SH. AMAN SETH,LUDHIANA vs. ITO, W-1(1), LUDHIANA

The brief facts of the case are that the assessee fled a return of income of Rs. 10,61,330/- electronically on 23/09/2013. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 on 07/01/2014. The case was selected for scrutiny through CASS. The statutory notice under section 143(2) was issued to the assessee on 02/09/2014 which was duly served upon the assessee on 03/09/2014. The case was received on transfer from Circle-I, Ludhiana. Keeping in view the provisions of section 129 of Income Tax Act, 1961, thereafter notices u/s 142(1) alongwith questionnaire were issued on 09/07/2015 for 27/07/2015 by the undersigned and served upon the assessee on 11/07/2015. 3. In response to said notices Sh. Daljit Puri, Advocate, counsel of the assessee, attended the assessment proceedings from time to time with whom the case was discussed. During the course of assessment proceedings, audit report in form No. 3CB and 3CD as required under section 44AB of the Income Tax Act along with Manufacturing Account/ Profit and Loss account, Balance Sheet etc was filed. The information requisitioned as per questionnaire was furnished, placed on record and examined. Books of account were produced and test checked. The assessee derives income from Trading of Chemicals.

During the course of assessment proceedings, it was noticed that the assessee firm has paid interest on secured/unsecured loans. It was further noticed that the assessee has given huge advance to M/s Ritesh Properties Ltd, M/s Punjab Apparel Park, advance for purchase of Plot, Insu. by Allahabad Bank, flat booking with Jaypee and residential house without charging/receiving any interest. Accordingly, vide noting dated 24..11.2015, counsel of the assessee was requested to show-cause as to why interest chargeable from M/s Ritesh Properties Ltd, M/s Punjab Apparel Park, advance for purchase of Plot, Insu. by Allahabad Bank, flat booking with Jaypee and residential house on advance given may not be disallowed out of interest paid by the assessee on secured/unsecured loans. In response to show-cause notice, counsel of the assessee vide noting dated 02.02.2016 and 09.02.2016 agreed for a disallowance of proportionate interest u/s 36 (l)(iii) of the Income Tax Act, 1961 being use for non business purpose.

The Ld. AO in his assessment order dt. 10/02/2015 has observed as under:

2 I have considered the submission of the counsel of the assessee. In the case of CIT Vs Abhishek Industries. Ltd. 286 ITR-I (P&H), the Hon'ble Punjab & Haryana High Court held that: - "The theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes could not be subscribed to. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under section 36(l)(iii)."

3 Assessee's counsel also referred the judgment of Honorable Supreme Court in the case of Hero Cycles (P) Vs Commissioner of Income Tax Civil appeal no. 514 of 2008(2015) 94 CCH 0097ISCC dated November 5,2015. The assessee is paying substantial amount of interest on the loans raised. Further the advance given to M/s Ritesh Properties Ltd, M/s Punjab Apparel Park, advance for purchase of Plot, Insu. by Allahabad Bank, flat booking with Jaypee and investment in residential house was not for any business expediency/purpose as is evident from the copy of accounts of these above said concern for the period 01.04.2011 to 31.03.2014. Further, vide noting date 28.01.2016 the assessee asked to provide the date of above said investment/advances and the assessee could not established that there was nexus between expenditure and purpose of business. Had the assessee not given advance to above concern, he might have reduced his liability to pay interest on loans to the extent of interest chargeable on interest free advance given. Keeping in view the judgment of Hon'ble Punjab and Haryana High Court in the case of CIT v/s Abhishek Inds. Ltd, Ludhiana reported at 286 ITR 1 (P&H), the proportionate amount of interest be disallowed from the interest claimed in the profit and loss account being interest chargeable on the interest free loan advanced by the assessee to above concern.

4 Further, the Hon'ble High Court of Punjab and Haryana's judgment in the case CIT Vs Kudu Industries, (2015)62 taxman.com 191 held that for disallowance u/s 36(l)(iii) of the Income Tax Act, 1961 the total fund (i.e owned fund and borrowed funds) is considered for working out the disallowance of interest. The Hon'ble High Court of Punjab and Haryana in the above said case held that “ Where mixed funds are diverted towards interest free advances, the disallowance should be made up to the level of the average cost of debt to the assessee. There is no justification in taking into consideration the rate of interest in respect of any particular transaction where under an assessee avails advances on interest. An assessee may avail

5 Accordingly, interest amounting Rs.8,61,473/- debited in Profit and Loss account is disallowed u/s 36(l)(iii) of the I.T. Act, 1961 being fund used for non business purpose. Accordingly, interest expenses debited in Profit and loss account amounting Rs. 8,61,473/- is disallowed and added back to the income of the assessee

6 I am satisfied that assessee has furnished inaccurate particulars of his income of Rs. 8,61,473/-. Penalty proceedings u/s 271(l)(c) are separately initiated along with this order.

During the course of assessment proceedings, it was noticed that the assessee has claimed telephone expenses of Rs. 85,552/-, car expenses & repair of Rs. 4,60,693/-, depreciation of Rs. 6,01,657/- on car and depreciation of 21,060/-on telephone, Interest on car loan, 1,65,552/- and Insurance of car 65,498/-. Personal use of car and telephone for non business purposes cannot be ruled out. The counsel of the assessee was requested to 'produce log book in respect of car and details of expenses for personal use of telephone. Counsel of the assessee replied that no doubt, personal use of car and telephone for non business purposes cannot be ruled out but in this regard no separate details have been maintained. After discussion with the counsel of the assessee, 1/6th out of these expenses, which, comes to Rs. 2,33,334/- as under, are disallowed for personal use and for non business purposes and added in the income of the assessee:-

In view of the above income of the assessee is computed as under: Income as shown in the return of income Rs. 10,61,330/- Addition: i) On account of disallowance of interest u/s 36(1)(iii) as discussed in para 3 above Rs. 8,61,473/- ii) On account of disallowance for personal use of car / telephone etc. as discussed in para 4 above Rs. 2,33,334/- iii) On account of unvouched expenses as discussed in para 5 Rs. 25,000/- Rs. 11,19,807/- Total Income Rs. 21,81,137/- Say Rs. 21,81,137/- Assessed: Issue requisite documents alongwith income tax computation sheet i.e. ITNS 150. Issue penalty notice u/s 271 (1)(c) of the Income Tax Act, 1961. 6. Being aggrieved by the AO order dt. 10/02/2015 (supra) the assessee preferred an appeal before the Ld. CIT(A) who by an order dt. 05/06/2017 has sustained the additions.

The assessee being aggrieved by the aforesaid order of Ld. CIT(A) dt. 05/06/2017 has preferred an appeal before us on following grounds of appeal:

The hearing before us took place on11/06/2024 when paper book in two volumes from page 1 to 75 were placed on record.

The Ld. AR contended before us that it is absolutely wrong and incorrect on part of lower authorties to reject the appeal of the assessee on the ground that assessment is agreed by the assessee, whereas the Counsel of the assessee has simply signed the order sheet marking his presence in the assessment proceedings and it is not for an assessment to be made on agreed basis. Therefore disallowance of Rs. 8,61,473/- under section 36(1)(iii) made by Ld. AO and sustained by the Ld. CIT(A) is illegal, unwarranted and uncalled for and may be deleted. The Ld. AR then vehemently argued the case on merits and interalia contended that addition of Rs. 8,61,473/- on account of disallowance of interest under section 36(1)(iii) is bad in law and illegal and ought to be deleted as in the books of account assessee has shown advances for different properties. That the Ld. AO has disallowed proportionate interest paid on secured / unsecured loans contending that no interest has been charged on advance paid for properties. The order to the effect that had the assessee not given advance, he might have reduced his liability to pay interest on loans and so proceeded for disallowance of respective pro-rata interest of Rs. 8,61,473/- u/s 36(1)(iii). Hence order of lower authority is defective, null and void besides presumptive in nature. It is not based on actual facts and details is placed on record.

1 That the assessee has enough surplus capital and had introduced the advances for purchase of properties in books of accounts for purpose of bank funding. The assessee was in want of additional funds from his bankers and the bankers had asked him to introduce property in books of accounts to cover the funding by ample collateral.

2 That the copy of sample financial statements where advance for properties have been deleted against capital was submitted during course of assessment proceedings and is again being submitted herewith for your rind perusal, having ample residual positive capital of Rs.5622523/- which clearly evinces that the capital, reserves and surplus are far more than the advances and the advances for properties had been given out of own capital only.

3 That the year wise investment made by the assessee as compared to his capital in balance sheet is very less. That the chart showing the investment made by the assessee and capital of the assessee is as under:

4 The assessee had placed reliance on landmark decision by the Hon'ble Supreme Court of India in the case of Hero Cycles (P) Ltd. vs. CIT civil appeal no.514 of 2008 (2015) CCH0097ISCC dated 05/11/2015 wherein it has been held as under: Remarkably, as observed by the CIT(A) in his order, the company had reserve/surplus to the tune of almost of Rs. 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its directors.

5 Reliance was placed on order in ITA No. 189/Chd/2017 in case of Smt. Jagit Kaur Chawla Vs. DCIT Circle-6(1) Mohali of ITAT Chandigarh benches wherein it was held as under:

We have heard the rival contentions and perused the orders of authorities below. The issue before us relates to disallowance of interest expenses u/s 36(1)(iii) of the Act. The Ld.CIT(A), we find, has not adjudicated the issue on merits but has upheld the disallowance for the reason that the assessee had agreed to the disallowance during assessment proceedings and, therefore, he was not entitled to appeal against the same and also for the reason that the assessee had taken up the new plea/explanation before him as to why the disallowance ought not to be made supplemented with documentary evidences which were additional evidences and no prayer was made for admission of the same as prescribed by Rule 46A of the Act.

We are not in agreement with the Ld.CIT(A) on both the counts. The Act allows the remedy of appeal if the assessee is aggrieved by an order passed. Though on the face of it, there can be no grievance in case of an agreed addition, but if the assessee is able to demonstrate that the agreement was made under some mistaken belief/ignorance of law, the assessee then can very well be said to be aggrieved by the addition so made. After all the entire exercise of assessment and appeal is aimed at determining the true and correct income which is liable to tax as per the provisions of the Income Tax Act and no addition/disallowance can be made/upheld, merely because the same was agreed to by the assessee in ignorance of the law. An assessee can, in appeal, very well retract its agreement made by explaining that it was recorded under a mistaken belief of law.

The case laws referred to by the Ld.CIT(A) do not support his contention that no appeal lies against agreed addition. In fact most of the decisions have been rendered in a different context relating to retraction of an admission during assessment proceedings or questioning a settlement agreement entered into with the government, but in all the case laws the courts have unanimously held that though admission is the best piece of evidence , it is not conclusive and an assessee can retract the same by showing that it was incorrectly made.

In the facts of the present case, we find that before the A.O. the assessee had offered no plausible explanation as to why the disallowance of interest expenses u/s 36(1)(iii) of the Act be not made but before the Ld.CIT(A) he pleaded that the same be allowed in view of the proposition of law laid down by various High Courts including the Apex Court and the juri ictional High Court, that where sufficient own interest free funds are available, no disallowance u/s 36(1)(iii) can be made. The assessee also showed from her financial statements that there were sufficient own funds available in the form of own capital of the proprietor for making the interest free advances. Undoubtedly, the assessee had demonstrated that its admission was wrongly made as per law and facts also. Therefore, we hold, that the Ld.CIT(A) ought to have considered the same on merits and his action of holding that no appeal lay against the agreed disallowance is therefore set aside.

Moreover, we do not agree with the Ld.CIT(A) that the contention raised was not admissible since it was a new ground and additional evidences were filed which were not accompanied by an application for admitting the same as prescribed by the Income Tax rules under Rule 46A in this regard. In fact we find that the assessee had raised a contention based on proposition of law laid down by courts ,which it was entitled to raise in appeal. Also the financial statements showing the availability of sufficient own funds was already available on record having been filed during assessment proceedings itself. The documents referred to by the assessee for establishing the fact of availability of sufficient own funds were not additional evidences at all, therefore, and thus, we hold that the Ld.CIT(A) was wrong in stating that they were additional evidences and, therefore, refusing to admit them since no prayer for admission of the same was filed by the assessee.

Now coming to the merits of the case, we are in agreement with the contention of the Ld.Counsel for the assessee that it is settled law that where sufficient own interest free funds are available, no disallowance u/s 36(1)(iii) of the Act can be made. The Hon'ble Apex Court in a recent decision in the case of CIT vs Reliance Industries Ltd. in Civil Appeal no.10 of 2019 dated 02.1.2019 has held that the presumption in such a case is that own funds have been used for making the advances, calling for no disallowance of interest u/s 36(1)(iii) of the Act. The question of law before the Hon’ble Court was :

The assessee has also placed the relevant facts before us reflecting the same from its financial statement. Since the said facts need to be verified, we consider it fit to restore the issue back to the CIT(A) to consider the submissions of the assessee and after verification of the facts adjudicate the same in accordance with law. (emphasis supplied by us)

The Ld. DR supported the orders of lower authorities i.e; Ld. AO and CIT(A). the Ld. DR contended that before Ld. AO there is clear finding “ In response to the show cause notice, counsel for the assessee vide noting dt. 02/02/2016 and 09/02/2016 agreed for a disallowance of proportionate interest under section 36 (1)(iii) of the Income Tax Act, 1961 being use for non business purpose.” The said finding of Ld. AO is sustained by CIT(A) too. Now it is not open for Ld. AR to turn around and contend otherwise. In any event even on merits the assertion of Ld. AR is required to be tested in original proceedings or before CIT(A). It was finally contended that CIT(A) order be sustained.

Both the Ld. AR and Ld. DR save and except disallowance of interest of Rs. 8,61,473/- have not placed much emphasis on other disallowances of Rs. 2,33,334/- and Rs. 25,000/-. The amount of Rs. 2,33,334/- is on account of telephone expenses of Rs. 85,552/- , car expenses and its maintenance of Rs. 4,60,693/- depreciation of Rs. 6,01,657/- on car, interest on car loan of Rs. 1,65,552/- and insurance of car of Rs. 65,498/-. The amount of Rs. 25,000/- is on account of unvouched expenses which are petty cash expenses like Diwali expense, staff welfare expense etc. Finding & Conclusions

In the foregoing we hold that Ld. AO and Ld. CIT(A) ought not to have decided the case on agreed basis. In Income Tax Law both assessee and counsel are in panic mode particularly so when an assessee is an individual. Full & complete opportunity should be given to such assessee to establish their case on merits. Seldom they should go by leeways given by Counsel. Any agreed addition should be expressly recorded in the presence of the assessee after admonishing them that they are not bound to do so. As far as possible in individual cases care and caution approach is required. The tax payers interest is paramount simultaneously Revenue has to augment resources for nation building.

In view of the peculiar facts and circumstances of the case keeping in mind that detailed verification is required of accounts and documents in support thereof to adjudge and adjudicate the case on merits on all issues rather than on agreed basis.

We therefore deem fit and proper to set aside the impugned order of Ld. CIT(A) following above decision (supra) with directions to verify the accounts and documents in support thereof in respect of all above disallowances / additions (supra). The Ld. CIT(A) is directed to pass a fresh

Accordingly impugned order of CIT(A) dt. 05/06/2017is set aside as and by way of remand.

In the result, appeal filed by the assessee is allowed for statistical purposes.

""यथ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File