SMT. RUPAL PIYUSH CHHEDA ,MUMBAI vs. DCIT, CIRCLE 20(1), MUMBAI

Briefly, the facts of the case are that the return of income filed by the assessee was selected for complete scrutiny and during the course of assessment proceedings, a show cause was issued to the assessee to furnish necessary supporting documentation in terms of various loan transactions undertaken by the assessee. In response, the assessee filed relevant documentation which were considered and the Assessing

The assessee thereafter carried the matter in appeal before the ld. CIT(A) who has since sustained the order and the findings of the Assessing Officer. As per ld. CIT(A), the assessee received a sum of Rs. 20,00,000/- through banking channels from three entities during the financial year 2017-18 and while identity stand tentatively established through account-payee credits and rudimentary confirmations, the edifice collapses on creditworthiness scrutiny. For Vijay Oil Mills, no PAN exists and neither ITR nor financial statements were furnished despite specific show cause, for Almac Enterprises and Prafull S. Chheda HUF, the assessee has only provided ledger extracts and repayment proofs without balance sheet reflecting capacity or source of lending funds and the interest payments while evidentiary of the transaction flow, cannot substitute for capacity proof as repeatedly held judicially and subsequent repayments in F.Y. 2019-20, even if genuine, cannot retrospectively validate unexplained credits and the action of the Assessing Officer in invoking provisions of Section 68 were confirmed. Regarding disallowance of interest, the ld. CIT(A) stated Section 57(iii) permit deduction of expenditure laid out or expended “wholly and

Against the said order, the assessee is in appeal before us.

Regarding the disallowance u/s. 68 of the Act, the ld AR submitted that the assessee has furnished the requisite documentation and our reference was drawn to the assessee’s paper book and it was submitted that regarding Almac Enterprises, the assessee has submitted copy of its bank statement highlighting the loan taken plus interest payment with confirmation of accounts by the party, the ledger account of the assessee in the books of M/s Almac Enterprises, the bank account of Almac Enterprises which demonstrates the availability of funds at the relevant point in time. In respect of Prafull S. Chheda HUF, it was submitted that the assessee has again submitted copy of its bank account, confirmation of accounts by the party, the bank account of Prafull S. Chheda HUF and in respect of Vijay Oil Mills, the assessee has submitted the bank account, confirmation of accounts, the bank

Regarding disallowance of interest u/s. 57(iii) of the Act, it was submitted that it is not in dispute that the assessee is eligible for claim of interest u/s. 57(iii) of the Act. In this regard, our reference was drawn to the financial statements, wherein the assessee has received a sum of Rs.1,32,27,374/- as interest which has been duly offered to tax and against that, the assessee has claimed an amount of Rs. 1,20,14,609/-. It was submitted that the limited dispute relates to the rate of interest at which the assessee has advanced the funds and the rate of interest at which the assessee has availed the funds. It was submitted that these are old running transactions which have been carried forward from the earlier assessment years and no dispute as such has been raised by the Assessing Officer in any of the earlier years and it is only in the year under consideration, the Assessing Officer has questioned the rate of interest so paid by the assessee. It was submitted that the assessee has sufficient own funds as so acknowledged by the ld. CIT(A), at the same time, merely because the borrowing cost was at a higher rate of interest as against the low rate of interest on the interest accrual, the Assessing Officer has disallowed the claim of the interest expense amounting to Rs.16,05,395/- ignoring the average rate of interest at which the funds were borrowed which comes to 11.88%. It was further submitted that no basis has been provided by the Assessing officer to benchmark the rate of interest and how the rate of interest @ 12% has been determined by the AO and that too, for unsecured loan transactions which typically carry a higher rate of interest. Reliance was placed on the Coordinate Raipur Bench decision in case of Sunil Bardiav. ITO, [2023] 155taxmann.com 539 (Raipur-Trib.), wherein it was held that even though the income earned by the assessee by way of interest was not equal to percentage of interest in terms of interest expenditure, the same could not be a reason to disqualify the

The ld. DR has been heard, who has relied on the order of lower authorities.

We have heard the rival contentions and perused the material available on record. Firstly, regarding disallowance u/s 68 of the Act, the limited area of dispute relates to establishing the creditworthiness of the three parties to advance the loan funds to the assessee and copy of the financial statement, tax return as well as bank statement for the relevant period will no doubt help establish their creditworthiness and the Assessing officer has rightly sought these documentation from the assessee. Except for the bank statement and copy of tax return for one of the parties, the assessee has shown her inability to furnish these documentation inspite of reaching out to the parties as the parties have shown reluctance in sharing these personal documentation with the assessee and at the same time, they have shown their willingness to share the same where the same is sought directly by the Assessing officer. In this regard, we find that the assessee did reach out to the Assessing officer and had requested to issue the notice directly to these parties seeking the necessary documentation. However, there is nothing on record which suggests that the Assessing officer has issued such a notice either during the assessment or any remand report called during the appellate proceedings. In light of the aforesaid facts, we deem it appropriate to set-aside the matter to the file of the Assessing officer for

Regarding disallowance of interest, it is the claim of the assessee that average rate of interest was 11.88% at which the loans were taken and therefore, the Assessing officer was not correct in disallowing interest higher than 12% and in any case, no basis has been provided by the Assessing officer to benchmark the rate of interest and how the rate of interest @ 12% has been determined by the AO and that too, for unsecured loan transactions which typically carry a higher rate of interest. It has been further contended before us that these are old outstanding loan transactions and which have been continued during the year and no adverse inference has been drawn in earlier years and the interest so claimed has been allowed in the earlier years. We find merit in the contentions advanced by the ld AR that where the AO wishes to benchmark the rate of interest, the rate of interest so employed by the AO has to satisfy the comparability test of similar situated transactions, however, in the instant case, no basis has been provided by the AO as to how he has arrived at the benchmark rate of 12% in respect of similar situated unsecured loan transactions. Therefore, on this ground itself, we find that the addition so made by the AO deserve to be deleted and in any case, no dispute has been raised in terms of genuineness of claim of the interest expenditure and nexus thereof with earning of interest income and the fact that these are loan transactions executed and carried forward from earlier years. In the result, the ground of appeal is allowed.