MEHAR CHAND BHATIA vs. COMMISSIONER OF INCOME TAX LUDHIANA PUNJAB

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ITA/2/2016HC Punjab & HaryanaPHHC01110390201620 September 20163 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that the ends of justice would be met by affording the appellant an opportunity for a re-hearing before the Tribunal. The impugned order of the Tribunal was set aside, and the matter was remanded to the Tribunal for a fresh decision after providing the appellant an opportunity of being heard. The Court noted that the CIT(A)'s order did not appear to have considered the assessee's written submissions and that the Tribunal's findings regarding the availability of unsecured loans were difficult to understand without considering the assessee's records. The Court also observed that the assessee's balance sheet was not very clear regarding a sum of approximately ₹5.38 crores shown under 'Other Liabilities' against M/s Garg Infrastructure Private Limited, and it was for the assessee to explain if this was an interest-free loan, which would significantly impact its case. The Court did not decide the substantial questions of law on merits.

What were the facts?

The appeal before the High Court of Punjab and Haryana at Chandigarh is against the order of the Income Tax Appellate Tribunal (Tribunal) for the assessment year 2009-2010. The Tribunal had confirmed the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which upheld the Assessing Officer's disallowance of interest amounting to ₹22,96,865/- under Section 36(1)(iii) of the Income Tax Act, 1961. The assessee contended that the CIT(A) did not consider written submissions filed prior to its order. The CIT(A) had noted that the borrowed funds were used for working capital, but also held that the assessee could not prove the interest was used for business purposes, finding it difficult to reconcile with the earlier observation. The Tribunal noted the assessee's capital account had a debit balance of approximately ₹2.28 crores, while unsecured loans were only around ₹36 lacs. The Tribunal also questioned the availability of unsecured loans of ₹588.79 lacs to the assessee, a finding the assessee disputed.

What were the issues?

1. Whether, under Section 36(1)(iii) of the Income Tax Act, 1961, interest can be disallowed when interest-free money has been advanced for interest-free purposes, both arising from commercial expediency and business exigencies, with no nexus, character, or purpose for diversion, as per CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 P&H? 2. Whether, on a correct interpretation of Section 57(iii) of the Income Tax Act, 1961, expenditure incurred for earning interest is allowable under the head 'income from other sources' when computing chargeable income? Assessee's contentions: For Issue 1, the assessee argued that interest-free advances were made for business exigencies and commercial expediency, citing CIT vs. Abhishek Industries Ltd. The assessee also contended that the CIT(A) failed to consider its written submissions and that the Tribunal's finding regarding unsecured loans was not based on the assessee's records. The assessee claimed that amounts were received by cheque from persons on its records. Revenue's contentions: The judgment does not record specific contentions from the revenue regarding these issues.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 57(iii)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA-2-2016 (O&M) Date of decision:- 20.09.2016 Mehar Chand Bhatia ...Appellant Versus Commissioner of Income Tax, Ludhiana ...Respondent CORAM: HON'BLE MR. JUSTICE S.J. VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE DEEPAK SIBAL Present:- Mr. Pankaj Jain, Senior Advocate, with Mr. Sachin Bhardwaj, Advocate, and Mr. Divya Suri, Advocate, for the appellant. Mr. Rajesh Katoch, Advocate, for the respondent. * * * * S.J. VAZIFDAR, C.J. (ORAL) This is an appeal against the order of the Tribunal confirming the order of the CIT (Appeals) pertaining to the assessment year 2009-2010. 2. The appellant contends that the following substantial questions of law arise in this appeal:- “I. Whether under the facts & circumstances of the case, u/s 36(1)(iii) of the Income Tax Act, 1961, can there be disallowance of interest while the interest free money has been advanced for interest free purposes, which both transactions are arising out of ‘commercial expediency’ & ‘business exigencies’ hence, none nexus, character, purpose for diversion pursuant to CIT Vs Abhishek Industries Ltd. (2006) 286 ITR 1 P&H? II. Whether on the true and correct interpretation of Section 57(iii) of the Income Tax Act, 1961, the claim of expenditure for earning the interest is to be allowed under the head income Amodh Sharma 2016.09.21 16:13 I attest to the accuracy and authenticity of this document chandigarh ITA-2-2016 (O&M) 2 from other sources while computing the chargeable income?” 3. The CIT (Appeals) upheld the disallowance made by the Assessing Officer on interest claimed under Section 36(1)(iii) of the Income Tax Act, 1961 in the sum of ` 22,96,865/-. The appellant/assessee had in fact filed detailed written submissions which are annexed as Annexure A-10 to this appeal. In paragraph 3, the CIT (Appeals) records that the matter had gone by default on account of the assessee not having pursued the matter seriously. It is apparent that the order did not take into consideration the written submissions which were filed prior thereto. The written submissions were filed on 29.11.2012 and the

order of the CIT (Appeals) is dated 13.12.2012. The assessee’s authorized representative’s presence has been marked in the order. It is difficult to understand why the submissions were not considered. On merits, the CIT (Appeals) observed that on the basis of the assessee’s submissions reproduced by the Assessing Officer, it is apparent that the said amount meaning thereby the amount borrowed on interest from the banks had been used towards working capital. It is further observed that the interest free funds and the funds availed of on interest formed a part of common kitty. Having made that observation, the CIT (Appeals) held that the assessee is not in a position to prove that the interest paid had been used for the purpose of business. This finding appears to be contrary to the earlier finding that the amount borrowed on interest had been used towards working capital. Although, this is a record of the appellant’s submission before the Assessing Officer, the CIT (Appeals) has not stated that it was incorrect.

4.

The Tribunal merely records that the assessee had overdrawn from the capital account and that the debit balance as on 31.03.2009 was about ` 2.28 crores. What is important is that the Tribunal noted that the unsecured loans were only about ` 36 lacs. The Tribunal upheld the Assessing Officer’s Amodh Sharma 2016.09.21 16:13 I attest to the accuracy and authenticity of this document chandigarh

ITA-2-2016 (O&M) 3 finding that the unsecured loans of ` 588.79 lacs were not available to the assessee. It is difficult to understand the basis for this finding as the Tribunal has not considered the assessee’s records which the assessee contends indicate the contrary. The assessee contends that the amounts have been received by him by cheque from persons who are on assessee’s records. Having said that, we must point out that the assessee’s balance-sheet is not very clear in this regard. The amount of about ` 5.38 crores is shown as against the name of M/s Garg Infrastructure Private Limited under the heading “Other Liabilities”. It is for the assessee to explain that it really is nothing but an interest free loan. If it is an interest free loan, it would make all the difference to the assessee’s case. It is not very clear whether this was so stated to the CIT (Appeals) and to the Tribunal or not.

5.

In the facts and circumstance of this case, the ends of justice, however, would be met by affording the appellant an opportunity of having the matter re-heard before the Tribunal.

6.

In these circumstances, the impugned order is set aside. The matter is remanded to the Tribunal for a fresh decision after affording the appellant an opportunity of being heard.

7.

The appeal is accordingly disposed of. (S.J. VAZIFDAR) CHIEF JUSTICE (DEEPAK SIBAL) JUDGE 20.09.2016 Amodh Whether speaking/reasoned Yes/No Whether reportable Yes/No Amodh Sharma 2016.09.21 16:13 I attest to the accuracy and authenticity of this document chandigarh

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