M/S. NARENDRA INDUSTRIES,BURHANPUR vs. THE ACIT, KHANDWA

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 1 of 10

आयकर अपील�य अ�धकरण ,इ�दौर �यायपीठ ,इ�दौर IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE �ी सी. एम. गग�, �या�यक सद�य तथा �ी ओ.पी.मीना ,लेखा सद�य के सम� BEFORE SHRI C.M.GARG, JUDICIAL MEMBER AND SHRI O.P. MEENA, ACCOUNTANT MEMBER

आ.अ.सं /.I.T.A. No.644/Ind/2015 �नधा�रण वष� / Assessment Year:2010-11 M/s. Narendra vs. ACIT Khandwa Industries, Bahadarpur Road, Burhanpur अपीलाथ� / अपीलाथ� /Appellant अपीलाथ� / अपीलाथ� / ��यथ� / ��यथ� /Respondent ��यथ� / ��यथ� / �था.ले.सं./PAN: AAAFN7193D अपीलाथ� क� ओर से/ अपीलाथ� क� ओर से/Appellant by अपीलाथ� क� ओर से/ अपीलाथ� क� ओर से/ Shri S.N. Agarwal,& Shri Pankaj Mogra CA ��यथ� क� ओर से/ ��यथ� क� ओर से/Respondent by ��यथ� क� ओर से/ ��यथ� क� ओर से/ Shri Mohd. Javed, D.R. सुनवाई क� तारीख/ सुनवाई क� तारीख/Date of hearing सुनवाई क� तारीख/ सुनवाई क� तारीख/ 22.02.2017 उ�ोषणा क� तारीख/ उ�ोषणा क� तारीख/ उ�ोषणा क� तारीख/ उ�ोषणा क� तारीख/ 28.02.2017 Date of pronouncement आदेश / आदेश /O R D E R आदेश / आदेश / PER O.P. MEENA, ACCOUTANT MEMEBR. This appeal by the assessee is directed against the order of learned Commissioner of Income tax (Appeals)-II, Indore [in short CIT (A)] dated 30.04.2015 for the Assessment Year 2010-11 on following grounds:

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 2 of 10 1. The Ld. CIT (A) has erred in confirming the addition of Rs.11,60,840/- on account of interest payments on the ground that the borrowed funds have been diverted for non business purposes. 1.1. It was proved before the lower authorities that the assessee had sufficient capital and interest-free funds. No nexus has been proved; by the Ld. AO, that borrowed funds have been utilized for interest free advances. 1.2. The Ld. CIT (A) did not consider the cases cited before him. 2. The addition of Rs. 11,60,840/- may please be deleted or in the alternative restricted to reasonable figure. 3. The Ld. CIT(A) has erred in maintaining the addition of Rs.86,346/- being the undervaluation of stock. The same may be deleted or in the alternative the AO may be directed to reduce the income in the subsequent year. 1. Ground no. 1 and 2 relate to confirmation of disallowance of interest of Rs. 11,60,840/- hence, these are being considered together.

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.93,73,320/-. 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

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 3 of 10 assessee has paid interest @ 12% on loan taken. The AO therefore,

worked out disallowance of interest as detailed below:

Name of the Perio Amount Interest Disallowance of concern d in charged interest @ 12% days 1.Balgavind 365 1,00,00,000 Nil 1,20,000 Ji Agrawal 2.Raghunath 5 25,00,000 Nil 1,25,000 & co. mont- hs 3.Raghunath 365 76,32,000 Nil 9,15,840 & Co. days Total interest disallowed 11,60,840/-

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

11,60,840/- 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 finding 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 is

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 4 of 10 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. 34,42,80,122/- (consisting of partners capital of Rs.

11,10,75,722/- and loans & deposit from relatives of Rs.

5,46,41,437/-) as against the interest bearing funds of Rs.

10,74,96,222/-. 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 18 to 19 of Paper Book. According to which funds of Rs.

42,87,94,274/- have been utilized for business purpose in fixed

assets, loan and advances, 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.

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 5 of 10 1.3.1. The Ld. A.R. relying on the decision of Hon`ble Supreme

Court in the case of S.A. Builders vs. CIT (2007) 288 ITR 1(SC)

contended that the onus on the revenue to show that interest

bearing fund alone were invested in investment on which no income

was earned. The Ld. A.R. further relied on the decision of Hon`ble

Supreme Court in the case Munjal Sales Corporation vs. CIT (2008)

298 ITR 298 (SC) wherein it was held that where assessee had

sufficient profits in the current year then interest free advances can

be considered flowing from such profits.

1.3.2. The Ld. A.R. also 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.

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 6 of 10 1.3.3. The Ld. A.R. also placed reliance on the judgement of

Hon`ble Supreme Court in the case of S. A. Builders vs. CIT (2007)

(288 ITR 1) (SC) wherein it was held that where the assessee has

made investment out of mixed funds for the commercial expediency

then no disallowance could be made under section 36 (1) (iii) of the

Act.

1.3.4. 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.

1.3.5. The Ld. A.R. further cited following judicial

pronouncements in support of his contention as follows: Ram

Kishan Oil Mills vs. CIT 56 ITR 186 (MP), Birla Gwalior Pvt. Ltd. vs.

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 7 of 10 CIT 44 ITR 847(MP), D & H Secheron Electrodes Ltd. 142 ITR 529

(MP), Regal Theatre vs. CIT 225 ITR 205(Del), Sarvodya Kela Group

vs. ITO 25 ITJ 409(Indore-Trib), 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.34.42 crores as per balance sheet

as on 31.03.2010 as against interest bearing funds offered at

Rs.10.74 crores. Hence, interest-free funds of Rs. 34.52 crores have

been utilised for giving interest-free advances to aforesaid above

parties on which no interest was charged. Thus interest-free

advance were given out of interest-free funds available with the

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 8 of 10 assessee during the year 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. The Ld. A.R. has, also

placed reliance on the judgement of Hon`ble Supreme Court in the

case of S. A. Builders vs. CIT (2007) 288 ITR 1(SC) wherein it was

held that where the assessee has made investment out of mixed

funds for the commercial expediency then no disallowance could be

made under section 36 (1) (iii) of the Act. 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,

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 9 of 10 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 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, 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. 11,60,840/- made by the AO is

deleted. Accordingly ground no. 1 and 2 of appeal is therefore,

allowed.

M/s. Narenda Industries vs ACIT,Khandwa I.T.A.No. 644/Ind/2015 Page 10 of 10 3. In the result, the appeal of the assessee stands partly allowed. The order pronounced in the open Court on 28.02.2017.

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

�दनांक /Dated : 28th February, 2017/opm