ITAT directs AO to verify transactions with Kadam under section 36(1)(iii)

The ITAT allowed the appeal, directing the AO to verify the actual transactions with Kadam to determine the applicability of the disallowance under section 36(1)(iii) of the Income Tax Act. The case was remanded for further examination regarding the nature of the outstanding amount, emphasizing the need to establish whether any advance was actually made to Kadam.

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Issues:
Appeal against disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act for Assessment Year 2014-15.

Analysis:
1. The Assessing Officer noted interest-free loans given by the assessee and interest-bearing loans taken during the year. The AO sought explanations regarding the utilization of interest-bearing funds for interest-free advances. The AO disallowed interest expenses of Rs. 18,84,000 on the opening balance of these advances under section 36(1)(iii).

2. The CIT(A) upheld the disallowance, stating that interest expenses must be incurred wholly and exclusively for business purposes to be allowable. The CIT(A) observed that since the borrowed funds were diverted for non-business purposes, the disallowance was justified. Citing case laws, the CIT(A) confirmed the disallowance under section 36(1)(iii).

3. The assessee contended that the outstanding amount represented the unpaid sale price of land sold in previous years, mistakenly shown as loans and advances instead of trade receivables. The appellant argued that no cash outflow occurred, and no interest-free advances were given, thus no disallowance was warranted.

4. The ITAT found that no interest-free advances were given, and the amount in question was a journal entry mistakenly categorized as loans and advances. Lack of evidence regarding the sale transaction with Kadam led the ITAT to direct the AO to verify if no advance was made to Kadam, restoring the file for further examination.

5. The ITAT allowed the appeal, emphasizing the importance of verifying whether any advance was actually made to Kadam. If no advance was given, the disallowance under section 36(1)(iii) was deemed unwarranted. The case was remanded to the AO for verification.

In conclusion, the ITAT allowed the appeal, directing the AO to verify the actual transactions with Kadam to determine the applicability of the disallowance under section 36(1)(iii) of the Income Tax Act.

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