TMI Blog2017 (2) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Ram Kishan Verma (2012 (6) TMI 534 - ITAT JAIPUR ) held that the assessee was having sufficient capital and there were mixed funds then non-interest bearing funds are to be considered as utilised for non-interest bearing advances. It is the assessee who has to take a business decision. There is no onus on the assessee to establish a nexus. The disallowance under challenge made by the Assessing Officer under section 36(1)(iii) and confirmed by the Commissioner of Income-tax (Appeals) was not justified - Decided in favour of assessee - I. T. A. No. 104/Jodhpur/2016 - - - Dated:- 13-10-2016 - B. P. Jain (Accountant Member) For the Appellant : Mahendra Gargieya, Advocate For the Respondent : Runi Pal, Departmental Representative ORDER B. P. Jain (Accountant Member) 1. This appeal by the assessee arises against the order of the learned Commissioner of Income-tax (Appeals) dated December 2, 2015. The short controversy involved is that the disallowance made by the Assessing Officer of ₹ 13,15,762 under section 36(1)(iii) of the Income-tax Act, 1961 made on account of the loans and advances given to the relatives interest-free was challenged by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r vide letter dated December 26, 2012 (paper book 9-12) from paragraph 6 and onwards. Relevant extract torn the submission follows hereinafter : '6. During the year under consideration the balance of loans and advances was ₹ 2,07,64,779 as compared to the previous year of ₹ 1,10,78,684. The assessee-company has made advances to its employees, directors and the relative of directors. The details of same is furnished along with our earlier submission dated December 17, 2012. The assessee-company has not charged any interest on the loans and advances given to the aforesaid persons as the company has not taken any interest bearing loan for making the interest-free advance to the aforesaid parties. It is respectfully submitted that during the year under consideration the credit facilities of the assessee-company was enhanced from ₹ 345 lakhs to ₹ 495 lakhs but such enhancement was on account of merger of Kushalbagh Marmo Pvt. Ltd. With the assessee- company and the merged company i.e. Kushalbagh Marmo Pvt. Ltd. was already having the cash credit limit of ₹ 150 lakhs from the same banker i.e. State Bank of India, Commercial Branch, Udaipur. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the audited balance-sheet as on March 31, 2010 (paper book 1-8) were submitted before the authorities below. A perusal therefore, clearly reveal that there was a huge interest-free capital and reserve and surplus which stood at ₹ 9,91,01,938 as on March 31, 2010 (assessment year 2010-11) and ₹ 9,90,58,584 as on March 31, 2009 (assessment year 2009-10) the break-up of which was submitted before the learned Commissioner of Income-tax (Appeals) also at page 4 (paper book 17). The subjected interest-free advances stood at ₹ 1.10 crores in the preceding year which increased to ₹ 2.07 crores this year as shown in the audited balance-sheet (paper book 1) as against that the assessee was having a huge interest-free capital and reserve and surplus of ₹ 9,91,01,938 (paper book l). In fact, during the year the current assets of the assessee-company decreased from ₹ 1,14,86,134 to ₹ 1,00,588 as compared to the previous year because of realisation of ₹ 1.14 crores from Agrasen Jewellers to whom the assessee sold gold in the previous year. Copy of ledger account of the said party was also submitted before the authorities below. This realisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of his own and the advances, if at all, being interest-free, is to the extent of ₹ 98,93,950 which is far below the capital of the assessee and, therefore, the Tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest It is also noticed by the lower authorities that the assessee earned bank interest to the extent of ₹ 24,48,843 out of which he paid total amount of ₹ 10,99,099 to the bank against loan and over draft, and it is out of the amount which has been paid by the assessee at ₹ 10,99,099 that the Assessing Officer has disallowed the interest. 13. Taking into consideration the fact as noticed hereinabove, in our view, as well when there was no agreement to charge interest from the persons to whom the assessee advance short-term loan/advance, the Assessing Officer could not disallow part of interest. It is also an admitted fact, as observed by the Tribunal, that the Assessing Officer was not able to pin pointedly come to a definite conclusion that how interest bearing loans has been diverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was entitled to full allowance of interest on borrowed money.' 2.3 The hon'ble Jodhpur Bench of the Income-tax Appellate Tribunal has also been taking a consistent view in favour of the asses see on this aspect in the following cases : Refer : Smt. Tara Devi v. ITO [2000] 68 TTJ (Jodh) 361 held that 'Business expenditure-Interest on borrowed capital-Interest- free loan given to husband-Most of the interest-bearing loans were taken by assessee in prior years and interest on such loans had been allowed as deduction in earlier years-This fact clearly proves absence of any nexus between the funds borrowed on interest and interest- free advances given by assessee to her husband-Even otherwise, assessee's own capital was substantially more than the interest-free loan-Disallowance made out of interest expenditure not justified.' In Yamuna Prasad Peshwa v. Deputy CIT [2012] 65 DTR (A. T.) 330 (Jodhpur) ; [2012] 143 TTJ (Jodhpur) 615 (DPB 35-46) wherein in paragraph 4.6 it was held that '4.6 We have heard both the parties. During the course of proceedings before us the learned authorised representative has submitted that the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Tin Box Co. [2003] 260 ITR 637 (Delhi). 2.5.1 The learned Commissioner of Income-tax (Appeals) alleged that from the copies of the bank account it appears that the subjected loans and advances were given from the overdraft account maintained by the appellant and therefore, the presumption arising that interest-free advances were given out of interest-free funds, stands rebutted. However, the learned Commissioner of Income-tax (Appeals) proceeded on misconception and misreading of the judicial guidelines provided through various decisions which were in the context that where there are borrowed funds and also interest-free funds both, discretion lies with the assessee for the utilisation of the funds in whatever manner it wants. What has been held is that where there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that interest-free loans and advances would be out of interest-free fund generated or available with the assessee, if the interest-free funds were sufficient to meet the investments and in such situation the specific nexus between utilisation being interest bearing bank overdraft towards interest-free ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for business purposes but disallowance was upheld for assessment years 1994-95 to 1997-98 on the ground of change of law brought about by the Finance Act, 1992, with effect from April 1, 1993-Not justified-Once it is found that interest-free loans granted by assessee to its sister concerns in August/September, 1991, continued up to the assessment year 1997-98 and that the said loans were advanced out of its own funds for business purposes and that the interest paid thereon did not exceed the rate prescribed under section 40(b)(iv), the assessee was entitled to deduction under section 36(1)(iii) read with section 40(b)(iv) for assessment years 1993-94 to 1997-98-So far as the assessment year 1995-96 was concerned in which the assessee advanced a further interest-free loan of ₹ 5 lakhs, the opening balance of ₹ 1.91 crores as on April 1, 1994, was sufficient to cover the said loan.' 2.5.4 However, this can better be understood by referring to paragraph 10 in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) (DPB 29-34) which is reproduced hereunder (page 344) : 'If there be interest-free funds available to an assessee sufficie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the overdraft account does not make any difference so long as the fact of the availability of larger interest-free funds and lesser amount of interest-free advances, is not established. 3.1 Loans taken were utilised for business purposes : On this aspect detailed working sheet were made before the learned Commissioner of Income-tax (Appeals) at pages 2 and 3 (paper book 15-16) however, the fact so mentioned stood unrebutted by the authorities below. 3.2 The learned Commissioner of Income-tax (Appeals) also unwantedly stressed over the alleged absence of the commercial expediency behind giving of the subjected loans and advances inasmuch as such a consideration was relevant only in a case where the interest refunds were given out of the interest bearing funds only and there was admittedly no availability of the interest-free funds. In the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) also, the decision was rendered in the context of diversion of the interest bearing funds to the interest-free advances. The hon'ble Rajasthan High Court in Ram Kishan Verma (supra) has also taken a note and interpreted the decision of S. A. Builders Ltd. v. CIT (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han Verma (supra). Similar is the position of the other cases. 6. Lastly, we also strongly rely upon the written submissions (PB 14-31) filed before the learned Commissioner of Income-tax (Appeals). He further submitted as under : In continuation and in addition to our earlier submission filed on December 26, 2012, it is further submitted that a comparatively recent decision in the case of Hero Cycles P. Ltd. v. CIT [2015] 379 ITR 347 (SC) ; [2015] 128 DTR 1 (SC) also directly supports the case of the assessee. In that case, the company had given loans and advances of ₹ 34 lakhs to its directors and charged interest at 10 per cent. only, whereas it availed of the loan at 18 per cent. hence, disallowance was made by the Assessing Officer saying that the money borrowed by the assessee cannot be treated for the purposes of the business of the assessee. Before the Commissioner of Income-tax (Appeals), the assessee demonstrated that there was a sufficient credit balance, while advancing loan to the directors and even that still there was a credit balance of ₹ 4.95 lakhs left. The Commissioner of Income-tax (Appeals) therefore held that such loan was not g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Departmental representative, on the other hand, strongly relied upon the order of the learned Commissioner of Income-tax (Appeals). 6. I have carefully considered the rival contentions, material available on records with reference to the case law cited by the parties in their written submissions and at Bar. The controversy involved in the present appeal is in a narrow compass and relates to the disallowance made under section 36(1)(iii) of the Act. The facts could not be disputed by the authorities below as also by the learned Departmental representative that the appellant was having interest-free funds to the extent of ₹ 9,91,01,938 as against which the interest-free loans and advances given to the relatives and directors etc. were only of ₹ 2,07,64,779, which were far below the interest-free funds. The objection of the authorities below that the assessee could not prove a nexus between the availability of interest-free funds and giving of interest-free advances, does not appear to be a requirement of the law inasmuch as it is by now settled that when there are interest-free funds available to the assessee sufficient to meet its investments or loans, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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