M/S GARG FURNACE LTD.,LUDHIANA vs. DCIT, CC-3, LUDHIANA

आदेश/ORDER

PER A.D.JAIN, VICE PRESIDENT

This is assessee's appeal for assessment years 2017-18

against the order of the ld. Commissioner of Income Tax

(Appeals)-5, Ludhiana dated 17.05.2023 contending that the

ld. Commissioner of Income Tax(Appeals) [hereinafter

referred to as ‘ld. CIT(A)’] has erred in upholding the

disallowance of Rs.34,16,610/- u/s 36(1)(iii) of the Income

ITA 382/CHD/2023 A.Y.2017-18 2 Tax Act, 1961 (in short ‘the Act’), on advances given

amounting to Rs.2,84,71,743/-.

the assessee company was engaged in the business of

manufacturing of all kinds of ferrous and non-ferrous

metals, alloy castings, non-alloy steel rounds, wire rods,

M.S. Billets, etc.; that the assessee had filed its return

pertaining to assessment year 2017-18, declaring current

year loss of Rs.13,82,61,785/-. The AO observed that the

assessee had been asked to give details of all loans and

advances given and was further asked to submit their

certified copies of ledger accounts and to give details of the

bank account, or the CC limit from which such payments

were made. The assessee was asked to explain as to why no

interest was charged on the loans and advances given to all

the persons, except M/s King Trader and Asian Bikes Pvt.

Ltd.; that the assessee filed reply and stated that the

payments were old and no interest was charged because of

the terms so agreed; that the assessee did not submit any

documentary evidence in support of the claim that these

advances had been given out of the assessee's own funds;

that the assessee's claim that no interest was paid to the

ITA 382/CHD/2023 A.Y.2017-18 3 bank and the interest paid to India Bulls was not having any

nexus with these funds was not acceptable, as the borrowed

funds constitute a common pool and the interest expense

cannot be considered separately; that the assessee had failed

to provide a satisfactory reply to show cause. The AO

observed that the case did not fall within the ambit of

commercial expediency; that all conditions for disallowance

of proportionate interest u/s 36(1)(iii) of the Income Tax Act

for the advances were satisfied, as the assessee had given

interest free advances, there being no commercial expediency

involved in giving the advances and the assessee had paid

interest on borrowed funds; that the assessee had availed

long term borrowings amounting to Rs.5,31,88,026/- and

short term borrowings of Rs.60,85,59,323/- and had

incurred finance cost of Rs.1,05,79,906/-. The AO observed

that despite having heavy loans and paying interest, the

assessee had not charged interest on the advances given to

the said persons and these amounts had been given through

the borrowed funds; that the expenditure was not expended

wholly and exclusively for the purpose of the business; and

that thus, proportionate interest u/s 36(1)(iii) read with

Section 37 of the Income Tax Act, calculated @ 12% of the

ITA 382/CHD/2023 A.Y.2017-18 4 interest expense, amounting to Rs.34,16,610/- was being

disallowed and added to the income of the assessee.

observed, inter-alia, that during the year under

consideration, interest free advances to the tune of

Rs.2,84,71,743/- were outstanding; that also, the assessee

had incurred finance cost to the extent of Rs.1,05,79,906/-

on long term and short term borrowings; that it had been

argued that the advances were given out of interest free

funds available with the assessee, but no proof of the same

had been submitted by the assessee despite issuance of

Show Cause and repeated opportunities of hearing; that the

AO had observed that the funds were not used for the

business purpose and also, these were advanced without any

commercial expediency; that the AO had given the factual

position and had also elaborately discussed the legal aspect

of the issue in the assessment order; and that it had been

highlighted that the assessee could not explain the

commercial expediency involved in giving the interest free

advances to the persons mentioned in the assessment order.

assessee has reiterated the stand taken by the assessee

ITA 382/CHD/2023 A.Y.2017-18 5 before the authorities below. It has been contended that

vide reply dated 25.12.2019, it had been stated before the

AO, that the funds were old funds and the same had been

made out of the own funds of the company; that during the

year, interest expense was claimed only in respect of loan

from India Bulls and no interest had been claimed as an

expense in respect of short term borrowings amounting to

Rs.60,85,59,323/-, as the said accounts of the assessee were

marked as Non Performing Assets (“NPA”) during the year

and in accordance with Reserve Bank of India norms, no

interest was charged by the banks; that however, the AO had

proceeded to disallow the amount in its entirety without

considering the submissions made by the assessee; that no

disallowance was warranted under the provisions of Section

36(1)(iii) of the Income Tax Act, as the advances made were

out of the assessee's own funds or interest free funds

available, which were much more than the total advances

given; that as on 31.03.2017, the total share capital and

reserves and surplus of the assessee was at

Rs.4,37,98,803/-; that in such a scenario, in keeping with

the following decisions, no such disallowance u/s 36(1)(iii) of

the Act was warranted :

ITA 382/CHD/2023 A.Y.2017-18 6 i) “CIT Vs Reliance Industries Ltd.”, 410 ITR 466 (S.C.) ii) CIT Vs. Satish Bala Malhotra (Punjab & Haryana High Court), 387 ITR 403 iii) Bright Enterprises Pvt. Ltd. vs. CIT (Punjab,& Haryana High Court), 381 ITR 107 iv) Gurdas Garg vs. CIT (Punjab & Haryana High Court), 63 taxmann.com 289 SEL Manufacturing Co. Ltd. (Chandigarh Tribunal), 186 TTJ 1 v) Fastway Transmissions (P.) Ltd. Vs. ACIT (Chandigarh Tribunal), 116 taxmann.com 427 vi) ACIT VS. Janank Global Resources (P.) Ltd. (Chandigarh Tribunal), 175 ITD 365

4.1 It has further been contended that otherwise too,

disallowance u/s 36(1)(iii) of the Act is not warranted,

especially since the entire interest expense pertains to term

loans, being specific borrowing, without any interplay with

generic funds; that the assessee has clearly stated that

finance incurred during the year was specific expenditure,

which cannot be linked to the advances given by the

assessee company; that the current portion of interest

expenditure incurred during the year under consideration is

of Rs.84,95,997.54 and the same pertains to two loans

availed from India Bulls and HDB Financial Services; that

these loans have been specifically raised for business

purposes and they are very old loans; that it is evident from

the ledger accounts, that there has been no fresh

introduction of loans and only some amount has been repaid

ITA 382/CHD/2023 A.Y.2017-18 7 during the year; that the expenditure incurred clearly

pertains to specific borrowings and particularly, the

expenditure has clearly been incurred for business purposes;

that the ld. CIT(A) has failed to appreciate this position; that

therefore, the order under appeal be reversed and the

addition confirmed be ordered to be deleted.

reliance on the impugned order. It has been contended that

as correctly observed by the ld. CIT(A), though the advances

have been stated to have been given out of interest free

funds available with the assessee, no proof thereof has been

submitted, despite issuance of Show Cause Notice and

despite repeated opportunities of hearing granted by the ld.

CIT(A). It has been contended that thus, there being no

error therein, the order passed by the ld. CIT(A) be upheld

and the appeal filed by the assessee, carrying no merit

whatsoever, be ordered to be dismissed.

material on record. APB-8 is a copy of the assessee's

balance sheet as on 31.03.2017, as submitted before the

authorities below. As per the same, there was a total of

share capital and reserves and surplus amounting to

ITA 382/CHD/2023 A.Y.2017-18 8 Rs.4,37,98,803/- available to the assessee at that time. This

is much more than the amount of the advances made. In

such a situation, in keeping with “CIT Vs Reliance Industries

Ltd.” 410 ITR 466 (S.C.), it is to be presumed that the

advances or investments were made from the interest free

funds available and so, no disallowance u/s 36(1)(iii) of the

Income Tax Act requires to be made.

sought to be raised by the assessee by way of the ground of

appeal raised, the same is accepted. The order under appeal

is reversed. The disallowance made by the AO, to the tune of

Rs.34,16,610/- is deleted.

Order pronounced on 10.04.2024.

Sd/- Sd/-

(VIKRAM SINGH YADAV) (A.D.JAIN ) VICE PRESIDENT ACCOUNTANTMEMBER “Poonam” आदेश क� �ितिलिप अ�ेिषत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�/ CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय आिधकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 5. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar