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Deepak Builders Versus The ACIT And Vice-Versa

2016 (2) TMI 909 - ITAT CHANDIGARH

Addition of interest made an account of interest free advances given - Held that:- Impugned advance made to Deepak Infrastructure was from the interest free funds of the assessee firm more particularly out of the interest free capital of the partner Mr. Deepak Kumar and therefore no disallowance u/s 36(1)(iii) could be made in the present case. We therefore, find no infirmity in the order of ld. CIT(A) in this regard and concur which the finding of the Ld. CIT(A) directing the deletion of disall .....

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8) TMI 123 - PUNJAB AND HARYANA High Court] is misplaced since the same has been overruled by subsequent decision of 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 suf .....

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(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 the Revenue & Cross objection by the assessee has been filed against order of Ld. CIT(A)-II, Ludhiana, dated 27.08.2013. We shall first take up the appeal filed by the Revenue in which the following grounds have been rai .....

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he ratio of decision of M/s Abhishek Industries 286 ITR 1(P & H). 2. Whether on the facts and in the circumstances of the case, the CIT(A) erred in not following the decision of Hon'ble P & H High Court in the case of M/s Abhishek Industries 286 ITR 1 wherein it was held that the only thing sufficient to disallow interest paid on the borrowings to the extent the amount is lent to a sister concern would be the assessee has some loans to be repaid irrespective of the fact whether the a .....

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(A) erred in not considering the fact that partners capital is meant for the purpose of business and not thereafter, giving advances to its partners for non-business purpose. 5. Whether on the facts and in the circumstances of the case, the CIT(A) erred in not considering that the High Court has not distinguished between share capital or partner's capital. 6. Whether on the facts and in the circumstances of the case, the CIT(A) erred in not considering the decision of Hon'ble High Court .....

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t 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 a .....

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ade was unwarranted since there were sufficient interest free funds in the partner s capital account to make the impugned advance. The assessee pleaded that it had not paid any interest on the credit balance of capital account of its partners and in such case if some partner had withdrawn any amount in the name of his firm, in this case, M/s Deepak Buildcon Infrastructure, there was no question of making disallowance u/s 36(1)(iii). The assessee placed reliance on the decision rendered in the ca .....

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s comments thereon, who stated that the reliance placed by the assessee on M/s Bhogal Sons (supra) was misplaced since it was distinguishable on facts and further emphasized that the assessee had used interest bearing funds for the purpose of making the advance. The A.O. s report was forwarded to the assessee for his comments who reiterated his earlier submissions made. Ld. CIT(A) thereafter, considering submissions made by both the parties, allowed the assessee s appeal relying upon the judgmen .....

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o seen that the appellant had not paid any interest on the capital balance of Shri Deepak Kumar. These facts have also been confirmed by the AO during the course of appellate proceedings. From the aforesaid facts, it is apparent that on the one 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 prop .....

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, 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 all partners except one i.e. Shri Surinder Singh Bhogal was posit .....

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closing balance of the capital account of the partners was ₹ 1.65 crores. Admittedly, the assessee has not paid any interest on the capital balances of the partners. The assessee during the year under consideration had incurred interest expenditure of ₹ 7,56,445/-. The Assessing Officer has computed the interest rdatable to the number of days on which there was debit balance in the capital account of four of the partners as mentioned above. The perusal of the details tabulated at pa .....

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ening balances was ₹ 4.32 crores along with additions during the year of ₹ 1.27 crores and withdrawal of ₹ 3.93 crores . After inclusion of the share of profit at ₹ 41.94 lacs, the net capital balance of all the partners i.e. positive minus negative capital balances was ₹ 1.65 crores at the close of the year i.e 31.3.2008. In the entirety of the facts and circumstances where the partners themselves had contributed positive capital balances on which no interest was p .....

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acts 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 .....

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laid down by the jurisdictional high Court in the case of M/s Abhishek Industries 286 ITR 1 (P&H) squarely applied to the assessees case and disallowance of interest u/s 36(1)(iii) of the Act was called for. Ld. AR on the other hand submitted that the advance made by the assessee firm to M/s Deepak Buildcon Infrastructure only for business purposes and there was valid commercial expediency. Ld. AR submitted that Shri Deepak Kumar who is the proprietor of M/s Deepak Buildcon Infrastructure is .....

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his regard. Ld. AR therefore stated that the advance was made for business purposes and there was therefore no question of making any disallowance of interest u/s 36(1)(iii). Ld. AR placed reliance on the decision of the Apex Court in the case of M/s S.A Builders vs. CIT 288 ITR 1 in this regard. Ld. AR submitted that Shri Deepak Kumar who was the proprietor of Deepak Buildcon Infrastructure and was a partner of 81% share in the assessee firm was having capital balance ₹ 4,40,33,756/- on w .....

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th the assessee and placed at paper book page no. 17 and stated that the total non-interest bearing funds amounting to ₹ 11.45 Crores which was enough to make the impugned advance of ₹ 3.99 Crores. Ld. AR further stated that the decision of the jurisdictional High Court in the case of Bright Enterprises P. Ltd. vs. CIT in ITA No. 224 of 2013 dated 24.07.2015 and the decision of the Hon ble Supreme Court in the case of Hero Cycle P. Ltd. vs. CIT (Central Ludhiana) in civil Appeal No. .....

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st 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. Mobilization Advanc .....

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s for non-business purpose so as to disallow interest attributable to the interest bearing funds used for the purpose of making this advance u/s 36(1)(iii) of the Act. From the facts narrated above it though it is evident that the assessee had business transactions with the aforesaid party and had sold material 7,80,700/- during the year. We find that the business purpose for making the advance of ₹ 3.99 Crore has not been established by the assessee. The fact the aforesaid party is a debt .....

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377; 4,40,33,756/- on which no interest had been paid by the assessee firm. The interest free advance of ₹ 3,99,87,813/- to the proprietorship firm of the partner could be therefore said to be out of his capital justifying the non charging of interest on the same. We concur with the reliance place by the Ld. CIT(A) on the decision of Hon ble Chandigarh Bench of the ITAT, in the case of Bhogal Sons (Supra) in support of the above proposition. Besides the fact remains that the assessee had i .....

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:- 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 .....

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is order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Income Tax Appellate Tribunal . In view of the same we hold that impugned advance of ₹ 3.99 Crore made to Deepak Infrastructure was from the interest free funds o .....

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to 286 ITR 1 (P&H), we find has no merit since the same has been overruled by the decision of Apex Court in the case of Hero Cycles (Supra). 6. The appeal of the Revenue is therefore dismissed. Cross Objection 35/Chd/2013, 7. The assessee in its cross objection has raised the following grounds 1. The Ld. CIT(A) erred in law and in facts in sustaining the addition of disallowance of interest u/s 36(1)(iii) on advances of ₹ 50,00,000/- to Sh. Virender Kumar, of ₹ 15,00,000/- to Sh .....

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ay not be disallowed 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) o .....

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ghal. 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 ITR 1 and held that disallowance of interest expenses on these advance was fully justified. He therefore, upheld the interest disallowed on the advance made to Sh. Akash Singhal, Mr. Virender Kumar, Ms. Anjali Dhand. Aggrieved by the same assessee filed the cross appeal before us agi .....

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Ld. AR further stated that Shri Akash Singhal had given an unsecured loan to the assessee during the year which had been repaid by the assessee and advance also had been made Ld. AR stated that the assessee had neither given any interest on the unsecured loan taken nor charged any interest on the advance given, Ld. AR further stated that without prejudice to the above argument the assessee had sufficient interest free funds in the form of reserves and capital from which the impugned advance had .....

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o the documents placed before us. The issue in this case pertains to disallowance of interest u/s 36(1)(iii) on interest free advances made by the assesee to certain persons. Certain facts pertinent to the issue are that interest free advance to Ms. Anjali Dhand amounting to ₹ 15,00,000/- and Shri Virender Kumar amounting to ₹ 50,00,000/- was made in the financial year ending on 31.03.2009, the interest fee funds available with the assessee as on 31.03.2009 amounted to ₹ 2,63,6 .....

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ecured 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 interest free funds to make the impugned advance. The presumption in such cases is that the advance has been made out of interest free funds available as held by .....

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ilable 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. This view has been affirmed by the Apex Court in Hero Cycle Ltd. wherein it was held 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. Remark .....

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