The Income Tax Appellate Tribunal (ITAT), Delhi Bench while deleting the disallowance under Section 14A of the Income Tax Act, ruled the Borrowing of funds has direct nexus with utilization towards interest bearing advances.
The assessee, Parminder Singh Kalra had borrowed interest bearing funds to the tune of Rs. 3,03,50,275 and utilized such funds towards advancing interest bearing loan to the tune of Rs. 3,41,00,000/- . Additionally, there were certain interest free advances made during earlier years by the assessee from his own capital and to another party Omega Finhold Private Limited during the year from owned funds. During the course of proceedings, AO vide letter required the assessee to show cause as to why disallowance of interest at the rate of 13.5% on interest free loan to the aforesaid three parties should not be made.
The assessee filed that reply wherein it was explained that all the interest bearing funds were utilized for making interest bearing advances. It was pointed out that the assessee was sanctioned overdraft facility of Rs. 400 Lacs. from State Bank of Patiala (SBOP) in October 2017. The interest free loan of Rs.15 Lacs was given to Mr. Gurdeep Singh in FY 2006-07 and Rs. 37 Lacs was given to Mr. RK Gupta in FY 2005-06 i.e. before sanctioning of the bank overdraft facility.
The AO without considering the reply of the assessee from proper perspective made an addition of Rs. 11,77,070, being proportionate disallowance of interest paid on borrowing vide the assessment order alleging that the assessee has not been able to establish the nexus between the borrowed and interest earning advances. The AO alleged that the assessee’s contention that all borrowed funds were utilized for earning income has not been substantiated with any credible evidence.
The CIT(A) after perusing the evidence on record deleted the addition by giving a categorical funding that all interest bearing loans to the tune of Rs. 3,03,50,275 had been advanced on interest.
The coram of Judicial Member, Amit Shukla and Accountant Member, Dr. B. R. R. Kumar on going through the profit and loss account, we note that the total interest earned Rs. 127,85,451/- and the interest paid for earning such interest is Rs. 76,26,407/-. Further expenditure of Rs. 120 has been incurred as fees and taxes and the balance amount of Rs. 51,58,924/- is the income declared by the assessee.
The ITAT ruled that there being a direct nexus of the borrowing of the fund and its utilization towards interest bearing advances, there is no justification for allocating any interest expenditure towards earning dividend income.
“It is also surprising that AO has made a disallowance of Rs. 2,98,882 as administrative expenses despite no such expenses having been incurred by the assessee. In view of these facts, we are of the view that no disallowance under section 14A is required in the present case,” the ITAT while upholding the order of the CIT(A) said.
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