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Facts
The assessee's appeal before the ITAT pertains to AY 2014-15, arising from an assessment order under Section 143(3). The Assessing Officer (AO) disallowed proportionate interest expenditure on funds given to family members and interest paid to an HUF which was not declared by the payee. The assessee's prior appeal before the CIT(A) was dismissed ex-parte.
Held
The Tribunal held that the disallowance of proportionate interest was unwarranted as the assessee had sufficient interest-free own funds exceeding the interest-free advances. Furthermore, the Tribunal allowed the second ground, deleting the disallowance of interest paid to the HUF, as Form 26AS supported the payment.
Key Issues
1. Whether disallowance of proportionate interest on interest-free advances to family members is justified when own funds are sufficient. 2. Whether disallowance of interest paid to a payee who has not declared it as income is valid when supported by Form 26AS.
Sections Cited
143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI & SHRI PARESH M. JOSHI
आदेश/ O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by order of first appeal dated 20.06.2025 passed by learned Commissioner of Income-Tax (Appeals)-Addl/JCIT(A)-2, Vadodara [“CIT(A)”] which in turn arises out of assessment-order dated 29.12.2016 passed by learned ITO, Sehore [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2014-15, the assessee has filed this appeal.
The background facts leading to present appeal are such that the assessee-individual is engaged in trading business of cement, fertilizer, khali, Page 1 of 6
Sharad Agrawal ITA No. 701/Ind/2025 – AY 2014-15 etc. For AY 2014-15 under consideration, the assessee filed return declaring a total income of Rs. 10,48,287/-. The case was selected under scrutiny and the AO issued notices u/s 143(2)/142(1) which were complied by assessee.
Finally, the AO passed assessment-order u/s 143(3) after making these disallowances, viz. (i) disallowance of proportionate interest expenditure of Rs. 64,048/- on account of interest-free funds having been given to family members, (ii) disallowance of interest of Rs. 63,798/- claimed to have been paid to M/s Madan Lal Khem Chand Agrawal (HUF) but not declared by payee in his return of income as income. Aggrieved, the assessee caried matter in firsta-appeal but could not represent case before CIT(A), therefore the CIT(A) dismissed assessee’s appeal. Now, the assessee has come in next appeal before us.
The grounds raised by assessee are as under:
“Ground 1: Disallowance of interest paid on unsecured loan Rs.63798/-. Ground 2: addition of interest not charged on loans and advances Rs.64048/-.” 4. Ld. AR for assessee submitted that the issues involved are petty and can be decided on the basis of material available on record and after hearing learned Representatives of both sides. Accordingly, this case may be disposed of on merit instead of remanding to CIT(A) to avoid multiplicity of proceeding. He submitted that the adjudication made by ITAT shall be acceptable to assessee without any objection. Ld. DR for revenue agreed. We proceed accordingly.
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Sharad Agrawal ITA No. 701/Ind/2025 – AY 2014-15
Ground No. 1 relates to the disallowance of proportionate interest expenditure of Rs. 64,048/- on account of interest-free funds having been given to family members. The AO has noted, in Para No. 4 of assessment- order, that the assessee has utilized borrowed funds from bank on cash credit limit and relatives amounting to Rs. 1,48,39,937/- and claimed interest expenditure of Rs. 23,06,614/- thereon as deduction. On the other hand, the assessee has given interest-free loans of Rs. 4,12,061/- to family members. Accordingly, the AO has made proportionate disallowance of Rs.
64,048/- (23,06,614 X 4,12,061 / 1,48,39,937). The Ld. AR for assessee at first submitted that the cash credit limit account is utilised by assessee for all transactions of business wherein all borrowed funds as well as own funds of assessee are routed and therefore the funds of assessee are mixed up. Then, Ld. AR carried us to the audited Balance-Sheet of assessee as on 31.03.2014 placed at Page 33 of Paper-Book to show that the assessee was having his own interest-free capital as high as Rs. 1,51,52,596/- which is about 37 times of the loans of Rs. 4,12,061/- given to the family members.
Further, the details of loans given to family members are as under: Family member Loan as on 31.03.2014 Loan as on 31.03.2013 Increase during year Khem Chand 12,362 12,363 Nil Shubham Agarwal 35,000 10,000 25,000 Satish Agarwal HUF 2,21,094 2,21,094 Nil Sharad Agarwal HUF 1,43,605 41,845 1,01,760 Total 4,12,061 2,85,301 1,26,760 Page 3 of 6
Sharad Agrawal ITA No. 701/Ind/2025 – AY 2014-15 Thus, the increase in loan during the year is a negligible amount of Rs.
1,26,760/- only; all other loans are old. Therefore, Ld. AR contended, having regard to these facts, no disallowance ought to have been made by AO. Per contra, Ld. DR for revenue supported the disallowance made by AO but at the same time left the issue for wisdom of bench. After a careful consideration, we are in agreement with Ld. AR for assessee that the assessee possessed ample interest-free own funds of Rs. 1,51,52,596/- which were far in excess of the interest-free advances of Rs. 4,12,061/- given to family members. Therefore, a clear presumption arises that such advances were made out of own funds and not out of borrowed funds. In CIT Vs. Reliance Industries Ltd. (2019) 102 taxmann.com 52 (SC), the Hon’ble Supreme Court held as under:
“7. In so far as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002- 03.
In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.” Further, only a small amount of Rs. 1,26,760/- represents fresh advances given during the year while the balance pertains to earlier years that were already accepted by department. Further, the funds of assessee are mixed up and the AO has also failed to establish any direct nexus between any borrowed fund and the alleged interest-free advances given. Accordingly, applying the judicial view, no disallowance of interest is warranted and the Page 4 of 6
Sharad Agrawal ITA No. 701/Ind/2025 – AY 2014-15 disallowance of Rs. 64,048/- made by AO deserves to be deleted. We direct the AO to delete disallowance. Thus, Ground No. 1 is allowed.
Ground No. 2 relates to the disallowance of interest of Rs. 63,798/-. Precisely stated, the AO has noted that the assessee paid interest of Rs.
63,798/- to M/s Madan Lal Khem Chand Agrawal (HUF) but the same was not declared by payee in his return of income; this has only led the AO to make impugned disallowance. However, Ld. AR for assessee carried us to Form No. 26AS of payee i.e. M/s Madan Lal Khem Chand Agarwal (PAN: AADHM7588N) wherein the amount of interest of Rs. 63,798/- with TDS of Rs. 6,380/- paid by assessee “Sharad Agarwal” is clearly appearing. Faced with this situation, we do not find any justification in the reasoning given by AO for making disallowance. Therefore, the disallowance made by AO is not sustainable and we direct the AO to delete this disallowance. Thus, Ground No. 2 is also allowed.
Resultantly, this appeal is allowed.
Order pronounced in open court on 13/01/2026
Sd/- Sd/- (PARESH M. JOSHI) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore िदनांक/Dated : 13/01/2026 Patel/Sr. PS
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Sharad Agrawal ITA No. 701/Ind/2025 – AY 2014-15 Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Senior Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore
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