TMI Blog2016 (2) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... f the the Apex Court in Hero Cycle Ltd. The argument of the Ld. DR that the advance were for non business purpose, we find has merit since no evidence was brought on record by the assessee before us or before the lower authorities to substantiate its arguments, but having said so no disallowance u/s 36(1)(iii) can still be made in the present case as we have held that there were sufficient interest free funds available with the assessee to make the impugned advance and the presumption in the such cases is that they are made out of the interest free funds available and not the interest bearing funds. In view of the above we hold that the disallowance of interest u/s 36(1)(iii) pertaining to the Miss. Anjali Dhand, Mr. Akash Singhal and Mr. Virender Kumar upheld by the Ld. CIT(A) be deleted. - Decided in favour of assessee - ITA No.1000/Chd/2013 & Cross Objection 35/Chd/2013 (In ITA No. 1000/Chd/2013) - - - Dated:- 26-2-2016 - SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER For the Respondent : Sh. Manjit Singh (DR) For the Petitioner : Sh. Sudhir Sehgal (CA) ORDER PER ANNAPURNA MEHROTRA A.M. The present appeal by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though there are old loans, and the partners had sufficient capital, the disallowance is justified. 7. That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off. The only issue thus in the present appeal is against the deletion of addition of interest amounting to ₹ 13,67,164/- made an account of interest free advances given. 2. Brief facts relating to the issue are that during assessment proceedings the A.O. noted that the assessee has shown outstanding debts in the name of M/s Deepak Buildcon Infrastructure of an amount of ₹ 3,99,87,812/-. No interest had been charged on the same, while the assessee had paid interest on borrowed funds. The A.O. accordingly asked the assessee to explain why interest on these funds diverted for non business purpose may not be disallowed. The assessee contended that there was business relationship with M/s Deepak Buildcon Infrastructure and further relied on the case of M/s SA Builders and M/s Munjal Sales Corporation. The A.O. did not find the assessee s reply satisfactory and accordingly disallowed an amount of ₹ 13,67,164/- being interest @12% on the debt outstanding in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne hand, Shri Deepak Kumar has a capital balance of ₹ 4,40,33,756/- in the appellant firm on which no interest has been paid by the appellant firm and on the other hand, the firm had advance an interest free advance of ₹ 3,99,87,812/- to the proprietary concern of Shri Deepak Kumar on which no interest had been charged. The issue to be considered here is whether in these circumstances, the AO was justified in disallowing proportionate interest on this advance on the ground that funds of the appellate were diverted for non business purposes. In this regard, the appellant has relied upon the decision of Hon ble ITAT, Chandigarh in the case of M/s Bhogal Sons vs. ACIT in ITA No. 567/Chd/2012 dated 14.09.2012. In this case, the Hon ble ITAT, Chandigarh bench has held as under:- We have heard the rival contentions and perused the record. The assessee is a partnership firm and is engaged in the manufacturing of cycle parts. The assessee firm constitutes of 15 partners out of which demise of one partner took place during the year under consideration. The break-up of partners capital account as on 31.3.2008 is enclosed at page 9 of the Paper Book. The opening balance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital balance available with the assessee firm in the account of the aforesaid partners, who had closing negative balance as on 31.3.2008. In the entirety of the facts and circumstances of the case, we direct the Assessing Officer to delete the aforesaid addition made on account of debit balances in the capital accounts of four of the partners. 3.6 The appellant s case is squarely covered by the decision of the Hon ble ITAT, Chandigarh Bench as the facts are similar to the case of M/s Bhogal Sons (Supra). Respectfully following the decision of the Hon ble ITAT, Chandigarh Bench in the case of M/s Bhogal Sons (Supra), the disallowance made by the AO is deleted. This ground of appeal is accordingly allowed. 3. Aggrieved by the same the revenue filed the present appeal before us. 4. Before us Ld. DR argued that the reliance placed by the ld. CIT(A) on the judgment in the case of M/s Bhogal Sons [Supra] is misplaced since no loans were raised in that case while in the present case the assessee firm has raised both secured as well as unsecured loans. Ld. DR further argued that since there were mixed funds available with the assessee the ratio laid down by the jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hero Cycle P. Ltd. vs. CIT (Central Ludhiana) in civil Appeal No. 514 of 2008 dated 05.11.2015 squarely applied to the assessee s case. 5. We have heard the rival submission perused the orders of authorities below as also the document placed before us. The facts emerging in the present case are that an interest free advance amounting to ₹ 3,99,87,812/- was made by the assessee firm to M/s Deepak Buildcon Infrastructure which was a Proprietorship firm of Sh. Deepak Kumar. It is also on admitted fact that Sh. Deepak Kumar is a partner with 81% interest in the profit of the assessee firm. Undisputedly the capital of Mr. Deepak Kumar in the assessee frim amounted to ₹ 4,40,33,756/- on which no interest was paid by the assessee firm. Besides it is also not in dispute that the total available interest free fund with the assessee firm during the impugned year amounted to ₹ 11,45,15,890/- which comprised the following:- 1. Interest Free partner Capital ₹ 4,27,39,654/- 2. Unsecured loans ₹ 20,29,797/- 3. Mobiliza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t free advance the presumption which arises is that the interest has been made out of interest free funds generated or available with the assessee. The Hon ble High Court held in this order para 16 as follows:- As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of ₹ 10.29 Crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. Even the Apex Court in the case of Hero Cycle P. Ltd. CIT (Central) Ludhiana in Civil Appeal No. 514 of 2008 dated 05.11.2015 has affirmed this view by holding as follows: Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of ₹ 34 lakhs was given. Remarkably, as observed by the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed to which the assessee submitted that the advances had been given for business purpose. The A.O. observed that the submissions of the assessee was factually incorrect and therefore, he disallowed interest of ₹ 15,48,965/- @ 12% during appellate proceedings. Before the Ld. CIT(A) the assessee filed detailed submissions reproduced in para 4.2 of the CIT(A) order. The submissions were forwarded to the A.O. for his comments whose report is reproduced at para 4.3 of CIT(A) order. After going through the submissions of both the parties Ld. CIT(A) held that the advance made to the JV Steel Tubes amounting to ₹ 60,00,000/- was for business purpose and relying upon the decision of the Hon ble Supreme Court in the case of M/s SA Builders 288 ITR 1 deleted the disallowance of interest made on the impugned advance. As for the advance made of ₹ 50,00,000/- to Mr. Virender Kumar, ₹ 15,00,000/- to Ms. Anjali Dhand ₹ 20,24,482/- to Sh. Aakash Singhal. Ld. CIT(A) held that there was no business purpose with regard to the aforesaid advance. He further relied upon the decision of Hon ble Punjab Haryana High Court in the case of Abhishek Industry Ltd. 286 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64,14,230/- 2. Unsecured loans (Interest free) ₹ 30,11,074/- 3. Mobilization Advances ₹ 69,40,000/- Total: ₹ 2,63,65,304/- The advance made of ₹ 20,24,482/- to Mr. Akash Singhal pertained to the impugned assessment year. The interest free advances available with the assessee during the impugned assessment year amounted to ₹ 6,91,77,985/ comprising of: 1. Partner s Capital Account ₹ 4,27,39,654/- 2. Unsecured loans (interest free) ₹ 20,29,797/- 3. Mobilization Advances ₹ 24,40 853/- Total:- Rs. 6,91,77,985/- After considering the interest free advance of ₹ 3,99,87,812/- given to M/s Deepak Buildcon Infrastructure, dealt with in Revenues appeal in ITA No. 1000/Chd/2013, above we find that the assessee firm had enough int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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