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of <h1>Tribunal grants 5% relief on disallowance amount under Income Tax Act - Fund-based liabilities distinction crucial</h1> <h3>Vipan Khanna Versus Income Tax Officer, Ward 6 (3), Pathankot, Punjab</h3> Vipan Khanna Versus Income Tax Officer, Ward 6 (3), Pathankot, Punjab - TMI Issues:Sustainability of disallowance of interest on borrowed capital u/s. 36(1)(iii) of the Income Tax Act, 1961.Analysis:The judgment pertains to an appeal against the Commissioner of Income Tax (Appeals)'s order dismissing the assessee's appeal contesting the assessment u/s. 143(3) of the Income Tax Act, 1961 for the Assessment Year 2013-14. The single issue raised in the appeal is the sustainability of the disallowance of interest on borrowed capital u/s. 36(1)(iii) of the Act, amounting to Rs. 12.72 lacs. The assessee, engaged in various businesses, claimed interest on secured loans borrowed ostensibly for business purposes. The Assessing Officer found that significant advances were made for non-business purposes, leading to the disallowance. The CIT(A) upheld the disallowance, emphasizing the inadequacy of interest-free funds compared to the total advances made. The assessee contended that there was sufficient interest-free capital available, but the Tribunal highlighted the importance of distinguishing between fund-based and non-fund based liabilities to ascertain the adequacy of interest-free capital. The Tribunal analyzed the balance sheet, concluding that the interest-free capital was insufficient to cover the non-business advances. Despite the assessee's arguments, no concrete evidence was provided to support the claim of adequate interest-free capital. Consequently, the Tribunal partially allowed the appeal, granting relief of 5% on the disallowance amount.In conclusion, the judgment delves into the intricacies of interest disallowance on borrowed capital under section 36(1)(iii) of the Income Tax Act. It emphasizes the necessity of substantiating claims with factual evidence and highlights the importance of differentiating between fund-based and non-fund based liabilities in determining the adequacy of interest-free capital. The Tribunal's decision to partially allow the appeal underscores the significance of presenting a well-supported case to challenge tax assessments effectively.
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