TMI Blog2017 (3) TMI 746X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid on business borrowings for reason of having given interest free loans. Thus, while the Tribunal has found ₹ 39,45,705/- were available by way of interest free advance with the assessee and that disallowance under Section 36(1)(iii) of the Act, commensurate to such deposit was not warranted, yet there is a total lack of any finding as to the amount of interest free loan given by the assessee in the previous year relevant to the assessment year 2010-11, both by the Tribunal and also by the CIT (Appeals). We are therefore of the view that the questions of law raised in the memo of appeal deserve to be answered partially in favour of the assessee to the extent that in view of the finding recorded by the Tribunal as to availability of ₹ 39,45,705/- by way of interest free advance, the Tribunal was further required to record a finding as to the amount interest free loan given by the assessee in the previous year relevant to the assessment year 2010-11. - Income Tax Appeal No. 46 of 2016 - - - Dated:- 10-3-2017 - Hon'ble Bharati Sapru And Hon'ble Saumitra Dayal Singh, JJ. For the Appellant : Shambhu Chopra For the Respondent : S. C. ,Krish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces available with it and that it also had available ₹ 1.80 crores by way of partner's capital. However, the assessing officer rejected this explanation with the observation that the assessee had failed to substantiate it. Upon appeal to the Commissioner, the assessee further clarified that out of ₹ 92.75 lacs standing in its books as interest free loans given by it, it had, in the previous year relevant to the assessment year 2010-11, given out only ₹ 75,000/- and that the balance of ₹ 92 lacs had been given out as interest free loans in earlier years prior to previous year relevant to A.Y. 2010-11. Also, the assessee further clarified that in the previous year relevant to the assessment year 2010-11 it had available with it ₹ 39,45,705/- by way of interest free advances from customers that were sufficient to give a loan of ₹ 75,000/- in that year. It was thus explained that in the previous year relevant to the assessment year 2010-11 the only interest free loan given by it was of ₹ 75,000/- from non interest bearing advances available with the assessee to the tune of ₹ 39,45,705/-. As such no part of the interest bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 400000 Venus Ventures 1450000 1450000 14424212 Total 19680955 Total 9275000 9200000 It is humbly submitted that proving commercial expediency is required only when borrowed funds are diverted as interest free advance but no such requirement, as expected to be proved when there are sufficient owned funds. From the tally given above, your honour will kindly appreciate that the interest free advance is much less than the owned funds of the appellant........... The CIT (Appeals) however, rejected the claim made by the assessee by relying on a Division Bench judgment of this Court in the case of Commissioner of Income Tax-I, Lucknow Vs. Sahu Enterprises (P.) Ltd. (2013) 352 ITR 8, wherein as the CIT (Appeals) has noted, it has been held The test to be applied in such cases is not the source of the funds but the purpose for which the loans were extended. Thus the CIT (Appeals) was of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2010-11. We have heard Sri Shambhu Chopra, learned counsel for the appellant-assessee and Sri Krishna Agarwal, learned counsel for the respondent-department as also perused the record. We find that there are two aspects in the matter. First, the quantum of interest free advance given by the assessee in the previous year relevant to the assessment year 2010-11 and the other being the amount of own funds or non interest bearing funds available with the assessee for the purpose of making the interest free advance in the previous year relevant to the assessment year 2010-11. In the original assessment proceedings the Assessing Officer considered the entire amount of closing value of interest free loan found standing in the books of account of the assessee as on 31.03.2010, which totaled ₹ 92.75 lacs which the assessee probably did not bifurcate and it did not show to the Assessing Officer as to what part of that amount it had advanced in the previous year relevant to the assessment year 2010-11. While before the CIT (Appeals) the assessee did give separately, full details of interest free loans given by it, during the previous year relevant to A.Y. 2009-10 as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this count. Then in CIT, Agra Vs. Krishna Murari Lal Agarwal Surya Nagar Agra (supra) the appeal had been heard on question no.5 which is quoted herein below:- 5. Whether the Hon'ble ITAT was legally correct in deleting the addition of ₹ 1,34,794/- made by AO u/s 36 (1) (iii) of the Act ignoring the fact that the assessee was compelled to resort to borrowing on interest due to diversion of his own funds for purpose (s) other than his own business. On that question the Court held as under:- 10. On question no.5 we find that the Tribunal recorded the findings that the assessee in his individual account was having sufficient capital of ₹ 1,78,85,290/-. Even if he had given the amount as interest free loan of ₹ 1,73,38,986/- to his family members, that by itself could not be put to doubt and on which the interest was disallowed under Section 36 (1) (iii) of the Act. 11. The AO added ₹ 1,78,85,290/- as interest on the ground that the amount was not advanced by way of any business expediency. The Tribunal, however, held that where the amount was not advanced from the business, but was the capital of the assessee, he could have advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and the later division bench decision in the case of CIT Vs. Sahu Enterprises (P) Ltd. in so far as it holds that the test of business expediency must be satisfied by the assessee irrespective of the source of funds (from which it may have made interest free loans) is not good law being inconsistent with the law laid down by the Supreme Court in the case of Hero Cycles Private Ltd. Vs. CIT Central Ludhiana 2015 (379) ITR 347, that besides the fact judgement in CIT Vs. Sahu Enterprises (P) Ltd (supra) was pronounced in ignorance of or without considering the earlier categorical and consistent view of this court expressed in three earlier division bench pronouncements. Thus, on a principle of law it is no longer open to the revenue to disallow interest expenditure under section 36(1)(iii), if it is established as a fact that interest free loans were given by the assessee from its own funds or from funds which are not part of its interest bearing borrowings. To this extent the order of the CIT appeals is patently wrong. Coming to the order of the Tribunal we find that the Tribunal has misdirected itself and also not decided the issue in light of the law expounded by the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest expenditure on same interest free loan may then be recorded in different assessment years, depending on the quantum of interest free advance available in each year. Four, from a businessman's stand point it would introduce impracticality in his business and other dealings, for if in a year, upon surplus amount being available and in absence of any business need existing at that point of time, he may give an interest free loan to his family members. Later, in a subsequent year he may feel the need for fresh business funds which he may borrow against payment of interest. It cannot then be said that such a businessman may either first recall the interest free loan advanced by him in the earlier year and only thereafter proceed to borrow funds or else face disallowance of interest expenditure on borrowed funds under section 36(1)(iii) of the Act. Such a rule, if accepted, would actually be a prescription against giving of any interest free sum to any one for any non-business purpose and may in fact curb the human nature to help another person in need of money by giving interest free loan on a return-when-able basis. There is neither any legal or other basis for such a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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