TMI Blog2012 (9) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... ting from 1991-92 to December, 2006 and Nov. 2007. Thus, no investment has been made in the AY under appeal. Secondly, no borrowed funds have been used for the purpose of investment. AO has not proved any nexus between the borrowed funds and the amounts invested in shares in assessment year. Further, sufficient funds and profits are available to the assessee to make investment though no investment has been made in this year, but it was made several years back. Thirdly, interest received by the assessee are in a sum of Rs.2,62,656/-, but interest paid was Rs.1,48,913/-, thus, assessee practically did not incur any expenditure on the interest. Hence, provisions of section 14A have been wrongly applied. Addition is, therefore, deleted. Dis-allowance u/s 36(i)(iii) - loan given to HUF for no business consideration - Held that:- It is observed that assessee has sufficient capital, profit and interest-free funds available with him for the purpose of investment. No nexus between the borrowed funds and interest free funds has been established by the AO on record. Therefore, the addition would be unjustified in the year under consideration - Decided in favor of assessee - ITA No. 44/Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovery of the amounts as shown due to them. The AO proposed to tax these amounts under the provisions of section 28(iv) of the IT Act. It was stated before the AO by the assessee that these were old loans and the same stood accepted by the department in scrutiny assessments. However, as per AO, in spite of having been afforded the opportunities, the assessee failed to file confirmations and explain the opening balances credited in the books of account. It was also submitted by the assessee before the AO that these persons were in jail. However, the AO held that the creditors were companies and a person is independent from the company. As per the AO, it was learnt that the companies and their directors were found indulging in serious irregularities and, therefore, legal proceedings are pending at various courts, for which the directors of the companies are in jail. The AO in the absence of confirmations from these loan creditors, after discussing the provisions of section 2(24) of the Act wherein income is defined and also referring to provisions of section 56 of the Act held that though the amounts might have been received as loan and on account of capital account but with the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies are in jail. Though the assessee requested the AO to issue summons u/s. 131 of the Act or requisition the information u/s. 133(6) but as already pointed out by the AO, no addresses as to where the summons / letters could be issued were supplied to the AO during the assessment proceedings. It is also not clear from the information available on record as to when these loans were received by the assessee. Also, there is nothing on record to suggest that the creditors are pursuing the recovery and for that purposes have filed any suit etc. against the assessee in any court of law coupled with that the assessee is also not paying any interest to these creditors. As mentioned by the AO, these companies, i.e., creditors and their directors were found indulging in serious financial irregularities and, therefore, I agree with the AO that the creditors as appearing in the books of account do not seem to be genuine. As per the AO, the assessee s own brother namely Shri Krishna Murari Lal Agarwal for the same assessment year had himself credited the amount of Rs.10 lac as liability foregone. Though the loans when claimed to have been received were of capital nature, but with the efflux o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment in the scrutiny assessment of the preceding assessment year. No addition to the loan has been made and the liability still holds good. The loans have not been written off either by the creditors or squared up by the debtor. Therefore, no addition could be made against the assessee. The ld. CIT(A) relied upon three decisions in the appellate order for rejecting the claim of the assessee, but none of the decisions are applicable to the facts of the case. He has submitted that the decision relied by the authorities below in the case of CIT vs. T.V. Sundaram Iynger Sons (supra) is not applicable because in this case, unclaimed balances transferred by the assessee to his profit and loss account were, therefore, treated as trading receipts, even though the deposits were initially treated as capital receipts, the claims of depositors having become time bared. Therefore, the issue was decided against the assessee. In the decision of Hon ble Bombay High Curt in the case of Solid Containers Ltd. vs. DCIT, 308 ITR 147, the amount received as loan by the assessee for trading activities and ultimately retained in the business was held as taxable u/s. 28(iv) of the Act. In the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are not applicable to the present case. In view of the above facts, even if the liability could not be confirmed through the parties, it would not make any difference for treating that the income accrued or arose to the assessee. We, therefore, set aside the orders of the authorities below and delete the addition. As a result, ground Nos. 1 2 of the appeal of assessee are allowed. Grounds Nos. 3 4 : 3 That the CIT (Appeals) has erred on facts as well as in law while sustaining the addition for Rs. 602311/- made by the AO, invoking the provision of section 14 A of the I.T. Act, no addition invoking the provision of section 14 A of the I.T. Act is liable to be made, addition made on this score is liable to be deleted. 4 That while making of the addition by invoking the provision of section 14 A of the I.T. Act, the authorities below have completely ignored the facts that the appellant has not made any investment out of the borrowed funds for earning of the exempt income, borrowed funds are not utilized in making of such investment, neither any exempt income has been earned by the assessee. Investment made in the earlier years does not attract the provision of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertain from the year 1991-92 to December, 2006. It was, therefore, submitted that the investments were made long back in the year 1991-92 from own funds available with the assessee, which were generated through business activities. The said investments have no relation with the borrowed funds and the same have been borrowed at a very later stage and specifically to fulfill certain day-to-day business requirements. Therefore, the addition is unjustified. It was submitted that section 14A will apply to make disallowances only when there is dominant and immediate connection between the expenditure incurred and the income not forming part of the total income. The facts of the case are totally different and the assessee has not incurred any expenditure. Therefore, no disallowance could be made. It was submitted that onus was upon the AO who alleges the above facts, but the burden by the AO has not been discharged. The assessee has not made any investment in shares to earn dividend. The investment in shares was made from earlier year from own funds and borrowed funds were utilized for the purpose of business. The decision in the case of CIT vs. Hero Cycles Ltd., 323 ITR 518 was relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport in which the auditor has certified that no deduction is claimed or admissible u/s. 14A and 36(1)(iii) of the IT Act. He has, therefore, submitted that the addition is clearly unjustified. On the other hand, the ld. DR relied upon the orders of the authorities below and submitted that intention of the assessee was to earn exempt income. Therefore, the addition is justified. 8. We have considered the rival submissions and the material on record. Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 held Held, dismissing he appeal, ha if here were funds available both interest-free and overdraft and/or loans taken, hen a presumption would arise ha investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case his presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. 8.1 Hon ble Punjab Haryana High Court in the case of CIT vs. Metalman Auto Pvt. Ltd., 336 ITR 434 held Held , (i) that dividend income was exempt. (ii). That, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , deleted and the ground Nos. 3 4 of appeal of the assessee are allowed. Ground No. 5 : 5 That the Authorities below have erred on facts and in law while disallowing of the amount of Rs. 6,52,857/- U/s 36(i)(iii) of the Income Tax Act, out of the total amount of interest paid by the assessee. While sustaining the addition at Rs. 6,52,857/- the authorities below have completely ignored that the assessee has not given the amount of Rs. 1,13,44,044/- to the HUF of him out of borrowed funds and were given out of accumulated income which cannot be said to have been invested out of the borrowed funds, no disallowance u/s 36 (i)(iii) of the I.T. Act is called for, addition made at Rs. 652857/- by the AO and sustained by the CIT (Appeals) is liable to be deleted. 9. The AO made disallowance of Rs.6,52,857/- u/s. 36(1)(iii) of the IT Act. It was noted by the AO that the assessee had taken interest bearing loans on which interest @ 12% was paid. However, the assessee had given Rs.1,13,44,044/- to his HUF. The AO held that the loan was not given by the assessee for any business consideration. Also the AO noted that the assessee during the year had paid interest of Rs.11,64,483/- o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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