J.V. GOKAL & CO.,MUMBAI vs. ACIT-17(2), MUMBAI

This appeal in A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)-56/ACIT-17(2)/2017-18/759 dated 13/06/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 26/12/2016 by the ld. Asst. Commissioner of Income Tax – 17(2), Mumbai (hereinafter referred to as ld. AO).

The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of interest in the sum of Rs 22,58,808/- u/s 36(1)(iii) of the Act on the premise that borrowed funds were diverted for non business purposes in the facts and circumstances of the case.

We have heard the rival submissions and perused the materials available on record. We find that the assessee is a partnership firm engaged in the business of export of teas and other traditional / non- traditional items and supply of D.I. Pipes. The business is carried on at Kolkata and Mumbai. We find that the ld .AO observed that the assessee had paid interest on its borrowings on one hand, and on the other hand, had allowed excess withdrawals to be made by one of the partner Shri Nakul Gokal. Accordingly, the ld AO observed that the borrowed funds were diverted for excess withdrawals to be made by the partners and proceeded to disallow the interest paid on such borrowings to the extent of Rs 22,58,808/-. This action of the ld AO was upheld by the ld CITA. We find that the assessee had pleaded that though the capital account of the partners is showing negative balance due to excess withdrawals by one of the partner, the assessee firm had sufficient own funds in the form of advance received from customers of tea to the tune of Rs 26.02 crores which had apparently funded the excess withdrawal of Rs 23.02 crores by one of the partner. The ld CITA is supposed to have examined the entire financial statements and ascertain the availability of interest free funds, if any, available with the assessee. In the instant case, the assessee had made a submission that advance received from customers lying in current liabilities and provisions does not carry any interest. We find that the ld CITA had not given any finding with regard to this fact in his appellate order. Hence we deem it fit and appropriate, in the interest of justice and fairplay, to remand this issue to the file of ld CITA for denovo adjudication in accordance with law. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

In the result, the appeal of the assessee is allowed for statistical purposes.