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Facts
The assessee filed an appeal against the order of the CIT(A) concerning AY 2016-17. The appeal primarily concerned the disallowance of interest under Section 36(1)(iii) of the Income Tax Act and disallowance of expenses related to salary and rent.
Held
The Tribunal held that the issue of disallowance of interest was squarely covered by a previous decision of a coordinate bench in the assessee's own case, leading to the deletion of the disallowance. Regarding the disallowance of salary and rent expenses, the Tribunal upheld the CIT(A)'s decision to remit the issue back to the AO for verification.
Key Issues
Whether the disallowance of interest on funds advanced to parties is justified? Whether the disallowance of salary and rent expenses is justified without proper verification?
Sections Cited
36(1)(iii), 115JB, 144, 14A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘E’: NEW DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI AVDHESH KUMAR MISHRA
A.Y. 2016-17 Mahak Industries Private Ltd., Income Tax Officer, D-5/105, Awadh Complex, Ward-16(1), Laxmi Nagar, New Delhi Vs. C. R. Building, PAN: AAICM1860H I P Estate, New Delhi (Appellant) (Respondent) Appellant by Sh. Suresh Kumar Gupta, CA Respondent by Sh. Gouranga Chandra, Sr. DR Date of Hearing 27/08/2025 Date of Pronouncement 17/11/2025 ORDER
PER AVDHESH KUMAR MISHRA, AM
This appeal for Assessment Year (‘AY’) 2016-17 filed by the assessee is directed against the order dated 03.08.2023 of the Commissioner of Income Tax (Appeals), NFAC, New Delhi [‘CIT(A)’].
Vide 3 grounds of appeal, the assessee has raised following two issues: i. Disallowance of interest of Rs.29,49,583/- under section 36(1)(iii) of the Income Tax Act, 1961 (‘Act’) [Ground No. 1 and 2] ii. Disallowance of expenses of Rs.3,95,318/- [Ground No. 3] Mahak Industries Pvt. Ltd.
3. The relevant facts giving rise to this appeal are that the assessee filed its Income Tax Return (‘ITR’) of the relevant year on 17.10.2016 declaring income of Rs.18,320/- under normal provisions of the Act and income of Rs.31,629/- under section 115JB of the Act. The case was picked up for scrutiny and consequential assessment was completed under section 144 of the Act at income of Rs.98,50,032/- making various additions/ disallowances. Aggrieved the assessee filed appeal before the Ld. CIT(A) and got part relief. The Ld. CIT(A) restricted the disallowance of Rs.73,29,738/- made under section 36(1)(iii) of the Act to Rs.29,49,583/-. The relief allowed by the Ld. CIT(A) out of disallowance of interest has not been challenged by the Revenue. However, the disallowance of Rs.29,49,583/- under section 36(1)(iii) of the Act sustained by the Ld. CIT(A) has been challenged by the assessee. The relevant finding for sustaining the disallowance of interest of Rs.29,49,583/- reads as under:
“5.5 Adjudication: This issue has been considered in the Assessment Year 2015-16 wherein the said ground has been decided partly in favour of the appellant. Following the said order, for this year also this ground is decided accordingly. The submission filed by the appellant and the findings of the Assessing Officer has been considered. Section 36(1) (iii) of the Act refers to "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession". The loan borrowed should be for the purposes of the business or profession. It is Implicit in this provision that the capital so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of the income from the business. The interest payable on the capital borrowed is a liability which continues till such time as the amount borrowed is repaid. Such interest is allowable under the provision only for 2 Mahak Industries Pvt. Ltd. the reason that the amount on which interest is paid continues to be used in the business and the payment of such interest is, therefore, necessary for the purpose of running the business. The loan cannot be given during the course of business without interest to any party as the essence of any business is to earn profit. The appellant submitted that it had own funds Rs.3,15,05,151 (preceding year Rs.3.14,95,750) to give loans and advances to the extent of Rs.2.01,35,000. Appellant's submission that the said loan and advances without interest were given /advanced due to commercial expediency and future business needs for smooth running of the day to day business has to be proved with documentary evidence by furnishing a cash flow statement that own funds were given to the parties and by proving the nexus between the availability of own funds on the date of lending the loan and the nature of commercial expediency to lend the amount. Further appellant did not furnish the details of loan and advances given and also the purpose for which the said amount was given and the nature of commercial expediency. Appellant has made an alternate plea that without prejudice and without admitting, even if some disallowance was required to be made, the disallowance could have been proportionated to the overall investment in audited balance sheet which is Rs.25.57 Crore. It could be seen from the balance sheet, the appellant has made investments in equity shares to the extent of Rs.3,32,25,000 in the preceding financial year ending 31.03.2014 and the source for investment is stated to be increase in investment in shares and long-term interest free loans in FY 2013-14 and the investment in shares for the year ending 31.03.2015 is Rs.5,61,25,000 and for the year ending 31.03.2016 it remains the same. Appellant also added fixed assets, trade debtors and small sundry items to compute the proportionate interest. But, all other items in the balance sheet, except increase in investment in shares to the extent of Rs.2,29,00,000 (5,61,25,000 Rs.3,32,25,000) and loans and advances of Rs.2,01.35,000 does not have significant change in the year under consideration as there is no increase in fixed asset. Trade payables and trade receivables are separate items. Hence, it cannot be conclusively proved that own funds of Rs.3.15 crores were utilized for lending loan and advances. Further, the "decision relied upon by the appellant are distinguishable to the facts of the case as the said judgments were rendered in the context of computation of disallowance under Sec. 14A read with Rule BD (2) for the purpose of interest. Hence, the said judicial precedents relied upon by the appellant are not binding on this issue. In these circumstances, disallowance of proportionate interest on the loans and advances given would meet the ends of justice and the same is computed as below: Interest X Amount of interest free loan given/Total credit facility availed from the bank Rs.73,29,738 X 2,01,36,000/5,00,35,630 which 3 Mahak Industries Pvt. Ltd. works out to Rs 29,49,583 and to this extent the disallowance under Sec. 36(1)(iii) is confirmed. The appellant gets partial relief to the extent of Rs.43.80.154. This ground is "Partly Allowed."
The disallowance of Rs.29,49,583/- made out of salary & wages and rent has been remitted back to the Ld. AO by the Ld. CIT(A) for verification and allow the same if the assessee submits corroboratory evidence.
At the outset, the Ld. Authorized Representative (‘AR’) submitted that the issue of disallowance of interest under section 36(1)(iii) of the Act is squarely covered by the decision of the Tribunal in assessee’s own case in AY 2015-16 in (order dated 9th July, 2025). Hence, he prayed for consequential relief on this score. As far as the disallowance of expenses of Rs.3,95,318/- made out of salary & wages and rent concerned, the Ld. AR submitted that the said disallowance was on adhoc basis/on estimation as the Ld. Assessing Officer (‘AO’) had not rejected the books of accounts of the assessee. However, the Ld. AO questioned the genuineness of expenses in absence of documentary evidence as he had held that the assessee has not produced the corroboratory evidence for rent, salaries and wages. Hence, he disallowed 100% of such expenses. But the Ld. AO had not denied the existence of business throughout year. Therefore, the bare minimum expenditure incurred (paid to the landlord and old employees since years) required to run the business. Such expenditure had not been questioned in earlier years. Thus, the Ld. AR prayed for allowance of such expenditure as the assessee had all corroboratory evidence. 4 Mahak Industries Pvt. Ltd.
On the other hand, the Ld. Sr. Departmental Representative (‘Sr. DR’) placing emphasis on the finding of the Ld. CIT(A) and the Ld. AO prayed for dismissal of the appeal.
We have heard both parties and have perused the material available on record. We take note of the fact that the aggregate Loans & advances have gone down in the relevant year (schedule-9 of the Balance Sheet). After careful consideration of the material on the record and the submissions of the Ld. AR, we are of the view that the issue of disallowance of interest under section 36(1)(iii) of the Act is squarely covered by the decision of the co- ordinate bench in the assessee’s own case in (supra). Hence, respectfully following the said decision in the disallowance of Rs.29,49,583/- sustained by the Ld. CIT(A) is hereby deleted. The assessee gets consequential relief.
The next issue is with respect to 100% disallowance out of rent, salary and wages. We do not find any infirmity in the finding of the Ld. CIT(A) in view the fact that the Ld. AR has not brought any material on the record to contradict the finding of the Ld. CIT(A) on this issue and the copy of ledger account is not the primary document of incurrence of any expenditure. The Ld. CIT(A) has remitted the issue to the Ld. AO for verification and doing needful thereafter. Hence, we decline to interfere with the finding of the Ld. CIT(A) in this regard. Thus, the ground No. 3 of the assessee gets dismissed as above.
Order pronounced in open Court on 17th November, 2025