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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-48, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The ground of appeal filed by the assessee reads as under :
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the AO in disallowing proportionate interest expense of Rs.1,93,918/- claimed as a deduction u/s 36(1)(iii) of the Act.
Jayantilal Shah 2 ITA No. 5149/M/2019
Briefly stated, the facts of the case are that the assessee filed his return of income for the assessment year (AY) 2012-13 on 29.09.2012 declaring total income of Rs.4,02,399/-. The dispute here is the disallowance of proportionate interest expense of Rs.1,93,918/- made by the Assessing Officer (AO) u/s 36(1)(iii) of the Act. The AO made the said disallowance on the ground that the assessee had utilized directly or indirectly, its interest bearing funds for giving interest-free loans to Shri Sunil J. Shah and Shri Manish J. Shah. In response to a query raised by the AO the assessee stated that :
“The assessee has given advance to Sunil J. Shah, Manish J. Shah. These accounts are represents their running account with the assessee which are used for their personal payments. The capital of assessee is more than both these advances; there is no question of interest bearing funds being given for advances resulting in disallowance of proportionate interest.
The assessee has taken interest free loans also which is as under :
Sr. No. Name of the concern Sum Advanced 1. C.K. Shah HUF Rs.62,810/- 2. Saryu Manish Shah Rs.31,410/- Total Rs.94,220/- However, the AO was not convinced with the above explanation of the assessee on the ground that it is not supported by documentary evidence. Therefore, he calculated the proportionate interest and accordingly made a disallowance of Rs.1,93,918/- u/s 36(1)(iii) of the Act.
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that vide order dated 31.05.2019, the Ld. CIT(A) affirmed the above disallowance made by the AO on the ground that :
Jayantilal Shah 3 ITA No. 5149/M/2019 “5.2 Ground No. 2-: This ground is regarding addition of Rs.1,93,918/- due to disallowance of proportionate interest expense. In respect of this ground, during assessment proceedings assessee has failed to prove his claim of disallowance u/s 36(1)(iii) of the Act. The assessee had not established that on the date when each interest free loan were given, there were sufficient non-interest bearing or own capital funds was available with it to advance the same to others without charging interest and maintaining balances. As the assessee has failed to establish any nexus between the borrowings and the utilization of such funds for the business and has failed to establish the nexus between interest free loans, advances with available interest free funds. A.O. disallowed the proportionate interest on the total advances from the interest paid by the assessee.
During appellate proceedings, in respect of this ground, assessee has filed the details as computation of income, personal Balance sheet, ledger accounts of loans given as on 31.03.2011. Vide order sheet noting dated 24.01.2019 assessee was asked to "prove the availability of interest free funds on the day when the loans were extended. As the Balance sheet filed does not prove such availability the time of extending loans." In reply to this, assessee submitted that the loans were granted in earlier years (prior to A.Y. 2011-12) for which the records are not available. Thus, availability of the funds and genuineness of the transactions regarding interest paid on borrowed loan by assessee has not been proven with the necessary documentary evidence.
In view of above facts, ground number 2 of the assessee is dismissed and the addition made by A.O. in respect of disallowance of proportionate interest expenses of Rs.1,93,918/- is upheld.”
Before us, the Ld. counsel for the assessee submits that the capital of assessee being more than the advances, there is no question of interest bearing funds being given for advances resulting in disallowance of proportionate interest.
Jayantilal Shah 4 ITA No. 5149/M/2019 On the other hand, the Ld. DR submits that the assessee has not established before the AO as well as Ld. CIT(A) that on the date when each interest-free loan was given, there was sufficient non-interest bearing or own capital funds available with it to advance the same to others without charging interest and maintaining balances.
We have heard the rival submissions and perused the relevant materials on record. The Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. (2009) 178 Taxman 135 (Bom) has held in the context of section 36(1)(iii) of the Act that “if there is interest-free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available”.
The above ratio laid down by the Hon’ble Jurisdictional High Court is to be examined in the instant case. Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to examine the applicability of the ratio laid down in Reliance Utilities & Power Ltd.(supra). We direct the assessee to file the relevant documents/evidence before the AO.
In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open Court on 18/03/2021.