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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SRI MAHAVIR SINGH
This appeal of the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-45, Mumbai [in short CIT(A)], in Appeal No CIT(A)-45/ACIT-33(3)/ITA-425/2010-11 vide order dated 01.03.2018. The Assessment was framed by the Income Tax Officer, Ward 25(3)(4) Mumbai (in short ‘ITO/ AO’) for the A.Y.
2008-09 vide order dated 29.12.2010 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the interest expenditure amounting to ₹ 12,16,024/- by holding that the loan taken was not used for the purpose of the business. For this assessee has raised the following grounds: -
“On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals)-45. Mumbai had erred in confirming the disallowance of Interest expenditure of Rs. 12,16,024/- claimed by the assessee u/s 36 (I)(iii) of the Act. He had failed to appreciate that the interest has been paid as per the High Court directions
1.1 The learned Commissioner of Income Tax (Appeals) -45 had also erred in not appreciating the fact that the loan was taken from Shri Prakash Shah to whom the interest has been paid much prior to the year under consideration and the same was used by the firm for the purpose of construction and the same was not used for advancing loan to non-interest bearing loans.
1.2 The learned Commissioner of Income Tax (Appeals)-45 had also not appreciated the fact that the assessee has failed to pay loan & interest because finanj.al crises and this interest has been paid as per directions from the High Court to save the firm from insolvency Proceedings. The fact remains that the loan taken was used for the purpose of the business of the assessee and therefore, the interest is allowable as business expenditure u/s 36(l)(iii) of the Act.”
Brief facts are that the assessee is a builder and developer. During the year under consideration, the assessee claimed interest expenses of ₹ 15,39,406/- in the P and L account. The AO noted that on perusal of the balance sheet of the assessee reveals that the assessee has given advances to the tune of Rs. 7,53,99,780/- to various parties and did not receive any interest on these advances. The assessee was asked to explain as to why the interest claimed should not be disallowed. During the remand proceedings, the assessee explained before the AO that the assessee’s interest free funds available is at ₹ 7,07,35,942/- as against the interest free advances given are to the tune of Rs. 7,33,67,539/-. Apart from this, the assessee has interest free funds available in the shape of partners’ capital at ₹ 1,00,62,785/-. According to the learned Counsel, the interest free funds are more than the interest free advances given to other parties. According to the assessee this fact has not been considered by the AO and made addition by disallowing the interest paid to one party namely Prakash D Shah on the interest free loan of ₹ 35 lacs. The AO disallowed the interest of Rs. 15,39,406/- less interest income shown by assessee of ₹ 3,23,382/- and thereby effective disallowance was made at ₹ 12,16,024/- by invoking the provisions of section 36(1)(iii) of the Act. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO. Aggrieved, now assessee is in appeal before us.
I have heard rival contentions and gone through the facts and circumstances of the case. Before me, the learned Counsel for the assessee drew our attention to the availability of interest free funds and application of interest free funds for the relevant assessment year 2008-09. The learned Counsel for the assessee drew our attention to page 1 of assessee’s paper book, wherein complete details of interest free funds and interest free funds advanced to other parties which is as under: -
Sources of Interest fee funds Application of interest free funds Partner’s Capital 10,062,785 Interest free 75,399,780 advance Bank overdraft- 13,312,707 Less: 2,032,241 73,267,539 interest is not Investment in Ashiana project Interest free loans 71,471,233 Income Tax 488,718 from others and TDS Less: interest bearing 735,291 70,735,942 Accumulated 16,860,989 loans Business losses Sundry Creditors 444,569 Total 94,556,003 Total 90,717,246 Excess Interest free funds available 3,838,757 Sources of Interest bearing funds Application of funds for earning taxable income Interest bearing loans 735,291 Fixed assets 201,556 Investment 1,653,490 Malpani Properties 30,000 Nivas Developers 45,830 Investment in Ashiana Project 2,032,241 Cash Balances 339,601 Bank balances 271(1)(c),330 Total 735,291 Total 4,574,048 5. I noted that this position has not been analyzed by the AO or the CIT(A). Hence, I am of the view that if this is a factual position and presumption goes in favour of assessee in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom) that the assessee has made interest free advances to various parties out of the interest free funds available with it. In view of these, I direct the AO to verify the factual aspect and if the facts are true, then the AO will allow the claim of the assessee.
In the result, the appeal of assessee is allowed for statistical purposes.
Order pronounced in the open court on 25-06-2019.