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Facts
The assessee, Nipun Malhotra, filed its return of income, which was originally assessed u/s 143(3). The assessment was later set aside u/s 263 by the CIT, leading to a fresh assessment where the AO disallowed Rs.14,82,100/- as interest expenses, contending that the assessee used interest-bearing funds for giving interest-free advances to individuals and Goverdhan Bottling Plant. The CIT(A) upheld this disallowance.
Held
The Tribunal held that the assessee had sufficient interest-free funds (capital + unsecured loan) to cover the advances given to individuals, thus the advances were presumed to be from interest-free funds. The advance to Goverdhan Bottling Plant was for business purposes to secure supplies. Citing the Supreme Court judgment in S.A. Builders Pvt. Ltd., the Tribunal concluded that no disallowance was warranted, especially as the CIT(A) relied on an overruled judgment.
Key Issues
Whether disallowance of interest expenses on interest-free advances is justified when the assessee possesses sufficient interest-free funds or when such advances are for business purposes.
Sections Cited
143(3), 263
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘B’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI MANOJ KUMAR AGGARWAL
The assessee is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 17.12.2021 passed for assessment year 2013-14.
The assessee has taken two grounds of appeal, however, its grievance revolves around a single issue, A.Y.2013-14 2 namely, ld.CIT (Appeals) has erred in upholding the addition of Rs.14,82,100/- which has been added by the AO on account of disallowance of interest expenses.
With the assistance of ld. Representative, we have gone through the record carefully. It emerges out from the record that assessee has filed its return of income electronically on 30.09.2013 declaring total income at Rs.12,54,390/-. The original assessment order was passed u/s 143(3) on 19.11.2015 which was set aside by the ld. Commissioner of Income Tax by exercising the powers u/s 263 of the Act vide his order dated 09.03.2018. The AO has passed the fresh assessment order on 23.12.2018 u/s 143(3) read with Section 263 of the Act. The AO was of the view that assessee has shown secured loans of Rs.1.01 Cr and unsecured loan of Rs.70.29 lacs. The assessee has shown sundry debtors of Rs.1,20,49,657/-. He confronted the assessee as to why interest has not been charged on the advances given to individuals and certain concerns. In the opinion of the A.Y.2013-14 3 AO, assessee has used interest bearing funds for making interest free advances.
3.1 The assessee has filed copy of the balance sheet as on 31.03.2013 on page Nos. 2 to 5 of the Paper Book and detail of Sundry Creditors as well as Sundry Debtors is available on page 5. There are five Debtors, namely, C.K.Malhotra, Nipun Malhotra, Nirmal Malhotra, Standard Hotel and Goverdhan Bottling Plant. Out of these 5 Debtors, AO himself accepted the advances given to Standard Hotel and did not make any disallowance of interest expenses. With regard to Goverdhan Bottling Plant, it was submitted by the assessee that it is in the liquor trade and made purchases of bottles from Goverdhan Bottling Plant, therefore, advances were paid for the purpose of business. It is not advances simpliciter without any business purposes. With regard to the balance amount of advances given to three individuals, it was submitted that total advances given to these three persons is only Rs.52,50,000/- whereas assessee has capital (+) unsecured loan of A.Y.2013-14 4 Rs.1,42,22,416/-. Thus, according to the assessee, it has more interest free funds than the advances given. He also pointed out that AO has followed the judgement of Hon'ble jurisdictional High Court in the case of CIT Vs Abhishek Industries 286 ITR 1 which has been overruled by the Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. V CIT 379 ITR 347.
The ld. DR, on the other hand relied upon the orders of Revenue Authorities.
We have duly considered the rival contentions and gone through the record carefully. It is pertinent to note that jurisprudence on this point, at present is that if assessee has mixed funds and it has more interest free funds, then it is to be assumed that interest free advances were given out of interest free funds available with the assessee. For buttressing this proposition, we take note of the following judgements : a) ACIT Vs Janak Global Resources Pvt. Ltd. 175 ITD 365 (Chd) b) Bright Enterprises (P) Ltd Vs CIT 381 ITR 107 (P&H.) c) CIT Vs Kapson Associates 381 ITR 204 (P&H.) d) CIT Vs Max India Ltd. 398 ITR 209 (Pb.)
A.Y.2013-14 5 e) CIT Vs Max India Ltd (2016) 388 ITR 81 (P&H) f) Gordrej & Boyce Manufacturing Co. Ltd Vs DCIT (2017) 394 ITR 449 (SC) g) CIT Vs Reliance Ind Ltd. 410 ITR 466 (SC) h) CIT v/s Reliance Utilities & Power Ltd 313 ITR 340-344 (Bom) i) CIT V/s Shapoorji Pallongi & Co 423 ITR 220 (Bom) j) Decision of ITAT Chandigarh in ITA No. 184/Chd/2015
The assessee has demonstrated that it has more interest free funds than the advances given to three individuals without charging interest. As far as the sum given to Goverdhan Bottling Plant is concerned, it is an amount given for the purpose of purchasing bottles and sales of liquor because this concern is engaged in the manufacturing of liquor. It was an advance to secure the supplies, hence, this aspect is covered by the judgement of Hon'ble Supreme Court in the case of S.A. Builders Pvt. Ltd. 288 ITR 1. No disallowance ought to have been made by the AO. The ld.CIT (Appeals) has erred in confirming the disallowance and ignoring the subsequent judgements cited by the assessee. It is an erroneous approach at the end of ld. First Appellate Authority to rely upon a judgement which has been overruled by the Hon'ble Supreme Court. Therefore, taking into note all A.Y.2013-14 6 these facts and circumstances, we delete the disallowance made by the AO and confirmed by the CIT (Appeals). Accordingly, appeal of the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on 20.02.2026.
Sd/- Sd/-