TMI Blog2019 (3) TMI 1760X X X X Extracts X X X X X X X X Extracts X X X X ..... ith a minor difference, with the interest rate applied, so that the matter, which some approximation, gets resolved. - I.T.A. No. 97/Asr/2017 - - - Dated:- 20-3-2019 - Sh. Sanjay Arora, Accountant Member And Sh. N. K. Choudhry, Judicial Member For the Appellant : Sh. P. N. Arora (Adv.) For the Respondent : Sh. Charan Dass (D.R.) ORDER PER SANJAY ARORA, AM: This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-2, Amritsar (CIT(A) for short) dated 10.11.2016, partly allowing the assessee s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 ( the Act hereinafter) dated 30.03.2015 for Assessment Year (A.Y.) 2012-13. 2. The only issue arising in this appeal is the disallowance of the interest expenditure under section 36(1)(iii), made at ₹ 3,83,761, by working out the interest expenditure attributable to the application of the borrowed funds for non-business purposes. 3. The facts in brief are that the assessee, a firm in stone crushing and transport business, returned its income for the year at ₹ 56.80 lacs on 31/3/2013. It was during assessment proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermed as liablities and assets respectively. We say so as not all liabilities would stand to be classified as a source of funds, i.e., liquid funds, which only could be diverted or applied by way of cash loans (for a non-business as in the present case, or even a business purpose). Trade creditors, also called spontaneous liabilities, are, for example, in that sense, non-fund liabilities, as they represent amounts payable against goods purchased (on services availed). Money becomes available only on the realization of the sale proceeds of the goods/ services, sold either as such or upon conversion into some other form, i.e., on completion of what is called the working capital cycle . Liquid funds in respect of trade liabilities, thus, get generated only after a gestation period marking the stocking period of raw material, work-in-progress, finished goods, through which stages the goods purchased pass before being sold, as well as the bills receivable (or trade debtors) phase, i.e., upon their sale. Rather, if this period, in aggregate, i.e., the cash to cash cycle, is more than the credit period allowed by the trade creditors, as is usually the case, liquid funds would be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 108.95 lacs, as on 31.3.2012]. The non-business loans/advances, which are at ₹ 40.98 lacs as on 31.3.2012, fall in the category of non-current assets. The V-form, thus, reveals the funding pattern of the assets, at (say) X% and Y% as at the year end. (being at 47.62% and 52.38% in the example). This may be, as indeed it would be, different at the beginning of the year or, for that matter, at any time of the year, which could be ascertained by drawing a statement of the obtaining assets and liabilities at the time, with equity capital being the balancing figure, i.e., where not accompanied by, to save the tedium, the preparation of the operating statement along with. 4.2 The funds in a going concern being in a state of flux, the funding pattern at different times of the year would reveal as to how it has varied over the year, or that which obtains on an average during the year. Clearly, a higher number of data points would give a better average, which is relevant in-as-much as interest is based only on the actual funding as obtaining over the year (as against that at any given point of time). Again, without doubt, the purport being to arrive at as good an average as poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital, if any, and therefore, interest thereon, i.e., for non-business purposes. That is, the question, if at all, could arise only in respect of the attribution of the interest on the undedicated borrowing (of ₹ 300, in the example); the balance ₹ 800 being for business purposes, where the non-current assets (₹ 100 in the example) is for non-business purpose. In fact, the figures in the example clearly show adequate own (equity) capital, so that the same would applying the presumption afore-said (refer para 3), finance the non-business purpose asset of ₹ 100 in full, attracting no disallowance u/s. 36(1)(iii). Further, here it needs to be clarified that as borrowing agreements normally provide for a margin, implying risk capital (equity), which, accordingly, is to be regarded as dedicated to that extent, even as the repayment of borrowed capital though could be from either equity or non-dedicated borrowing. That would, thus, modify the funding pattern still further, as may be exemplified by redrawing the table afore-stated: Table 2.2 Total DB EC Balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year, has to be regarded as inuring evenly during the year. As interest is essentially a charge toward the time cost of funds, where own funds are available whether introduced or generated later during the year, the same may give rise to some interest attribution, i.e., relatable to the period for which the adequate capital was not available, i.e., was in deficit, for a part of the year, though stood met by the end of the year, as where the same was introduced, or the profits came to be generated, later. 4.3 The financing of a firms assets can therefore be ascertained with reasonable accuracy. The afore-stated exercise can, in fact, be done on a daily basis in case of computerized accounts, feeding the algorithm therein, yielding the borrowed capital applied for non-business purpose/s for each date and, thus, on an average. The adequacy or otherwise of equity (risk) capital is to be examined with reference to the contractual obligations and the corresponding assets in which the said capital, as any other, could be regarded as having been applied, i.e., as per the business plan/project financing. Merely comparing the (absolute) value of the capital with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 108.95 lacs. The finding by the first appellate authority for AY 2011-12, not carried to the tribunal, is based on a misreading of the decision in Gurdas Garg (supra), which it purportedly follows. The sufficiency or otherwise of funds has necessarily to be with reference to the corresponding application of funds and not regarded in isolation, i.e., by comparing one item on the liability (source of funds) side with one item on the asset (application of funds) side of the balance-sheet, as the first appellate authority has. Further, the same can definitely be examined in the proceedings for the current year in-as-much as it has a direct bearing on the disallowance under reference. In fact, but for this finding by the first appellate authority (for AY 2011-12), which though is not binding on us, the assessee s case would stand to be dismissed at the threshold in-as-much as no plea of sufficient interest-free funds, i.e., qua a matter of fact, was taken earlier, and on which there is no therefore no finding by any of the Revenue authorities. The non-appealing by the Revenue for AY 2011-12 would not hit it adversely ( Gangadharan (C.K.) v. CIT [2008] 304 ITR 61 (SC)). This wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee thus does not clearly have sufficient funds of his own . The shortfall, however, is made good by trade credit an interest-free source, in surplus by ₹ 108.95 lacs (as on 31/3/2012). No disallowance of interest u/s. 36(1)(iii) is therefore called for as per the closing balance-sheet. This, though, cannot be said with regard to the opening state of financing, which would require, similarly, an analysis of the opening balance-sheet, i.e., as at 01.4.2011. This is as financing is dynamic, and interest which is the time cost of funds, relatable to the period for which it obtains, would arise. The additional reliance on borrowed capital as on that date is, again, patent. The firm has repaid borrowed capital to the extent of ₹ 230.13 lacs during the current year, so that it was indebted by borrowed capital to that additional extent as at the beginning of the year, and which is much higher than the non-business advance of ₹ 25.50 lacs as obtaining thereat. The average non-business advance for the year, thus, works to ₹ 33.24 lacs ((₹ 25.50 lacs + ₹ 40.98 lacs)/2). We do so as the date of the additional advance (₹ 15.48 lacs) made during th ..... 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