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Income Tax Appellate Tribunal, JAIPUR BENCHES “B”, JAIPUR
Before: SHRI RAMESH C SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 1170/JP/2018
ORDER PER: R.C. SHARMA, A.M. This is an appeal filed by the assessee against the order of ld.CIT(A)-IV, Jaipur dated 04/09/2018 for the A.Y. 2012-13 in the matter of order passed U/s 143(3) of the Income Tax Act, 1961 (in short, the Act). Grounds taken by the assessee reads as under:
“1. Under the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the addition of Rs. 6,83,047/- by not allowing the claim of interest expenses debited in P&L account of the assessee company.
2 ITA 1170/JP/2018_ M/s Shakun Advertising Pvt. Ltd. Vs ACIT 2. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.”
2. Rival contentions have been heard and record perused. The facts in brief are that the assessee is engaged in the business of advertisement making and publicity work. During the course of scrutiny assessment, the A.O. made disallowance of interest expenditure of Rs. 6,83,047/- after observing as under:
“4(a) During the course of assessment proceedings it was noticed the assessee had made substantial loans and advances during the year under consideration. Such loans and advance amounting to Rs. 22346015/- and other advances of Rs. 19492914/- aggregating to Rs. 41838929/-. The other advances of Rs. 1.94 Cr. were largely trade advances in the form of advance tax, earnest money deposit etc. whereas the loans and advance of Rs. 2.23 Cr. were made to parties some of whom were related parties. In this regard a specific query was raised in the questionnaire accompanying the notice u/s 142(1) vide query no.
By way of such query the assessee was required to bifurcate the loans and advances into interest yielding and non interest yielding advances and in case of non interest yielding advances, the assessee was required to furnish detailed justification of the same.”
By the impugned order, the ld. CIT(A) confirmed the disallowance after observing as under:
3 ITA 1170/JP/2018_ M/s Shakun Advertising Pvt. Ltd. Vs ACIT “5. I have perused the order of AO and submissions made by the Ld. A/R. The Ld. A/R has submitted that there is in fact interest surplus. Certain advances were made to related parties which are out of the interest free funds available. I find the contention that such advances to the related parties and its source from the interest free funds available is not factually furnished before me. It may be noticed that even the AO has asked for such nexus in the assessment proceedings and same detailed were not filed at the assessment stage. That being the case and on the facts and in the circumstances of the case as no factual rebuttal is available from the appellant I am of the view that disallowance of Rs. 6,83,047/- made by the AO is sustainable. Same is confirmed. Appellant's appeal in Ground No. 1 is dismissed.”
The assessee is in further appeal before the ITAT against the order of the ld. CIT(A).
It was vehemently argued by the ld AR of the assessee that there is positive income on account of interest. The total interest income earned by the assessee company during the year was Rs. 19,55,163/-. Which was credited under the head other incomes in P&L A/c and the total interest expenses incurred by the assessee company was Rs. (6,21,699+6,05,941+44313) 12,71,953/- so in fact there is a surplus of interest income of Rs. 4 ITA 1170/JP/2018_ M/s Shakun Advertising Pvt. Ltd. Vs ACIT 6,83,209/- and no interest expenditure was debited in P&L A/c. He further contended that the assessee has made Loans and advances to various parties amounting to Rs. 4,18,38,929/- This included a sum Of Rs. 1.94 Cr. as trade advances, and the balance Rs. 2.23 Cr. as loans to various parties, on which the assessee has earned interest income, and advances to some related parties. Also, the assessee had certain Unsecured loans on which it had paid interest amounting to Rs. 12,71,953/- The total interest received by it from the loans and advances made amounted to Rs. 19,55,000/-. The position of interest earning and interest payment are as under: - (a) Interest Income (Note `P') Rs. 19,55,163.19 (b) Interest expenses (Note `Q') Rs. 12,71,953.27 Net income Rs. 6,83,209.00 6. On the other hand, the ld DR has relied on the orders of the authorities below.
We have considered the rival contentions and carefully gone through the orders of the authorities below and found that the disallowance of interest is made in respect of interest free advances made to related parties for non-business purposes. Disallowance of interest so made by the A.O. was confirmed by the ld. CIT(A) by 5 ITA 1170/JP/2018_ M/s Shakun Advertising Pvt. Ltd. Vs ACIT observing that the advances were made to related parties but source of interest free funds were not furnished before the A.O. nor before the ld. CIT(A). He further observed that even the A.O. has asked for such nexus in the assessment proceedings but no details were filed by the assessee. There is no dispute to the well settled legal proposition that only interest expenditure incurred for the purpose of business can be allowed. If the assessee borrows funds and utilize it for non-business purposes, interest expenditure incurred on such borrowings cannot be allowed. Onus is on the assessee to prove that borrowed funds have been used for business purposes. However, no disallowance of interest expenditure is warranted if the assessee establishes that use of funds for non-business purposes is out of reserve and surplus or interest free funds available with him. Here also onus lies on assessee to corelate the availability of such interest free funds and its utilization for non-business purposes. In this regard, we observe that if there is diversion of interest bearing funds for non-business purposes, the disallowance of proportionate interest is warranted. However, in the instant case, the assessee has not furnished details to corelate the advances made to related parties and the interest free funds available with him for making such advance neither before the A.O. nor before the ld. CIT(A).
6 ITA 1170/JP/2018_ M/s Shakun Advertising Pvt. Ltd. Vs ACIT However, no such details were even placed in the paper book so as to persuade us to decide the issue at this juncture, therefore, in the substantial interest of justice, we restore the matter back to the file of the A.O. for deciding the issue afresh. The assessee is directed to place before the A.O. the details to corelate the interest free funds available with it out of which he has made interest free advances to the related parties. If the A.O. found that the interest free advances have been made to related parties for non-business purposes out of the interest free funds available with the assessee, no disallowance is warranted. Needless to say that the assessee should be given due and effective opportunity of hearing before the deciding the issue.
In the result, appeal of the assessee is allowed for statistical purposes only. Order pronounced in the open court on 23rd July, 2019.