Addition of Notional Interest Income on Interest Free Advance under the Income Tax Act

IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES “B”: HYDERABAD
(THROUGH VIRTUAL CONFERENCE)
BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 2238/Hyd/2018
Assessment Year: 2014-15

M/s. Srinath Agencies,
Secunderabad.
PAN AAQFS 3447M

vs

Dy. Commissioner of Income Tax,
Circle 10(1), Hyderabad

Assessee by: Shri Siddharth Toshnival.
Revenue by: Shri Rohit Majumdar (D.R)
Date of hearing: 13/05/2021
Date of pronouncement: 03/09/2021
O R D E R

The learned Commissioner (Appeals) erred in holding that the expenditure cannot be allowed in terms of Section 40A(2) (a) of Income Tax Act as M/s. Suryauday Spinning Mills Private Limited is a related party.

2. The brief facts of the case are that the assessee is a partnership firm and filed Return of Income for the Assessment Year 2014-15 on 4.10.2014 declaring total income of Rs.31,70,640. The case was selected for scrutiny and other statutory notices were issued to the assessee. The assessee was a Del Credere agent for Reliance Industries Ltd. and has undertaken the responsibility of collecting the amounts due to Reliance Industries, receives commission on the sales made by Reliance Industries as per the agreement entered into by the assessee-firm. It was observed that the assessee had paid interest amounting to Rs.51,37,080 to Bank and Rs.49,34,457 on “interest on unsecured loans” to others. It was submitted by the assessee that it has extended advances and loans of Rs.5,67,500 to Ms. Nidhi Karwa; Rs.34 lakhs to Mr. Arun Agarwal and paid Rs.56 lakhs to Ms. Neha Agarwal. The assessee had admitted that the interest was charged @ 15% on loan given to Ms. Nidhi Karwa as income and it was observed that all these loans were paid in the earlier year in regard to interest free loan given to Ms. Arun Agarwal and Ms. Neha Agarwal. When the assessee was asked as to why it has not charged interest on loan to these two persons, in reply on 20.6.2002, the assessee stated that it was the opening balance and further submitted that at the time of proceedings for the Assessment Year 2012-13, it was stated that the assessee had not charged interest as these advances were given for a business proposal which did not materialize.

3. If the Assessing Officer finds that the assessee has diverted the borrowed funds for other than business purpose, he can disallow the interest paid to the bank on interest free loan given and addition can be made as per section 36(1)(iii) of the Act.. Therefore the addition made by the Assessing Officer is deleted. The grounds raised by the assessee in this regard Ground Nos.1 to 6 are allowed.

4. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 3rd Sept., 2021.

Please find attached the enclosed file for the full judgement