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Facts
The assessee, operating a petrol pump, claimed bank interest but had also provided interest-free advances of Rs. 93,82,912/- to sister concerns. The AO disallowed bank interest of Rs. 14,07,437/- under Section 36(1)(iii), assuming diversion of borrowed funds for non-business purposes, a decision upheld by the CIT(A). This disallowance originated from a PCIT revision order under Section 263.
Held
The Tribunal determined that the assessee possessed sufficient interest-free own funds (Rs. 1,27,56,603.22) exceeding the interest-free advances to sister concerns (Rs. 93,82,912/-). Citing judicial precedents, it was held that the interest-free advances must be presumed to have been made from the assessee's own funds. Consequently, the disallowance of bank interest under Section 36(1)(iii) was deleted.
Key Issues
Whether disallowance of bank interest under Section 36(1)(iii) is justified when the assessee has sufficient interest-free own funds to cover interest-free advances given to sister concerns.
Sections Cited
Section 143(3), Section 263, Section 36(1)(iii), Section 154
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Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: SH. MAHAVIR SINGH & SH. S. RIFAUR RAHMAN
Assessment Year: 2014-15 Balaji Fuels Vs PCIT 66, Milestones, NH 8 Distt. Gurgaon Gurgaon-122413 PAN No.AAJFB5505E (APPELLANT) (RESPONDENT) Appellant by Manoj Kumar, CA Respondent by Mr. Javed Akhtar, CIT DR Date of hearing: 16/12/2024 Date of Pronouncement: 16/12/2024 ORDER PER MAHAVIR SINGH, VP: These appeals by the assessee are arising out of the order of CIT(A)/NFAC, Delhi in Appeal No. CIT(A), Gurgaon-1/11855/2019- 20 vide order dated 13.06.2022 and order of PCIT, Gurgaon dated 06.03.2019. The assessment in consequence to revision order was framed by ITO, Ward -13, Gurgaon for the A.Y. 2014-15 u/s. 143 (3) r.w.s. 263 of the IT Act, 1961 (hereinafter referred as “the Act”) vide his order dated 15.12.2019. The original assessment was framed by ITO, Ward–1(3), Gurgaon for the A.Y. 2014-15 U/s.143 (3) of the Act vide order dated 26.09.2016.
The first issue in these appeals of the assessee is as regards to the order of CIT(A) confirming the action of the AO in disallowing the bank interest of Rs.14,07,437/- U/s. 36 (1) (iii) of the Act for the reason that the assessee has claimed interest on bank loan as against which he has advanced interest free loan to its sister concern. For this assessee has raised following ground No.6 :-
6. That the Honorable CIT(A), NFAC has erred in law and on facts in sustaining the addition in sustaining the disallowance of bank interest of Rs.14,07,437.00 u/s. 36(1)(iii) on untenable and illegal grounds. Hence, the disallowance of Rs.14,07,437.00 may be deleted.”
3. The brief facts are that the assessee is deriving income from business of running petrol pump at Gurgaon. The assessee filed its return of income on 31.10.2014 originally and accordingly scrutiny assessment was completed u/s. 143 (3) of the Act by the AO vide order dated 26.09.2016. Subsequently PCIT, Gurgaon passed revision order U/s. 263 of the Act by holding the assessment order passed U/s.143 (3) dated 26.09.2016 is erroneous as well as prejudicial to the interest of the Revenue for the reason that “on examination of records” it is noted that the assessee has taken a loan of Rs.1,50,40,345/- from banks and claimed interest paid to the banks amounting to Rs.22,00,266/-. On the other hand, the assessee has given interest free loans and advances to its sister concerns for non business purposes amounting to Rs.93,82,912/-. According to PCIT, the AO failed to verify the same during the course of assessment proceedings and hence he set aside assessment order and directed the AO to reframe the assessment after verifying the business purpose of the assessee for taking loan of Rs.1,50,40,345/- from banks.
Accordingly, the impugned assessment order was passed by the AO. The AO simplicitor noted that the assessee has given interest free advances to its sister concerns for non business purposes amounting to Rs.93,82,912/- as under :-
Ganpati Builders Rs.19,00,000/- Hakim Harikishan Rs.7,30,625/- Rishi raj Films Rs.20,60,000/- Rishi Raj Rs.46,92,287/- The AO noted that the borrowed funds were not used for the business purposes but was used for supplementing the cash diverted by the assessee without any benefit. Hence, he disallowed the proportionate interest to the extent on the amount borrowed for non business purposes amounting to Rs.93,82,912/- and thereby disallowed a sum of Rs.14,07,437/-. Aggrieved, assessee preferred appeal before the CIT(A).
The CIT(A) dismissed the appeal on merits by observing vide para 6.2 as under :- “DECISION:- On perusal of the detailed assessment order it is evident that enough opportunity was provided to the appellant during the course of assessment proceedings but assessee did not avail those opportunities. During the present proceedings also the appellant has not availed the opportunity of being heard and did not comply to any of the 6 notices issued. Despite 6 notices served upon the appellant to defend his case and bring relevant evidences on record to explain the genuineness of the advances given to the sister concerns, the appellant preferred to remain
silent. In view of the reasons discussed in the detailed assessment order, the action of the AO to disallow the interest of Rs.14,07,437/- U/s. 36(1)(iii) of the Act is confirmed. Grounds of appeal 1 to 8 are therefore dismissed.” Aggrieved, assessee is in appeal before us.
We have heard the rival contentions and gone through the facts of the case. Before us Ld. Counsel for the assessee made short submissions before us and stated that the assessee has its own interest free funds as under :- Capital 1,08,78,603,.22 Interest free Unsecured loan 18,78,000.00 Total interest free funds 1,27,56,603.22 Alleged Interest fee loan given 93,82,912.00 Ld. Counsel in view of the above stated that whereas the assessee has interest free funds available with it, as noted above, which are more than the alleged interest free loan of Rs.93,82,912/-, the presumption will be that the assessee has advanced these interest free loans out of own funds. The Ld. Counsel for the assessee stated that this issue is covered by decision of Hon’ble Bombay High Court in the case of HDFC Limited reported in 366 ITR 505 wherein Hon’ble Bombay High Court Ltd. held as under :- “5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the Income-tax Appellate Tribunal in the present case is that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax – free securities. This factual position is not one that is dispute. In the present case, undisputedly the assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee. We, therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground. We do not find that question (A)gives rise to any substantial question of law and is therefore rejected.”
Apart from that, Ld. Counsel also relied upon the decision of Hero Cycles of Hon’ble Supreme Court CIT 379 ITR 347(SC) wherein it is held as under:- “In so far as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs.34 lakhs was given. Remarkably, as observed by the CIT(Appeal) in his order, the company had reserve/ surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors. On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that the of the Income Tax Appellate Tribunal.”
Since the issue is covered by the aforesaid two decisions and on facts the assessee is having own funds which are much more than the funds advanced to sister concerns interest free, the lower authority should not have resorted to the disallowances u/s. 36 (1) (iii) of the Act. Hence, we delete the disallowance and allow the issue of assessee’s appeal.
Coming to the judicial issue raised by the assessee, the parallel proceedings U/s.154 and 263 of the Act, we refrain ourselves from adjudicating the same because we have already adjudicated the issues on merits and decided the same in assessee’s favour. Hence, the appeal of the assessee is allowed. is as regards to revision order passed by PCIT U/s. 263 of the Act. At the outset, the Ld. Counsel for the assessee stated that he is not pressing this appeal. He wants to withdraw the same. Hence, this appeal is dismissed as withdrawn.
In the result, the appeal in is dismissed and appeal in is allowed.
Order dictated in the open court on conclusion of hearing on 16.12.2024.