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Facts
The assessee filed an appeal against an order related to assessment year 2014-15. The AO noted that the assessee claimed interest expenses of Rs. 69,32,786/- and showed interest income of Rs. 65,31,210/-, resulting in excess interest expenses of Rs. 4,01,576/-.
Held
The tribunal held that the assessee had claimed interest expenditure under the head 'business income' which could not be allowed as such. However, the AO disallowed the excess interest expenditure of Rs. 4,01,576/- without assigning a valid reason and without establishing a lack of nexus between borrowed funds and funds advanced. Therefore, the addition was deleted.
Key Issues
The appeal concerns the disallowance of excess interest expenses claimed by the assessee and the validity of reopening the assessment.
Sections Cited
147, 144B, 36(1)(iii), 57(iii), 271(1)(c), 234A, 234B, 234C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC‘ BENCH MUMBAI
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 09/02/2024 passed by NFAC, Delhi for the quantum of assessment passed u/s.147 r.w.s. 144B for the A.Y.2014-15. 2. In various grounds of appeal, the assessee submitted the validity of reopening on the ground that issue on which ld. AO has made the addition was beyond the reasons recorded u/s M/s. Sonal Infotech Pvt. Ltd. 148 and secondly, disallowance of interest expenses of Rs.4,01,576/-.
The brief facts are that assessee in the return of income has declared income from house property and income from other sources. Based on certain information that assessee company had given loan of Rs.77,7,00,000/- on 24/06/2013 to M/s. Shilpriya Builders and Developers which appeared to be a circular transaction from one company to another. Based on this information, notice u/s.148 was issued on 30/07/2022 for A.Y.2014-15. However, the issue of credit entries has not been added by the ld. AO and it seems the he accepted the assessee’s explanation. However, the ld. AO noted that assessee has claimed interest expenses of Rs.69,32,786/- and had shown interest income of Rs.65,31,210/-, thus, there was excess interest expenses claimed of Rs.4,01,576/-. He further noted that in the income tax return assessee had declared income of Rs.65,31,210/- under the head ‘income from other sources’ and interest expenditure cannot be allowed u/s.36(1)(iii) as claimed in the ROI. The interest income neither can be allowed against business loss to be set off against gross total income of the assessee. At the most the interest expenses are required to be claimed u/s.57(iii). Thus, he held that assessee wrongly debited interest expenditure in the profit and loss account of returned income as business expenditure. Thereafter, ld. AO has analysed all details of interest income and expenditure by the assessee in the following manner:- “On perusal of the bank account No. 023110100003966 of Bombay Mercantile Co. Operative Bank of the assessee, it is M/s. Sonal Infotech Pvt. Ltd. seen that the assessee had received loan of Rs. 3,40,00,000/- on 31.08.2010 and the loan of Rs.4,00,00,000/- on 09.02.2011 at the interest rate at 16.50% P. A. The assessee had not used the said fund for your construction business but given as a loan to different persons. As per assessee's submissions, the assessee had used the said fund for earning interest income. However, on perusal of financial statements of F.Y. 2012-13 and F.Y 213-14, it is seen that the assessee had claimed high interest expenses and low interest income. The details of interest income and expenditure reported by the assessee is produce hereunder Sr Particulars Amount Amount No. clamed in FY claimed in FY 2012-13(in 2013-14(in Rs) Rs.) 1 Interest expenses 91,00,456/- 69,32,786/- 2 Interest income 81,76,090/- 65,31,210/- Excess interest expenses 9,24,366/- 4,01,576/- claimed In view of the above, during the FY 2012-13 claimed excess interest expenses of Rs.9,24,366/- and during the year under consideration, the assessee had claimed excess interest expenses of Rs. 4,01,576/-.”
Since assessee had claimed interest expenditure u/s.36(1)(iii) and had claimed business loss of Rs.69,32,780/-, AO held that assessee had tried to reduce the tax liability and held that difference of interest income and interest expenditure is to be disallowed after observing as under:- “Considering the above fact, it is concluded that the assessee had tried to reduce their tax liability and wrongly claimed interest expenditure as per provisions of section 36(1)(iii) of the M/s. Sonal Infotech Pvt. Ltd. IT Act. The assessee had not used the borrowed fund for their business purposes. Further, from the borrowers, the assessee had less charged interest and paid high interest to the Bank. Therefore, excess interest expenses of Rs.4,01,576/- Interest income Rs.65,31,210/-(-) Interest expenditure Rs 69,32,786/-) claimed by the assessee is added to the total income of the assessee as per provisions of section 57(iii) of the IT Act. Penalty proceedings u/s 271(1(c) of the IT Act are initiated for furnishing inaccurate particulars of income. (Addition of Rs. 4,01,576/
The ld. CIT(A) held that since appeal of the assessee was time barred by 35 days, he dismissed the appeal as unadmitted without considering the condonation of delay. The reasons given by the assessee for filing the appeal belatedly stating that the Director of the company is very old person and his e-mail ID was given. His email was not checked as he was not used to e-mail being at a very advanced stage.
From the perusal of the impugned ld. CIT(A) order, we find that till page 16 he has reproduced the entire assessment order and various provisions of the Act and had copied the statement of facts and grounds of appeal
and then while deciding the appeal he noted that appeal is barred by limitation by 35 days and therefore, he held that there was no sufficient cause and appeal of the assessee is barred by limitation and appeal was not admitted. First of all, when assessee has given the reasons that the Director of the assessee company is very senior citizen and the assessment order was served through e-mail ID but failed to check his e- mail in time. For a marginal delay looking to the fact that very M/s. Sonal Infotech Pvt. Ltd. senior citizens are not use to email then Ld. CIT (A) should have condoned the delay of 35 days. Looking to the issue involved is only addition of Rs.4,00,000/-, we hold that delay of 35 days in filing of the appeal before First Appellate Authority is been condoned.
7. On merits, it is seen that the entire case of the ld.AO is that assessee has claimed interest expenditure under the head ‘business income’ and has claimed it u/s.36(1)(iii), which we agree with the contention of the ld. AO that the same could not have been allowed as interest expenditure for the purpose of the business. The assessee has taken loan from the bank and has given/ advanced loan to various parties on interest. From the perusal of notes appearing in the audited financial statements for F.Y.2013-14 i.e. A.Y.2014-15, it is seen that loan outstanding from bank at the end of the year was Rs. 3,49,06,728/- and loan advanced at the end of the year was Rs. 3,42,49,950/-. The reduction in loan of Rs. 1,48,79,708/- is on account of amount returned back from the amount advanced to parties of Rs. 1,48,61,164/-. In tabular form this can be summarized in the following manner:- Period Loan from Bank Loan Difference advanced to various parties At the beginning 4,97,86,436 3,49,06,728 1,48,79,708 (01.04.2013) At the end (31. 4,91,11,114 3,42,49,950 1,48,61,164 03. 2014)
Difference 6,75,322 6,56,778 18,544 8. During the year assessee has paid interest to the bank of Rs.69,32,786/- which was comparatively less than the interest paid in the earlier year. Moreover during the year assessee has earned interest from loan given to the parties was Rs.65,31,210/-. There is no dispute that the loan taken from the bank has been given loan to other parties on interest. None of the parties to whom loan have been given are related parties or closely connected to the assessee. Thus, there is a direct nexus of interest earned and interest paid. Accordingly, ld. AO has correctly held that the interest expenditure has to be examined u/s.57(iii).
However, ld. AO has disallowed the interest which is the excess interest expenditure of Rs.4,01,576/- without assigning any reason as to why the interest should be disallowed if the assessee earlier also had taken loan from the bank and given to others and have been earning interest and showing interest income and if this year interest paid to the bank is more than the interest earned then, without any information or enquiry that the interest bearing funds have been given to the parties either interest free or at a lesser interest and there is no nexus between the loan borrowed and loan given on interest. Thus, in absence of such facts interest cannot be disallowed. Accordingly, the addition of Rs.4,01,576/- is deleted.
M/s. Sonal Infotech Pvt. Ltd. 10 . Since, we have deleted the addition on merits of the issue raised with regard to levy of interest u/s.234A, 234B & 234C becomes consequential. In so far as validity of reopening u/ 147 is concerned, the same is also treated as academic as we have deleted the addition on merits.
In the result, appeal of the assessee is allowed.
Order pronounced on 28th June, 2024.