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Income Tax Appellate Tribunal, “SMC” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM]
M/s. Sunil Kumar Kundu -vs.- D.C.I.T. Circle-2, Siliguri Siliguri [PAN : AAWFS 9435 R] (Respondent) (Appellant) For the Appellant : Shri Subash Agarwal, Advocate For the Respondent : Shri Snehangshu Biswas, Addl. CIT Date of Hearing : 12.12.2017. Date of Pronouncement : 03.01.2018. ORDER Per N.V.Vasudevan, JM
These are appeals by the Assessee against a common order dated 06.06.2017 of C.I.T.(A)-Siliguri relating to A.Y.2012-13, 2013-14 and 2014-15
The Assessee is a partnership firm. It carries on the business of re-seller of fertilizers and machineries. In the course of assessment proceedings for A.Y.2012-13 the AO noticed that two out of the three partners, viz (i) Shri Sanjit Kundu and (ii) Shri Sunil Kundu as on 01.04.2011 had overdrawn a sum of Rs.55,44,391/- and Rs.56,05,858/- respectively from their capital account. The total drawings by the two partners was thus Rs.1,11,50,251/- as on 01.04.2011. The AO also noticed that the assessee had borrowed monies from bank for the purpose of business and a sum of Rs.31,81,293/- was claimed as interest on the aforesaid loan. The said interest was claimed as an expenditure in the profit and loss account and claimed as deduction while computing the total income.
2 to 1566/Kol/2017 M/s Sunil Kumar Kundu A.Yr.2012-13 to 2014-15 3. During the relevant previous year Shri Sanjit Kundu and Shri Sunil Kundu had introduced capital of Rs.15,50,000/- and Rs.19,05,157/- respectively in their capital account. The balance as on 31.03.2012 in their capital account was overdrawn as follows :- (i) Sanjit Kundu – Rs.37,16,846 (ii)Sunil Kundu – Rs.36,94,377 The total drawings by the two partners was that Rs.74,11,233 as on 31.03.2012.
The AO in the above given facts and circumstances of the case was of the view that borrowed funds on which interest was paid had been diverted by the assessee for non-business purposes in the form of drawings by the partners from the capital account and therefore proportionate disallowance on interest u/s 36(1)(iii) of the Income Tax Act, 1961 (Act should be made. The AO accordingly disallowed a sum of Rs.11,30,718/- which was calculated in the following manner :- “1.5. The assessee’s two partners had opening debit balance at Rs.1,11,50,249/- and the partners has introduced fresh capital of rs.34,55,157/- by Sept. 2011, so the disallowance of interest is charged by this formula [(1,11,50,249x12%)/2 + {(1,11,50,249-34,55,157)x12%}/2=Rs.11,30,718/-. The proportionate disallowance of interest is computed at Rs.11,30,718/- so the said amount of interest has been disallowed and added back to assessee’s income.
Considering the above fact a sum of Rs.11,30,718/- has been disallowed and added back to assesee’s income for diversion of interest bearing loan fund for non business purpose. [Addition of Rs.11,30,718/-]”
Aggrieved by the aforesaid addition made by the AO the assessee preferred appeal before CIT(A). Before CIT(A) the assessee submitted that the withdrawal in the partners capital account is not diversion of funds and that the loan funds obtained from the bank was utilized for the purpose of the business of the assessee. In this regard the assessee pointed out that the credit facility availed from the bank was upto Rs.3 crores towards working capital on the basis of closing stock and book debts of the firm. It was 2
3 to 1566/Kol/2017 M/s Sunil Kumar Kundu A.Yr.2012-13 to 2014-15 pointed out that such credit limit sanctioned by the bank are regularly monitored. The assessee pointed out that during the relevant previous year the credit limit was enhanced only after conducting due diligence process by the bank as to the utilization of the funds for the purpose of the business.
The CIT(A) however did not agree with the submissions of the assessee and he confirmed the order of AO holding that there was no interest free funds available with the assessee which can be the source of funds for withdrawal by the partners from their capital account.
Aggrieved by the order of CIT(A) the assessee has preferred the present appeals before the Tribunal.
I have heard the submissions of the ld. Counsel for the assessee, who drew our attention to the balance sheet of the assessee as on 31.03.2012 and pointed out that apart from secured loan from the bank of Rs.2.96 crores the other liability items in the balance sheet was current liability of Rs.7.35 crores. The ld. Counsel for the assessee pointed out that out of the aforesaid current liability, a sum of Rs.7.25 crores was sundry creditors. The assessee pointed out that sundry creditors balance would be sufficient to explain the withdrawal from the partner’s capital account and that the sundry creditors were interest free funds which should be considered as available for utilization by the assesse. In this regard the ld. Counsel for the assessee placed reliance on the following decisions :
(i) CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (BOM)
"If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. The principle therefore would 3
4 to 1566/Kol/2017 M/s Sunil Kumar Kundu A.Yr.2012-13 to 2014-15 be that if there are 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 fund generated or available with the company, if the interest- free funds were sufficient to meet the investments. “
(ii) Munjal Sales Corporation, Petitioner Vs. CIT 298 ITR 298 (SC) wherein it was held that the profits earned by the assessee during the relevant year were sufficient to cover the loan given to sister concern. Impliedly it was held that profits earned during the previous year should also be considered as interest free fund available.
(iii) CIT Vs. Tin Box Co. 260 ITR 637 (DEL)
If the assessee has substantial capital and interest-free funds available with it, not only in the preceding years but also in the relevant previous year, which far exceed the interest- free advances to the sister concern, no disallowance of interest u/s 36(1) (iii) of the Act could be made. 9 The ld. DR placed reliance on the order of CIT(A).
I have given a very careful consideration to the rival submissions. For the sake of ready reference I reproduce the balance sheet of the assessee as on 31.03.2012 :
5 to 1566/Kol/2017 M/s Sunil Kumar Kundu A.Yr.2012-13 to 2014-15 11. A perusal of the balance sheet would show that the liability of the assessee towards the sundry creditors was Rs.7.25 crores The amount payable to the Sundry Creditors remained available with the assessee. This was interest free funds available to the assessee and there is no finding that interest is payable on these sundry creditors. This interest free fund so available is much more than the drawings of the partners’s from their capital account. In the given circumstances, we are of the view that the principles laid down by the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd (supra) will support the plea of the assesee that a presumption has to be drawn that where interest free and interest borrowing funds though are available with the assessee that the investments (in this case drawing) would be out of interest free funds generated or available with the assesee, if the interest free funds is sufficient to meet the investments (in this case drawings of the partners from the capital account). The other decisions cited by the ld. Counsel for the assessee also support the plea of the assessee that borrowed funds on which interest was paid had no nexus with the drawings from the partners from their capital account. Therefore disallowance u/s 36(1)(iii) of the Act cannot be sustained and the same is directed to be deleted.
In the result the appeal by the assesee for A.Y.2012-13 is allowed.
As far as the appeal for A.Y.2013-14 is concerned the facts are almost identical. The AO made disallowance of interest by taking the opening balance of drawings in the partners capital account which was as follows :- Name of the Partner Balance as on 31.03.2012 Sanjit Kundu (37,16,846) Sunil Kumar Kundu (36,94,377) Total (74,11,223)
The balance sheet as on 31.03.2013 of the assesee was as follows :- 5
It can be seen from the aforesaid balance sheet as against the drawings in the capital account of Rs.96.46 lakhs the sundry creditors was to the tune of Rs.17.19.cores. This being the factual position, we have to conclude that the borrowed funds had not been utilized and have no nexus with the drawings by the partners from their capital account. The disallowance made u/s 36(1)(iii) of the Act cannot therefore be sustained. The same is therefore directed to be deleted. The reasons given for deleting similar disallowance in A.Y.2012-13 will equally apply to this assessment year also.
7 to 1566/Kol/2017 M/s Sunil Kumar Kundu A.Yr.2012-13 to 2014-15 15 As far as A.Y.2014-15 is concerned the facts are identical. The balance in the capital account as on 01.04.2013 are as follows :-
The balance sheet of the assessee as on 31.03.2014 shows the following position :-
8 to 1566/Kol/2017 M/s Sunil Kumar Kundu A.Yr.2012-13 to 2014-15 16. It can be seen from the aforesaid balance sheet that as against the drawings in the capital account of Rs.62.84 lakhs by the partners from their capital account, the sundry creditors available is Rs.14.68 crores. It is clear that interest free funds available with the assessee was more than the drawings in the partners capital account. Therefore presumption would be that interest bearing funds were not the source of drawings in the partners capital account. Therefore disallowance u/s 36(1)(iii) of the Act made by the AO cannot be sustained and the same is directed to be deleted
In the result all the appeals of the assessee are allowed.
Order pronounced in the Court on 03.01.2018.