Sh. Ravinder Kumar Gupta, Chandigarh V. Pr. Commissioner of Income Tax - 1, Chandigarh

ITA 187/CHANDI/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5067 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 05-09-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 04-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI SARANGA L
• Keywords: Capital asset; Opportunity of being heard; Proportionate interest; Cost of acquisition; Assessment record; Commercial expediency
• Section: 143(3); 142(1); 37(1); 145; 263; 63; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE MS. DIVA SINGH, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.187/CHD/2016 (ASSESSMENT YEAR : 2012-13) SH.RAVINDER KUMAR GUPTA, VS. THE PR.C.I.T., H.NO.250, SECTOR 19A, N.W. REGION, AAYAKAR BHAWAN CHANDIGARH. SECTOR 17-E, CHANDIGARH. PAN: AATPG3953H (APPELLANT) (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY : SHRI RAVI SARANGAL, CIT DR DATE OF HEARING : 06.07.2017 DATE OF PRONOUNCEMENT : 12.07.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINS T THE ORDER OF PR. COMMISSIONER OF INCOME TAX, CHANDI GRH DATED 22.2.2016 RELATING TO ASSESSMENT YEAR 2012-13 , PASSED U/S 263 OF THE INCOME TAX ACT, 1961 (IN SHOR T THE ACT). 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LD. PRINCIPAL COMMISSIONER OF INCOME TAX IS BAD, AGAINST FACTS & LAW. 2. HAVING ADMITTED THAT THE ASSESSING OFFICER HAD CONDUCTED/ EXAMINED THE ISSUE OF ASSESSEE HAVING ADVANCED THE AMOUNT OF RS.84,92,000/- TO HIS WIFE THE LD. PRINCIPAL COMMI SSIONER OF INCOME TAX, HAS MISDIRECTED HIMSELF IN CONCLUDI NG THAT ASSESSING OFFICER HAD NOT EXAMINED THAT THE SAID A DVANCE WAS TO HIS WIFE FOR BUSINESS PURPOSES. THE LD. PRINCIPAL C OMMISSIONER OF INCOME TAX WITHOUT APPRECIATING THE FACTS EXPLANATI ON, AND EVIDENCE ON RECORD HAS ERRED IN CANCELLING THE ASSE SSMENT ORDER 2 U/S 143 (3) DATED 31-12-2014. THE ORDER OF LD. ASSE SSING OFFICER BE RESTORED. 3. LD. PR. COMMISSIONER OF INCOME TAX HAS ERRED IN CANCELLING THE ORDER OF ASSESSING OFFICER U/S 143 (3) DATED 31-12- 2014 FOR INADEQUATE ENQUIRY INTO THE FACTS AND CIRCUMSTANCES OF THE CASE. THE ORDER OF THE LD. PRINCIPAL COMMISSIONER O F INCOME TAX BE STRUCK DOWN AND THE ASSESSING OFFICER 'S ORD ER BE RESTORED. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR DELE TE ANY OF THE GROUND OF APPEAL BEFORE THE SAME IS TAKEN UP FOR FI NAL DISPOSAL. 3. AT THE OUTSET IT MAY BE STATED THAT THE CASE WA S INITIALLY HEARD ON 29.3.2017 WHEN IT WAS ARGUED AT LENGTH BY THE LD. COUNSEL FOR ASSESSEE SHRI ANIL BATRA. T HEREAFTER THE CASE WAS REFIXED, FOR SEEKING CLARIFICATION FRO M THE REVENUE, ON 6.7.2017, WHEN NONE ATTENDED ON BEHALF OF THE ASSESSEE. AFTER HEARING THE LD. DR THE CASE WAS HE ARD ON THE SAME DATE. 4. BRIEF FACTS RELEVANT TO THE CASE ARE THAT RETUR N DECLARING INCOME OF RS.31,45,490/- WAS FILED BY THE ASSESSEE ON 29.9.2012, WHICH WAS ASSESSED AT AN INC OME OF RS.37,79,700/- U/S 143(3) OF THE ACT ON 31.12.2014 AFTER MAKING ADDITION OF RS.5,92,193 ON ACCOUNT OF LOW NE T PROFIT RETURNED AND RS.42,000/-BEING INTEREST DISALLOWED U /S 37(1) OF THE ACT, PERTAINING TO INTEREST FREE ADVAN CE MADE OF RS.3,50,000/- TO DR.V GUPTA. 5. THEREAFTER ON EXAMINING THE ASSESSMENT RECORDS, THE LD. PR.CIT NOTICED THAT THE ASSESSEE HAD TAKEN SECURED LOAN AMOUNTING TO RS.1,34,45,048/- ON WHICH INTERES T OF RS.17,74,961/- WAS PAID AND FURTHER THAT THE ASSESS EE HAD GIVEN INTEREST FREE ADVANCES AMOUNTING TO RS.84,92 ,000/- 3 TO HIS WIFE FOR CONSTRUCTION OF BUILDING. THE LD. P R.CIT CONCLUDED THEREFROM THAT SINCE THE AMOUNT ADVANCED WAS NOT USED FOR THE PURPOSE OF BUSINESS BUT WAS USED T O ACQUIRE CAPITAL ASSET WHICH WAS NOT PUT TO USE BY T HE ASSESSEE, PROPORTIONATE INTEREST WAS REQUIRED TO BE DISALLOWED U/S 36(1)(III) R.W.S. 37(1) OF THE ACT. ACCORDINGLY, PROCEEDINGS U/S 263 OF THE ACT WERE IN ITIATED AND SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. IN RESPONSE REPLIES WERE SUBMITTED BY THE ASSESSEE. T HE LD. PR.CIT AFTER CONSIDERING THE ASSESSEES REPLY, NOTE D THAT THE ISSUE OF DISALLOWABILITY OF INTEREST RELATING TO TH E ADVANCE MADE TO HIS WIFE HAD NOT BEEN VERIFIED AND EXAMINED BY THE AO, AS TO WHETHER IT WAS USED FOR THE PURPOSE OF B USINESS. THE LD PR.CIT ALSO NOTED THAT THE ASSESSEE HAD NOT FILED ANY DOCUMENTARY EVIDENCE TO PROVE THAT THERE WAS NO NEX US OF THE SAID ADVANCE WITH THE BORROWED FUNDS .HE THEREF ORE HELD THAT THE PROVISIONS OF SECTION 36(1)(III) WERE APP LICABLE IN THE PRESENT CASE AND THE ASSESSMENT FRAMED BY THE ASSESSING OFFICER WAS THUS ERRONEOUS AND PREJUDICIA L TO THE INTEREST OF THE REVENUE. THE LD. PR.CIT, THEREFORE , CANCELLED THE ASSESSMENT ORDER AND DIRECTED THE AS SESSING OFFICER TO FRAME A FRESH ASSESSMENT ORDER AFTER CAR RYING OUT NECESSARY INVESTIGATIONS AND CROSS-VERIFYING THE EV IDENCES SUBMITTED BY THE ASSESSEE. THE RELEVANT FINDINGS O F THE LD. PR.CIT AT PARA 4 AND 5 OF HIS ORDER ARE AS UNDER: 4. THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED. THOUGH THE ISSUE HAS BEEN EXAMINED BY THE ASSESSING OFFICE R, IT HAS BEEN NOT BEEN EXAMINED AND VERIFIED WHETHER ADVANCE AMOUNTING TO RS.84,92,000/- GIVEN TO ASSESSEES WIF E WAS USED 4 FOR THE PURPOSE OF BUSINESS. THE ASSESSEE HAS ALSO NOT FURNISHED ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THAT THE SAID ADVANCES HAD NO NEXUS WITH THE BORROWED FUND. REGARDING THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF M/S HERO CYCLE (P) LTD., IT IS SEEN THAT THE FAC TS OF THE INSTANT CASE OF THE ASSESSEE ARE DIFFERENT AND DIST INGUISHABLE FROM FACTS OF THE CASE OF CASE OF M/S. HERO CYCLE (P) LTD. IN THE CASE OF M/S. HERO CYCLE (P) LTD., THE AMOUNT WAS ADVANCED BY WAY OF BUSINESS EXPEDIENCY. FURTHER, IN THAT CASE SOME ADVANCE WAS GIVEN TO ONE OF THE DIRECTORS FROM OUT OF THE SURPLUS FUND. HOWEVER, IN THE INSTANT CASE OF THE ASSESSEE, THE ADVANCE WAS GIVEN NOT FOR THE PURPOSE OF BUSINESS BUT IT HAS BEEN USED FOR ACQUISITION OF A CAPITAL ASSET WHICH HAS NOT BEEN PUT TO USE. FURTHER THE ASSESS EE DID NOT FURNISH ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE TH AT THE AMOUNT PAID HAD NO NEXUS WITH THE BORROWED FUNDS. THUS, IT IS CLEAR THAT PROVISIONS OF SECTION 36(L)(III) OF I .T. ACT, 1961 ARE APPLICABLE IN THE CASE OF THE ASSESSEE. 5. IN VIEW OF THE ABOVE, IT IS HELD THAT THIS IS A FIT CASE FOR INVOKING THE PROVISIONS OF SECTION 263 OF I.T. ACT, 1961 AS THE ASSESSMENT FRAMED BY THE ASSESSING OFFICER IS ERRON EOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. THE ASSESSM ENT ORDER U/S 143(3) OF I.T. ACT, 1961 DATED 31.12.2014 FOR THE A. Y. 20 12- 13 IS, THEREFORE, CANCELLED U/S 26 3 OF I.T. ACT, 1961 AND THE AO IS DIRECTED TO FRAME ASSESSMENT ORD ER AFRESH AFTER CARRYING OUT INVESTIGATIONS AS DISCUSS ED ABOVE, CROSS VERIFICATION OF EVIDENCES SUBMITTED AND AFFOR DING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 6. AGGRIEVED BY THE SAME, THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. DURING THE COURSE OF HEARING THE LD. COUNSEL FOR ASSESSEE STATED THAT THERE WAS NO ERROR IN THE ORDER OF THE AO AND BROADLY RAISED THE FOLLOWING CO NTENTIONS BEFORE US AGAINST THE VALIDITY OF ASSUMPTION OF JUR ISDICTION BY THE LD. PR.CIT U/S 263 OF THE ACT.: 1) THAT THE ISSUE HAD BEEN THOROUGHLY EXAMINED DURING ASSESSMENT PROCEEDINGS AND THE ASSESSING OFFICER HAD CHOSEN NOT TO DISALLOW INTEREST ON THE ADVANCE MADE TO THE WIFE OF THE ASSESSEE. 2. THAT IN ANY CASE, THERE WAS NO ERROR IN THE ORDE R OF THE AO SO AS TO CAUSE PREJUDICE TO THE REVENUE, 5 SINCE NET PROFIT ADDITION HAD BEEN MADE IN THE CASE OF THE ASSESSEE AND NO FURTHER ADDITION ON ACCOUNT OF INTEREST U/S 36(1)(III) OF THE ACT, COULD BE MADE I N SUCH CIRCUMSTANCES. 3) THAT THE ASSESSEE HAD DEMONSTRATED THE AVAILABILITY OF ENOUGH OWN INTEREST FREE FUNDS FOR THE PURPOSE OF MAKING THE SAID ADVANCE AND, THEREFORE, ALSO NO DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT COULD BE MADE. 7. IN SUPPORT OF HIS CONTENTION THAT THE ISSUE HAD BEEN THOROUGHLY EXAMINED DURING ASSESSMENT PROCEEDI NGS. THE LD. COUNSEL FOR ASSESSEE DREW OUR ATTENTION TO THE FOLLOWING: I) SPECIFIC QUERY RAISED VIDE NOTICE U/S 142(1) DAT ED 25.11.2014 RELATING TO LOANS AND ADVANCES IN RESPON SE TO WHICH THE ASSESSEE VIDE HIS REPLY DATED 5.12.201 4 HAD SUBMITTED THAT THE AMOUNT ADVANCED TO HIS WIFE MRS.ARUNA GUPTA WAS FOR THE PURPOSE OF SETTING UP A GODOWN AND OFFICE TO BE UTILIZED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AT MULLANPUR. THE RELEVAN T REPLY FILED BY THE ASSESSEE IS AS UNDER: (I) DR.V.K. GUPTA RS.3,50,000/- AS A MEDICAL CONSULTANT. (II) MRS.ARUNA GUPTA. THE AMOUNT ADVANCED TO HER IS IN ACCOUNT OF SETTING UP A GODOWN AND OFFICE AT MULLANPUR. THOUGH THE SITE BELONGS TO HER, THE UTILIZATION OF THE GODOWN/OFFICE SITE IS STRICTLY FOR THE BUSINESS OF THE ASSESSEE. 8. THEREAFTER THE LD. COUNSEL FOR ASSESSEE POINTED OUT THAT VIDE NOTICE DATED 16.12.2014, THE ISSUE WA S RAISED ONCE AGAIN BY WAY OF FOLLOWING QUESTION: 2(B) THEREAFTER THE A.O. VIDE HIS NOTICE 16 TH DECEMBER, 2014 RAISED THE ISSUE ONCE AGAIN BY WAY O F FOLLOWING QUESTION, 6 (III) YOU HAVE SHOWN INTEREST FREE ADVANCES TO YOUR SON 'S FIRM M/S HARSORIA CRUSHING CO AT RS.10.98359/-, DR. V. G UPTA AT RS.3.50 LACS AND TO YOUR WIFE SMT. ARUNA GUPTA A T RS.84,92,154/-. ON THE OTHER HAND YOU ARE PAYING I NTEREST TO THE BANKS AT RS.17,74,96I/- ON THE FUNDS BORROWED. PLEASE SHOW CAUSE WHY THE INTEREST ON THE EQUAL AMOUNT OF FUNDS BORROWED FROM THE BANKS BE NOT DISALLOWED IN VIEW O F THE JUDGMENT OF THE HONABLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES REPORTED IN 286 ITR 1. TO WHICH QUERRY THE ASSESSEE VIDE HIS REPLY DATED 2 2-12-2014 REPRODUCED AS; 9. THE LD. COUNSEL FOR ASSESSEE SUBMITTED THAT THE REPLY TO THIS ISSUE HAD ALREADY BEEN SUBMITTED VIDE THEIR REPLY DATED 5.12.2014. THEREAFTER THE LD. COUNSEL F OR ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER VIDE PROCEEDINGS RECORDED ON ORDER SHEET DATED 9.12.2014 RECORDED ANOTHER QUERY PERTAINING TO THIS ISSUE AS UNDER: 2(C) FURTHER DURING THE INTERVENING PERIO D THE LD. ASSESSING OFFICER VIDE PROCEEDINGS RECORDED ON ORDER SHEET N /2 DATED 09- 12-2014 RECORDED THE FOLLOWING QUERY; SH. ANIL KUMAR BATRA, ADVOCATE ATTENDED AND FILED T HE DETAILS ALREADY REQUISITIONED VIDE LETTER DATED 481 5 DATE 09-10- 2014 THE AR FURTHER ASKED LO FILE THE DOCUMENTARY E VIDENCE ESTABLISHED THAT THE ASSESSEE IS USING THE GODOWN O F MRS. ARUNA GUPTA TO WHOM THE 'A' HAS ADVANCED INTEREST FREE AM OUNT OF RS.31,49,940/-. THE AR FURTHER ASKED TO FURNISHED A LATEST COPY OF ORDER FRAMED U/S L43 (3) OF THE I.T ACT, 1961. 10. AND ANOTHER SUCH QUERY WAS RAISED VIDE ORDER SHEET ENTRY DATED 31.12.2014 AS UNDER: 2(D) FURTHER, THE ASSESSING OFFICER ON DATED 31- 12-2014 RECORDED THE FOLLOWING QUERRY/ OBSERVATIONS ON ORDER SHEET N /3 DATED 31- 12-2014. SH. ANIL KUMAR BATRA, ADVOCATE ATTENDED BOOKS OF ACCOUNTS \VOUCHERS WERE ALSO PRODUCED & TEST CHECKE D. THE AR ASKED TO SAY ANYTHING OVER & ABOVE THE EXPLANATI ON ALREADY FURNISHED IN RESPECT OF LOW NP RARE & INTER EST FREE ADVANCE MADE TO DR. ARUNA GUPTA. THE AR AGREED TO A PPLY NP AT THE RATE SHOWN LAST YEAR I.E. 9. 71% AND ALSO TO DISALLOW INTEREST ON THE EQUAL AMOUNT OF INTEREST ON ADVANCE S MADE TO DR. GUPTA TO AVIOD LITIGATION WITH OUT ANY PENAL AC TION. 7 11. THE LD. COUNSEL FOR ASSESSEE SUBMITTED THAT IN RESPONSE TO THE ABOVE QUERY A DECLARATION FROM THE WIFE OF THE ASSESSEE SMT.ARUNA GUPTA WAS FILED IN WHICH SHE STATED THAT SHE WAS THE OWNER OF A PLOT IN MULLANPUR ON WH ICH HERE HUSBAND WISHED TO CONSTRUCT A SUPERSTRUCTURE F OR THE CONDUCT OF HIS BUSINESS AND FOR WHICH PURPOSE HE HA D ADVANCED A SUM OF RS.85 LACS TO HER. THE CONTENTS OF THE DECLARATION ,PRODUCED BEFORE US, ARE AS UNDER: THIS IS CERTIFY THAT 1 ARUNA GUPTA WIFE OF SH. RA VINDER GUPTA, R/O NO. 250, SECTOR 19, CHANDIGARH, AN THE ACTUAL, REAL AND LEGAL OWNER OF PLOT/ LAND MEASURING APPROX, 8 KANAI LOCA TED VILLAGE CHAHARMAJRA PO MULLANPUR GARIBDASS TEHSIL. KHARAR, MOHALI PUNJAB, AND WHICH HAS BEEN PURCHASED OUT OF MY OWN INCOME AND FUNDS. THAT I HAVE BEEN APPROACHED BY MY HUSBAND SH. RAVIN DER GUPTA TO PERMIT HIM TO CONSTRUCT THE SUPERSTRUCTURE ON THE S AID LAND, FOR THE CONDUCT OF HIS BUSINESS FROM HIS OWN SOURCES AND FI NANCES, TO WHICH I HAVE CONSENTED, AND IN PURSUANCE OF SUCH ASSURANCE HE HAS INVESTED APPROX. RS.85,00,000/- (RS. EIGHTY FIVE LACS ONLY) ON THE SAID SUPERSTRUCTURE. THAT IT HAS BEEN STIPULATED BETWEEN BOTH, THAT I SH ALL CONTINUE TO BE THE OWNER OF THE SAID LAND WITHOUT ANY ENCUMBRANCE THEREON AND SH.RAVINDER GUPTA SHALL HE THE OWNER OF THE SUPERST RUCTURE WITH THE FURTHER CONDITION THAT SH. RAVINDER GUPTA WILL PAY LAND RENT FOR THE OCCUPATION OF SUCH SITE AND ON VACATION, THE SUPERS TRUCTURE SHALL VEST AS PROPERTY OF THE DECLARANT AND TO BE COMPENS ATED, AS MUTUALLY AGREED UPON IN SUCH EVENT. ARUNA GUPTA. (DECLARENT) ACCEPTED 12. THE LD. COUNSEL FOR ASSESSEE FURTHER SUBMITTED THAT SMT.ARUNA GUPTAS STATEMENT WAS ALSO RECORDED BY THE ASSESSING OFFICER ON 31.12.2014 IN WHICH SHE REITER ATED THE ASSERTIONS MADE REPEATEDLY BEFORE THE ASSESSING OFF ICER THAT THE IMPUGNED SUM OF RS.85 LACS HAD BEEN ADVANCED TO HER BY HER HUSBAND FOR THE PURPOSE OF CONSTRUCTING A SUPERSTRUCTURE ON THE LAND OWNED BY HER IN MULLANPU R AND WHICH SUPERSTRUCTURE WAS TO BE USED BY HER HUSBAND FOR 8 THE CONDUCT OF HIS BUSINESS. THE RELEVANT EXTRACT OF THE STATEMENT IS AS UNDER: Q,5 PLEASE STATE THE COST OF ACQUISITION OF THI S LAND. AM. IT FETCH ME AROUND RS.70.00 LACS BY THE TIME. Q 6 HAVE YOU MADE ON CONSTRUCTION ON THIS LAND. ANS. YES, CONSTRUCTION OF AROUND 7000 SQ. FT ALONG WITH A BOUNDARY HAS BEEN MADE ON THIS PLOT. THIS 7000 SQ. FT. IN CLUDES A SHED THREE ROOMS AND AN OFFICE. THIS WAS CONSTRUCTED DU RING THE FINANCIAL YEAR 2010-11 AND 2011-12. Q.7 WHAT WAS THE SOURCE OF ACQUISITION OF THIS PROP ERTY. ANS. THIS PLOT WAS PURCHASED OUT OF SALE OF 1/4TH SHARE IN SHOWROOM IN SECTOR 5. PANCHKULA. THIS WAS SOLD ARO UND RS. 3.00 CRORES AND MY SHARE WAS RS. 80.00 LACS APPROX. Q.8. PLEASE EXPLAIN THE SOURCES OF CONSTRUCTION MAD E ON THIS PLOT. ANS. MY HUSBAND SH. RAVINDER KUMAR GUPTA HAD MADE M E ADVANCES OF APPROX RS. 85.00 LACS UNDER' AN AGREEME NT THAT HE WILL BE THE OWNER OF SUPERSTRUCTURE AND THE PIECE O F LAND WILL CONTINUE TO BELONG TO ME. IN LIEU OF THIS THE GROUN D RENT BY HIM AND INTEREST ON THE AMOUNT MADE ADVANCE TO ME WILL HE CHARGED BY MY HUSBAND. A COPY OF THIS DECLARATION I S PROVIDED FOR NECESSARY CONFIRMATION RECORD. Q.9 CAN YOU PROVIDE A COPY OF YOUR BANK ACCOUNT IS WHICH THE MONEY WAS TRANSFERRED. ANS. YES, I AM MAINTAINED ACCOUNT WITH PUNJAB NATIO NAL BANK, SECTOR 9, CHANDIGARH, A COPY OF THIS ACCOUNT WILL B E PROVIDED WITHIN A DAY. Q.10 HAVE YOU PAID ANY INTEREST IN LIEU OF THIS ADV ANCE TO YOUR HUSBAND. ANS. NO. HE NEVER CHARGES ANY INTEREST FROM ME. 13. THE LD. COUNSEL FOR ASSESSEE THEREAFTER SUBMIT TED THAT IT IS AMPLY EVIDENT FROM THE ABOVE THAT DUE INVESTIGATIONS WERE CARRIED OUT DURING ASSESSMENT PROCEEDINGS BY THE ASSESSING OFFICER AND THEREAFTER IN HIS WISDOM HE HAD CHOSEN NOT TO DISALLOW ANY INTEREST O N SUCH ADVANCE. THE LD. COUNSEL FOR ASSESSEE STATED THAT IN VIEW OF THE ABOVE, IT COULD NOT BE SAID THAT THERE WAS A NY ERROR IN THE ORDER OF THE ASSESSING OFFICER TO WARRANT TH E 9 ASSUMPTION OF JURISDICTION BY THE LD. PR.CIT U/S 26 3 OF THE ACT TO REVISE THE SAME. THE LD. COUNSEL FOR ASSESS EE RELIED UPON THE DECISION OF THE ITAT CHANDIGARH BENCH IN T HE CASE OF SH. NARAIN SINGLA, PROP. M/S NARAIN & COMPANY, M ANDI GOBINDGARB VS. PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL), LUDHIANA IN ITA NOS.423, 425, 426 & 427/CHD/2015 DATED 31.8.2015 IN THIS REGARD. 14. THE LD. COUNSEL FOR ASSESSEE ALSO STATED THAT IN ANY CASE NO DISALLOWANCE U/S 36(1)(III) OF THE ACT COULD HAVE BEEN MADE IN HE PRESENT CASE FOR TWO REASONS; I) SI NCE NET PROFIT HAD BEEN ESTIMATED IN THE PRESENT CASE AND A DDITION MADE ON ACCOUNT OF THE SAME AND SECONDLY, THERE WE RE ENOUGH OWN INTEREST FREE FUNDS AVAILABLE WITH THE A SSESSEE IN THE FORM OF ITS OWN CAPITAL AMOUNTING TO RS.3,36,63,807/- WHICH WAS SUFFICIENT FOR MAKING TH E IMPUGNED ADVANCE OF RS.85 LACS. RELIANCE WAS PLACE D BY THE LD. COUNSEL FOR ASSESSEE IN THE CASE OF HERO CY CLES (P) LIMITED VS. CIT IN CIVIL APPEAL NO.514 OF 2008 BY T HE HON'BLE APEX COURT IN SUPPORT OF ITS ABOVE CONTENTI ON. 15. THE LD. DR, ON THE OTHER HAND RELIED UPON THE ORDER OF THE LD. PR.CIT AND STATED THAT THE INVESTI GATION CARRIED BY THE ASSESSING OFFICER WAS INADEQUATE AND DID NOT PROVE THAT THE ADVANCES WERE MADE FOR BUSINESS PURP OSES. THE LD. DR ALSO POINTED OUT TO THE OBSERVATION OF T HE LD. PR.CIT THAT NO DOCUMENTARY EVIDENCE WAS ALSO FILED BY THE ASSESSEE TO SUBSTANTIATE THAT THE SAID ADVANCES HAD NO NEXUS WITH THE BORROWED FUNDS. THE LD. DR CONTENDE D THAT 10 IT WAS A CLEAR CASE WHERE PROVISIONS OF SECTION 36( 1)(III) OF THE ACT WERE APPLICABLE HAVING NOT BEEN APPLIED BY THE ASSESSING OFFICER, IT HAD RESULTED IN AN ERROR IN T HE ORDER OF THE ASSESSING OFFICER CAUSING PREJUDICE TO THE REVE NUE. HE, THEREFORE SUPPORTED THE ORDER PASSED BY THE LD. PR. CIT. 16. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED T HE ORDER OF THE LD. PR.CIT AND ALSO THE DOCUMENTS REFE RRED TO BEFORE US. 17. SECTION 263 OF THE ACT HAS BEEN INVOKED IN TH E PRESENT CASE ON THE ISSUE OF DISALLOWABILITY OF INT EREST PERTAINING TO ALLEGED NON-BUSINESS INTEREST FREE AD VANCE MADE TO THE WIFE OF THE ASSESSEE AMOUNTING TO RS.85 LACS. 18. UNDOUBTEDLY FOR EXERCISE OF JURISDICTION U/S 2 63 OF THE ACT, A FINDING THAT THE ORDER IS ERRONEOUS I S A PRE- REQUISITE. IN THE PRESENT CASE BEFORE US WE FIND N O SUCH FINDING IN THE ORDER OF THE LD. PR.CIT. 19. A PERUSAL OF THE ORDER OF THE PR. CIT REVEALS THAT AFTER ADMITTING THAT THE IMPUGNED ISSUE WAS EXAMINE D DURING ASSESSMENT PROCEEDINGS BY THE ASSESSING OFFI CER, THE LD. PR.CIT HAS OBSERVED THAT THE AO HAD NOT EXAMINE D AND VERIFIED WHETHER THE ADVANCE GIVEN WAS USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE LD.PR.CIT ALSO NOT ED THAT NO EVIDENCE WAS FILED BY THE ASSESSEE TO RULE OUT N EXUS BETWEEN THE BORROWED FUNDS AND THE ADVANCES SO MADE . ON THIS BASIS, THE LD. PR.CIT HELD THAT SECTION 36(1)( III) OF THE ACT WERE APPLICABLE IN THE CASE OF THE ASSESSEE AND BY NOT 11 MAKING DISALLOWANCE OF INTEREST UNDER THE SAID SECT ION, THE ORDER OF THE ASSESSING OFFICER WAS ERRONEOUS SO AS TO CAUSE PREJUDICE TO THE REVENUE. HE, THEREFORE, REMITTED THE ISSUE TO THE ASSESSING OFFICER FOR A FRESH DECISION AFTER CONDUCTING FURTHER ENQUIRIES. 20. WE DO NOT AGREE WITH THE LD. PR.CIT THAT ON THE BASIS OF INFORMATION AVAILABLE ON RECORDS, IT COULD BE SAID THAT SECTION 36(1)(III) WAS ATTRACTED IN THE PRESEN T CASE AND THE AO NOT HAVING DONE SO AN ERROR HAD CREPT IN THE ORDER. CLEARLY, THE INVESTIGATIONS CARRIED OUT BY THE ASSE SSING OFFICER DURING ASSESSMENT PROCEEDINGS, AS REPRODUCE D ABOVE, REVEAL THAT COMMERCIAL EXPEDIENCY OF THE SAI D ADVANCE WAS EXAMINED. THE REPEATED QUERIES RAISED B Y THE ASSESSING OFFICER ASKING WHY INTEREST PROPORTIONATE TO THE SAID ADVANCE BE NOT DISALLOWED IN VIEW OF THE JUDGE MENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF ABHISH EK INDUSTRIES 286 ITR 1 AND THE REPEATED ASSERTION OF THE ASSESSEE AND HIS WIFE THAT THE ADVANCE WAS GIVEN FO R CONSTRUCTING A GODOWN AND OFFICE ON THE LAND OWNED BY THE WIFE ,FOR USE BY THE ASSESSEE IN HIS BUSINESS, ESTA BLISH THIS FACT. THAT THE INVESTIGATION CARRIED OUT BY THE AO WAS INADEQUATE TO ESTABLISH COMMERCIAL EXPEDIENCY OF TH E ADVANCE COULD BE THE CASE OF THE LD.PR.CIT. BUT INA DEQUACY OF ENQUIRY BY THE ASSESSING OFFICER, IN THE PRESENT CASE, DOES NOT ESTABLISH THAT THE ADVANCES WERE GIVEN FOR NON- BUSINESS PURPOSE. IT ONLY LEADS TO THE CONCLUSION T HAT THE BUSINESS EXPEDIENCY OF THE SAID ADVANCE HAD NOT BEE N 12 CONCLUSIVELY ESTABLISHED. SIMILARLY THE NON-FILING OF EVIDENCE, BY THE ASSESSEE, TO RULE OUT NEXUS BETWEE N THE BORROWED FUNDS AND ADVANCES SO MADE, DOES NOT ESTAB LISH THAT THE ADVANCES WERE MADE BY UTILIZING THE INTERE ST BEARING BORROWED FUNDS OF THE ASSESSEE. BOTH THE AB OVE CANNOT LEAD TO THE CONCLUSION THAT THE INTEREST WAS TO BE DISALLOWED U/S 36(1)(III) OF THE ACT BY THE ASSESSI NG OFFICER WHICH THE ASSESSING OFFICER HAVING FAILED TO DO SO AN ERROR HAS CREPT IN HIS ORDER. 21. FURTHER WE FIND THAT THE LD. PR.CIT HAS NOT EXAMINED THE ISSUE IN THE PRESENT PROCEEDINGS U/S 2 63 OF THE ACT ALSO. NO FACTUAL INCORRECTNESS OR DISCREPA NCY IN THE EXPLANATION OF THE ASSESSEE HAS BEEN POINTED OUT BY THE LD. PR.CIT SO AS TO LEAD TO THE CONCLUSION THAT THE ASS ESSING OFFICER HAD ERRED BY ACCEPTING THE ASSESSEES EXPLA NATION AND EVIDENCES AND MAKING NO DISALLOWANCE U/S 36(1)( III) OF THE ACT. THE LD. PR.CIT COULD HAVE COME UP WITH SOM E OTHER MATERIAL OR INFORMATION TO POINT OUT THAT THE PURPO RTED SHED CONSTRUCTED ON THE SAID LAND, AS CLAIMED BY THE ASS ESSEE, WAS NOT ACTUALLY USED FOR THE BUSINESS OF THE ASSES SEE OR FOR THAT MATTER THAT NO SHED AT ALL HAD BEEN CONSTR UCTED OR ANY OTHER INFORMATION WHICH COULD LEAD TO THE CONCL USION THAT INADEQUATE INVESTIGATION CARRIED OUT BY THE AS SESSING OFFICER HAD RESULTED IN AN ERROR IN HIS ORDER BY NO T MAKING ANY DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT. 22. THUS, WE HOLD, THAT THERE IS NO FINDING OF ANY ERROR IN THE ORDER OF THE ASSESSING OFFICER. IN FA CT, WE FIND 13 THAT THE LD. PR.CIT HAS REMITTED THE ISSUE ASKING T HE ASSESSING OFFICER TO EXAMINE THE ISSUE AFRESH AFTER MAKING FURTHER ENQUIRIES. THUS, THE LD. PR.CIT IS IN FACT HIMSELF NOT SURE WHETHER ANY DISALLOWANCE U/S 36(1)(III) WA S WARRANTED AND HAD IN FACT REMITTED THE ISSUE TO THE ASSESSING OFFICER TO DECIDE WHETHER THE ORDER WAS ERRONEOUS. THIS IS NOT PERMISSIBLE UNDER LAW. THE LD. PR.CIT MUST, AFTER RECORDING REASONS, HOLD THAT THE ORDER IS ERRONEOUS TO ASSUME JURISDICTION U/S 263 OF THE ACT . 23. WE DRAW SUPPORT FOR THE ABOVE PROPOSITION FROM THE ORDER OF THE HON,BLE DELHI HIGH COURT IN THE CA SE OF ITO VS. D.G HOUSING LTD.(2012) 343 ITR 329 (DEL), WHERE IN THE HON'BLE HIGH COURT HAD ELABORATED ON THE ISSUE OF INADEQUATE INVESTIGATION LEADING TO ERROR IN THE OR DER OF THE COMMISSIONER OF INCOME TAX AT PARA 19 OF THE ORDER AS UNDER: 19. IN THE PRESENT CASE, THE FINDINGS RECORDED BY THE TRIBUNAL ARE CORRECT AS THE CIT HAS NOT GONE INTO AND HAS NO T GIVEN ANY REASON FOR OBSERVING THAT THE ORDER PASSED BY THE A SSESSING OFFICER WAS ERRONEOUS. THE FINDING RECORDED BY THE C IT IS THAT 'ORDER PASSED BY THE ASSESSING OFFICER MAY BE ERRON EOUS'. THE CIT HAD DOUBTS ABOUT THE VALUATION AND SALE CONSIDERATION RECEIVED BUT THE CIT SHOULD HAVE EXAMI NED THE SAID ASPECT HIMSELF AND GIVEN A FINDING THAT THE ORD ER PASSED BY THE ASSESSING OFFICER WAS ERRONEOUS. HE CAME TO T HE CONCLUSION AND FINDING THAT THE ASSESSING OFFICER H AD EXAMINED THE SAID ASPECT AND ACCEPTED THE RESPONDEN TS COMPUTATION FIGURES BUT HE HAD RESERVATIONS. THE CIT IN THE ORDER HAS RECORDED THAT THE CONSIDERATION RECEIVABLE WAS EXAMINED BY THE ASSESSING OFFICER BUT WAS NOT PROPE RLY EXAMINED AND THEREFORE THE ASSESSMENT ORDER IS 'ERR ONEOUS'. 14 THE SAID FINDING WILL BE CORRECT, IF THE CIT HAD EXAM INED AND VERIFIED THE SAID TRANSACTION HIMSELF AND GIVEN A FI NDING ON MERITS. AS HELD ABOVE, A DISTINCTION MUST BE DRAWN IN T HE CASES WHERE THE ASSESSING OFFICER DOES NOT CONDUCT AN ENQUIRY; AS LACK OF ENQUIRY BY ITSELF RENDERS THE ORD ER BEING ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVE NUE AND CASES WHERE THE ASSESSING OFFICER CONDUCTS ENQUIRY BUT FINDING RECORDED IS ERRONEOUS AND WHICH IS ALSO PREJ UDICIAL TO THE INTEREST OF THE REVENUE. IN LATTER CASES, THE CIT HAS TO EXAMINE THE ORDER OF THE ASSESSING OFFICER ON MERITS OR THE DECISION TAKEN BY THE ASSESSING OFFICER ON MERITS AN D THEN HOLD AND FORM AN OPINION ON MERITS THAT THE ORDER PA SSED BY THE ASSESSING OFFICER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. IN THE SECOND SET OF CASES, CIT CANNOT DIRECT THE ASSESSING OFFICER TO CONDUCT FURTHER ENQ UIRY TO VERIFY AND FIND OUT WHETHER THE ORDER PASSED IS ERRONEOUS OR N OT. 24. MOREOVER WE FIND MERIT IN THE CONTENTION OF T HE LD.COUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE OF INTEREST IN THE PRESENT CASE U/S 36(1)(III) OF THE ACT WAS W ARRANTED SINCE IT HAD ENOUGH OWN INTEREST FREE FUNDS IN THE FORM O F CAPITAL TO MAKE THE IMPUGNED ADVANCES AND ALSO SIN CE NET PROFIT HAD BEEN ESTIMATED AND ADDITION MADE ON ACCO UNT OF THE SAME. THE HON'BLE APEX COURT IN THE CASE OF HER O CYCLES (P) LIMITED (SUPRA) AND HON'BLE JURISDICTION AL HIGH COURT IN A NUMBER OF DECISIONS HAVE HELD THAT WHERE THERE ARE ENOUGH SURPLUS FUNDS AVAILABLE WITH THE ASSESS EE, THE PRESUMPTION IS THAT THE INTEREST FREE ADVANCES, IF ANY MADE, ARE OUT OF THE SAID FUNDS AND, THEREFORE, NO DISALL OWANCE OF ANY INTEREST U/S 36(1)(III) OF THE ACT COULD BE MAD E. THE APEX COURT IN THE CASE OF HERO CYCLES (P) LTD VS CI T 15 LUDHIANA IN CIVIL APPEAL NO.514 OF 2008 DT.05-11-15 HAS LAID DOWN THE SAID PROPOSITION AS UNDER: INSOFAR AS THE LOANS TO DIRECTORS ARE CONCERNED, IT C OULD NOT BE DISPUTED BY THE REVENUE THAT THE ASSESSEE HAD A CREDIT BALANCE IN THE BANK ACCOUNT WHEN THE SAID ADVANCE O F RS. 34 LAKHS WAS GIVEN. REMARKABLY, AS OBSERVED BY THE CIT (APPEAL) IN HIS ORDER, THE COMPANY HAD RESERVE/SURPLU S TO THE TUNE OF ALMOST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COULD IN ANY CASE, UTILISE THOSE FUNDS FOR GI VING ADVANCE TO ITS DIRECTORS. 25. THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS CIT(201 6) 381 ITR 107 HAS ALSO LAID DOWN THE AFORESAID PROPOSITIO N AS UNDER: 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE A PPELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS.10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIR ELY IN AGREEMENT WITH THE JUDGMENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES & PO WER LTD., (2009) 313 ITR 340, PARA-10, THAT IF THERE ARE INTE REST FREE FUNDS AVAILABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUNDS G ENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FU NDS WERE SUFFICIENT TO MEET THE INVESTMENT. 26. THEREFORE IN VIEW OF THE FACT THAT THE ASSESSE E HAD DEMONSTRATED THE AVAILABILITY OF ENOUGH OWN SURPLUS FUNDS, WHICH HAS NOT REMAINED UNCONTROVERTED, NO DISALLOWA NCE U/S 36(1)(III) COULD BE MADE. 27. ALSO WE FIND MERIT IN THE CONTENTION OF THE LD.COUNSEL FOR THE ASSESSEE THAT ONCE AN ADDITION B Y ESTIMATING NET PROFIT HAS BEEN MADE, NO FURTHER 16 ADDITION/DISALLOWANCE OF INTEREST CAN BE MADE. THE HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF INDWELL CONSTRUCTION VS CIT (1998) 232 ITR 776 HAS HELD THA T WHERE PROFITS ARE ESTIMATED, AS AGAINST COMPUTING THE SAM E U/S 29 OF THE ACT WHICH REQUIRES COMPUTATION IN ACCORDA NCE WITH THE PROVISIONS OF SECTION 30 TO 43D OF THE ACT , IT IS TO BE DEEMED THAT ALL DEDUCTIONS AND DISALLOWANCES REF ERRED TO IN SECTION 29 HAVE BEEN TAKEN INTO ACCOUNT WHILE MA KING THE ESTIMATE. THE HONBLE HIGH COURT ON THE QUESTIO N OF LAW FRAMED BEFORE IT AS UNDER: WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, IT IS CORRECT IN LAW TO MAKE A SEPARATE ADDITION OF RS . 63,859 REPRESENTING THE INTEREST AND REMUNERATION PAID TO P ARTNERS, TO THE INCOME ALREADY ESTIMATED AND ASSESSED FROM CONTRACTS?' THE HON'BLE HIGH COURT HELD AS FOLLOWS: 4.THE PATTERN OF ASSESSMENT UNDER THE IT ACT IS GI VEN BY S. 29 WHICH STATES THAT THE INCOME FROM PROFITS AND GA INS OF BUSINESS SHALL BE COMPUTED IN ACCORDANCE WITH THE PROV ISIONS CONTAINED IN SS. 30 TO 43D. SEC. 40 PROVIDES FOR CERTA IN DISALLOWANCES IN CERTAIN CASES NOTWITHSTANDING THAT TH OSE AMOUNTS ARE ALLOWED GENERALLY UNDER OTHER SECTIONS. THE COMPUTATION UNDER S. 29 IS TO BE MADE UNDER S. 145 ON THE BASIS OF THE BOOKS REGULARLY MAINTAINED BY THE ASSE SSEE. IF THOSE BOOKS ARE NOT CORRECT OR COMPLETE, THE ITO MAY REJECT THOSE BOOKS AND ESTIMATE THE INCOME TO THE BEST OF H IS JUDGMENT. WHEN SUCH AN ESTIMATE IS MADE IT IS IN SUBS TITUTION OF THE INCOME THAT IS TO BE COMPUTED UNDER S. 29. IN O THER WORDS, ALL THE DEDUCTIONS WHICH ARE REFERRED TO UNDER S. 29 ARE DEEMED TO HAVE BEEN TAKEN INTO ACCOUNT WHILE MAK ING SUCH AN ESTIMATE. THIS WILL ALSO MEAN THAT THE EMBARGO PLA CED IN S. 40 IS ALSO TAKEN INTO ACCOUNT. 5. NO DOUBT THERE IS BIG DIFFERENCE BETWEEN PROFIT EA RNED WITH OWN CAPITAL AND PROFIT EARNED WITH BORROWED CAPITAL AND S UCH A DIFFERENCE COULD HAVE BEEN TAKEN INTO ACCOUNT BY T HE ITO WHILE MAKING AN ESTIMATE. IF THE CIT HAD SET ASIDE TH E ESTIMATE ON THE GROUND THAT THE VITAL FACT THAT THE BU SINESS WAS CARRIED ON WITH OWN CAPITAL AND NOT WITH BORROWED CAPITAL HAS BEEN IGNORED BY THE ITO, THERE MAY NOT HAV E BEEN ANY DIFFICULTY IN UPHOLDING THAT ORDER. BUT, WHEN HE P ROPOSES 17 TO ADD BACK AN EXACT ITEM IN THE P&L A/C, HE WAS RELY ING ON THE REJECTED BOOKS WHICH HE COULD NOT DO AS HELD BY T HE BENCH OF THIS COURT IN MADDI SUDARSANAM OIL MILLS CO. VS. CIT (SUPRA). THERE IS ALSO A FURTHER DIFFICULTY IF S. 40, AS ARGUED BY LEARNED COUNSEL, IS TO BE TAKEN INTO ACCOUNT EVEN AFTE R MAKING AN ESTIMATE. WHEN THERE ARE CERTAIN OTHER DEDUCTIONS WHICH ARE TO BE DISALLOWED SUCH AS WEALTH-TAX PAYMENT IN S. 40, CAN IT BE SAID THAT AFTER MAKING AN ESTIMATE, THE WEALTH-T AX CHARGED IN THE P&L A/C SHOULD AGAIN BE ADDED BACK TO THE PROFIT. THIS EXAMPLE, ILLUSTRATES HOW THE CONTENTION OF THE REVENUE, THAT S. 40(B) MAKES A DIFFERENCE IN THE SITUA TION, IS UNTENABLE. IN OUR CONSIDERED OPINION, THE ANSWER TO T HE QUESTION HAS TO BE IN THE NEGATIVE AND IN FAVOUR OF THE ASSESSEE. 28. IT IS CLEAR THEREFORE THAT THERE WAS NO ERROR IN THE ORDER OF THE ASSESSING OFFICER IN THE FIRST PLACE B Y NOT MAKING ANY DISALLOWANCE OF INTEREST VIS A VIS THE A DVANCE MADE TO THE WIFE OF THE ASSESSEE SO AS TO CAUSE PRE JUDICE TO THE REVENUE. FURTHER THERE IS NO FINDING OF ANY ER ROR BY THE LD.PR.CIT ALSO SO AS TO WARRANT ASSUMPTION OF JURIS DICTION U/S 263 OF THE ACT. 29. IN VIEW OF THE ABOVE, THE ORDER OF THE LD. PR. CIT IS SET ASIDE. 30. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 12 TH JULY, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH