DY.C.I.T.1(1), RAIPUR (CG) vs. M/S NAVBHARAT PRESS, RAIPUR (CG)

On appeal before the CIT(A), the assessee submitted that the assessee is regular in filing his income tax return with its books of accounts audited u/s 44AB- AH the expenses and incomes are vouched. The A.O did not find any defect in the accounts. Therefore, any disallowance of expenses is unjustified. The assessee further contended that none of the partners have withdrawn any borrowed funds in the current year or in any prior years. The assessee also claimed that during the year under consideration there was cash profit receipts of Rs.246.07 lakhs against the withdrawals of Rs.194.03 leaving Rs.52.04 lakhs, which was sufficient to absorb the firm's tax. On the basis of the above position the assessee claimed that withdrawals made by the partners in no case involves any borrowed funds whether interest bearing or interest free and is entirely out of profits. The assessee also filed a chart showing borrowings from the banks and repayment made and claimed that there was no diversion of the interest bearing borrowed funds to the partners/sister concerned. The assessee filed one more chart showing

The CIT(A) after considering the submissions of assessee has observed as under :- “7. 1 have carefully gone through the assessment order and the submissions of the appellant. The only issue involved in this appeal is regarding disallowance of interest of Rs.41,54,811/-under section 36(l)(iii) of the Act on two prepositions by the AO, The interest was computed by 5 the AO on the debit balance of Advance Tax Account balance of Rs.1,10,54,514/- appearing on asset side of the Balance Sheet of the appellant as on 31.3.2010 along-with interest computation on the debit balance of the partners capital account on pro rata basis with daily rest at 12% per annum rate of interest.

For disallowance of interest on Advance tax account balance the appellant submitted about the facts relating to account head "Advance Tax Payment" maintained by it. All the payments made by the appellant firm against direct taxes including any amount of appellant's tax deducted by others and any demand of tax paid by the appellant is initially debited to this account. Thereafter, on completion of the assessment for a particular year, whole of the tax paid for the relevant year is transferred to the partner's capital account in their respective profit sharing ratio. The appellant is following this system of accounting for many years, which is duly vouched by generally accepted accounting principles and is also substantiated by the audited statements issued to the appellant by auditors. The system followed is also evidenced by one such transfer entry in respect of the assessment completed for the A.Y. 2007-2008 of Rs. 1630 lacs. In past assessments also, the system adopted by the appellant firm was accepted by the department and was not interfered with. Notwithstanding the above, the appellant has also been religiously following the fundamental accounting assumptions laid down vide Accounting Standards prescribed by the Income Tax Act under section 145 vide notification number SO 69(E) dated 25-01-1996. According to which, the accrual of debit of firm's tax to the partner's capital account is made only after the same is crystallized. Further, the practice is consistently followed in consonance of the principle of consistency under the cardinal accounting assumption of going concern. All these fundamental accounting assumptions are distinctly mentioned at clause 5 of the notification and elaborately defined at clause 6 of the same notification. For the principle of the consistency followed, the appellant relied on the judgement reported in [2013] 38 Taxmann.com 241 (High In concluding the disallowance of interest u/s 36(1)(iii), the A.O has relied on the three cardinal principles governing the deduction under section 36(1)(iii). The A.O. herself at paragraph 4.1 of the order has observed that, "three conditions are required to be satisfied in order to enable the assesses to claim deduction in respect of interest on borrowed capital, namely: (1) that money (capital)must have been borrowed by the assesses. (2)That it must have been borrowed for the purpose of business or profession and (3) That the assessee must have paid interest on the said amount and claimed it as deduction u/s 36(1)(iii) - However, the AO failed to bring out any fact and instances of borrowings for payment of taxes and interest paid on such borrowings in the order. Hence, I am of the considered opinion that when any expenses of interest payment has not been claimed then its disallowance is not justified u/s 36(1)(iii) of the Act. In view of these facts, computation of interest on such debit balance of Advance tax account for which no borrowings were made is unjustified and therefore, the addition made on this account is deleted.

Secondly, the A.O computed interest on the debit balance of partners capital account and added the same to the returned income by disallowing the same from the total interest expenses claimed contending that, interest bearing funds received from the banks and others were utilized in advancing interest free loans to partners for their personal purposes. On the contrary, the appellant has submitted that, sufficient cash profits were available with the appellant for withdrawal by the partner. Appellant submitted following figures in their justification.

00 Sheet Share in profit before 193.88 82.40 152.65 178.79 246.07 853.79 depreciation Sub Total 193.88 -2.79 125.22 189.03 388.90

79 Net Withdrawals During the Year 200.02 -0.25 113.14 -8.88 194.03 498.06

89 Income Tax Closing Balance -85.19 -27.43 10.24 142.83 181.84

84 Position of Capital A/c of Nava Bharat Press (Raipur) Pvt. Ltd. Considering Cash Profit (Rs.in Lacs) Particulars 31.03.2006 31.03.2007 30.03.2008 31.03.2009 31.03.2010 Total Balance as -25.83 0.86 10.42 42.13 72.81 -25.83 per last Balance Sheet Share in 48.47 20.60 38.16 44.70 6152 213.45 profit before depreciation Sub Total 22.64 21.46 48.59 86.83 134.33

62 Net Actual withdrawals 2.02 4.81 6.00 0.25 15.00

08 During Yr National debit for Share in 19.76 6.22 0.46 13.77 3.26

48 Firm Income Tax

07 Balance

Another dimension of the argument of the appellant that payment of interest was commercially expedient has been examined. The appellant furnished the details of borrowed interest bearing funds for business in the current and prior years as under:

34 Nil 12.64

70 Bank Ltd (purchased residential & in prior commercial year) immovable property

Corporation Newsprint Rental

81 Nil 50.00 11.54

46 Bank (purchase Income of in current Firm and year) personal guarantee of partner

HDFC Bank Business Personal 1.28

19 Nil 7.16

03 Loan (prior Guarantee of years) Partner

HDFC Bank Vehicle Hypothecation 4.10 40.58 19.00 17.97

61 Ltd. And Loan of vehicles & IDBI Bank personal guarantee of partner Working Capital Loan

Bank of Business Partner’s 61.51

16 Nil 6.72

44 Maharashtra Loan immovable property, personal guarantee of the partner and current assets of assessee firm Unsecured Loan

From others Personal 3.34 3.00 40.00 15.00 28.07 goodwill of Partner It has been argued that in case of the borrowings at serial numbers 1 to 4, the lenders have directly paid the loan disbursement amount to the supplier / dealer of the raw materials or capital assets. Thus, in any case contention of diversion of the interest bearing borrowed funds to the partners / sister concern by the appellant does not sustain. The appellant, for this proposition, relied on the judgement reported in. [2013] 36 CCH 352 (ITAT Delhi) in Metro Institute of Medical Sciences Pvt. Ltd. Vs. Dy. CIT. It has been further argued that the business loan borrowed from the lender at serial number 2 was necessitated, to obtain release of the bulk imported raw material consignment from the port after full payment. Since any delay in release of the import documents would have entailed heavy demurrage and penal charges, and therefore, as a matter of business prudence the funds were borrowed, which again were paid to supplier directly by the lending bank. The principal and interest repayment against this loan was promptly made by extending the rent income directly to the 10 lender bank's account, since they themselves were the tenants occupying the appellant's premises. Further the appellant also paid Rs.1 lac every month to reduce the interest liability at the earliest. It is seen that the unsecured interest bearing loans obtained as mentioned at serial number 6 have been directly received in the cash credit account of the appellant for further payment of the business expenditure. It is seen that the appellant has made repayment of Rs. 70.90 lacs worth principal amount, in respect of interest bearing loans during the relevant previous year. Considering the facts and evidences on record, in my considered view, the A.O has not established any nexus between interest bearing funds and diversion for non business purposes.

We find that the DR relied on the order of AO. He could not point out any specific error in the order of CIT(A). The finding of CIT(A) that the assessee had sufficient non-interest bearing funds available with it for partners withdrawals, was not controverted by the DR by bringing any cogent and positive material on record. Further, the finding of CIT(A) that the payment of interest was commercially expeditent was examined by the AO in the current and prior years. Therefore, the contentions of AO for diversion of interest bearing borrowed funds to the partners of the sister concern of the assessee cannot be sustained, was also not controverted by the DR by brining any cogent and positive materials on record. Hence, we do not find any good and justifiable reason to interfere with the order of CIT(A), which is confirmed and the ground of appeal of the Revenue is dismissed.

In the result, appeal filed by Revenue is dismissed. Order pronounced in the open court on this 15/01/2018. (PAVAN KUMAR GADALE) (N. S. SAINI) न्याययक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER Raipur; ददन ांक Dated 15/01/2018 प्र.कु.मि/PKM, Senior Private Secretary आदेश की प्रयिलऱपि अग्रेपिि/Copy of the Order forwarded to : अऩीऱ थी / The Appellant- 1. प्रत्यथी / The Respondent- 2. आयकर आयुक्त(अऩीऱ) / The CIT(A), 3. आयकर आयुक्त / CIT 4. विभ गीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, Raipur / DR, ITAT, Raipur 5. 12 ग र्ड प ईऱ / Guard file. 6. सत्य वऩत प्रतत ////