M/S. AMIT KUMAR (HUF),,MEERUT vs. ITO, MEERUT

This appeal is preferred by the assessee against the order of CIT(A), Meerut dated 18.07.2014 against confirmation of disallowance of interest of Rs.9,16,394/- by the CIT(A) u/s. 36(1)(iii) of the Income-tax Act.

The brief facts of the case are that the appellant is carrying on the business of real estate comprising of purchase and sale of land, plots and buildings etc. During the year, the assessee has incurred an expenditure of 2014 Amitkumar HUF V ITO A Y 2009-10 Rs.6,35,632/- as interest on unsecured loan and further interest of Rs.2,80,762/- was also paid on account of debit balance of the capital account of the assessee in one of the partnership firm. During the course of assessment proceedings, it was fund that the assessee has given a loan of Rs. 2,07,18,807/- to some parties on which interest has not been charged. As no interest has been charged on this sum, the AO disallowed the whole of the interest paid of Rs.9,16,394/- u/s. 36(1) (iii) holding that the interest bearing funds have been diverted towards non-interest bearing advance. The assessee carried the matter before the CIT (A) who, in turn, rejected the contention of the assessee that it has more non-interest bearing funds available with it than interest free advances to the parties. The CIT (A) confirmed the disallowance.

Before us in appeal, the ld. AR of the appellant submitted that the assessee has interest free funds available to the tune of Rs.3,21,21,177/- and the Assessing Officer has not established any nexus between the funds borrowed with the interest free advances.. He submitted cash flow chart with respect to each of the parties to whom the interest free loans were advanced to show that no interest bearing funds have been diverted. He also submitted the balance sheet as on 31.03.2009 to demonstrate that he has interest free funds available with him which exceeds the amount lent without charging interest. Therefore, he submitted that no disallowance u/s. 36(1) (iii) is called for.

The ld.DR, on the other hand, vehemently supported the reasons advanced by Assessing Officer as well as CIT (A) and submitted that the interest free funds of the assessee are always blocked in the business of the assessee and therefore, same are not available to the assessee for the purpose of advancing loan to the relatives without charging any interest. He further submitted that by claiming interest expenditure and diverting such funds to the relatives, the assessee is not eligible for the purpose of deduction of interest u/s. 36(1)(iii) of the Act, as such sums are not utilized for the purpose of business.

We have carefully considered the rival submissions. It is an accepted fact that the assessee has given loan of Rs.2,07,18,807/- to its relatives and not charged any interest thereon and further, the assessee has claimed deduction u/s. 36(1)(iii) of Rs.9,16,394/-, out of which the interest of Rs.2,80,762/- has been paid to the partnership firm in which the assessee is a partner. On reading of the assessment order, it is apparent that the AO has not established any nexus between the interest bearing funds and non-interest bearing advances. Hon’ble Bombay High Court in 313 ITR 340 has held 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 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.”

Examining the case of the assessee from this angle, it is apparent that the assessee has total interest free funds available of Rs.3,21,21,117/- as submitted before the CIT (A) in the form of interest free unsecured loans from 23 persons, security deposits, and appellant’s own capital and credit balances of partnership firm in the books of the assessee. Therefore, in our opinion, the assessee has more interest free funds available than advance given to the relatives without charging interest. Therefore, respectfully following the decision of Hon’ble Bombay HighCourt in the case of CIT vs. Reliance Utilities and Power Ltd, 313 ITR 340, we reverse the finding of the CIT(A) and delete the disallowance u/s. 36(1)(iii) of the Act of Rs.9,16,394/-.