M/S CHADHA SUPER CARS (P) LTD vs. ADDL. CIT, LUDHIANA

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ITA 872/CHANDI/2014Status: DisposedITAT Chandigarh16 November 2018AY 2011-123 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that if the assessee has sufficient own funds (share capital, reserves), it is presumed that interest-free funds are used for non-interest bearing investments. Therefore, disallowance of interest on advances made from own funds is not warranted.

What were the facts?

The assessee made investments in shares and advances to various parties. The Assessing Officer disallowed proportionate interest on these advances, arguing that all business funds come from a common pool. The CIT(A) confirmed this disallowance.

What were the issues?

Whether disallowance of interest is justified on advances made from own funds when the company has sufficient interest-free funds available.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

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Income Tax Appellate Tribunal, CHANDIGARH BENCH “A”, CHANDIGARH

Before: SMT. DIVA SINGH, JM & Dr. B.R.R. KUMAR , AM

For Appellant: Shri. Kuldeep Singh
For Respondent: Smt. Chandrakanta
Hearing: 27/09/2018Pronounced: 16/11/2018

आदेश/Order PER DR. B.R.R. KUMAR, A.M:

The present appeal has been filed by the Assessee against the order of the Ld. CIT(A)-II, Ludhiana dt. 05/09/2014.

2.

In the present appeal Assessee has raised the following grounds:

1.

That the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana has erred in confirming the disallowance u/s 36(1 )(iii) of the Income Tax Act, 1961 of Rs. 720000/- on account of investment made by the company in shares of m/s Renny Steel Casting (P) Ltd. and M/s Renny Strips (P) Ltd. without considering the reply filed by appellant during the course of proceedings, whereas the above said advances was not made from the borrowed funds. Therefore, disallowance of Rs. 720000/- made u/s 36(1) (iii) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana may be deleted.

2.

That the Ld Commissioner of Income Tax (Appeals)-ll, Ludhiana has erred in making the disallowance of Rs. 30000/- u/s 36(1) (iii) of the Income Tax Act, 1961 on account of advance given to Sh. Daljit S. Puri which was made from the current account and not from the borrowed funds and for the business purposes. As the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana confirm the disallowance under section 36(1) (iii) of the Income Tax Act, 1961 without considering the reply filed by the appellant during the course of proceedings. Therefore, disallowance made u/s 36(1) (iii) of the Income Tax Act, 1961 by the Ld Commissioner of Income Tax (Appeals)-ll, Ludhiana may be quashed

3.

That the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana has erred in making the disallowance of Rs. 30000/-u/s 36(1) (iii) of the Income Tax Act, 1961 on account of advance given to Smt. Promila Puri which was made from the current account and not from the borrowed funds and for the business purposes. As the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana confirm the disallowance under section 36(1) (iii) of the Income Tax Act, 1961 without considering the reply filed by the appellant during the course of proceedings. Therefore, disallowance made u/s 36(1) (iii) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana may be quashed.

4 That the Ld. Commissioner of Income Tax (Appeals)-ll, Ludhiana has erred in confirming the disallowance of Rs. 126628/- u/s 36 (1) (iii) of the Income Tax Act, 1961 on account of advance given to M/s Rahul Sales. Whereas, the amount was advanced out of the current account and not from the borrowed funds. As the-Ld. Commissioner of Income Tax (Appeals)-!!, Ludhiana confirm the disallowance u/s 36(1)(iii) of the Income Tax Act,1961 without considering the reply filed by the appellant during the course of proceedings. Therefore, disallowance of Rs. 1266628/- made under section 36(1)(iii) of the Income Tax Act,1961 by the Ld. CIT(A)-II, Ludhiana may be quashed.

3.

The facts of the case in brief are that the assessee has made investments in the shares of the Company namely R.S. Castings Pvt. Ltd. and R.S. Strips of Rs. 60,00,000/-. In addition the assessee has given advances to the persons namely Shri. Daljeet and Smt. Pramila of Rs. 2,50,000/- each and of Rs.44,67,207/- to one concern namely Rohit Sales.

4.

The Assessing Officer disallowed the proportionate interest @12% on the advances given to these parties mentioned above addition on the grounds that the entire money in a business entity comes from a common kitty. The Assessing Officer held that the monies received as share capital, as term loan as working capital as sales proceedings do not have different color. Whatever are the receipts in the business that have the color of business receipts and have no separate identification of the source.

5.

The Ld. CIT(A) confirmed the disallowance relying on the ratio laid down by the Hon’ble Punjab & Haryana High Court in CIT Vs. Abhishek Industries Ltd. 286 ITR 1.

6.

Before us, Ld. AR relied on the judgment of Supreme Court in the case of Hero Cycles Pvt. Ltd. Vs. CIT C.A No. 514/2008 (2015) Supreme Court, while the Ld. DR strongly supported the orders of the lower authorities.

7.

Having heard both the parties, we find that as per the ratio laid down by the Hon’ble Supreme Court in the case of Hero Cycles(P) Ltd. Vs. CIT civil appeal no. 514 of 2008 (2015) CCH0097ISCC dt. 05/11/2015, ACIT Vs. Omax Bikes Ltd., (2016) 156 ITD 566 (Chd. Trib.), DCIT Vs. Sindhu Realtors Pvt. Ltd. (2016) 45 ITR

448 (Delhi Trib) no disallowance is warranted wherein the assessee had sufficient own funds in the form of share capital, reserve and surplus, non interest bearing funds, the presumption would be that the interest free funds are utilized for non interest bearing investments or expenses and interest bearing borrowings are utilized for purpose of the business .

8.

Since in the instant case, the assessee has own funds to the tune of Rs. 78,35,750/- in the form of share capital and Rs. 6,00,74,901/- in the form of general reserves which is more than the interest free loans advanced which is to the tune of Rs. 1,09,67,207/-, therefore, the addition of Rs. 63,00,000/- made by the Ld. Assessing Officer under section 36(1)(iii) is considered to be not in consonance with the established judicial pronouncements, and therefore hereby directed to be deleted.

9.

In the result appeal of the Assessee is allowed.

Order pronounced in the open Court.

Sd/- Sd/- �दवा �संह डा. बी.आर.आर. कुमार, (DIVA SINGH) (Dr. B.R.R. KUMAR) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member AG Date: 16/11/2018 आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

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