2024 (4) TMI 93 - AT - Income Tax

Assessee's interest disallowance under Section 36(1)(iii) remanded due to missing documentary evidence for verification

M/s Moonlight Properties Pvt. Ltd. Versus The ACIT, Central Circle-II, Chandigarh.

M/s Moonlight Properties Pvt. Ltd. Versus The ACIT, Central Circle-II, Chandigarh. - [2024] 113 ITR (Trib) 705 (ITAT [Chand]) Issues Involved:1. Disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961.2. Nexus between advances given to the Director and the business of the assessee.3. Availability of interest-free funds with the assessee.4. Admission of additional evidence.Summary:1. Disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961:The assessee challenged the order confirming the disallowance of interest of Rs. 75,75,208/- u/s 36(1)(iii) made by the AO. The AO disallowed interest on the grounds that the assessee did not have sufficient liquid funds to make advances to the Director and had raised further loans during the year. The ld. CIT(A) confirmed the disallowance, stating that the assessee could not explain the business purpose for the advances and had not discharged its onus to prove that the borrowed funds were utilized for business purposes.2. Nexus between advances given to the Director and the business of the assessee:The AO held that the assessee could not prove any nexus between the advance given to the Director and the business of the assessee. The assessee contended that the advance was given out of commercial expediency, but the AO found no interest-free funds available and that interest-bearing funds had been borrowed during the year.3. Availability of interest-free funds with the assessee:The assessee argued that it had sufficient interest-free funds available, including share capital and reserves, and that the advances were made out of these funds. The assessee sought to place additional evidence on record, including bank statements and other financial documents, to support its claim. The Tribunal found these documents to be very material and relevant for adjudicating the matter and decided to restore the issue to the AO to verify the correctness and authenticity of these documents.4. Admission of additional evidence:The Tribunal allowed the admission of additional evidence, stating that the availability of funds can be ascertained on documentary evidence. The Tribunal cited various cases, including 'S.A. Builders Ltd. Vs CIT(Appeals), Chandigarh' and 'Vaman Prestressing Co. (P) Ltd. Vs Addl. Commissioner of Income Tax,' to support the principle that if there are sufficient interest-free funds available, it can be presumed that the investments were made out of these funds. The Tribunal remanded the matter to the AO to verify the additional documents and re-adjudicate the issue after providing an adequate opportunity of being heard to the assessee.Conclusion:The appeal was treated as allowed for statistical purposes, and the matter was remanded to the AO for fresh adjudication based on the additional evidence provided by the assessee.