The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) deleted the disallowance of interest under Section 36(1)(iii) of the Income Tax Act,1961 for genuine unsecured loans provided to the assessee during the assessment year ( AY ) 2014-15.
Ardor Overseas Pvt. Ltd.,the appellant-assessee, was involved in a land transaction with Nikshal Properties Pvt. Ltd. during the assessment year 2014-15. Nikshal Properties sold the land to the assessee for Rs. 44 crores, though it had originally purchased the land for Rs. 8 crores just a few days prior.
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M/s. Nikshal Properties claimed that the transaction was an accommodation entry, with the inflated sale price intended to create a bogus capital gain, while the actual value was only Rs. 8 crores. The funds were alleged to have been routed back to the assessee through intermediary entities, with M/s. Nikshal Properties earning a commission. The assessee, however, maintained that the transaction was genuine.
During the assessment, the Assessing Officer ( AO ) reduced the cost of the land from Rs. 44 crores to Rs. 8 crores based on M/s. Nikshal Properties directors’ statements that the transaction was inflated. The AO also added Rs. 8 crores to the assessee’s income under Section 68 of the Act, treating a loan from Matrix International—used in the transaction—as unexplained. Additionally, the AO disallowed interest paid on the loan, part of which had been capitalized as the cost of land.
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On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)]upheld the disallowance of interest paid to Matrix International.
The tribunal reviewed the disallowance of interest paid on unsecured loans from M/s. Matrix International and confirmed that the funds introduced as unsecured loans were genuine. It established that there was a legitimate flow of funds between the entities and noted that, under Section 36(1)(iii) of the Income Tax Act, interest on borrowed capital could be claimed as a deduction if the funds were utilized for business purposes
Given the genuineness of the loans and their connection to the assessee’s operations, the tribunal concluded that the interest payments should not be disallowed.
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The two member bench comprising T.R Senthil Kumar ( Judicial Member ) and Annapurna Gupta ( Accountant Member ) deleted the disallowance of interest under Section 36(1)(iii) of the Act, affirming that the interest paid on the unsecured loans was deductible and consistent with previous assessments regarding the genuine nature of the transactions.
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