Disallowance on interest expenditure under the Income Tax Act by AO

The Income Tax Appellate Tribunal is reviewing a case where the Assessing Officer (AO) disallowed over £54,000 in interest expenditure. The AO believed the company had used interest-bearing funds to make investments and provide interest-free loans, disallowing the claimed interest. The company argued that its own funds exceeded the investment and loan amounts, suggesting these were used instead of borrowed funds.

IN THE INCOME TAX APPELLATE TRIBUNAL
“A’’ BENCH: BANGALORE

BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
SHRI B.R. BASKARAN, ACCOUNTANT MEMBER

 ITA No.2032/Bang/2019
 Assessment Year : 2015-16

Wave Mechanics Pvt. Ltd.
V-3, I Main, I Phase
Peenya Industrial Area
Bangalore 560 058
PAN NO : AAACW3621J
APPELLANT 

Vs.

Deputy Commissioner of
Income-tax
Circle-7(1)(2)
Bangalore
RESPONDENT

Appellant by : Shri Sharath Rao, A.R.
Respondent by : Shri Kannan Narayanan, D.R.

Date of Hearing : 01.04.2021
Date of Pronouncement : 28.06.2021

O R D E R

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

The Assessee has filed this appeal challenging the order dated 16.7.2019 passed by Ld. CIT(A)-7, Bengaluru and it relates to the assessment year 2015-16. The assessee is aggrieved with the decision of Ld CIT(A) in confirming the disallowance on interest expenditure of Rs.54,32,211/- made by the A.O.

2. The facts relating to the issue are stated in brief. During the course of assessment proceedings, the A.O. noticed that the assessee has made investment of Rs.2.71 cores in a company named M/s. ComAvia System Technologies Pvt. Ltd. He also noticed that the assessee has also given interest free loan of Rs.3 crores to others. (During the course of hearing before us, the Ld A.R submitted that the above said amount of Rs.3.00 crores was also given to M/s ComAvia System Technologies P Ltd). The AO noticed that the assessee has not charged any interest on the loans given. The A.O. noticed that the assessee was claiming interest expenditure of Rs.54,32,211/-. The A.O. took the view that the assessee has diverted its interest bearing funds for making above said investment and giving interest free loan. Accordingly, he proposed to disallow interest expenditure relatable to the above said investment & Loan. He calculated interest @ 12.5% on the investment & loan amount, which worked out to Rs.71,42,730/-. Since the assessee was claiming interest expenditure of Rs.54,32,211/- only, the A.O. restricted the disallowance to Rs.54,32,211/-. The Ld. CIT(A) also confirmed the same. Aggrieved, the assessee has filed this appeal before us.

3. We heard the parties and perused the record. The ld. A.R. advanced his arguments at length on different limbs in order to contend that the interest disallowance was not justified. One of his arguments was that the own funds available with the assessee was more than the value of investment and amount of loan. Hence no disallowance of interest is called for, since the presumption is that the assessee has used its own funds for making investment and giving loan. In this regard, the ld A.R invited our attention to the Balance Sheet placed in the paper book. We notice from the Balance Sheet that the interest free funds available with the assessee as at the beginning and end of the year was Rs.9.78 crores and Rs.10.02 crores respectively. The aggregate amount of investment made and interest free loan given by the assessee was Rs.5.71 crores.

To know more in details find the attachment file