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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 30.04.2024 of the CIT(A) / NFAC, Delhi relating to assessment year 2018-19.
Facts of the case in brief, are that the assessee is an individual and engaged in real estate business. He filed his return of income on 07.10.2018 declaring total income at Rs.52,98,930/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Subsequently, the case was selected under CASS for complete scrutiny under the E-assessment Scheme, 2019.
Accordingly, statutory notice u/s 142(1) of the Act was issued and served on the assessee to which, the AR of the assessee appeared before the Assessing Officer from time to time and filed the requisite details.
During the course of assessment proceedings the Assessing Officer noted that the assessee has debited an amount of Rs.51,84,792/- as interest on unsecured loans. He noted that the unsecured loans were outstanding at Rs.5,02,96,865/- as on 31.03.2018. The assessee has further given loans and advances amounting to Rs.1,15,67,000/- during the year under consideration. Since the assessee has not charged any interest, therefore, the Assessing Officer examined the issue with respect to the provisions of section 36(1)(iii) of the Act. Rejecting the various explanations given by the assessee, the Assessing Officer disallowed an amount of Rs.6,25,496/- in respect of the following four persons to whom the loans have been given without charging any interest: a) Amit Shinde Rs.10,000/- b) Nilesh Powar Rs.26,301/- c) Sheela Ranade Rs.5,36,400/- d) Tejash Ghadge Rs.52,795/- Total Rs.6,25,496/-
The relevant observations of the Assessing Officer read as under: “3.2 Accordingly, the amount Rs.6,25,496/- is being disallowed being interest on the loans and advances outstanding as on 31.03.2018 whereas interest has been charged 5% to 23% as computed by the assessee in the case of interest paid on unsecured loans. Taking into consideration the varying rates of interest given on account of interest on unsecured loans, average rate of 12% has been adopted for computing interest as per the table. Thus, amount of Rs.6,25,496 is being disallowed and added back to the taxable income of the assessee. Penalty
proceedings is being initiated u/s 270A(2)(a) of the IT Act for under reporting of income.”
The Assessing Officer further noted that the assessee has taken unsecured loans during the year from the various parties. He, therefore, asked the assessee to furnish the details of such unsecured loan creditors to whom interest has been paid. After considering the various details furnished by the assessee and observing that the assessee has paid interest ranging from 17% to 23% whereas the banks are charging interest ranging from 9% to 12% on business loans, he adopted the interest rate of 15% on unsecured loans as reasonable and accordingly made addition of Rs.4,55,190/- as excess interest paid.
In appeal, the CIT(A) / NFAC dismissed the appeal filed by the assessee.
Aggrieved with such order of CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds of appeal: The following grounds are taken without prejudice to each other - On facts and in law, 1] The learned CIT(A) erred in confirming the disallowance of interest of Rs.6,25,496/- u/s 36(1)(iii) on account of the loans / advances given interest free to the following persons on the ground that the assessee ought to have charged interest on the loans / advances advanced to them -
Sr. No. Name of the person Amount of the loan advance given (Rs.) 1 Amit Shinde 5,00,000/- 2 Nilesh Pawar 40,00,000/- 3 Sheela Ranade 44,70,000/- 4 Tejas Ghadge 5,00,000/-
2] The learned CIT(A) erred in holding that the assessee failed to prove that the loans/advances given to the above persons was for the purposes of his business and therefore, the learned A.O. was justified in making disallowance u/s 36(1)(iii) of Rs.6,25,496/-. 3] The learned CIT(A) failed to appreciate that the loans/advances given to Shri Amit Shinde, Shri Nilesh Pawar and Shri Tejas Ghadge were in the course of the regular business of the assessee and therefore, there was no reason to hold that the assessee ought to have charged interest on the said loans / advances given and accordingly, the disallowance of interest in respect of the said loans is not justified and the same may kindly be deleted. 4] The learned CIT(A) failed to appreciate that the assessee had sufficient interest free funds available with him for making the above referred loans advances and since there was no nexus that the borrowed funds were utilised for giving the above referred loans / advances, the disallowance made of Rs.6.25,496/- may kindly be deleted. 5] The learned CTT(A) erred in confirming the disallowance of interest of Rs.4,55,190/- on the ground that the assessee had paid interest on the loans taken from a few persons at a rate much higher rate than the market rate. 6] The learned CIT(A) failed to appreciate that the persons to whom higher rate of interest was paid were not related with the assessee and hence, there was no question of making any disallowance of the interest amount. 7] The learned CIT(A) erred in not appreciating that in the earlier years, the learned A.O. had accepted payment of interest at a higher rate and hence, there was no reason to take a different view in the year under consideration. 8] The learned CIT(A) failed to appreciate that the assessee had taken unsecured loans from a few persons and hence, had paid higher rate of interest on the said loans taken and accordingly, considering the fact that the terms and conditions of the said loans were different vis-à-vis the loan taken from the bank and hence, the comparison made by the learned A.O. was not justified and accordingly, the disallowance may kindly be deleted. 9] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
The Ld. Counsel for the assessee submitted that the grounds of appeal No.1 to 4 relate to the order of the CIT(A) / NFAC in confirming the disallowance of interest u/s 36(1)(iii) of the Act to the tune of Rs.6,25,496/- whereas rest of grounds relate to the disallowance of interest of Rs.4,55,190/- being the excess interest paid.
9. So far as the first issue is concerned, the Ld. Counsel for the assessee submitted that the own capital of the assessee is shown at Rs.4,36,06,730/- which is evident from page 3 of the paper book. This own capital far exceeds the amount of interest free loans given to the four persons. Referring to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities Ltd. reported in 313 ITR 340 (Bom) and the decision of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT reported in 438 ITR 1 (SC), he submitted that since the own capital of the assessee is much more than the amount of interest free loans given by the assessee, no disallowance u/s 36(1)(iii) of the Act is called for.
10. So far as the second issue is concerned, he submitted that the assessee has paid interest on unsecured loans running from 17% to 23%. He submitted that the Assessing Officer has not doubted the genuineness of such unsecured loans but he has restricted the interest to 15%. He submitted that none of the parties are related to the assessee. Referring to the copy of the assessment order for assessment year 2016-17 placed at pages 57 to 59 of the paper book, he submitted that no such disallowance has been made in the order passed u/s 143(3) of the Act. Similarly, for assessment year 2017-18 also, the Assessing Officer has passed the order u/s 143(3) of the Act, copy of which is placed at pages 61 to 63 of the paper book and no such disallowance has been made. Similarly, for assessment year 2014-15, no such disallowance has been made on account of interest paid on unsecured loans. Therefore, the Assessing Officer is not justified in disallowing such interest. He further submitted that banks charge less interest due to mortgage of properties or 3rd party guarantee and various other formalities. However, no such formalities are required while accepting the unsecured loans from un-related parties and therefore, they usually charge a higher rate of interest than the bank interest. He submitted that under identical circumstances, the Co-ordinate Benches of the Tribunal are taking a liberal view in allowing the interest upto 24%. He accordingly submitted that no disallowance is called for.
The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the CIT(A) / NFAC.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. So far as the first issue is concerned, the same relates to the order of the CIT(A) / NFAC in confirming the disallowance of interest of Rs.6,25,496/- u/s 36(1)(iii) of the Act. A perusal of the Balance Sheet of the assessee, placed at page 3 of the paper book, shows that the opening capital as on 01.04.2017 is Rs.4,36,06,730.78 whereas the assessee has given interest free loans / advances of only Rs.94,70,000/-. The Hon'ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT (supra) has held that when the assessee having sufficient interest free funds of their own greater than the investments, proportionate disallowance of interest paid is not called for. The Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities Ltd. (supra) has held that if there were funds available both interest free and overdraft and / or loans taken, then a presumption would arise that the investment would be out of interest free funds generated or available with the company, if the interest free funds are sufficient to meet the investments and accordingly upheld the decision of the Tribunal in deleting the disallowance. Since in the instant case also, the assessee has sufficient own capital which is much more than the amount of interest free loans given to the various parties, therefore, no disallowance of interest u/s 36(1)(iii) of the Act is called for. The first issue raised by the assessee in the grounds of appeal is accordingly allowed.
So far as the second issue is concerned, the same relates to the disallowance of proportionate interest and thereby making an addition of Rs.4,55,190/-. A perusal of the assessment order shows that the assessee has given interest on unsecured loans to the various parties ranging from 17% to 23%. While the Assessing Officer has not doubted the unsecured loans, however, he has restricted such interest to 15% and thereby made the addition of Rs.4,55,190/- being the excess interest paid. We find for assessment year 2016-17 the case was reopened, inter-alia the high interest expenses relatable to the exempt income and high interest expenses and low turnover. We find the Assessing Officer in the order passed u/s 143(3) of the Act has not made any such disallowance. Similarly, for assessment years 2014-15 and 2017-18 also, no such disallowance has been made by the Assessing Officer in the orders passed u/s 143(3) of the Act on account of excess interest paid. Therefore, following the rule of consistency itself, we are of the considered opinion that no disallowance of interest is called for. The second issue raised by the assessee in the grounds of appeal is accordingly allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 14th October, 2024.
Sd/- Sd/- (ASTHA CHANDRA) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 14th October, 2024 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपीलार्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. The concerned Pr.CIT 4. DR, ITAT, ‘A’ Bench, Pune 5. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 1 Draft dictated on 08.10.2024 Sr. PS/PS 2 Draft placed before author 09.10.2024 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to the Head 9 Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order