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Income Tax Appellate Tribunal, DELHI “SMC-1” BENCH: NEW DELHI
Before: SHRI KUL BHARAT
This appeal filed by the assessee for the assessment year 2016-17 is directed against the order of learned CIT(A), Faridabad dated 18.03.2020.
The assessee has raised following grounds of appeal:-
1. “That under the facts and circumstances of the case the Ld. CIT(A) has erred in law as much as in fact in upholding the addition of Rs.46,29,509/- made on account of disallowance of interest. While upholding the disallowance Ld. CIT(A) has failed to appreciate that the disallowance could not be made:
a. as the interest paid by the assessee is eligible for deduction u/s 36(l)(iii) of the Act. b. as interest free funds available with the assessee were sufficient to cover the interest free advances made by the assessee and thus, the disallowance was not called for as per law laid down by Hon'ble Supreme Court in the case of CIT vs. Reliance Industries [2019] 410 ITR 466(SC) and other decisions relied upon before the Ld. CIT(A) which have been arbitrarily ignored by Ld. CIT(A) on the ground that they are not applicable to the facts of the present case. c. as the disallowance also could not be made by referring to section 14A of the Act, which is applicable only if any tax-free income has been earned by the assessee. In the present case no interest free income has been earned by the assessee.
Without prejudice to the above and in the alternative, the disallowance of Rs. 46,29,509/- could not be made in its entirety and referring to the facts and circumstances of the case the interest earned by the assessee to the extent of Rs. 39,14,863/- is eligible for set-off against interest payment of Rs. 46,29,509/-. Thus, addition only to the extent of Rs. 7,14,646/- could be made.
That each of the above grounds is independent and is without prejudice to each other.”
2. The facts giving rise to the present appeal are that the case of the assessee was picked up for scrutiny assessment. The assessment u/s 143(3) of the Income tax Act, 1961 (“the Act”) was framed vide order dated 26.12.2018. While framing the assessment, the Assessing Officer noticed that during the year under consideration, the assessee had earned income of Rs.39,14,863/- from interest. The assessee has incurred interest expenses to the tune of Rs.46,29,509/-. It was observed by the Assessing Officer that no business transaction was carried out by the assessee during the year under consideration. Further, the Assessing Officer noticed that the assessee raised a secured loan from HDB Financial Services Ltd. during the previous year which 2 | P a g e was Rs.4,02,21,214/- as on 31.03.2015 and Rs.3,79,74,981/- as on 31.03.2016 after repayment of Rs.68,75,741/- during the year under consideration. The assessee has also raised unsecured loan of Rs.25,00,000/- during the Financial Year 2015-16 relevant to Assessment Year under consideration from Smt. Sweta Gupta. It was further noticed by the Assessing Officer that the assessee has given loan/advance to sister concerns/related parties. It was further noticed by the Assessing Officer on the P&L Account that the assessee had raised interest bearing loans and paid interest of Rs.46,29,509/- and claimed deduction for the same. The Assessing Officer disallowed the claim on the ground that the interest free loan was given to the related parties for non-business purposes. Therefore, he made addition of Rs.46,29,509/- on account of disallowance of interest expenditure.
3. Aggrieved against this, the assessee preferred appeal before Ld. CIT(A) who after considering the submissions and material on records, sustained the addition.
Now, the assessee is in appeal before this Tribunal.
Ld. Counsel for the assessee, Sh. I. P. Bansal, Advocate, vehemently argued that the action of the authorities below is contrary to the judicial pronouncements. He submitted that the assessee was having sufficient interest free fund to give interest free loan. He took me through the balance sheet of the assessee company and placed reliance on the judgement of Hon’ble Supreme Court in the case of CIT vs Reliance Industries Ltd. [2019] 410 ITR 466 (SC) and also on the judgement of Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. 313 ITR 340 (Bombay) to buttress the contention that when the interest free funds were available with the assessee, therefore, in the light of the above judgements, disallowance was not called for.
Ld. Sr. DR vehemently opposed these submissions and supported the orders of the authorities below. He contended that the Assessing Officer has categorically stated in the assessment order that the assessee failed to establish nexus between the interest free advances given and availability of funds. He further contended that the point of availability of funds is required to be demonstrated from the date when such advances have been given.
I have heard the rival contentions and perused the material available on record and gone through the orders of the authorities below. The only dispute is with regard to allowability of interest expenses as claimed by the assessee.
The submissions of the assessee are three folds, firstly the disallowance by taking resort to section 14A of the Act cannot be made as the assessee has not earned any exempt income; secondly when the assessee is having interest free fund the expenditure of interest incurred on borrowed funds, cannot be disallowed merely on the ground that the assessee is required to prove nexus between the interest free advances/loan given to the related parties; and thirdly without prejudice to other submissions, the interest earned by the assessee to the extent of Rs.39,14,863/- is eligible for set off against interest payment of Rs.49,29,509/-. Thus, the addition to the extent of Rs.7,14,646/- could be 4 | P a g e made. However, the Ld.CIT(A) dismissed the appeal purely on the basis that the assessee failed to establish that borrowed fund was utilized for the purpose of business. It is noticed even before Ld.CIT(A), it was submitted that the assessee had sufficient interest free fund available for making advances. It was also stated that since no tax free income is earned, hence no disallowance could be made. Lastly, it was also stated that the assessee is eligible for setting off interest earned and offered for taxation. Admittedly, no finding is recorded by the Ld.CIT(A) on these submissions.
The Revenue has not disputed the fact that the authorities below have not allowed set off of the interest earned and offered for tax. Moreover, the assessee has not earned any exempt income under these undisputed facts, the additions made by invoking the provision of section 14A of the Act is hereby restricted to a sum of Rs.7,14,646/- as prayed by the assessee. Thus, grounds raised by the assessee in this appeal are allowed.
In the result, the appeal of the assessee is allowed.
Above decision was pronounced on conclusion of Virtual Hearing in the presence of both the parties on 08th June, 2021.