AI Insights
The case involves Shri Mahendra Singh, who appealed against the order of the CIT(A), National Faceless Appeal Centre, Delhi, which upheld the AO's decision disallowing interest expenditure on the grounds that the assessee had given interest-free advances amounting to Rs.7,92,69,331 to friends and relatives, which was financed from interest-bearing loans. The Tribunal examined whether the advances were made from interest-free funds and the commercial expediency of such advances. The Tribunal concluded that the assessee had sufficient interest-free funds to cover the advances and that the advances were made in commercial expediency, thus allowing the appeal.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 122694 (ITAT-JODHPUR)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
7 month(s) 22 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
17-09-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
DB
Next Hearing Date
03-07-2023
Assessment Year
2017-2018
Appeal Filed On
26-01-2023
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH, JODHPUR BEFORE Dr. S. SEETHALAKSHMI, JUDICIAL MEMBER AND SHRI RATHOD KAMLESH JAYANTBHAI, ACCOUNTANT MEMBER ITA No. 20/Jodh/2023 (ASSESSMENT YEAR- 2017-18 ) Shri Mahendra Singh Flat No. 303, Ashapura Tower Paota, Jodhpur Vs TheACIT Circle-3 Jodhpur (Appellant) (Respondent) PAN NO. CSDPS 5573B Assessee By Shri P.C. Parwal,CA Revenue By Shri Lovish Kumar, CIT-DR Date of hearing 04/07/2023 Date of Pronouncement 18 /09/2023 O R D E R Dr. S. SEETHALAKSHMI, JM The assessee has filed this appeal challenging the order passed by Ld CIT(A), National Faceless Appeal Centre (NFAC), Delhi dated 05-01-2023 for the assessment year 2017-18 raising therein following ground of appeal. 2 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR ‘’The ld. CIT(A) has erred on facts and in law in upholding the order of AO in computing notional interest of Rs.1,18,90,400/- on interest free advance of Rs.7,92,69,331/- given to Shri Bharat Singh Bhati, Shri Kuldeep Singh Bhati and others and thereby disallowing the interest expenses to that extent u/s 36(1)(iii) of I.T. Act, 1961 2.1 Brief facts of the case are that assessee is engaged in the business of collection of royalty on behalf of mining department of the State Government in its proprietary concern M/s Devdashrath Royalties & Tollways. It filed the return of income on 06.10.2017 declaring total income of Rs.1,95,91,310/-. In course of assessment proceedings, the AO at para 5 of the assessment order observed that assessee has made interest payment of Rs.1,28,17,968/- on unsecured loans but has not charged any interest on loans advanced at Rs.7,92,69,331/-. It is noted that the AO by referring to section 36(1)(iii), definition of interest u/s 2(28A), decision of Hon’ble Supreme Court in case of SA Builders Ltd. Vs. CIT as to the commercial expediency and burden of proof that borrowed money has not been utilized for giving interest free advances, calculated interest @ 15% on the amount advanced (7,92,69,331 x 15%= 1,18,90,400) which is worked out at Rs.1,18,90,400/-. This amount was disallowed by the AO out of the interest expenditure claimed. 2.2 In first appeal, the ld. CIT(A) has confirmed the action of the AO by holding at para 6.6 of his order as under:- ‘’6.6 As I have stated above, the submission and contention of the appellant for not charging the interest from the relatives and 3 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR friends on the loans and advances given from interest bearing unsecured and secured loans taken is baseless, having no basis whatsoever in nature. It is an established fact and admittedly the loans were advanced without interest to friends and relatives of Rs. 7,92,69,331/-. The Assessing Officer, beyond doubt, had proved with facts and figures and after considering almost the identical submission as made during appellate proceedings which had also been made before the AO, observed and held that the appellant had advanced interest free loans to his friends and relatives out of interest bearing loans taken by him and therefore the provisions of section 36(1)(iii) of the Act were attracted in appellant's case. The AO referring to the said section 36(1)(iii) and after a detailed analysis about the meaning of interest as defined in section 2(28A) of the Act and further referring to various judicial decisions of Hon'ble Supreme Court and the various High Courts proved that there was no commercial expediency in the case of the appellant for advancing any interest free loans to his friends and relatives. The AO made a threadbare discussion about each contention of the appellant which was almost identical both before the AO and before the Appellate Authority and had categorically negated with factual and legal discussion as to why the business purpose as contemplated in section 36(1)(iii) and in section 37(1) had not been served by the appellant and resultantly why the interest expenditure claimed by the appellant to the extent of Rs. 1,18,90,400/- was required to be disallowed and added to the total income of the appellant during the year under consideration. I find that the appellant could not prove or establish that such interest free 4 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR advances/loans had been given by him for his business expediency and so also for the reasons that the appellant could not establish as to how such interest free loans had been given out of his non-interest bearing funds and capital and accordingly the appellant could not discharge his onus of proving otherwise than as observed and found by the AO in the assessment order. am in total agreement with the observation and findings of the Assessing Officer, who in my considered opinion had dealt with each and every actual and legal aspect relating to the appellant's contention vis-à-vis his refutal of such contention of the appellant, while he had invoked the provisions of section 36(1)(iii) of the Act. I do not find any reason whatsoever in nature to interfere with the observation and findings of the Ld. Assessing Officer in regard to the disallowance of Interest expenditure u/s. 36(1)(iii) of the Act of Rs. 1,18,90,400/-.No interference in AO's Order is called for. The addition made of Rs. 1,18,90,400/- on account of disallowance of interest u/s. 36(1)(iii) of the Act is therefore hereby confirmed. Ground No. 2 raised by the appellant is accordingly dismissed.’’ 2.3 During the course of hearing, the ld. AR of the assessee submitted that ld. CIT(A) has erred on facts and in law in upholding the order of AO in computing notional interest of Rs.1,18,90,400/- on interest free advance of Rs.7,92,69,331/- given to Shri Bharat Singh Bhati, Shri Kuldeep Singh Bhati and others and thereby 5 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR disallowing the interest expenses to that extent u/s 36(1)(iii) of I.T. Act, 1961 for which the ld. AR has filed the detailed written submission as under:- 1. At the outset it is submitted that the lower authorities in making disallowance out of interest have not considered the P&L A/c of the assessee. From the P&L A/c (PB 5) it can be noted that against the interest paid on unsecured loans and other loans at Rs.1,62,54,625/- (1,28,17,968+4,354+32,90,190+1,42,113), the interest received is Rs.90,82,848/- (88,40,024+2,21,570+21,254). Thus the net interest paid is only Rs.71,71,777/- (1,62,54,625-90,82,848). Therefore, the disallowance made of Rs.1,18,90,400/- is apparently incorrect. 2. It may be noted that the own capital of assessee is Rs.6,96,50,507/- (PB 4). Further out of total unsecured loan of Rs.11,99,19,206/- (PB 7), assessee has not paid any interest on unsecured loan of Rs.2,32,60,960/- taken from Kuldeep Pratap Singh Bhati HUF (Rs.3 lacs), Madan Singh Champawat (Rs.25 lacs), Smt. Pramod Kanwar (Rs.52.94 lacs), M/s DG Auto Finance (Rs.15 lacs), Lal Singh (Rs.5 lacs), Mahendra Singh Chouhan (Rs.24.90 lacs), Virendra Singh Bhati (Rs.38.77 lacs) and M/s Vishnu Enterprises (Rs.68 lacs). Copy of ledger account of all these persons is at PB 8-9. Thus, the interest free funds available with the assessee is Rs.9,29,11,467/- (6,96,50,507+2,32,60,960). The interest free funds far exceeds the interest free advances given at Rs.7,92,69,331/-. Thus, when the interest free funds far exceeds the interest free advances, no disallowance out of interest expenditure can be made as the presumption is that interest free advance is given out of interest free funds available with the assessee. For this purpose reliance is placed on the following cases:- CIT Vs. Reliance Industries Ltd. (2019) 175 DTR 1 (SC) Tribunal having found that the interest free funds available to the assessee were sufficient to meet its investment, it could be presumed that funds were given to subsidiaries out of interest free funds and therefore, interest referable to funds given to subsidiaries is allowable as deduction under sec. 36(1)(iii). CIT Vs. Ram Kishan Verma (2016) 132 DTR 107 (Raj.) (HC) AO observed that interest bearing loans had been diverted towards interest free loans/advances to friends and relatives for non business purpose and 6 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR accordingly disallowed the interest paid on borrowed loans. It was held that since the advances were far below the available capital of the assessee and the AO was not able to pin pointedly come to a definite conclusion which proves the nexus between interest bearing loans vis-à-vis interest free loan/advances, disallowance has been rightly deleted. Further, when there was no agreement to charge interest from the persons to whom the assessee advanced short term loan/advance, the AO could not disallow part of the interest. CIT Vs. Vijay Solvex Ltd. (2015) 113 DTR 382 (Raj.) (HC) Assessee admittedly had its own funds and such funds/reserves being substantially higher than the advances to debtors, no notional interest or hypothetical interest could have been disallowed on such facts. It may be that the assessee on account of business expediency advanced money to sister concerns or other concerns at a lower rate of interest or did not charge interest, that by itself does not prove that the assessee diverted interest bearing loans to said firms. ACIT Vs. Smt. Alpana Gupta ITA No.45/Jodh/2020 order dt. 01.02.2021 (Jodhpur) (Trib.) In this decision by relying on the decision of Hon’ble Supreme Court and Hon’ble Rajasthan High Court, it was held that where assessee is having the capital which is more than the interest free funds given and no interest bearing funds has been diverted for giving interest free advance, no disallowance out of interest expenditure can be made. 3. The position of interest free advances given during the year is as under:- (Amount in Rs.) Name Opening Balance Advance Given Amount realized Closing Balance PB Rakesh Kumar Jain 20,00,000 - 14,00,000 6,00,000 11-13 Mateshwari Royalties 1,47,00,000 - - 1,47,00,000 14,20,15 Ghewar Chand Mukan Chand 3,00,000 - 3,00,000 20,16 Bhim Singh - 10,00,000 4,00,000 6,00,000 20,17 Kuldeep Pratap Singh Bhati 3,51,25,000 62,73,496 46,65,000 3,67,33,496 18,20,19 Bharat Kumar 3,55,90,000 66,41,836 1,58,96,000 2,63,35,836 21,20,22 7 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR Singh Bhati Total 8,74,15,000 1,42,15,332 2,23,61,000 7,92,69,332 From the above table it can be noted that the opening interest free advance given to these persons is Rs.8,74,15,000/-. The advance given during the year is only Rs.1,42,15,332/- which is covered by the advance realized from these persons. The closing interest free advance is Rs.7,92,69,332/-. Thus the closing balance of advance given to these persons is lower than the opening advance. Further the major advance given is to Sh. Bharat Kumar Singh Bhati and Sh. Kuldeep Pratap Singh Bhati, sons of the assessee who were partners in M/s Devdashrath Royalties. This firm suffered heavy losses as is evident from the computation of total income of these persons (PB 23-26 & 27-31) and therefore advance given to them is in commercial expediency in as much as both the assessee and the firm in which his sons are partner have similar business. The advance given to these two persons has been completely realized in FY 17-18 (PB 19 & 22). Thus otherwise the advances is given in commercial expediency and therefore expenditure incurred on interest is fully allowable u/s 36(1)(iii) as held by Hon’ble Supreme Court in case of SA Builders Ltd. Vs. CIT 288 ITR 1. In view of above, disallowance made by the lower authorities be deleted by allowing the ground of assessee.’’ 2.4 On the other hand, the ld. DR supported the order of the ld. CIT(A) 2.5 We have heard both the parties and perused the materials available on record. In this case, it is noted that during the course of assessment proceedings the AO observed that the assessee has made interest payment of Rs.1,28,17,968/- on unsecured loans but has not charged any interest on loans advanced at Rs.7,92,69,331/-. It is also noted that the AO by referring to section 36(1)(iii), definition of interest u/s 2(28A), decision of Hon’ble Supreme Court in case of SA Builders Ltd. Vs. CIT as to the commercial expediency and burden of proof that borrowed money has not been utilized for giving interest free advances calculated 8 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR interest @ 15% on the amount advanced (7,92,69,331 x 15%= 1,18,90,400) which is worked out at Rs.1,18,90,400/-. This amount was disallowed by the AO out of the interest expenditure claimed which has been confirmed by the ld. CIT(A). During the course of hearing, the ld. AR of the assessee has submitted a table giving details of position of interest free advances giving during the year (supra). From the records produced before the Bench, it is found that the opening interest free advance given to these persons is Rs.8,74,15,000/-. The advance given during the year is only Rs.1,42,15,332/- which is covered by the advance realized from these persons. The closing interest free advance is Rs.7,92,69,332/-. Thus the closing balance of advance given to these persons is lower than the opening advance. Further the major advance given is to Sh. Bharat Kumar Singh Bhati and Sh. Kuldeep Pratap Singh Bhati, sons of the assessee who were partners in M/s Devdashrath Royalties. This firm suffered heavy losses as is evident from the computation of total income of these persons (PB 23-26 & 27-31) and therefore advance given to them is in commercial expediency inasmuch as both the assessee and the firm in which his sons are partner have similar business. The advance given to these two persons has been completely realized in FY 17-18 (PB 19 & 22). Thus otherwise the advances is given in commercial expediency and therefore expenditure incurred on interest is fully allowable u/s 36(1)(iii) in view of the decision of Hon’ble Supreme Court in the case S.A. Builders Ltd. vs CIT (supra). 9 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR Even otherwise, alternatively the ld. AR of the assessee also pleaded that out of total unsecured loan of Rs.11,99,19,206/- (PB 7), assessee has not paid any interest on unsecured loan of Rs.2,32,60,960/- taken from Kuldeep Pratap Singh Bhati HUF (Rs.3 lacs), Madan Singh Champawat (Rs.25 lacs), Smt. Pramod Kanwar (Rs.52.94 lacs), M/s DG Auto Finance (Rs.15 lacs), Lal Singh (Rs.5 lacs), Mahendra Singh Chouhan (Rs.24.90 lacs), Virendra Singh Bhati (Rs.38.77 lacs) and M/s Vishnu Enterprises (Rs.68 lacs). Copy of ledger account of all these persons is at PB 8-9. Thus, the interest free funds available with the assessee is Rs.9,29,11,467/- (6,96,50,507+2,32,60,960). The interest free funds far exceeds the interest free advances given at Rs.7,92,69,331/-. Thus, when the interest free funds far exceeds the interest free advances, no disallowance out of interest expenditure can be made as the presumption is that interest free advance is given out of interest free funds available with the assessee. The ld. AR also placed reliance in the case of CIT vs Reliance Industries Ltd. (2019) 175 DTR 1 (SC) wherein the Hon’ble Supreme Court held that Tribunal having found that the interest free funds available to the assessee were sufficient to meet its investment, it could be presumed that funds were given to subsidiaries out of interest free funds and therefore, interest referable to funds given to subsidiaries is allowable as deduction under sec. 36(1)(iii). Hence, taking into consideration the above facts and 10 ITA NO.20/JODH/2023 SHRI MAHENDRA SINGH VS ACIT, CIRCLE-3, JODHPUR circumstances of the case, we do not concur with the findings of the ld. CIT(A). Thus the appeal of the assessee is allowed. 3.0 In the result, the appeal of the assessee is allowed Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 by placing the details on the notice board. Sd/- Sd/- (RATHOD KAMLESH JAYANTBHAI) (Dr. S. SEETHALAKSHMI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 18 /09/2023 *Mishra Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) Asstt. Registrar 5. The DR 6. Guard File Jodhpur Bench
Other Referred Cases
SA Builders Ltd. Vs. CIT, CIT Vs. Reliance Industries Ltd., CIT Vs. Ram Kishan Verma, CIT Vs. Vijay Solvex Ltd., ACIT Vs. Smt. Alpana Gupta
Laws Referred To
Income Tax Act, 1961
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