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2024 Supreme(Online)(ITAT) 4218
INCOME TAX APPELLATE TRIBUNAL (HYDERABAD BENCH)
SHRI LALIET KUMAR, J, SHRI MADHUSUDAN SAWDIA, A.M
M/s. Agarwal Sponge & Energy Private Limited, Hyderabad – Appellant
Versus
Learned Commissioner of Income Tax (Appeals)-I, Hyderabad – Respondent
ITA No.1109/Hyd/2018
For the Appellants/Petitioners: Ld. AR
For the Respondents: Ld. DR
Charging of notional interest does not arise when interest-free funds exceed loans given, and verification of outstanding balances must be carried out to ensure their legitimacy.
Headnote:(A) Income Tax Act, 1961 - Sections 36(1)(iii) and 133(6) - Disallowance of interest and unsecured loans - Assessing Officer disallowed interest on loans given to related parties, arguing lack of surplus funds, upheld by CIT(A) - Assessee demonstrated interest free funds exceeding loans granted, relying on past case law - Court ruled that charging of notional interest does not arise if interest-free funds available. (Para 9)
(B) Appeal - Verification of Accounts - Court remanded unverified outstanding closing balances to Assessing Officer for further examination - Confirmation from related parties deemed adequate proof of identity and creditworthiness, warranting deletion of additions made to total income. (Para 19)
Facts of the case:
The company was engaged in sponge iron manufacturing and had declared nil income for A.Y. 2012-13, later assessed with significant additions by AO due to loans and interest disallowed.
Findings of Court:
Disallowance of Rs.22,97,435 on notional interest deemed unjustified; addition of unsecured loans and outstanding balances to be remanded for verification. (Paras 9 and 19)
Issues: Main issues included whether interest could be disallowed without adequate proof of surplus funds and whether claimed amounts should be included as income without corroboration from related parties.
Ratio Decidendi: The court emphasized that if interest free and own funds are available, charging notional interest does not stand; confirmation of debts is crucial to assessing the legitimacy of claims made. (Paras 9, 19)
Result: Appeal allowed for statistical purposes.
| Table of Content |
|---|
| 1. overview of appeal and assessment details. (Para 1 , 2) |
| 2. disallowance of interest claimed on loans. (Para 4 , 5) |
| 3. outstanding loans verification and explanation. (Para 10 , 15) |
| 4. court's decision and remand for verification. (Para 19 , 20) |
आदेश/ORDER
PER MADHUSUDAN SAWDIA, A.M:
This appeal is filed by M/s. Agarwal Sponge & Energy Private Limited, Hyderabad (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-I, Hyderabad (“Ld. CIT(A)”), dated 09.01.2018 for the A.Y. 2012-13.
2. The facts of the case in brief are that the assessee was a company engaged in the business of manufacturing of sponge iron lump, filed it’s return of income for A.Y. 2012-13 on 29.03.2013 declaring total income of Rs.Nil. The case of the assessee was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of the Income Tax Act, 1961 (“the Act”) were issued to the assessee. After considering the submissions of the assessee, the Learned Assessing Officer (“Ld. AO”) completed the assessment u/s.143(3) of the Act on 30/03/2015 determining the total income at Rs.1,47,78,396/-.
3. Aggrieved with the order of Ld. AO the assessee filed appeal before the Ld. CIT(A), who partly allowed the appeal of the assessee. Then feeling aggrieved with the order of Ld. CIT(A) the assessee is in appeal before us.
4. At the outset, the Ld. AR submitted that, there are three issues involved in the appeal i.e. a) disallowance of interest of Rs.22,97,435/-; b) addition of unsecured loan from Frontline Steel Pvt. Ltd. of Rs.44,93,733/- and c) addition of outstanding amount of Industrial Engineering Consultants of Rs.13,53,500/-.
5. The brief facts with regard to the ground i.e. disallowance of interest of Rs.22,97,435/- are that, the assessee company had given interest free loan to related parties amounting to Rs.2,87,17,946/-. On account of such interest free loans of Rs.2,87,17,946/- the Ld. AO disallowed an amount of Rs.22,97,435/- u/s.36(1)(iii) of the Act, as per his observation in para No.3 of his order, which is reproduced as under :
“ 3. After verifying the information submitted by the assessee company, the assessment is completed as under: - On verification of records of the asessee, it is noticed that the assessee company had advanced huge amounts to related party concerns viz.,
1. Agarwal Steel Structures (India) Pvt Ltd Rs.99,50,000
2. Satish & Co Rs.1,20,00,000
3. Bhagwati Fats & Edible oils Pvt Ltd Rs.57,67,946
4. Suresh Jimat Lalwani Rs.10,00,000.
Total amounts advanced Rs.2,87,17,946
(At Sino.2,3, & 4, the details of amounts advanced to related party were not mentioned in my show cause letter as they information was furnished subsequent to issue of my show cause notice)
The assessee has neither trading relations nor share interest in the above company & firms. While the assessee paid huge interest to banks and private parties, no interest was charged on the amounts lent to the above related parties. The following is the loan taken from related party and the interest paid
| Company Name | Loan Amount | Interest Paid |
|---|---|---|
| Agarwal Inds. Pvt Ltd | Rs.18,31,72,105 | Rs.29,85,762 |
The assessee was asked to explain as to why proportionate interest should not be disallowed U/s 36(1)(iii) of the Act.
In response the assessee objected to the same stating that the assessee had interest free funds of Rs.45,90,59,790/- (including borrowed funds, share capital and free reserves). The contention of the assessee is not accepted. The assessee had paid interest on the funds borrowed from related party & sister concerns, similarly, whatever amount given to sister concerns, the interest had to be levied irrespective of whether the assessee company has any interest free loans from various parties.
Further, in the instant case, the assessee has no commercial/trading transactions with the above companies and firms. They are not subsidiary companies either. The assessee has not explained the circumstances under which huge amounts was lent
