M/S CHADHA SUPER CARS PVT. LIMITED,LUDHIANA vs. ACIT, LUDHIANA

आदेश/ORDER Per Annapurna Gupta, Accountant Member: The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-2, Ludhiana (in short ‘CIT(A)’ dated 19.11.2016 passed u/s 250(6) of the Income Tax At, 1961 (hereinafter referred to as ‘Act’).

“1. That the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana has erred :n sustaining the addition of Rs.48,329/- made u/s 36 (1) (iii) of the Income Tax Act, 1961 by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana on

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account of amount advanced to M/s Nikkamal Jewellers for purchase of Coins, requiring for Diwali Pooja without considering the reply filed by the assessee during the course of assessment proceedings as well as during the course of appellate proceedings and without considering the facts of the case, Therefore, addition of Rs.48,329/- made by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana on account of amount advanced to M/s Nikkamal Jewellers and sustained by the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana is illegal, unwarranted, uncalled for and may be deleted. 2. That the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana has erred in sustaining the disallowance of Interest of Rs.4,69,863/- made u/s 36 (1) (iii) of the Income Tax Act, 1961 by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana on account of loans given to various parties and interest charged from them at 9% and the Ld. Assessing Officer estimating that the Interest to be charged from parties @ 12% and making the addition at 3% on loans advanced to various parties without considering the reply filed by the assessee during the course of assessment proceedings as well as during the course of appellate proceedings and without considering the facts of the case whereas, loans to the various parties were advanced out of the "Current Account" against the sale proceeds of the business were credited. Therefore, disallowance of interest of Rs.4,69,863/- made by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana on account of loans advanced to various parties and sustained by the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana is illegal, unwarranted, uncalled for and may be deleted.” 3. Briefly stated, the A.O. noted that the assessee had

made advances to one M/s Nikkamal Jewellers Pvt. Ltd.

amounting to Rs.10 lacs which had remained outstanding

during the year for a period of 147 days. The A.O. asked the

assessee to explain why proportionate disallowance of

interest be not made on the said interest free advance, to

which the assessee replied that the advances had been made

on account of purchase of gold coins for the purpose of pooja

for Diwali and had been given, therefore, in the ordinary

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course of business. The A.O. was not satisfied with the

explanation of the assessee and accordingly made

disallowance of proportionate interest @ 12% on the

impugned advance which came to Rs.48,329/-.

The A.O. further noted that the assessee had made

advance to many other parties and charged interest @ 9% as

under:

Name (S./Shri/Smt/Mrs. Amount (in Rs.) Interest Period charged

Rahul Sales 44,67,207/- Nil 365 days Renny Steel Castings 10,00,0007- 9% 365 days Renny Strips Pvt. Ltd. 49,00,000/- Nil 365 days Amit Kumar 10,01,973/- 9% 365 days Janak Raj 20,36,962/- 9% 365 days Pawan Kumar 16,40,055/- 9% 36/5 days Advent Impex 11,35,468/- 9% 365 days A.V. Engineering Industries 11,20,000/- 9% 365 days Kamaldeep 3,36,000/- 9% 365 days Rajnish Enterprises 11,35,468/- 9% 365 days Ravi Nandan Kumar 23,61,515/- 9% 365 days Rajnish Ahuja 38,94,653/- 9% 365 days Total 2,50,29,301/-

be not disallowed u/s 36(1)(iii) of the Act since the advances

had been made at lower rate of interest as compared to the

rates charged by banks on loans taken. The assessee

explained that no borrowed funds had been used for the

purpose of making these advances and that the entire

advances had been made from the current account of the

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assessee. Not being satisfied with the reply of the assessee

the A.O. held that there were mixed funds available with the

assessee and no commercial expediency had been

established for the purpose of making these advances. He,

therefore, disallowed the short interest charged on these

advances @ 3% by taking appropriate rate of interest @ 12%

and made a disallowance of interest amounting to

Rs.6,26,484/-.

before the CIT(A) who upheld the disallowances made

following the decision of the Hon'ble Jurisdictional High

Court in the case of CIT Vs. Abhishek Industries Ltd., 286

ITR 1.

challenging the disallowance of interest made pertaining to

advances given to M/s Nikkamal Jewellers and other parties

as stated above. Before us, the Ld. counsel for assessee drew

our attention to the submissions filed before the CIT(A),

laced at Paper Book page No.A-1 to A-60 and to the

supporting evidences filed from page NO.1 to page No.183.

Referring to the same,, the Ld. counsel for assessee stated

that the assessee had sufficient own interest free funds in

the form of share capital, reserves and surplus which far

exceeded the loans and advances made and it was these

funds which had been utilized for giving the impugned loans

since all the advances had been made from the current

account of the assessee which carried no interest. Drawing

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our attention to the funds available with the assessee it was

pointed out that the share capital and reserves for the

impugned year stood at Rs.78,35,750/- and

Rs.8,46,25,794/- respectively. It was pointed out that the

profits during the year were Rs.2,45,50,893/- which were

more than sufficient for making the impugned advances

amount in all to Rs.2.60 crores. Our attention was also

drawn to the copy of account of these parties and also copies

of bank account showing that all the advances had been

made from the current account of the assessee where all

trading receipts were deposited. It was further pointed out

that the interest bearing funds of the assessee were specific

purpose loans which were used for the said purpose and not

for giving any of the impugned advances. Our attention was

drawn to the Balance Sheet of the assessee for the impugned

year, placed at Paper Book page Nos.300 and 301 pointing

out therefrom that all the long term borrowings related to

car loans taken from banks and other term loans taken from

banks and investment funding loans taken, which were all

specific purpose loans and were used for the said purpose.

It was, therefore, contended that the disallowance of interest

made was against the law and facts of the case and ought to

be deleted.

of the lower authorities stating that there were mixed funds

available with the assessee and, therefore, disallowance of

proportionate interest have been rightly done considering the

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fact that the business expediency for making the impugned

advances had not been demonstrated by the assessee.

interest he contention of the assessee. Admittedly, the

assessee had demonstrated to the lower authorities that the

impugned advances had been made from its current account

on which no interest was being paid. It was also

demonstrated that the assessee had more than sufficient

interest free funds in the shape of share capital and reserves

amounting to Rs.78,35,750/- and Rs.8,46,25,794/-

respectively and its profits during the year, loan amounting

to Rs.2,45,50,893/- and further the impugned advances

amounted to Rs.2.60 crores. All the above facts have not

been controverted by the Revenue. In view of the same, it

stands sufficiently established that the assessee had

sufficient own interest free funds and it was these funds

which had been used for making the impugned advances

which is evident from the fact that all the trading receipts,

which were interest free in nature, were deposited in the

current account of the assessee and it was out of this

current account that the advances had been made.

Undoubtedly, therefore, it stands established that the

assessee had used interest free funds for making the

impugned advances and, therefore, there was no occasion for

making any disallowance of interest u/s 36(1)(iii) of the Act.

Considering the above facts, there is no merit in the

contention of the Revenue that the mixed funds were

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available with the assessee and, therefore, the proportionate

interest needed to be disallowed. In fact, in the present case,

the assessee has established the nexus between the interest

free funds and their deployment for the advances made.

Therefore, the mixed funds theory cannot be brought into

operation or applied in the present case. In view of the

above, the disallowance made of interest u/s 36(1)(iii) of the

Act amounting to Rs.48,329/- & Rs.4,69,863/- is deleted .

The ground of appeal Nos.1 and 2 are accordingly allowed.

relate to disallowance of expenses made for the purpose of

earning exempt income as per the provisions of section 14A

of the Act and read as under:

“3. That the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana has erred in sustaining the addition of Rs.64,07,002/- made u/s 14A of the Income Tax Act, 1961 by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana without considering the reply filed by the assessee during the course of assessment proceedings as well as during the course of appellate proceedings, whereas section 14A is not applicable in the case of assessee. Therefore, addition of Rs.64,07,002/- made by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana and sustained by the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana is illegal, unwarranted, uncalled for and may be deleted. 4. That the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana, without any prejudice to above stated grounds has erred in sustaining the addition of Rs.64,07,002/- made u/s 14A of the Income Tax Act, 1961 by the Ld. Assistant Commissioner of Income Tax Circle-V, Ludhiana after ignoring the facts of the case that the calculation of disallowance u/s 14A is not in accordance with the provisions of Law where the additions should be restricted to the extent of exempt income as held Hon'ble Jurisdictional High Court in the case of CIT Vs. Mascot Footcare in ITA

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No.67 of 2009 (0 &M) dated 2.4.2014 and by the Jurisdictional appellate tribunal i.e. Hon'ble bench of ITAT Chandigarh in the case- of M/s Aarti Steels Limited Vs. DCIT [ITA No. 268/CHD/2015] dated 30/11/2015 [A.Y. 2009-10] and also interest paid on loan taken by assessee for specific purposes are not to be included while calculating amount u/s 14A of the Income Tax Act, 1961. Therefore, addition of Rs.64,07,002/- made by the Ld.Assistant Commissioner of Income Tax Circle-V, Ludhiana and sustained by the Learned Commissioner of Income Tax (Appeals)-2, Ludhiana is illegal, unwarranted, uncalled for and may be deleted.” 10. Brief facts relating to the issue are that the A.O. noted

that the assessee had shown investments of

Rs.9,70,32,778/- as on 31.3.2012. The income from these

investments was not taxable. The details of the said

investments are as under:

PARTICULARS AMOUNT (ln Rs.) CHADHA MOTORS 9,13,90,778/- DSP BLACK ROCK EQUITY FUND 3,92,000/- HDFC MUTUAL FUND-TOP 200 2,50,000/- RENNY STRIPS PVT LTD 50,00,000/- TOTAL 9,70,32,778/-

relation to these investments was required to be disallowed

u/s 14A of the Act. The assessee contended that the

investment in Chadha Motors amounting to Rs.

9,13,90,778/- was in the form of capital by a partner from

which no taxable income had been distributed to the

partners since it had made losses during the year. The

assessee contended therefore that no disallowance u/s 14A

was required to be made. The A.O. was not satisfied with the

contention of the assessee. He referred to the decision of the

Hon'ble ITAT in assessee’s own case for assessment year

2008-09 where the disallowance u/s 14A had confirmed. The

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A.O. observed that the claim of the assessee that the

investment in partnership firm, M/s Chadha Motors, does

not merit disallowance u/s 14A had been dealt in depth by

Hon'ble ITAT, Chandigarh in assessee’s own case and had

decided the issue in favour of the revenue. The A.O.

accordingly worked out the disallowance u/s 14A r.w.r. 8D

at Rs.64,07,002/-.

contention made before the lower authorities that no exempt

income had been earned from the impugned investments

made since the investment made in the partnership concern

had returned loss and therefore no disallowance of expenses

u/s 14A of the Act was warranted. The Ld. counsel for

assessee further contended that in it is own case for

assessment year 2011-12 the I.T.A.T. had restricted the

disallowance of expenses u/s 14A of the Act to the extent of

exempt income earned. Copy of the order was placed before

us.

of the lower authorities.

the contention of the Ld. counsel for assessee. It is settled

law that the disallowance of expenses u/s 14A of the Act

cannot exceed the quantum of exempt income earned and

consequently where no exempt income is earned, no

disallowance of expenses can be made. This proposition of

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law has been laid down by the Hon'ble Jurisdictional High Court in the case of CIT Faridabad Vs. Lakhani Marketing Inc. Ltd., 226 Taxman 45 (P&H) and also by the Hon'ble Delhi High Court in the case of Chemnivest Ltd. Vs. ITO (2015) 378 ITR 33. In view of the same since no exempt income has been earned by the assessee during the year, which fact has been reiterated time and again before the lower authorities and has remained uncontroverted and which has also been demonstrated by showing that the major investment of Rs.9 crores made in the partnership firm has returned loss, we held that no disallowance of expenses is warranted in the present case u/s 14 A of the Act. The disallowance so made of Rs.64,07,002/- is, therefore, directed to be deleted. In view of the above, ground Nos.3 and 4 stand allowed. 16. In the result, the appeal of the assessee is, therefore, allowed. Order pronounced in the Open Court. Sd/- Sd/- संजय गग� अ�नपणा� ग�ता (ANNAPURNA GUPTA) (SANJAY GARG ) �याय�क सद�य/ Judicial Member लेखा सद�य/ Accountant Member �दनांक /Dated: 8th January, 2019 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आय�त / CIT 4. आयकर आय�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar

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