DCIT, C-1(1), CHANDIGARH V. M/S RANA POLYCOT LTD., CHANDIGARH

ITA 1050/CHANDI/2018

AI Insights

The case involves four appeals by the Revenue against the orders of the CIT (Appeals) which pertained to the assessment years 2009-10 to 2012-13. The primary issue was the disallowance of interest expenses by the Assessing Officer, which was later deleted by the CIT (Appeals). The disallowances were based on the grounds that the assessee had made advances from interest-bearing funds for non-business purposes. The Tribunal examined the financial records and the arguments presented by both parties, including various judicial precedents, and concluded that the advances were made from interest-free funds and were for business purposes.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 712126 (ITAT-CHANDIGARH)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Assessment Year: 2009-2010
• Other Referred Cases: ACIT Vs Janak Global Resources Pvt. Ltd. 175 ITD 365 (Chd), Bright Enterprises (P) Ltd Vs CIT 381 ITR 107 (P&H), CIT Vs Kapson Associates 381 ITR 204 (P&H), CIT Vs Max India Ltd. 398 ITR 209 (Pb), CIT Vs Max India Ltd (2016) 388 ITR 81 (P&H), Gordrej & Boyce Manufacturing Co. Ltd Vs DCIT (2017) 394 ITR 449 (SC), CIT Vs Reliance Ind Ltd. 410 ITR 466 (SC), CIT v/s Reliance Utilities & Power Ltd 313 ITR 340-344 (Bom), CIT V/s Shapoorji Pallongi & Co 423 ITR 220 (Bom), Decision of ITAT Chandigarh in ITA No. 184/Chd/2015
• Laws Referred To: Section 36(1)(iii) of the Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SARABJEET SINGH
• Assessee Lawyers: PARIKSHIT AGGARWAL
• Keywords: Proportionate interest; Unexplained cash credit; Commercial expediency; Assessment record; Notional interest
• Section: 14A

Judgement Text

" आयकर अपीलȣय अͬधकरण,चÖडीगढ़ Ûयायपीठ , चÖडीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH ‘B’ CHANDIGARH BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपील सं./ ITA No. 1050/CHD/2018 & ITA Nos. 1013, 1014 & 1015/CHD/2018 Ǔनधा[रण वष[ / A. Ys : 2009-10, 2010-11, 2011-12 & 2012-13 The DCIT, Circle 1(1), Chandigarh. बनाम VS M/s Rana Polycot Ltd., SCO 49-50, Sector 8-C, Chandigarh. èथायी लेखा सं./PAN /TAN No: AAACR7623M अपीलाथȸ/Appellant Ĥ×यथȸ/Respondent Ǔनधा[ǐरती कȧ ओर से/Assessee by : Shri Parikshit Aggarwal, CA and Ms. Shruti Khandelwal, Advocate राजèव कȧ ओर से/ Revenue by : Shri Sarabjeet Singh, CIT, DR तारȣख/Date of Hearing : 08.07.2025 उदघोषणा कȧ तारȣख/Date of Pronouncement : 23.07.2025 HYBRID HEARING आदेश/ORDER PER RAJPAL YADAV, VP The present four appeals are directed at the instance of the Revenue against the separate orders of ld. Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 08.05.2018, 04.05.2018, 08.05.2018 and 04.05.2018 for assessment year 2010-11 to 2012-13 respectively. Since common issue is Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 2 involved in all these appeals, therefore, we heard them together and deem it appropriate to dispose of them by this common order. 2. Though Revenue has taken six grounds in each year, but its substantial grievance is that ld. CIT (Appeals) has erred in deleting the disallowance of Rs.2,29,20,000/-, Rs.3,03,14,085/- Rs.4,43,94,826/- and Rs.5,99,57,626/-. These disallowances have been made by the AO with the aid of Section 36(1)(iii) of the Act on the ground that assessee has made advances out of interest bearing funds for non-business purposes, hence interest expenditure is not admissible to the assessee. 3. The ld. counsel for the assessee, at the very outset submitted that assessee has sufficient interest free funds and it has not used interest bearing funds. He drew our attention to page No. 45 of the Paper Book in assessment year 2009-10 where copy of the Balance Sheet is available. He pointed out that reserve and surplus of the assessee is more than Rs.79 Cr whereas advances given by him are far less than the interest free funds available with the assessee. He submitted that ld. First Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 3 Appellate Authority has made a detailed analysis and thereafter deleted the disallowance. He also placed on record details of alleged loans in tabular form right from 2007 upto assessment year 2012-13. Since assessee was having more interest free funds than the advances in each year, therefore, no disallowance ought to have been made. He relied upon following judgements: a) ACIT Vs Janak Global Resources Pvt. Ltd. 175 ITD 365 (Chd) b) Bright Enterprises (P) Ltd Vs CIT 381 ITR 107 (P&H.) c) CIT Vs Kapson Associates 381 ITR 204 (P&H.) d) CIT Vs Max India Ltd. 398 ITR 209 (Pb.) e) CIT Vs Max India Ltd (2016) 388 ITR 81 (P&H) f) Gordrej & Boyce Manufacturing Co. Ltd Vs DCIT (2017) 394 ITR 449 (SC) g) CIT Vs Reliance Ind Ltd. 410 ITR 466 (SC) h) CIT v/s Reliance Utilities & Power Ltd 313 ITR 340-344 (Bom) i) CIT V/s Shapoorji Pallongi & Co 423 ITR 220 (Bom) j) Decision of ITAT Chandigarh in ITA No. 184/Chd/2015 3.1 On the other hand, ld. CIT DR filed written submissions and also placed on record copies of re-assessment order in the case of M/s Rana Sugar Ltd. For assessment year 2011-12. The written submissions of the ld. CIT DR read as under : Sub:- Written submissions in the case of Rana Polycot 1TA No. 1013/2018, 1014/2018, 1015/2018, 1050/2018 -Reg. Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 4 In this connection, it is submitted that above said cases were heard on 08.07.2017 by the Hon'ble Bench. During the course of hearing, the undersigned has brought forward new facts verbally in the knowledge of the Bench. The Hon'ble Bench has directed that the same may be submitted in writing. It is submitted that in the above said cases, there is one common issue involved regarding the addition made by the Assessing Officer u/s 36(1)(iii) of the Act. The Learned AO assessed notional interest on account of interest free loan given by the assessee to various parties including M/s Century Agro Pvt. Ltd. and M/s R J Texfab Pvt. Ltd. The Leaned AO claims that such loans were given without any business exigencies and without business purpose. During the course of proceedings before the Learned CIT (A) the Learned Counsel of the assessee contended that these advances were for business purposes and these are not loans but advances. The names of the parties are mentioned in the Para 5 of the Learned CIT (A) order in the case of M/s Rana Polycot ltd. for the AY 2010-11. The similar additions were made in other years by the AO which are deleted by the Learned CIT (A) and all these appeals of Department are pending before the Hon'ble Bench, out of which 4 were heard as discussed about. As stated above, the undersigned has contradicted the contention of the assessee regarding the genuineness of such parties. These parties were also having transactions with one group company of the assessee namely M/s Rana Sugar Ltd. The Learned AO passed assessment order in the case of M/s Rana Sugar Ltd. for AY 2011-12 on 26.12.2018 in which he had made addition on account of the unexplained credit received from there two paper company namely M/s Century Agro Pvt. Ltd. and M/s R J Texfab Pvt. Ltd. to the tune of the Rs. 19.13 crores. Such addition were confirmed by Learned CIT (A) vide order dated 17.06.2019. From the above facts it is clear that he assessee Rana Polycot Ltd. has received the funds from banks and diverted these funds to these paper Companies and later on these paper Companies had diverted these funds to group Company namely M/s Rana Sugar Ltd. The copies of AO's order and Leaned CIT (A)'s order are attached as Annexure 1 and 2. The assessee has filed appeal before the Hon'ble Bench in the case of M/s Rana Sugar Ltd. against the said orders of the AO (dated 26.12.2018) and CIT(A) (dated 17.06.2019), and these appeals are still pending before the Hon'ble Bench. During the course of above hearing the undersigned has pleaded that the cases of M/s Rana Polycot Ltd. and M/s Rana Sugar Ltd. should be heard together, but the request was denied. Since there is common issue namely, the genuineness of the above said parties is involved in the both the appeals, so the conclusion of the above case, before hearing the case of M/s Rana Sugar Ltd. is premature. My observation in this regard may be taken on record.” 3.2 The ld. CIT DR emphasizes that these advances were not given for business purposes because genuineness of some of the Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 5 loanee companies is in doubt. Though such details were not available at the time of passing the assessment order but there have been re-assessment orders in other connected cases whose appeals are still pending in the Tribunal. 4. We have duly considered the rival contentions and gone through the record carefully. Section 36(1)(iii) of the Act has a direct bearing, therefore, it is imperative upon us to take note of relevant part of this Section, which reads as under : “Other deductions, 36. (1)The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- x x x x x x (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. - Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; x x x Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 6 5. A bare perusal of the Section would reveal that the amount of interest paid in respect of a capital borrowed for the purpose of business or profession, then interest on such amount would be allowed to the assessee as a deduction. In other words, the borrowed fund ought to be used wholly and exclusively for the purpose of the business in order to claim a deduction of interest expenditure. Before adverting to the submissions, we would like to take note of the brief finding of the ld. CIT (Appeals) in each year, which reads as under : ITA 1050/CHD/2018 “5. Ground of appeal No. 2: Brief facts are that the appellant engaged in business of manufacturing cotton yarn, dyed yarn and knit yarn. The AO has observed in the order as under:- \"2.0 The assessee has during the year under consideration, diverted substantial amount of funds to its sister concern namely M/s Camelot Exports Pvt. Ltd. During the course of the assessment proceedings, the assessee was duly confronted with the fact that amounts have been advances to its sister concern without any business consideration. 2.1 The assessee company has raised both secured and unsecured loans during the year under consideration and is also paying huge interest on these loans. A perusal of the balance sheet as on 31.3.2009 filed alongwith the return of income reveals that the total loan funds are amounting to Rs. 2,53,47,44,039/-. The secured loans are amounting to Rs. 2,32,35,33,266/- and unsecured loans are amounting to Rs. 21,12,10,773/- as on 31.3.2009. In the immediately preceding year, the total loan funds as on 31.3.3008 were only Rs. 2,30,88,54,351/-. Thus, there is a substantial increase in the loan funds raised during the year under consideration which amounts to Rs. 22,58,89,688/'-. Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 7 2.3 The total interest debited in the profit and loss account for the year under consideration is amounting to Rs. 17,48,43,528/- in the immediately preceding year, the interest expenses were amounting to Rs. 13,56,32,362/-. This clearly shows that the assessee is paying interest on borrowed capital on the various secured loans raised from the banks and on the unsecured loans raised from the family members and other parties. 2.6 Thus, interest on borrowed capital is allowed as a deduction u/s 36(l)(iii) only if it is used for the purposes of business. However, if the funds of the assessee company are diverted to its sister concern without any business consideration or commercial expediency, then the expense on account of interest is not allowable. In the instant case, the assessee has diverted huge amounts of funds to its sister concerns mainly M/s Camelot Exports Pvt. Ltd though there are no business activities with this concern. The copy of account of M/s Camelot Exports Pvt. Ltd. in the books of assessee company has been filed during the course of the assessment proceedings, which are placed on record. A perusal of these accounts reveals that there are no business transactions except for transfer of funds to these entities. There are no credit entries in the copy of the account of this entity and they are only debit entries which relates to the transfer of funds. The assessee has during the course of the assessment proceedings, has not given any reason as to why the funds has been transferred to these two sister concerns. Referring to the judgment of Hon'ble Punjab & Haryana High Court in the case of M/s Abhishek Industries (286 ITR 1), the AO has made the addition as under:- \"As per the copy of account of M/s Camelot Exports Pvt. Ltd. the sister concern of the assessee, the closing balance is a debit balance amounting to Rs. 19,10,00,000/'-. In view of the above discussion, the disallowance of interest @12% is being worked out.\" 5.1 In response to the appeal filed by the appellant u/s 250 of the Act, authorized representative Sh. T.N. Singla, C.A. (in short \"Ld. AR\") filed written submission on behalf of the appellant as under: \"The appellant company has given advances of Rs. 19,10,00,000/- to M/s Camlot Exports Pvt. Ltd. for the purchase of cotton yarn. These advances were made during the last year and the company had surplus funds in the shape of capital reserves plus amounting to Rs. 79.4 crores as on 31.03.2008 and no interest bearing funds were transferred by the appellant company to the Camlot Exports Pvt. Ltd. As these advances were given for business purposes and out of own funds, hence no disallowance u/s 36(l)(iii) be made out of interest expenses charged in profit & loss account by relying on the judgement of Hon'ble Punjab & Haryana High Court in the case of Brite Enterprises Pvt. Ltd.\" 5.2 I have perused the assessment order and examined the reply of the assessee. The advances were verified and were found to be made from the current account of the assessee Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 8 representing non-interest bearing funds. Hence, no disallowance u/s 36(l)(iii) is sustainable. Thus, ground of appeal No. 2 is allowed.” ITA 1013/CHD/2018 5. Ground of appeal No. 2: Brief facts are that the appellant is engaged in business of manufacturing cotton yarn, dyed yarn and knitted yarn. The AO observed that the assessee had made the following advances totaling to Rs. 25,32,30,876/-:- S.No. Name of the Party Amount 1 Ajay Bharat Kumar & Co., Baroda, Gujarat Rs 2,75,00,000/- 2 Century Agros Pvt. Ltd. Rs. 14,02,00,000/- 3 Jiwan Overseas Pvt. Ltd. Rs. 95,00,000/- 4 Preet Bansal Rs. 6,00,000/- 5 R.J. Tex fab Pvt. Ltd. Rs. 7,40,67,376/- 6 SF Industries Rs. 7,50,000/- 7 Sound of Music India (P) Ltd. Rs. 6,13,500/- Total Rs. 25,32,30,876/- The AO asked the assessee to give the business expediency and observed that there was no business relations with the persons to whom the loan is given. The AO has further observed that funds diverted for non-business purposes were not its own funds but borrowed at a high interest rate. The AO thus disallowed the interest claimed as expense by the assessee u/s 36(l)(iii) of the Act. The AO mainly relied on the judgement of M/s Abhishek Industries Ltd. (286 ITR 1) to support his case. 5.1 In response to the appeal filed by the appellant u/s 250 of the Act, authorized representative Sh. T.N. Singla, C.A. (in short \"Ld. AR\") filed written submission on behalf of the appellant as under: \"The Ld. Assessing Officer has wrongly disallowed notional interest of Rs. 3,03,87,705/- u/s 36(l)(iii) on advances. The appellant company has given advances of Rs. 25,32,30,876/- to various parties. These advances were made during the last year and the company had surplus funds in the shape of capital reserves plus share capital amounting to Rs. 76.66. crores as on 31.03.2010 and no interest bearing funds were transferred by the appellant company to these parties. As these advances were given for business purposes and out of own funds, hence no disallowance u/s 36(l)(iii) be made out of interest expenses charged in profit & loss account. We rely on the following judgements on this issue:- In the judgement of Punjab and Haryana High Court in the case of Brite Enterprises Pvt. Ltd. Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 9 Further, the Ld. AR has submitted as under:- \"In addition to the earlier submission we would like to submit that the payments were made to Century Agros Pvt. Ltd. Jiwan Overseas Ltd, Preet Bansal and S.F. 'Industries from Indusind Bank (C/A No. 180150) Payments to S.F. Industries were also made from Canara Bank (C/A No. 2190) and PNB (C/A No. 0376). The amount reflected in R.J. Texfab Ltd is transfer entry from advance for purchase of land to R.J. Texfab Ltd and no interest bearing funds were transferred. The statement of Sound Music were not made available by the assessee. The statement of account of M/s Ajay Bharat & Company clearly shows that all payment/ transfer of funds was made from current account of the Company with Indus Ind Bank.\" 5.2 I have perused the assessment order and examined the reply of the assessee. (i) Ajay Bharat Kumar & Co. Baroda, Gujarat: On examination of copy of account of Ajay Bharat Kumar & Co. Baroda, it is seen that the opening balance was Rs. 4,84,43,000/- and closing balance was Rs. 27,50,00,000/-. No debit entries have been made during the year. In earlier years the debits were on account of funds transfer from current accounts of the appellant. Hence, no adverse view is taken on this issue. Addition is therefore deleted. (ii) Century Agros Pvt. Ltd: On examination of the ledger account of this concern and submission of the appellant, it is seen that the funds transferred to the party was made from the current bank account maintained with Indus Inda Bank bearing account No. 180150, hence, no interest bearing funds were used to make advances to this concern. Moreover, the dealing with this company are in the nature of business transaction. No disallowance u/s 36(l)(iii) can be sustained, thus, the addition is deleted. (iii) Jiwan Overseas: A sum of Rs. 95,00,000/- was transferred from current account No. 180150 of the appellant on 18.06.2007 and no other transaction has taken place after that date. No interest bearing funds have been used. Therefore, no disallowance u/s 36(l)(iii) can be made and is deleted. iv) Sh. Preet Bansal: A sum of Rs. 6,00,000/- was transferred from current account No. 180150 of the appellant on 08.07.2004 and no other transaction has taken place after that date. No interest bearing funds have been used. Therefore, no disallowance u/s 36(l)(iii) can be made and is deleted. Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 10 (v) M/s R.J. Texfab Ltd: On 31.03.2009 an amount of Rs. 7,40,67,376/- were debits representing amounts receivable as share of land sold by the appellant and it does not represent any fund transferred from interest bearing loan funds. Therefore, no disallowance u/s 36(l)(iii) can be made and is deleted. (vi) M/s SF Industries: On perusal of the ledger account of M/s S.F. Industries in the books of the appellant, it is seen that the loan/ advances have been given from non interest bearing funds from current accounts in Indus Ind Bank and Canara Bank of the appellant. Since no interest bearing funds have been used, no disallowance u/s 36(l)(iii) can be made and is deleted. (vii) Sound of Music India (P) Ltd: The appellant has not been able to prove that non- interest bearing funds were used for non-business advances. Hence, addition with respect to interest on this amount is confirmed u/ s 36(l)(iii) of the Act. 5.3 In view of the above, ground of appeal No. 2 is partly allowed. ITA 1014/CHD/2018 5. Ground of appeal No. 2: Brief facts are that the appellant is engaged in business of manufacturing cotton yarn, dyed yarn and knitted yarn. The AO observed that the assessee had made the following advances totaling to Rs. 36,99,56,886/-:- S.No. Name of the Party Amount 1 Ajay Bharat Kumar & Co., Baroda, Gujarat Rs. 2,75,00,000/- 2 Century Agros Pvt. Ltd. Rs. 9,49,00,000/- 3 G.K. Hotel Ltd Rs.25,00,000/- 4 Jiwan Overseas Pvt. Ltd. Rs.95,00,000/- 5 Preet Bansal Rs.6,00,000/- 6 Pro Eye Protection World Pvt. Ltd. Rs. 16,39,510/- 7 R.J. Tex fab Pvt. Ltd. Rs.23,18,67,376/- 8 SF Industries Rs.7,50,000/- 9. Sahil Kakkar Rs. 7,00,000/- 10. Total Rs. 36,99,56,886/- The AO asked the assessee to give the business expediency and observed that there was no business relations with the persons to whom the loan is given. The AO has further observed that funds diverted for non-business purposes are not its own funds but borrowed at a high interest rate. The AO thus disallowed the interest claimed by the assessee as expense u/s 36(l)(iii) of the Act. The AO mainly relied on the judgement of M/s Abhishek Industries Ltd. (286 ITR 1) and similar other judgements to support his case. Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 11 5.1 In response to the appeal filed by the appellant u/s 250 of the Act, authorized representative Sh. T.N. Singla, C.A. (in short \"Ld. AR\") filed written submission on behalf of the appellant as under: \"The Ld. Assessing Officer has wrongly disallowed expenses of Rs. 4,43,94,826/ -u/s 36(l)(iii) on advances. The appellant company has given advances of Rs. 36,99,56,886/- to various parties. These advances were made during the last year and the company had surplus funds in the shape of capital reserves plus share capital amounting to Rs. 76.66 crores as on 31.03.2012 and no interest bearing funds were transferred by the appellant company to these parties. As these advances were given for business purposes and out of own funds, hence no disallowance u/s 36(l)(iii) be made out of interest expenses charged in profit & loss account. We rely on the following judgements on this issues:- In the judgement of Punjab and Haryana High Court in the case of Brite Enterprises Pvt. Ltd. While making the said disallowance, the Learned Assessing Officer wrongly relied upon judgement in case of M/s Abhishek Industries which has been overruled by Apex Court judgement in case of Hero Cycles (P) Ltd. Further, without prejudice to our above said submission, if at all interest is to be disallowed on these advances, though not admitted, then also the Learned Assessing Officer has wrongly applied interest @ 12% on the total advances without proving any direct nexus with the interest bearing funds simply on the plea of use of mixed funds, instead of proportionate interest, i.e. out of the total interest charged to the profit & loss account in the ratio of advances divided by total assets of the appellant company.\" 5.2 I have perused the assessment order and examined the reply of the assessee. All the advances were verified and were found to be made from the current account of the assessee representing non-interest bearing funds. Hence, no disallowance u/s 36(l)(iii) is sustainable. Thus, ground of appeal No. 2 is allowed. ITA 1015/CHD/2018 5: Ground of appeal No. 2: Brief facts are that the appellant is engaged in business of manufacturing cotton yarn, dyed yarn and knitted yarn. The AO observed that the assessee had made the following advances totaling to Rs. 49,96,46,886/-: Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 12 S.No. Name of the Party Amount 1 Ajay Bharat Kumar & Co., Baroda, Gujarat Rs.5,11,20,000/- 2 Century Agros Pvt. Ltd. Rs.17,06,00,000/- 3 G.K. Hotels Ltd. Rs.25,00,000/- 4 Jiwan Overseas Pvt. Ltd. Rs.95,00,000/- 5 Preet Bansal Rs.6,00,000/- 6 Pro Eye Protection World Pvt. Ltd. Rs.16,39,510/- 7 R.J. Texfab Pvt. Ltd. Rs.26,22,37,376/- 8 SF Industries Rs.7,50,000/- 9 Sh. Sahil Kakkar Rs.7,00,000/- Total Rs.49,96,46,886/- The AO asked the assessee to give the business expediency and observed that there was no business relations with the persons to whom the loan is given. The AO has further observed that funds diverted for non-business purposes are not its own funds but borrowed at a high interest rate. The AO thus disallowed the interest claimed by the assessee as expense u/s 36(1)(iii) of the Act. The AO mainly relied on the judgement of M/s Abhishek Industries Ltd. (286 ITR 1) and similar other judgements to support his case. 5.1 In response to the appeal filed by the appellant u/s 250 of the Act, authorized representative Sh. T.N. Singla, C.A. (in short \"Ld. AR\") filed written submission on behalf of the appellant as under: \"The Ld. Assessing Officer has wrongly disallowed notional interest of Rs. 5,9,57,626/- u/s 36(l)(iii) on advances. The appellant company has given advances of Rs. 49,96,46,886/- to various parties. The company has surplus funds in the shape of share capital amounting to Rs. 61,64,96,460/- as on 31.03.2012 and no interest bearing funds were transferred by the appellant company to these parties. As these advances were given for business purposes and out of own funds,' hence no disallowance u/s 36(l)(iii) be made out of interest expenses charged in profit & loss account. We rely on the following judgements on this issues:- In - the judgement of Punjab and Haryana High Court in the case of Brite Enterprises Pvt. Ltd. While making the said disallowance, the Learned Assessing Officer wrongly relied upon judgement in case of M/s Abhishek Industries which has been overruled by Apex Court judgement in case of Hero Cycles (P) Ltd. Further, without prejudice to our above said submission, if at all interest is to be disallowed on these advances, though not admitted, then also the Learned Assessing Officer has Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 13 wrongly applied interest @ 12% on the total advances without proving any direct nexus with the interest bearing funds simply on the plea of use of mixed funds, instead of proportionate interest, i.e.. out of the total interest charged to the profit & loss account in the ratio of advances divided by total assets of the appellant company.\" Further, the Ld. AO has submitted as under: - \"In addition to the earlier submission we would like to submit that the payments were made to the following parties from Induslnd Bank (C/A No. 180150):- 1. Ajay Bharat Kumar & Co., Baroda, Gujarat 2. Century Agros Pvt. Ltd. 3. G.K. Hotels Ltd. 4. Jiwan Overseas Pvt. Ltd. 5. Preet Bansal 6. Pro Eye Protection World Pvt. Ltd. 7. R.J. Texfab Pvt. Ltd. 8. SF Industries 9. Sh. Sahil Kakkar Payments to S.F. Industries were also made from Canara Bank (C/A No. 2190) and PNB (C/A No. 0376). In addition to our earlier submission we are submitting 'statement of M/s Ajay Bharat & Company alongwith bank accounts from where the amount was transferred to said concern upto 31.03.2012, which could not be submitted, as the same was not provided by the appellant company. The statement of account of M/s Ajay Bharat & Company clearly shows that all payment/ transfer of funds was made from current account of the Company with Indus Ind Bank.\" 5.2 I have perused the assessment order and examined the reply of the assessee. All the advances were verified and were found to be made from the current account of the assessee representing non-interest bearing funds. Hence, no disallowance u/s 36(l)(iii) is sustainable. Thus, ground of appeal No. 2 is allowed.” 5.1 A perusal of the Balance Sheet would reveal that assessee has reserve and surplus of Rs.79.4 Cr. Similar Balance Sheet is being placed on record in each year. The assessee has demonstrated that it has more interest free funds in every year than the advances. The ld. CIT (Appeals) has observed that Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 14 assessee has interest free funds of Rs.79.4 Cr whereas it has advanced Rs.19,10,00,000/-. The assessee has demonstrated that it has not transferred any interest bearing funds for non business purposes. If we peruse the written submissions of ld. CIT DR, it would reveal that he has emphasized that AO has observed that these loans were given without any business exigency and without business purposes. It is pertinent to mention that assessee is not claiming the deduction of interest expenses on the ground that it has made advances for business purpose. The case of the assessee is that loans given to these concerns is out of interest free loans and AO cannot stop the assessee from giving advances to anyone if it is not incurring interest expenditure and claiming such expenditure as a deduction. The AO cannot persuade an assessee to earn notional interest income on surplus funds available with it and then pay taxes. This is not comprehended in the scheme of the Income Tax Act. 5.2 The ld. CIT DR thereafter made a reference about re-assessment order passed in some third concern i.e. two Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 15 alleged loanee of the assessee and submitted that they are not genuine companies. We fail to appreciate what is the relevancy of this submission with the issue in hand. If assessee has some interest free surplus funds, then it has every domain and control over such funds to use it in any manner. The AO cannot put any restriction on the assessee. The alleged material might be discussed in the re-assessment order, but it was neither on the assessment record of these assessees nor before the CIT (Appeals). It is a subsequent development which has not been brought on record by the Revenue in a formal way. Even the cognizance of this material has not been taken by the Revenue Authorities i.e. CIT (Appeals) or the AO. Therefore, ld. DR cannot persuade a second Appellate Authority to enhance the scope of assessment. Whether M/s Rana Polycot has received the funds from bank and diverted it to these concerns or not, is not the issue involved in the present appeal. The case of the AO is that assessee has made advances out of interest bearing funds and therefore, it cannot claim interest expenses. The CIT (Appeals) has held that these funds were not interest bearing funds and Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 16 therefore, interest expenses cannot be disallowed. In other words, the AO cannot persuade the assessee to earn a notional income on account of charging interest from these concerns. 5.3 Apart from that, in the last paragraph, ld. DR has alleged that since appeals of M/s Rana Sugar are pending, therefore, he made a request that these cases be connected. It is pertinent to note that these appeals are of 2018 lying in this Tribunal for the last seven years and the Revenue has been seeking repeated adjournments and these appeals were adjourned 47 times by one or the other reason. The earlier Bench adjourned the group separately because of the voluminous Paper Books involved therein. However, today on 16.07.2025, we have heard M/s Rana Sugar Ltd. also in the same combination for two assessment years, therefore, we do not find any merit in this suggestion of ld. CIT DR because it has no relevancy with the issues involved therein. Identical issues are involved in the case of M/s Rana Sugar in regular assessment for assessment years 2010-11 and 2011-12 ITA Nos. 1048 and 1049/CHD/2018. Cross-appeals ITA Nos.512 and 513/CHD/2023 are also heard. Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 17 After going through orders of the ld. CIT (Appeals) in all these four years, we do not find any error on this ground, hence, finding of the CIT (Appeals) qua deletion of disallowance made with the aid of Section 36(1)(iii) of the Act is affirmed in all the four years. 6. No other issues are involved in assessment year 2009-10 and 2010-11, therefore, both these appeals are dismissed. 7. There is one more issue in assessment year 2011-12 and 2012-13. The AO has made an addition of Rs.61,164/- and Rs.65,383/- with the help of Section 14A. A perusal of Section 14A would indicate that it contemplates expenses incurred for earning tax free income, would not be allowed to the assessee. In other words, if any expenses relatable to an income which is otherwise exempt from taxation, then no expenditure would be allowed to the assessee as a deduction. The ld. CIT (Appeals) has categorically recorded that assessee has not earned any tax free income, therefore, no disallowance is to be made u/s 14A of the Act. We uphold the order of the CIT (Appeals) and put reliance upon the judgement of Hon'ble Gujrat High Court in the Printed from counselvise.com ITA-1050, 1013 to 1015/CHD/2018 A.Y. 2009-10 to 2012-13 18 case of CIT Vs Corrtech Energy Ltd. 372 ITR 97. We also put reliance upon the judgement of Hon'ble Delhi High Court in the case of Cheminvest Limited v CIT 378 ITR 33 whereby Hon'ble Delhi High Court has reversed the Special Bench decision of the ITAT. 8. In view of these judgements, we do not find any error in the order of the ld. CIT (Appeals). Accordingly, this ground of appeal is rejected in both the years. 9. In the result, all the appeals are dismissed. Order pronounced on 23rd July,2025. Sd/- Sd/- (MANOJ KUMAR AGGARWAL) (RAJPAL YADAV) ACCOUNTANT MEMBER VICE PRESIDENT “Poonam” आदेश कȧ ĤǓतͧलͪप अĒेͪषत/ Copy of the order forwarded to : 1. अपीलाथȸ/ The Appellant 2. Ĥ×यथȸ/ The Respondent 3. आयकर आयुÈत/ CIT 4. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय आͬधकरण, चÖडीगढ़/ DR, ITAT, CHANDIGARH 5. गाड[ फाईल/ Guard File सहायक पंजीकार/ Assistant Registrar Printed from counselvise.com "