SMT. ABHADEVI NARENDRA AGRAWAL,BURHANPUR vs. THE ACIT, KHANDWA

आदेश /O R D E R

PER O.P.MEENA, ACCOUNTANT MEMBER This appeal by the assessee is directed against the order of

learned Commissioner of Income tax (Appeals)-II, Indore [in short

CIT (A)] dated 30.10-2014 for the Assessment Year 2010-11 on

following grounds: 1. The Ld. CIT (A) has erred in confirming the addition of Rs.22,58,779/- being the disallowance of interest on advances given treating it to be non business expenditure 1.1. The Ld. CIT (A) erred in remarking that the assessee was required to produce documentary evidence in the

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form of cash book and bank statement. No such requirement was made and the balance sheet were filed showing the capital of the assessee. The case laws were not considered by simply observing that they are distinguishable on facts. 1.2. The addition of Rs. 22,58,779/- may please be deleted or in the alternative restricted to reasonable figure. 2. The Ld. CIT(A) has erred in maintaining the addition of Rs.6,76,266/- under section 41(1) by observing that confirmation is not filed. The addition is bad-in-law and deserve to be deleted. 3. The Ld. CIT (A) erred in maintaining the disallowance of Rs. 1,83,889/- u/s. 14A . The addition may please be deleted.

1.1. Succinctly, facts as culled out from the orders of lower

authorities are that the assessee derives income from trading of

soya oil. F.P., tuar, Mustard and cottonseeds. The assessee has

filed return of income on 30.09.2010 declaring total income of

Rs.73,29,800/-. The AO found that the assessee has advanced

interest bearing funds to some of persons from which either no

interest is charged or the same is charged at lesser rate whereas

the assessee has paid interest @ 12% on loan taken. The AO

therefore, worked out disallowance of interest as detailed below: -

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Name of the Period Amount Interest @ Intt. charged Less Intt. concern in 12% @ 9% Charged days 1.Manoj 365 25,00,000 3,00,000 Not Charged 3,00,000 Traders Shri days Ganganagar 140 75,00,000 3,45,000 Not Charged 3,45,000 days 152 50,00,000 2,49,863 Not Charged 2,49,863 days 88 50,00,000 1,44,660 Not Charged 1,44,660 days 92 50,00,000 1,51,230 Not Charged 1,51,230 days Total 11,90,953 2.N.M. Exports 323 40,00,000 4,24,770 Not Charged 4,24,770 days 2.N.M. Exports 323 35,00,000 3,71,000 Not Charged 3,71,000 days 3.Nandlal This is the case of 10,88,220 8,16,164 2,72,056 Naresh Kumar less charge of intt. 4.Raghunath Agro tech Pvt. Ltd. 22,58,779 Gross Total

1.1.1. In view of above, the AO disallowed the interest of Rs.

22,58,779/- by observing that the assessee has diverted interest

bearing funds for advancing the same without interest or on

lesser side.

1.2. Being, aggrieved the assessee filed an appeal before the ld.

CIT (A). However, ld. CIT(A) confirmed the action of the AO by

observing that the assessee has failed to controvert the findings

of the AO. The contention of the assessee that it had sufficient

interest-free funds available out of which interest-free funds

advances were given was not found acceptable.

1.3. Being, aggrieved the assessee filed this appeal before the

Tribunal. The Ld. A.R. submitted that the observation of the AO

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is not correct on the facts of the case. The Ld. A.R. submitted a

table demonstrating that the assessee has substantial interest-

free funds of Rs. 16,88,97,140/- (consisting of capital of Rs.

10,69,90,175/- and loans and without interest of Rs.

2,00,00,000/-) as against the interest free loans given Rs.

5,75,00,000/-. The Ld. A.R. has filed a table depicting the details

of funds utilization of interest-free funds and interest bearing

funds, which is supported by the copy of balance sheet appearing

at page No 29 to 34 of Paper Book. According to which funds of

Rs. Rs. 34,70,17,015/- out of interest bearing funds of Rs.

23,26,98,883/- have been utilized for business purpose in fixed

assets, sundry debtors, cash and bank balances, etc. From the

above facts and data, the Ld. A.R. contended that the assessee

has not diverted its interest bearing funds for non-business

purposes. Therefore, there was no question of diversion of

interest bearing funds by the assessee. Thus, the disallowance as

made by the AO is totally wrong. The Ld. A.R. further submitted

that above facts of the case shows that advances to above

persons as mentioned in assessment order from whom interest

was not charged was given out of interest-free funds available

with it.

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1.3.1. The Ld. A.R. place reliance on the judgement of

Hon`ble Bombay High Court in the case of CIT vs. Reliance

Utilities & Power Ltd. (2009) 313 ITR 340(Bom) wherein it was

held that if there are fund available both interest free and

interest bearing, then a presumption would arise that investment

were out of interest free funds generated or available with the

assessee. If the interest-free funds were sufficient to meet the

investment no disallowance of interest paid on borrowed funds

would be necessary. Once such presumption is established claim

of interest was allowable.

1.3.2. The Ld. A.R. further placed reliance on following

judgement in the case of CIT vs. Hero Cycles Ltd. (2010) 323 ITR

518 (P&H) wherein it was held that no disallowance out of

interest payment is permissible if AO does not establish nexus

between the expenditure incurred and income generated. The Ld.

A.R. submitted that in the present case the AO has failed to

establish that the assessee had diverted interest bearing funds

for non business purposes or advanced the same without

interest. When the assessee has utilized the interest bearing

funds for business purpose and justified the same , then no

disallowance of interest can be made.

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1.3.3. The Ld. A.R. further cited decision in the case of

Narendra Industries (I TA No. 644/IND/2015) dated 28.2.2017

(copy filed paper book page no.-50-54) and others as per his

written submissions.

1.4. On the other hand, the Ld. D.R. relying on the orders of

lower authorities submitted that the assessee is not able to

substantiate that interest free advances were given out of

interest-free funds available with the assessee, hence, finding of

the AO/Ld. CIT(A) may be upheld.

1.5. We have heard the rival submissions of both the parties and

have perused the material available on record. We find that the

ld. A.O. has failed to establish that interest free advances to

above stated parties were out of interest bearing funds. It is the

contention of the assessee that it had sufficient non-interest

bearing funds to the tune of Rs.16.88 crores as per balance sheet

as on 31.03.2010 as against interest bearing funds at Rs.23.26

crores. Hence, interest-free funds of Rs. 16.88 crores have been

utilised for giving interest-free advances of Rs. 5.75 crores to

aforesaid above parties on which no interest was charged or less

interest was charged. Thus interest-free advance were given out

of interest-free funds available with the assessee during the year

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for which sufficient interest-free funds were available. Therefore,

we are of the view that the Ld. A.O. has failed to establish that

interest free advances to above stated four parties were out of

interest bearing funds. We find that the AO has not been able to

establish the nexus between interest bearing funds utilized for

non business purpose as held in above quoted decision of

Hon`ble Supreme Court. The ld. A. R. has placed reliance in the

case of CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR

340 (Bom)/ 178 Taxman 135 (Bom) wherein it was held that if

there was funds available both, interest-free and overdraft and

or/loans taken, then a presumption would arise that investments

would be out of the interest-free funds generated or available

with the company, if the interest free funds were sufficient to

meet the investments. In the present case, the sufficient interest

free funds were available at the disposal of the assessee.

Therefore, presumption would go in favour of the assessee that

the interest free funds were given out of interest free funds

available at the disposal of the assessee as per balance sheet of

the assessee. We further rely on the decision of Hon`ble Punjab &

Haryana High Court in the case of CIT vs. Hero Cycles Ltd. (2010)

323 ITR 518(P&H) wherein it was held that no disallowance out of

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interest payment is permissible if AO does not establish nexus

between the expenditure incurred and income generated.

Therefore, by applying the ratio as laid down by the Hon’ble

Bombay High Court in in the case of CIT vs. Reliance Utilities &

Power Ltd. (2009) 178 Taxman 135 (Bom) and the decision of

CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) and other

judgements as cited above and decision in the case of M/s

Narendra Industries ITA No. 644/IND/2015 dated 28.2.2017 of

I.T.A.T., Indore, we are of the considered opinion that no

disallowance of interest is warranted in this case. In view of these

facts and circumstances, the disallowance of interest of Rs.

22,58,779/- made by the AO is deleted. Accordingly ground no. 1

of appeal is therefore, allowed.

u/s 41(1) of the Act.

2.1 Briefly stated the facts of the case are that the AO noticed

that there is a one creditor M/s Mahima Porsepun in whose case

an amount of Rs. 6,76,266/-was outstanding for last three years.

Therefore, the AO treated the same trading liability as cessation

of liability within the meaning of Section 41(1) of the Act and

added the same the total income.

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2.2 Being aggrieved the assessee filed appeal before the CIT(A)

who upheld the addition by observing that the liability remain

outstanding for long time of three years. There has been no

transaction with the party under consideration. The assessee has

also not filed any confirmation from the said party. Therefore, the

CIT(A) opined that liability as on date does not exist hence, the

addition made u/s 41(1) was confirmed.

2.3 Being aggrieved the assessee filed this appeal before

the Tribunal. The Ld. AR of the assessee submitted that the AO

involved that the provision of Section 41(1) of the Act merely on

the ground that balance was outstanding for more than three

years whereas Section 41(1) of the Act provides that the addition

u/s 41(1) of the Act can be made only if the trading liability

ceased to exist. In support of his contention the Ld. AR also relied

in the case of Dr. Pallab Ghosh v/s ITO in ITA No. 659/Kol/2013,

Unison Hotels Ltd v/s ACIT ITA No. 2113/Del/2012, CIT v/s

Southern Roadways Ltd. 282 ITR 379 , New Commercial Mills Co.

Ltd. v/s Dy. CIT (2001) 73 TTJ (Ahd) 893, CIT v/s Sugauli Sugar

Works (P) LTD. (1999) 152 CTR (SC) 46; (1999) 236 ITR 518 (SC):

((1999) 102 TAXMAN 713 (SC), Shri Vardhman Overseas Ltd. v/s

Assistant Commissioner of Income Tax (2008) 24 SOT 393 (Del),

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Wilson & Co v/s ACIT 121 TTJ 258. Therefore, it was claimed

that the provision of Section 41(1) of the Act are attracted only

when the assessee has written off the liability in the books of

accounts by unilateral act. Since in the case of assessee, liability

has not been written off in the books of accounts hence, provision

of Section 41(1) are no applicable. Further the limitation period

prescribed in the Act for sundry creditor for filing a suit only. It

has no relevance so far as cessation of liabilities are concerned.

Thus, there is no reason for invoking of provision of Section

41(1) of the Act. It was also pointed out by the AR that the said

liability has been settled during the year 2015 and as such

therefore, there was no cessation of liabilities. Accordingly, the

addition was made by the AO deserve to be deleted.

2.4 The Ld. DR supported the orders of the lower

authorities. 2.5 We have considered the facts, rival submissions and

perused the material available on record. We find that the

provision of Section 41(1)(a) provides that where the assessee had

obtained, whether in case in any other manner whatsoever, any

amount in respect of such loss or expenditure or some benefit in

respect of such trading liability by way of remission or cessation

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thereof, the amount obtained by him shall be deemed to be

profits chargeable to tax. Thus, the Section contemplates that by

obtaining any benefit by an amount either in cash or in any other

manner whatsoever, whether benefit by way of remission or

cessation and it should be of a particular amount obtained by

him. Thus, obtaining benefit by virtue of remission or cessation is

sine-quo-non for the application of Section unless such liability is

written off in books of accounts by unilateral act of the assessee.

We find that the liability of Rs. 6,76,266/- in respect of Mahima

Porsepun was outstanding for more than three years, but the

same has not been written off in the books of accounts by the

assessee. Therefore, there was no basis by treating the said

amount as remission or cessation of a trading liability of the

assessee when it was not unilateral written off by the assessee.

We find that the AO has made this addition merely on the basis

of expiry of limitation to file the suit by creditor, where he cannot

who come up with a proceedings for enforcement of debt.

However, we find that this amount was subsequently settled by

the assessee in the succeeding years therefore, the assessee has

not derived or obtained any benefit in respect of such trading

liability. Therefore, the addition made on the basis of

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presumption cannot be sustained in the eyes of law. The Ld. AR

has relied in the case of CIT v/s Southern Roadways Ltd. 282 ITR

379 wherein the decision of the Apex Court in the case of CIT

v/s Sugauli Sugar Works (P) Ltd., (1999) 152 CTR (SC) 46: (1999)

236 ITR 518(SC) was considered and it was held that the

principle that expiry of period of limitation prescribed under the

Limitation Act, could not extinguish the debt but it would only

prevent the creditor from enforcing the debt, has been well

settled. If that principle is applied it is clear that some entry in

the books of accounts of the debtor made unilaterally without

any act on the part of the creditor will not enable the debtor to

say that the liability has come to an end. Apart from that, that

will not by itself confer any benefit on the debtor as contemplated

by the Section. The other decision as relied by the Ld. AR has

mentioned above are also supports his view. Therefore, we are of

the considered opinion that the provision of Section 41(1)(a) of

the Act can only be invoked when the assessee has written off the

liability in its books of accounts by unilateral act. Since, the

assessee has not written off the aforesaid amount in its books of

accounts and the payment has been settled in the subsequent

year, therefore, the addition so made by the AO, is not

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sustainable in the law. Accordingly, the same is deleted. This

grounds of appeal is therefore allowed.

made u/s 14A of the Act.

3.1. Facts apropos of this ground are that the assessee has

invested the capital in the form of share capital for which he is

earning his share income from the firm and has shown share of

profit of Rs. 36,647/- from Shree Krishna Commercial Co. and

profit of Rs. 35,16,810/- from Shree Venkateshwar Cotton Co.

and profit of Rs. 21,61,009/- from Chhaganlal Kishanlal and Co.

This share income from the firms does not form the part of

income chargeable to tax. Therefore, the AO referred the

provision of Section 14A asking to show cause as to why

disallowance u/s 14A should not be made. However, the assessee

has replied that there was no income which is not chargeable to

tax in the case of assessee. Therefore, no disallowance u/s 14A

are required. However, the AO applied to the decision in the case

of Daga Capital Investment Company and observed that

disallowance u/s 14A is called for irrespective of fact, whether

the assessee has exempted income during the year or not.

According to the AO, the Sub-Rule (iii) of Rule 8D says that if no

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expenditure is incurred, the disallowance @ 0.5% is to be made

on average investment. Accordingly, the AO calculated the

disallowance of Rs. 1,83,889/- by 0.5 % of average investment

made in the various firms at Rs. 3,67,77,862/- (Rs. 4,58,464/-

from Krishna Commercial Co., Rs. 2,49,62,860/- from Chhagnlal

Kishanlal & Co. and Rs. 1,12,56,538/- from Sheri Venkateshwar

Cotton Co.). Accordingly, the AO made disallowance at Rs.

1,83,889/- u/s 14A read with Rule 8D.

3.2. Being aggrieved the assessee has filed this appeal before the

CIT(A). However, the CIT(A) observed that the appellant had

contended that since there was no exempt income earned from

partnership firm and it was not required to incur any

expenditure, the disallowance is not justified. The contention of

the appellant has not been found sustainable for the reason that

the AO has only invoked Sub-Rule (iii) of Rule 8D of IT Rules

1962 which are not subject to earning of any income and

incurring of any expenditure. Accordingly, the action of the AO

was upheld.

3.3. Being aggrieved the assessee has filed this appeal before the

Tribunal. The Ld. AR submitted that the assessee has not

claimed any expenses in her computation of income to earn her

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exempt income hence the AO was totally wrong in disallowing an

amount of Rs. 1,83,889/- u/s 14A of the Act. The AO referred the

decision of I.T.A.T. Bombay Bench, in the case of Daga Capital

Management 119 TTJ 289 for disallowing the above expenses

however, the Section 14A provides that disallowance can be made

in respect of expenditure incurred in relation to exempt income

whereas the assessee has not incurred any expenditure in

relation to exempt income. The AR also cited the some decision of

the Hon'ble Punjab & Haryana High Court to contend that Rule

8D cannot be blindly applied where no expenditure was incurred

to earn exempt income.

3.4. On the other hand, the Ld. DR drew our attention to the

paper book page no. 25 which is profit and loss account of the

proprietory concern of the assessee, wherein the assessee, has

debited interest expenditure of Rs. 1,66,83,160/- and Rs.

6,53,550/- has bank charges. Therefore, the Ld. DR contended

that the assessee has incurred expenditure in relation to earning

exempt income and therefore, it cannot be said that no

expenditure on account of administrative and handling etc. has

been incurred by the assessee who have earned exempt income.

The DR has also submitted that the assessee has invested in her

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own funds towards the capital of the aforesaid three firms.

Therefore, the disallowance under Rule 8D(iii) can be correctly

made. Hence, the findings of the AO and the CIT(A) may be

upheld.

3.5. We have considered the facts, rival submissions and

perused the material available on record. We find that the

assessee has earned substantial exempt income in the form of

share from partnership firm of Rs. 57,14,466/- ( from Shree

Krishna Commercial Co. of Rs. 36,647/-, from Shree

Venkateshwar Cotton Co. of Rs. 35,16,810/- and from

Chhaganlal Kishanlal & Co. of Rs. 21,61,009/-) as against which

the assessee had a closing balance of Rs. 5,48,19,993 as on

31.10.2010 in the balance sheet. We further find that the

assessee has incurred investment expenditure in her proprietory

concern at Rs. 1.66 crores and also bank charges of Rs. 6.53

lakhs besides, and establishment as well as telephone expenses

etc. The assessee is a partner in the aforesaid firm. In view of

these circumstances, we are of the view that it may be impossible

that the assessee had not incurred any expenditure to earn

exempt income which is not chargeable to the tax in the case of

assessee. This view of our is also supported by the decision in the

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case of Citycorp. Finance (India) Ltd. (2007) 108 ITD

471(Mumbai) wherein it was held as “it is difficult to accept the

hypothesis that one can earn substantial dividend income without

incurring any expenses, whatsoever, including management or

administrative expenses. By same logic it is equally difficult to

accept that only expenses involved in earning dividend or on

enchasing a few dividend warrants. A company cannot earn

dividend without existence and management. Investment decision

is very complex in nature. They require substantial market

research, day to day analysis of market trends and decisions with

regard to acquisition, retention and sale of shares and

consequential blocking of funds. It is well known that capital has

cost and the element of cost is represented by interest. Besides

investment decisions are generally taken in the meetings of board

of directors for which administrative expenses are incurred. It is

therefore, not correct to say that dividend income can be earned by

incurring no or nominal expenditure therefore, all expenses

connected with the exempt income have to be disallowed u/s 14A

regardless of whether they are direct or indirect, fixed or variable

and managerial or financial in accordance with law.” Similarly, in

the case of ITO v/s M/s Daga Capital Management (P) Ltd. 119

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TTJ 289 (SB) (Mum) has also held that the disallowance under

Rule 8D(iii) have to be made by analyzing the expenditure

incurred in relation to exempt income. In the case of Gujrat Gas

Finance Service Ltd. v/s ACIT 2008 14 DTR (AHD) (SB) 481 it

was held that there is no dispute that there cannot be any doubt,

that some expenditure incurred in making of earning of income

for dividend in case of maximum accounting the expenditure is

not identified as such it directly relates to earning of dividend but

that cannot be granted to say that no expenditure is incurred for

earning dividend income for that or no expenditure could be

related to that income. Therefore, in the light of aforesaid

decisions and the provision of Rule 8D(iii) we are of the view that

the assessee must have incurred the some expenditure in

relation to earn exempt income therefore, the disallowance made

by the AO and as confirmed by the CIT(A) are upheld. Hence this

ground of appeal is dismissed.

Sd/- Sd/- (सी.एम.गग�)/(C.M. GARG) (ओ.पी.मीना) /(O.P.MEENA) �या�यक सद�य /JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER

Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 19 of 19

Dated : 16.03.2017.