TaxTMI 
TaxTMI 
2026 (1) TMI 688
X X X X Extracts X X X X
X X X X Extracts X X X X
....referred to as "the Act"] for Assessment Year 2014-15, arising out of the assessment order dated 16.12.2016 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961. 2. The brief facts of the case are that the assessee is a partnership firm engaged in the business of builder and developer. For the assessment year under consideration, the assessee filed its return of income on 29.11.2014, declaring a total income of Rs. 21,67,520/-.The case was selected for scrutiny under the Computer Aided Scrutiny Selection (CASS). During the course of assessment proceedings, the Assessing Officer observed that the assessee had shown sales of bungalows of approximately Rs. 3.33 crore and closing work-in-progress of Rs. 7.56 crore....
X X X X Extracts X X X X
X X X X Extracts X X X X
....interest on unsecured loans : Rs. 3,13,109/- iv. Disallowance under section 36(1)(iii) : Rs. 25,01,730/- 3. Thus, the assessed total income was determined at Rs. 84,71,400/-. Penalty proceedings under section 271(1)(c) were also initiated separately. 4. Aggrieved by the assessment order, the assessee carried the matter in appeal before the learned CIT(A). Before the CIT(A), the assessee furnished detailed written submissions, confirmations from creditors, bank statements, ledger accounts and comparative statements of assets and liabilities. It was contended that the unsecured loans were genuine and that the assessee had discharged the onus cast upon it under section 68 by establishing the identity and creditworthiness of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng interest computed at 12 percent on the said amount, and relief was granted for the balance. Thus, the appeal before the CIT(A) was partly allowed. 8. Aggrieved by the partial sustenance of the disallowance under section 36(1)(iii), the assessee has raised the following grounds before us - 1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in retaining a part of disallowance at Rs. 7,70,069/- out of the disallowance of Rs. 25,01,730/- made by the Assessing Officer under section 36(1)(iii) in respect of claim of expenditure on interest. 2. It is therefore prayed that the aforesaid disallowance of Rs. 7,70,069/- may please be directed to be deleted. 3. The assessee craves leave t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of which advances of Rs. 15,17,425/- were for purchase of land and directly relatable to business. iv. The effective interest-free advances thus stood at Rs. 1,93,30,320/-. v. The assessee demonstrated availability of interest-free funds aggregating to Rs. 5,86,81,943/-, comprising advances received against sale of bungalows, sundry creditors, and deposits from buyers. vi. The increase in interest-free advances during the year was only Rs. 64,17,245/-, whereas interest-bearing loans increased by Rs. 3,52,26,779/-. vii. The learned CIT(A) recorded a categorical finding that the Assessing Officer failed to establish any direct nexus between borrowed funds and interest-free advances. 12. The learned CIT(A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the conclusion that borrowed funds have been diverted for non-business purposes, particularly in the absence of any fund-flow analysis or identification of specific diversion. 14. At this stage, an important and decisive aspect of the matter deserves emphasis. As noted above, a substantial portion of the interest income earned by the assessee during the year represents interest received from partners, which fact has not been disputed by the authorities below. Once it is an admitted position that the assessee has charged and recovered interest from partners on their debit balances, the mere existence of a debit balance in the capital account loses its relevance for the purpose of invoking section 36(1)(iii). The charging of interest fro....