Harish Pursottamdas Morwani Vs ITO (ITAT Ahmedabad)
Summary: ITAT Ahmedabad partly allowed the assessee’s appeal concerning disallowance of bank interest and bank charges under Section 36(1)(iii) read with Section 37(1) of the Income Tax Act. The assessee, engaged in trading activity, had obtained a ₹2 crore cash credit facility from SBI and advanced ₹80 lakh therefrom to Shri Bhavesh Bhandari of M/s Simandhar Corporation. The Assessing Officer found that the assessee earned interest of only ₹47,671 while incurring bank charges of ₹1,00,775 and loan interest of ₹2,33,550 and consequently disallowed ₹2,86,654. The CIT(A) upheld the addition.
The Tribunal observed that substantial interest-bearing funds had been diverted to a third party and the assessee failed to establish through cogent documentary evidence that the borrowed funds were used wholly and exclusively for his business. It further held that no direct nexus between the cash credit funds advanced to the third party and the assessee’s trading activity was established and commercial expediency was not demonstrated.
However, considering that ₹24 lakh out of the ₹80 lakh advance had been repaid on or before 31 March 2018 and interest of ₹47,671 had also been paid to the assessee, the Tribunal held that a pro-rata interest disallowance of ₹1,14,662 would meet the ends of justice. It accordingly directed the AO to restrict the disallowance from ₹2,86,654 to ₹1,14,662 and partly allowed the appeal.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The assessee has filed the appeal against the order dated 20-022026 passed by Commissioner of Income Tax (Appeals), National Faceless Appeal Centre NFAC (in short, referred to as the CIT(A)) u/s. 250 of the Income Tax Act, 1961 (herein referred to as “the Act”) relating to Assessment Year 2018-19.
2. The assessee has raised following grounds of appeal:-
“[1] The Ld. CIT(A), NFAC, Delhi was grievously erred in upholding the addition of Rs. 2,86,654/- made by the Ld. A.O. being bank interest and bank charges by partly allowing the appeal is illegal and bad in law.
The appellant submits that the Ld. A.O is mistaken to is disallow the expense in comparing the income as there is no free loans and advance and the income is duly considered for the period given and the purpose is explained in the assessment proceeding which is not accepting.
[2] The appellant therefore requests your goodself to kindly delete the above mentioned addition of Rs. 2,86,654/- made by the Ld. AO by upholding the same by the Ld. CIT(A) vide his order, looking to the merits of the case.
[3] The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
3. Brief facts of the case are that assessee, engaged in trading activity, filed return of income on 25-10-2018 admitting total income of Rs. 8,24,320/-. During the course of assessment proceedings, AO noted that assessee had entered into transaction of unsecured loan to the tune of Rs. 80 lakhs with Shri Bhavesh Bhandari, M/s. Simandhar Corporation, out of cash credit loan of Rs. Two crores availed by him from AO further noted that assessee had earned interest income of Rs. 47,671/-only during the year whereas he incurred bank charges of Rs. 1,00,775/-and loan interest payment of Rs. 2,33,550/- for the relevant period. Consequently, AO disallowed a sum of Rs. 2, 86,654/- [( 2,33,550/- + 1,00,775/-) – 47,671/- ].
4. The CIT(A) upheld the addition of Rs. 2, 86,654/- being bank interest and bank charges u/s. 36(1)(iii)r.w.s. 37(1) of the Act.
5. A. R. in his paper book submitted the following. Assesseee started business of trading on 07-11-2017. He applied for cash credit loan to meet heavy requirement of working capital. When the loan of Rs. Two crores (cash credit) was sanctioned by SBI during Feb, 2018, he could not utilize the money for his trading activity immediately. In order not to have the CC limit reduced or cancelled, he utilized part of the loan amount by lending Rs. 80 lakhs to Shri Bhavesh Bhandari, M/s. Simandhar Corporation on 16-02-2018. As the loan amount was diverted to non-business purpose, the AO disallowed the expenses claimed of Rs. 1,00,775/- (bank charges) and Rs. 2,33,550/- (bank interest payment). Assessee contended that the disallowance was not warranted as the same was in connection with his business activity.
6. The DR relied on the order of the ld. CIT(A).
7. We have heard both parties and perused the relevant materials. The only disputed issue is disallowance u/s. 36(1)(iii) r.w.s. 37(1) of the Act. Assessee availed cash credit of Rs. Two crores from SBI during Feb, 2018. The fact remains that substantial interest-bearing fund to the tune of Rs. 80 lakhs was diverted to a third party. The appellant has failed to establish with cogent documentary evidence that the borrowed funds were utilized wholly and exclusively for the purposes of his own business as required u/s. 36(1)(iii) of the Act. The mere fact that the appellant carried on business activities and recorded sales and purchases during the year does not automatically justify diversion of borrowed funds. Further, the interest earned of Rs. 47,671/- is significantly lower than the total finance cost incurred, thereby indicating a clear mismatch and non-business utilization of funds.
7.1 It is a fact that assessee could not establish any direct nexus between interest bearing cash credit and its application by way of loan to Shri Bhavesh Bhandari, M/s. Simandhar Corporation as related to his business activity of trading. Hence, commercial expediency is also not brought out on record. The assessee is active in share trading and also as a LIC agent. Assessee had not utilized the substantial amount of loan for earning profit but made loss.
7.2 Though assessee advanced Rs. 80 Lakh to Mr. Bhavesh Kumar Bhandari on 16-02-2018, a sum of Rs. 24 Lakh had been repaid by him on or before 31-03-2018. Further, interest of Rs. 47,671/- was paid by him to assessee. In view of the above, we are of the considered view that interest-disallowance of Rs. 1,14,662/- (worked out on pro-rata basis) will meet the ends of justice in lieu of Rs. 2,86,654/- (being bank interest and bank charges ) as mentioned in CIT(A) order.
7.3 We, therefore, direct the AO to restrict the disallowance to Rs. 1,14,662/- in lieu of Rs. 2,86,654/-.
8. In the result, the assessee’s appeal is partly allowed.
Order pronounced in the open court on 22-09-2026
