The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) allowed the interest expenses of the assessee on alleged fund misuse citing that lack of nexus between borrowed funds and personal investments.
Abhaykumar Sevantilal (assessee) filed his Income Tax Return (ITR) for the Assessment Years (AYs) 2016-2017 and 2017-2018. The Assessing Officer (AO) selected the cases for scrutiny and the assessment order was passed with some additions which included interest expenses. The AO disallowed the interest expenses due to borrowed funds utilised for personal investments.
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Therefore, the AO calculated a proportionate disallowance and disallowed the amount of Rs. 38,36,692 for AY 2016-17 and 44,06,456 for AY 2017-18. The assessee filed an appeal before the Commissioner of Income Tax (appeals) [CIT(A)] challenging the order of the AO.
The CIT(A) upheld the order of the AO highlighting that the assessee failed to provide evidence for the allegation that interest bearing funds not utilised for personal investments. The CIT(A) dismissed the appeal of the assessee.
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Therefore, the assessee further filed an appeal before the ITAT. The counsel for the assessee submitted that interest free funds were sufficiently available to cover the personal investments of the assessee.
The counsel for the assessee also submitted a paper book before the tribunal. The counsel also stated that a significant portion of the personal assets were inherited and pre-existing from earlier financial years.
On the other hand, the counsel for the revenue relied on the order of the lower authorities and sought to dismiss the appeal of the assessee.
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The tribunal comprising T.R. Senthil Kumar (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) observed that the assessee had sufficient interest free funds which exceeded alleged investment in personal assets.
The tribunal also highlighted a judgement of Allahabad ITAT in the case of Shreyans S. Sanghavi V. ACIT, held that the absence of nexus between borrowed funds and the investments which leads to presumption that the investment made from interest-free funds.
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The tribunal held that the CIT(A) erred in upholding the proportionate disallowance of interest expenses.
Therefore, the tribunal ruled the addition as unjustified and deleted the addition of the interest expenses. Thereby the appeal was partly allowed.
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