M/S KOEING SOLUTIONS LTD.,CHANDIGARH vs. DCIT, C-1(1), CHANDIGARH

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘A’, CHANDIGARH BEFORE MS.DIVA SINGH, JUDICIAL MEMBER AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER

ITA No.1554/Chd/2017 (Assessment Year : 2013-14) M/s Koeing Solutions Ltd., Vs. The D.C.I.T., Plot No.22, Industrial Area, Circle 1(I), Phase-II, Chandigarh. Chandigarh. PAN: AABCK9007D (Appellant) (Respondent)

Appellant by : Shri Tej Mohan Singh, Adv. Respondent by : Smt.Chanderkanta, Addl.CIT Date of hearing : 04.04.2018 Date of Pronouncement : 04.05.2018

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

the order of Ld. Commissioner of Income Tax (Appeals)-1,

Chandigarh (hereinafter referred to as (‘Ld.CIT(Appeals)’)

dated 29.9.2017 confirming the levy of penalty u/s 271(1)(c)

of the Income Tax Act, 1961 (in short ‘the Act’) on the

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

us:

“1) That Learned Commissioner of Income Tax (Appeals)-l, Chandigarh has failed to appreciate the facts and circumstances of the case and has thereby erred in sustaining penalty u/s 271(l)(c) of Income Tax Act, 1961 on the ground of disallowance u/s 36(l)(iii) of Income Tax Act, 1961. The order under appeal is erroneous as disallowance u/s 36(l)(iii) does not tantamount to furnishing of inaccurate particulars of income.

In view of the above it is prayed that order of Learned Commissioner of Income Tax (Appeals)-l may kindly be quashed.” 3. During the course of hearing before us, the Ld. counsel

for assessee stated that penalty in the present case had

been levied on account of disallowance of interest expenses

made u/s 36(1)(iii) of the Act. Ld.Counsel took us through

the assessment order passed u/s 143(3) of the Act in the

present case and drew our attention to para 4 of the order

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

was discussed and made by the Assessing Officer amounting

to Rs.4,54,507/-. Referring to para 4 of the assessment

order, the Ld. counsel for assessee pointed out that the

Assessing Officer during assessment proceedings had noted

that the assessee had made loans and advances amounting

to Rs.37,87,561/-, the business expediency of which could

not be explained by the assessee. The Assessing Officer

further found that the assessee was incurring expenditure

on interest payment of secured and unsecured loans.

Therefore, applying the ratio laid down by the Hon'ble

Jurisdictional High Court in the case of CIT Vs. Abhishek

Industries Ltd., 286 ITR 1, the Assessing Officer held that

since the business expediency for making the aforesaid

loans and advances had not been established, it was clear

that the assessee had diverted interest bearing funds for

non-business purpose. He, therefore, proceeded to disallow

proportionate interest of Rs.4,54,507/- on the said

advances calculated @ 12% of the advances so made. The

Ld. counsel for assessee thereafter stated that the

Assessing Officer initiated penalty proceedings on the same

as per the provisions of section 271(1)(c) of the Act and

thereafter levied penalty vide order dated 24.2.2016 which

was in turn confirmed by the Ld.CIT(Appeals) stating that it

was a fit case for levy of penalty since the assessee had not

brought anything on record as to what interest free sources

were available with it for making interest free advances, nor

was any explanation given of any business purpose for the

advances made. The relevant findings of the Ld.CIT(Appeals)

at para 4 of his order are as under:

“4. As regards penalty levied on disallowance made u/s 36(l)(iii) of the Act, it is noticed that the appellant has neither brought on record what interest free resources were available with it for making interest free advance, nor the appellant has explained any business purpose of the advance made. Since the appellant has failed to substantiate its claim, penalty levied on this account is confirmed.” 4. The Ld. counsel for assessee, after detailing the facts

of the case, proceeded to make arguments against the

action of the Ld.CIT(Appeals) in upholding the levy of

penalty on the aforesaid disallowance made of interest u/s

36(1)(iii) of the Act, stating that the basis for the

disallowance made was the decision of the Hon'ble

Jurisdictional High Court in the case of Abhishek

Industries Ltd. (supra),laying down the proposition that

where mixed funds are available it cannot be presumed that

interest free advances have been made from interest free

funds and the onus is on the assessee to establish user of

interest bearing funds for business purposes for claiming

deduction of interest paid on account of the same, failing

which interest expenses are liable to be disallowed to the

extent borrowed funds are used for non business purpose .

Ld.Counsel for the assessee stated that subsequently the

jurisdictional High Court in a number of decisions held

that where mixed funds are available, it is to be presumed

that interest free advances have been made out of interest

free funds warranting no disallowance of interest u/s

36(1)(iii) of the Act. Ld.Counsel for the assessee drew our

attention to the decision of the Hon'ble jurisdictional high

court in the case of Bright Enterprises Pvt. Ltd. vs CIT,

Jaladhar (2016) 381 ITR 107 & CIT vs Kapsons Associates

381 ITR 204. The Ld. counsel for assessee, therefore, stated

that since all particulars relevant to the expenses had been

furnished and disallowance had been made relying upon a

decision of the Jurisdictional High Court which had

subsequently been diluted, it could not be said that the

assessee had either furnished inaccurate particulars of

income or concealed particulars of his income. The Ld.

counsel for assessee pointed out that the issue in any case

was debatable and, therefore, the assessee could not be

charged with either furnishing of inaccurate particulars or

concealing particulars of income. Ld.Cousel for the assessee

further relied on the following case laws in support of his

contention that no penalty was leviable on account of

disallowance of interest made by applying the provisions of

section 36(1)(iii) of the Act.

1) CIT Vs. Trident Infotech Corpn. Ltd. 34 Taxman.com 132 (P&H)

2) Pr. CIT Vs. Rana Sugar Ltd. 81 Taxman.com 77 (P&H)

3) Pr. CIT Vs. Torque Pharmaceuticals (P) Ltd. 82 Taxman.Com 47 (Chandigarh-Trib) 5. The Ld. DR, on the other hand, relied upon the order

of the Ld.CIT(Appeals).

gone through the orders of the authorities below leading to

and confirming the levy of penalty in the present case. In

the present case penalty has been levied on account of

disallowance made on interest u/s 36(1)(iii) of the Act. It is

not disputed that the particulars relating to interest were

all fully disclosed by the assessee in its Balance Sheet and

the assessee had claimed the entire interest as business

expenditure. It is also not disputed that the assessee had

made interest free advances and had failed to establish

commercial expediency of the same. The impugned

disallowance, we find, has been made following the

decision of the Hon'ble Jurisdiction High Court in the case

of Abhishek Industries Ltd. (supra), as per which, where the

assessee had borrowed interest bearing funds and at the

same time made interest free advances without any

business purpose, the interest to the extent of interest free

advances made had to be disallowed since the interest

bearing borrowings made to the extent of interest free

advances was held to be not for the purpose of business but

for supplementing the cash diverted without deriving any

benefit out of it. This proposition laid down by the Hon'ble

Jurisdictional High Court we find, has been reversed in its

subsequent judgments in Bright Enterprises Pvt. Ltd vs CIT,

Jalandhar (2016) 381 ITR 107 & Kapsons Associates (supra)

wherein it has been held that where mixed funds, both

interest bearing and interest free, were available with the

assessee and the interest free funds are sufficient to make

the interest free advances made by the assessee, the

presumption is that the said advances had been made out of

interest free funds and consequently no disallowance of

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

have been duly disclosed and the disallowance of expense is

based on proposition of law laid down by the Hon’ble High

Court, which subsequently is reversed, the assessee cannot

be charged with having concealed or furnished any

inaccurate particulars of income so as to levy penalty on

account of the same u/s 271(1)(c) of the Act.

made on the basis of decision of Hon’ble High Court which

has only interpreted the scope of the section. The assessee

having otherwise furnished all details of the said expenses,

it cannot be said to have concealed particulars of its income

to the extent of disallowance made based on the

interpretation of the scope of the section by the Hon’ble

High Court. The Hon’ble Punjab & Haryana High Court has

held so in the case of CIT vs Trident Infotech Corpn. Ltd

(supra) wherein penalty levied on identical disallowance of

interest u/s 36(1)(iii) following decision of the High Court

in the case of Abhishek Industries (supra) was held to be

not as per law. The Hon’ble High Court while upholding the

deletion of penalty by the ITAT held at para 3 of its order as

under:

“3. In the present case, the assessee has furnished its return prior to the judgment of this Court in Abhishek Industries Ltd. case (supra). In view of the principles of law laid down in the aforesaid judgment, the Assessing Officer made addition to the extent of Rs.45,14,3737-. The learned Tribunal has set aside the penalty on the aforesaid addition inter alia for the reasons that such additions were made on account of judgment of this Court in Abhishek Industries Ltd. case (supra) and it does not establish that the assessee has either concealed its income or furnished inaccurate particulars of income. The scope of the provisions of the Act came to be interpreted by this court in the aforesaid judgment. Therefore, the claim of the Assessee cannot be said to be concealment of income, which may attract penalty.” 9. In view of the above therefore, we direct the deletion of

penalty levied on disallowance of interest made u/s

36(1)(iii) of the Act. The ground of appeal raised by the

assessee is allowed.

Order pronounced in the Open Court.

Sd/- Sd/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 4th May, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR Assistant Registrar, ITAT, Chandigarh