IT Rules, the AO has issued notice for invoking the provisions.The assessee vide letter dated 7-3-2016 submitted details and working of disallowance. Whereas, the A.O was not satisfied with the explanations and dealt on the provisions and computed disallowance u/s 14A r.w.r. 8D(2)(ii) &(iii) of the I T rules of Rs.60,153/- and assessed the total income of Rs.13,22,920/- and passed the order u/s 143(3) of the Act dated 08.03.2016.
Aggrieved by the order, the assessee has filed an appeal before the CIT(A). Whereas the CIT(A) considered the grounds of appeal
, submissions of the assessee and findings of the AO and confirmed the disallowance u/s 57(iii) of the Act and granted relief in other grounds of appeal and partly allowed the assessee appeal. Aggrieved by the order of the CIT(A), the assessee has filed an appeal before the Hon’ble Tribunal.
6. At the time of hearing, the Ld. AR submitted that the CIT(A) has erred in sustaining the interest irrespective of the fact that the assessee has not received interest from the family friend and legal proceedings are initiated for the recovery of amount and on the second issue, lower rate of interest is charged on the loan transactions with the family member concerns. Further the Ld. AR submitted that the assessee has surplus funds/ own funds, which are utilized for the purpose of loan transactions and relied on the judicial decisions and substantiated the submissions with the factual paper book and prayed for allowing the assessee appeal. Contra, the Ld.DR relied on the order of the CIT(A).
7. We heard the rival submissions and perused the material on record. The Ld.AR submitted that the CIT(A) has erred in confirming the addition of notional interest overlooking the facts and submissions in the proceedings. Whereas the AO has estimated the deemed interest based on the rate of interest charged by the lender of the funds to the assessee.. The contentions of the Ld. AR that the assessee has filed the return of income disclosing the interest income under the in income from other sources, and placed at page 1 of the paper book with the computation of income. The contentions of the Ld. AR that the assessee has filed substantial information, evidences in support of claim referred at page 8 & 9 of the paper book and the assessee has own capital Rs.1,16,21,055/- and the loans and advances provided to Shri. R. B. Dedhia and M/s Euro Office Systems Ltd. are aggregated to Rs.36,18,980/-. Further the assessee has not received interest on loan provided to Mr Umakant Sharma and the legal proceedings are initiated for the recovery of amount in District court, Udaipur and the Ld.AR demonstrated proof of suit filed for recovery placed at page 10 to 24 of the paper book.
Further the assessee has substantial surplus funds and referred to the financial statements explaining that the assessee has capital account balance, which is more than the loans provided by the assessee to the parties. The Ld.AR relied on the judicial decisions in support of surplus funds availability and the investments/ funding is considered out of surplus funds. The assessee has received interest on loans from the parties and same was offered for taxation and claimed the deduction of interest payments made. Therefore, the action of the AO in treating the differential interest based on the average lending rate of interest paid by the assessee cannot be basis and only real income has to be taxed and not notional income. Further the loan transactions of the assessee are not doubted and the revenue has accepted the system of accounting. Accordingly, the action of the AO in charging the notional interest overlooking the facts of business relation and further in the case, where the recovery of principle is doubtful and the assessee has filed the suit in the court, the chargeability of interest is not a prudent practice and is not tenable. Accordingly, we set aside the order of the CIT(A) and allow the grounds of appeal in favour of the assessee. 9..In the result, the appeal filed by the assessee is allowed.