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Facts
The assessee, M/s Modland Wears Pvt Ltd, faced a disallowance of Rs. 51,14,66,924/- under section 36(1)(iii) of the Income Tax Act for the differential interest on funds borrowed at 14% and lent to Blue Line Finance Pvt Ltd at 10%. The lower authorities held that there was no nexus between the interest-bearing borrowed funds and the loans given, leading to the disallowance.
Held
The Tribunal found, after reviewing bank statements and ledger accounts, that there was no direct nexus between the assessee's borrowings from Fortis Hospital Ltd and its lending to Blue Line Finance Ltd. It noted that fresh loans to Blue Line Finance were minimal, while significant repayments were made, and borrowings from Fortis Hospital Ltd did not coincide with the loan disbursements. Consequently, the disallowance was uncalled for, and the Assessing Officer was directed to delete it.
Key Issues
Whether the disallowance of interest expenditure under Section 36(1)(iii) was justified in the absence of a direct nexus between borrowed funds and funds lent at a lower rate.
Sections Cited
36(1)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI ‘E’ BENCH,
Before: SHRI SAKTIJIT DEY, & SHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order dated 31.03.2023 by NFAC, Delhi pertaining to A.Y. 2018-19.
The sum and substance of the grievance of the assessee is that the CIT(A) erred in confirming the disallowance of Rs. 5,14,66,924/- u/s 36(1)(iii) of the Income-tax Act, 1961 [the Act, for short] out of the total interest expenditure.
Briefly stated, the facts of the case are that the assessee filed its return of income on 30.03.2019 declaring loss of Rs. 4,66,19,009/- Return was selected for scrutiny assessment and accordingly, statutory notices were issued and served upon the assessee.
Returned loss was assessed at an income of Rs. 4,61,94,33,924/- after making disallowance of Rs. 51,14,66,924/- on the ground that the assessee has borrowed funds @ 14% per annum but lent the same to one Blue Line Finance Pvt Ltd, New Delhi @ 10%. Therefore, the differential amount of interest has no nexus with the interest bearing borrowed funds.
Action of the Assessing Officer was upheld by the ld. CIT(A).
Before us, the ld. counsel for the assessee vehemently stated that there is no nexus between lending to Blue Line Finance Pvt Ltd and borrowing from Fortis Hospital Ltd., New Delhi as money was given in earlier year and there is an opening balance of Rs. 54,68,30,000/- in
The ld. counsel for the assessee pointed out that during the year itself, Blue Line Finance Ltd repaid the loan of Rs. 45 crores and fresh loan was only to the extent of Rs. 2.74 crores. Therefore, there is no nexus between borrowing of funds from Fortis Hospital Ltd and lending of funds to Blue Line Finance. The ld. counsel for the assessee also explained the transaction reflecting in the bank statements to buttress his submissions.
Per contra, the ld. DR strongly supported the findings of the Assessing Officer.
We have given thoughtful consideration to the orders of the authorities below and have carefully considered the relevant documentary evidence brought on record. We find from the ledger account of Blue Line Finance that there is an opening balance of Rs. 54.68 crores. Fresh loan has been given only to the extent of Rs. 2.74 crores. Blue Line Finance has repaid Rs. 45 crores during the year itself.
Further, on perusal of bank statements, we find that fresh loan of Rs. 1.40 crores and Rs. 72 lakhs was given on 23.06.2017 and 27.06.2017 when there are no borrowings whatsoever from Fortis Hospital Ltd. Third tranche of loan of Rs. 62 lakhs was given on 11.07.2017. Again, there is no borrowing from Fortis Hospital Ltd before the date.
Considering the facts in totality, we are of the considered view that there is no nexus between borrowings from Fortis Hospital and lending to Blue Line Finance Ltd. Therefore, the disallowance is uncalled for. The Assessing Officer is directed to delete the same.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 07.02.2024.