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Income Tax Appellate Tribunal, “D” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]
ORDER Per Shri M. Balaganesh, AM:
This appeal by assessee is arising out of order of CIT(A)-XX, Kolkata vide Appeal No. 26/CIT(A)-XX/Wd-34(4)/2011-12/Kol dated 04.03.2014. Assessment was framed by ITO, Ward-34(4), Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2009-10 vide his order dated 27.12.2011.
The only issue to be decided in this appeal is as to whether the ld CITA is justified in upholding the disallowance of interest on borrowed funds proportionately in the sum of Rs.6,21,667/- in the facts and circumstances of the case.
Brief facts of this issue is that the assessee is an individual engaged in the business of dealing in the export import licensors. The AO observed that the assessee had given interest free loans to his close relatives, which are as under:
Smt. Pragnya Ghelani Rs. 4,00,000/- Wife of assessee 2. Shri Rahul Ghelani Rs. 22,66,361/- Son of assessee 3. Smt. Smita Ghelani Rs. 12,16,629/- Daughter of assessee
The AO also observed that the assessee had some borrowings from banks bearing interest @ 16.01% and on interest payment thereon to the tune of Rs.49,56,755/-. The AO concluded that the borrowed funds were diverted by the assessee for non-business purposes
2 Girish Ghelani, AY 2009-10 and accordingly, disallowed the interest in the sum of Rs.6,21,667/- (Rs.38,82,990/- x 16.01%) on proportionate basis. The assessee pleaded that it had sufficient funds which is quite evident from the Balance Sheet and also interest free funds in the form of sundry creditors and no borrowed funds were utilized for advancing interest free funds to the relatives of the assessee. The Ld. CIT(A) confirmed the action of the AO. Aggrieved, the assessee is in appeal before us on the following grounds:
“1. For that in the facts and circumstances of the case the assessment order passed was in violation of principals of natural justice hence is bad in law and be quashed.
2. For that in the facts and circumstance the Learned CIT Appeals erred in confirming the disallowing Rs.6,21,667/- on account of proportionate loan interest. The disallowance was not called for and hence the same be deleted.
3. For that in the facts and circumstance the Learned CIT Appeals erred in holding that the onus was on the assessee to prove that interest free funds were utilized to grant the interest free advances. This was directly contrary to the settled law. Hence this finding be reversed.”
The ld AR placed copy of the Balance Sheet of the assessee as at 31.03.2009 and pleaded that the proprietor’s capital account was Rs.36,85,401/- and whereas the interest free advances given to the relatives were Rs.38,82,990/-. He placed reliance on the decision of Hon’ble Calcutta High Court in the case of CIT Vs. Britannia Industries Ltd. reported in 280 ITR 525 (Cal) and also on the decision of Hon’ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT reported in 298 ITR 298 wherein it was held that in the event of own funds and borrowed funds being mixed up the presumption has to be in favour of the assessee that the interest free funds were given out of own funds of the assessee provided the own funds are much more than the interest free funds. He pleaded for disallowance of interest on proportionate basis only to the extent of deficit in availability of own funds i.e Rs.1,97,589/- (Rs.38,82,990/- - Rs.26,85,401/-) and applying the interest rate at 16.01% on the same. In response to this, ld. DR vehemently relied on the orders of the lower authorities.
We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence, the same are not reiterated for the sake of brevity. We find that the assessee has got own funds to the tune of Rs.36,85,401/- which is evident from the Balance Sheet of the assessee and placing reliance on the decision relied on by the Ld. AR supra, we hold that interest free advances given to 3 Girish Ghelani, AY 2009-10 the relatives of the assessee were out of own funds of Rs.36,85,401/- and out of borrowed funds to the tune of Rs.1,97,589/-. Accordingly, we direct the AO to disallow interest on borrowed funds diverted for non business purposes proportionately to the extent of Rs.31,634/- i.e. Rs.1,97,589 x16.01%. We direct the AO accordingly. Appeal of assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed.