KEDAR SHASHANK RANADE,PUNE vs. ACIT, CIRCLE -2 , PUNE

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.

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

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 -

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.

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.