Vikram Biharisaran Khandelwal Vs DCIT (ITAT Mumbai)
In the case of Vikram Biharisaran Khandelwal Vs DCIT, the Income Tax Appellate Tribunal (ITAT) of Mumbai ruled in favor of the assessee, directing the deletion of several additions made by the Assessing Officer (AO) for the assessment years 2005-06 and 2006-07. The case, which was in its second round of proceedings, stemmed from a search and seizure operation conducted by the Revenue in 2006. The dispute centered on three main issues: the disallowance of interest expenses, the treatment of capital gains from share transactions as unexplained income, and the addition of estimated commission expenses.
Disallowance of Interest Expenses
The AO had disallowed a portion of the interest expenses, arguing that the assessee had given interest-free loans while simultaneously borrowing funds on which interest was paid. The AO presumed the borrowed funds were used for the interest-free loans and disallowed interest at a rate of 18% on the entire loan amount.
The ITAT, however, applied the principle established in the Reliance Utilities and Power Ltd v. CIT (2009) case by the Bombay High Court. This precedent holds that when an assessee has both “own funds” (capital) and “borrowed funds,” it is presumed that the interest-free loans are first given out of the own funds. The tribunal noted that the assessee had a significant capital balance in his business. Following this judicial precedent, the ITAT directed the AO to disallow interest only on the portion of the interest-free loan that exceeded the assessee’s available capital. It also instructed the AO to use the average actual interest rate paid by the assessee on his loans (9.39% for AY 2005-06 and 10.36% for AY 2006-07) instead of the arbitrary 18% rate previously applied.
