2026 (2) TMI 418 - AT - Income Tax

Proportionate interest disallowance and unexplained credit and partner remuneration additions upheld after lack of nexus and proof

Proportionate interest claimed by a firm was disallowed because advances for property bookings and alleged interest free loans lacked documentary proof ... Proportionate interest paid by the firm disallowed for non utilization of loan funds for business purposes - As argued since there is surplus funds available with the Firm, therefore there is no question charging proportionate interest - A.O. and held that the advance amounts received for flat booking cannot be accepted as interest free advance and the sundry creditors referred to are for materials purchased and labour employed which had also been reflected in the Work-In-Progress (WIP) meaning thereby that the amount had been utilized in the construction activity - HELD THAT:- Assessee has not filed these bank statements before the A.O. Lower authorities clearly held that the assessee has not proved that the direct nexus of so called interest free unsecured loan in advancing the loan to Praveenbhai R. Khatri HUF. Thus the arguments of the assessee without supporting evidence is not acceptable. Therefore the advance of Rs. 1.12 crores is not related to the business activity of the appellant firm and the interest bearing funds has been diverted for other than the business activities. Therefore the interest expenses made by the A.O. does not require any interference. Thus Ground No. 1 raised by the assessee is hereby dismissed. Addition of unsecured loan u/s. 68 - Assessee submitted before us confirmation of accounts, PAN card and State Bank of India bank account in the name of Dharmeshkumar Ashokbhai Barot and stated that Rs. 2.14 lakhs was issued by Dharmeshkumar Ashokbhai Barot son of Ranjanaben A. Barot. Since the source is being explained the addition is liable to be deleted - HELD THAT:- This argument of the assessee is not acceptable since the assessee failed to establish the identity, creditworthiness of the transaction, therefore the addition made in the hands of the assessee is liable to be sustained. Thus Ground No. 2 raised by the assessee is hereby dismissed. Addition on account of remuneration paid to all partners disbelieving the Supplementary Partnership Deed filed by the assessee - HELD THAT:- The original Partnership Deed clearly states that the remuneration to the extent of 10% of the profit as defined u/s. 40(b) of the I.T. Act be paid to the managing partners. In the so called Supplementary Deed it refers to Clause 14 of the original Partnership Deed which clause has no relevance regarding the remuneration payable to the partners. Further the payment of Rs. 35,00,000/- to all Partners is against the provisions of Section 40(b) of the Act, therefore the addition made by the Lower Authorities does not require any interference. Thus the submissions made by the counsel has no relevance and the case laws relied by him is also clearly distinguishable with the facts of the present case. In the result, ground no. 3 raised by the assessee is devoid of merits and liable to be dismissed. Issues: (i) Whether disallowance of proportionate interest of Rs. 13,44,000 on account of interest-free loan given to third party is justified; (ii) Whether addition of Rs. 2,14,000 under section 68 for unsecured loan from Ranjanaben A. Barot is justified; (iii) Whether excess deduction of Rs. 30,83,406 claimed as partners' remuneration is correctly disallowed under section 40(b).Issue (i): Whether the disallowance of proportionate interest of Rs. 13,44,000 is sustainable.Analysis: The issue required examination of whether sufficient interest-free funds were shown to have been available and directly applied to the loan in question. The returned explanations relied on customer advances and sundry creditors as interest-free sources and contended use of RERA-mandated accounts. Documentary proof showing direct nexus between the asserted interest-free funds and the loan (bank statements/ledgers filed contemporaneously with the assessing authority) was not placed on record before the assessing officer. The assessing and appellate authorities relied on inventories and work-in-progress figures to conclude that the cited funds were utilized in construction activity and not available to justify the loan, and found no direct link establishing that interest-bearing funds were not diverted.Conclusion: The disallowance of Rs. 13,44,000 is upheld; issue decided against the Assessee.Issue (ii): Whether the addition of Rs. 2,14,000 under section 68 is sustainable.Analysis: The issue required proof of identity, genuineness and creditworthiness of the creditor and the genuineness of the loan transaction. The ledger and bank evidence available indicated that amounts were linked to a third person's bank account and the creditor had not proved filing of returns or independent creditworthiness to the satisfaction of the assessing authority. The appellate record sustained the view that the assessee failed to discharge the evidential burden to establish the source and genuineness of the loan.Conclusion: The addition of Rs. 2,14,000 under section 68 is upheld; issue decided against the Assessee.Issue (iii): Whether the excess partners' remuneration of Rs. 30,83,406 is correctly disallowed under section 40(b).Analysis: The question turned on application of the partnership deed and section 40(b) rules for allowable remuneration. The original partnership deed limited aggregate remuneration to prescribed percentages of book profit and the supplementary document relied upon by the assessee was not executed on non-judicial stamp paper and was treated as a letter for presentation during assessment proceedings; it did not modify the remuneration clauses of the original deed. The authorities concluded that claimed payments exceeded the allowable amount under section 40(b) and that the supplementary document did not validly expand entitlement.Conclusion: The disallowance of Rs. 30,83,406 is upheld; issue decided against the Assessee.Final Conclusion: All substantive additions and disallowances raised in the assessment were affirmed on the record and evidence before the authorities, resulting in dismissal of the assessee's appeal.Ratio Decidendi: Where an assessee relies on asserted interest-free sources or altered partnership arrangements to avoid additions, absence of contemporaneous documentary proof establishing direct nexus between source and application of funds, and absence of a validly executed instrument altering remuneration entitlements, justify sustaining additions under the Income-tax Act, 1961.