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Facts
The assessee, a partnership firm engaged in printing job work, advanced an interest-free loan of Rs. 85,00,000/- to its sister concern, Ekta Industries, for business expansion. The Assessing Officer (AO) disallowed the interest paid on partners' capital and unsecured loans amounting to Rs. 8,58,092/-, considering it a diversion of interest-bearing funds. The CIT(A) upheld this disallowance. The assessee appealed to the ITAT.
Held
The Tribunal noted that the revenue failed to establish a direct nexus between interest-bearing funds and the interest-free loan advanced to the sister concern. However, the assessee's Balance Sheet for the relevant year was not provided to verify the availability of sufficient interest-free funds. Therefore, the Tribunal set aside the impugned order.
Key Issues
Whether the disallowance of interest on partners' capital and unsecured loans is justified when interest-free funds are available to be advanced to a sister concern for business expediency.
Sections Cited
36(1)(iii), 143(3), 263, 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT BEFORE DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER AND SHRI DINESH MOHAN SINHA, JUDICIAL MEMBER आयकरअपीलसं./ITA No. 514/RJT/2024 (�नधा�रणवष� / Assessment Year: (2015-16) (Hybrid Hearing) Akta Processors, Jetpur, Rajkot Income Tax Officer, ITO Vs. Junagadh Road, Nr. Lions School, ward – 1(2)(1), Jetpur – 360370 Rajkot - 360001 �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AADFA4881G (Appellant) (Respondent) Appellant by : Shri Gaurang Khakhar, Ld. AR Respondent by : Shri Abhimanyu Singh Yadav, Ld. Sr. DR Date of Hearing : 25/03/2025 Date of Pronouncement : 09/06/2025 आदेश / O R D E R PER DINESH MOHAN SINHA, JM:
Captioned appeal filed by the assessee, pertaining to Assessment Year 2015-16, is directed against the order passed under section 143(3) r.w.s. 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by National Faceless Appeal Centre (NFAC), Delhi/Commissioner of Income- tax (Appeals), dated 14.06.2024, which in turn arises out of an order passed by the Assessing Officer u/s 143(3) r.w.s. 263 of the Act, on 25.09.2021.
Grounds of appeal raised by the assessee are as follows: 1) The Hon’ble Commissioner of Income Tax (A) has erred in law as well as on facts in upholding addition of Rs. 8,58,092/-being interest payment to partners & unsecured loan depositor u/s. 36(1)(iii) of the Income Tax Act, 1961. 2) That the order passed by the Ld. CIT u/s. 250 of the I. T. Act, 1961 was arbitrary, bad in law and unjust.
(AY 2015-16) AKTA PROCESSORS
3) That the assessee craves leave to urge such other ground or grounds before or at the time of hearing of appeal.
Brief facts of the case that the appellant a partnership firm, is engaged in the business of printing job work; trading in textile and maintaining regular books of account. The assessee had e-filed return of income on 29.09.2019 declaring the total income at Rs. 6,68,573/-. The appellant firm has, during the year under consideration, advance interest free loan aggregating Rs. 85,00,000/- to its associate concerns, viz. Ekta Industries (in short, “sister concerns”) whereas the assessee has liability to pay interest on partner capital and unsecured loans were duly declared in the books of account. The case of the assessee was selected for completely scrutiny and the assessment was framed u/s. 143 of the Act. Hon’ble Principal Commissioner of Income Tax -1, Rajkot initiated proceedings u/s. 263 of the Act and set-aside the assessment, vide order dated 19.03.2020, observing that the appellant had utilized interest bearing fund for advancing interest free loan of Rs. 85,00,000/- to sister concern. The AO negate the explanation, backed by documents, of the appellant that interest free fund was utilized to sister concern in due business expediency and finalized the de-novo assessment, vide order dated 25.09.2021, making disallowance u/s. 36(1)(iii) of the Act of Rs. 8,58,092/- on following score; Sr. No. Description Amount 01 Interest on partners’ capital 2,41,532 02 Interest on unsecured loans Sonal Print 6,16,500 Total 8,58,092 (AY 2015-16) AKTA PROCESSORS
That the assessee filed an appeal before the Ld. CIT(A) against the order of the Ld. AO, vide order dated 25.09.2021. That the Ld. CIT(A) dismissed the appeal of the assessee with following remarks: “As per record the appellant had paid interest of Rs. 2,41,532/- on partner’s capital and Rs. 61,65,602/- to M/s. Sonal Print – HUF during financial year 2014-15 disallowed the interest of Rs. 8,58,092/- debited to the profit and loss account u/s. 36(1)(iii) of the Act vide impugned assessment order. During appellate proceedings, the appellant reiterated the submissions made by it during assessment proceedings and relied on certain decisions of Hon’ble Courts of the land, the facts of which are not squarely applicable to the facts of the case.”
That the assessee filed an appeal before us, against the impugned order of the Ld. CIT(A), order dated 14.06.2024.
During the course of hearing, the Ld.AR of the assessee submitted that the AO has disallowed the interest paid to partners & interest on unsecured loan u/s. 36(1)(iii) of the Act. The AR of the assessee also submitted details of Interest Expenses and Details of Loan given & Capital Introduction.
On the contrary, the Ld. Sr. DR for the revenue relied on the order of the Ld. CIT(A).
We have heard both the parties and perused the material available on record. We note that the assessee partnership firm consisting of four partners, Shree Jatin Vithalbhai Vadalia, Shree Kajalben Jatinkumar, Shree Meghaben Rahulkumar, and Shree Vithalbhai J. Vadaliya. i. During the Financial Year, i.e., 2014-15, the Ld. AO disallowed the interest paid by the firm of (Rs. 2,41,532/- + Rs. 6,16,560/- = Rs. 8,58,092/-) u/s. 36(1)(iii) of the Act.
(AY 2015-16) AKTA PROCESSORS ii. We note that there is debit entry of interest to the partners of Rs. 2,41,532/- and also interest to Sonal Print HUF amounting of Rs. 6,16,560/-. Since, there was an unsecured loan from Sonal Print amount of Rs. 43,92,109/- (Copy of schedules is placed on record.) we note that the assessee has given loan Rs. 85,00,000/- to sisters concerns M/s. Ekta Industries. iii. We note that the nature of advance was given to sister concerns for develop a new business vertical with the name of M/s. Ekta Industries which will be a Printing Unit, and the fund were utilized for the purchase of new plant and machinery and solely for the advancement of business and commercial expediency. There was an addition of Rs. 3,01,29,350/- in the plant and machinery of Ekta Industries for the financial year under consideration i.e., 2014-15. The details are available in the Audit Report of the same year and are placed on record. We observed the M/s. Akta Processors and M/s. Ekta Industries are sister concerns advance money was given integration of installing New Plant and Machinery in Ekta Industries will eventually help to establish the cost synergy and make our product available in the market a less cost which is a necessary step in the textile industry. iv. The loan of Rs. 85 Lacs was given to sister concerns M/s. Ekta Industries from the capital of the assessee’s firm, on which, no interest payable. v. We note that revenue does not established direct nexus between interest bearing land and capital taken from partners and non interested bearing fund advanced to M/s. Ekta Industries. The appellant is engaged in business of job-work of printing textile, which under gone various manufacturing cycles. Page | 4 (AY 2015-16) AKTA PROCESSORS The appellant was not having infrastructure for processing grey raw cotton into white cotton to be sued printing process. The nature of advance was to develop a new business vertical with the name of M/s. Ekta Industries which will be a printing Unit, and the fund were utilized for the purchase of new plant and machinery and solely for the advancement of business and commercial expediency which in turn reduced dependency on local supplier. There was an addition of Rs. 3,01,29,350/- in the plant and machinery of Ekta Industries for the financial year. Our attention was drawn towards the judgement of Hon’ble Gujarat High Court in CIT v. R. L. Kalthia Engin. & Auto. (P.) Ltd. has held that: “Business deduction u/s. 36(1)(iii) – Interest on borrowed capital Interest free advance to sister concern – Assessing officer disallowed assessee’s claim of deduction of interest paid on borrowed funds u/s. 36(1)(iii) as it had diverted interest bearing funds for purpose of investment in shares and loans to sister concerns. Held: was not justified, as on the basis of material available, it was found that sufficient amount of interest free funds were available with assessee and more so, revenue failed to establish any nexus between the borrowed funds and the funds diverted/lent.”
After considering the above submission, it was noticed that the assessee has submitted during the course of hearing, the details of interest expenses of Rs. 8,58,092/- and Breakup of interest expenses, Partners capital account, secured loan and unsecured loan. We have noted that the Schedule to the accounts submitted by the assessee, wherein partners made addition of Rs. 61,81,062/- during the year as well as the partners withdrawn of Rs. 50,76,203/- in the business, etc. However, the assessee has not submitted the Balance-Sheet for AY 2015-16 to verify the fact that whether the assessee has sufficient interest free fund to give to sister concerns without interest, when the Balance-Sheet has remain unverified about sufficient interest free fund was available or not with the assessee. Since, we are unable to verify that the sufficiency of fund available with the assessee. We are of the view that we set aside the impugned order dated 14.06.2024, (AY 2015-16) AKTA PROCESSORS therefore, we restored back to the matter to the Ld.AO with the direction to verify the addition made during the year, and the sufficient fund was available with the assessee to given interest free loan to sister concerns and pass a speaking order. Hence, we uphold the order of the Ld.PCIT and dismissed the appeal of the assessee.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open court on 09-06-2025