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Facts
The assessee company declared NIL income and a business loss for AY 2013-14. The AO noted that the assessee received interest on loans advanced at a lower rate (8.51%) than the interest paid on its own borrowings (15-18%). Consequently, the AO disallowed a portion of the interest paid, considering it as diversion of funds for non-business purposes.
Held
The Tribunal noted that when an assessee has mixed funds (interest-free and interest-bearing), the presumption is that loans given are from interest-free funds, as per judicial precedent. The Tribunal found that the AO had not verified these facts and set aside the CIT(A)'s order.
Key Issues
Whether the disallowance of interest on borrowed funds, when lent out at a lower interest rate, is justified, especially when mixed funds are involved.
Sections Cited
36 (1) (iii)
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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI AMITABH SHUKLA
आदेश / O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "the Ld.CIT(A)”), Delhi, dated 08.01.2024 for the Assessment Year (hereinafter in short "AY”) 2013-14.
The only grievance that has been raised before us is against the action of the Ld.CIT(A) confirming the action of the AO disallowing interest of Rs.25,95,810/- on account of diversion of interest-bearing funds towards low interest-bearing loans.
(AY 2013-14) M/s.EH Building Consultancy Pvt. Ltd. :: 2 ::
The brief facts are that the assessee company filed its return of income for AY 2013-14 on 01.10.2013 declaring total income of Rs. NIL and reflected business loss of Rs.51,74,593/-. Later, the case of the assessee was selected for scrutiny and the AO, inter alia, noted that assessee has showed the sources of funds which included long term borrowings of Rs.5,77,90,006/- and that the assessee has received interest of Rs.37,44,000/- @ 8.51% on loan advanced to M/s.Info Drive Software Ltd., to the tune of Rs.4,40,00,000/-. The AO also noted that the assessee has paid interest of Rs.51,69,043/- to creditors @15-18% whereas, it received interest @ 8.51% from M/s.Info Drive Software Ltd.
1. Therefore, the AO asked the assessee to explain ‘as to why’ proportionate interest (out of total interest debited to P & L A/c) relevant to amount advanced at low interest rates be not disallowed, as having been diverted for non-business purpose. And the AO having noted that the assessee has taken loans on higher rate of interest and advanced at a lower rate of interest which according to him, was diversion of funds at low interest rates which are not for the benefit of the assessee, he disallowed a sum of Rs.22,95,810/- as under:-
Party Loan Interest paid Rate Interest allowed Interest Outstanding Disallowed Martech Rs. 1,60,00,000 Rs.45,77,261 15% Rs. 25.93,791 Rs.19.83,480 Peripherals P Ltd Anandram Rs. 50,00,000 Rs, 5,91,782 15% Rs. 2,79,452 Rs. 3,12,330 Developers Private Limited (AY 2013-14) M/s.EH Building Consultancy Pvt. Ltd. :: 3 ::
Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who confirmed the same.
Aggrieved, the assessee is in appeal before this Tribunal.
We have heard both the parties and perused the material available on record. Before us, the Ld.AR submitted that the assessee had a total long-term borrowing of Rs.5,77,90,006/-. And out of which Rs.2,10,00,000/- are interest-bearing loans, and that out of Rs.2,10,00,000/-, the assessee had availed a sum of Rs.1,60,00,000/- at the rate of interest of 15% and a sum of Rs.50,00,000/- was availed at interest rate of 18%; and the balance amount of Rs.3,67,90,006/- are interest-free loans. And that the assessee had given advance/loan of a sum of Rs.4,40,00,000/- @8.51% to M/s.Info Drive Software limited.
According to the Ld.AR, the AO in the assessment order had, without appreciating about the mixed funds (interest-free amount of Rs.3,67,90,000/- as well as interest bearing amount of Rs.1.60 crs at 15% & Rs 50 lacs at 18%), has erred in adding/computing disproportionate interest in the hands of assessee. According to the Ld.AR, the assessee was not given the benefit of presumption where mixed funds are in the hands of assessee as seen above. According to the Ld.AR, firstly, if the benefit of presumption is given to the Assessee/ Appellant, the entire non-interest-bearing loan amount i.e. (AY 2013-14) M/s.EH Building Consultancy Pvt. Ltd. :: 4 ::
Rs.3,67,90,000/- to be disregarded. Therefore, out of Rs.4,40,00,000/- loan advanced by the Assessee/ Appellant to M/s.Info Drive Software limited, it would have to be necessarily presumed that sum of Rs.3,67,90,006/- was out of non-interest-bearing loans and hence disregarded for this purpose (computing the purported interest disallowing) and the difference would only have to be considered and that would amount to sum of Rs. 72,09,994/- (Rs.4,40,00,000 minus Rs.3,67,90,006 = Rs.72,09,994). Secondly, for the purposes of calculating proportionate interest, the Ld.AR submitted that while computing interest rate of 15%, the AO ought to have arrived at the proportionate interest by calculating such rate of interest by reducing the rate at which the assessee had advanced the loan i.e. @8.51%. If that is taken into consideration herein, out of the 15%, the rate of interest taken into account by the AO, 8.51% is to be reduced, therefore, the difference being 6.49% (15 minus 8.51% = 6.49%) is only to be taken into account when disallowing the exemption claimed u/s.36 (1) (iii) of the Act. Having noted the aforesaid submissions of assessee, in this context, we note that it is no longer res integra then when the assessee has mixed funds (interest free as well as interest bearing) then the presumption is that the loan given are from the interest-free funds as held by the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd., reported in (2009) 313 ITR 340 (Bom.).
(AY 2013-14) M/s.EH Building Consultancy Pvt. Ltd. :: 5 ::
In the light of the aforesaid submission of the Ld.AR and since, the aforesaid facts have not been verified by the AO, we set aside the impugned order of the Ld.CIT(A) and restore this issue back to the file of the JAO for limited purpose of verification of the aforesaid facts discussed (supra) and if it is found to be correct, then, the AO to disallow only interest @6.49% of Rs.72,09,994/- and if the assessee fails to prove it, then, the AO is at liberty to confirm/restrict the disallowance in accordance to law, after hearing the assessee. The assessee is at liberty to substantiate the aforesaid submissions made before us and the AO to pass a speaking order while framing the assessment on this issue.
In the result, appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced on the 21st day of August 2024, in Chennai.