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Facts
The assessee, a partnership firm, provided interest-free loans of Rs. 20,48,777/- to Shri Ashok G Khant, who is the husband of one of the partners. The Assessing Officer disallowed the interest expenditure claimed by the assessee on these advances, treating it as income. The CIT(A) confirmed this disallowance.
Held
The Tribunal held that since the assessee firm had sufficient interest-free funds in the form of partners' capital (Rs. 49,49,096/-) which were higher than the interest-free advances given, there was no need to establish a nexus with borrowed funds. Therefore, disallowing interest expenditure under Section 36(1)(iii) was not justified.
Key Issues
Whether disallowance of interest expenditure on interest-free advances to a related party is justified when the assessee has sufficient own interest-free funds?
Sections Cited
36(1)(iii), 143(3), 263, 69A, 44AB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI, AM. &
आदेश / O R D E R
PER DINESH MOHAN SINHA JM;
Captioned appeal filed by assessee pertaining to Assessment Year 2014- 15, is directed against order passed by Commissioner Of Income Tax (Appeal), vide order dated 01/01/2024, which in turn arises out of an order passed by the Assessing Officer dated 06/12/2019 u/s 143(3) r.w.s 263 of the Income Tax Act, 1961.
GROUNDS OF APPEALS:-
1. The assessment order u/s 143(3) is bad in law.
2. The Ld AO has erred in law as well as on facts in making disallowance of intrest of Rs. 2,45,853/- u/s. 36(1)(iii) of the Act and the Ld CIT(A) has also erred in law as well as on facts in confirming the same.
Facts Of The Case as recorded by The Ld CIT(A)
“In this case, the above named assessee has filed his e return of income on 19.09.2014 declaring total income at Rs.9,85,135/- along with return of income audit report u/s 44AB of the Act in Form No. 3CB & 3CD and Balance Sheet, P&L A/c etc. were also filed. The return of income was process u/s 143(1) of the Act. The case was selected for scrutiny.
The assessment u/s. 143(3) of the I.T. Act, 1961 was completed on 06.10.2016 thereby assessing the total income of assessee at Rs.9,85,135/-.
Subsequently, the Ld. P.CIT-3, Rajkot has passed a revision order u/s.263 of the I.T. Act, 1961 on 22.03.2019 setting aside the assessment with a direction to examine the following facts:-
Unsecured loan of Rs. 2,58,135/- were taken from Shri Ashok G Khant (HUF) on which interest of Rs. 27,957/- was claimed. On the other hand, interest free loans/advances of Rs. 20,48,777/- was given to Shri Ashok G Khant (Indl), who is husband of one of the partner named Smt. Jyotsana Ashok khant. For the relevant year.
That notice issued by Ld AO remain uncomplied with Thereforein such circumstances, you are hereby show caused that why interest of Rs 2,45,853/- out of total interest expenditure claim of Rs. 11.20.954/- should not be added to the total income in your case for the year under consideration as per the provisions of Section 36(1)(iii) of the Income tax Act-1961 in absence of not a single plausible justification. The assessee has filed its reply dated 19/11/2019. The same is re produced as under:
"In the above notice your good self has raised issues related to disallowance of interest expenses on the ground that the firm has given interest free loans/advances worth Rs. 2048777/- to Shri Ashok G. Khant (Indl.) who is the husband of one of the partner Smt. Jyotsnaben Ashok Khant. The arguments of the assessee are fully supported by the Supreme courtjudgement in the case of HERO CYCLES (P) LTD. VS CIT andCIT Vs. Reliance Industries Limited. Copies of the judgements are enclosed.”
The Ld AO pass an order with following observation.
In the circumstances, interest @ 12% p.a. is hereby charged on Rs.20,48,777/-, Therefore amount totaling to Rs. 2,45,853/- (i.e 12% of Rs. 20,48,777/-)is hereby added back to the total income for the year under consideration.
That the assessee filed an appeal against the order of assessment before Ld CIT(A). That said appeal was disposed of by Ld. CIT(A) with following observation.
Further, appellant's argument that as it had interest-free fund in the form of Partners' capital to the tune of Rs. 49,49,096/- which were much higher and sufficient to cover-up the interest-free advances of Rs. 20,48,777/-, so that it can give interest free loan to anybody without a nexus of commercial expediency has no legal basis, Further, the purpose for which the loan has been granted is relevant and the not the source from which the fund has been obtained.
Further, grant of interest free loan to husband of one of the partner named Smt. Jyotsana Ashok Khant is of personal in nature and there is no nexus between the grant of interest-free loan and business interest.
That the assessee filed an appeal against the impugned order dated 01/01/2024 before us.
(i) During thecourse of hearing the Ld AR has submitted that the assessee is apartnership firm one of the partner Shrimati Jyotsnaben Ashok Kant has contributed capital in the firm amount of Rs. 49,49,095/- and the firm hasgiven a loan to Ashok KantGopaldas Kant amount of Rs. 20,48,777/- the AR submitted thatthe interest free money given for business exigiences and no income is attributed. (ii) On thecontrary the Ld DR has supported the order of lower authority and also relied on the judgement Deliveredby Supreme Court in case of S.A Builder Pvt. Ltd. where the commercial existence was one of the basic issue to be considered for allow in the expenditure.
7. We have heard both therepresentative of the party and perused all the material available on record before us.
We note thatreply submitted by assessee.That the LdCIT(A) has observed in the order that no infirmity or illegally was found in the order of Ld AO and confirmed the action of the AO about the unexplained investment u/s 69A of the Act.Besides this the Ld CIT(A) has dismissed the appeal of the assessee stating that assessee is not willing to pursue the appeallate proceedings anymore.
(i)We note that The fact of the case is that appellant firm had provided interest free loans/advances of Rs 20,48,777/- to Shri Ashok G Khant (Indl), who is husband of one of the partner named Smt. Jyotsana Ashok Khant.AO had calculated interest @ 12% per annum on Rs 20,48,777/-, and added Rs. 2,45,853/-to the total income of appellant. The advances of money was prima facie appeared to have been made out of interest free funds available with the assessee; secondly, the AO has not discharged onus of establishing clear cut and direct nexus between the interest bearing loans and interest free advances so as to justify disallowance in the light of the ratio laid down in the case of Reliance Utility and Hero Cycles therefore, as a matter fact, it was to be held that such a nexus did not exist warranting any disallowance under section 36(1)(iii) of the Act; thirdly, there was clear and self-evident mutuality and business expediency in sizable inter-se transactions between the assessee and recipients of funds, and further that there did not appear any noticeable personal or non-business use by recipients of the funds received interest free and thus, on fact of the case as also in view of the law as explained by the Supreme Court in SA Builders and Hero Cycles (supra), there was no case to invoke the provisions of section 36(1)(iii) of the Act for making any disallowance.
(ii)We note that the appellant had interest-free fund in the form of Partners' capital to the tune of Rs. 49,49,096/- which were much higher and sufficient to cover-up the interest-free advances of Rs. 20,48,777/- (iii) We notethat the ratio of Hon'ble judgment on Supreme Court judgment in case of S.A. Builders ( 288 ITR 1) squarely applicable in instant case. As per the Supreme Court ruling in case of S.A. Builders, the taxpayer has to establish commercial expediency for advancing of such interest free loan.
(iv) We noteDuring the course of de-novo assessment proceedings, the appellant submitted that the appellant had sufficient interest-free funds available in the form of partners' capital to cover-up interest-free advances advanced to Shri Ashok G. Khant and therefore, there cannot be any disallowance on account of interest.
(v) We note the appellant had interest-free fund in the form of Partners' capital to the tune of Rs.49,49,096/-which were much higher and sufficient to cover-up the interest-free advances of Rs. 20,48,777/-. Therefore, there was no question of making any disallowance u/s. 36(1)(iii) on account of interest. A copy of the audited Balancesheet and Profit & Loss Account showing the same is enclosed herewith. - Page No. 6-7.
(vi) The Hon'ble Gujarat High Court and Jurisdictional Rajkot ITAT has also taken the view that in the situation of sufficient interest-free funds, no disallowance of interest expense on account of interest free advances/investment should be made. We rely upon the following direct judgments in this regard: 1. ➤ Gujarat High Court in case of CIT vs. R. L. Kalthia Engineering & Authomobiles (P.) Ltd. - 33 taxmann.com 14 Page No. 28-29 2. ➤ Gujarat High Court in case of CIT vs. Raghuvir Synthetics Ltd. - 36 taxmann.com 275-Page No. 25-27 3. ➤ Gujarat High Court in case of CIT vs. Amod Stamping (P.) Ltd. - 45 taxmann.com 427- Page No. 30-34 4. ➤ Rajkot ITAT in case of Maheshwari Handling Agency (P.) Ltd. vs. ACIT-18 taxmann.com 195 Page No. 12-17 5. ➤ Rajkot ITAT in case of Gupta Global Exim (P.) Ltd. vs. ACIT - 18 taxmann.com 255 Page No. 18-24 Thus, the legal position is clear by virtue of the above judicial pronouncements that when there is no direct nexus between borrowed funds and interest-free advances and the interest-free advances are covered by sufficient interest-free funds, no disallowance out of interest expense should be made. In view of the above we are of the view to accept the ground of the appeal of the assessee and the order of the Ld CIT dated 01.01.2024 and the order of Ld AO dated 06.12.2019 are hereby quashed.
In result the appeal of the assessee allowed.
Order pronounced in the open court on 07 / 03/2025.