RAVINDRA MADANLAL KHANDELWAL,AKOLA vs. DCIT/ACIT CIRCLE , AKOLA

./2024 (Assessment Year : 2018–19) Ravindra Madanlal Khandelwal C/o M/s. Khandelwal Jewellers ……………. Appellant Gandhi Road, Akola 444 001 PAN – AMFPK2167B v/s Dy. Commissioner of Income Tax ……………. Respondent Akola Circle, Akola Assessee by : Shri Mahavir Atal Revenue by : Shri Sandipkumar Salunke Date of Hearing – 24/10/2024 Date of Order – 18/11/2024 O R D E R PER K.M. ROY, A.M.

The captioned appeal has been filed by the assessee challenging the impugned order dated 14/05/2024, passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2018–19, arising out of assessment order dated 17/08/2021, under section 143 r/w section 144B of the Income Tax Act, 1961 ("the Act") by the National Faceless Appeal Centre, Delhi,

“1. Whether on the facts and circumstances of the case, the learned First Appellate Authority was justified in endorsing the addition made under section 68 of Rs.5,20,84,000/-. Specifically in the light of the facts that the appellant has duly maintained all requisite records prescribed by the act and the deeming fiction of section 68 have been invoked only on the basis of non-furnishing of tax returns and bank statement of lenders.

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2. Whether on the facts and circumstances of the case, the learned First Appellate Authority was justified in endorsing disallowing of interest income of Rs.74,32,292/-.

3. Whether on the facts and circumstances of the case, the learned First Appellate Authority was justified in endorsing disallowing on interest expenses of Rs.97,66,208/–.

4. Appellant craves leave to add or alter any other ground that may be taken at the time of hearing.”

4. During the scrutiny assessment, the Assessing Officer noted that the assessee is in receipt of new unsecured loans from various individuals and entities which were reflected in the books of the assessee. Hence, the Assessing Officer sought to verify the genuineness, creditworthiness, and identity of the creditors from whom these loans were reportedly received. The Assessing Officer had directed the assessee to provide comprehensive documentation for all creditors. This included detailed contact information, PAN details, bank statements, and income tax returns which are crucial for verifying the financial standing and identity of the lenders. The Assessing Officer issued multiple notices under Sections 142(1) and 133(6) of the Income Tax Act, 1961 (“the Act”) requesting specific details about the lenders and the loans. In response to notices under section 142(1) of the Act, the assessee submitted list of lenders, their PAN, address, ledger confirmation of most of the debtors, interest payment details, details of TDS deducted on interest and the TDS returns of the assessee. However, the assessee did not submitted tax returns and Bank Statements of the lender making it

3 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 challenging to assess their capacity to lend such amounts. It was submitted by the assessee that they are unable to submit the return of income and bank statements of the lenders, as the said documents were personal documents of the lenders and the lenders have denied share their personal information with the assessee. The assessee expressing its inability to submit the aforementioned documents and requested the Assessing Officer to verify the said transactions at the Department’s end, as all the people are resident of Akola and the credentials of tax return can be easily verified by the Department. The assessee also submitted detailed working that in case of almost all the lenders, the loans were repaid in full either in current year or in subsequent year. The assessee also submitted lender wise working to buttress his submission.

6. The learned CIT(A) was of the opinion that the assessee has failed to provide complete and satisfactory documentation that could establish the of the transactions concerning all creditors. The learned CIT(A) further held that assessee also failed to comply with the notices issued by the Assessing Officer, as it indicated a lack of due diligence in substantiating the claimed transactions. Further, the primary burden of proof lies with the assessee to establish that the source of the cash credits appearing in the books are from 4 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 genuine sources and in this case, the assessee was unable to discharge this burden satisfactorily. Therefore, the addition of ` 5,20,84,000, as unexplained cash credit under Section 68 of the Act was upheld by dismissing the ground raised by the assessee.

7. Ground no.2, relates to disallowance on account of interest amounting to ` 97,66,308.

8. The Assessing Officer noticed that the assessee failed to provide adequate documentation to prove that the interest expenses were incurred solely for the purpose of business. The linkage between the borrowed funds and their utilization in business activities was not substantiated satisfactorily. The interest expenses might not have been wholly for the purpose of business. For the reasons, the addition of ` 97,66,308, was made to the total income of the assessee.

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10. Insofar as ground no.3, which relates to disallowance of ` 72,32,292, under section 57 of the Act is concerned, the Assessing Officer observed that the assessee claimed an expenditure of ` 72,32,292, as interest expenses, which were asserted to be incurred for earning income from other sources, but were not recorded in the Profit & Loss Account of the business. The Assessing Officer disallowed this expenditure on the grounds that the expenditure claimed was not reflected in the Profit & Loss Account, which is a standard practice for legitimate business expenses. This raised doubts about the nature of the expenses and whether they were genuinely incurred for business purposes. The Assessing Officer was not convinced that the expenses were incurred wholly and exclusively for the purpose of business, as required under section 57 of the Act. Since the assessee failed to provide sufficient evidence to prove that the interest expenses were directly linked to income-generating activities that would justify their classification under section 57 of the Act, the failure to route the expenses through the Profit & Loss Account suggests a potential discord between the claimed expenses and the regular accounting practices of the business. This irregularity raises questions about the legitimacy and the true nature of the expenses.

11. The learned CIT(A) dismissed the issue raised by the assessee on the following grounds:–

“Lack of Documentation and Justification: The appellant did not satisfactorily demonstrate that the expenses were incurred wholly and exclusively for the purpose of making or earning income as required by Section 57. The expenses' omission from the profit and loss account is particularly concerning and undermines the claim.

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Compliance with Tax Laws: Proper adherence to accounting standards and tax laws is crucial. Expenses claimed for tax deductions must be transparently recorded and justifiably linked to income generation. Based on the analysis of the documents presented and the legal framework, the AO's decision to disallow the expenditure of 74,32,292 is confirmed. The burden of proof to establish a direct and justifiable link between the expenditure and the income purportedly earned was not adequately met by the appellant. The importance of maintaining meticulous and compliant accounting records is reiterated to uphold the integrity of tax claims.”

In effect, all the three grounds were dismissed.

12. The learned Counsel, Shri Mahavir Atal, appearing for the assessee, furnished a detailed written submissions contained in Paper Book from Page– 221 to 242, which are reproduced below:– “The Assessee is an individual running a jewellery business under the proprietorship concern M/s Khandelwal Jewellers. The assessee is engaged in this line of business for 5 decades.

7 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 b) Pan of lenders:- PAN of lenders were also been provided in submissions before the AO. The same details are attached herewith vide Annexure 1 for ease of reference c) Amount of loan Accepted during the year:- The assessee had submitted before the AO the details of loan accepted during the year including confirmation ledgers, which highlighted the amount of loan accepted, interest paid & loan repayments during the year. d) Amount of loan repaid during the year:- Your kindness may kindly appreciate that most of the loans were repaid during the year. This fact can be verified from the confirmation ledgers attached herewith as Annexure 1. To highlight the factum that the loans were duly repaid through the banking channel, the assessee had also submitted the bank statements before the AO. The same is attached herewith again as Annexure 2 for ease of reference. e) Quantum of interest paid and rate of interest:- The assessee has also submitted the details with respect to interest rate and quantum of interest. Your kindness may appreciate that the assessee has duly deducted TDS and deposited same to the credit of the ex-chequer. Duly complying with the law, the assessee had also filed TDS returns. The TDS returns were also submitted before the AO. We are hereby again attaching herewith all TDS returns for the relevant year annexure 3. f) Purpose for which loan was taken:- The Loans were taken for the purpose of business. Your kindness may appreciate that the said loans were advanced to Flagship Company of the group, KJAPL, where most of the business is done. The assessee has submitted requisite ledgers and scan copy of the bank statements to substantiate that the said funds were indeed advanced to the private limited company which was further used for the business purpose. g) Copy of bank statements of lenders:- The assessee had humbly submitted before the AO that these details being personal details, the lenders are not ready to provide their personal and financial details to us. In this regard, we humbly wish to submit that your kindness has a right to issue summon and enforce the attendance of the parties. As far as bank statements of the assessee is concerned, the assessee has submitted the bank account statements of the assessee‟s both business

8 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 and personal accounts highlighting the loans received from these parties and also the loans repaid back to the parties. h) Copy of ITRs of lenders of last 3 years:- Time and again it has been held by the courts that the tax returns are in the realm of personal details of the tax payer and same cannot be divulged without the permission of the tax payer. Therefore, all the lenders have expressed their reservations for sharing their personal details. It was submitted before the AO by the assessee that being a quasi-judicial authority the AO had access to all the income tax details of these lenders on the income tax portal. We have already submitted their PAN details. We humbly requested the AO to download the said details and verify the same at your end. Your kindness may also appreciate the fact that all these lenders have duly reported income is their tax returns and have also claimed credit of TDS deducted by the assessee. i) Copy of documentary evidences to substantiate identity and creditworthiness of the lenders:- The assessee submitted details like PAN number of the lenders before the AO. All the lenders are tax paying assessee and have duly filed tax returns. Their complete details like, address, email id and contact details were already available with the AO, as all the lenders have their PAN issued by the tax department, after verifying complete KYC. Therefore, as these lenders are already registered with tax authorities and are filing tax returns, their identity in our opinion is established. As far as creditworthiness is concerned all the tax payers filed return of income, the creditworthiness may kindly be verified on the basis of the tax returns filed by them. Moreover, as already submitted above, the tax returns and bank statements are personal property of the tax payer, however, same can be easily fetched by the department by issue of summons. j) Copy of documentary evidences to substantiate genuineness of the lenders:-

The fact that the transaction was indeed in a realm of a loan, is apparent from the fact that almost all the loans borrowed from the third parties were repaid to them either in the current year or in subsequent year. The assessee had submitted ledger accounts of these parties, along with the extract of the assessee‟s bank statement, highlighting the repayment of loans borrowed by the assessee. Therefore, as the loans were borrowed and also repaid, there is apparently no case of bogus loans or capitalization. Your kindness may also appreciate the fact, at the cost of the repetition that the assessee has duly deducted TDS on interest payments. A complete working vis-à-vis loan receipt, repayment, bank statement and TDS returns are enclosed for your kind perusal. These parties have also reported income and claimed benefit of TDS credit.

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The assessee had discharged his onus with respect to proving the identity and genuineness of the transaction. With respect to the creditworthiness, the assessee has had also submitted all the details available with the assessee. However, the assessee was not in a position to submit the personal details of the lenders as they were not ready to share the same. k) Copy of ledger accounts of all the lenders and copy of confirmations of transactions by the lenders:– In this regard we humbly wish to submit that the assessee had submitted the ledger account of almost all the lenders of loans from the date of receipt of loan till its repayment and the confirmations of these parties also before the AO. 1.2. Even after the submission of the above extensive documentation, the AO has not accepted the reply of the assessee. The fact which deserves to be appreciated is that the AO has disputed assessee‟s submission that these transactions are in the realm of loan. 1.3. In para 6.7 of the assessment order, the AO has mentioned that the assessee had not submitted the confirmations of 8 parties even after repeated reminders. The assessee most humbly wishes to submit that the assessee had submitted the confirmations of 5 out of the 8 parties mentioned by the AO. However, the AO has inadvertently not considered the same. 1.4. Moreover, on request of the assessee, the AO‟s had issued notice under section 133(6) of the Act to a total of 10 people, out of which 4 people had filed the replies. It is pertinent to note that out of the remaining 6 assessee had already filed the confirmation of 5 parties. Since, the parties had not even replied to the notice issued by the AO under section 133(6). We most humbly wish to submit that it is unfair of the AO to ask assessee to furnish the personal details of the parties. The AO has enough powers under the Act to summon the non-compliant parties and get the details from them. The assessee has discharged his first onus by submitting the PAN of these parties as all the information related to the PAN including ITRs can be accessed by the AO. 1.5. Your kindness may appreciate, that most of the lenders are unrelated parties. The loans have been borrowed from them on commercial terms and interest after due deduction of TDS have been paid to the lenders. However, the lenders, have expressed their unwillingness to share their personal information like Income Tax Return, Financial statements and bank statements. 1.6. Moreover, the concern here is regarding whether the assessee has introduced his own funds by way of unsecured loans, in this regard we wish to submit that the borrowings were indeed a short-term loan. The fact that these were not capitalization borrowings, may also be substantiated by the fact that most of the borrowings of the current year were actually repaid in the current year or in subsequent year.

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1.7. The assessee vide a submission dated 27.03.2021 before the AO had submitted a separate working highlighting the fact that most of the amount received from the lenders were already repaid back to them. We are hereby again attaching a detailed chart of the working of accepting and repaying the loan. A fact which deserves to be appreciated is that all the lenders are assessed to tax and are regularly filing their returns of income. Moreover, the loans advanced to the assessee were through the regular banking channel and were also repaid through the banking channel after deducing TDS on interest. 1.8. Moreover, the assessee had duly deducted and paid TDS on the interest amount. During the year under consideration, the assessee has neither purchased any capital asset nor undertook any big expenditure, like marriage, house construction or foreign trips. The borrowed funds were utilized in Khandelwal Jewelers Akola Private Limited, as the jewelry is a very capital-intensive business and the business man has to invest a majority of its funds, in the stocks of jewelry. 1.9. The assessee had discharged his onus by submitting the requisite documents available with the assessee. It is a well settled Law that assessee need not prove source of the source. For this jurisprudence we rely upon the Judgment of the Hon‟ble Delhi High Court in the case of CIT vs., Dwarkadhish Investment Pvt. Ltd., [2011] 330 ITR 298 (Del.) and Judgment of Hon‟ble Gujrat High Court in the case of DCIT vs., Rohini Builders [2002] 256 ITR 360 (Guj.). 1.10. In a recent similar case before Ahmedabad Tribunal in the case of M/S Hindon Forge Ltd Vs DCIT (Del) (Trib) dated 03/12/20, the Hon‟ble tribunal has relied on the case laws relied upon by the assessee and allowed the appeal in favour of the assessee. The relevant extract of the order is re- produced below. “It is well settled Law that assessee need not to prove source of the source. We rely upon the Judgment of the Hon‟ble Delhi High Court in the case of CIT vs., Dwarkadhish Investment Pvt. Ltd., [2011] 330 ITR 298 (Del.) and Judgment of Hon‟ble Gujrat High Court in the case of DCIT vs., Rohini Builders [2002] 256 ITR 360 (Guj.).” 1.11. Further, in the landmark decision of the Hon‟ble Delhi High Court in the case of CIT vs. Dwarkadhish Investment Pvt. Ltd., (2011) 330 ITR 298 (Del.) it was held that assessee need not prove “source of the source”. 1.12. On similar findings, Judgment of the Hon‟ble Supreme Court in the case of CIT vs. Orissa Corporation (P.) Ltd., (1986) 159 ITR 78 (SC) in which the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the revenue that the said creditors were the income-tax assessees. Their index number was in the file of the revenue. The revenue, apart from issuing notices under section 131 at the instance of the assessee, did not pursue the matter further. The revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 premises, if the Tribunal came to the conclusion that the assessee had discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which a conclusion could be arrived at, no question of law as such could arise. Thus, it was held that The High Court was, therefore, right in refusing to refer the questions sought for.” 1.13. In another decision of Hon‟ble Gauhati High Court in the case of CIT vs. Nemi Chand Kothari reported at (2003) 264 ITR 254 (Gauhati) it has been held that- “Under section 68 of Income Tax Act creditor‟s creditworthiness has to be judged vis-à-vis transactions, which have taken place between assessee and creditor, and it is not business of assessee to find out source of money of his creditor or genuineness of transactions, which took place between creditor and sub-creditor and/or creditworthiness of sub-creditors for these aspects may not be within special knowledge of assessee.” 1.14. In a case before Hon‟ble Delhi High Court in the case of CIT vs. Mod Creations Pvt. Ltd., (2013) 354 ITR 282 (Del.) it was held as under : 1.15. The Hon‟ble Delhi High Court in the case of CIT vs. Kamdhenu Steel and Alloys Ltd., & Ors. 361 ITR 220 (Del.) held that – “The Tribunal has adopted an erroneous approach on the aspects of genuineness of the transactions in issue and the creditworthiness of the persons/creditors who lent money to the assessee. The first aspect, i.e., identity of the creditors was established before any of the authorities below. It will have to be kept in mind that section 68 only sets up a presumption against the assessee whenever unexplained credits are found in the books of account of the assessee. It cannot but be again said that the presumption is rebuttable. In refuting the presumption raised, the initial burden is on the assessee. This burden, which is placed on the assessee, shifts as soon as the assessee establishes the authenticity of transactions as executed between the assessee and its creditors. It is no part of the assessee‟s burden to prove either the genuineness of the transactions executed between the creditors and the sub- creditors nor is it the burden of the assessee to prove the creditworthiness of the sub-creditor.” 1.15 The Hon‟ble Delhi High Court in the case of CIT v/s Kamdhenu Steel and Alloys Ltd. & Ors. 361 ITR 220 held that – “Once adequate evidence/material is given, which would prima facie discharge the burden of the assessee in proving the identity of shareholders, genuineness of the transaction and creditworthiness of the shareholders, thereafter in case such evidence is to be discarded or it is proved that it has “created” evidence, the Revenue is supposed to make thorough probe before it could nail the assessee and fasten the assessee with such a liability under s.68; AO failed to carry his suspicion to logical conclusion by further investigation and therefore addition under s. 68 was not sustainable.”

12 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 1.16. It is evident from the above jurisprudence that the assessee was not required to disclose the source of the source and had no responsibility for verifying the source of income in the hands of lender. Thus, considering the facts of the case and in the light of documentary evidences submitted, the assessee has established the identity of the lender, their creditworthiness and the genuineness of the transaction in the matter. 1.17. On the basis of explanations offered and relying on catena of judgements on this issue we humbly request your kindness to please delete the addition made by the AO in this regard and oblige.

2. Disallowance of interest to the tune of ` 74,32,292 2.1. In this regard we humbly wish to submit that the assessee has claimed interest of Rs. 74,32,292/- on the unsecured loans raised in his personal capacity. 2.2. The Assessee has an opening balance of unsecured loans to the tune of Rs. 5,33,08,725/-. During the year under consideration, the assessee has received unsecured loans to the tune of Rs. 85,60,000/- in his personal capacity. A fact which deserves to be appreciated is that out of the loans borrowed during the year to the tune of Rs. 85,60,000/-, an amount of Rs. 55,00,000/- has also been repaid in the current year itself. 2.3. The AO has disallowed the said interest expenses stating that the assessee has not routed the said interest through the Profit and Loss Account of the proprietorship business and has claimed it in the return of income directly. The AO has also stated that no evidences have been furnished in order to prove that the loans claimed to be received in individual capacity were used for business purpose. 2.4. With all humbleness we wish to submit that the assessee, maintains two set of accounts, one is for the proprietary concern (Khandelwal Jewelers) and the other is for the individual personal account. As already mentioned above the assessee has formed a new private limited company named as M/s Khandewal Jewellers (Akola) Private Limited. As and when there is an urgent requirement of funds to the company, funds were transferred to the aforementioned company from the CC Account of M/s Khandelwal Jewelers (proprietorship Concern). However, when CC is utilized, the assessee borrowed in his personal capacity from the market and then same is advanced to the aforementioned private limited company. This fact can be verified from the bank statement of the assessee, KJAPL and the ledger of the assessee in the books of KJAPL. 2.5. As your kindness can figure out that the assessee is already under lot of debt, sometimes, to honor the old repayment of loans, which were earlier advanced to KJAPL, the assessee borrowed from the market and repaid the old loans. All in all, the fact which your kindness can easily figure out, is that the assessee is under severe debt and entire business is being run by borrowing funds from the market and most of the income is being spent in paying interest on the borrowed debt.

Ravindra Madanlal Khandelwal ITA no.375/Nag./2024

2.6. Another major reason for borrowing in personal capacity and further lending it to the company, is the restriction of the company law that the private limited company cannot borrow from the public. Even as far as shareholders are concerned, private limited company can only borrow to the extent of aggregate of paid-up capital, reserves and share premium. Therefore, as the company has no option to borrow funds from the outsiders, the shareholders have borrowed funds in their Individual capacities and forwarded same to the company. Even the cash credit limit of the assessee‟s proprietorship concern was used to advance funds to the private limited company. Therefore, the end-use of the borrowed funds is only the advances to the private limited company. 2.7. Your kindness may also appreciate the fact that it is not a case of tax planning but a prudent business decision as both the concerns M/s Khandelwal Jewelers and M/s Khandelwal Jwellers (Akola) Private Limited are assessed to tax at maximum marginal rates. Therefore, there is no loss of revenue to the government. 2.8. The assessee has duly deducted and paid TDS on such interest the details of which are tabulated below for quick perusal. Sr. TDS Party Name Interest Paid No. Deducted 1 Abhijeet F Goenka 23,421 2,342 2 Abhishekh F Goenka 16,729 1,673 3 Amit F Goenka 20,075 2,008 4 Anil R Chandak 30,417 3,042 5 Anita F Goenka 26,767 2,677 6 Basantibai B Goenka 26,767 2,677 7 Bherulal Dhanraj 4,083 - 8 Fakirchand B Goenka 20,075 2,008 9 Gaurav R Chandak 30,417 3,042 10 Geetabai K Savana 30,417 3,042 Hauldar Leasing & Finance 44,411 4,441 11 Pvt Ltd 12 J S Corporation 8,167 817 13 Khandelwal Silvers 302,220 30,222 Ku. Shruti Ravi 19,470 1,947 14 Khandelwal 15 Ku. Vijeta A Agrawal 30,000 3,000 16 Murlidhar R Chandak 30,417 3,042 17 Namita N Khandelwal 81,812 8,181 18 Nitin M Khandelwal 3,577,401 357,740 19 Omprakash M Sharma 132,000 13,200 20 Prabla Manoj Shah 61,000 6,100 21 Pragya Alok Agrawal 30,000 3,000 22 Pranita N Khandelwal 207,785 20,779 23 Pratik R Khandelwal 130,592 13,059 24 Pushpa M Rathi 67,513 6,751 25 Radheshyam M Chandak 30,417 3,042 26 Rajshree Anil Chandak 24,333 2,433 Ravindra M Khandelwal 2,192,604 219,260 27 (HUF) 28 Sau. Asha A Agrawal 84,000 8,400 29 Sau. Rupa P Agrawal 15,600 1,560

Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 30 Sudhir M Rathi (HUF) 67,920 6,792 31 Tisha Anand Manwani 10,333 1,033 32 Veena R Chandak 30,417 3,042 Interest on Late Payment 24,711 - 33 of TDS Total 7,432,291 740,352 2.9. Since, the finds borrowed have been used for the purpose of business and the assessee has duly complied with requirements of deducting TDS. We humbly request your kindness to please delete the disallowance made by the AO.

3. Disallowance of interest to the tune of Rs. 97,66,308/- 3.1 In this regard we humbly wish to submit that the assessee has debited an amount of Rs. 97,80,891/- towards interest paid account for the year under consideration in the profit and loss account. Out of this interest amount, interest of Rs. 53,23,055/- is the interest paid by assessee towards the Cash Credit Limit availed by the assessee and the remaining interest of Rs. 44,57,836/- belongs to the interest paid by the assessee to the unsecured loan providers. The aforementioned interest is part of audited books of accounts of the assessee which is duly accounted and TDS on the same has also been paid. A tabular representation of the breakup of this interest is being reported below along with detail of TDS deducted. Sr. Party Name Interest Paid TDS No. Deducted 1 Amarchand Omprakash Kasat 4,200 - 2 Arihant Corporation 30,667 3,067 3 Ashok Bharatlal Agrawal 1,100 - 4 Ashok Bharatlal Agrawal (HUF) 11,025 1,103 5 Baba Accosiates 1,07,000 10,700 6 Bilala Refinaries 1,02,000 10,200 7 Chandadevi B Khandelwal 73,608 7,361 8 Chetan Ashok Agrawal 25,550 2,555 9 Deepak Mohanlalji Chandak 5,167 517 10 Ekta Ravindra Khandelwal 1,73,024 17,302 11 Gangasahay Tarachand 34,640 3,464 12 Garg Agro Industries 61,975 6,198 13 Kamlesh Kisanchand Motwani 550 - 14 Kanika Agro Industries 94,808 9,481 M/s, Shradha Ginning & Pressing 20,333 2,033 15 Factory 16 M/s. Kapil Industries 5,425 543 17 Maa Vaishnavi Udyog 20,000 2,000 18 Mukesh Ramchand Motwani 550 - 19 Nikhil Bharat Shah 1,21,667 12,167 20 Nikita Tushar Shah 1,21,667 12,167 21 Pannalal Sumerchand 60,116 6,011 22 Prafulla K Chandak (HUF) 1,52,083 15,208 23 Pratibha N Kedia 60,900 6,090 24 R G Agro Industries 29,450 2,945 25 R G Udyog 1,44,767 14,027 26 Radheshyam Biharilal Khandelwal 47,800 4,780 27 Rajendra K Chandak (HUF) 1,52,083 15,208 28 Rajesh B Khandelwal 20,075 2,008 29 Ravindra Gopidasji Mohata 14,250 1,425 30 Ravindra M Khandelwal HUF 1,15,125 11,513

Ravindra Madanlal Khandelwal ITA no.375/Nag./2024

31 Ravindrakumar Harikisanji Chandak 5,167 517 32 S K Udyog 10,920 1,092 33 Sandip Tejpalji Shah 27,191 2,719 34 Sanjay Industries 19,000 1,900 35 Sau. Binti R Bhala 1,08,982 10,897 36 Sau. Chitra Umesh Agrawal 18,958 1,896 37 Sau. Lajwanti S Motwani 47,700 4,770 38 Smt. Nirmalal R Khandelwal 1,22,383 12,238 39 Sau. Rashmi R Chandak 1,52,083 15,208 40 Sau. Sarika Vinit Mohata 15,000 1,500 41 Sau. Usha Ashok Agrawal 47,725 4,773 42 Shah Agencies 26,667 2,667 43 Shah Brothers 1,23,750 12,375 44 Sharad Makhanlal Agrawal HUF 15,334 1,534 45 Snehlata B Shah 1,21,667 12,167 46 Sukhdeo Sitaram 1,02,634 10,264 47 Sumit Traders 32,700 3,270 48 Tulsiram Goenka & Co 1,23,450 12,345 49 Tulsiram R Goenka 87,667 8,767 50 Uday Traders 71,300 7,130 51 Umesh Laxmikant Agrawal 14,408 1,441 52 Vimlabai R Khandelwal 31,867 3,187 53 Vinodkumar Nathmal Goenka HUF 15,333 1,533 54 Khandelwal and Agrawal Jewellers 13,04,345 1,30,435 55 TJSB Saharaki Bank Ltd 53,23,055 - Total 97,80,891 4,44,698 3.2 The AO has disallowed the entire expenses by stating that interest bearing funds was used for non-business activity. In this regard we humbly wish to submit that the interest-bearing funds i.e., secured as well as unsecured are used for business of the related concern (i.e.) private limited company Khandelwal Jewellers Akola Private Limited. 3.3 The term for business purpose, used in the section 36(1)(iii) & Section 37 have been interpreted by the Hon‟ble Supreme Court in the landmark judgment of SA Builders 288 ITR 1 (SC). “ In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, the Supreme Court held that the expression 'for the purpose of business' occurring under the provision of section 36(1)(iii) is wider in scope than the expression 'for the purpose of earning income, profits or gains', and this has been the consistent view of the Supreme Court. [Para 20] The High Court in the impugned judgment as well as the Tribunal and the income-tax authorities had approached the matter from an erroneous angle. In the instant case, the assessee borrowed the fund from the bank and lent part of it to its sister concern (a subsidiary) as interest-free loan. The test in such a case was really whether this was done as a measure of commercial expediency. [Para 21] The decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is 'for the purpose of business'. It has been consistently held in decisions relating to section 37 that the expression 'for the purpose of business' includes

16 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. [Para 22] It is not in every case that interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances. Where holding company, has a deep interest in its subsidiary, and the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans. [Para 35] 3.4 Therefore, the very fact that the loan was used for the purpose of the business of a related concern is quite evident. As the newly formed Private Limited company could not borrow more from for the financial institutions the only option available was to mobilize funds from the open market. However, as the Company Acts prohibit direct acceptance of loans from the public. The assessee, being a shareholder member borrowed loan from the open market and advanced same to the company. The entire planning is tax neutral and it was the need of business to mobilize funds from the market.

17 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 following conditions for claim of expenditure. o The expenditure must have been laid out or expended wholly and exclusively for the purpose of making of earning "income from other sources"; • expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; 4.5 Clause (iii) to section 57 makes admissible the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income (income chargeable under the head "income from other sources'). This means section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively 'for the purpose of making or earning such income". In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly to earn income falling under the head "income from other sources". The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify, the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned (CIT vs. Rajendra Prasad Moody (1978), Taxation 51 (3)-52, 115 ITR 519 (SC) : CIT vs. MurliManohar (1998) IX SITC 673 (All): CIT vs. Rampur Tirnber&Turney Co. Ltd. (1981) 129 ITR 58 (All.) : CIT vs. Administrator General of Madras (1998) 142 Taxation 85 (Mad)). A similar view was also taken by the Hon'ble Madras High Court in the case of "CIT vs. M Ethurajan" (273 ITR 95) (Mad).) 4.6 In the assessee‟s case, assessee has made an investment in a related company, and the resultant in a form of a dividend income, interest income or directors remuneration fall within the head of income from other sources. The courts have time and again held that it is immaterial whether the assessee has made profit out of such expenditure or not. For claiming deduction u/s 57(iii) of the income tax act it would be sufficient to prove that there is nexus between the income which will be earned and amount expended. Therefore, here in the case of the assessee as all the requirements for claiming deduction u/s 57(iii) of the income tax act, 1961 are fulfilled, assessee has legally claimed deduction u/s 57(iii). 4.7 Further, I humbly wish to submit the fact that any advance made to the related/sister concern out of commercial expediency is also allowable under section 36(1)(iii), section 37 and section 57(iii) of the income tax act, 1961. The landmark judgment on this issue, which explains the entire gamut of provisions is that of the Hon'ble Supreme Court in SA Builders Limited's case 288 ITR 1 (SC). 4.8 In the above-mentioned case, the issue was whether an assessee, who had borrowed funds carrying interest and advanced part thereof to 18 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 its sister concern on interest free basis, can claim deduction to that extent. In the aforesaid case, Hon'ble the Supreme Court opined that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. In case, it is found that transfer of borrowed funds to a sister concern was on account of commercial expediency even if the same is interest free, the deduction claimed by the assessee cannot be disallowed. 4.9 This jurisprudence was further explained in the recent judgment of the Jaipur Tribunal in case of Shri Kailash Chand Soni V/s ACIT (ITA NO.960/JP/2019) where in it was held that- “Para 14 :- We are of the view that it is not necessary that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income. Para 15 :- Further, clause (iii) to section 57 makes admissible the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income (income chargeable under the head "income from other sources'). This means section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively 'for the purpose of making or earning such income". In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur 16 to earn income falling under the head "income from other sources". The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qual0, the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned (CIT vs. Rajendra Prasad Moody (1978), Taxation 51 (3)-52, 115 ITR 519 (SC) : CIT vs. Murli Manohar (1998) IX SITC 673 (All): CIT vs. Rampur Tirnber & Turney Co. Ltd. (1981) 129 ITR 58 (All.) : CIT vs. Administrator General of Madras (1998) 142 Taxation 85 (Mad)).” 4.10 This year our company has already witness lockdowns for almost 6 months. Because of cash crunch and being a non-essential item, the general public has refrained from purchasing and investing in gold. With the business being highly under debt stress and lockdowns, it is becoming very difficult to even fulfill daily fixed cost like EMI, salaries and therefore, it is our humble request that any further tax demand will certainly push assessee in a deeper financial trouble as the business is 19 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 already on the brink of closure. We are ready to co-operate and furnish all the possible documents for your kind perusal. We humbly request a practical and pragmatic stand may be taken.”

13. On the other hand, the learned Departmental Representative, Shri Sandipkumar Salunke, appearing on behalf of the Revenue prayed that the authorities below have correctly came to the conclusion which need not be interfered with as the assessee miserably failed to prove the creditworthiness.

“5. Being aggrieved by the aforesaid, the assessee preferred an appeal before the learned CIT(Appeals). Surat who vide its order dated 10-2- 2020 allowed the appeal of the assessee observing, inter alia, as under: "7.6 Repayment of advances. The AR pointed out that the impugned advances have been re-paid by assessee company within the financial year mostly within 30 days). The repayments are evident from the ledger accounts, bank a/c. statements and also from the affidavits filed by the lenders. The Ld. AO has not questioned repayments or sources of the repayments. No contrary findings or evidences are lead by Ld. AO. The repayment of loan or advances when no fault is found by Ld. AO, constitutes a good evidence regarding genuineness of the said loans or advances. This commercial logic & common knowledge is recognized by judiciary. The Hon'ble jurisdictional High Court in case of Ayachi Chandrashekhar Narsangaji TA 992 of 22013 datd. 2-12-2013 has held that "It has also come on record that the said loan amount has been repaid by the assessee to 'IA' in the immediately next year and the Department had accepted the repayment of loan without probing into it. In the aforesaid facts and circumstances of the case, when the Tribunal has held that the matter is not required to be remanded as no other view would be Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 possible, there was no reason to interfere with the impugned order passed by the Tribunals". Further the Hon'ble ITAT Surat in case of Kalubhai A. Dhamelia dtd. 18-9- 2018 & in case of Damjibhai Varjibhai Gangani ITA 124/SRT/2018 dtd. 18-9-2018 have also taken a view that the repayment of loan/advances constitute evidence regarding genuineness of the impugned loan or advances. The above binding decisions squarely apply to the facts of instant appeal & hence the addition u/s. 68 liable to be deleted on this reason."

6. As against that Revenue has approached the Tribunal by way of filing Appeal being for Assessment Year 2016-2017. The Tribunal by its order dated 11-1-2023 dismissed the appeal of the Revenue observing, inter alia, as under "15. We find that the Ld. CIT(A) after considering the submission of assessee further noted that all the advances were repaid by assessee within the same financial year ie, most of the case within 30 days. The repayment was verified from the ledger account and the bank statement. The Ld. CIT(A) on relying on the decision of Jurisdictional High Court in Ayachi Chandrasekhar Narsangji (supra). wherein it was held that when loan amount has been repaid by the assessee in the immediately next year and the Department has accepted the repayment of such loan without proving it, no addition can under section 68 can be made, deleted the entire additions. During the hearing, the L.d. AR for the assessee vehemently argued that the assessee received the said amount during the course of its business activities and the amount was return either within one or two days or in a span of very short period, for which the provisions of section 68 cannot be invoked. We find the Ld. AR for the assessee filed following summary of impugned deposits and refunds;

Repay– Sr. Details of Details of trade advance Details of trade advance ment no. payers received repaid within Date of Amount Date of Name Amount repaid Receipt Received Payment M/s. Anshul 1. 20/08/2015 31,00,000 21/08/2015 31,00,000 Gems Pvt. Ltd. M/s. Manhar 07/07/2015 5,00,000 08/07/2015 5,00,000 2. 1 day Impex Pvt. Ltd. 13/07/2015 73,00,000 14/07/2015 73,00,000 M/s. Uttam 3. 07/07/2015 50,00,000 08/07/2015 50,00,000 1 day Gems Pvt. Ltd. 07/12/2015 M/s. Look At Me 21,34,000 4. 04/12/2015 2,10,00,000 10/12/2015 3–6 days Retails Pvt. Ltd. 1,88,66,000 22/06/2015 M/s. Veena 5. 18/06/2015 5,00,000 22/06/2015 5,00,000 4 days Gems M/s. Royal 07/09/2015 10,00,000 01/09/2015 50,00,000 6–27 6. Refinery Pvt. 08/09/2015 50,00,000 03/09/2015 1,40,000 days Ltd. 30/09/2015 1,30,00,000 M/s. Rama 7. 07/05/2015 75,00,000 08/09/2015 75,00,000 124 days Exports

Ravindra Madanlal Khandelwal ITA no.375/Nag./2024

M/s. Kaushal 8. 07/05/2015 15,00,000 15/09/2015 15,00,000 131 days Diamonds 07/05/2015 63,25,000 15/09/2015 30,00,000 M/s. Kumar 131–141 9. 13/05/2015 30,00,000 01/10/2015 83,25,000 Exports days 14/05/2015 28,00,000 01/10/2015 8,00,000 08/05/2015 50,00,000 M/s. Piyush 15/05/2015 28,00,000 10,60,00,00 10. 01/10/2015 146 days Exports 19/05/2015 20,00,000 0 25/05/2015 8,00,000 M/s. Jai Shree 11. 19/05/2015 27,00,000 01/10/2015 27,00,000 135 days Exports 13/05/2016 1,00,00,000 12. Rajen Vasant 29/12/2015 2,00,00,000 138 days 16/05/2016 1,00,00,000 M/s. Osiaji `49,54,500 13. 22/03/2016 22/03/2016 46,54,500 1 day Exports 11,57,79,50 11,57,79,50 Total 0 0

recorded the statements of only six creditors, viz., creditors at serial Nos. 1. 2. 3. 4, 6. and 7. However, in respect of all the 21 creditors the assessee has furnished their complete addresses along with GIR numbers/permanent account numbers as well as confirmations along with the copies of assessment orders passed in the cases of creditors at serial Nos. 1, 2, 4, 5, 6, 7, 9, 10, 11, 12 and 16. In the remaining cases where the assessment orders passed were not readily available, the assessee has furnished the copies of returns filed by the creditors with the Department along with their statement of income. All the loans were received by the assessee by account payee cheques and the repayments of loans have also been made by account payee cheques along with the interest in relation to those loans. It is rather strange that although the Assessing Officer has treated the cash credits as non-genuine, he has not made any addition on account of interest claimed/paid by the assessee in relation to those cash credits, which has been claimed as business expenditure and has been allowed by the Assessing Officer. It is also pertinent to note that in respect of some of the creditors the interest was credited to their accounts/paid to them after deduction of tax at source and information to this effect was given in the loan confirmation statements by those creditors filed by the assessee before the Assessing Officer. Thus it is clear that the assessee had discharged the initial onus which lays on it in terms of section 68 by proving the identity of the creditors by giving their complete addresses, GIR numbers/permanent accounts numbers and the copies of assessment orders wherever readily available. It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by the Bombay High Court in the case of Orient Trading Co Ltd. v. CIT [1963] 49 IIR 723. The genuineness of the transaction is proved by the fact that the payment to the assessee as well as repayment of the loan by the assessee to the depositors is made by account payee cheques and the interest is also paid by the assessee to the creditors by account payee cheques. Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee -from those creditors as non-genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 [TR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue's case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non- compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw an adverse inference against the assessee. In the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those

23 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69. Further, we may point out that section 68 under which the addition has been made by the Assessing Officer reads as under: "68. Where any sum is found credited in the books of an assessee maintained for any previous year. and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this, case the legislative mandate is not in terms of the words "shall be charged to income-tax as the income of the assessee of that previous year". The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word "may" and not "shall". Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 IIR 570."

11. Keeping in mind the ratio laid down in the said judgment, in the facts of the present case, we do not see any merit in the appeal and therefore, same deserves to be dismissed and is accordingly dismissed with no order as to costs.”

15. Moreover, certain lenders have confirmed the transaction. The Assessing Officer, out of total 43 lenders, issued notices under section 133(6) of the Act only to 10 lenders out of which 4 lenders confirmed the transaction, while 6 lenders did not respond. There is no denial in any case. The Assessing Officer, only on the basis of non–receipt of response from 6 lenders, coloured the entire unsecured loan borrowed during the year as unexplained cash credit, conveniently ignoring the fact that majority of loans were repaid during the current year and subsequent year and the assessee has duly paid interest and complied with TDS provisions. The A.O. erred in drawing negative inference based on non–response from few parties. Moreover, the A.O. only enquired from 10 parties out of 43. It was least expected from the 24 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 Assessing Officer to at least verify the return of income of the lenders from their own database. Needless to say that in case of non–response, the Assessing Officer has all the powers to issue summons under section 133 of the Act and enforce attendance of the lenders. However, the said exercise was also not conducted by the Assessing Officer.

25 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 "The donor had retired in 2003 and claims to earn tuition income of Rs. 1.5 Lacs p.a. and this money has been claimed to have been hoarded and kept in cash by him over several years and he claims that out of this accumulation he deposited a sum of Rs. 5,00,000/- in cash in his bank account with SBI Rae Baraeli on 20-7-2009 and it was transferred to Savitri Thakur on 20-7-2009. The donor has not filed any income tax return." 11.1 Similarly in respect of Smt. Sarojini Thakur, result of verification and remarks by the Department is as under: "This donor has ostensibly retired from service in 2007 and she has deposited cash of Rs. 9,00,000/- in her bank with SBI, Rae Baraeli on 18- 7-2009 before issuing two cheques to Savitri Thakur. She has not filed any return of income admittedly from A.Y. 2008-09. She also claims to receive agricultural income of Rs. 1.5 lacs p.a. which is claimed to be kept in cash with her since several years."

14. In Pr. CIT v. Veedhata Towers (P) Ltd. [2018] 403 ITR 415 (Bom), this court has held that assessee is only required to explain the source of the credit. There is no requirement under the law to explain the source of the source. In the instant case, there is no dispute as to the identity of the creditor. There is also no dispute about the genuineness of the transaction. That apart, the creditor has explained as to how the credit

26 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 was given to the assessee. Thus assessee had discharged the onus which was on him as per the requirement of section 68 of the Act. What the Assessing Officer held was that sources of the source were suspect ie, he suspected the two sources Shri Rajendra Bahadur Singh and Smt. Sarojini Thakur of the source Smt. Savitri Thakur.

16. Considering the above, we are of the view that the Tribunal was not justified in sustaining the addition of Rs. 14 lakhs to the total income of the assessee as undisclosed cash credit under section 68 of the Act.

17. Consequently, finding of the Tribunal to the above extent is set aside. The question framed is answered in favour of the assessee and against the Revenue.

18. Appeal is accordingly allowed but with no order as to cost.”

Ravindra Madanlal Khandelwal ITA no.375/Nag./2024

“In this regard the assessee has under In respect of claim of Rs. 7432292/- from the income of the Assessee, EN it is a payment of interest paki and the details of the same have been submitted in Yst reply itself. However, for your reference the same is again enclosed herewith. This payment of interest is in personal capacity of the Assessee and paid over and above the financial accounts submitted. Details of the interest paid for Audited accounts and personal loans are already submitted. In these details the name of the tenders, address, PAN, opening balance. Loan received, Loan paid, Closing balance & interest paid are given. It is further added that the due amount of TDS has been deducted & TDS returns in this regard are filed in time. All these transactions have been made through bank alt only & all the copies of bank a/c are already submitted with the reply. For your ready reference we are again enclosing with copies of bank a/c which shows that the amount received from parties has been either to Khandelwal Jewelers (Firm) or Khandelwal Jewellers (Akola) Pvt. Ltd. From the Khandeshwal Jewellers (Akola) Pvt. Ltd., the Assessee received interest to the ture of Rs. 5152434. The total amount of interest paid in personal capacity is As under:–

Interest paid to parties 7427850 Interest paid to LIC 37517 Interest paid to Buldhana Urban Co–operative Credit 2726565 Society Total Interest Paid 10191932 Interest received from Khandelwal Jewellers (Akola) Pvt. 545243 Ltd. Interest received from Pawankumar Jagdishprasad 32200 Bachhuka Interest received from Prakash Narayandas Lodhiya 18133 Total Interest Received 595576 Balance interest paid in personal Books 9596356

31 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024

Out of the above ` 74,32,292 has been claimed as interest paid for the purpose of business.”

32 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 disallowance of interest on borrowed capital is unjustified-ITO v. Naresh Fabrics [2002] 75 TTJ (Jodh.) 386.

33 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 must not look at the matter from their own view point but that of a prudent businessman. One has to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount is advanced for earning profits.

34 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 construction of the language of section 57(iii) of the Act, leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) of the Act requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The provisions of section does not require that this purpose must be fulfilled in order to qualify, the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned [CIT v/s Rajendra Prasad Moody [1978], 115 ITR 519 (SC). In the present case, the assessee has made an investment in a related company and the resultant income in the form of a dividend income, interest income or directors’ remuneration fall within the head of “income from other sources”. Therefore, for claiming deduction under section 57(iii) of the Act, it would be sufficient to prove that there is nexus between the income which will be earned and amount expended. In the given case, it is undisputed fact that the funds have been advanced to related concern. At this juncture it is also apropos to refer to the landmark judgment of the Hon'ble Supreme Court in S.A. Builders Ltd., 288 ITR 1 (SC) wherein it has been held that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. In case, it is found that transfer of borrowed funds to a sister concern was on account of commercial expediency even if the same is interest free, the deduction claimed by the assessee cannot be disallowed. Thus, ground no. 2, raised by the assessee is allowed. It is reiterated that the Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 allowance of any expenditure is within the judicial periphery laid in the Act and mere non–recording in the books of account can hardly negate the claim.

No. of Figures at the end of Current Particulars Schedule Financial year SOURCE OF FUNDS:– Promoter‟s Fund A Promotor‟s Capital A/c A 19405970.01 B Reserve & Surplus B 00 19405970.01 Loan Funds A Secured Loans C 9529106.16 B Unsecured Loans D 24746174.00 34275280.15 Current Liabilities & Provisions A Current Liabilities E 72065313.96 B Provisions F 61600.00 72126913.96 125808164.12 APPLICATION OF FUNDS:– Opening WDV & Fixed Assets G 6692145.65 Additions Less: Depreciation 237031.00 6455114.65 Investments H 151015.00 Current Assets, Loans & Advances A Inventories I 6061250.00 B Sundry Debtors J 69813542.00 C Cash and Bank Balances K 605920.06 D Other Current Assets L 13197195.26 E Loans and Advances M 29524126.15 119202034.47 125808164.12

36 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024

“8.7 Considering the above mentioned facts it is clear that the entire loan shown in the books of accounts is not used for the business purpose. Moreover most of the unsecured loan is treated as unexplained/bogus. Considering the above mentioned facts the entire claim of interest expenses of Rs.9766308/- is hereby disallowed and added to the total income of the assessee. Moreover, the unsecured loan claimed to be obtained during the year has also been rejected and added u/s 68 of the I.T. Act. As such the claim of interest is also not allowable on this ground also. Penalty proceedings for under reporting u/s 270A of the I.T. Act has also been initiated separately.”

37 Ravindra Madanlal Khandelwal ITA no.375/Nag./2024 0.97 crore, the interest paid by the assessee on cash credit of ` 0.53 crore is availed from Bank, which is undisputedly loan taken for business, which fact is examined and is not in dispute. Even for the balance interest, not even single instance of diversion of funds have been brought by the Assessing Officer. In the absence of any instance of diversion of funds, the interest claimed under section 36(1)(iii), which are part of audited books of account, cannot be disallowed. Thus the Assessing Officer is directed to delete the disallowance. Thus, ground no. 3, raised by the assessee is allowed.