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Facts
The assessee debited Rs. 34,66,984/- for bank charges and interest and showed Rs. 2,55,44,363/- as loans and advances to related parties without charging interest. The AO disallowed Rs. 30,65,324/- as interest expenditure, holding it improbable that a businessman would take loans with interest and give interest-free advances.
Held
The Tribunal held that bank charges are not disallowable under Section 36(1)(iii). Regarding loans and advances, it was found that most were carried forward from the proprietor's business or paid from own funds, not borrowed funds. Therefore, the addition was directed to be deleted.
Key Issues
Whether disallowance of interest expenditure is justified when advances to related parties are from own funds or carried forward from previous proprietorship business, and whether bank charges are covered under Section 36(1)(iii).
Sections Cited
36(1)(iii), 143(3)
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आयकरअपीलीयअिधकरण,च"ीगढ़ "ायपीठ “ए” , च"ीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “A”, CHANDIGARH HEARING THROUGH: PHYSICAL MODE "ी िव"म िसंह यादव, लेखा सद" एवं "ी परेश म. जोशी, "ाियक सद" BEFORE: SHRI. VIKRAM SINGH YADAV, AM & SHRI. PARESH M. JOSHI, JM आयकर अपील सं./ िनधा"रण वष" / Assessment Year : 2017-18 Kler Wines बनाम The DCIT C/o Shri Tejmohan Singh, Advocate Circle-4(1), Chandigarh # 527, Sector 10-D, Chandigarh-160011 "ायीलेखासं./PAN NO: AAQFK2184F अपीलाथ"/Appellant ""थ"/Respondent िनधा"रती की ओर से/Assessee by : Shri Tejmohan Singh, Advocate राज"की ओर से/ Revenue by : Shri Vivek Vardhan, Addl. CIT, Sr. DR सुनवाई की तारीख/Date of Hearing : 07/01/2025 उदघोषणा की तारीख/Date of Pronouncement : 10/01/2025 आदेश/Order PER VIKRAM SINGH YADAV, A.M. :
This is an appeal filed by the Assessee against the order of the Ld. CIT(A)/ NFAC, Delhi dt. 27/10/2023 pertaining to Assessment Year 2017-18 wherein the limited issue relates to sustenance of addition of Rs. 30,65,324/- under Section 36(1)(iii) of the Act.
Briefly the facts of the case are that during the course of assessment proceedings, the AO observed that the assessee has debited a sum of Rs. 34,66,984/- under the head “Bank Charges and Interest” and separately has shown “loans and advances” to related parties amounting to Rs. 2,55,44,363 and it was held that no interest was charged by the Assessee from these persons whereas the assessee has raised loans / taken CC Limit and has paid huge interest to the bank and after issuing the show cause and considering the reply submitted by the assessee but not found the same acceptable, the AO held that the amount of expenditure incurred by the assessee on account of interest paid during the year needs to be proportionately disallowed as it is highly improbable that a prudent businessman would take loan on interest and at the same time, advance loans to other persons without charging any interest thereon and therefore, an amount of Rs. 30,65,324/- being the interest @ 12% of 2 Rs. 2,55,44,363 was disallowed while completing the assessment under section 143(3) dt. 12/12/2019.
The assessee thereafter carried the matter in appeal before the Ld. CIT(A) who has since sustained the said disallowance. Against the said findings the assessee is in appeal before us.
During the course of hearing, the Ld. AR submitted that firstly, both the lower authorities have failed to appreciate that the amount of Rs. 34,66,984/- debited in the P&L account consist of bank interest of Rs. 17,40,161/- and bank charges of Rs. 17,26,823/- and the bank charges are related to the various day to day transactions such as cash handling charges, RTGS charges, cheque book charges etc. related to liquor business being carried on by the assessee and therefore, the amount of Rs. 17,26,823/- cannot be subject matter of disallowance invoking provisions of Section 36(1)(iii) of the Act.
It was further submitted that regarding the loans and advances to related parties totaling to Rs. 2,55,44,363/-, Mr Darshan Singh Kler was carrying on the business in his sole proprietorship capacity during the F.Y. ended on 31/03/2016 and all the assets and liability of his sole proprietorship business have been transferred at the book value to the assessee company. It was submitted that except for Mr. Ved Parkash, rest of four related parties in respect which the advances have been shown under the head “Loans & Advances”, the same have been carried forward from the earlier sole proprietorship business of Mr. Darshan Singh Kler. In this regard, our reference was drawn to the balance sheet of the proprietorship business as on 31/03/2016 wherein these balances under the head ‘loans and advances” have been reflected.
Further, our reference was drawn to the ledger account of Shri Happy Singh wherein there is opening balance of Rs. 10,00,000/- and there are no further transactions during the year. In respect of M/s Kler Hotels Pvt. Ltd., our reference was drawn to its ledger account wherein there is opening balance of Rs. 1,35,62,763/- and there are repayment to the tune of Rs. 11,40,000/- and further payment to the extent of only Rs. 60,000/- resulting in closing balance of Rs. 1,24,82,763/- and it was submitted that there are no fresh payment made to the said party except for an amount of Rs. 60,000/- and rest all transactions are carried forward from the earlier financial year from 3 the proprietorship business. Regarding M/s Liquor Hut, it was submitted that there is an opening balance of Rs. 1,55,00,000/- which has been carried forward from the sole proprietorship business of Mr. Darshan Singh Kler and there is a repayment of Rs. 1,00,00,000/- and further payment of Rs. 50,00,000/- during the year and in this regard, it was submitted that such payment have been made on 01/04/2016 i.e, at the beginning of the financial year and at that point in time, the assessee was having sufficient cash and bank balance of Rs. 3,26,11,769/- and it was accordingly submitted that even the said payment which has been made during the F.Y. is out of the available cash in hand at the beginning of the year. Further drawing reference to the ledger account of M/s Sukhwinder Investment Pvt. Ltd., it was submitted that there is opening balance of Rs. 61,600/- which has been transferred from the sole proprietorship business of Shri Darshan Singh Kler and no fresh payment have been made during the year. Regarding Shri Ved Parkash, it was submitted that an amount of Rs. 80,00,000/- has been paid on 06/04/2016 and out of which Rs. 65,00,000/- have ben repaid subsequently during the same F.Y. and there is a closing balance of Rs. 15,00,000/- and in respect of Rs. 80,00,000/- so paid on 06/04/2016, our reference was drawn to the bank statement of Shri Darshan Singh Kler wherein there is a cheque payment of rs 80 lacs to Shri Ved Prakash on 06/04/2016 and it was submitted that the said payment has been made from the individual bank account of Shri Darshan Singh Kler and as such no funds of the assessee have been utilized for making the said payment. In light of the same, it was submitted that no borrowed funds have been utilized by the assessee company for advancing these funds to the related parties and in absence thereof, the disallowance so made by the AO and sustained by the ld CIT(A) be directed to be deleted.
Per contra, the Ld. DR has relied on the order of the lower authorities.
We have heard the rival contentions and purused the material available on record. Firstly, the bank charges cannot be subject matter of disallowance under section 36(1)(iii) of the Act as rightly pointed out by the ld AR. Secondly, in respect of the payment to the related parties, it is noted that most of the amount standing credit to the related parties have been transferred from the sole proprietorship of the Shri Darshan Singh Kler as evident from the ledger account of the respective parties and as such, no borrowed funds have been utilised by the assessee company. In respect of 4 M/s Liquor Hut, the fresh amount has been paid out of cash in hand at the beginning of the year and in respect of Shri Ved Parkash, the payment has been made in the individual capacity of Shri Darshan Singh Klera as evident from his bank statement. We therefore find that the assessee has sufficiently demonstrated that no interest bearing funds have been utilized for making payment to these related parties and in absence of any adverse material on record, there is nothing to establish the nexus between the borrowings and the payment shown against the related parties and therefore the provision of Section 36(1)(iii) cannot be invoked and the addition so made is hereby directed to be deleted.
In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 10/01/2025 परेश म. जोशी िव"म िसंह यादव (PARESH M. JOSHI) ( VIKRAM SINGH YADAV) "ाियक सद" / JUDICIAL MEMBER लेखा सद"/ ACCOUNTANT MEMBER