ACIT, Ludhiana V. M/s Deepak Builders, Ludhiana

ITA 1000/CHANDI/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8430 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-12-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 24-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Proportionate interest; Question of law; Commercial expediency

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO.1000/CHD/2013 ASSESSMENT YEAR:2010-11 THE ACIT, VS. DEEPAK BUILDERS CIRCLE VI 629-B LUDHIANA AGGAR NAGAR LUDHIANA PAN NO. AACFD9483E CROSS OBJECTION 35/CHD/2013 (IN ITA NO. 1000/CHD/2013) DEEPAK BUILDERS VS. THE ACIT 629-B CIRCLE VI AGGAR NAGAR LUDHIANA LUDHIANA (APPELLANT) (RESPONDENT) DEPARTMENT BY : SH. MANJIT SINGH (DR) ASSESSEE BY : SH. SUDHIR SEHGAL (CA) DATE OF HEARING : 09/12/2015 DATE OF PRONOUNCEMENT : 26/02/2016 ORDER PER ANNAPURNA MEHROTRA A.M. THE PRESENT APPEAL BY THE REVENUE & CROSS OBJECTION BY THE ASSESSEE HAS BEEN FILED AGAINST ORDER OF LD. CIT(A)-II, LUDHIANA , DATED 27.08.2013. WE SHALL FIRST TAKE UP THE APPEAL FILED BY THE REVENUE IN WHICH TH E FOLLOWING GROUNDS HAVE BEEN RAISED:- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT (A)-II, LUDHIANA HAS ERRED IN DELETING THE ADDITION OF RS. L 3,67,164/- BY RELYING UPON THE DECISION OF HON'BLE ITAT, CHANDIGARH IN TH E CASE OF M/S BHOGAL SONS VS. ACIT IN ITA NO. 567/CHD/2012 DATED 14.9.2012 BY IGN ORING THE FACTS THAT THE ASSESSEE FIRMS HAS RAISED SECURED AS WELL UNSECURED LOANS DURING THE YEAR UNDER APPEAL WHEREAS NO SUCH LOAN WAS RAISED BY M/S BHOGA L SONS FOR MAKING THE ADVANCES AND IGNORING THE RATIO OF DECISION OF M/S ABHISHEK INDUSTRIES 286 ITR 1(P & H). 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE CIT(A) ERRED IN NOT FOLLOWING THE DECISION OF HON'BLE P & H HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES 286 ITR 1 WHEREIN IT WAS HELD T HAT THE ONLY THING SUFFICIENT TO DISALLOW INTEREST PAID ON THE BORROWINGS TO THE EXT ENT THE AMOUNT IS LENT TO A SISTER CONCERN WOULD BE THE ASSESSEE HAS SOME LOANS TO BE REPAID IRRESPECTIVE OF THE FACT WHETHER THE ASSESSEE HAS OWN CAPITAL OR NOT. 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE CIT(A) ERRED IN NOT CONSIDERING THE DECISION OF HON'BLE PU NJAB AND HARYANA HIGH COURT 2 WHEREIN THE HIGH COURT HELD THAT EVEN THE PLEA OF N EXUS OF LOANS RAISED BY THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER CONC ERN ON INTEREST FREE BASIS, MAY BE IT IS PLEADED TO BE OUT OF SALE PROCEEDS OR SHAR E CAPITAL CANNOT BE ACCEPTED. 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT PARTNERS CAP ITAL IS MEANT FOR THE PURPOSE OF BUSINESS AND NOT THEREAFTER, GIVING ADVANCES TO ITS PARTNERS FOR NON-BUSINESS PURPOSE. 5. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE CIT(A) ERRED IN NOT CONSIDERING THAT THE HIGH COURT HAS NO T DISTINGUISHED BETWEEN SHARE CAPITAL OR PARTNER'S CAPITAL. 6. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE CIT(A) ERRED IN NOT CONSIDERING THE DECISION OF HON'BLE HI GH COURT IN ITA NO. 138 OF 2004 DATED 16.10.2006 IN THE CASE OF MUNJAL SALES CORPOR ATION A PARTNERSHIP CONCERN IN RESPONSE TO QUESTION OF LAW IN (IV) HELD THAT EV EN THOUGH THERE ARE OLD LOANS, AND THE PARTNERS HAD SUFFICIENT CAPITAL, THE DISALL OWANCE IS JUSTIFIED. 7. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF. THE ONLY ISSUE THUS IN THE PRESENT APPEAL IS AGAINS T THE DELETION OF ADDITION OF INTEREST AMOUNTING TO RS. 13,67,164/- MADE AN AC COUNT OF INTEREST FREE ADVANCES GIVEN. 2. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURIN G ASSESSMENT PROCEEDINGS THE A.O. NOTED THAT THE ASSESSEE HAS SHOWN OUTSTANDING DEBTS IN THE NAME OF M/S DEEPAK BUILDCON INFRASTRUCTURE OF AN AMOUNT OF RS. 3,99,87,812/-. NO INTEREST HAD BEEN CHARGED ON THE SAME, WHILE THE ASSESSEE HAD PA ID INTEREST ON BORROWED FUNDS. THE A.O. ACCORDINGLY ASKED THE ASSESSEE TO E XPLAIN WHY INTEREST ON THESE FUNDS DIVERTED FOR NON BUSINESS PURPOSE MAY NOT BE DISALLOWED. THE ASSESSEE CONTENDED THAT THERE WAS BUSINESS RELATIONSHIP WITH M/S DEEPAK BUILDCON INFRASTRUCTURE AND FURTHER RELIED ON THE CASE OF M/ S SA BUILDERS AND M/S MUNJAL SALES CORPORATION. THE A.O. DID NOT FIND THE ASSESS EES REPLY SATISFACTORY AND ACCORDINGLY DISALLOWED AN AMOUNT OF RS. 13,67,164/- BEING INTEREST @12% ON THE DEBT OUTSTANDING IN THE NAME OF M/S DEEPAK BUILDCON INFRA. AGAINST THE SAME THE ASSESSEE FILED AN APPEAL TO THE LD. CIT(A) BEFO RE WHOM THE ASSESSEE ARGUED THAT THE DISALLOWANCE MADE WAS UNWARRANTED SINCE TH ERE WERE SUFFICIENT INTEREST FREE FUNDS IN THE PARTNERS CAPITAL ACCOUN T TO MAKE THE IMPUGNED ADVANCE. THE ASSESSEE PLEADED THAT IT HAD NOT PAID ANY INTEREST ON THE CREDIT 3 BALANCE OF CAPITAL ACCOUNT OF ITS PARTNERS AND IN S UCH CASE IF SOME PARTNER HAD WITHDRAWN ANY AMOUNT IN THE NAME OF HIS FIRM, IN TH IS CASE, M/S DEEPAK BUILDCON INFRASTRUCTURE, THERE WAS NO QUESTION OF MAKING DIS ALLOWANCE U/S 36(1)(III). THE ASSESSEE PLACED RELIANCE ON THE DECISION RENDERED I N THE CASE OF M/S BHOGAL SONS REGD. VS ACIT IN ITA NO. 567/CHD/ 2012 DATED 1 4.09.2012 IN THIS REGARD. FURTHER THE ASSESSEE CONTENDED THAT THE ADVANCE HAD BEEN MADE FOR BUSINESS PURPOSE SINCE THE ASSESSEE HAS BEEN MAKING PURCHASE S AND ALSO SELLING GOODS TO THE SAID PARTY. THE ASSESSEE ALSO ARGUED THAT AL L HIS INTEREST BEARING FUNDS HAD BEEN USED FOR THE PURPOSE OF BUSINESS AND MOREOVER IT HAD SUFFICIENT INTEREST FREE FUNDS TO MAKE THE IMPUGNED ADVANCE. THE ASSESS EE SUBMISSIONS WERE FORWARD TO A.O. FOR HIS COMMENTS THEREON, WHO STATE D THAT THE RELIANCE PLACED BY THE ASSESSEE ON M/S BHOGAL SONS (SUPRA) WAS MISP LACED SINCE IT WAS DISTINGUISHABLE ON FACTS AND FURTHER EMPHASIZED THA T THE ASSESSEE HAD USED INTEREST BEARING FUNDS FOR THE PURPOSE OF MAKING TH E ADVANCE. THE A.O.S REPORT WAS FORWARDED TO THE ASSESSEE FOR HIS COMMENTS WHO REITERATED HIS EARLIER SUBMISSIONS MADE. LD. CIT(A) THEREAFTER, CONSIDERIN G SUBMISSIONS MADE BY BOTH THE PARTIES, ALLOWED THE ASSESSEES APPEAL RELYING UPON THE JUDGMENT OF HONBLE ITAT CHANDIGARH BENCH IN THE CASE OF M/S BH OGAL SONS (SUPRA). LD. CIT(A) HELD AT PARA 3.5 & 3.6 OF HIS ORDER AS FOLLO WS:- I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. M/S DEEPAK BUILDCON INFRA IS A PROPRIETARY CONCERN OF MR. DEEPAK KUMAR, WHO IS A M AJOR PARTNER IN THE APPELLANT FIRM, HAVING 81% SHARE IN THE PARTNERSHIP CONCERN. IT IS FURTHER SEEN THAT THERE IS BALANCE IN THE CAPITAL ACCOUNT OF SHRI DEE PAK KUMAR AMOUNTING TO RS.4.40,33,756/- AS ON 31.03.2010. IT IS ALSO SEEN THAT THE APPELLANT HAD NOT PAID ANY INTEREST ON THE CAPITAL BALANCE OF SHRI DEEPAK KUMAR. THESE FACTS HAVE ALSO BEEN CONFIRMED BY THE AO DURING THE COURSE OF APPEL LATE PROCEEDINGS. FROM THE AFORESAID FACTS, IT IS APPARENT THAT ON THE ONE HAN D, SHRI DEEPAK KUMAR HAS A CAPITAL BALANCE OF RS.4,40,33,756/- IN THE APPELLAN T FIRM ON WHICH NO INTEREST HAS BEEN PAID BY THE APPELLANT FIRM AND ON THE OTHER HA ND, THE FIRM HAD ADVANCE AN INTEREST FREE ADVANCE OF RS.3,99,87,812/- TO THE PROPRIETARY CONCERN OF SHRI DEEPAK KUMAR ON WHICH NO INTEREST HAD BEEN CHARGED. THE ISSUE TO BE CONSIDERED HERE IS WHETHER IN THESE CIRCUMSTANCES, THE AO WAS JUSTIFIED IN DISALLOWING PROPORTIONATE INTEREST ON THIS ADVANCE ON THE GROUND THAT FUNDS OF THE APPELLATE WERE DIVERTED FOR NON BUSINESS PURPOS ES. IN THIS REGARD, THE APPELLANT HAS RELIED UPON THE DECISION OF HONBLE I TAT, CHANDIGARH IN THE CASE OF M/S BHOGAL SONS VS. ACIT IN ITA NO. 567/CHD/2012 DA TED 14.09.2012. IN THIS CASE, THE HONBLE ITAT, CHANDIGARH BENCH HAS HELD AS UNDE R:- WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E RECORD. THE ASSESSEE IS A PARTNERSHIP FIRM AND IS ENGAGED IN THE MANUFACTURIN G OF CYCLE PARTS. THE ASSESSEE FIRM CONSTITUTES OF 15 PARTNERS OUT OF WHICH DEMISE OF ONE PARTNER TOOK PLACE DURING THE YEAR UNDER CONSIDERATION. THE BREAK-UP O F PARTNERS CAPITAL ACCOUNT AS 4 ON 31.3.2008 IS ENCLOSED AT PAGE 9 OF THE PAPER BOO K. THE OPENING BALANCE OF ALL PARTNERS EXCEPT ONE I.E. SHRI SURINDER SINGH BHOGAL WAS POSITIVE BALANCE TOTALING RS.4.32 CRORES. AFTER ADDITIONS AND WITHDRAWALS MAD E BY THE PARTNERS DURING THE YEAR AND ALSO INCLUSION OF SHARE OF PROFITS FOR THE FINANCIAL YEAR, THERE WERE DEBIT BALANCES IN THE CASE OF FOUR OF THE PARTNERS I.E. S HRI DHANWANT SINGH BHOGAL. MOHINDER SINGH BHOGAL, PARDAMAN SINGH BHOGAL AND SU RINDER SINGH BHOGAL, ON I HE CLOSE OF THE YEAR I.E. 31.03.2008. IN THE CASE O F ALL THE PARTNERS THERE WAS CREDIT BALANCE ON THE CLOSE OF THE YEAR I.E. 31.03.2008 AN D THE CUMULATIVE CLOSING BALANCE OF THE CAPITAL ACCOUNT OF THE PARTNERS WAS RS. 1.65 CRORES. ADMITTEDLY, THE ASSESSEE HAS NOT PAID ANY INTEREST ON THE CAPIT AL BALANCES OF THE PARTNERS. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HA D INCURRED INTEREST EXPENDITURE OF RS. 7,56,445/-. THE ASSESSING OFFICE R HAS COMPUTED THE INTEREST RDATABLE TO THE NUMBER OF DAYS ON WHICH THERE WAS D EBIT BALANCE IN THE CAPITAL ACCOUNT OF FOUR OF THE PARTNERS AS MENTIONED ABOVE. THE PERUSAL OF THE DETAILS TABULATED AT PAGES 3 AND 4 REFLECT THE BREAK UP OF THE NUMBER OF DAYS RELATABLE TO IT. THE SAID INTEREST HAS BEEN COMPUTED BY THE A SSESSING OFFICER. HOWEVER, NO CREDIT HAS BEEN ALLOWED ON ACCOUNT OF POSITIVE BALA NCE AVAILABLE IN THE CAPITAL ACCOUNT OF THE SAID PARTNERS OR EVEN THE OVERALL CA PITAL BALANCE OF THE PARTNERS IN TOTALITY AVAILABLE WITH THE ASSESSEE. IN THE CAS E OF PARTNERSHIP FIRM, I.E. THE ASSESSEE BEFORE US, ALL THE PARTNERS HAD MADE CONTR IBUTIONS BY WAY OF THEIR CAPITAL ACCOUNTS AND CUMULATIVE OPENING BALANCES WA S RS.4.32 CRORES ALONG WITH ADDITIONS DURING THE YEAR OF RS.1.27 CRORES AN D WITHDRAWAL OF RS 3.93 CRORES . AFTER INCLUSION OF THE SHARE OF PROFIT AT RS.41.94 LACS, THE NET CAPITAL BALANCE OF ALL THE PARTNERS I.E. POSITIVE MINUS NEGATIVE CAPITAL B ALANCES WAS RS. 1.65 CRORES AT THE CLOSE OF THE YEAR I.E 31.3.2008. IN THE ENTIRET Y OF THE FACTS AND CIRCUMSTANCES WHERE THE PARTNERS THEMSELVES HAD CONTRIBUTED POSIT IVE CAPITAL BALANCES ON WHICH NO INTEREST WAS PAID BY THE ASSESSEE FIRM, WE FIND NO MERIT IN THE STAND OF THE AUTHORITIES BELOW IN CHARGING INTEREST ON THE N EGATIVE CAPITAL BALANCE OF SOME OF THE PARTNERS THAT ALSO FOR LIMITED NUMBER O F DAYS DURING THE YEAR. IN AN Y CASE, THE SAID ACTION OF THE ASSESSING OFFICER IS M ISPLACED WHEN NO CREDIT HAS BEEN ALLOWED ON ACCOUNT OF POSITIVE CAPITAL BALANCE AVAILABLE WITH THE ASSESSEE FIRM IN THE ACCOUNT OF THE AFORESAID PARTNERS, WHO HAD CLOSING NEGATIVE BALANCE AS ON 31.3.2008. IN THE ENTIRETY OF THE FACTS AND C IRCUMSTANCES OF THE CASE, WE DIRECT THE ASSESSING OFFICER TO DELETE THE AFORESAI D ADDITION MADE ON ACCOUNT OF DEBIT BALANCES IN THE CAPITAL ACCOUNTS OF FOUR OF T HE PARTNERS. ' 3.6 THE APPELLANTS CASE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE ITAT, CHANDIGARH BENCH AS THE FACTS ARE SIMILAR TO THE CASE OF M/S BHOGAL SONS (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE ITAT, CHANDIGARH BENCH IN THE CASE OF M/S BHOGAL SONS (SUPRA), THE D ISALLOWANCE MADE BY THE AO IS DELETED. THIS GROUND OF APPEAL IS ACCORDINGLY AL LOWED. 3. AGGRIEVED BY THE SAME THE REVENUE FILED THE PRES ENT APPEAL BEFORE US. 4. BEFORE US LD. DR ARGUED THAT THE RELIANCE PLACED BY THE LD. CIT(A) ON THE JUDGMENT IN THE CASE OF M/S BHOGAL SONS [SUPRA] IS MISPLACED SINCE NO LOANS WERE RAISED IN THAT CASE WHILE IN THE PRESENT CASE THE ASSESSEE FIRM HAS RAISED BOTH SECURED AS WELL AS UNSECURED LOANS. LD. DR FUR THER ARGUED THAT SINCE THERE WERE MIXED FUNDS AVAILABLE WITH THE ASSESSEE THE RA TIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S ABHISH EK INDUSTRIES 286 ITR 1 (P&H) SQUARELY APPLIED TO THE ASSESSEES CASE AND DISALLOW ANCE OF INTEREST U/S 36(1)(III) OF THE ACT WAS CALLED FOR. LD. AR ON THE OTHER HAND SUBMITTED THAT THE ADVANCE MADE BY THE ASSESSEE FIRM TO M/S DEEPAK BUILDCON IN FRASTRUCTURE ONLY FOR 5 BUSINESS PURPOSES AND THERE WAS VALID COMMERCIAL EX PEDIENCY. LD. AR SUBMITTED THAT SHRI DEEPAK KUMAR WHO IS THE PROPRIE TOR OF M/S DEEPAK BUILDCON INFRASTRUCTURE IS ALSO A MAJOR PARTNER HOLDING 81% SHARES IN THE PROFIT OF THE ASSESSEES FIRM. LD. AR SUBMITTED THAT M/S DEEPAK B UILDCON INFRASTRUCTURE HAD STATED A NEW PROJECT FOR CONSTRUCTION OF FLATS FOR WHICH THE ASSESSEE DURING THE YEAR HAD SOLD MATERIAL AMOUNTING TO RS. 75,80,700/- BESIDES LD. AR SUBMITTED THERE WAS ALSO TRANSACTION OF PURCHASE OF GOODS IN THE PRECEDING YEAR ENDING ON 31.03.2009. LD. AR DREW OUR ATTENTION TO COPY OF ACCOUNT OF M/S DEEPAK BUILDCON INFRASTRUCTURE PLACED AT PB 13-16 IN THIS REGARD. LD. AR THEREFORE STATED THAT THE ADVANCE WAS MADE FOR BUSINESS PURPOSES AND THERE WAS THEREFORE NO QUESTION OF MAKING ANY DISALLOWANCE OF INTEREST U/S 36(1)(III). LD. AR PLACED RELIANCE ON THE DECISION OF THE APEX COURT IN THE C ASE OF M/S S.A BUILDERS VS. CIT 288 ITR 1 IN THIS REGARD. LD. AR SUBMITTED THAT SHR I DEEPAK KUMAR WHO WAS THE PROPRIETOR OF DEEPAK BUILDCON INFRASTRUCTURE AND WA S A PARTNER OF 81% SHARE IN THE ASSESSEE FIRM WAS HAVING CAPITAL BALANCE RS. 4, 40,33,756/- ON WHICH NO INTEREST HAS BEEN PAID BY THE ASSESSEE FIRM. THE AD VANCE MADE TO THE PROPRIETARY CONCERN OF RS. 3,99,87,812/- WITHOUT I NTEREST CAN BE ATTRIBUTED ENTIRELY TO THE CAPITAL OF THE PARTNER AND AS LAID DOWN BY THE HONBLE CHANDIGARH BENCH IN THE CASE OF M/S BHOGAL SONS AC T. LD. AR ALSO SUBMITTED THAT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUND S FOR THE PURPOSE OF MAKING THE IMPUGNED ADVANCE. LD. AR DREW OUR ATTENTION TO A CO PY OF STATEMENT SHOWING NON-INTEREST BEARING FUNDS AVAILABLE WITH THE ASSES SEE AND PLACED AT PAPER BOOK PAGE NO. 17 AND STATED THAT THE TOTAL NON-INTE REST BEARING FUNDS AMOUNTING TO RS. 11.45 CRORES WHICH WAS ENOUGH TO M AKE THE IMPUGNED ADVANCE OF RS. 3.99 CRORES. LD. AR FURTHER STATED T HAT THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENT ERPRISES P. LTD. VS. CIT IN ITA NO. 224 OF 2013 DATED 24.07.2015 AND THE DECISION OF TH E HONBLE SUPREME COURT IN THE CASE OF HERO CYCLE P. LTD. VS. CIT (CENTRAL LUD HIANA) IN CIVIL APPEAL NO. 514 OF 2008 DATED 05.11.2015 SQUARELY APPLIED TO THE AS SESSEES CASE. 6 5. WE HAVE HEARD THE RIVAL SUBMISSION & PERUSED THE ORDERS OF AUTHORITIES BELOW AS ALSO THE DOCUMENT PLACED BEFORE US. THE FA CTS EMERGING IN THE PRESENT CASE ARE THAT AN INTEREST FREE ADVANCE AMOU NTING TO RS. 3,99,87,812/- WAS MADE BY THE ASSESSEE FIRM TO M/S DEEPAK BUILDCO N INFRASTRUCTURE WHICH WAS A PROPRIETORSHIP FIRM OF SH. DEEPAK KUMAR. IT IS AL SO ON ADMITTED FACT THAT SH. DEEPAK KUMAR IS A PARTNER WITH 81% INTEREST IN THE PROFIT OF THE ASSESSEE FIRM. UNDISPUTEDLY THE CAPITAL OF MR. DEEPAK KUMAR IN THE ASSESSEE FRIM AMOUNTED TO RS. 4,40,33,756/- ON WHICH NO INTEREST WAS PAID BY THE ASSESSEE FIRM. BESIDES IT IS ALSO NOT IN DISPUTE THAT THE TOTAL AVAILABLE INTERE ST FREE FUND WITH THE ASSESSEE FIRM DURING THE IMPUGNED YEAR AMOUNTED TO RS. 11,45 ,15,890/- WHICH COMPRISED THE FOLLOWING:- 1. INTEREST FREE PARTNER CAPITAL RS. 4,27,39,654/- 2. UNSECURED LOANS RS. 20,29,797/- 3. MOBILIZATION ADVANCE RS. 2,44,08,534/- ----------------------- TOTAL:- RS.6,91,77,985/- ============= IT IS ALSO NOT DISPUTED THAT DURING THE IMPUGNED YE AR THE ASSESSEE HAD BUSINESS TRANSACTIONS WITH M/S DEEPAK BUILDCON INFRASTRUCTUR E TO WHOM MATERIAL AMOUNTING TO RS. 7,80,700/- WAS SOLD AND THERE WERE ALSO TRANSACTION OF PURCHASE OF GOODS IN THE PRECEDING YEAR. IN THE LIGHT OF THE ABOVE FACTS IT HAS TO BE EXAMIN ED WHETHER THE INTEREST FREE ADVANCE MADE TO M/S DEEPAK BUILDCON INFRASTRUCTURE COULD BE SAID TO BE MADE OUT OF INTEREST BEARING FUNDS FOR NON-BUSINESS PURPOSE SO AS TO DISALLOW INTEREST ATTRIBUTABLE TO THE INTEREST BEARING FUNDS USED FOR THE PURPOSE OF MAKING THIS ADVANCE U/S 36(1)(III) OF THE ACT. FROM THE FACTS NARRATED ABOVE IT THOUGH IT IS EVIDE NT THAT THE ASSESSEE HAD BUSINESS TRANSACTIONS WITH THE AFORESAID PARTY AND HAD SOLD MATERIAL 7,80,700/- DURING THE YEAR. WE FIND THAT THE BUSINESS PURPOSE FOR MAKING THE ADVANCE OF RS. 3.99 CRORE HAS NOT BEEN ESTABLISHED BY THE ASSE SSEE. THE FACT THE AFORESAID 7 PARTY IS A DEBTOR FROM WHOM MONEY IS TO BE COLLECTE D BY THE ASSESSEE DOES NOT JUSTIFY THE PURPOSE OF MAKING SUCH A HUGE ADVANCE. NO OTHER FACT HAS BEEN BROUGHT ON RECORD EVEN BEFORE US OR THE LOWER AUTHO RITIES TO ESTABLISH THE COMMERCIAL EXPEDIENCY OF THE TRANSACTION AND THEREF ORE WE HOLD THAT THE ADVANCE WAS NOT MADE FOR THE BUSINESS PURPOSE. HAVING SAID SO THE FACT REMAINS THAT THE ADVANCE WA S MADE TO THE PROPRIETORSHIP FIRM OF ONE OF THE PARTNER OF THE AS SESSEE FIRM WHOSE CAPITAL IN THE FIRM AMOUNTED TO RS. 4,40,33,756/- ON WHICH NO INTE REST HAD BEEN PAID BY THE ASSESSEE FIRM. THE INTEREST FREE ADVANCE OF RS. 3,9 9,87,813/- TO THE PROPRIETORSHIP FIRM OF THE PARTNER COULD BE THEREFORE SAID TO BE O UT OF HIS CAPITAL JUSTIFYING THE NON CHARGING OF INTEREST ON THE SAME. WE CONCUR WIT H THE RELIANCE PLACE BY THE LD. CIT(A) ON THE DECISION OF HONBLE CHANDIGARH BE NCH OF THE ITAT, IN THE CASE OF BHOGAL SONS (SUPRA) IN SUPPORT OF THE ABOVE PROP OSITION. BESIDES THE FACT REMAINS THAT THE ASSESSEE HAD INTEREST FREE FUNDS O F RS. 6,91,77,985/-. THE IMPUGNED ADVANCES COULD BE THEREFORE ATTRIBUTED TO BE OUT OF THE SAME. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES P. LTD. VS. CIT HAS HELD THAT WHERE THERE ARE SUFFICIENT FU NDS / RESERVES TO COVER THE INTEREST FREE ADVANCE THE PRESUMPTION WHICH ARISES IS THAT THE INTEREST HAS BEEN MADE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILA BLE WITH THE ASSESSEE. THE HONBLE HIGH COURT HELD IN THIS ORDER PARA 16 AS FO LLOWS:- AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APPE LLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS. 10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AGREEMENT WITH THE JUDGMENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES & POWER LTD., (2009) 313 ITR 340, PARA-10, THAT IF THERE ARE INTEREST FREE FUNDS AVAI LABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE F UNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SU FFICIENT TO MEET THE INVESTMENT. EVEN THE APEX COURT IN THE CASE OF HERO CYCLE P. LT D. CIT (CENTRAL) LUDHIANA IN CIVIL APPEAL NO. 514 OF 2008 DATED 05.11.2015 HAS A FFIRMED THIS VIEW BY HOLDING AS FOLLOWS: 8 INSOFAR AS THE LOANS TO DIRECTORS ARE CONCERNED, I T COULD NOT BE DISPUTED BY THE REVENUE THAT THE ASSESSEE HAD A CREDIT BALANCE IN T HE BANK ACCOUNT WHEN THE SAID ADVANCE OF RS. 34 LAKHS WAS GIVEN. REMARKABLY, AS OBSERVED BY THE CIT (APPEAL) IN HIS ORDER, THE COMPANY HAD RESERVE/SURP LUS TO THE TUNE OF ALMOST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COULD I N ANY CASE, UTILISE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. ON THE B ASIS OF AFORESAID DISCUSSION, THE PRESENT APPEAL IS ALLOWED, THEREBY SETTING ASIDE TH E ORDER OF THE HIGH COURT AND RESTORING THAT OF THE INCOME TAX APPELLATE TRIBUNAL . IN VIEW OF THE SAME WE HOLD THAT IMPUGNED ADVANCE O F RS. 3.99 CRORE MADE TO DEEPAK INFRASTRUCTURE WAS FROM THE INTEREST FREE FU NDS OF THE ASSESSEE FIRM MORE PARTICULARLY OUT OF THE INTEREST FREE CAPITAL OF TH E PARTNER MR. DEEPAK KUMAR AND THEREFORE NO DISALLOWANCE U/S 36(1)(III) COULD BE M ADE IN THE PRESENT CASE. WE THEREFORE, FIND NO INFIRMITY IN THE ORDER OF LD. CI T(A) IN THIS REGARD AND CONCUR WHICH THE FINDING OF THE LD. CIT(A) DIRECTING THE D ELETION OF DISALLOWANCE OF INTEREST AMOUNTING TO RS.13,67,164/-. THE RELIANCE PLACE BY THE LD. DR ON THE DECISION OF THE P&H HIGH COURT IN THE CASE OF M/S A BHISHEK INDUSTRY TO 286 ITR 1 (P&H), WE FIND HAS NO MERIT SINCE THE SAME HAS BEEN OVERRULED BY THE DECISION OF APEX COURT IN THE CASE OF HERO CYCLES (SUPRA). 6. THE APPEAL OF THE REVENUE IS THEREFORE DISMISSED . CROSS OBJECTION 35/CHD/2013, 7. THE ASSESSEE IN ITS CROSS OBJECTION HAS RAISED T HE FOLLOWING GROUNDS 1. THE LD. CIT(A) ERRED IN LAW AND IN FACTS IN SUSTAIN ING THE ADDITION OF DISALLOWANCE OF INTEREST U/S 36(1)(III) ON ADVANCES OF RS. 50,00,000/- TO SH. VIRENDER KUMAR, OF RS. 15,00,000/- TO SH. ANJALI DHAND & OF RS. 20.25 LACS TO SH. AKASH SINGHAL 8. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURIN G THE ASSESSMENT PROCEEDINGS IT WAS NOTED THAT ASSESSEE HAD GIVEN FOLLOWING ADVA NCES WITHOUT CHARGING ANY INTEREST:- SR. NO. PARTICULARS BALANCE AS ON BALANCE AS ON 31.03.2009 31.03.2010 1. AKASH SINGHAL -175518 2024482 2. ANJALI DHAND 1500000 1500000 3. J.V. STEEL TUBES 6000000 6000000 4. VARINDER KUMAR 5000000 5000000 THE ASSESSEE WAS ASKED TO EXPLAIN WHY PROPORTIONATE INTEREST MAY NOT BE DISALLOWED TO WHICH THE ASSESSEE SUBMITTED THAT THE ADVANCES HAD BEEN GIVEN 9 FOR BUSINESS PURPOSE. THE A.O. OBSERVED THAT THE SU BMISSIONS OF THE ASSESSEE WAS FACTUALLY INCORRECT AND THEREFORE, HE DISALLOWED IN TEREST OF RS. 15,48,965/- @ 12% DURING APPELLATE PROCEEDINGS. BEFORE THE LD. CIT(A) THE ASSESSEE FILED DETAILED SUBMISSIONS REPRODUCED IN PARA 4.2 OF THE CIT(A) OR DER. THE SUBMISSIONS WERE FORWARDED TO THE A.O. FOR HIS COMMENTS WHOSE REPORT IS REPRODUCED AT PARA 4.3 OF CIT(A) ORDER. AFTER GOING THROUGH THE SUBMISSIONS OF BOTH THE PAR TIES LD. CIT(A) HELD THAT THE ADVANCE MADE TO THE JV STEEL TUBES AMOUNTING TO RS. 60,00,000/- WAS FOR BUSINESS PURPOSE AND RELYING UPON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF M/S SA BUILDERS 288 ITR 1 DELETED THE D ISALLOWANCE OF INTEREST MADE ON THE IMPUGNED ADVANCE. AS FOR THE ADVANCE MADE OF RS.50,00,000/- TO MR. VIRENDER KUMAR, RS. 15,00,000/- TO MS. ANJALI DHAND & RS. 20,24,482/- TO SH. AAKASH SINGHAL. LD. CIT(A) HELD THAT THERE WAS NO BUSINESS PURPOSE WITH REGARD TO THE AFORESAID ADVANCE. HE FURTHER RELIED UPON TH E DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUST RY LTD. 286 ITR 1 AND HELD THAT DISALLOWANCE OF INTEREST EXPENSES ON THESE ADV ANCE WAS FULLY JUSTIFIED. HE THEREFORE, UPHELD THE INTEREST DISALLOWED ON THE AD VANCE MADE TO SH. AKASH SINGHAL, MR. VIRENDER KUMAR, MS. ANJALI DHAND. AGGR IEVED BY THE SAME ASSESSEE FILED THE CROSS APPEAL BEFORE US AGITATING THE DISA LLOWANCE UPHELD BY THE LD. CIT(A). 9. BEFORE US THE LD. AR ARGUED THAT THE IMPUGNED AD VANCE HAD BEEN MADE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSE E. LD. AR STATED THAT THE ASSESSEE HAD GIVEN THE ADVANCE TO MISS. ANJALI DHAN D AMOUNTING TO RS. 15,00,000/- FOR THE SUPPLY OF GOODS BUT THE PARTY D ID NOT SUPPLY THE GOODS, AS FOR THE ADVANCE GIVEN TO MR. VIRENDER KUMAR OF RS. 50,0 0,000/-. LD. AR STATED THAT THE SAME HAD BEEN GIVEN FOR THE SUPPLY OF STEEL FOR VARIOUS SITES. LD. AR FURTHER STATED THAT SHRI AKASH SINGHAL HAD GIVEN AN UNSECUR ED LOAN TO THE ASSESSEE DURING THE YEAR WHICH HAD BEEN REPAID BY THE ASSESS EE AND ADVANCE ALSO HAD 10 BEEN MADE LD. AR STATED THAT THE ASSESSEE HAD NEITH ER GIVEN ANY INTEREST ON THE UNSECURED LOAN TAKEN NOR CHARGED ANY INTEREST O N THE ADVANCE GIVEN, LD. AR FURTHER STATED THAT WITHOUT PREJUDICE TO THE ABO VE ARGUMENT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF R ESERVES AND CAPITAL FROM WHICH THE IMPUGNED ADVANCE HAD BEEN MADE. LD. AR DREW OUR ATTENTION TO THE DETAIL SHOWING NON-INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE PLACED THAT PAPER BOOK. PAGE NO. 80 AND STATED THAT WHILE THE TOTAL NON-INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE AMOUNTED TO RS. 7,44,58,865/- THE ADVANCES WERE TO THE TUNE OF RS. 1,25,00,000/-. THU S THE LD. AR PLEADED THAT THE DISALLOWANCE UPHELD BY THE CIT(A) WAS NOT CORRECT. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED ORDER OF THE AUTHORITIES BELOW AS ALSO THE DOCUMENTS PLACED BEFORE US. THE ISSUE IN THIS CASE PERTAINS TO DISALLOWANCE OF INTEREST U/S 36(1)(III) ON INTEREST FREE ADVANCES MADE BY THE ASSESEE TO CERTAIN PERSON S. CERTAIN FACTS PERTINENT TO THE ISSUE ARE THAT INTEREST FREE ADVANCE TO MS. ANJALI DHAND AMOUNTING TO RS. 15,00,000/- AND SHRI VIRENDER KUMAR AMOUNTING TO RS . 50,00,000/- WAS MADE IN THE FINANCIAL YEAR ENDING ON 31.03.2009, THE INTERE ST FEE FUNDS AVAILABLE WITH THE ASSESSEE AS ON 31.03.2009 AMOUNTED TO RS. 2,63,65,3 04/-AS FOLLOWS:- 1. PARTNERS CAPITAL ACCOUNT RS. 1,64,14,230/- 2. UNSECURED LOANS (INTEREST FREE) RS. 30,11,074/- 3. MOBILIZATION ADVANCES RS. 69,40,000/- ------------------------ TOTAL:- RS. 2,63,65,304/- ============== THE ADVANCE MADE OF RS. 20,24,482/- TO MR. AKASH SI NGHAL PERTAINED TO THE IMPUGNED ASSESSMENT YEAR. THE INTEREST FREE ADVANCE S AVAILABLE WITH THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR AMOUNT ED TO RS. 6,91,77,985/- COMPRISING OF: 1. PARTNERS CAPITAL ACCOUNT RS. 4,27,39,654/- 2. UNSECURED LOANS (INTEREST FREE) RS. 20,29,797/- 3. MOBILIZATION ADVANCES RS. 24,40 853/- ----------------------- TOTAL:- RS. 6,91,77,985/- ============= 11 AFTER CONSIDERING THE INTEREST FREE ADVANCE OF RS. 3,99,87,812/- GIVEN TO M/S DEEPAK BUILDCON INFRASTRUCTURE, DEALT WITH IN REVEN UES APPEAL IN ITA NO. 1000/CHD/2013, ABOVE WE FIND THAT THE ASSESSEE FIRM HAD ENOUGH INTEREST FREE FUNDS TO MAKE THE IMPUGNED ADVANCE. THE PRESUMPTION IN SUCH CASES IS THAT THE ADVANCE HAS BEEN MADE OUT OF INTEREST FREE FUND S AVAILABLE AS HELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENT ERPRISES P. LTD. WHEREIN IT WAS HELD THE PARA 16 AS FOLLOWS: 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APPELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS. 10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AGREEMENT WITH THE JUDG MENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UT ILITIES & POWER LTD., (2009) 313 ITR 340, PARA-10, THAT IF THERE ARE INTEREST FREE F UNDS AVAILABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INT EREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUN DS WERE SUFFICIENT TO MEET THE INVESTMENT. THIS VIEW HAS BEEN AFFIRMED BY THE APEX COURT IN HE RO CYCLE LTD. WHEREIN IT WAS HELD AS FOLLOWS: INSOFAR AS THE LOANS TO DIRECTORS ARE CONCERNED, IT COULD NOT BE DISPUTED BY THE REVENUE THAT THE ASSESSEE HAD A CREDIT BALANCE IN T HE BANK ACCOUNT WHEN THE SAID ADVANCE OF RS. 34 LAKHS WAS GIVEN. REMARKABLY, AS OBSERVED BY THE CIT (APPEAL) IN HIS ORDER, THE COMPANY HAD RESERVE/SURP LUS TO THE TUNE OF ALMOST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COULD I N ANY CASE, UTILISE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. ON THE B ASIS OF AFORESAID DISCUSSION, THE PRESENT APPEAL IS ALLOWED, THEREBY SETTING ASIDE TH E ORDER OF THE HIGH COURT AND RESTORING THAT OF THE INCOME TAX APPELLATE TRIBUNAL . THEREFORE WE HOLD THAT THE IMPUGNED ADVANCE HAVE BE EN MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND THUS THE RE WAS NO OCCASION WHAT SO EVER OF DISALLOWING INTEREST U/S 36(1)(III) OF THE INCOME TAX ACT, 1961. RELIANCE PLACED BY THE LD. DR ON THE JURISDICTIONAL HIGH COU RT DECISION IN THE CASE OF ABHISHEK INDUSTRIES IS MISPLACED SINCE THE SAME HAS BEEN OVERRULED BY SUBSEQUENT DECISION OF THE THE APEX COURT IN HERO C YCLE LTD. THE ARGUMENT OF THE LD. DR THAT THE ADVANCE WERE FOR NON BUSINESS P URPOSE, WE FIND HAS MERIT SINCE NO EVIDENCE WAS BROUGHT ON RECORD BY THE ASSE SSEE BEFORE US OR BEFORE THE LOWER AUTHORITIES TO SUBSTANTIATE ITS ARGUMENTS , BUT HAVING SAID SO NO DISALLOWANCE U/S 36(1)(III) CAN STILL BE MADE IN TH E PRESENT CASE AS WE HAVE HELD THAT THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAI LABLE WITH THE ASSESSEE TO MAKE 12 THE IMPUGNED ADVANCE AND THE PRESUMPTION IN THE SUC H CASES IS THAT THEY ARE MADE OUT OF THE INTEREST FREE FUNDS AVAILABLE AND N OT THE INTEREST BEARING FUNDS. IN VIEW OF THE ABOVE WE HOLD THAT THE DISALLOWANCE OF INTEREST U/S 36(1)(III) PERTAINING TO THE MISS. ANJALI DHAND, MR. AKASH SIN GHAL AND MR. VIRENDER KUMAR UPHELD BY THE LD. CIT(A) BE DELETED. 11. THE CROSS OBJECTION OF THE ASSESSEE THEREFORE S TANDS ALLOWED. 12. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED AND C.O OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 26/02/2016 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR