TMI Blog2017 (3) TMI 1808X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. We further rely on the decision in the case of CIT vs. Hero Cycles Ltd. [ 2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT] wherein it was held that no disallowance out of interest payment is permissible if AO does not establish nexus between the expenditure incurred and income generated. - Decided in favour of assessee. Addition u/s 41(1) - cessation of liability - there is a one creditor M/s Mahima Porsepun in whose case an amount was outstanding for last three years - HELD THAT:- there was no basis by treating the said amount as remission or cessation of a trading liability of the assessee when it was not unilateral written off by the assessee. We find that the AO has made this addition merely on the basis of expiry of limitation to file the suit by creditor, where he cannot who come up with a proceedings for enforcement of debt. However, we find that this amount was subsequently settled by the assessee in the succeeding years therefore, the assessee has not derived or obtained any benefit in respect of such trading liability. Therefore, the addition made on the basis of presumption cannot be sustained in the eyes of law. Provision of Section 41(1)(a) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that they are distinguishable on facts. 1.2. The addition of ₹ 22,58,779/- may please be deleted or in the alternative restricted to reasonable figure. 2. The Ld. CIT(A) has erred in maintaining the addition of ₹ 6,76,266/- under section 41(1) by observing that confirmation is not filed. The addition is bad-in-law and deserve to be deleted. 3. The Ld. CIT (A) erred in maintaining the disallowance of ₹ 1,83,889/- u/s. 14A . The addition may please be deleted. 1. Ground no. 1 relate to confirmation of disallowance of interest of ₹ 22,58,779/-. 1.1. Succinctly, facts as culled out from the orders of lower authorities are that the assessee derives income from trading of soya oil. F.P., tuar, Mustard and cottonseeds. The assessee has filed return of income on 30.09.2010 declaring total income of ₹ 73,29,800/-. The AO found that the assessee has advanced interest bearing funds to some of persons from which either no interest is charged or the same is charged at lesser rate whereas the assessee has paid interest @ 12% on loan taken. The AO therefore, worked out disallowance of interest as detailed below: - Name of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. A.R. submitted a table demonstrating that the assessee has substantial interestfree funds of ₹ 16,88,97,140/- (consisting of capital of ₹ 10,69,90,175/- and loans and without interest of ₹ 2,00,00,000/-) as against the interest free loans given ₹ 5,75,00,000/-. The Ld. A.R. has filed a table depicting the details of funds utilization of interest-free funds and interest bearing funds, which is supported by the copy of balance sheet appearing at page No 29 to 34 of Paper Book. According to which funds of Rs. ₹ 34,70,17,015/- out of interest bearing funds of ₹ 23,26,98,883/- have been utilized for business purpose in fixed assets, sundry debtors, cash and bank balances, etc. From the above facts and data, the Ld. A.R. contended that the assessee has not diverted its interest bearing funds for non-business purposes. Therefore, there was no question of diversion of interest bearing funds by the assessee. Thus, the disallowance as made by the AO is totally wrong. The Ld. A.R. further submitted that above facts of the case shows that advances to above persons as mentioned in assessment order from whom interest was not charged was given out of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est was charged or less interest was charged. Thus interest-free advance were given out of interest-free funds available with the assessee during the year for which sufficient interest-free funds were available. Therefore, we are of the view that the Ld. A.O. has failed to establish that interest free advances to above stated four parties were out of interest bearing funds. We find that the AO has not been able to establish the nexus between interest bearing funds utilized for non business purpose as held in above quoted decision of Hon`ble Supreme Court. The ld. A. R. has placed reliance in the case of CIT vs. Reliance Utilities Power Ltd. (2009) 313 ITR 340 (Bom)/ 178 Taxman 135 (Bom) wherein it was held that if there was funds available both, interest-free and overdraft and or/loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest free funds were sufficient to meet the investments. In the present case, the sufficient interest free funds were available at the disposal of the assessee. Therefore, presumption would go in favour of the assessee that the interest free funds were g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Dr. Pallab Ghosh v/s ITO in ITA No. 659/Kol/2013, Unison Hotels Ltd v/s ACIT ITA No. 2113/Del/2012, CIT v/s Southern Roadways Ltd. 282 ITR 379 , New Commercial Mills Co. Ltd. v/s Dy. CIT (2001) 73 TTJ (Ahd) 893, CIT v/s Sugauli Sugar Works (P) LTD. (1999) 152 CTR (SC) 46; (1999) 236 ITR 518 (SC): ((1999) 102 TAXMAN 713 (SC), Shri Vardhman Overseas Ltd. v/s Assistant Commissioner of Income Tax (2008) 24 SOT 393 (Del), Wilson Co v/s ACIT 121 TTJ 258. Therefore, it was claimed that the provision of Section 41(1) of the Act are attracted only when the assessee has written off the liability in the books of accounts by unilateral act. Since in the case of assessee, liability has not been written off in the books of accounts hence, provision of Section 41(1) are no applicable. Further the limitation period prescribed in the Act for sundry creditor for filing a suit only. It has no relevance so far as cessation of liabilities are concerned. Thus, there is no reason for invoking of provision of Section 41(1) of the Act. It was also pointed out by the AR that the said liability has been settled during the year 2015 and as such therefore, there was no cessation of liabilities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the Section. The other decision as relied by the Ld. AR has mentioned above are also supports his view. Therefore, we are of the considered opinion that the provision of Section 41(1)(a) of the Act can only be invoked when the assessee has written off the liability in its books of accounts by unilateral act. Since, the assessee has not written off the aforesaid amount in its books of accounts and the payment has been settled in the subsequent year, therefore, the addition so made by the AO, is not sustainable in the law. Accordingly, the same is deleted. This grounds of appeal is therefore allowed. 3. Ground no. 3 relates to disallowance of ₹ 1,83,889/- made u/s 14A of the Act. 3.1. Facts apropos of this ground are that the assessee has invested the capital in the form of share capital for which he is earning his share income from the firm and has shown share of profit of ₹ 36,647/- from Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of expenditure incurred in relation to exempt income whereas the assessee has not incurred any expenditure in relation to exempt income. The AR also cited the some decision of the Hon'ble Punjab Haryana High Court to contend that Rule 8D cannot be blindly applied where no expenditure was incurred to earn exempt income. 3.4. On the other hand, the Ld. DR drew our attention to the paper book page no. 25 which is profit and loss account of the proprietory concern of the assessee, wherein the assessee, has debited interest expenditure of ₹ 1,66,83,160/- and ₹ 6,53,550/- has bank charges. Therefore, the Ld. DR contended that the assessee has incurred expenditure in relation to earning exempt income and therefore, it cannot be said that no expenditure on account of administrative and handling etc. has been incurred by the assessee who have earned exempt income. The DR has also submitted that the assessee has invested in her own funds towards the capital of the aforesaid three firms. Therefore, the disallowance under Rule 8D(iii) can be correctly made. Hence, the findings of the AO and the CIT(A) may be upheld. 3.5. We have considered the facts, rival sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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