M/S. RAMBILAS SHIVKUMAR,KEKRI, AJMER vs. INCOME TAX OFFICER, WARD-2(3), AJMER

ORDER PER: VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated 17/01/2018 of ld. CIT(A), Ajmer for the A.Y. 2013-14. The assessee has raised following grounds of appeal: “1. The impugned additions and disallowances made in the order u/s 143(3) dated 17.01.2018 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.

2. Rs.8,65,241/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs.8,65,241/- [18% 2 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO of Rs.48,06,896/-] as made by the AO u/s 37 of the I.T. Act, 1961 on the ground of diversion of interest bearing fund to interest free advances. The disallowance so made & confirmed by the Id. CIT(A), is contrary to the provisions of law and facts hence, kindly be deleted and directed to be allowed in full, as claimed.

3. The Id. AO further erred in law as well as on the facts of the case in charging interest u/s 234B & 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full.

4. The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.”

2. Ground No. 1 of the appeal is general in nature and does not require any specific adjudication.

3. Ground No. 2 of the appeal is regarding disallowance of interest on account of interest free advances given by the assessee. The assessee is a partnership firm and derives income from trading in agricultural commodities. The assessee filed return of income on 19/09/2013 declaring total income of Rs. 1,38,230/-. In the scrutiny assessment, the A.O. noted that during the year under consideration, the assessee had given interest free advances of Rs. 48,06,896/- to various parties including its sister concern/associate concern like M/s Raj Minerals of Rs. 39,37,346/-. On the other hand, the assessee has 3 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO taken interest bearing loan from various sources. Accordingly, the A.O. made disallowance by applying interest @ 18% on Rs. 48,06,896/- which comes to Rs. 8,64,241/-. The assessee challenged the action of the A.O. before the ld. CIT(A) but could not succeed.

4. Before the Tribunal, the ld AR of the assessee has submitted that the A.O. has taken interest @ 18% whereas the cost of borrowed fund is much less than the 18%. He has referred certain instances of borrowed fund taken at the interest of 4 to 5% per annum, thus the ld AR has contended that adopting 18% rate by making disallowance of interest by the A.O. is arbitrary and contrary to the facts. The ld AR has further contended that even otherwise the entire interest free advances cannot be taken into consideration for making disallowance by ignoring assessee’s own interest free fund to the tune of Rs. 10,62,790/- as the assessee has also obtained certain loans interest free. He has further contended that certain advances given to the farmers on which the interest is charged by the assessee but the A.O. has also considered those advances under the category of interest free. Thus, the ld AR has submitted that the advance of Rs. 2,29,130/- which is part of this total amount of Rs. 48,06,896/- are not interest free but the assessee has charged interest on this amount on day to day basis. The next 4 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO contention of the ld AR of the assessee is that out of the total 61 transactions of advances, some transactions of advances are due to commercial expediency. He has referred to some of the advances wherein very small amounts were given by the assessee to the customers which is below Rs. 5,000/- and submitted that while dealing with these traders with whom the assessee has having regular business transactions, it is a prudent decision of assessee whether charge interest or not. Therefore, the ld AR has submitted that the disallowance of interest in respect of such small amounts of advances on account of commercial expediency is not called for. Accordingly, he has contended that the action of the A.O. making disallowance against the entire amount of loan and advance of Rs. 48,06,896/- by applying the rate of 18% is not justified and the same may be deleted.

5. On the other hand, the ld DR has submitted that the A.O. has given details of the funds which clearly manifests that the assessee was not having any interest free fund but of the funds with the assessee with interest bearing as the assessee is even paying interest on the capital of the partners. Thus, the claim of the assessee that the assessee was having some interest free funds is contrary to the records. She has further contended that a major amount of Rs. 5 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO 39,37,346/- is given to the related party without charging any interest. Similarly, the assessee has given these advances to the parties which is not for the business purpose and therefore the proportionate interest in respect of advance given free of interest is liable to be disallowed. The ld DR has further contended that the A.O. has specifically pointed out that the assessee’s contention that some of the parties were not in the position to repay the amount and therefore, the recovery of the principal amount was also doubtful and in such case, no disallowance of interest is called for. However, the A.O. has brought on record that despite the highly indebted parties like M/s Rambilas Ramprasad and M/s Raj Minerals, the assessee has given advances during the year under consideration, therefore, the said contention of the assessee is not born out of the record. She has relied upon the orders of the authorities below.

6. I have considered the rival submissions as well as relevant material on record. Except the claim of Rs. 10,62,790/- on account of current year’s profit, the assessee is not having any interest free fund. Further this amount of profit is also distributed among the partners and the capital account balance of the partners is also entitled for interest to be paid by the assessee firm. Hence, in view of the fact that the 6 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO assessee is paying interest on the capital of the partners, the profit which is also distributed to the partners cannot be considered as interest free fund for the purpose of giving advances to these parties. The assessee has given advances to as many as 61 parties though the ld AR had demonstrated from the record that a sum of Rs. 2,29,130/- was given to the farmers and the assessee has charged interest on the same, therefore, for the purpose of making disallowance, the said amount is required to be excluded. The second contention of the ld AR is regarding the advances were made for business/commercial expediency. However, this is an issue which requires to be examined by considering the nature of advances and to whom the advances were given. The A.O. has given a finding that despite the old advances become doubtful the assessee has further given advances to the parties and therefore, such advances cannot be accepted as for the business purposes or commercial expediency. It is to be noted that if the assessee, despite the fact that earlier advances become doubtful and there is no possibility of recovery, has again given advances to the same parties then it will not be considered as the advance for business purposes or commercial expediency. The only issue which the assessee is having merits is the rate of 18% applied by 7 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO the A.O. without considering the average cost of borrowing in the hands of the assessee. Therefore, the disallowance cannot be made more than the cost of borrowing in the hands of the assessee. Secondly the assessee has claimed that certain loans were taken by the assessee interest free and certain other loans are taken @ 4 to 5%. To the extent of the loan taken interest free, the corresponding amount shall be excluded from the advances given by the assessee without charging interest and therefore, the balance borrowed amount shall be considered for taking the average cost of borrowing which has to be applied on the advances given by the assessee after excluding the amount on which the assessee has charged interest and the amount which is given from the interest free borrowed fund. Accordingly, in the facts and circumstances of the case, this issue is set aside to the record of the A.O. to reconsider the same in the light of the facts as discussed in the forgoing part of this order. Needless to say, the assessee be given proper and reasonable opportunity of hearing before passing the order on this issue. Since it is a factual issue, therefore, the A.O. is required to verify all these facts regarding the interest charged by the assessee on the advances, interest free loan as claimed by the assessee as well as cost of borrowing in the hands of the assessee.

8 ITA 381/JP/2018 M/s Rambilas Shivkumar Vs ITO 7. In the result, appeal of the assessee is allowed for statistical purposes only.

Order pronounced in the open court on 19th September, 2019

Sd/- ¼fot; iky jko½ (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 19th September, 2019 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- M/s Rambilas Shivkumar, Kekri. 1. izR;FkhZ@ The Respondent- The I.T.O. Ward-2(3), Ajmer. 2. vk;dj vk;qDr@ CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए 5. Jaipur xkMZ QkbZy@ Guard File (ITA No. 381/JP/2018) 6. vkns'kkuqlkj@ By order,

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