This document provides a detailed analysis of the Income Tax Appellate Tribunal’s final decision on the case between DCIT, Central Circle-27, New Delhi and Mannohar Lal Hira Lal Ltd., Ghaziabad, concerning the assessment year 2017-18. The case number is ITA 2663/DEL/2022, presided over by Judicial Member Shri Kul Bharat.
The appeal filed by the assessee, Mannohar Lal Hira Lal Ltd., was directed against the order dated 08.08.2022 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, pertaining to the assessment year 2017-18. The primary issue in this case was the disallowance of interest on borrowed capital.
During the hearing on 12.06.2023, the Revenue was represented by Shri Om Prakash, Sr. DR. The Tribunal proceeded to adjudicate the appeal based on the materials on record and submissions made by the Revenue, as the assessee did not attend the proceedings.
The grounds raised by the assessee were as follows:
The assessee filed its return of income on 31.10.2017, declaring a total income at NIL and claiming brought forward losses of Rs.85,37,766/-. The case was selected for scrutiny assessment, and the Assessing Officer (AO) adjusted brought forward losses, assessed the income at NIL, and reduced brought forward losses by Rs.873,760 by disallowing interest expenses.
The assessee argued that the disallowance of interest was made without proving a direct nexus between borrowed funds and advances given for the purchase of land in FY 2007-2008. The interest was paid on short-term financing for bill discounting and LC discounting related to business transactions.
The Tribunal noted that the assessee had advanced a loan of Rs.3.13 Crore to M/s Pasondia Steels in FY 2007-08, which was adjusted as an advance against the sale of land. The agreement signed between the parties had vague terms, and the land was not transferred to the assessee even after several years. The Tribunal found that the assessee had blocked its interest-bearing funds without earning any interest and had made no efforts to recover the loan/advances.
The Tribunal concluded that the disallowance of interest by the AO was justified as the borrowed funds were diverted towards a non-genuine transaction. The findings of the Ld. CIT(A) were affirmed, and the grounds raised by the assessee were dismissed.
Order pronounced in the open Court on 15th June, 2023.
(KUL BHARAT)
JUDICIAL MEMBER
This case underscores the importance of maintaining a clear nexus between borrowed funds and their utilization for business purposes to claim interest deductions. The Tribunal’s decision to uphold the disallowance highlights the necessity for companies to ensure the genuineness of their transactions and to make efforts to recover loans and advances to avoid penalties and additional tax liabilities.
The appellant, Mannohar Lal Hira Lal Ltd., challenged the disallowance of interest on borrowed capital, arguing that there was no nexus between borrowed funds and advances given for land purchase.
The appellant contended that the interest paid was for short-term financing related to business transactions, not for the advance given in FY 2007-2008. The Revenue, however, maintained that the borrowed funds were diverted towards a non-genuine transaction.
The Tribunal found that the appellant had blocked its interest-bearing funds without earning any interest and had not made any efforts to recover the loan/advances. The Tribunal agreed with the AO’s findings that the funds were diverted towards a non-genuine transaction.
The Tribunal’s decision in the case of DCIT, Central Circle-27, New Delhi vs. Mannohar Lal Hira Lal Ltd., Ghaziabad, reaffirms the principle that maintaining a clear nexus between borrowed funds and their utilization for business purposes is essential to claim interest deductions. The disallowance was upheld, emphasizing the importance of ensuring the genuineness of transactions to avoid penalties and additional tax liabilities.
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