TMI Blog2024 (4) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... ector in the books, the partnership firm where director [Shri Harpal Singh] was a partner, the Partnership Deed, the PAN of Partnership firm and the assessee's balance sheet for assessment year 2014-15, are required to be adduced as evidence, and the Form 26AS would show the veracity of the assessee's contention that it had received Income Tax refund on 21.12.2013, as contended. Transfer of such refund to partnership firm would also be reflected in the bank statement. The factum of Director, being a partner in partnership firm would be evincible from the Partnership Deed and PAN Card of partnership firm Perusal of the bank statement would also divulge as to whether the funds were given out from the debit balance or the credit balance in the bank account and would also allow ascertainment of the truthfulness or otherwise of the assessee's contention that its bank account is devoid of drawing power and it maintains a credit balance and that the interest rate charged is zero . Still further, the ledger of Harpal Singh Capital Account in the books of M/s Synergy Thrislington would show as to whether indeed interest free funds were credited in the capital account in instalme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is remanded to the file of the AO to verify the correctness and authenticity of the documents discussed and to provide adequate opportunity of hearing to the assessee with regard thereto and to re-adjudicate the matter. Ordered accordingly. Appeal allowed for statistical purposes. - Shri A.D. Jain, Vice President And Shri Vikram Singh Yadav, Accountant Member For the Assessee : Shri Nikhil Goyal, Advocate And Shri Ashok Goyal, C.A. For the Revenue : Shri Dharam Vir, JCIT, Sr. DR ORDER PER A.D. JAIN, VICE PRESIDENT This is assessee's appeal for assessment year 2014-15, challenging the order dated 28.03.2023 passed by the ld. CIT(A), confirming disallowance of interest of Rs. 75,75,208/- u/s 36(1)(iii) of the Income Tax Act, 1961 made by the Assessing Officer. 2. The assessee company had given advance to Shri Harpal Singh, Director, amounting to Rs. 7,80,19,515/-. The AO made disallowance of interest @ 12% of average advance outstanding, of Rs. 6,31,26,735/-, amounting to Rs. 75,75,208/-. The assessee held that there was no nexus between the advances given and the business of the assessee. It was held that the assessee did not have sufficient liquid funds to make advances to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's bank account; that in the absence of the bank statement, the assessee's onus for claiming expenditure u/s 36(1)(iii) of the Act, to prove that the borrowed interest bearing funds had been utilized for business purposes, had not been discharged; that so, the assessee had not been able to justify its claim of interest paid, as made in the Profit Loss Account; that the assessee had already applied all the interest free funds available with it in different assets, and so, no interest free funds were available with it as on the date of advancing the loans to Shri Harpal Singh, Director; and that the AO was, therefore, justified in making a disallowance of interest amounting to Rs. 75,75,208/-. 6. The assessee has sought to place on record, by way of additional evidence, copies of statement of bank account of the assessee, Annual Tax Statements of the assessee u/s 203AA of the Income Tax Act, in Form 26AS for Financial Year 2013-14, relevant to assessment year 2014-15, i.e., the year under consideration, ledger of Shri Harpal Singh, Director in the books of the assessee, Shri Harpal Singh s capital account in the books of M/s Synergy Thrislington, in which, Shri Harp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ster concern and the balance of Shri Harpal Singh was debited by the amount of Rs. 2,97,85,560/-, making the total debit balance in the books of the assessee to be Rs. 7,80,19,515/-. 6.1 It has been contended that the ledger of Shri Harpal Singh in the books of the assessee makes it evident that payment was made to the firm on behalf of Shri Harpal Singh. It has been averred that the taxing authorities have, thus, erred in treating the transfer of funds to be from interest bearing funds. It has been contended that a thorough examination of the ledger within the firm s books, under the name of Shri Harpal Singh Capital Account would establish that the funds, housed within the capital account, are explicitly earmarked and were utilized for the fulfilment of the firm s business requirements, disproving the finding that the funds were not transferred for business purposes. It has been contended that the capital account of a partner in a firm represents the partner s investment or contribution to the business; that when a partner introduces capital into the firm, it is recorded in the capital account to reflect the investment in the business; that this capital is typically used for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the petitioner had advanced borrowed capital to its sister concern and associate concern without charging any interest and, therefore, the interest claimed on borrowed capital was not allowable u/s 36(1)(iii) of the Act; that in S.A.Builders (supra), the Hon'ble Supreme Court was considering an almost identical situation, wherein, the assessee had transferred a huge amount of Rs. 82 lacs to its subsidiary company out of the Cash Credit Account of the assessee, in which, there was a huge debit balance; that the AO had held that since the assessee had diverted its borrowed funds to its sister concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed; that the Hon'ble Supreme Court held that extending such a loan would fall under the expression used for purpose of business ; that it was held that if the amount has been advanced as a measure of commercial expediency, the interest on the funds borrowed by the assessee should be allowed as a deduction u/s 36(1)(iii) of the Act; that it was held that the petitioner had been granting loans and advances to its sister and associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presumption would arise that investment would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment. 7. It has been argued that in CIT, Jalandhar-I, Jalandhar Vs Max India Ltd. [2017] 80 taxmann.com 98 (P H), it was found after going through the Cash Flow Statement, that the company had received interest free share capital from the issue of shares; that it was held that where the assessee gave interest free loans to its subsidiaries out of surplus funds, the disallowance made by the AO u/s 36(1)(iii) of the Act was to be deleted; that it was held that admittedly, the assessee company had given interest free loans and advances amounting to Rs. 2297.83 lacs upto the end of the relevant year, including Rs. 704 lacs during the relevant year to its three subsidiary companies, that the AO did not make any disallowance in respect of expenditure incurred on borrowed funds u/s 36(1)(iii) of the Act in relation to interest free loans and advances given to the said three subsidiary companies in the earlier years; that after perusing the Cash Flow Statement of the assessee company for the assessment year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been contended that the Tribunal further found that during the relevant years, the assessee had sufficient interest free funds to make investment in the group companies. It has been contended that it was in view of these findings of the Tribunal that the Hon'ble High Court held in favour of the assessee, observing that no substantial question of law arose, since the findings recorded by the Tribunal were not shown to be illegal or perverse. 8.1 It has been submitted that in the case of Beekons Industries Ltd. Vs Commissioner of Income Tax , [2023] 149 taxmann.com 383 (P H), the Hon'ble High Court set aside the order passed by the Tribunal and restored that of the ld. CIT(A), directing the AO to recompute the disallowance as per the decision in the case of Hero Cycles , [2015] 63 taxmann.com 308 (S.C) and that in Pr. CIT Vs Holy Faith International (P) Ltd. , order dated 24.07.2017, passed in IT Appeal No. 87 of 2017. It was contended that in the scrutiny proceedings, the assessee had been found to have given loans and advances amounting to Rs. 3,11,22,866/- to its Directors, relatives of Directors and sister concerns in which the Directors had substantial interest, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the decision of the Hon'ble Supreme Court in the case of Hero Cycles (supra), it is to be seen as to whether the assessee had availability of sufficient interest free funds with it, as on the dates on which funds were advanced by it to Shri Harpal Singh, Director. It cannot be denied, as also has not been done before us, that such availability of funds can be ascertained on documentary evidence, which is proved on record unrebutted. In this scenario, we are of the considered opinion that the statement of bank account of the assessee for Financial Year 2013-14, relevant to the year under consideration, i.e., assessment year 2014-15, the assessee's Annual Tax Statement in Form 26AS for the year under consideration, the ledger of Shri Harpal Singh, Director in assessee's books, the capital account of Shri Harpal Singh, Director in the books of M/s Synergy Thrislington, the partnership firm where Shri Harpal Singh was a partner, the Partnership Deed of M/s Synergy Thrislington, the PAN of M/s Synergy Thrislington and the assessee's balance sheet for assessment year 2014-15, are required to be adduced as evidence, and the Form 26AS would show the veracity of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be very material and relevant for adjudicating the matter. Since those documents were not available with the AO and were produced before the Tribunal for the first time, it was held that the issue was to be restored to the file of the AO to verify the correctness and authenticity of such documents, and also to adjudicate the gross profit issue afresh after providing adequate opportunity to the assessee of being heard and looking into comparable cases. In the present case, we are alive to the fact that the best evidence in the shape of the account statement was not produced by the assessee before the authorities below. However, as discussed herein above, we have found the afore-enumerated documents, including the bank statement of the assessee, to be very material and relevant for adjudicating the matter in a just and proper manner. It is, therefore, that exercising our powers under Rule 29 of the ITAT Rules, that we are ordering all these documents to be adduced in evidence. 11.1 In Braganza Construction (P) Ltd. Vs ACIT, Circle II(1), Panaji , [2020] 116 taxmann.com 11 (Bom), the Tribunal had treated a certain amount expended by the assessee as unexplained expenditure and it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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