TMI Blog2018 (2) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... , AM: This is an appeal filed by the Revenue against the order of the CIT(A), Raipur, dated 12.06.2014 for the assessment year 2010-2011. 2. The Revenue has raised the following grounds :- 1. Whether in law and on facts circumstances of the case, the CIT(A) has erred in deleting the disallowance of interest u/s.36(1)(iii) of the Income Tax Act, 1961 of ₹ 41,54,811/- as interest bearing funds were used for non-business purposes. 3. Brief facts of the case are that the assessee is a partnership firm derives income from printing and publishing of Hindi Daily Newspaper Nav Bharat and English daily Central Chronicle from Raipur. The assessee filed its return of income declaring total income of ₹ 1,85,77,530/-. Thereafter the AO framed the assessment u/s.143(3) of the Act determining the total income of the assessee at ₹ 2,27,32,341/-. During the assessment proceeding, the AO on perusal of partner's capital accounts, found that as on 01.04.2009 there was debit balance of ₹ 115.25 lakhs in the case of Partner Shri Sameer Maheshwari. There was opening debit balance as on 01.04.2009 of ₹ 100.97 lakhs appearing in the Advance Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the current year or in any prior years. The assessee also claimed that during the year under consideration there was cash profit receipts of ₹ 246.07 lakhs against the withdrawals of ₹ 194.03 leaving ₹ 52.04 lakhs, which was sufficient to absorb the firm's tax. On the basis of the above position the assessee claimed that withdrawals made by the partners in no case involves any borrowed funds whether interest bearing or interest free and is entirely out of profits. The assessee also filed a chart showing borrowings from the banks and repayment made and claimed that there was no diversion of the interest bearing borrowed funds to the partners/sister concerned. The assessee filed one more chart showing interest free unsecured funds from relatives and associates of the partners for the immediate business needs and submitted that assessee has not lent any interest free funds to any person or sister concern. The assessee further contended that a mere perusal of capital account alone can never lead to appropriate conclusion unless a comparative analysis of capital account verses the amounts borrowed is made. The A.O has not proved nexus between borrowings and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued to the appellant by auditors. The system followed is also evidenced by one such transfer entry in respect of the assessment completed for the A.Y. 2007-2008 of ₹ 1630 lacs. In past assessments also, the system adopted by the appellant firm was accepted by the department and was not interfered with. Notwithstanding the above, the appellant has also been religiously following the fundamental accounting assumptions laid down vide Accounting Standards prescribed by the Income Tax Act under section 145 vide notification number SO 69(E) dated 25-01-1996. According to which, the accrual of debit of firm's tax to the partner's capital account is made only after the same is crystallized. Further, the practice is consistently followed in consonance of the principle of consistency under the cardinal accounting assumption of going concern. All these fundamental accounting assumptions are distinctly mentioned at clause 5 of the notification and elaborately defined at clause 6 of the same notification. For the principle of the consistency followed, the appellant relied on the judgement reported in [2013] 38 Taxmann.com 241 (High Court of Gujarat) in CIT II Vs. Patidar Oil C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85.19 82.40 -27.43 152.65 10.24 178.79 142.83 246.07 0.00 853.79 Sub Total Net Withdrawals During the Year 193.88 200.02 -2.79 -0.25 125.22 113.14 189.03 -8.88 388.90 194.03 853.79 498.06 National debit Share in Firm Income Tax 79.5 24.89 1.84 55.08 13.03 173.89 Closing Balance -85.19 -27.43 10.24 142.83 181.84 181.84 Position of Capital A/c of Nava Bharat Press (Raipur) Pvt. Ltd. Considering Cash Profit (Rs. In Lacs) Particulars 31.03.2006 31.03.2007 30.03.2008 31.03.2009 31.03.2010 Total Balance as per last Balance Sheet -25.83 0.86 10.42 42.13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The jurisdictional High Court of Chhattisgarh, in case of JCIT Vs. Beekay Engineering Corporation (2010) 325 ITR 384 (CG) has held that Appellant firm had given interest-free advances to two members of HUF partner-ft is evident from the balance sheet of the appellant firm that there was sufficient fund in the account of the HUF as found by the Tribunal--Besides, profit of ₹ 46,8l.943/- accrued to the firm in the relevant financial year-In these circumstances, the findings recorded by the Tribunal that no evidence is available on record to show that the borrowed funds were not utilized by the appellant for its own business but were diverted as advance to members of the HUF free of interest and, therefore, there is no justification in making part disallowance out of interest paid on borrowed funds . The Hon'ble Mumbai High Court in case of CIT Vs. Reliance Utilities Power Ltd. 313 ITR 340 (Mum) has held that The principal, therefore, would be that if there are funds available both interest free and overdraft and/ or loan taken, then a presumption would arise that investments would be out of the interest free funds generated or available with the company, if the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is seen that the appellant has made repayment of ₹ 70.90 lacs worth principal amount, in respect of interest bearing loans during the relevant previous year. Considering the facts and evidences on record, in my considered view, the A.O has not established any nexus between interest bearing funds and diversion for non business purposes. It is seen that the partner has mortgaged his own fixed assets and has executed personal guarantees favouring financial institutions for obtaining loans for the purpose of business of the appellant firm. Thus, if the partner is in need of the funds, the only recourse available to the partner is to withdraw from the firm. If the firm had not allowed withdrawal of funds by the partner, the partner would have been constrained to dispose of the properties to meet his financial needs and this would have interrupted the credit facilities being enjoyed by the appellant firm. In S. A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) ANR. (2006) 206 CTR (SC) 63J:(2007) 288 ITR 1 (SC):(2007) 158 Taxman 74 (SC)/ (2007) 158 Taxman 230 (SC) the Apex Court held that interest on borrowed funds cannot be disallowed if the assessee has advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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