MULCHAND LALAJI AND CO.,MUMBAI vs. ASST CIT WD 12(1), MUMBAI

We have heard the Authorised Representative (AR) of the assessee and Departmental Representative (DR) of the revenue and have gone through the material available on record. AR of the assessee has argued that the assessee has filed Audit Report showing that debtor-company had stopped payment of interests. The company who has taken money from the assessee to invest in plot of land at Andheri. When the plot was purchased by the said party it was free from all encumbrances. After some time said plot was suddenly come under encroachment and despite their best effort the same could not be recovered and thus, to reduce their concurrent losses stopped payment interest to the assessee. The assessee also argued that copy of resolution of said company is placed on record (page no. 65 of paper book) and statement account of debtor-company at page no. 55 to 64 along with the purchaser agreement is also placed on record. On the other hand, DR relied upon the order of authorities below and further argued that principle of res judicata is not applicable in the Income-tax proceeding.

We have considered the rival contentions of the parties and perused the material available on record. The AO while making addition u/s 36(iii) observed that the assessee claimed interest expenses of Rs. 44,37,115/- on unsecured loan of Rs.3.82 Crore. Further the assessee has shown interest income of Rs. 27,23,2018/- on the loan of Rs. 4,21,48,963/-advances by him. The assessee was asked to explain that the he paid interest at the average interest of 11.5%, whereas interest charged by him is only at 7.5%. The assessee explained that he has not received interest since 1999 from Parsvatej Nirman Pvt Limited. Since 2000-01 the assessee stopped crediting interest in its book. And the assessee decided from 2000-01onwards not to credit the interest till the principal amount is received back. The contention of the assessee was not accepted by AO. The AO concluded that the interest was advanced to the sister concern , the assessee was following mercantile system of accounting and the interest accrued on loan ought to have offered to tax, there was no commercial expediency, it was not established that assessee have sufficient funds. The assessee must establish the nexus between interest expenditure and purpose of business. The AO calculated the total interest as under: Total interest paid X Amount of interest free loans Total borrowed funds = 44,37,115 X 1,65,96,451 3,82,96,000 = Rs. 19,22,925 5. The ld. CIT(A) while dealing with the ground has observed that the assessee has not adequately explained the commercial expediency for advancing interest free loan, nor established any nexus between the interest expenditure and the purpose of business. The assessee merely stated that the money was lent to its sister concern to earn interest. CIT(A) further concluded that no document was furnished to show that any efforts was made to recover the loan and confirmed the action of AO.

We find that the assessee has explained that from the year 2001-to AY-2006-07 not charged interest from Persvatej Nirman Pvt. Ltd. and further explained that the said company has not able to pay interest to the assessee due to extraordinary circumstances. The no payment of interest is shown in the audited account of the assessee. Assessee has filed documentary evidence about the inability of debtor- company to pay interest. The AO disallowed the interest only on hypothetical basis. It is an admitted fact that in the earlier years no interest was received and the department has not made any addition on the same ground. We have seen the copy of assessment order in respect of AY-2003-04 passed u/s. 143(3) of the Act (page no. 52 to 54 of paper book), wherein no disallowance u/s. 36(iii) was made. We have noticed that the CIT(A) directed the AO to disallow interest on the basis of day to day balances outstanding in the loan account of Persvatej Nirman Pvt. Ltd. As we have already observed that no addition was made in the past year assessment and there was no change of circumstances. Hence, keeping in view the principle of consistency the CIT(A) should not have treated this year in different to the earlier years. As there was no change of circumstances for the relevant year under consideration, thus the addition made u/s. 36(iii) in the relevant AY is also liable to be deleted. Hence, this ground of appeal