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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI SANJAY GARG & SHRI RAJESH KUMAR
Per Sanjay Garg, Judicial Member:
The above titled appeals have been preferred by the Revenue against the two separate orders both dated 18.02.2014 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2010-11 & 2011-12. Since the issues taken in both the appeals are identical in nature, hence the same are taken together for disposal by this common order. For the sake of convenience, the facts have been taken from ITA No.3190/M/2014. The Revenue has taken the following grounds of appeal: "(i) Whether on the facts and circumstances of the case and in law, the CIT(A)-40, Mumbai was correct in deleting the addition of Rs.63,12,722/- made by the AO on account of disallowance of interest?"
(ii) Whether on the facts and circumstances of the case and in law, the CIT(A) was correct in holding that there existed a nexus between the interest expenses and interest income solely on the basis of the bank statements ?
2 Shri Himanshu B. Kanakia The Appellant craves to leave, to add, to amend and / or to alter any of grounds of appeal
, if need be. The Appellant, therefore, prays that on the grounds stated above, the order of the CIT(A)-40, Mumbai may be set aside and that of the Assessing Officer restored.”
2. The brief facts relating to the issue raised before us are that in the return of income, the assessee had shown the interest income of Rs.88,14,417/- and had claimed set off of the interest expenditure of Rs.81,76,776/-. The assessee offered the balance amount of Rs.6,37,641/- to tax along with certain other disallowances. The Assessing Officer (hereinafter referred to as the AO), however, observed that the assessee had not been able to establish the nexus between the funds used for giving interest bearing loans to other parties, on which interest had been earned with the funds which have been taken on interest from other parties. He observed that only if the funds taken on interest would have been advanced by the assessee to other parties from whom he has charged the interest, then only the assessee could claim deduction and since the assessee had failed to establish the nexus between the two, hence the interest expenditure could not be allowed to be set off. He, therefore, held that there was reasonable presumption that the capital of the assessee had been used by him to forward the interest bearing loans to parties whereas the interest bearing loans taken by the assessee would have been utilized for other purpose. He accordingly disallowed the set off of the expenditure and assessed the interest income of the assessee at Rs.88,14,417/-. Being aggrieved by the order of the AO, the assessee preferred appeal before the Ld. CIT(A).
The Ld. CIT(A) observed that the loans upon which the assessee had paid interest were not the new loans. The issue relating to payment of interest on such loans had already been examined by the AO in the earlier assessment years and no such disallowance of interest was made by the AO in the earlier years. He, further, observed from the bank statement of the assessee that there was a direct correlation between the loan amount received and the loan amount 3 Shri Himanshu B. Kanakia advanced by the assessee. He observed that it was evident that the loans were raised and investments were made by the assessee with a view to earn interest income and the assessee had offered for taxation a positive interest income. Besides that the assessee at his own disallowed a sum of Rs.18,64,054/- and has offered interest income of Rs.25,01,695/- and that the suo-moto disallowance had been made by the assessee taking into consideration the overall loan taken during the year on which the interest was paid and the overall loan given during the year on which interest was received. The assessee has disallowed the proportionate interest on the amount of loan taken which was more than the amount of loan given. The Ld. CIT(A) has given a well reasoned finding, the relevant part of which, for the sake of completeness, is reproduced as under: “18. Thus, the overwhelming view is that once the issue has been specifically examined by the AO in the earlier proceedings and has been allowed, and if there is no fresh evidence or material against the assessee, the same issue should not be raked up again in the later assessment proceedings. In my considered view, the interest expenditure on loan taken is a valid and allowable claim in the eyes of law. Evidently, loans were raised and investments were made with a view to earn interest income and interest income to the tune of Rs.88,14,417/- has actually been earned and declared. Therefore, interest expenditure cannot be disallowed. In any case, interest received at Rs.88,14,417/- is more than the interest paid at Rs.81,76,776/-, resulting into positive income under the head ‘interest’. Still the assessee on his own disallowed a sum of Rs.18,64,054/- and has offered interest income of Rs.25,01,695/-. This disallowance has been made on the basis of a well thought out logic, which is 'what is the average loan taken during the year on which interest is paid and what is the average loan / given during the year on which interest is received'. If the average loan taken is higher than average loan given during the year, then interest is disallowed on the difference amount of loan taken vis-à-vis loan given calculated at the effective rate of interest paid. In formula terms, it is denoted as under:-
Interest disallowed= [Average amount of loan taken on which interest is paid - Average amount of loan on which interest is received] x effective rate of interest paid. So if average of amount of loan taken is less than average amount of loan given, then no disallowance is called for. However, this calculation does not consider interest-free funds taken or given, and rightly so.
4 Shri Himanshu B. Kanakia This methodology has been adopted by the assessee consistently over last few years and had been accepted by the then AO and Addl. CIT. Central, while completing the search assessments earlier vide order dated 31/3/2009 for A.Ys. 2007-08 and 2008-09 and appears to be reasonable. On the contrary, the logic given by the AO to disallow the entire interest paid on loan taken, though it was earlier accepted, does not appear to be sound enough. As per Balance Sheet, total amount of unsecured loan taken is Rs.15,88,47,709/- and loan given is Rs.15,13,64,527/-. However, amount on which interest is paid and received is different. In the current year, average loan taken works out to Rs.9,40,86,738/- and average loan given works out to Rs.7,33,75,025/-. Thus, there is difference of Rs.2,07,11,713/-. Effective rate of interest works out to 9%. So disallowance of interest works out to Rs.18,64,054/-, which has been done by the assessee and in my considered view appears to be fair.
The learned AO, in his order, has mentioned that there was no direct correlation between Ioan given and loan taken. However, it does not appear to be a correct observation. I looked into the bank statement of the assessee maintained jointly with Shri Rasesh Kanakia, his brother, and found that by an large, there is direct co-relation, even though it is not necessary to claim such an interest expenditure. This issue has been dealt with by me in the appellate orders in case of Shri Rasesh Kanakia for A.Ys. 2005-06 to 2011-12, which is being decided simultaneously. Therefore, it may be mentioned that there was strong co-relation between the loan taken and loan advanced. However, I would like to add that the interest expenditure is allowable, even if there is no direct correlation between the loan taken and the loan given, as long as the assessee is charging interest on loan given by him. In any case, the funds are flowing in and flowing out, out of the bank account, and genuineness of loan taken and loan given is not in doubt.
In view of the above discussion and respectfully following the judgements of Hon'ble Apex Court and Hon'ble High Courts as mentioned in paras 11 to 17 of this order, respectfully following the above judgements, I hold that disallowance of interest expenditure and consequently making an addition of Rs.63,12,722/- is unsustainable and unjustified. The same is, therefore, directed to be deleted and this ground of appeal is allowed.”
4. We do not find any infirmity in the above well reasoned order of the Ld. CIT(A) and the same is accordingly upheld.
ITA No.3191/M/2014 5. The issues taken in are identical. Hence in view of our findings upholding the order of the Ld. CIT(A) on identical issue in ITA No.3190/M/2014, the order of the Ld. CIT(A) for A.Y. 2011-12 is also 5 Shri Himanshu B. Kanakia upheld.
In the result, both the appeals are hereby dismissed.
Order pronounced in the open court on 16.03.2016.