M/S. K. CHIMANLAL & CO., (R.F.),,AHMEDABAD vs. THE JT.CIT, RANGE-2,, AHMEDABAD

In this case, return of income declaring income of Rs. 25,29,530/- was filed on 29th Sep, 2011. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) on 31st August, 2012. During the course of assessment proceedings, the assessing officer noticed that assessee has shown loan and advances at Rs. 6,99,131 in the balance sheet inter alia he also observed that assessee has advanced interest free loan to the following persons:- Ramanlal C. Shah Rs. 72,037/- Premlataben Shah Rs. 34,900/- Jaswantbhai P. Patel Rs. 2,00,000/- Bhavesh G. Shah HUF Rs. 28,89,386/- Amit G. Shah HUF Rs. 28,89,381/- Total Rs. 60,85,704/- The assessee has failed to substantiate with supporting evidences that these advances were given for business purpose. Consequently,

Aggrieved against the decision of the assessing officer, the assessee preferred appeal before he ld. CIT(A). The ld. CIT(A) has allowed part relief to the assessee by observing as under:- “5.1. The effective ground of appeal is regarding addition of Rs.7,30,285/-on account of disallowance interest on loans. During the assessment proceedings, the AO observed that the appellant had advanced interest free loans of Rs.60,85,704/-. The appellant did not charge any interest on these loans. The AO observed that these advances were not made for the purpose of business. Since the appellant could not give a satisfactory reply as to why interest was not charged on these advances, the AO added Rs.7,30,285/- on account of interest on these advances charged at the rate of 12%. During the appellate proceedings, the appellant submitted that notional interest on interest free advances considered as income is injudicious and unlawful. The appellant further submitted that advances are not made in the year and are brought forwarded from earlier years. Further, the Indian Income tax Act is based on the concept of "Real Income" and that there is no provision in the Act for taxing notional income. Further, there is no fall in Gross Profit during the year. In support of its contention, the appellant relied on the following judgments: - - Godhra Electric Co. Ltd. vs. CIT 225 ITR 746 (SC). - Highway construction Co. Pvt. Ltd. vs. CIT 199 ITR 702 (Guj.). - CIT vs. Motor Credit Co. Pvt. Ltd. 127 ITR 572. -H. M. Kashi Parekh & Co. vs. CIT 39 ITR 706. - Pune Electric Supply Co. Ltd. vs. CIT 57 ITR 521, 529. - CIT vs. Shoorji Vallabhdas & Co. 46 ITR 144. Decision. The rival submissions have been considered. It is a fact that the appellant -33 advanced interest free loans of Rs.60,85,704/-. The appellant was not able to give convincing reply as to why it did not charge interest on these loans. Further, the appellant submitted during appeal proceedings that unsecured loans of Rs.54,16,046/-are outstanding on which it has paid interest of Rs.4,73,604/-, and claimed the same as deduction. Facts narrated above show that while the appellant has borrowed interest bearing funds of Rs.54,16,046/- on which it has paid interest of Rs.4,73,604/-, it has advanced its own funds of Rs.60,85,704/- without charging any interest. The appellant has not been able to give any justification for this or establish business expediency for doing this. The appellant is free to advance its funds and charge no interest on the same but then it cannot claim deduction in respect of interest paid on the funds that it has borrowed which leads to reduction in profits. With due regard to ratio of judgments in cases relied upon by the appellant, the same are not applicable to the present case. In view of this discussion above, I uphold the addition made by the AO to the extent of Rs.4,73,604/-.Out of addition of Rs.7,30,285/-,addition of Rs.4,73,604/- is upheld while addition of Rs.2,56,681/- is deleted. The appellant gets partial relief. This ground of appeal is partly allowed.” 5. During the course of appellate proceedings before us, the ld. counsel has submitted paper book containing tax audit report, ledger account and submission made before the assessing officer etc. He

We have heard both the sides and perused the material on record. We observed that the assessee has borrowed interest bearing fund of Rs. 54,16,046/- on which it has paid interest of Rs. 4,73,604/-. On the other hand, the assesee has advanced its own fund of Rs. 60,85,740/- without charging any interest. We have noticed that assessee failed to substantiate with supporting evidences why it has not charged interest on these loans. We also find that ld. CIT(A) has also allowed part relief to the assesse of the interest amount of Rs. 4,73,604/- which it has paid on the unsecured loan of Rs. 54,16,046/-. In view of the facts and circumstances and after considering the detailed findings of the ld. CIT(A), we do not find any reason to interfere in the findings of the ld. CIT(A), therefore, the appeal of the assessee is dismissed.

In the result, the appeal of the assessee is dismissed.