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Income Tax Appellate Tribunal, DELHI BENCH : SMC-1 : NEW DELHI
Before: SHRI R.K. PANDA
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER Assessment Year: 2015-16 Ashish Jindal, Vs ITO, 8, Sundar Nagar, Ward-52(4), Delhi. New Delhi. PAN: AEXPJ2013H (Appellant) (Respondent) Assessee by : Shri Ved Jain, Advocate & Shri Ashish Goel, CA Revenue by : Shri Vijay Kumar Kataria, Sr. DR Date of Hearing : 26.07.2021 Date of Pronouncement : 03.08.2021 ORDER This appeal filed by the assessee is directed against the order dated 11th April, 2019 of the CIT(A)-18, New Delhi, relating to assessment year 2015-16.
This appeal was earlier dismissed by the Tribunal for non-prosecution. Subsequently, the Tribunal recalled its order vide MA No.205/Del/2020, order dated 11.06.2021. Hence, this is a recalled matter.
Facts of the case, in brief, are that the assessee is an individual and is engaged in the business of trading of agro products. He filed his return of income on 26th September, 2015 declaring the total income at Rs.16,85,900/-. During the course of assessment proceedings, the AO noticed from the various details filed by the assessee that the assessee has debited an amount of Rs.27,11,471/- towards payment of interest for the impugned assessment year. He noted that this interest is paid on secured loan of Rs.2,26,52,053/- whereas he has also given interest-free advance of Rs.1,12,03,500/-. He, therefore, asked the assessee as to why proportionate interest should not be disallowed u/s 36(1)(iii) and u/s 37(1) of the Act to the extent of Rs.1,12,03,500/- not utilized for business purpose.
The assessee submitted that it has own interest free funds in the form of own capital of Rs.75.58 lakhs as on 31.03.2015 and Rs.92.16 lakhs as on 31.03.2014. Further, the said advances have been given out of commercial expediency and, therefore, the interest paid on secured loan should not be disallowed. However, the AO was not satisfied with the arguments advanced by the assessee and disallowed an amount of Rs.27,11,471/- being the proportionate interest on interest free advance of Rs.1,12,03,500/- . In appeal, the ld.CIT(A), following the decision of Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 01 and various other decisions of the Tribunal, sustained the addition made by the AO.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal raising the following grounds:- “1. On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad both in the eye of law and on facts.
2. (i) On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in confirming the disallowance of 13,41,068/-made on account of interest expenses invoking the provisions of section 36(1 )(iii) of the Act. (ii) That the disallowance has been confirmed rejecting the explanation and evidences brought on record by the assessee in this regard.
3. On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in confirming action of the AO rejecting the contention of the assessee that the advances having been made out of the owned funds of the assessee, no disallowance u/s 36(1)(ii) can be made. 4. On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in rejecting the contention of the assessee that the interest claimed by the assessee having direct nexus with the business expediency of the assessee, no disallowance under section 36(1)(iii) can be made. 5. The appellant craves leave to add, amend or alter any of the grounds of appeal.”
The ld. Counsel strongly challenged the order of the CIT(A) in sustaining the disallowance of Rs.27,11,471/- made by the AO u/s 36(1)(iii) of the IT Act. He submitted that the own funds of the assessee at the beginning of the year was Rs.75.58 lakhs. He submitted that the assessee has earned interest of Rs.8 lakhs on investment of Rs.1 crore in 8% government bonds. Further, the assessee has also earned interest of Rs.1.15 lakhs on FDR purchased on short-term spare funds. Thus, the net interest payment is only Rs.17.96 lakhs. Referring to the Profit & Loss Account, he submitted that the assessee has made sales of Rs.4,61,78,210/- on which it has earned profit of Rs.46,38,762/-. He submitted that the allegation of the AO is that the assessee has given huge advances of Rs.1,12,03,500/- which are not in the course of business. He submitted that except one advance of Rs.17,40,000/- given to Nazuk Jindal which is not in the nature of business, the remaining advance of Rs.94,63,500/- are given during the normal course of business. He submitted that it is a general practice to give advances to other business concerns for the smooth functioning of the business. So far as the loan of Rs.17,40,000/- given to Nazuk Jindal is concerned, he submitted that even here also no proportionate disallowance of interest can be made since own capital of the assessee is Rs.75.58 lakhs which is much more than the interest free advances of Rs.17,40,000/- given for non-business purpose. Referring to various decisions, he submitted that the Revenue cannot put itself in the armchair of the businessmen and decide about the genuineness and reasonableness of an expenditure incurred by the assessee. For the above proposition, he relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Dalmia Cement Pvt. Ltd. reported in 254 ITR 377, the decision of Hon’ble Calcutta High Court in the case of Ravi Marketing Pvt. Ltd. vs. CIT, reported in 280 ITR 519, the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. vs. CIT, 288 ITR 01. Further, the decision relied on by the ld.CIT(A) in the case of Abhishek Industries Ltd. (supra) has already been reversed by the Hon’ble Supreme Court. He accordingly submitted that the order of the CIT(A) be set aside and the grounds raised by the assessee should be allowed.
The ld. DR, on the other hand, referred to para 3.3 of the order of the AO which reads as under:-
“3.3 After carefully consideration of the reply of the assessee, I am of the opinion that the reply of the assessee is not tenable. It is very much clear from the balance-sheet filed by the assessee and from the above mentioned reply, that the assessee has obtained loans from the Kotak Mohindra Bank and ICICI Bank, totaling to Rs. 2,26,52,053/- on which he has paid Rs. 27,11,471/- as interest. In para 3 of the reply of the assessee dated, 08.11.2017, the assessee has explained that he has made interest bearing investment of Rs. 1,00,00,000/- on which 8 lac of interest is shown as received. The data provided by the assessee is nothing but self serving presentation of statistics. Further in para 4 & 5 of the reply, he has given summery of outstanding liability & assets and tried to convince that during the year he was having sufficient funds to provide interest free loans/advances. This has already been taken care of that while issuing the show-cause notice. Interest is proposed to be disallowed in proportion to only interest free advance is given by the assessee. As far as contention of the assessee about availability of interest free funds is concerned, that funds must be used for business purposes, so that the assessee can save interest expenses. At one side, assessee has obtained interest bearing loans on which he has paid interest of Rs. 27,11,471/- and at the other side, has given interest free loans to different persons.”
Referring to the order of the CIT(A), the ld. DR drew the attention of the Bench to the finding of the CIT(A) and submitted that the ld.CIT(A) has given valid reasons while upholding the order of the AO. He accordingly submitted that the ground raised by the assessee should be dismissed.
I have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.27,11,471/- by invoking the provisions of section 36(1)(iii) on the ground that the assessee has paid interest of Rs.27,11,471/- on secured loan of Rs.2,26,52,053/- whereas it has given interest free advance of Rs.1,12,03,500/-. I find, the ld.CIT(A) sustained the addition made by the AO on the ground that the assessee has granted interest free advance of 5 Rs.1,12,03,500/- and failed to establish the nexus between the interest free funds available in the form of capital and the interest free advances given by him. It is the submission of the ld. Counsel for the assessee that out of the total interest free advance of Rs.1,12,03,500/-, only an amount of Rs.17,40,000/- is the interest free advance for the non-business purpose and the remaining advance of Rs.94,63,500/- are given in the normal course of business. It is also his submission that the assessee has earned interest of Rs.8 lakhs on investment of Rs.1 crore in 8% government bonds and interest of Rs.1.15 lakhs on short-term fixed deposits which has been offered to tax as per the computation of income. It is also his submission that since the assessee is having own capital of Rs.75.58 lakhs, therefore, the interest free advances of Rs.17,40,000/- given for non-business purpose does not require any proportionate disallowance of interest.
I find some force in the above submission of the ld. Counsel. A perusal of the computation of income, copy of which is placed at page 2 of the paper book, shows that the assessee has shown interest income on government securities at Rs.8 lakhs, interest on fixed deposits at Rs.1,15,626/- and interest on savings bank account at Rs.3,867/- all totaling to Rs.9,19,493/- and accordingly, along with business income has declared the total income of Rs.16,85,897/- which is the figure taken by the AO in the body of the assessment order as the returned income. Thus, the AO has taxed the interest income on 8% interest on investment of Rs.1 crore government securities and Rs.1,15,626/- as interest on short-term fixed deposits. The own capital of the assessee company stands at Rs.75,58,000/- which is not disputed by the lower authorities as it was the plea of the assessee from the very beginning. From the various details furnished by the assessee, we find out of the total amount of Rs.1,12,03,500/-, only an amount of Rs.17,40,000/- given to Nazuk Jindal is on account of non-business purposes and the remaining advances of Rs.94,63,500/- are given in the normal course of business. The AO, in the instant case, without considering the interest earned by the assessee, has disallowed an amount of Rs.13,41,068/- being the proportionate interest on interest free advances of Rs.1,12,03,500/-. In my opinion, in the instant case, disallowance, if any, can be made on the interest free advances of Rs.17,40,000/- given to Mr. Nazuk Jindal since the same is admittedly for non-business purposes. However, while computing the proportionate disallowance of interest free advances, the AO has to consider the interest earned on government securities and short-term deposits which was shown separately by the assessee as ‘Income from other sources’ from the total interest deposited in the Profit & Loss Account to the tune of Rs.27,11,471/-. In other words, for computing the proportionate disallowance of interest on the interest free non-business advance of Rs.17,40,000/-, the AO is directed to set off the interest income of Rs.9,15,626/- and, thereafter compute the proportionate disallowance. To this extent, the order of the CIT(A) is modified and the ground raised by the assessee is partly allowed.