Nitin Madhukar Rathi, Pune V. Income-tax Officer,

ITA 2231/PUN/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7479 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 15-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUKESH JHA
• Keywords: Business income; Business expenditure; Proportionate interest
• Section: 143(3); 37; 28

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.2231/PUN/2014 / ASSESSMENT YEAR : 2009-10 N ITIN MADHUKAR RATHI, OFFICE NO.1, PRESTIGE POINT, 283, SHUKRAWAR PETH, PUNE 411 002. PAN NO.AAZPR9199L. . / APPELLANT V/S INCOME TAX OFFICER, TECH III, PUNE. . / RESPONDENT / APPELLANT BY : SHRI NIKHIL PATHAK / RESPONDENT BY : SHRI MUKESH JHA, JCIT / ORDER PER ANIL CHATURVEDI, AM : THIS APPEAL FILED BY THE ASSESSEE IS EMANATING OUT OF T HE ORDER OF COMMISSIONER OF INCOME TAX (A) III PUNE DT. 13.10.2014 FOR THE ASSESSMENT YEAR 2009-10. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- ASSESSEE IS AN INDIVIDUAL AND IS ENGAGED AS PROMOTER AND DEVELOPER. ASSESSEE FILED HIS RETURN OF INCOME FOR A.Y. 2009 -10 ON 01.10.2009 DECLARING TOTAL INCOME AT RS.4,02,65,509/-. THE CA SE / DATE OF HEARING : 23.08.2017 / DATE OF PRONOUNCEMENT: 18.09.2017 2 WAS SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED U/S 143(3) OF THE ACT VIDE ORDER DT.30.12.2011 AND THE TOTAL INCOME WAS DETERMINED AT RS.4,24,42,486/-. AGGRIEVED BY T HE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO VIDE ORDER DT.13.10.2014 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APP EAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISA LLOWANCE OF INTEREST U/S 36(1)(III) OF RS.2,73,000/- ON THE GRO UND THAT THE ASSESSEE HAD DIVERTED INTEREST BEARING BORROWED FUN DS FOR NON- BUSINESS PURPOSES. 2) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASS ESSEE HAD FAILED TO DEMONSTRATE THAT THE BORROWED FUNDS WERE USED FOR BUSINESS PURPOSES OF THE ASSESSEE AND NOT FOR GIVIN G INTEREST FREE ADVANCE TO SISTER CONCERN AND THEREFORE, THE DISALLOWANCE OF INTEREST U/S.36(1) (III) WAS JUSTIF IED. 3) THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE OWN FUNDS AVAILABLE WITH THE ASSESSEE WERE FAR MORE THAN THE INTEREST FREE ADVANCE MADE TO SISTER CONCERN AND FURTHER, TH ERE WAS NO NEXUS BETWEEN BORROWED FUNDS AND THE INTEREST FR EE ADVANCE GIVEN TO SISTER CONCERN AND HENCE, THE DISA LLOWANCE OF INTEREST U/S.36(1)(III) WAS NOT JUSTIFIED ON FAC TS OF THE CASE. 4) THE LEARNED CIT(A) ERRED IN CONFIRMING THE AD-HO C DISALLOWANCE OF RS.2,00,000/- MADE IN RESPECT OF LA BOUR CHARGES WITHOUT APPRECIATING THAT THE SAID DISALLOW ANCE WAS NOT WARRANTED ON FACTS OF THE CASE. 5) WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSE SSEE SUBMITS THAT THE AD-HOC DISALLOWANCE OF LABOUR CHAR GES MADE BY THE LEARNED A.O. IS VERY HIGH AND HENCE, TH E SAME MAY BE REDUCED TO A REASONABLE AMOUNT. 3. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT ASSESS EE DID NOT WISH TO PRESS GROUND NOS.4 AND 5 AND THE GROUND N OS. 1 TO 3 ARE INTER-CONNECTED. CONSIDERING THE SUBMISSIONS OF THE A SSESSEE, GROUND NOS. 4 AND 5 ARE DISMISSED AS NOT PRESSED. 3 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTIC ED THAT DURING THE YEAR ASSESSEE HAD BORROWED RS.9.81 CR ORES (ROUNDED OFF) FROM VARIOUS PARTIES AND HAD PAID INTEREST OF RS.16,05,285/-. HE ALSO NOTICED THAT ASSESSEE HAD ADVANCE D AN AMOUNT OF RS.21,00,000/- TO HIS SISTER CONCERN AND HAD N OT RECEIVED ANY INTEREST FROM THE ADVANCE GRANTED TO IT. T HE ASSESSEE WAS ASKED TO JUSTIFY THE REASON FOR ADVANCING INTEREST FREE LOANS FROM INTEREST BEARING FUNDS TO HIS SISTER CONCERN. THE SU BMISSION OF THE ASSESSEE THAT THE AMOUNT ADVANCED WAS OUT OF H IS OWN CAPITAL WAS NOT FOUND ACCEPTABLE TO THE AO. AO NOTICED T HAT ASSESSEE ON THE AMOUNTS BORROWED, HAD PAID INTEREST AT AN AVERAGE OF 13% AND HAD THE ASSESSEE UTILIZED THE AMOUNT ADVANCE D TO HIS SISTER CONCERN TOWARDS THE REPAYMENT OF LOANS, HE WOULD HAVE PAID LESS INTEREST TO THAT EXTENT. AO THEREAFTER WORKED OUT THE PROPORTIONATE INTEREST ON THE AMOUNT ADVANCED AT 13% AND DISALLOWED RS.2,73,000/-. AGGRIEVED BY THE ORDER OF AO, ASSE SSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 4.3 I HAVE CONSIDERED THE SUBMISSIONS MADE AND F IND THAT THE APPELLANT HAD BORROWED UNSECURED LOANS TOTALING RS. 9,81,26,023/- FROM VARIOUS PARTY AND PAID INTEREST AMOUNTING TO R S. 16,05, 285/-. APPARENTLY THE APPELLANT HAD ADVANCED RS.21,00,000/ - TO JEWEL PROPERTIES, A SISTER CONCERN ENGAGED IN THE BUSINES S OF PROPERTY DEVELOPMENT, FOR PURCHASE OF LAND AT KASARWADI, PUN E. THE SAID FUNDS WERE SUPPOSEDLY ADVANCED FROM APPELLANTS OWN CAPITAL OF RS. 6,27,76,488/- BUT SINCE THE PURCHASE DEED COULD NOT BE COMPLETED DUE TO LITIGATION, NO DEVELOPMENT OF THE LAND COULD BE DONE AND INTEREST WAS NOT RECEIVED AGAINST THE LOAN . THE APPELLANT HAS ARGUED THAT SINCE THE ADVANCES HAVE BEEN MADE O UT OF OWN CAPITAL/RECEIPTS, THIS SHOWS THAT BORROWED FUNDS HA VE NOT BEEN UTILIZED. I FIND MYSELF UNABLE TO AGREE. THE VIEW T HAT WHERE THE AMOUNT IS ADVANCED FROM A MIXED ACCOUNT OR SHARE/PA RTNERS CAPITAL OR SALE PROCEEDS OR PROFITS, IT WOULD NOT B E DEEMED AS DIVERSION OF BORROWED CAPITAL OR THAT THE REVENUE H AD NOT BEEN ABLE TO ESTABLISH NEXUS OF THE FUNDS ADVANCED TO THE SIS TER CONCERNS WITH 4 THE BORROWED FUNDS, IS NOT CORRECT. ONCE IT IS BORN E OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUND S ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERN S OR OTHERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSI NESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MAD E WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED UNDER SEC TION 36(1) (III) OF THE ACT. IN FACT, THE DELHI HIGH COURT IN PUNJAB ST AINLESS STEEL INDUSTRIES VS. CIT REPORTED IN 324 ITR 396 HELD THA T IT MAY NOT BE RELEVANT AS TO WHETHER THE ADVANCES HAVE BEEN EXTEN DED OUT OF THE BORROWED FUNDS OR OUT OF MIXED FUNDS WHICH INCLUDE BORROWED FUNDS. THE TEST TO BE APPLIED IN SUCH CASES IS NOT THE SOURCE OF THE FUNDS BUT THE PURPOSE FOR WHICH THE ADVANCES ARE EX TENDED. 4.3.1 NO WHERE DURING THE ASSESSMENT PROCEEDING NO R IN THE PRESENT PROCEEDINGS IS THERE ANY JUSTIFICATION THAT HAS BEEN ADVANCED BY THE APPELLANT TO SHOW THAT THE ADVANCE MADE TO THE SISTER CONCERNED WAS IN THE BUSINESS INTEREST OF TH E APPELLANT. I THEREFORE FILED MYSELF IN AGREEMENT BY THE ASSESSIN G OFFICER THAT HAD THE APPELLANT UTILIZED THIS AMOUNT TOWARDS REPA YMENT OF LOANS RATHER THAN MAKING AN INTEREST FREE ADVANCE, HE WOU LD HAVE TO PAY LESS INTEREST, TO THAT EXTENT. IN REACHING THESE CONCLUSIONS, I AM GUIDED BY THE FACT THAT WHILE A BUSINESSMAN IS NORM ALLY EXPECTED TO TAKE SOUND AND PRUDENT BUSINESS DECISIO NS (REF: CIT VS. WALCHAND & CO. (P.) LTD. [1967] 65 ITR 381 WHEREIN IT WAS OBSERVED BY THE HON'BLE SUPREME COURT THAT YARD STICK WILL HAVE TO BE TAKEN FROM THE BUSINESSMAN POINT OF VIEW BUT THE BUSINESSMAN MUST BE A PRUDENT BUSINESSMAN), THE TAX AUTHORITIES ARE STILL ENTITLED TO EXAMINE THE BUSIN ESS EXPEDIENCY. THIS WAS THE RATIO OF THE PUNJAB AND HA RYANA HIGH COURT DECISION IN CIT VS. ROCKMAN CYCLE INDUST RIES PVT. LTD. REPORTED IN 326 ITR 291. THE FACTS OF THE CASE BEFORE THE HIGH COURT WERE THAT THE ASSESSEE BORROWED MONEY FR OM ITS SISTER CONCERN ON INTEREST AT RATE OF 18 PER CENT P ER ANNUM AND PURCHASED SHARES FROM OTHER SISTER CONCERN WHIC H CARRIED DIVIDEND AT RATE OF 4 PER CENT. THE ASSESSING OFFICER HELD THAT THERE WAS NO JUSTIFICATION TO BORROW FUNDS AT RATE OF 18 PER CENT INTEREST FOR MAKING INVESTMENT IN SHARES, WHIC H WOULD GIVE A DIVIDEND OF 4 PER CENT ONLY AND HAVING REGAR D TO FACT THAT BORROWING WAS MADE FROM SISTER CONCERN AND INV ESTMENT WAS ALSO IN ANOTHER SISTER CONCERN, CLAIM FOR INTER EST WAS TO BE DISALLOWED. THE COMMISSIONER (APPEALS) UPHELD TH E ORDER OF ASSESSING OFFICER. HOWEVER, ON SECOND APPEAL, TR IBUNAL ALLOWED ASSESSEES CLAIM HOLDING THAT IT COULD NOT BE PREVENTED FROM MAKING INVESTMENT ONLY BECAUSE RETUR N FROM SHARES WAS LOW; AND THAT THE WISDOM OF ASSESSEE IN CHOICE OF INVESTMENT WAS NOT OPEN TO QUESTION; EVEN IF SUCH TRANSACTIONS WERE NOT PRUDENT. THE HIGH COURT HELD THAT SINCE TRIBUNAL, WHILE TAKING ITS DECISION, HAD NOT APPLIE D TEST OF BUSINESS EXPEDIENCY, THAT ORDER WAS TO BE SET ASIDE . WHILE DOING SO, THE QUESTION AS TO WHETHER HAVING REGARD TO RELATIONSHIP BETWEEN DIFFERENT CONCERNS, WHERE A TR ANSACTION WHICH IS PATENTLY IMPRUDENT, TAKES PLACE, THE TAXING AUTH ORITY SHOULD EXAMINE THE QUESTION OF BUSINESS EXPEDIENCY AND NOT GO MERELY BY FACT THAT ASSESSEE HAD TAKEN A DECISIO N IN ITS WISDOM WHICH MAY BE WRONG OR RIGHT', WAS REFERRED T O A LARGER BENCH OF HIGH COURT. 5 4.3.1 AS PER PROVISIONS OF SECTION 36(1)(III) OF TH E ACT, THE INTEREST ON LOANS RAISED BY THE ASSESSEE FOR BUSINE SS PURPOSES IS AVAILABLE AS A BUSINESS DEDUCTION. IF T HE ASSESSEE MAKES A CLAIM TO DEDUCTION IN TERMS OF SEC TION 36 FOR THE PURPOSE OF COMPUTATION OF INCOME REFERRED T O IN SECTION 28, HE HAS TO PLACE MATERIALS IN SUPPORT OF HIS CLA IM OF ENTITLEMENT TO THE DEDUCTION. SECTION 36(1)(III) RE LATES TO THE AMOUNT OF INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS, PROFESSION OR VOCATION. THE ASSESS EE HAS TO SATISFY THE ASSESSING AUTHORITY THAT HE IS ENTITLED TO OBTAIN DEDUCTION IN ACCORDANCE WITH THE TAXING STATUTE. TH E BURDEN IS ON THE ASSESSEE TO PROVE THAT A PARTICULAR CLASS OF INCOME IS EXEMPT FROM TAXATION. THE BURDEN IS ON THE REVENUE AUTHORITIES TO SHOW THAT THE INCOME IS LIABLE TO TA X UNDER THE STATUTE; BUT THE ONUS OF SHOWING THAT A PARTICULAR CLASS OF INCOME IS EXEMPT FROM TAXATION LIES ON THE ASSESSEE . TO EARN THE EXEMPTION, THE ASSESSEE HAS TO ESTABLISH THAT H IS CASE CLEARLY AND SQUARELY FALLS WITHIN THE AMBIT OF THE EXEMPTING PROVISIONS OF THE ACT. THE PRINCIPLES EQUALLY APPLY IN CASES OF DEDUCTIONS CLAIMED. ONCE THE ASSESSEE CLAIMS ANY SU CH INTEREST AS DEDUCTION IN THEIR BOOKS OF ACCOUNT THE ONUS IS ALWAYS ON THE ASSESSEE TO SATISFY THE ASSESSING OFF ICER THAT WHATEVER LOANS WERE RAISED BY THE ASSESSEE WERE FOR THE PURPOSE OF BUSINESS. IF IN THE PROCESS OF EXAMINATI ON OF GENUINENESS OF SUCH DEDUCTION, IT TRANSPIRES THAT T HE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO SISTER CONCE RNS CHARGING NO INTEREST, THERE WOULD BE A VERY HEAVY O NUS ON THE ASSESSEE TO DISCHARGE BEFORE THE ASSESSING OFFICER TO THE EFFECT THAT IN SPITE OF OUTSTANDING LOANS ON WHICH THE ASSESSEE IS INCURRING LIABILITY TO PAY INTEREST, TH ERE WOULD BE SUFFICIENT JUSTIFICATION TO ADVANCE THE LOANS TO SI STER CONCERNS FOR NON BUSINESS PURPOSES WITHOUT CHARGING ANY INTE REST. THIS WAS THE FINDING OF THE HONBLE ALLAHABAD HIGH COURT IN 352 ITR 8 [CIT VS. SAHU ENTERPRISE (P) LTD.]. 4.3.2. THE HONOURABLE PUNJAB AND HARYANA HIGH COURT IN ABHISHEK INDUSTRIES LTD REPORTED IN 286 ITR 1 CAME TO A FINDING THAT ONCE IT IS BORNE OUT FROM THE RECORD T HAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABIL ITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAN D, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTH ERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSIN ESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III). SUCH BORROWINGS TO THAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FO R SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING AN Y BENEFIT OUT OF IT. IT WAS HELD: THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A CO MMON KITTY AND THE APPELLANT'S BUSINESS IS NO DIFFERENT. THE MONIES RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS ETC. DO NOT HAVE ANY DIFFERENT COLOUR. THE ONLY THING SUFFICIENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT THE AMOUNT IS LENT TO SISTE R CONCERN WITHOUT CARRYING ANY INTEREST FOR NON-BUSINESS PURP OSES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTERE ST BEARING DEBTS TO BE REPAID. IN CASE THE ASSESSEE HAD SOME S URPLUS 6 AMOUNT WHICH, ACCORDING TO IT, COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, STILL THE SAME IS EIT HER REQUIRED TO BE CIRCULATED AND UTILISED FOR THE PURPOSE OF BUSIN ESS OR TO BE INVESTED IN A MANNER IN WHICH IT GENERATES INCOME A ND NOT THAT IT IS DIVERTED TOWARDS SISTER CONCERN FREE OF INTEREST. THIS WOULD RESULT IN NOT PRESENTING TRUE AND CORRECT PIC TURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCUR RED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. IT CANNOT POSSIBLY BE HELD THAT THE FUNDS TO THE EXTENT DIVERTED TO SISTER CONCERNS OR OTHER PERSONS FREE O F INTEREST WERE REQUIRED BY THE ASSESSEE FOR THE PURPOSE OF IT S BUSINESS AND LOANS TO THAT EXTENT WERE REQUIRED TO BE RAISED . THEREFORE, DIRECT NEXUS OF THE FUNDS BETWEEN BORROWINGS OF THE FUNDS AND DIVERSION THEREOF FOR NON BUSINESS PURPOSES IS NOT AT ALL A FACTOR IN CONSIDERING THE ISSUE OF ALLOWABILITY OF SECTION 36(1) (III). RATHER, THERE SHOULD BE NEXUS OF USE OF BORR OWED FUNDS FOR THE PURPOSE OF BUSINESS TO CLAIM DEDUCTION UNDE R SECTION 36(1)(III) OF THE ACT. 4.3.3 FOR CLAIMING ANY DEDUCTION UNDER SECTION 30 T O 43D IN COMPUTING THE INCOME OF THE ASSESSEE, THE CONDITION PRECEDENT IS THAT THE INCOME FROM THE CONNECTED RECEIPTS IS C OMPUTED UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS OR P ROFESSION. ACCORDING TO THE SCHEME OF THE INCOME TAX ACT, ALL INCOMES OF THE ASSESSEE ARE TO BE CLASSIFIED UNDER VARIOUS HEA DS DESCRIBED UNDER SECTION 14 AND THEN INCOME IS TO BE COMPUTED UNDER THOSE VERY HEADS IN ACCORDANCE WITH THE PROVI SIONS CONTAINED UNDER THOSE VERY HEADS. IF THE RECEIPT FA LLS UNDER A PARTICULAR HEAD, THEN, THE INCOME FROM SUCH RECEIPT MUST BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS UNDER TH E VERY HEAD, IRRESPECTIVE OF THE NATURE OF RECEIPTS. THE R ECEIPTS AND THE EXPENDITURE HAVING NEXUS WITH EACH OTHER MUST B E CONSIDERED UNDER ONE HEAD ONLY. IF THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT ALLOWABLE UNDER THAT HEAD, T HEN IT CANNOT BE ALLOWED EVEN IF IT HAS BEEN INCURRED BY THE ASSESSEE. ON THIS ACCOUNT ALSO, INTEREST PAID ON BORROWED CAP ITAL CANNOT BE OWED AS THERE IS NO FORESEEABLE 'INCOME FROM BUS INESS' IN THE AMOUNTS ADVANCED TO THE SISTER CONCERN. THE HON'BLE DELHI HIGH COURT IN CIT VS. J.K. SYNTHETICS LTD. REPORTED IN 200 TAXMAN 101 TOOK A VIEW THAT SECTION 36(1)(III) USES THE EX PRESSION 'FOR THE PURPOSE OF BUSINESS', WHILE SECTION 37 CONTAINS THE EXPRESSION 'LAID OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS' AND SINCE THE SUPREME COURT IN S.A. BUILDERS VS. CIT HAS EQUATED THE TWO EXPRESSIONS AND AS A MATTER OF FACT APPLIED THE TEST LAID DOWN BY COURTS UNDER SECTION 37 TO INTERPRET THE EXPRESSION USED UNDER SECTION 3 6(1)(III), TAKING A CUE FROM THE PRINCIPLE ENUNCIATED IN S.A. BUILDERS CASE, WENT ON TO HOLD THAT SINCE SHARE INVESTMENT WAS NOT BUSINESS OF THE ASSESSEE AND WOULD NOT RESULT IN BUSINESS INCOM E, THE INTEREST EXPENDITURE WAS NOT BUSINESS EXPENDITURE I N TERMS OF SEC. 36(1)(III). IT HELD: IN ORDER TO DETERMINE AS TO WHETHER THE EXPENDITURE INCURRED IS FOR THE PURPOSE OF BUSINESS. IT HAS TO BE ASCERTAIN ED WHETHER THE ACT OF INVESTMENT IN SHARES WAS COMMERCIALLY EXPEDI ENT. IN OTHER WORDS WHETHER THERE WAS A NEXUS BETWEEN THE EXPENDITURE MADE AND THE BUSINESS OF THE ASSESSEE. IT IS NOT IN DISPUTE THAT THE BUSINESS OF THE ASSESSEE IS TO MAN UFACTURE AND 7 DEAL IN YARN. IN MAKING INVESTMENT IN SHARES BY TAK ING RECOURSE TO BORROWED FUNDS, THE ASSESSEE COMPANY MAY HAVE AC QUIRED ON ASSET AND BECAME ITS OWNER, IT HAD NOT NECESSARI LY INCURRED EXPENDITURE FOR THE PURPOSE OF THE BUSINESS. IT HAS TO BE BORNE IN MIND THAT A DEDUCTION UNDER SECTION 37 OF THE I.T A CT IS AVAILABLE TO AN ASSESSEE WHILE CALCULATING PROFITS AND GAINS FROM BUSINESS AND PROFESSION UNDER SECTION 28 OF T HE I.T ACT. IT CANNOT BE DISPUTED THAT ON ACQUIRING SHARES IN A CO MPANY THE ASSESSEE WOULD STAND TO GAIN BY WAY OF DIVIDEND WHI CH WOULD ADD TO THE INCOME OF THE ASSESSEE. BUT THIS INCOME WOULD NOT BE A BUSINESS INCOME AS UNDERSTOOD UNDER SECTION 28 OF THE I.T ACT. THEREFORE, GIVEN THE FACT THAT THERE WAS CLEAR FIND ING AS REGARDS THE UTILIZATION OF BORROWED FUNDS IN THE INVESTMENT MADE IN SHARES, THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER WILL HAVE TO BE SUSTAINED. 4.3.4 IN CONCLUSION THEREFORE, IN VIEW OF THE FACT THAT NO EVIDENCE HAS BEEN BROUGHT ON RECORD TO SHOW THAT TH E INTEREST FREE ADVANCE HAS BEEN NECESSITATED BY BUSINESS CONSIDERATION, WHICH HAS BEEN UPHELD BY THE SUPREME COURT IN SA BUILDERS CASE (SUPRA.) THE DISALLOWANCE OF PR ORATA INTEREST BY THE ASSESSING OFFICER IS UPHELD. GROUND S OF APPEAL NO. 6 AND 6.1 STAND DISMISSED. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APP EAL BEFORE US. 5. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFORE AO AND LD.CIT(A). HE FURTHER POINTED TO THE COPY OF BALANC E-SHEET AS ON 31.03.2009 PLACED AT PAGE 17 OF THE PAPER BOOK AN D POINTED THAT THE CAPITAL ACCOUNT WAS IN EXCESS OF RS.6 CRORE AS AGAINST THE AMOUNT ADVANCED OF RS.21,00,000/-. HE THEREFORE SUBMITT ED THAT WHEN THE AVAILABILITY OF INTEREST FREE FUNDS WERE FAR IN EXCES S OF THE AMOUNT ADVANCED, THERE IS A PRESUMPTION THAT THE AMOU NT ADVANCED COMES OUT OF INTEREST FREE FUNDS AVAILABLE WITH T HE ASSESSEE AND FOR THIS PROPOSITION HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LIMITED (2009) 313 ITR 340 (BOM). HE THEREFORE SUBMITTED THAT RELYING ON THE AFORESAID DECISION, NO DISA LLOWANCE 8 OF INTEREST IS CALLED FOR. LD.D.R. ON THE OTHER HAND, SUPPOR TED THE ORDER OF AO AND LD.CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DISALLOWANCE OF INTEREST ON THE PRESUMPTION THAT ASSESSEE HAS DIVERTED FUNDS ON WHICH HE PAID INTEREST TO HIS SISTER CO NCERN WITHOUT CHARGING ANY INTEREST. FROM THE COPY OF THE BALA NCE-SHEET AS ON 31.03.2009 PLACED AT PAGE 17 OF THE PAPER BOOK, IT IS SEEN THAT CAPITAL ACCOUNT OF THE ASSESSEE WAS RS.6.27 CRORES AND THE INTEREST FREE AMOUNT ADVANCED TO HIS SISTER CONCERN (JE WEL PROPERTIES) WAS OF RS.21 LAKHS MEANING THEREBY THAT AVAILAB ILITY OF INTEREST FREE FUNDS WAS MORE THAN THE AMOUNTS ADVANCED TO SISTER CONCERN. WHEN INTEREST FREE FUNDS ARE MORE THAN THE AM OUNT ADVANCED, THERE IS A PRESUMPTION THAT THE AMOUNT ADVA NCED COMES OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESS EE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANC E UTILITIES AND POWER LIMITED (SUPRA) HAS HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AND / OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE C OMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTM ENTS. BEFORE US, REVENUE HAS NOT PLACED ANY MATERIAL TO DEMONS TRATE THAT THE INTEREST FREE ADVANCES TO THE SISTER CONCERN ARE OUT OF FUNDS ON WHICH ASSESSEE HAS PAID INTEREST. REVENUE HAS ALSO NOT POINTED TO ANY CONTRARY BINDING DECISION IN ITS SUPPORT. W E THEREFORE RELYING ON THE AFORESAID DECISION OF HONBLE BO MBAY HIGH 9 COURT ARE OF THE VIEW THAT IN THE PRESENT CASE SINCE TH E AVAILABILITY OF INTEREST FREE FUNDS WERE MORE THAN THE INTEREST FREE A MOUNTS ADVANCED TO SISTER CONCERN, NO DISALLOWANCE OF INTEREST WA S CALLED FOR. WE THEREFORE DIRECT THE ADDITION MADE BY AO. THUS, THE GROUNDS OF ASSESSEE ARE ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 18 TH DAY OF SEPTEMBER, 2017. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) ! / JUDICIAL MEMBER '! / ACCOUNTANT MEMBER PUNE; ! DATED : 18 TH SEPTEMBER, 2017. YAMINI #$%&'('% / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5. 6. CIT(A)-III, PUNE. CIT-III, PUNE. #$% &&'(,* '(, / DR, ITAT, A PUNE; %-.// GUARD FILE. / BY ORDER , // / TRUE COPY / / // TRUE COPY // //T///// TRUE COPY // 012&3'4 / SR. PRIVATE SECRETARY * '(, / ITAT, PUNE.