2024 (3) TMI 539 - AT - Income Tax

Interest expense disallowance overturned as assessee had sufficient own funds for interest-free advances to related parties

Rajesh Gupta, Sanjay Gupta Versus ACIT, Circle-40 (1), New Delhi

ITAT Delhi allowed the assessee's appeal regarding disallowance of interest expenses on loans from various parties. The AO had disallowed interest paid on ... Addition of interest expenses on the loan taken from various parties - sufficiency of own funds to lend advance free loans or not? - loans received have been used for income earning purpose - AO observed that the assessee has advanced large amount of loans to its firm and his related concern, thus since the loans received on which the interest paid was utilized for advancing loans for which no interest has been received, the total interest paid has been disallowed - as per CIT(A) disallowance has to be worked out by taking the ratio of average interest bearing funds and the average total funds - HELD THAT:- The assessee has returned income Rs. 4.58 Cr. and had a capital of Rs. 25.69 Cr. and is also on fact that Rs. 7.96 Cr. has been invested in the partnership firm on which the assessee has earned income which has been duly offered to tax. Capital account of the assessee in the books of M/s B. K. Sales Corporation have been examined. After examination and verification, it is observed that the assessee had sufficient own funds to lend advance free loans and the loans received have been used for income earning purpose and such income earned has been offered to tax. Hence, we hold that no disallowance on account of interest is called for. Appeal of assessee allowed. Issues involved:The judgment involves appeals filed by the assessees against the orders of ld. CIT(A)-14, New Delhi dated 06.11.2018, 08.11.2018, 09.12.2019, and 14.02.2020. The common grounds raised by the assessees in various ITA numbers relate to the disallowance of interest paid on borrowings for the business of the firm, the nexus of specific transactions of borrowings, and the justification of disallowance amounts. The Assessing Officer disallowed interest expenses on loans taken from various parties as the loans were advanced to related concerns without receiving interest. The ITAT Hyderabad decision was referenced to support the disallowance of interest paid on money borrowed for making advances.ITA No. 251/Del/2019:In this case, the assessee claimed interest expense on loans taken from various parties, which the Assessing Officer disallowed as the loans were advanced to related concerns without receiving interest. The ld. CIT(A) modified the disallowance amount to 22% of the interest paid, considering the ratio of average interest-bearing funds to total funds. The assessee argued that investments and advances were made from interest-free funds earned as remuneration and profits from partnership firms, rentals, and other incomes. The ld. DR contended that interest-bearing funds were utilized for related concerns, justifying the Assessing Officer's action.ITA Nos. 725 & 726/Del/2020:The grounds raised in these appeals challenge the orders passed by the Learned Commissioner of Income-Tax (Appeals) -14, New Delhi, regarding the disallowance of interest paid on unsecured loans. The appellants argue against the partial upholding of disallowances and the failure to confront the alleged report of the Investigation Wing.ITA No. 1255/Del/2020:The assessee in this case challenged the disallowance of interest paid on unsecured loans, contending that confirmations were filed and the interest expenditure was genuine. The judgment emphasizes that no disallowance is warranted when loans are accepted as genuine.The judgment concluded that no disallowance on account of interest is justified in the cases discussed. Additionally, in ITA No. 1255/Del/2020, the acceptance of loans as genuine led to the allowance of the appeals.