Klasse Consultants, Vadodara V. The DCIT, Circle-1(2)(1) Now Circle -1(1)(1), Vadodara

ITA 196/AHD/2023

AI Insights

The case involves Klasse Consultants, the appellant, contesting the additions made by the AO regarding disallowed interest expenditure and incorrect carry forward of business losses for the assessment year 2011-12. The AO had disallowed interest on advances made to Harshad Patel, considering them non-business related, and had also recalculated the carry forward of business losses. The CIT(A) partly upheld the AO's decision. The Tribunal, however, found that the advances were made from the assessee's own funds and that the reopening of the assessment was not justified, leading to the allowance of the appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299922 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 16-05-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2023
• Other Referred Cases: ITA No. 1256/Ahd/2014
• Laws Referred To: Section 36(1)(iii), Section 143(3), Section 147, Section 148
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Notional interest
• Section: 143(3); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, AHMEDABAD BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER I .T .A . N o . 1 9 6/ A h d /2 0 23 ( A s se ss m e nt Y e a r : 20 11- 12 ) Kla s s e C o ns ul ta nt s 8 t h F lo or , A ru nd e e p C o m ple x , R ac e C o u r s e C ir c le , B ar od a-39 00 0 7 V s . D C I T C ir cl e - 1 ( 2 ) ( 1 ) , N o w C i rc l e- 1( 1 )( 1 ) , V a do da r a [ P AN N o. A A EF K8 31 4 R ] (Appellant) .. (Respondent) Appellant by : Shri Sunil Talati, A.R. Respondent by : Shri Sanjeev Bhagat, Sr. D.R. D a t e of H ea r i ng 17.05.2023 D a t e of P r o no u n ce me nt 24.05.2023 O R D E R The appeal filed by the assessee is against the order passed by the Ld. CIT(Appeals), National Faceless Appeal Centre (in short “NFAC”), Delhi on 27.01.2023 for A.Y. 2011-12. 2. The grounds of appeal raised by the assessee are as under: “1. The order passed by the learned CIT(A) confirming the addition made by ld. AO is bad in law and be quashed. It be held so now and returned income be accepted by deleting disallowance made by the Ld. AO. 2. A. The Learned CIT(A) has erred in confirming disallowance made by Ld. AO of Rs. 1,95,000/- on account of interest expenditure u/s 36(1)(iii). The Ld. AO has considered advance made of Rs. 13 lakhs to Harshad Patel as non-business purpose and accordingly disallowed interest of the same. B. No notional interest can be disallowed/ added back to income, which is neither received / receivable or accrued on the loans / advances given to various persons. Hence, the AO is not justified to make any addition disallowance in this behalf. C. Moreover, The Ld. AO has made the mentioned disallowance without proving the nexus between the amounts advanced and borrowed funds. The appellant submits that the advance was given in earlier years and was out of own funds and hence the addition is not justified. D. Accordingly, the addition made by AO is unjust and uncalled for and Ld. AO be directed to delete the same. ITA No. 196/Ahd/2023 Klasse Consultants vs. DCIT Asst.Year–2011-12 - 2 - 3. Accordingly, The Ld. AO be directed to consider setoff of brought forward losses and further directed to allow carried forward balance loss as finally determined as per latest orders passed in the matter. Your appellant craves for to leave add/alter/amend any grounds of appeal before hearing of this appeal.” 3. The assessee firm filed its return of income on 17.09.2011 declaring total income at Rs. Nil after claiming business loss of Rs. 25,73,723/-. The assessment under Section 143(3) was finalized on 24.02.2014 after disallowing interest for Rs. 1,04,250/-, business loss of A.Y. 2010-11 Rs. 58,96,684/- restricted to Rs. 26,77,523/- and the assessee was allowed to carry forward loss of Rs. 32,19,161/-. From the order passed under Section 143(3) dated 24.02.2014 for the A.Y. 2011- 12, the Assessing Officer notice that the business loss of the assessee firm was considered at Rs. 58,96,684/- which is incorrect. The Assessing Officer further observed that the Assessing Officer should have taken the total business loss assessed for the A.Y. 2010-11 and accordingly business loss for the A.Y. 2011-12 should have been arrived. By not doing so, the assessee was allowed to carry forward for an extra amount of Rs. 4,20,326/-. The Assessing Officer further observed that the interest amount on the interest free loan amounting to Rs. 1,95,000/- is to be disallowed under Section 36(i)(ii) as the same does not form part of the business purpose. Thus, the Assessing Officer made addition of interest income towards Rs. 2,16,600/-. 4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. ITA No. 196/Ahd/2023 Klasse Consultants vs. DCIT Asst.Year–2011-12 - 3 - 5. The Ld. A.R. submitted that the Assessing Officer has reopened the assessment by issuing the notice given 148 on the ground that excess carried forward of loss in set off and charging interest of 12% instead of 15% in case of loans given to Arunaben D Patel. The reasons recorded as above do not fall under the ambit of provision of Section 147/148 and therefore, the assessment order is illegal, void and bad in law. The Ld. A.R. further submitted that the excess carry forward of loss being consequential in nature, same can be revised as per law and hence the said issue does not form reason for the same. This issue have been dealt by the CIT(A) at all. As regards Ground No. 2 the Ld. A.R. submitted that the Assessing Officer has disallowed Rs. 1,95,000/- being notional interest calculated at 15% on the advances of Rs. 13,00,000/- given to Shri Harshad R. Patel on the ground that no interest is charged on such advances. The Ld. A.R. submitted that there is no provision in the income tax act to tax the income on notional basis and hence the addition made by the Assessing Officer is unjust and uncalled for. The Ld. A.R. further submitted that the Tribunal has deleted such addition in respect of addition of notional interest calculated on the advances made to Harshad R Patel in ITA No. 1256/Ahd/2014 dated 24.03.2017 in assessee’s own case for A.Y. 2010-11. The Tribunal observed that in absence of any interest paid on borrowed funds, if any, and in view of the sufficient own capital available at the disposal of the assessee, there is no warrant to make addition towards notional interest on money lent to party even otherwise. ITA No. 196/Ahd/2023 Klasse Consultants vs. DCIT Asst.Year–2011-12 - 4 - 6. The Ld. D.R. relied upon the assessment order and the order of the CIT(A). The Ld. D.R. further submitted that in the present assessment order notional interest has not been added to the total income with respect to interest free advance given to Harshad Patel but interest expenditure has been disallowed under Section 36(1)(iii) as monies have been advanced to relatives for non-business purposes. 7. Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has given advances to Shri Harshad R Patel from the funds available with the assessee. The assessee had advanced of Rs. 5,75,000/- to Shri Harshad R Patel on 11.09.2001 and the advanced amount as 31.03.2010 is Rs. 13,00,000/- which includes the interest element from year to year on the principal amount of Rs. 5,75,000/- was made on 11.09.2001 out of assessee’s own funds, since the amount of borrowings on 31.03.2002 was only Rs. 50,000/- as per the balance sheet for F.Y. 2001-02. Borrowed funds of Rs. 50,000/- as against own funds of Rs. 8,28,413/- and thus, the advances were made out from assessee’s own funds. The Tribunal has categorically observed that notional interest on money lent to party the tax cannot be charged. But in the present case the assessee has given interest free advances to Harshad R Patel from its own funds. Since the assessee’s case the issue regarding calculation of notional interest was already covered hence recalculation of the same for both the issues on which the reopening of the assessment was not done as not justifiable. The reopening is only to the extent of excess carry forward of loss is set off and charging interest at 12% instead of 15% in case of loans given to ITA No. 196/Ahd/2023 Klasse Consultants vs. DCIT Asst.Year–2011-12 - 5 - Arunaben D Patel, therefore, the Assessing Officer as well as the CIT(A) was not right in making the addition of Rs. 2,16,000/- towards interest income. 8. In result, the appeal of the assessee is allowed. This Order pronounced in Open Court on 24/05/2023 Sd/- (SUCHITRA KAMBLE) JUDICIAL MEMBER Ahmedabad; Dated 24/05/2023 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/ Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 17.05.2023 2. Date on which the type draft is placed before the Dictating Member 17.05.2023 3. Other Member..................... 4. Date on which the approved draft comes to the Sr.P.S./P.S .05.2023 5. Date on which the fair order is placed before the Dictating Member for pronouncement .05.2023 6. Date on which the fair order comes back to the Sr.P.S./P.S 25.05.2023 7. Date on which the file goes to the Bench Clerk 25.05.2023 8. Date on which the file goes to the Head Clerk.......................................... 9. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 10. Date of Despatch of the Order..........................................