SHRI VIPAN KHANNA ,PATHANKOT vs. INCOME TAX OFFICER, WARD6(3), PATHANKOT

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR (SMC) BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER I.T.A. No. 209/Asr/2018 Assessment Year: 2013-14

Vipan Khanna, vs. Income Tax Officer, c/o Pushap Palace, Ward 6(3), Dhangu Road, Pathankot Pathankot, Punjab [PAN: AELPK 0437Q] (Appellant) (Respondent)

Appellant by : Sh. P. N. Arora (Adv.) Respondent by: Sh. Charan Dass (D.R.) Date of Hearing: 12.03.2019 Date of Pronouncement: 07.06.2019

ORDER Per Sanjay Arora, AM: This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-2, Amritsar ('CIT(A)' for short) dated 24.01.2018, dismissing the assessee’s appeal contesting his assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 23.03.2016 for the Assessment Year (AY) 2013-14.

2 ITA No. 209/Asr/2018 (AY 2013-14) Vipan Khanna v. ITO Petros Mart, Pathankot) and as contract engineers (through M/s. Khanna Engineers, Pathankot and M/s. DC Khanna & Sons, Chamba). He filed his return of income for the relevant year at Rs. 2,09,738 on 07/01/2015. During the assessment proceedings, initiated by the issue of notice u/s. 143(2) on 28/8/2015 (served on 05.9.2015), it was observed by the Assessing Officer (AO) that the assessee had claimed interest on secured loans (outstanding at Rs.166.36 lacs as on 31/03/2013) at Rs.21,34,843/-, borrowed ostensibly for business purposes. The assessee, whose capital as at the year-end was at a meager Rs.4.80 lacs, had advanced large amounts, aggregating to Rs.122.77 lacs, which were not for the purpose of his business. The assessee was accordingly show caused on 19/3/2016 for proportionate interest disallowance (i.e., at Rs.15.75 lacs) vide notice dated 17/3/2016. After considering the assessee’s reply the AO found advances for non business purposes at Rs.99.13 lacs and, accordingly, disallowed Rs.12,72,216/-. The same stood confirmed in first appeal, with the ld. CIT(A) holding as under:

‘Decision- The assessment order and the written submissions of the appellant are considered. It is observed that the total loan and advances made by the appellant to various parties was to the tune of Rs 122,76,505/- whereas the consolidated balance sheet of the assessee as on 31.3.2013 shows capital of Rs 480,489/-, unsecured loans amounting to Rs 55,61,456/- and sundry creditors of Rs 9,53,173/- and others payable amounting to Rs 3,00,493/- aggregating to Rs 72,95,612/-, which was free of cost. Therefore total loan and advances made by the appellant were much more than the total interest-free funds available with the appellant, and accordingly the decisions of hon’ble Punjab & Haryana high Court in the case of Bright Enterprises P Ltd, and Sh. Gurdas Garg and the decision of hon’ble Apex Court in the case of S A builders P Ltd are not of any help to the appellant. The AO has analyzed each and every advance made by the appellant and the assessment order and rightly concluded that the total advances of Rs 99,13,472/- were made otherwise than for business purposes. Further, the assessee has not brought material on record to discharge its onus for proving that the advances made by it were purely for business purposes. Therefore, the AO was justified in concluding that the amount of Rs 99,13,472/- was advanced by the appellant otherwise than for business expediency and was therefore justified in making disallowance of Rs 12,72,216/- u/s. 36(l)(iii) of the Act which is confirmed.’ Aggrieved, the assessee is in second appeal.

3 ITA No. 209/Asr/2018 (AY 2013-14) Vipan Khanna v. ITO 4. Before me, the thrust of the assessee’s case was that he has sufficient interest-free capital, i.e., at Rs.72,95,611 as at year-end (31/03/2013), as under and, accordingly, no interest disallowance is called for: (Amount in Rs.) Proprietor capital 4,80,489 Unsecured Loans (interest fee) 55,61,456 Trade Creditors 9,53,173 Other payables 3,00,493

4 ITA No. 209/Asr/2018 (AY 2013-14) Vipan Khanna v. ITO which the same have been raised or, as the case may be, stand applied. Sure, where the funds are not dedicated, i.e., contracted for a specific purpose, it is open for the assessee to appropriate the same against a particular application, i.e., as may suit his interest or operate to minimize his tax liability. For example, it is perfectly justified for the assessee to contend that the interest-free loans had been applied for the non-business purposes, so that, by implication, the interest-bearing capital is applied for business purposes. The only caveat is that the interest-free capital ought to be available for being so applied. Further, it is to be appreciated that trade credit arises on the purchase on goods and services (for the business) on credit and, accordingly, is in the nature of a spontaneous liability, toward the corresponding assets of the business. That is, it is in the nature of non-fund source of credit and, further, only in respect of the relevant assets. Liquid funds qua the same, and which can therefore be said to be applied toward a particular avenue, business or non-business, would only be where the trade credit exceeds the corresponding current assets, i.e., the firm has a negative net working capital (NWC). The balance-sheet of the assessee as at 31/3/2013, which is the only balance- sheet on record, is as under: Balance-sheet as at 31.3.2013 Liabilities (Amt. Rs.) Assets (Amt. Rs.) Proprietors’ capital 4.80 Fixed assets 6.94 Secured Loans 166.36 Shares 0.84 Unsecured Loans 55.62 Securities 50.31 51.15 Trade Liabilities 12.54 Current Assets 82.10 Advances(@) 99.13 _____ _____ Total 239.32 Total 239.32 [(*) (Amount in Rs. lacs); (@) denotes the impugned advances]

5 ITA No. 209/Asr/2018 (AY 2013-14) Vipan Khanna v. ITO

The NWC in the instant case is at a positive sum of Rs.69.56 lacs (Rs.82.10 lacs – Rs.12.54 lacs) as at the year-end. There is also no indication of it being at a negative sum at any time during the year. The interest-free capital (as at the year- end) with the assessee is, thus not, as contended, Rs. 72.96 lacs, but Rs. 60.42 lacs (Rs. 72.96 lacs – Rs. 12.54 lacs). Further, the secured loans (Rs.166.36 lacs) assumed by the assessee, as apparent from their profile at Schedule VII to the balance-sheet as on 31.3.2013 (PB pages 1-28), is toward financing the working capital, which is thus over-financed by Rs.96.80 lacs (Rs.166.36 lacs – Rs. 69.56 lacs). The interest-free capital with the assessee (Rs.60.42 lacs) is to be, without doubt, firstly appropriated against fixed assets (and other assets) of the business, owned by the assessee, as it is only against their collateral security, i.e., other than the primary security in the form of working capital assets, that the said loans are secured against. The fixed assets and the non-current assets block at the year-end is at Rs.58.09 lacs, resulting thus in a surplus interest-free capital (as at the year-end) at Rs. 2.33 lacs (Rs.60.42 lacs – Rs.58.09 lacs). The non-business advances (Rs. 99. 13 lacs) are, thus, financed as under: (Amount in Rs. lacs) Amt. (%) - interest free capital 2.33 (2.30) - borrowed capital (SL) 96.80 (97.65)

Clearly, therefore, the non-business advances stand financed, as the year-end, by interest bearing borrowed capital (in the form of secured loans) to the extent of 97.65%, i.e., as against 100% taken by the Revenue. The position as at the beginning of the year may be different. There could be accretion to or, as the case may be, depletion of capital, including interest-free loans, during the year. The position of the latter is not available, while the depletion during the year, in the form of withdrawals and losss, is at Rs.3.29 lacs, amounting to 3.3% (of the

6 ITA No. 209/Asr/2018 (AY 2013-14) Vipan Khanna v. ITO impugned advances), leading to an average (by taking the mean of opening and closing balances) would therefore approximate to 4%. The ratio of the borrowed capital financing the non-business advances may thus be reasonably taken at 96% (as against 100% by the Revenue). Sure, some variables, as the unsecured and secured loans as at the beginning of the year, or indeed the average for the year, may well be different. Why, the non-business advances itself may well be, for all we know, at a higher figure (than as at year-end), absorbing such interest-free or, as the case may be, interest bearing capital. However, it was for the assessee to set up a case in this regard. In fact, even no contention to this effect, i.e., that the figures as at the beginning of the year are at a material variance, stands raised. In fact, what stands stated in the preceding paragraphs, was discussed during hearing, and the assessee, also represented by Sh. Anil Vasudeva, CA (i.e., along with Sh. Arora) on 07/3/2019, required to work out the adequacy or otherwise of the interest-free capital during the year, substantiating, thus, his case with facts and figures. However, no such exercise was done. Sh. Vasudeva, who presented the assessee’s case on 07/3/2019, and was explained to state his case with reference to the contractual obligations attending the different interest-bearing or, as the case may be, interest free, liabilities, did not appear on the next date, with no explanation for the same. And neither was any adjournment sought. Rather, Sh. Arora, the assessee’ counsel, proceeded de hors what had transpired during the previous hearing, reiterating, without reference to any factual basis, that the assessee had sufficient interest-free capital to preclude the disallowance of interest on borrowed capital. The assessee’s case, thus, continues to be no more than a bald statement, i.e., as it was before the Revenue authorities. In view of the foregoing, I find no reason to interfere, except to direct relief to the extent of 5% (five per cent.), by further relaxing the interest-free financing component of the impugned advances by the assessee, obtaining for the year. No

7 ITA No. 209/Asr/2018 (AY 2013-14) Vipan Khanna v. ITO mistake in the working of the interest by the AO having been pointed out, the same works to Rs.63,611/-. Reference, once again, is drawn to the elaborate decision in Sunil Grover (supra), also considering the decisions by the higher courts of law, explaining further the matter to be principally factual. I decide accordingly, and the assessee gets part relief.