M/S STOVEKRAFT INDIA,BADDI vs. DCIT, CIRCLE, PARWANOO

The present appeal has been preferred by the assessee against the order dated 29.3.2019 of the Commissioner of Income Tax (Appeals), Shimla[hereinafter referred to as ‘CIT (A)’].

The assessee in this appeal has taken following grounds of appeal:

The sole issue raised by the assessee in this appeal is regarding disallowance of Rs. 17,01,714/- by the Assessing Officer and furtherconfirmed by the CIT(A) onaccount of disallowance ofnotionalinterestexpenditure u/s 36(1)(iii) of the Income Tax Act.

The brief facts relating to the issue are that the Assessing Officer during the assessment proceedings noticedthat the assessee firm had a debit balance of Rs. 1,41,80,951/- advanced toone of its partners namely M/s Rajindra J. Gandhi under the head ‘Loan and Advances’ on which no interest was charged, whereas, the assessee firm had claimed finance cost of Rs. 35,49,756/- on the loan debited in the profit and loss account. The Assessing Officer, therefore, made a disallowance of interest expenditure u/s 36(1)(iii) of the Income Tax Act in respect of the interest free amount advanced by the assessee firm to its partners. -Chd-2019 M/s Stovekraft India, Solan 3 The disallowance so made by the Assessing Officer was further confirmed by the Ld. CIT(A).

Before us, the Ld. Counsel for the assessee has submitted that while making the impugned disallowance, the lower authorities totally ignored the fact that though there was an interest free advance of Rs. 1,41,80,951/- to one of the partners namely ShriRajindra J. Gandhi, however, at the same time, the assessee also had a credit capital balance of other partner Softkraft Pvt Ltd of Rs. 6,90,67,365/-, which was much more than the amount advanced of Rs. 1,41,80,951/-. Under the circumstances, there was areasonable presumption that the amount from the capital of the other partner was advanced.The Ld. Counsel has further submitted that no interest was paid by the firm on the said capital introduced by the other partner. It has been further pleaded that even otherwise the total interest free amount available with the firm at the opening of the year was at Rs. 23.50 cores and at the close of the year was Rs.6.90 crores and that the firm had sufficient funds to make the interest free advance of Rs. 1,41,80,951/- to one of the partners.

The Ld. DR , on the other hand, has relied on the findings of the lower authorities

We find that the issue is squarely covered by the various decisions of the High Courts as well as of the apex court of the country including that of the Hon'ble Jurisdictional High Court in the case of ‘Bright Enterprises Pvt. Ltd Vs. CIT, Jalandhar’ (supra), ‘CIT Vs. Kapsons Associates’ (2016) 381 ITR 204 (P&H) and the latest decision of the Coordinate Bench of the Tribunal in the case of ‘ACIT Vs. Janak Global Resources Pvt Ltd’ order dated 16.10.2018, holding that that if the assessee is possessed of sufficient own interest free funds to meet the investments / interest free advances, then, under the circumstances, presumption will be that interest free advances / investments have been made by the assessee out of own funds / interest free funds. Reliance in this respect can also be placed on the decision of the Hon'ble Supreme Court in the case of ‘Hero Cycles (P) Ltd Vs. CIT’ 379 ITR 347 (SC) and also on the latest decision of the Hon'ble Supreme Court in the case of ‘CIT (LTU) Vs. Reliance Industries Ltd.’ [2019] 410 ITR 466 (SC).Thus, as per the settled law no disallowance u/s 36(1)(iii) -Chd-2019 M/s Stovekraft India, Solan 5 of the Act is warranted on this issue. The disallowance made by the AO on this issue is ordered to be deleted. This issue is accordingly allowed in favour of the assessee.