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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR.
Before: SH. RAVISH SOOD & DR. M. L. MEENA
O R D E R PER BENCH The present appeals filed by the assessee are directed against the orders passed by the CIT(Appeals)-2, Jalandhar, which in turn arises from the respective assessment orders passed by the AO u/s 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) for Assessment Years 2012-13, 2013-14 and 2014-15. As common issues are involved in the captioned appeals therefore, the same are being taken up and disposed off by way of a consolidated order. We shall take up the appeal filed by the assessee for Assessment Year 2012-13 in as the lead case and the order therein passed shall be followed for the remaining appeals. The assessee has assailed the impugned order on the following grounds of appeal before us:- “1. That the order passed by the worthy CIT(A), Jalandhar dated 10.04.2017 is against the law and facts of the case.
2. That the worthy CIT(A), Jalandhar was erred in law in upheld the addition of Rs. 6,48,000/- made u/s 36(i)(iii) of the Act, ignoring the fact that advances made to the M/s Khaira Trading company were exclusively for business purposes and case of assessee is squarely covered by the decision of jurisdiction high court of Punjab & Haryana in the case of Bright Enterprises Pvt. Ltd. Vs. CIT ITA No. 224 of 2013.
That the worthy CIT(A), Jalandhar was erred in law in upheld the addition of Rs. 6,48,000/- made u/s 36(i)(iii) of the Act, without appreciating the fact that assessee firm paid interest on partners capital @ 3% only.” Apart from that the assessee has raised before us the following additional grounds of appeal:- “
1. That having regard to the facts and circumstances of the case, Hon’ble CIT(A) has erred in law and on facts in confirming the action of the AO in disallowing interest amounting to Rs.6,48,000/- without considering the fact that no disallowance of interest u/s 36(1 )(iii) can be made on the opening balance/amount.”
2. Before us, it is submitted by the ld Authorised Representative (for short “AR”) for the assessee that as the adjudication of the aforementioned additional ground of appeal involves purely a legal issue which is based on the facts available on record and no new facts are required to be looked into, therefore, the same merits admission. Rebutting the aforesaid claim of the ld AR it is submitted by the Ld. Departmental Representative (for short ‘Ld DR”) that as the assessee had not raised the aforesaid additional ground of appeal in the course of the proceedings before the lower authorities, therefore, the same does not warrant admission at the present stage.
3. We have given a thoughtful consideration qua the issue as regards admission of the additional ground of appeal and concur with the ld AR that the adjudication of the same does not require reference to any additional facts. Backed by the aforesaid factual position, we are of the considered view that the aforesaid additional ground of appeal raised by the assessee merits admission. Our aforesaid conviction is supported by the judgment of the Hon’ble Supreme Court in case of National Thermal Power Company Ltd Vs. CIT (1998) 229 ITR 383 (SC).
4. Briefly stated, the assessee firm which is engaged in the business of running of a rice mill had on 29.09.2012 e-filed its return of income for Assessment Year 2012-13, declaring an income of Rs. 9,17,756/-. The return of income filed by the assessee firm was processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee firm was selected for scrutiny assessment u/s 143(2) of the Act.
5. During the course of assessment proceedings, it was observed by the AO that a perusal of the ‘balance sheet’ of the assessee firm revealed “a debit balance” of Rs. 54 lakh towards M/s. Khaira Trading Company, Mehatpur. On perusal of Page | 2 the account of the aforementioned party, it was observed by the AO that there was an opening ‘debit balance’ of Rs. 54 lakh in the account of the aforementioned party on 01.04.2011, which had remained as such till 31.03.2012. As per details gathered by the AO, it stood revealed that the aforementioned amount was in the nature of an “advance” that was given by the assessee firm to the above mentioned party, viz. M/s. Khaira Trading Company during the immediately preceding year i.e. the period relevant to AY 2011-12. It was further observed by the AO that though the aforementioned party was reflected in the list of sundry debtors, however, the assessee had not carried out any business transactions in the form of purchase/sale with the said party either in the preceding year or during the year under consideration. In the backdrop of the aforesaid facts, the AO, being of the view that the assessee had advanced an interest free amount to the aforesaid party out of its interest bearing funds that were raised in the form of secured loans from the banks, thus, called upon the assessee to explain as to why the interest corresponding to the aforesaid interest free advance/loan may not be disallowed u/s 36(1)(iii) of the Act. In reply, it was claimed by the assessee that though the aforesaid amount was advanced to the above mentioned party in question by the assessee for purchase of rice, however, as the said transaction did not materilise, therefore, the said amount of advance had remained outstanding in the ‘books of account’ of the assessee firm. Alternatively, it was the claim of the assessee that as it had suffices interest free funds amounting to Rs. 16,99,632.68 available with it in the form of unsecured loans that were raised from the family members of the partners of the assessee firm, therefore, no disallowances of the interest expenditure qua the said amount was called for u/s 36(1)(iii) of the Act. In order to verify the genuineness and veracity of the aforesaid claim of the assessee of having entered into a purchase transaction with the above mentioned party, the AO called upon it to place on record supporting documents. However, the assessee failed to comply with the aforesaid direction of the AO and did not place on record any such detail which could substantiate its claim that the amount was advanced to the aforesaid party in lieu of a business transactions. Backed by the aforesaid facts, the AO held a conviction that the amounts in question was nothing but a simpliciter interest free advance that was given by the assessee to the above mentioned party in question out of its interest bearing funds. On the basis of the aforesaid facts, the AO disallowed the interest expenditure of Rs. 6.48 lakhs corresponding to the aforesaid interest free funds that were advanced by the assessee to the aforementioned party u/s 36(1)(iii) of the Act. Accordingly, the AO vide his order passed u/s 143(3) of the Act dated 25.03.2015 assessed the income of the assessee firm at Rs. 16,65,756/-.
6. Aggrieved, the assessee carried the matter in appeal before the CIT(A). However, the CIT(A) finding no infirmity in the view taken by the AO qua the disallowance of the interest u/s 36(1)(iii) of the Act upheld his order and dismissed the appeal.
Being aggrieved with the order of the CIT(A) the assessee has carried the matter before us.
The ld Authorised Representative (for short “AR”) for the assessee assailed the disallowance of Rs. 6.48 lac made by the AO u/s 36(1)(iii) of the Act on two fold grounds viz. (i) that as the assessee firm had advanced the aforementioned amount in the immediately preceding year and the amount of Rs. 54 lac (Dr) was merely an “Opening balance” during the year under consideration, therefore, no disallowance u/s 36(1)(iii) could have been made qua the said amount; and (iv) that as the assessee had sufficient interest free funds along with interest bearing capital contribution of the partners on which interest was being paid @3% per annum, therefore, there was no justification on the part of the AO to have worked out the disallowance u/s 36(1)(iii) of the Act to the extent of such interest free funds were available with the assessee, and also the disallowance as regards to the balance amount of interest free advance was liable to be restricted to 3% per annum i.e. the rate of interest which was being paid by the assessee firm on the capital contribution of the partners.
In support of his aforesaid contention that no disallowances u/s 36(1)(iii) was called for with respect to “Opening balance” of the outstanding loan/advance appearing in the books of account of the assessee firm, the ld AR had relied on the order of this Tribunal in the case of Bhagwati Rice Vs. ITO, Ward 3(2), Firozpur in dated 26.07.2019. Our attention was drawn by the ld AR to the relevant observation of the Tribunal qua the aforesaid issue at Para 6.9 of the aforesaid order. Alternatively, it was averred by the ld AR that the disallowances u/s 36(1)(iii), if any, was liable to be restricted after taking cognizance of the interest free funds that were available with the assessee firm, while for the disallowance as regards the balance amount of such interest free advance was liable to be restricted to 3% per annum i.e. the rate of interest that was being paid on the capital deployed by the partners, as against the disallowance that was worked out by the AO @8% per annum.
Per contra, the ld Departmental Representative (for short ‘DR) relied on the orders of the lower authorities. Qua the claim of the assessee that no disallowance was called for in respect of “Opening balance” of the interest free advance given by the assessee firm to the aforementioned party in question, it was submitted by the DR that the said contention of the assessee’s counsel was absolutely misplaced and misconceived. It was submitted by the DR that as the assessee firm during the year under consideration had paid interest on the loans/advances that were raised by it in the form of secured loans from the banks in the preceding year, therefore, the corresponding disallowance of the interest pertaining to the interest free advance given by the assessee in the immediately preceding year, though, reflected as an opening balance during the year under consideration was liable to be disallowed u/s 36(1)(iii) of the Act. As regards the claim of the assessee that as it had interest free funds/funds in the form of capital of the partners on which lower rate of interest was being paid, therefore, no disallowance of interest was called for u/s 36(1)(iii) to the extent of such interest free funds along with the fact that disallowance with respect to the balance amount of interest free advance, if any, was to be restricted to 3% per annum i.e. the rate of interest that was being paid to the partners of the firm on the capital deployed by them, it was submitted by the DR that as the aforesaid interest free/low interest bearing funds were used for the business purpose of the firm, therefore, the claim of the assessee for considering the availability of the said funds for justifying the source of the interest free advance in question was absolutely misconceived and misplaced.
We have heard the ld AR for both the parties and perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncement that have been relied upon by them to drive home their respective contentions. Admittedly, it is a matter of fact borne from the record that the assessee firm had in the immediately preceding year i.e. the period relevant to Assessment Year 2011-12 advanced an interest free advance of Rs. 54 lacs to M/s. Khaira Trading Company. As the assessee had during the under consideration claimed deduction of interest amounting to Rs. 1,23,48,727/- i.e. Page | 5 the amount of interest that was paid qua the funds which were raised in the form of secured loans from the banks, therefore, the AO being of the view that the assessee had diverted his interest bearing funds for advancing interest free loans for non business purposes to a third party, viz. M/s. Khaira Trading Company, had therein worked out the disallowance of the interest corresponding to the aforesaid amount of advance. Insofar, claim of the Ld. AR that as the amount was advanced by the assessee in the immediately preceding year and, the same was only in the nature of an “Opening balance” during the year under consideration, therefore, de hors advancing of any such amount during the year under consideration no disallowance of any interest expenditure was warranted u/s 36(1)(iii) of the Act, the same, we are afraid does not find favour with us. In our considered view, as stated by the Ld. DR, and rightly so, as the assessee had during the year under consideration continued to pay interest on the interest bearing loans raised from the banks in the preceding years, therefore, there being a direct nexus between the outstanding balance of the interest free loans that were advanced to the aforementioned party and the said interest bearing funds, there can be no justification in not disallowing the interest corresponding to such interest free advance during the year under consideration, for the reason, that the amount of such advance was merely in the form of “Opening balance” and had not been given during the year under consideration. At this stage, we may herein observe, that as part of the interest expenditure claimed as deduction by the assessee during the year under consideration pertained to the interest bearing loans that were raised by the assessee in the immediately preceding year and, continued as such during the year under consideration, therefore, we are unable to comprehend as to on what basis the assessee is claiming that no disallowance of the interest expenditure was called for with respect to the opening balance of the outstanding interest free advance that was given to the aforementioned party. Accordingly, we are unable to persuade ourselves to subscribe to the aforementioned claim of the assessee, and thus, reject the same. Adverting to the alternative contention of the assessee, we find, that the same comprises of two limbs, viz. (i) that no disallowances u/s 36(1)(iii) is called for to the extent the assessee was found to be in possession of interest free funds during the year under consideration; and (ii) that as the assessee had funds in the form of capital deployed by the partners on which interest was being paid @3% per Page | 6 annum, therefore, the disallowances, if any, u/s 36(1)(iii) of the Act was to be restricted in the backdrop of availability of the aforementioned amount of concessional interest bearing funds to 3% per annum and not 8% per annum as worked out by the AO.
In the backdrop of the aforesaid facts, we find substance in the claim of the ld AR that as the Assessee had interest free funds available with it, therefore, no disallowance to the said extent was called for u/s 36(1)(iii) of the Act. On a perusal of the order of the CIT(A), we find, that the details of the funds that were available with the assessee along with the interest free funds that were advanced to the aforementioned party, viz. Khaira Trading Company, are as under:- Particulars Amount Interest % Unsecured loans from family members 16,99,632.68 0% Partner Capital as on 01.04.2011 1,54,38,270.10 .3% Total 1,71,37,902.78 Advance made to Khaira Trading co. 54,00,000/- 0% Disallowance made during assessment 6,48,000/- 12%
Accordingly, as the assessee was admittedly having interest free funds of Rs. 16,99,632.68 i.e. unsecured loans raised from family members, therefore, no disallowance to the said extent qua the loan/advances given by the assessee to M/s. Khaira Trading company was called for. Our aforesaid view is supported by the judgments of the Hon’ble High Court of Bombay in the case of HDFC Bank Ltd vs. ACIT, 368 ITR 505 (Bom) and that in the case of Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom). In its aforesaid orders, the Hon’ble High Court had held that where interest free funds are available with the assessee, then, a presumption would arise that the investments made were from its interest free funds. In the backdrop of the facts involved in the case before us r.w the aforesaid settled position of law, we are of the considered view that no disallowance u/s. 36(1)(iii) would be called for in the hands of the assessee as regards the interest bearing funds advanced to M/s. Khaira Trading Company i.e. to the extent of the interest bearing funds of Rs.16,99,632.68 available with it. We, thus, vacate the disallowance of the interest expenditure u/s 36(1)(iii) qua the aforementioned amount of Rs. 16,99,632/- (approx.). As regards the balance amount of the interest free advance given by the assessee firm to the aforementioned party, viz. M/s. Khaira Trading Company i.e. Rs. 37,00,367.32 [Rs. 54,00,000/- (-) Rs. Page | 7 16,99,632.68], we are of the considered view that as the assessee firm had sufficient amount of capital of the partners of Rs. 1.54 crore on which interest was being paid @3% per annum, therefore, the disallowance u/s 36(1)(iii) with respect to the aforesaid balance of amount of Rs. 37,00,367.32 was to be restricted to 3% per annum and not 8% per annum as had been worked out by the AO. We, thus, in terms of our aforesaid deliberations modify the disallowance worked out by the AO u/s 36(1)(iii) of the Act. The Grounds of appeal
Nos. 2 to 3 are partly allowed in terms of our aforesaid observations.
14. Grounds of appeal Nos. 1 and 4 being general are dismissed as not pressed.
15. As the facts and circumstances as well as the issues involved in the appeals filed by the assessee in the remaining two years i.e. for Assessment Year 2013-14 in Assessment Year 2014-15 in remains the same as were there before us in the appeal of the assessee for Assessment Year 2012-13 in ITA No. 501/ASR/2017, therefore, our order therein passed qua the issue in hand shall apply mutatis mutandis for the purpose of disposing of the present appeals.
16. The appeals filed by the assessee for Assessment Year 2013-14 in ITA No. 502/ASR/2017 and for Assessment Year 2014-15 in ITA No. 767/ASR/2017 are partly allowed in terms of our aforesaid observations. Order pronounced in the open court on 24/12/2021.