M/S. MEHENDIPUR BALAJI IMPEX PRIVATE LIMITED,KANPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTREL CIRCLE- II, KANPUR

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH “SMC”, LUCKNOW BEFORE SHRI. A. D. JAIN, VICE PRESIDENT ITA No.23/LKW/2019 Assessment Year: 2014-15 M/s Mahendipur Balaji Impex v. DCIT Pvt. Ltd. Central Circle II 51/56, Sita Ram Market Kanpur Shakkarpatti, Kanpur TAN/PAN:AAECM7300C (Appellant) (Respondent) Appellant by: Shri P. K. Kapoor, C.A. Respondent by: Smt. Alka Singh, D.R. Date of hearing: 23 05 2019 Date of pronouncement: 24 05 2019 O R D E R This is assessee’s appeal against the order of the ld. CIT(A)- IV, Kanpur, dated 22/11/2018 for the assessment year 2014-15, taking the following effective grounds of appeal: 1. Because the Learned CIT (Appeal) was wrong in law and on facts in dismissing the appeal filed by the appellant against assessment order dated 31.12.2016 passed by Assessing Officer Central Circle II Kanpur in respect of addition of Rs.22,20,000/- being proportionate disallowance out of interest paid. 2. Because on the facts & circumstances of the case the learned CIT (Appeal) should have deleted the disallowance of interest of Rs.22,20,000/- as the appellant had sufficient surplus fund by way of share capital & reserve & surplus & should have also allowed the claim of brought forward of Rs.7,49,430/- of earlier years.

ITA No.23/LKW/2019 Page 2 of 7 2. The A.O, from the perusal of the assessee’s balance sheet, noticed that the assessee company had made loans and advances to various persons as detailed below: 1. Kanishka Iron Pvt. Ltd. Rs.10,00,000/- 2. Passion Infra Developer P. Ltd. Rs.25,00,000/- 3. Sulabh Engineering consultant P Ltd. Rs.50,00,000/- 4. Sun Impex P. Ltd. Rs.1,00,00,000/- Total Rs.1,85,00,000/- 3. The assessee had not charged any interest on the above advances made to such persons. The assessee was asked to explain the nature of advances and to show cause as to why proportionate interest in respect of the interest-fee advances made by it should not be disallowed, as the assessee had borrowed huge capital and paid interest thereon. In this connection, the assessee had submitted as under :- "That as regards your query about interest free advances given to parties, amounting to Rs.1,85,00,000/- appearing in Schedule 15 of Audited Balance Sheet, we respectfully beg to submit that we had sufficient interest free fund-in the shape of share capital and Reserve and Surplus amounting to Rs.2,56,70,293/- appearing in Schedule 3 & 4 of Audited Balance Sheet. In view of the above, there being sufficient interest free fund available with the assessee, no adverse view may kindly be taken in this regard." 4. The A.O observed that from a perusal of detail of the advances given by the assessee, it was found that the assessee had charged interest from some persons and not charged any interest from the above-referred persons; that in its reply, the assessee had claimed that it had sufficient interest-free funds, but it had submitted nothing evidentiary to prove that there was no nexus between the money borrowed and the money advanced; that the fact remained that the assessee had diverted the advance borrowed, for making interest-free

ITA No.23/LKW/2019 Page 3 of 7 advance; that accordingly, interest on such advances needed to be computed and added to the total income of the assessee; that since the above said advance was outstanding with the persons for the whole of the year, the interest on such advance at the prevalent rate came to 12% per annum; and that the interest amount so computed amounted to Rs.22,20,000/-. Accordingly, proportionate interest of Rs. 22,20,000/- paid by the assessee was disallowed and added to the total income of the assessee. 5. The ld. CIT(A) has dismissed the assessee’s appeal, by holding as follows: “Further, during the course of hearing of this appeal, it was submitted by ld. AR that after passing of order under section 143(3) of the Act, the case of appellant was against assessed under section 153C of the Act on 31/12/2017 against which appellant Co. is also in appeal before the undersigned. In the assessment order under section 153C dated 31/12/2017 A.O included the originally assessed income under section 143(3) being Rs.29,69,430/-. Ld. AR contended that addition of Rs.22,20,000/- was made twice, first under section 143(3) dated 30/12/2016 and secondly under section 153C dated 31/12/2017. The ld. AR further submitted that in view of double addition and addition of Rs.22,20,000/- part of order under section 153C of the Act, order under section 143(3) dated 30/12/2016 should be cancelled. The undersigned has carefully perused the records of this office and it is found that A.O has assessed the case of appellant twice, firstly under section 143(3) on 30/12/2016 and secondly under section 153C on 31/12/2017. It is seen from the computation of income part (Page 25) that A.O has computed appellant’s income as under: Income as assessed vide order dated 30/12/2016 Rs.29,69,430/- Add: As discussed in para Rs.1,84,80,000/- Add: As discussed in para Rs.68,40,833/- Total income Rs.2,82,90,263/-

ITA No.23/LKW/2019 Page 4 of 7 Round off Rs.2,82,90,260/-

In computation of income, A.O has taken income as assessed under section 143(3) inspite of returned income under section 153C at Nil. The income adopted by A.O includes the addition of Rs.22,20,000/-. Thus, it is clear that addition of Rs.22,20,000/- has been taken by the A.O in the assessment under section 153C also. Further, appellant has also raised ground of appeal No.1(B) relating to above said addition in appeal against order under section 153C of the Act dated 31/12/2017. Therefore, keeping in view the facts and circumstances of both the appeals, undersigned is of the opinion that ground of addition Rs.22,20,000/- shall be adjudicated in appeal against order under section 153C of the Act, which is still pending for adjudication with other grounds of appeal. As, the adjudication of ground shall be made in appeal against order under section 153C dated 31/12/2017. Thus, adjudication of issue here has no relevance accordingly, all grounds of appeal raised by the appellant are hereby rejected and resultantly appeal is dismissed.”

ITA No.23/LKW/2019 Page 5 of 7 7. The ld. A.R. of the assessee has reiterated the assessee’s stand before the authorities below, that the assessee had sufficient interest-free funds in the shape of share capital and reserve & surplus, amounting to Rs.2,56,70,293/-, appearing in Schedules 3 and 4 of its audited balance sheet. It is submitted that this position has wrongly not been considered by the authorities below; that this position be now considered and the adverse view taken by the A.O be reversed. My attention has been drawn to APB-10, which is a copy of Notes to Financial Statements for the year ended 31/3/2014, i.e., Schedules 3 and 4 to the assessee’s audited balance sheet for the year under consideration. 8. The ld. D.R., per contra, has contended that the assessee has not shown before the A.O that non-interest bearing funds available with the assessee were more than the interest-free advances made. 9. Heard. The assessee has advanced interest-free funds to the tune of Rs.1.85 crores. Schedule 3 (APB:10) to the assessee’s balance sheet shows issued, subscribed and paid-up shares of Rs.15.14 lakhs. Schedule 4 (APB:10) states the assessee’s reserves and surplus to be at Rs.2,41,30,293/-. So, the assessee has funds of Rs.2,56,70,293/-. This amount is more than the amount advanced, of Rs.1.85 crores, by Rs.71,70,293/-. Hence, the non-interest-bearing funds available with the assessee are more than the amounts advanced. There are sufficient funds available with the assessee, in the form of paid-up share capital and reserves & surplus, other than the borrowed money, for advancing the amount of Rs.1.85 crores. 10. It stands well settled that if there are interest-free funds available with the assessee, sufficient to meet its investments and at the same time, the assessee had raised a loan, it can be presumed that the investments were from the interest-free funds available. In the present

ITA No.23/LKW/2019 Page 6 of 7 case, this is so. This material, in the shape of Schedules 3 & 4 of the assessee’s balance sheet, was available with the A.O. However, the A.O, in utter disregard/oblivion thereof, illegally made disallowance under section 36(1)(iii) of the Act, as per which, the amount of interest paid in respect of capital borrowed for the purposes of the business or profession shall be allowed as deduction in computing the profits and gains of the business and profession, i.e., income referred to in section 28 of the Act. The A.O further went wrong in observing that the assessee had “submitted nothing evidentiary to prove that there is no nexus between the money borrowed and the money advanced”. It is under the law, the A.O’s onus to prove the nexus between the borrowed amount and the sums advanced. The A.O failed to discharge such onus and to prove that the assessee had “diverted the advance borrowed for making interest-free advance”. The assessee had, in its reply (reproduced at page 2 of the assessment order) to the A.O, specifically stated that it had sufficient interest-free funds, as appearing in Schedules 3 and 4 of its audited balance sheet. The A.O, in the assessment order, has nowhere held that this stand of the assessee was incorrect. This also answers the objection raised by the ld. D.R. 11. In view of the above, finding the same to be justified, the grievance of the assessee is accepted. The order under appeal is reversed. The disallowance made by the A.O is deleted. 12. In the result, the appeal is allowed. Order pronounced in the open Court on 24/05/2019.

SD/- [A. D. JAIN] VICE PRESIDENT DATED: 24/05/2019 JJ:2305

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