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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
Before: Shri Shamim Yahya (AM)
O R D E R These are appeals by the assessee against respective orders of learned CIT(A) for concerned assessment years.
Since issues are common and appeals were heard together, these are being consolidated and disposed of by this common order.
Grounds of appeal for A.Y. 2010-11 read as under :- i) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in confirming the disallowance of interest of Rs.3,14,075/- u/s. 36(l)(iii) of the Income Tax Act 1961.
ii) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred confirming the disallowance on the ground that the Assessing Officer was justified in holding that the appellant had no interest free funds out of which the appellant could give interest free loans of Rs.25,46,000/-. iii) On the facts and in the circumstances of. the case and in law, the learned C.I.T.(A) erred in confirming the findings of the Assessing Officer that the appellant failed to prove that it had interest free fund of Rs.2,10,76,888/-and hence the interest of Rs.3,14,075/- is allowable u/s. 36(l)(iii).
2 M/s. Chemofarbe Industries iv) The appellant craves, leave to add, alter, amend or delete any ground(s) of appeal either before or during the course of hearing of the appeal.
Grounds of appeal for A.Y. 2013-14 read as under :- i) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in confirming the disallowance of interest of Rs.16,81,346/-u/s. 36(l)(iii) of the Income Tax Act 1961.
ii) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred confirming the disallowance on the ground that the Assessing Officer was justified in holding that the appellant had no interest free funds out of which the appellant could give interest free loans of Rs.3,85,91,652/-. iii) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in confirming the findings of the Assessing Officer that the appellant failed to prove that it had interest free fund of Rs.6,75,15,353/-and hence the interest of Rs. 16,81,346/- is allowable u/s. 36(l)(iii).
Brief facts of the case are that the assessee is a partnership firm. For A.Y. 2010-11, assessment was reopened to examine the issue of interest paid on secured and unsecured loans. In response to the notice the assessee gave written submissions. The assessee inter alia submitted that the assessee has sufficient interest free funds to grant impugned loans. However, the Assessing Officer was not satisfied. He asked the assessee to furnish fund-flow statement to show nexus of deployment of interest free funds for extending advances to the following parties :-
i) Virendra Sutaria Rs. 16,36,000 ii) Virendra Sutaria (HUF) Rs. 5,00,000 iii) Pratibha Sutaria Rs. 2,50,000 iv) Rajan Gupta Rs. 1,60,000 Assessing Officer observed that the above funds were claimed to be business advances. However, the assessee failed to furnish any evidence in this regard.
Assessing Officer rejected the assessee’s submission that sundry creditor for goods amounting to Rs. 2,05,06,270/- and sundry creditors for expenses of Rs. 5,20,618/- can be claimed to be interest free funds available. Similarly, he rejected the assessee’s contention regarding partner’s fixed capital of Rs.
3 M/s. Chemofarbe Industries 50,000/-. He held that same were contributed in the initial year and has already been used as such. Hence, the Assessing Officer held that the assessee has utilised its interest bearing funds for extending interest free loans aggregating to Rs. 25,46,000/- to the above said four persons for non-business purposes. He computed proportionate interest of Rs. 3,14,075/- and disallowed the same.
Upon assessee’s appeal learned CIT(A) confirmed the same.
For A.Y. 2013-14 the Assessing Officer noted that the assessee has given following interest free advances :-
Arun Doshi HUF Rs. 46,51,887 Balaji Enterprises Rs. 5,00,000 Dhawal Enterprises Rs. 1,26,50,000 R.K. Corporation Rs. 75,60,000 Mr. Kairav A. Doshi-employee Rs. 1,31,82,765 Total Rs. 3,85,44,652 He rejected the assessee’s submission that the assessee has following interest free funds : Sundry Creditors for Goods Rs. 5,03,68,256 Sundry Creditors for Expenses Rs. 1,26,99,408 Partners fixed capital Rs. 50,000 Current capital Rs. 43,97,689 Rs. 6,75,15,353
Regarding claim of the assessee that the above said parties were given advances for purchases, the Assessing Officer rejected the claim of purchase advances to Shri Arun Doshi, HUF on the ground that the same is a HUF of the partner of the assessee firm. He further noted that none of the above four parties have supplied goods to the assessee. No other documentary evidence regarding advances being purchase advances were produced. Regarding payment of Rs. 1,31,82,765/- for Shri Kairav A. Doshi, assessee stated that he is an employee. The Assessing Officer rejected this also. Furthermore, in absence of any further details Assessing Officer rejected the proportionate interest on account of following advances :-
4 M/s. Chemofarbe Industries
Arun Doshi HUF Rs. 46,51,887 Balaji Enterprises Rs. 5,00,000 Dhawal Enterprises Rs. 1,26,50,000 R.K. Corporation Rs. 75,60,000 Mr. Kairav A. Doshi-employee Rs. 1,31,82,765 Others (para 3.3.5) Rs. 3,56,866 Total Rs. 3,89,01,518
Against this order the assessee appealed before learned CIT(A). Learned CIT(A) confirmed the Assessing Officer’s action.
Against these orders the assessee is in appeal before ITAT.
I have heard both the counsel and perused the records.
For A.Y. 2010-11 in my considered opinion the disallowance has been correctly made by the Assessing Officer. Assessee’s claim of interest free funds is not at all tenable as the same is claimed to be in the form of outstanding liability for goods and expenses. This fact is further highlighted by the fact that sundry debtors outstanding in the books are more than this outstanding liability. Hence, assessee’s claim of interest free funds is not sustainable. Submission that these are purchase advances have not at all been proved. Furthermore, assessee itself started charging interest on these loans in subsequent years. Hence, order for A.Y. 2010-11 is duly sustained.
For A.Y. 2013-14 also position is similar. No evidence whatsoever of subsequent purchases have been produced. Hence, claim that these parties are purchase advances is not at all proved. Furthermore, for a part plea of interest free advances is not sustainable on the same basis as in the earlier year as sundry creditors for goods and expenses cannot be claimed to be interest free funds available with the assessee. More so, as sundry debtors are much more than this. However, the assessee’s plea of partner’s current capital for A.Y. 2013-14 to the extent of Rs. 43,97,689/- needs to be examined. Assessing Officer has not given proper reason as to why this cannot be considered to be interest free funds available. Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd (ITA No 1398 of 2008 vide
5 M/s. Chemofarbe Industries order dated 9.1.2009) has duly expounded that when assessee has interest free funds, assessee can be given credit thereof and assessee need not show one to one nexus of interest free funds and deployment thereof. Hence, in my considered opinion assessee’s appeal for A.Y. 2013-14 deserves to be set aside to the file of the Assessing Officer for limited purpose of examination of interest free funds in the shape of current capital amounting to Rs. 43,97,689/- is available to grant interest free advances. The Assessing Officer shall examine this aspect in the light of observation as above and if interest free funds in this regard are available, assessee deserves to be granted proportionate relief.
Other limb of assessee’s submission that these are purchase advances stands dismissed on the ground that no cogent material has been produced to support this claim.
In the result, assessee’s appeal for A.Y. 2010-11 is dismissed and assessee’s appeal for A.Y. 2013-14 is partly allowed.
Order has been pronounced in the Court on 12.3.2020.