M/S G.S. SETHI & CO.,SHIMLA vs. ITO, SHIMLA

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘A’, CHANDIGARH

BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA No.813/Chd/2017 (Assessment Year : 2013-14) M/s G.S. Sethi & Co., Vs. The Income Tax Officer, Shashi Villa, Navarattan Guest Ward 1, House, Chotta Shimla, Shimla. Shimla. PAN: AAGFG2468L (Appellant) (Respondent)

Appellant by : S/Shri Sudhir Sehgal, Adv. & Ashok Goyal, CA Respondent by : Smt.Chanderkanta, Addl.CIT & Shri Yoginder Mittal, Sr.DR Date of hearing : 13.07.2018 Date of Pronouncement : 13.07.2018

ORDER PER ANNAPURNA GUPTA, A.M. : This appeal has been preferred by the assessee against

the order of Ld. Commissioner of Income Tax (Appeals),

Shimla dated 08.03.2017 relating to assessment year 2013-

14.

“1. That in the facts and circumstances of the case, the Id.CIT(A) has erred in confirming the assessment as made in the status of AOP by the Assessing Officer, against the assessee's claim that it was a partnership firm. 2. That the Id.CIT(A) has misdirected himself in law and on facts to uphold the addition of Rs.39,69,660/-, as made by the Id.AO by disallowance of interest paid to bank under section 36(l)(iii), on wholly erroneous and insufficient grounds.” 3. At the outset it may be stated that ground No.1 was

not pressed by the assessee. The same is, therefore, treated

as dismissed.

interest made u/s 36(1)(iii) of the Income Tax Act, 1961 (in

short ‘the Act’) raised in ground No.2 above.

was a partnership concern comprising of three partners,

Shri Gurdeep Singh Sethi, Shri Manpreet Singh Sethi and

Shri Priyadarshan and was engaged in the business of

liquor, having been allotted L-14 and L2 licences in the

State of Himachal Pradesh. The assessee had filed its return

of income declaring income at Rs.7,44,330/-. During

assessment proceedings the Assessing Officer noticed that

there was debit balance of Rs.5,68,42,578/- in the capital

account of one of the partner Shri G.S. Sethi. Perusal of

profit & loss account revealed that during the year assessee

firm paid Interest of Rs.39,69,660/- as interest on bank

overdraft and claimed expenditure of the same in the P & L

account. The AO noted that the assessee had paid interest

to the bank on account of interest on overdraft but had not

charged any interest on the debit balance of Shri G.S.

Sethi. The Assessing Officer therefore, relying on the

judgment of Hon'ble Punjab and Haryana High Court in the

case of M/s Abhishek Industries Vs. C1T (286 ITR-1),

disallowed interest amounting to Rs.39,69,660/- as

pertaining to interest bearing funds used for making

interest free advance to partner and the same was added to

the total income of the assessee.

it had sufficient own funds for making the impugned

advance to the partner and, therefore, the interest bearing

funds cannot be said to have been diverted for the purpose

of making such advance. It was contended that the other

partners had sufficient credit balance in their accounts

which was more than the debit balance in the account of

the relevant partner and, therefore, the disallowance on

account u/s 36(1)(iii) of the Act was unwarranted.

submissions noted that huge funds to the tune of

Rs.5,68,42,578/- had been advanced to the partner Shri

G.S.Sethi without any interest and that simultaneously, the

assessee was claiming deduction on interest paid to banks

for availing over draft facility to the tune of Rs.39,69,660/-.

The CIT(Appeals) further noted that the assessee was

availing loan/overdraft facility/credit facility from Hindu

Cooperative Bank and the amount outstanding from the

said bank as at the end of the year was Rs.3,03,37,185/-.

The CIT(Appeals) further noticed that the entire advance

had been made to the partner from the said bank only on

which interest was being paid by the assessee by issuing

cheques. Considering the above facts, the Ld.CIT(Appeals)

held that clearly the interest bearing funds had been used

for making interest free advance to the partner which was

not shown to be for business purpose and, therefore, for the

said reason upheld the disallowance made of interest u/s

36(1)(iii) of the Act amounting to Rs.39,69,660/-. The

relevant findings of the Ld.CIT(Appeals) at paras 5.4.2 and

5.4.3 are as under:

“5.4.2 The facts of the case, the order of the A.O. and the submissions of the appellant have been considered. It is not in dispute that huge funds to the tune of Rs,5,68,42,578/- has been advanced to Sh. G.S. Sethi, partner and no interest has been charged by the concern for the same. The appellant is simultaneously claiming the deduction of Rs.39,69,660/- in the profit and loss account on the interest paid to banks for availing overdraft facilities. The appellant claimed deduction while computing the profits of business income under section 36(i)(iii) which allows deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. Thus, the only issue to be seen is whether the interest expenditure claimed by the appellant is for the purpose of business or not. Considering the facts of the case, and also considering that substantial funds are being advanced to one of the partners without charging any interest, it will be important to peruse the facts of the case. A perusal of the balance sheet shows that the appellant is availing loan/overdraft facility/credit facility from the Hindu co- operative Bank. The amount received as loan/credit outstanding as on 31.03.2013 is shown at Rs.3,03,37,185/-. To decide the issue at hand the source of the money advanced to the partner in question and the nexus thereof needs to be looked into. In case, the amounts has been advanced to the partner by issuing cheques and debiting the Hindu co- operative bank the bank from which credit and overdraft facility is being taken , it will be clear that the funds advanced to the partner has been advanced out of interest-bearing funds taken for the concern. A perusal of the statement of account of Sh. Gurdeep Singh Sethi , placed on record by the appellant, in this case shows that following amounts have been advanced by issuing cheques from the Hindu co-operative bank on which the interest is being paid by the assessee concern.

Sr. No. Date Amount (Debit) Narration 1. 09.04.2012 700000 Cheque No. 11 11645, The Hindu Co.Op. Bank 2. 26.04.2012 2500000 Cheque No. 1111650, The Hindu Co.Op. Bank 3. 01.05.2012 3000000 -Cheque No. 1111655, The Hindu Co.Op. Bank 4. 21.05.2012 2000000 Cheque No. 1111664, The Hindu Co.Op. Bank 5 01.06.2012 2150000 Cheque No. 1111673, The Hindu Co.Op. Bank Q. 04.06.2012 1000000 Cheque No. 1111674, The Hindu Co.Op. Bank 7 05.06.2012 2000000 Cheque No. 111 1676, The Hindu Co.Op. Bank 8 05.06.2012 2000000 Cheque No. 1111677, The Hindu Co.Op. Bank

5.4.3 Perusal of the above clearly shows that the contention of the appellant That the interest-bearing funds are used for the purpose of business is not supported by the facts on record. It is clearly seen that the interest-bearing funds have been advanced to the partner in question without charging any interest. The amounts tabulated above are not advanced to the partner for any business exigency. It is not out of place to mention here that a perusal of the balance sheet as on 31.03.2013 shows that the imprest .debit to Sh. G.S. Sethi is separately shown at Rs.1,88,00,000/- and the current account of Sh. G.S. Sethi, partner is showing a debit balance of Rs.1842989/-. Hence, even if the imprest "debit is considered to be advanced for the purpose of business, the debit of Rs.5,68,42,578/- referred supra cannot be held to be advanced for the purpose of business. Diversion of interest bearing funds is established in this case and thus the disallowance of interest u/s 36(i)(iii) is fully justified. Thus, the action of the assessing officer cannot be faulted with. The disallowance of the interest made by the A.O. in this case is upheld and ground No. 8,9 & 10 are deleted.” 8. Aggrieved by the same, the assessee has come up in

appeal before us. During the course of hearing before us,

Ld. counsel for assessee reiterated the contentions made

before the lower authorities stating that there was

sufficient interest free funds available with the partnership

concern for making impugned interest free advance to the

partner of the firm. The Ld. counsel for assessee in this

regard pointed out that the assessee firm had available

interest free funds of Rs.6.3 crores as under:

1) Total Credit side of the Balance Sheet Rs.9,39,52,526/-

2) Less: loans taken Rs.3,08,37,105/-

3) Interest free amounts

Available Rs.6,31,15,421/-

balance to the partner was to the tune of Rs.5,68,42,578/-.

Thus, the available interest free funds with the assessee

firm, it was pointed out was sufficient to make the

impugned interest free advance. It was also pointed out

that sufficiency of funds is evidenced from the credit

balance of capital of other two partners to the tune of

Rs.4,97,12,378/-. The Ld. counsel for assessee stated that

the findings of the Ld.CIT(Appeals) that the advance had

been made from overdraft account of Hindu Cooperative

bank ,and therefore the nexus between the interest bearing

funds and said advances so made was established, is

incorrect. The Ld. counsel for assessee contended that the

funds in the Hindu Cooperative bank were mixed funds

wherein the trading receipts of the assessee were also

deposited. Copy of the loan account of the assessee with the

said bank for the impugned period was filed showing

deposit of sale proceeds in the said account. The Ld.

counsel for assessee stated that in fact all bank accounts

maintained by the assessee contained mixed funds wherein

the sale proceeds were also deposited by the assessee. The

Ld. counsel for assessee also pointed out that the turnover

of the assessee during the year was Rs.18.55 crores which

was all deposited in these bank accounts and the advances,

therefore, made to the partner could not be attributed only

to the loan taken by the assessee but could be attributed to

the trading receipts of the assessee. The Ld. counsel for

assessee, therefore, stated that in view of the above, no

disallowance of interest u/s 36(1)(iii) of the Act was

warranted.

the CIT(Appeals).

the parties. The issue before us relates to disallowance of

interest u/s 36(1)(iii) of the Act on account of attributing

the interest bearing funds of the assessee to have been used

for advancing to partner without interest by way of surplus

withdrawals from capital account to the extent of

Rs.5,68,42,578/-.

assessee that sufficient surplus interest free funds were

Available with it to make the impugned advance to the

partners, we find that the assessee has been unable to

corroborate the same with the facts on record. The Ld.

counsel for assessee has merely submitted a calculation of

availability of interest free funds to the tune of Rs.6.3

crores by reducing the loans taken by the assessee from the

credit balance of the Balance Sheet of the assessee. In our

view, the balance figure does not necessarily reflect only

the interest free funds available with the assessee. The

balance could comprise of creditors balances and other

liabilities outstanding as also any provision created by the

assessee, which, by no stretch of logic can be termed as

interest free funds available with the assessee for the

purpose of making advances. Therefore, since the assessee

has failed to demonstrate the actual amount of interest free

funds available with it, we cannot agree with the

submissions of the Ld. counsel for assessee that it had

sufficient interest free funds to make the impugned advance

to the partners thus warranting no disallowance of interest

u/s 36(1)(iii) of the Act. As for the alternate contention of

the Ld.Counsel for the assessee, that it had used its trading

receipts deposited in its bank account for making the

impugned advance to the partners, we find merit in this

contention of the Ld. counsel for assessee. It is an admitted

fact that the amount advanced to the partners was entirely

by issuing cheques from Hindu Cooperative Bank from

which overdraft/credit facility was available by the

assessee. The Ld. counsel for assessee has contended that

it was depositing its business receipts in the said account.

If there is direct nexus between the trading receipts

deposited in the said account and advance given to the

partners, it can be safely presumed that the trading

receipts had been used for making the said advances and in

such circumstances, it can be safely held that the interest

free funds had been used for making advances to the

partners warranting no disallowance of interest u/s

36(1)(iii) of the Act. But we find that the facts in this regard

need to be examined. We, therefore, consider it fit to restore

the issue to the Assessing Officer with the limited direction

to examine the nexus, if any, between the trading receipts

of the assessee deposited in the Hindu Cooperative Bank

account maintained by the assessee and the amount

advanced to the partner and direct that in the

circumstances the nexus is found to exist, no disallowance

of interest u/s 36(1)(iii) of the Act be made to the extent

pertaining to the amount so advanced. With this limited

direction we restore the issue to the Assessing Officer to re-

adjudicate the same. The assessee is directed to furnish all

necessary evidences to prove its case and the Assessing

Officer is directed to afford adequate opportunity to the

assessee to do the same. In view of the above, the ground of

appeal raised by the assessee stands allowed for statistical

purposes.

allowed for statistical purposes.

Order pronounced in the Open Court.

Sd/- Sd/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 13th July, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR

Assistant Registrar, ITAT, Chandigarh