M/S. CHHAGANLAL KISHANLAL & CO.,BURHANPUR vs. THE ACIT, KHANDWA

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)]

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 2 of 10

dated 29.05.2015 for the Assessment Year 2011-11 on following

grounds: 1. The Ld. CIT (A) has erred in confirming the addition of Rs.1,98,291/- 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. 1,98,291/- may please be deleted or in the alternative restricted to reasonable figure. 1.0. Ground no. 1 and 2 relates to confirmation of disallowance of interest of Rs. 1,98,291/- hence, these being considered together. 1.1. Succinctly, facts as culled out from the orders of lower

authorities are that the assessee is a firm and derives income from

cottonseeds and all type of grains. The return of income was filed on

30.09.2010 declaring total income of Rs.43, 22, 020/-. During the

course of assessment proceedings, the AO found that the assessee

has advanced interest bearing funds to some of its family members

and group concerns on which either no interest is charged or the

same is charged at lesser rate whereas the assessee has obtained

loan from bank @13.5% and interest charged @12% only or Nil as

detailed below:

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 3 of 10

Name of the concern Interest Interest Less @13.5 @12%/ interest Nil rate charged 1.Shubham Kela Agency 4,88,219 4,34,630 53,590 2.Sri Ram Kela Agency 3,80,430 3,38,160 42,270 3.Sudha Garg 93,806 Not 93,806 charged 4.Sweta(loan 5 lac for 1- 8,625 Not 8,625 1/2 month) charged Total interest disallowed 1,98,291

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

1,98,291/- by observing that the assessee has diverted interest

bearing funds for advancing the same without interest or on lesser

rate of interest. 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 AO has given a categorical finding that the assessee has

been paying interest to the banks @13.5% whereas the interest

charged on the funds advanced to family members was @12% or no

interest was charged, which the assessee has failed to controvert,

as can be seen from the written submissions. The contention of the

assessee that the partners having capital of Rs. 1.90 crores is of no

use as the assessee has failed to prove that the advances were

made out of the capital of the partners.

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 4 of 10

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

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

are not correct, on the facts of the case, as the assessee has

substantial interest-free funds of Rs. 29,48,05,256/-, (consisting of

capital of partners of Rs. 10,04,83,765/-, loan and advances from

friends and relatives and Rs. 12,25,81,177/- from sundry

creditors), as against total interest bearing funds of Rs.

8,19,66,386/- mainly borrowed from bank. Thus, total interest-free

funds and interest bearing funds of Rs. 37,67,71,642/- were

available with the assessee. 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 15 to 21 of Paper Book. According to which

funds of Rs. 36,81,70,385/- 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. The Ld. A.R. further submitted

that above facts of the case shows that advances to all the four

parties as mentioned in assessment order from whom interest was

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 5 of 10

not charged or charged at the lesser rate were given out of interest-

free funds available with it. 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

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 6 of 10

necessary. Once such presumption is established claim of interest

was allowable. 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.

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 7 of 10

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.

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

assessee had sufficient non-interest bearing funds to the tune of

Rs. 29.48 crores as per balance sheet as on 31.03.2010, (consisting

of partner`s capital of Rs.10.04 crores, loan and advance from

friends and relatives of Rs. Rs.7.17 crores and sundry creditors of

Rs. 8.19 crores) as against interest bearing funds of Rs.8.19 Crores.

Further, we find that the ld. A. R. has contended that the assessee

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 8 of 10

had utilised these funds for giving interest-free advances to above

mentioned four parties on which interest is also charged @12%

from two parties and no interest was charged from two parties

which are relatives of the assessee. Thus interest-free advance were

given out of interest-free funds available with the assessee during

the year for which interest-free funds of Rs.29.48 crores 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

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 9 of 10

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 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

M/s. Chhaganlal Kishanlal & Co. vs. ACIT-Khandwa/ I.T.A. No.646/Ind/2015/A.Y.:10-11 Page 10 of 10 Rs.1,98,291/- made by the AO is deleted. Accordingly ground no. 1 and 2 of appeal is therefore, allowed. 2. In the result, the appeal of the assessee stands allowed. 3. 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