DCIT CENT. CIR. - 2(1), MUMBAI vs. DHANERA DIAMONDS, MUMBAI

The captioned appeal by revenue for Assessment Year [AY] 2011- 12 contest the order of Ld. Commissioner of Income-Tax (Appeals) - 48 Dhanera Diamonds Assessment Year 2011-12 [CIT(A)], Mumbai Appeal No.CIT(A)-48/IT-126/DCCC-2(1)/2015-16 dated 26/07/2016. The assessment for impugned AY was framed by Ld. Deputy Commissioner of Income Tax, Central Circle-2(1) on 20/03/2015 u/s 143(3) of the Income Tax Act, 1961. The effective grounds raised before us reads as under:- I. Whether on the facts and circumstances of the case, the Ld. CIT(A) was correct in deleting disallowance of Rs.36,31,377/- being the interest corresponding to the interest free loans and advances given by the assessee to the sister concern, friends and relatives, without appreciating that the funds were mixed funds and the assessee failed to establish that interest bearing funds were not utilized for advancing loans to sister concerns and relatives. II. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in relying on the decision in the case of HDFC Bank Limited 366 ITR 505 which was on the issue of investment resulting an exempt income for the purpose of u/s. 14A and the facts of the present case are different that of HDFC Bank Limited.

The assessee contested the same with success before Ld. CIT(A) vide impugned order dated 26/07/2016 and made various submissions. After due consideration, the Ld. CIT(A) concurred with the same and allowed the assessee’s claim by making following observations:- 4.1 I have considered the assessment order and submissions made by the appellant and material available on record. The AO disallowed Rs.36,31,377/- on the basis of working furnished by the appellant without linking the interest free advances with the interest bearing loans obtained by the appellant from bank etc. The Assessing Officer has not established the nexus between the interest bearing loan and the interest bearing loans given to sister concerns, friends and relatives. On the other hand, it is the case of the appellant that it had opening balance of Rs.46.43 crore and closing balance of Rs.59.12 crore in the partners’ balances, which was never in debit during the entire year. No interest on the credit balance on the partners’ capital accounts was paid. Apart from interest free capital, the appellant had also interest free unsecured loans to the tune of Rs.0.67 crore at the beginning of the year and Rs.5.02 crore at the end of the year. Further the appellant had earned post tax net profit of Rs.10.15 crore during the years which was also sufficient to meet the interest free loan of Rs.1.86 crore to sister concerns. Interest Is paid to bank on borrowings for business purposes. The appellant has also relied upon the decision of the Hon’ble jurisdictional Bombay High Court in the case of HDFC Bank Ltd. (366 ITR 505). 4.2 The Ld. AR further relied on the decision of CIT(A)-37, Mumbai (Appeal No. CIT(A)-37/I.T.124/ACCC-11/10-11 dated 19.04.2011) in appellant’s own case for A,Y,2008-09. I find that the CIT(A) has allowed the assessee’s appeal for the reason that there was sufficient self owned funds and in absence of nexus between interest bearing loans utilized for non-interest bearing loans given, the disallowance was held as not justified. I find that the facts of the present case are similar to that of the case decided by my predecessor in appellants’ own case for AY 2008-09. Considering the above, the AO is directed to delete the disallowance of Rs.36,31,377/- in the light of the decision of Hon’ble Bombay High Court as mention in the preceding paragraphs. Accordingly, the ground of appeal is allowed.

We have carefully heard the contentions and perused relevant material on record. After delving upon the observations of Ld. CIT(A) as extracted above, we find that Ld. CIT(A) has clinched the issue in the right perspective since there is no evidence on record to suggest that interest bearing loans were diverted by the assessee to grant interest free advances to various entities. The Ld. CIT(A) has already noted that there was sufficient credit balance in partner’s capital account and unsecured loans to cover the interest free loans granted by the assessee which is also supported by the fact that the assessee had healthy accumulated profits during impugned AY. In the absence of clear nexus between interest bearing loans obtained by the assessee and interest free advances granted by the assessee, a presumption has to be drawn in assessee’s favor in terms of cited judgment of Hon’ble Bombay High Court.

The Ld. CIT(A) has also placed reliance on the decision of its predecessor in assessee’s own case for AY 2008-09. The revenue is unable to controvert the same in any manner. Therefore, from any angle, we find no infirmity in the order of Ld. first appellate authority and hence, no hesitation in dismissing revenue’s appeal.

Resultantly, the revenue’s appeal stands dismissed.