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Facts
The assessee, a salaried employee, filed an appeal against the disallowance of interest expenses of Rs. 26,60,245. The disallowance was based on the AO's finding that interest-bearing loans were diverted to non-interest bearing investments, and the assessee failed to prove the nexus between interest payment and interest earning.
Held
The Tribunal held that the assessee had sufficient non-interest bearing funds to cover investments and advances. Therefore, it was presumed that interest-bearing loans were used for interest-earning purposes, establishing a clear nexus. The disallowance of interest expenses was deemed unjustified.
Key Issues
Whether the disallowance of interest expenses is justified when the assessee had sufficient non-interest bearing funds to support investments and advances, thereby establishing a nexus for interest-earning.
Sections Cited
57(iii), 36(1)(iii)
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: DR. S. SEETHALAKSHMI, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA. No. 850/JPR/2025
PER DR. S. SEETHALAKSHMI, J.M. This is an appeal filed by the assessee against the order of ld. CIT (A), National Faceless Appeal Centre (NFAC), Delhi, dated 28.07.2022 passed under section 250 of the I.T. Act, 1961, for the assessment year 2016-17. 2. The assessee has raised the following ground of appeal :-
Sh. Shashank Poddar, Jaipur. “1.That the Ld.CIT(A), NFAC has erred on facts and in law in confirming the disallowance of interest expenses of Rs.26,60,245/- u/s 57 of the Income Tax Act, 1961 2. The appellant craves to alter, amend AMD modify any ground of appeal
3. Necessary cost be awarded to the assessee”.
3. During the course of hearing, the Registry has pointed out that there is a delay of 967 days in filing the present appeal before the Tribunal. The assessee has filed an application explaining the cause of such delay which is supported by duly sworn Affidavit. We have gone through the averments made in the affidavit and thus, we are of the opinion that the assessee is prevented in filing the appeal in time and we are satisfied that the delay in filing the appeal is due to reasonable cause. The Ld. DR did not object the application filed by the assessee for the condonation. Thus, the delay of 967 days in filing the appeal by the assessee is condoned in view of the decision of Hon'ble Supreme Court in the case of Collector, Land Acquisition vs. Mst. Katiji and Others, 167 ITR 471 (SC) as the assessee is prevented by sufficient cause. Consequently, we condone the delay in filing the present appeal and admit the same for adjudication on merit.
4. Succinctly, the facts as culled out from the records are that the assessee is a salaried employee and had filed ITR for the relevant year on 28.12.2016 disclosing a total income of Rs.54,35,250/-. During the year under consideration, the assessee had positive income from salary and Sh. Shashank Poddar, Jaipur. short term capital gain, whereas he had negative income (loss) under the head Income from house property and Income from other sources, which was set off, as permissible under the Act. The case was selected for compulsory scrutiny through CASS. The AO disallowed the claim of expenditure u/s 57(iii) holding that interest bearing loans were diverted to non-interest bearing investments & advances and the assessee failed to prove the nexus of payment of interest towards earning of interest. Against the said addition, the assessee filed appeal before the CIT(A), who dismissed it.
Now the assessee is in appeal before the Tribunal. The ld. AR has filed a written submission on the ground of appeal
which is reproduced below:- “Facts:-
1. The assessee is a salaried employee getting salary from K.P. Automotive Pvt. Ltd. Apart from salary income he has income from house property, capital gain and income from other sources. Return was filed by the assessee on 28.12.2016 declaring total income of Rs.54,35,250/- (PB 1-4).
2. In the return assessee declared under the head income from other sources, saving bank interest, other interest and other income of Rs.25,54,381/- against which it claimed deduction of interest paid on loans Rs 26.60.245/- and the loss of Rs.1,05,864/- was set off against the income from salary. The interest was paid on ICICI bank loan Rs. 15,17,122/-and to Aarti Poddar Rs. 11,43,123/-.
3. The AO disallowed the claim of interest paid on loans of Rs.26,60,245/- for the reason that as per the details of loans and advances given no interest was charged from amount advance to K.P. Finance Rs.16,86,875/-, Rishi Poddar Rs.6,320/-, Shashank Poddar HUF Rs.9,12,000/- and Vashuda Jhunjhunuwala Rs.17,000/- (Refer para E of the assessment order- PB 7). Further, assessee Sh. Shashank Poddar, Jaipur. was having several investments of Rs.2,08,71,428/- (PB 6) not yielding any income. The unsecured loan on which interest has been paid was not procured in this year and the advances made also existed in the previous year. The bank account shows that the receipt and payment from the parties are circular one and not specific. Thus, assessee failed to discharge his onus of proving the nexus of payment of interest towards earning of interest and hence deduction of interest of Rs.26,60,245/- is not allowed.
The Ld. CIT(A) NFAC observed that assessee failed to furnish any submission. As per section 57 of the Act, allowance can be granted if the expenditure is incurred wholly and exclusively for the purpose of earning income. This is examined by AO during assessment proceedings but since, assessee failed to prove nexus of payment of interest towards earning of interest income, the disallowance made by AO is justified. Accordingly, the appeal filed by the assessee is dismissed. Submission:- 1. At the outset it is submitted that the lower authorities have not properly appreciated the facts of the case. From the statement of assets and abilities (PB 5), the position of interest free fund and interest bearing fund on which deduction of interest paid is not claimed vis-à-vis the amount utilized in non- income earning investments is as under: Non-interest bearing funds:- On capital 4,15,29,700 Loan from Standard Chartered Bank (Housing loan) 2,09,17,940 Loan from Krishan Kumar Poddar 2,19,521 Loan from Rishi Poddar 47,86,792 Total non-interest bearing funds 6,74,53,953 Non-income earning investments:- Fixed Assets:- Audio Vision (FY 2009-10) 45,400 Building at Shyam Nagar (Office) previous) 27,94,555 Land at Shyam Nagar (previous) 9,17,972 Land at Shyam Nagar (previous) 3,41,000 Sh. Shashank Poddar, Jaipur. Hazawala 4,73,240 D-97 3,73,69,847 Investment (As per details Annexed)(PB6) 2,08,71,428 Total Non-income earning investments 6,28,13,442 From the above it can be noted that excess of non-interest bearing fund over non-income earning investments is Rs. 46,40,511/- (6,74,53,953-6,28,13,442). As against this the interest free loans and advances given is Rs.26,22,195/- (16,86,875+6,320+9,12,000+17,000). Thus. when non-interest bearing funds and the interest bearing fund on which interest paid is not claimed as deduction exceeds the non-income earning investments, it proves that interest bearing funds has direct nexus to the interest earning advances and therefore, disallowance of interest paid of Rs.26,60,245/- is uncalled for and the same be deleted.
Otherwise also it is a settled law that where assessee was having both interest bearing funds and interest free funds, then it has to be presumed that interest free loans were given out of interest free funds. For this purpose reliance is placed on the following cases: - CIT Vs. Reliance Industries Ltd. (2019) 410 ITR 466/175 DTR 1 (SC) Tribunal having found that the interest free funds available to the assessee were sufficient to meet its investment, it could be presumed that funds were given to subsidiaries out of interest free funds and therefore, interest referable to funds given to subsidiaries is allowable as deduction under sec. 36(1)(iii). CIT Vs. Ram Kishan Verma (2016) 132 DTR 107 (Raj.) (HC) AO observed that interest bearing loans had been diverted towards interest free loans/advances to friends and relatives for non-business purpose and accordingly disallowed the interest paid on borrowed loans. It was held that since the advances were far below the available capital of the assessee and the AO was not able to pin pointedly come to a definite conclusion which proves the nexus between interest bearing loans vis-à-vis interest free loan/advances, disallowance has been rightly deleted. Further, when there was no agreement to charge interest from the persons to whom the assessee advanced short term loan/advance. the AO could not disallow part of the interest. CIT Vs. Vijay Solvex Ltd. (2015) 113 DTR 382 (Raj.) (HC) Assessee admittedly had its own funds and such funds/reserves being substantially higher than the advances to debtors, no notional interest or Sh. Shashank Poddar, Jaipur. hypothetical interest could have been disallowed on such facts. It may be that the assessee on account of business expediency advanced money to sister concerns or other concerns at a lower rate of interest or did not charge interest, that by itself does not prove that the assessee diverted interest bearing loans to said firms.
It is further submitted that AO has accepted the fact that the unsecured loan on which interest has been paid, already existed in the previous years. Similarly, advances given on which interest was received were also carried forward from the earlier years. In earlier years no disallowance on interest was made. Hence, disallowance made during year is unjustified and uncalled for. In view of above the disallowance confirmed by Ld. CIT(A) NFAC be directed to be deleted.”
Ld. AR of the assessee in support of the contention so raised in the written submission, further placed reliance on the following evidence / records in the form of Paper book :
S.No. Particulars Page No. 1. Copy of computation of income of the assesssee 1-4 2. Statement of affairs of the assessee as on 31.03.2016 5 3. Details of investment as on 31.03.2016 6 4. Details of loans & advances as on 31.03.2016 7 5. Copy of ledger account of K.P.Finance from 01.04.2015 16 to 31.03.2016
Per contra, ld. DR is also heard, who relied on the findings of AO and submitted that the CIT(A) in the absence of any compliance being made by the assessee, correctly upheld the order of the AO.
Sh. Shashank Poddar, Jaipur. 8. We have heard the rival contentions and perused the material placed on record, as well as the relevant provisions of law and the various case laws cited by the Ld.AR.
8.1 We find that the assessee had availability of non-interest bearing funds to the extent of Rs.6,74,53,953/- At the same time, the assessee had Fixed assets & Investments aggregating Rs.6,28,13,442/-, which did not yield any interest income. As per the AO, the assessee had further given interest free loans of Rs.26,22,195/- So, the aggregate funds not yielding any income work out to Rs.6,54,35,637/- as against non-interest bearing funds (source) of Rs.6,74,53,953/-, which makes it clear that the entire amount infused in fixed assets, investments and interest free advances are sourced out of non-interest bearing funds available with the assessee. Resultantly, the advances given are out of interest bearing loans and thus the interest payment has a clear nexus with the interest earned, showing that the payment of entire interest of Rs.26,60,245/- claimed u/s 57(iii) is an expense incurred for earning of interest income of Rs.25,54,381/- 8.2 We further find that the assessee is a share holder in both the companies, viz. M/s K.P.Automotives Pvt. Ltd. and M/s Shrerit Auto Pvt. Ltd., to whom he has advanced loans. The assessee on account of business expediency advanced money to these concerns. It is also an Sh. Shashank Poddar, Jaipur. undisputed fact that the loans on which interest has been paid and the advances on which interest has been received were existing from the earlier year(s) and no such disallowance had been made in the earlier year(s).
8.3 We thus, observe that the view of the AO that the loan on which interest has been paid, has been utilized for acquiring fixed assets, making investments and advancing interest free loans (all of which are not generating any income) is ex-facie contrary to the facts and documents on record and our findings arrived at in Para-7.1 & 7.2 above. We hold that interest free funds, available to the tax payer, are more than sufficient to meet his investments. It therefore, can safely be presumed that investments were made from interest free funds available with the tax payer. This position clearly emerges from the records.
8.4 The ratio of the judicial pronouncements cited by assessee (though in the context of Business income) is equally applicable for Income from other sources. Applying the same to the facts of the case together with various evidential documents submitted by the assessee, it can be inferred that since the interest payment of Rs.26,60,245/- has been incurred, wholly and exclusively for the purpose of earning interest and there is a clear nexus between the expenditure incurred and the income earned, the Sh. Shashank Poddar, Jaipur. deduction claimed by the assessee u/s 57(iii) cannot be disallowed. Therefore, the disallowance of interest made by the AO and sustained by the Ld.CIT(A) is set aside. We order accordingly.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 30/10/2025.