2021 (3) TMI 724 - AT - Income Tax

Tribunal Remands Tax Case for Reexamination, Highlights Need for Proof of Non-Interest-Bearing Funds in Interest-Free Loans.

The Tribunal allowed the appeal for statistical purposes, setting aside the CIT(A)'s order and remanding the case to the AO for reexamination. The ... Disallowing proportionate interest expense claimed as a deduction u/s 36(1)(iii) - AO made the said disallowance on the ground that the assessee had utilized directly or indirectly, its interest bearing funds for giving interest-free loans - HELD THAT:- The Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] has held in the context of section 36(1)(iii) of the Act that “if there is interest-free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available”. The above ratio laid down by the Hon’ble Jurisdictional High Court is to be examined in the instant case. Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to examine the applicability of the ratio laid down in Reliance Utilities & Power Ltd.(supra). We direct the assessee to file the relevant documents/evidence before the AO. Assessee appeal is allowed for statistical purposes. Issues:Disallowance of proportionate interest expense u/s 36(1)(iii) of the Income Tax Act 1961.Analysis:The appeal pertains to the disallowance of proportionate interest expense of Rs. 1,93,918 claimed as a deduction u/s 36(1)(iii) of the Act for the assessment year 2012-13. The Assessing Officer disallowed the interest expense on the grounds that interest-bearing funds were utilized to provide interest-free loans. The AO found the assessee's explanation unsupported by documentary evidence, leading to the disallowance. The CIT(A) affirmed the disallowance, stating that the assessee failed to prove the availability of non-interest bearing funds at the time of giving interest-free loans. The CIT(A) emphasized the necessity of establishing a nexus between borrowings, fund utilization, and interest-free loans.During the appellate proceedings, the assessee submitted various details, including income computation, balance sheet, and ledger accounts. However, the CIT(A) dismissed the appeal, highlighting the lack of evidence regarding the availability of interest-free funds at the time of extending loans. The CIT(A) upheld the disallowance of interest expenses due to the failure to establish the genuineness of transactions and the source of interest-free funds.Upon further review, the Tribunal referred to the decision in CIT v. Reliance Utilities & Power Ltd., emphasizing the presumption that investments were made from available interest-free funds if such funds were adequate to cover investments. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to reexamine the matter in light of the Reliance Utilities case. The assessee was instructed to provide relevant documents and evidence to support their case.Ultimately, the Tribunal allowed the appeal for statistical purposes, indicating a partial victory for the assessee. The matter was remanded to the AO for a fresh examination based on the legal precedent cited, emphasizing the importance of substantiating the source of funds in such cases.This detailed analysis of the judgment highlights the key legal arguments, evidentiary requirements, and the Tribunal's decision to remand the matter for further review based on established legal principles.