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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI VIJAY PAL RAO & SHRI B.M. BIYANI
PER BENCH:
These two set of cross appeals are directed against two separate orders of Commissioner of Income Tax (Appeals) dated 17.01.2022 for A.Ys.2014-15 & 2015-16 respectively.
& 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 2 of 12 First we take up the appeals of the assesse wherein the assessee has raised common grounds in both the appeals except the quantum of disallowance. The grounds raised for A.Y.2014-15 are reproduced as under:
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in disallowing interest expenses of Rs.95,70,527/- u/s 36(1)(iii).
The solitary common ground raised by the assessee in these appeals is regarding disallowance of interest expenses made by the AO u/s 36(1)(iii) on account of interest free advances. During the scrutiny assessment proceedings the AO noted that the assessee has debited financial expenses of Rs.1,06,17,917/- in the P & L account. The assessee has advanced loans of Rs.14,53,28,390/- out of which the assesse charged interest on loans of Rs.2,55,70,996/- only. Thus, the remaining advance of Rs.11,97,57,394/- are interest free loans and advances given by the assessee. The AO also noted the fact that opening balance of such loans and advances is Rs.11,39,32,574/-. Accordingly the AO has made proportionate disallowance of interest expenses to the tune of Rs.95,70,527/-. Similar disallowance was made by the AO for A.Y.2015- 16 of Rs.76,07,135/-. The assessee challenged the action of the AO before the Ld. CIT(A) but could not succeed.
Before the Tribunal the Ld. AR of the assessee has submitted that the assesse was having interest free funds more than sufficient to advance these loans for these years and therefore, no disallowance is called for on account of interest payment as there was no diversion of interest bearing fund for giving the interest free loans and advances. Ld. AR of the assessee has referred to the ledger account of “other loans and advances” as well as balance sheet and note no. 6 of notes of accounts and submitted that the assessee has received more than Rs.31,63,96,167/- as advances from customers. He has further submitted that even the loans and advances for the year under consideration as on 31.03.2014 is Rs. 15,78,91,468/- in comparison to balance on 31.03.2013 at Page 2 of 12 & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 3 of 12 Rs.13,64,89,924/-. Therefore, only a sum of Rs.2,14,00,000/- is fresh loans and advances during the year under consideration. Ld. AR submitted that the AO himself accepted that out of this amount a sum of Rs.2,55,70,996/- was given on interest and therefore, no interest free fresh loans or advances was given by the assessee during the year under consideration. He has pointed out that in any case the assessee was having balance of more than Rs.31 crores on account of advances from customers. The said interest free funds was more than sufficient for giving loans and advance under consideration and therefore, no interest bearing fund was utilized for loans and advances if any during the year.
3.1 In support of his contention he has relied upon the decision of the Hon’ble Rajasthan High Court in case of CIT vs. Ram Kishan Verma 64 taxmann.com 358 and submitted that the Hon’ble High Court has held that it is incumbent upon the AO to establish the direct nexus between the interest bearing loans having been diverted towards interest free loans/advances. He has also relied upon judgment of Hon’ble Bombay High Court in case of CIT vs. Reliance Utilities & Power Ltd. 313 ITR 340 and submitted that the Hon’ble High court has held that if the assesse’s own funds as well as interest bearing funds are pooled together then a presumption would arise that investments would be out of interest free funds available with the assessee. Hence, the Ld. AR has submitted that when the assessee was having more than sufficient interest free funds then the and disallowance made by the AO and confirmed by the CIT(A) is not justified.
On the other hand, ld. DR has relied upon the orders of the authorities below.
We have considered rival submissions as well as relevant material on record. The AO has disallowed the interest expenses u/s 36(1)(iii) on account of interest free loans and advances in para six of the assessment order as under: & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 4 of 12 “6. It is seen that the assessee has debited financial expenses of Rs 1,06,17,917/- in P&L account. During the course of assessment proceedings vide order sheet entry dated 17/11/2016, the A.R. of the assessee was specifically asked to justify the claim of financial expenses w.r.l. interest free advances and utilization of interest borrowing funds. In response to this query the assessee has claimed that the interest borrowing funds are utilized for business purpose and not for advancing interest free funds and therefore the claim of these expenses may be accepted The submission of the assessee is examined, however the same is not acceptable for following reasons: (i) From the schedule of other loans and advances, it is seen that the assessee has advanced loans of Rs 14,53,28,390/- out of which interest on loan is received in respect of loan given to M.T. Realtor Pvt. Ltd. of Rs 2,55,70,996/- only. Thus the remaining advances of Rs 11,97,57,394/- are interest free loans and advances given by the assessee. The opening balance of such loans and advances is Rs 11,39,32,574/-. Thus, these loans and advances are outstanding for almost entire year on which no interest has been received by the assessce. (ii) On the other hand the assessee has paid interest on term loans to the extent of Rs 95,70,527/- out of total financial cost debited in P&L account at Rs 1,06,17,916/-. It is seen that the closing balance of term loan and loan from Sicom Reality Ltd. is Rs 3,77,69,386/-, which includes fresh loan of Rs 2,52,14,408/- from Sicom Reality Ltd. during the year. Apart from this, the other term loans which were repaid during the year are to the extent of Rs 1,58,73,630/- and interest was also paid on these term loans during the year. Thus, the assessee has paid interest on these term loans and advances interest free loans to other persons From the above facts it is clear that the assessee has given interest free loans to other persons out of interest bearing funds and therefore the interest expenses of Rs 95,70,527/- debited in P&L account are disallowed and added to the total income of the assessee.”
5.1 Ld. AO has given details as extracted from the leger account of loans and advances that the assessee has shown loans and advances of Rs.14,53,28,390/- out of which the AO accepted that loan given to M.T. Realtor Pvt. ltd. of Rs.2,55,70,996/- is against interest and therefore, the remaining advances of Rs.11,97,57,394/- is considered as interest free loans and advances given by the assessee. The AO has also recorded the fact that opening balance of said loans and advances is Rs.11,39,32,574/- & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 5 of 12 . If all these figures as extracted by the AO from the ledger account are taken into consideration then only a sum of Rs.58 lakhs would be fresh loan given by the assessee during the year under consideration. The assessee has shown advances from customers as on 31.03.2014 at Rs.31,63,96,167/- as against balance of Rs.27,70,54,562/- as on 31.03.2013 and therefore, there is an increase of about Rs.4,00,00,000/- during the year under consideration in advances from customers. These figures are part of the balance sheet as well as note -6 of notes farming part of the financial statement at page no.33 of the paper book. These facts are duly emanated from the record and hence, when there is an increase in the advance from costumers to the tune of Rs.4 crore during the year under consideration then the loans and advances disallowance given during the year of about Rs.58 lakhs would be considered as from the interest free funds available with the assesse. The Hon’ble Bombay High Court in case of CIT vs. Reliance Utilities & Power Ltd. (supra) has observed in para 10 as under:
“10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a Page 5 of 12 & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 6 of 12 presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT.” 5.2 Thus, if interest free funds available with the assesse are sufficient to meet its investments and at the same time the assesse has raised a loan it can be presumed that the investment were made from the interest free funds available. We further note that loan taken from M/s. Sicom Reality Ltd. of Rs.80 lac as considered by the CIT(A) has been utilized by the assessee as advances for purchase of land and this fact is reflected from the bank account placed at page no.71 to 93 of the paper book. The relevant entries are reflected at page no.77 as well as back side of the said page wherein a sum of Rs.80 lakhs was shown as received from Sicom Reality Ltd. and the said amount was paid on the same date for purchase of land. Therefore, no adverse interference can be drawn on account of the fresh loans taken by the assessee from the said company as the same was utilized for the purpose of business and not diverted for interest free advances as observed by the CIT(A) at page no.28 of the impugned order. Thus the said observation of the CIT(A) in para 3.2.2 relied upon by Ld. DR is contrary to the facts as evident from the record. Further neither the AO nor the CIT(A) has established the nexus between the interest bearing loan having been diverted for interest free loans/advances.
5.3 The Hon’ble Rajasthan High Court in case of CIT vs. Ram Kishan Verma (supra) has observed in para 12 to 14 as under:
“12. As far as the disallowance of interest is concerned, admittedly the assessee had an opening capital of Rs. 5,70,74,967/- of his own and the advances, if at all, being interest free, is to the extent of Rs. 98,93,950/- which is far below the capital of the assessee and, therefore, the Tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest. It is also noticed by the lower authorities that assessee earned bank interest to the extent of Rs. 24,48,843/- out of which he paid total amount of Rs. 10,99,099/-to the bank against loan and over draft, and it is out of the amount which has Page 6 of 12 & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 7 of 12 been paid by the assessee at Rs. 10,99,099/- that the AO has disallowed the interest.
Taking into consideration the fact as noticed hereinabove, in our view as well, when there was no agreement to charge interest from the persons, to whom the assessee advanced short term loan/advance, the AO could not disallow part of the interest. It is also an admitted fact, as observed by the Tribunal, that the AO vas not able to pin pointedly come to a definite conclusion that how interest bearing loans had been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-a-vis interest free loans/advances, therefore, in our view as well, once the AO was not able to come to a definite conclusion as to nexus having been established about interest bearing loans having been diverted towards interest free loans/advances, and such being a finding of fact based on appreciation of evidence, in our view no substantial question of law arise on this question as well. It can be observed that this court in similar circumstances and on identical facts, when the capital of the partners/proprietor being more than the interest free short term advances, has in the case of CIT v. Vijay Solvex Ltd. [2015] 59 taxmann.com 294 (Raj.) while relying on the judgment rendered in (a) S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC); (b), Munjal Sales Corpn. v. CIT [2008] 298 ITR 298/168 Taxman 43 (SC); (c), CIT V. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All); (d), CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377/121 Taxman 706 (Delhi); (e), CIT V. Britannia Industries Ltd. [2006] 280 ITR 525/ [2005] 148 Taxman 654 (Cal.) and (f) CIT v. Motor Sales Ltd. [2008] 304 ITR 123 (All.), held as under:- "16. In view of the authoritative pronouncement of the Apex Court and other judgments referred supra, in our view, the assessee admittedly had its own funds, as referred to earlier, and admittedly such funds/reserves being substantially higher than, even otherwise, the advances to the debtors, no notional interest or hypothetical interest could have been disallowed on such facts. The revenue has failed to prove nexus. In our view, the ITAT has correctly appreciated the facts and law.
Therefore, the finding reached by the Tribunal is essentially a finding of fact based on appreciation of evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT." 5.4 Accordingly in the facts and circumstances of the case as discussed above as well as following judgment of Hon’ble Bombay High Court in case of Reliance Utilities & Power Ltd.(supra) as well as judgment of the Hon’ble Rajasthan High Court in case of CIT vs. Ram Kishan Verma (supra) we Page 7 of 12 & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 8 of 12 hold that the disallowance made by the AO on account of interest expenditure u/s 36(1)(iii) is not sustainable and the same is deleted.
For A.Y.2015-16 in ITANo.49/Ind/2022
Identical facts are merging from the financial statements and particularly balance sheet and notes forming part of the financial statements. The details of the interest free available funds are placed at page no.27 of the paper book in note no.3 & note no.6 as under:
6.1 Thus, it is clear that the assessee was having advances from customers to the tune of Rs.30,47,72,853/- however at the same time the balance of loans and advances as on 31.03.2015 is reduced to Rs.13,24,66,066/- as against opening balance of Rs.14,53,28,390/- as recorded by the AO in para 5 of the assessment order. Therefore, when the Page 8 of 12 & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 9 of 12 closing balance of the loans and advances is less than the opening balance then there is no fresh loans and advances given by the assessee during the year under consideration. Accordingly in view of our finding for A.Y.2014-15 no disallowance of interest on account of interest free loans and advances is called far for the year under consideration.
Now we take up Department’s Appeals in ITANos.68 & 69/Ind/2022
The department has also raised common grounds in these appeals and the grounds raised for A.Y.2014-15 are reproduced as under:
Whether or not on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs.4,36,45,968/- made by the AO on account of on money/undisclosed receipts for A.Y.2014-15.
The solitary common issue raised by the department in these appeals is regarding the addition made by the AO on account of unaccounted/undisclosed receipt which was deleted by the CIT(A). The Ld. DR has relied upon the order of the AO and submitted that during the search and seizure action it was found that the assessee has received on money against the sale of units from project namely Amrit Homes. The AO while framing the assessment u/s 153A for A.Ys.2009-10 to 2013-14 has made similar addition on this account based on the undisclosed receipt detected during the search and seizure action and therefore, the same percentage of undisclosed sales/receipts has been applied by the AO for these assessment years. Accordingly the AO has made addition of 40% of all the advances and sales recorded by the assessee as unaccounted sales. Thus, ld. DR has submitted that the addition is made by the AO on the basis of the facts detected during the search regarding undisclosed receipt.
On the other hand, ld. AR of the assessee has submitted that addition was made by the AO purely on the basis of presumption and conjecture and in absence of any material or record available with the AO. He has further contended that even the additions made by the AO for & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 10 of 12 block assessment was deleted by the CIT(A) as well as by this tribunal. Therefore, the very basis of the addition made by the AO is the block assessment which has already been deleted by the CIT(A) as well as this tribunal and therefore, the said addition made by the AO on account of suppressed receipt/unaccounted receipts is not sustainable and liable to be deleted. The CIT(A) has rightly deleted the addition by considering earlier orders of the CIT(A). He has strongly relied upon the impugned order of the CIT(A).
We have considered rival submissions as well as relevant material on record. The AO has made addition on account of suppressed/unaccounted receipt on the ground that a similar addition was made in the hands of the assessee in the block assessment u/s 153A r.w. section 143(3) for A.Y.2009-10 to 2012-13. There is no dispute that addition made by the AO on account of suppressed sales/unaccounted receipt is not based on any material or fact revealing such unaccounted for these years but the AO made addition on the basis of the similar addition made in block assessments. The CIT(A) has deleted the additions made by the AO in para 3.3.2 & 3.3.3 as under:
“3.3.2 I have considered the facts of the case, plea raised by the appellant and findings of the AO. On perusal of assessment order, it has been observed that the AO has based his findings of the basis of search assessment proceedings where addition on account of suppression of receipts was made in the hands of appellant in AYs 2008-09 to 2013-14 and with same analogy the Id AO made addition in the hands of appellant in the year under consideration. Per contra, the appellant has stated that the additions made in AYs 2008-09 to 2013-14 have been deleted, except the receipts of on-money from 'Amit Group' amounting to Rs. 36,08,130/- in AY 2011-12 and Rs. 10,00,000/- in AY 2012-13 by ld CIT(A)-3 vide order in appeal No CIT(A)-3/BPL/IT-1119 to 1123/2014-15 dated 18.10.2016. In support appellant has also filed copy of the said appellate order. On perusal of findings of ld CIT(A) it has been transpired that the entire addition on account of suppression of receipts has been made on sheer assumption and presumption basis by the AO. In the year under consideration also, the Id AO has totally failed to bring on record any cogent evidence or finding suggesting suppression of receipts by the appellant. Mere relying on the findings made in earlier assessment year does not proves that any such suppression was Page 10 of 12 & 49/Ind/2022 and ITANo.68 & 69/Ind/2022 M. Ahuja Project P. Ltd. Page 11 of 12 actually made in the year under consideration. It is also well settled that principle of 'res judicata' is not applicable to income tax 3 proceedings. Thus, the AO was not justified in presuming certain facts without having anything to corroborate. Hon'ble Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. v/s CIT (1954) 26 ITR 775 (SC) has held that although strict rules of evidence Act do not apply to income tax proceedings, still assessment cannot be made on the basis of imagination and guess work. It has been held in the case of Umacharan Saha & Bros co. v/s CIT 37 ITR 21 (SC) that suspicion, however strong cannot take place of evidence. Similar views have been expressed by Apex court in the case of Dhiraj Lal Girdharilal v/s CIT (1954) 26 ITR 736 (SC). 3.3.3 In view of the above discussion, the ld AO erred in totality in making addition on presumption and surmises and therefore, entire addition made by the AO on this account amounting to Rs. 4,36,45,968/- is deleted. Therefore, appeal on this ground is allowed.” 10.1 Thus, the CIT(A) has deleted these additions by considering earlier orders of the CIT(A) in respect of the assessment years 2008-09 to 2013- 14 as well as judgment of Hon’ble Supreme Court in case of Dhakeshwari Cotton Mills ltd. vs. CIT 26 ITR 775. The Department has not disputed the fact that the earlier order of the CIT(A) has also been confirmed and attained finality. Therefore, in the facts and circumstances of the case we do not find any error or illegality in the impugned order of the CIT(A) qua this issue, the same is upheld.
In the result, the appeals of the assessee are allowed and appeals of revenue are dismissed.
Order pronounced in the open court on 20.12.2023