TMI Blog2022 (4) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... re journal entry, which has been incorrectly reflected under the head loan and advances , while it should have been accounted for as Trade Receivables . And if that be the case, then in our view, no disallowance of interest u/s 36(1)(iii) of the Act is called for, merely on account of mistaken accounting treatment, when on facts, no advance has been given. Appeal of assessee allowed. - ITA No. 1793/Ahd/2018 - - - Dated:- 27-4-2022 - Shri P.M. Jagtap, Vice President And Shri Siddhartha Nautiyal, Judicial Member For the Assessee : Shri S.N. Divatia, A.R. For the Revenue : Shri C.S. Sharma, Sr. D.R. ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-10, Ahmedabad in Appeal no. CIT(A)-10/ITO Ward-2(1)(2)/10084/17-18 vide order dated 29/06/2018 passed for the Assessment Year 2014-15. 2. The assessee has raised following grounds of appeal:- 1.1 The order passed u/s 250 on 29-06-2018 for A.Y.2014-15 by CIT(A)-10, Abad, upholding the disallowance of interest expenses of ₹ 18, 84,000/- is wholly illegal, unlawful and against the principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee did not charge any interest. The ld. Assessing Officer noted that assessee has not submitted that any supporting evidence in this regard to show that the above amount shown as loans and advances to Kadam is actually a debtor towards sale of Kadam Residency and inadvertently shown under the head loans and advances and therefore the claim of the assessee cannot be accepted. The ld. Assessing Officer accordingly held that assessee has diverted interest bearing funds for giving interest free advance of ₹ 1,76,78,048/- and therefore disallowed a sum of ₹ 18,84,000/- for interest @ 12% on the opening balance of these advances u/s. 36(1)(iii) of Act and added the same to the income of the assessee. 4. In appeal before ld. CIT(A), the appellant submitted that the outstanding amount of ₹ 1,76,78,048/- as on 31.03.2014 was the unpaid sale price of land sold in the earlier years. However, while grouping for the purpose of Schedule to the Balance Sheet, the said balance was inadvertently shown under the head loans and advances (debit) instead of trade receivables . Therefore, there is no question of charging interest on the said amount. The appellant also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er financial year and there was no fresh advance by way of cash flow in this year, the question of charging interest did not arisen. The AO has also failed to appreciate that out of the interest expenses, the private parties were paid interest of ₹ 12,34,478/- whereas institution towards vehicle/ windmill etc. 3.5. It is to be noted that appellant is having mixed funds and is not able to demonstrate the flow of the funds. The assessee has not utilized the interest bearing fund for its business purpose but advanced the same as interest free made by the assessee to the loan obtained from others. Moreover, the appellant has also not established the fact that same has been given from the interest free surpluses. Where the money borrowed was diverted for giving interest free loans, the proportionate interest attributable to such loans could be legitimately disallowed by the Assessing Officer. It was so held in S.A. Builders Ltd. v. CIT(2004) 269 ITR 535 (P H). Further, this view was accepted in CIT v. H.R. Sugar Factory Pvt. Ltd. [1971] 187 ITR 363 (All) in a case, where money was borrowed for purposes of business, but advanced at a concessional rate to its directors, so that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had to be recalled. In response, Ld. Departmental Representative relied on the observations of order passed by Ld. CIT(A) and Ld. Assessing Officer. 6. We have heard the rival contentions and perused the material on record. Ld. Counsel for the assessee has submitted that for section 36(1)(iii) to be invoked to disallow interest payments, it is a pre-requisite that interest free advances have to be given in the first instance. If no interest free advances have been given, then there is no room of disallowance of interest under section 36(1)(iii) of the Act. Mere mistake in accounting entries cannot be basis for disallowing interest under section 36(1)(iii) of the Act. Ld. Counsel for the assessee has invited our attention to Page 39 of Paper- Book wherein he has pointed out that a sum of ₹ 20,0,000/- was received from Kadam through banking channels from sale of land on 28-030-2013. Thereafter, on 31-03-2013, a journal entry was passed on 31-03-2103 in Kadam s ledger account, debiting a sum of ₹ 1,77,00,000/- on account of sale of Kadam Residency. The Ld. Assessing Officer has disallowed a sum of ₹ 18,84,000/- u/s.36(1)(iii) of the Act computed @12% of the clo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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