Revenue raised an appeal against the order of CIT (A) deleting the addition of Rs. 10,38.237/- made by the assessing officer in its order issued u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as “the Act”).
Brief of the case
In the case of ACIT Vs. Shri JugalKishore K. Agrawal, ITAT Ahmedabad on the basis of revenue observation and after going thought the case file, held that if there is no nexus between the interest income earned and interest paid, then interest paid cannot be allowed within preview of section 57(iii).
Further, this case is initiated as ex –parte against the assessee due to his absence in the hearings. Decision is taken on the basis of written submission of assessee contention made before CIT (A) and revenue arguments.
Facts of the case
a. Assessee is having a Interest free funds of Rs. 4,80,61,281/-, which is majorly invested in FDR of Rs. 200,00,000/- and in capital of its Company “Alfa Plastomers Private Limited” amounting Rs. 1,86,00,000.
b. Assessee filed his return claiming Income Under the head salary and other sources. During the period, assessee need some funds, as his funds were blocked he took a loan from bank against the FDR. Due to this arrangement, he is being able to earn interest of Rs. 22.50 Lacs. Assessee claimed an interest expenditure of Rs. 10,38,237/- (Rs. 5,15,245/- paid for Bank Current Account and Rs. 5,22,986/- paid to Shri Shyam K. Agrawal @ 10.5% on Unsecured Loan of Rs. 90 Lacs) against a interest income of Rs. 22,50,000/- held with Oriental Bank of Commerce.
c. As per assessing officer there was no nexus between the interest paid and income earned, hence disallowed the claim made by the assessee and made an addition of Rs. 10,38,237/-.
d. Later on, Assessee filed an appeal against the order of Assessing officer to CIT(A). CIT (A) after considering the arguments of the assessee and assessing officer and relying upon the ruling of S. A. Builders, CIT (A) deleted the addition made by the assessing officer.
e. On second round of litigation, assessee didn’t appears in the tribunal, hence tit is decided to proceed ex parte against him. Here contentions of assessee were taken from the record file of assessing officer.
Contention of Revenue
a. Assessee fails to prove the nexus between the interest paid and the interest income earned by him.
b. Amount borrowed by the assessee was utilized by him in, investment of such assets which are exempt from tax and in non assessable income.
c. It was contended that as assessee is no where doing business i.e. having no income under the head PGBP, therefore he is not eligible for deduction for interest u/s 36(i)(iii).
d. Due to blockage of fund, he decided to take loan from bank just to preserve its income earning asset (FDR). Thus there is clear nexus between interest income earned and interest paid by him. The same is held in the case of J.D. Italia V. ITO (1986) 17 ITD 154 (HYD.) :-
i. Assessee preserves the income earning moveable assets by raising a loan only at 2% extra Interest cost from bank for the payment of estate duty liability.
ii. In this case expenditure was allowed stating that the interest cost incurred for the payment of liability and there is clear nexus between the income earned and expenditure incurred by the assessee.
e. Investment in sister concerns is a non assessable income, is not correct, as income in the form of interest from partnership firm and dividend from company would be taxable. Although same was not earned in period under consideration, but in subsequent years income got generated.
f. Interest cannot be disallowed on the plea that investment is made in Interest free loans and advances and where interest free capital exceeds the interest free advance. The assessee is having a interest free capital of Rs. 4,08,20,280/- and it exceeds the interest free loans and advance made by him, as stated in the facts of the case. For this Reliance is made on judicial ruling of Torrent Financiers Vs. ACIT (2001) 73 TTJ 624 (Ahd) :-
If Interest free advances (including debit balance of assessee firm) do not exceed the interest free funds available with the assessee then, interest will not be disallowed by stating that funds are not used for business purpose.
Held by the CIT (A)
CIT (A) after hearing the contention of the revenue and considering the written submission of the assessee, concluded that Assessing Officer went more technical for establishing the nexus between the interest paid and revenue earned. Further, he analyze section 56, 57 & 36 to establish the connection between the interest paid and interest free investment in company and firm made by him to earn future income. CIT (A) agrees with the assessee argument that he is having interest free fund which was utilized in giving interest free loans or advances or investment, as the same is squarely covered in the case of S.A. Builders 288 ITR 1 (SC) and deleted the addition made by the revenue.
Held by the Tribunal
As the case is ex parte against the assessee, ITAT after hearing the arguments of revenue and considering written submission of assessee (found in records) made to CIT (A), Concluded that lower authority passed the decision by placing a reliance on the S.A Builders (Supra) and considering the plea of commercial expediency involved therein to give borrowed fund to the sister concern without charging interest. Assessing officer made the addition because assessee is unable to state nexus between the interest paid and interest received. Further, after going through the written submission, we are unable to get the nexus of interest paid and interest received. Thus, we accept the revenue arguments.
The Revenue Sole Substantive ground succeeds.