RARE ENTERPRISES, MUMBAI V. DCIT, CIR-7(1), MUMBAI

ITA 3060/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0927 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 27-04-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITTAL; PADMA RAM MIRDHA
• Assessee Lawyers: S C TIWARI
• Keywords: Source of fund; Proportionate interest; Commercial expediency

Judgement Text

P A G E | 1 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) IN THE INCOME TAX APPELLATE TRIBUNAL ' C ' BENCH, MUMBAI BEFORE SHRI G. MANJUNATHA , ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO. 3060/MUM/2016 (ASSESSMENT YEAR: 2011 - 12 ) M/S RARE ENTERPRISES 151, NARIMAN BHAVAN, NARIMAN POINT, MUMBAI - 400 021 VS. THE DY. CIT. CENTRAL CIR. 7(1) (ERSTWHILE ACIT.C.C.40) ROOM NO. 653, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400 020 PAN AAEFR8176J ( APPELLANT ) ( RESPONDENT ) APPELLANT BY: SHRI S.C. TIWARI , A.R RESPONDENT BY: SHRI RAJAT MITTAL & SHRI PADMA RAM MIRDHA, SR. D.R DATE OF HEARING: 12 .10 .2018 DA TE OF PRONOUNCEME NT: 2 8 .12 .2018 O R D E R PER RAVISH SOOD, JM THE PRESENT APPEAL WAS EARLIER DISPOSED OFF BY THE TRIBUNAL VIDE ITS ORDER DATED 19.04.2017. HOWEVER, THE GROUND OF APPEAL NO. 3 WHICH WAS RAISED BY THE ASSESSEE AS UNDER: THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE AND IN LAW, LEARNED COMMISSIONER OF INCOME TAX HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS.3,53,06,301/ - MADE BY THE ASSESSING OFFICER U/S. 36(1)(III) OF THE ACT. ,H AD INADVERTENTLY REMAINED OMITTED TO BE DISPOSED OFF BY THE TRIBUNAL VIDE ITS AFORESAID ORDER. SUB SEQUENTLY, ON THE BASIS OF A MISCELLANEOUS APPLICATION FILED BY THE ASSESSEE ON 19.07.2017 THE ORDER WAS RECALLED BY THE TRIBUNAL , VIDE ITS ORDER DATED 08.12.2017 , FOR THE LIMITED PURPOSE OF ADJUDICATING THE GROUND OF APPEAL NO. 3, AS HEREINABOVE. P A G E | 2 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) 2. BRI EFLY STATED, THE FACTS TO THE EXTENT RELEVANT FOR DISPOSING OFF THE GROUND OF APPEAL NO. 3 OF THE PRESENT APPEAL ARE THAT THE ASSESSEE HAD FILED ITS RETURN OF INCOME FOR A.Y. 2011 - 12 ON 30.09.2011, DECLARING TOTAL INCOME AT RS.NIL. SUBSEQUENTLY, THE CASE O F THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT UNDER SEC. 143(2) OF THE I NCOME - TAX ACT, 1961 (FOR SHORT I .T. ACT ) . 3. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS THE A.O OBSERV ED THAT AS THE ASSESSEE HAD DIVERTED ITS INTEREST BEARING FUNDS FOR SOURCING THE DEBIT BALANCE IN THE CURRENT ACCOUNT OF ONE OF THE PARTNER VIZ. SMT. REKHA JHUNJHUNWALA AS WELL AS ADVANCING OF INTEREST FREE FUNDS ADVANCES TO THIRD PARTIES FOR NON - BUSINESS PURPOSES, THUS DISALLOWED THE CORRESPONDING INTEREST OF RS.3,53, 06,301/ - UNDER SEC. 36(1)(III) OF THE I.T ACT . 4. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). THE CIT(A) NOT FINDING FAVOUR WITH THE CONTENTION S ADVANCED BY THE ASSESSEE UPHELD THE DISALLOWANCE OF RS.3,53,06,301/ - MADE BY THE A .O UNDER SEC.36(1)(III) OF THE I.T ACT. 5. THE ASSESSEE BEING AGGRIEVED WITH THE ORDER OF THE CIT(A) HA S CARRIED THE MATTER IN APPEAL BEFORE US. THE LD. AUTHORIZED REPRESENTATIVE (FOR SHORT A.R) FOR THE ASSESSEE SUBMITTED THAT THE LOWER AUTHORITIES HAD ERRED IN CONCLUDING THAT THE ASSESSEE HAD DIVERTED ITS INTEREST BEARING FUNDS FOR MAKING INTEREST FREE ADVANCES TO CERTAIN PARTIES FOR NON BUSINESS PURPOSES AS WELL AS FOR SOURCING THE DEBIT BALANCE IN THE CURRENT ACCOUNT OF OF ONE OF THE PARTNER VIZ. SMT. REKHA JHUNJHUNWALA . IT WAS SUBMITTED BY THE LD. A.R THAT THE ASSESSEE HAD IN THE COURSE OF THE ASSESSMENT PROCEEDINGS DULY ESTABLISHED THAT THE FUNDS WHICH WERE UTILIZED FOR ADVANCING OF INTEREST FREE ADVANCES TO THIRD PARTIES AND WITHDRAWAL S MADE BY THE PARTNERS DID NOT HAVE ANY NEXUS WITH THE INTEREST BEARING BORROWINGS. INSOFAR P A G E | 3 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) THE ADVANCES TO THE THIRD PARTIES WERE CONCERNED, IT WAS AVERRED BY THE LD. A.R THAT THE SAME WERE MADE FROM THE SELF OWNED FUNDS OF THE ASSESSEE FIRM. FURTHER, IT WAS SUBMI TTED BY THE LD. A.R THAT THE A.O HAD ALSO LOST SIGHT OF THE AVAILABILITY OF PROFIT OF RS.29,73,91,730/ - WITH THE ASSESSEE FIRM FOR MAKING THE AFORESAID ADVANCES. AS REGARDS THE CUMULATIVE DEBIT BALANCE IN THE CURRENT ACCOUNT S OF THE PARTNER S VIZ. (I) RAKESH JHUNJHUNWALA; AND (II) SMT. REKHA JHUNJHUNWALA, IT WAS SUBMITTED BY THE LD. A.R THAT THE SAME HAD ARISEN ON ACCOUNT OF A NOTIONAL DEBIT ENTRY O F RS.37,31,17,500/ - AND RS.12,43 ,72,500/ - , RESPECTIVELY, IN THE RESPECTIVE ACCOUNTS OF THE PARTNERS ON A CCOUNT OF TRANSFER OF THE INVESTM ENT OF THE ASSESSEE FIRM IN ITS SISTER CONCERN VIZ. M/S RARE INVESTMENT TO THE ACCOUNT S OF THE SAID PARTNERS. IN SUM AND SUBSTANCE , IT WAS SUBMITTED BY THE LD. A.R THAT AS THE AFORESAID DEBITS IN THE ACCOUNT OF THE PARTNE RS WAS PURSUANT TO AN ADJUSTMENT ENTRY AND DID NOT INVOLVE MOVEMENT OF ANY FUNDS, THUS NO DISALLOWANCE UNDER SEC.36(1)(III) IN THE SAID CONTEXT WAS LIABLE TO BE MADE IN RESPECT OF THE SAID AMOUNT. APART THEREFROM , IT WAS THE CONTENTION OF THE LD. A.R THAT THE RESPECTIVE PARTNERS OTHERWISE HAD HUGE FUNDS IN THEIR ACCOUNT S WHICH WERE AVAILABLE TO THE ASSESSEE FIRM FOR MAK ING OF INTEREST FREE ADVANCES. THE LD. A.R SUBMITTED THAT IF DEBIT ENTRIES OF RS.49.75 CRORES WERE EXCLUDED FROM THE CURRENT ACCOUNT S OF THE PARTNERS, THEN THE DEBIT BALANCE IN THEIR RESPECTIVE ACCOUNT S APPEARED ONLY ON SEVEN DAYS AND RESULTANTLY THE DISALLOWANCE OF INTEREST ATTRIBUTABLE TO THE SAME WOULD STAN SCALED DOWN TO RS.2,28,637/ - . IT WAS SUBMITTED BY THE LD. A.R THAT THE ASSESSE E HAD EXPLAINED THE SOURCE OF EACH ITEM BY CORRELATING THE SAME WITH THE CORRESPONDING ENTRIES IN THE BANK ACCOUNT , AND IT WAS ESTABLISHED THAT NO PART OF THE BORROWED FUNDS WERE DEPLOYED FOR ADVANCING OF INTEREST FREE LOANS, THEREFORE, NO DISALLOWANCE WAS LIABLE TO BE MADE IN THE P A G E | 4 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) HANDS OF THE ASSESSEE UNDER SEC.36(1)(III) OF THE I.T. ACT. THE LD. A.R IN SUPPORT OF HIS CONTENTION THAT IN CASE OF MIXED FUNDS THE PRESUMPTION WOULD BE THAT THE AMOUNTS ADVANCED BY THE ASSESSEE WERE MADE FROM ITS SELF OWNED FUND S, RELIED ON THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. RELIANCE UTILITY AND POWER LIMITED (2009) 313 ITR 340 (BOM). IN THE BACKDROP OF HIS AFORESAID CONTENTION IT WAS SUBMITTED BY THE LD. A.R THAT NOW WHEN THE ASSESSEE HAD ESTABLISHED BEFORE THE LOWER AUTHORITIES THAT THERE WAS NO DIVERSION OF INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSES, THEREFORE, THERE REMAIN ED NO REASON FOR MAKING OF A NY DISALLOWANCE UNDER SEC.36(1)(III) OF THE INTEREST EXPENDITURE CLAIMED BY THE ASS ESSEE. 6. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE (FOR SHORT D.R) RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. IT WAS SUBMITTED BY THE LD. D.R THAT AS THE ASSESSEE HAD DIVERTED ITS INTEREST BEARING FUNDS FOR MAKING INTEREST FREE ADVANCES FOR N ON BUSINESS PURPOSES TO THIRD PARTIES, AS WELL AS FUN DING THE DEBIT BALANCE IN THE CURRENT ACCOUNT OF THE PARTNERS, THEREFORE, THE A.O HAD RIGHTLY DISALLOWED THE CORRELATING INTEREST EXPENDITURE UNDER SEC. 36(1)(III) OF THE I.T ACT, WHICH THEREAFTER HA D RIGHTLY BEEN UPHELD BY THE CIT(A). 7. WE HAVE HEARD THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATER IAL AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAS SOUGHT OUR INDULGENCE IN THE PRESENT APPEAL FOR ADJUDICATING AS TO WHETHER IN THE BACKDROP OF THE FACTS OF THE CASE THE CIT(A) WAS RIGHT IN UPHOLDING THE DISALLOWANCE OF RS.3,53,06,301/ - MADE BY THE A.O UNDER SEC. 36(1)(III) OF THE I. T. ACT. ON A PERUSAL OF THE ORDERS OF THE LOWER AUTHORITI ES , IT STAND S REVEALED THAT THE DISALLOWANCE UNDER SEC.36(1)(III) HAD P A G E | 5 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) BEEN MADE ON TWO COUNTS, VIZ. (I) DISALLOWANCE OF INTEREST WITH RESPECT TO THE INTEREST FREE ADVANCE S GIVEN BY THE ASSESSEE TO THIRD PARTIES; AND (II) INTEREST ON THE DEBIT BALANCE IN THE ACCOUNT OF THE PARTNER I.E SMT. REKHA JHUNJHUNWALA. IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE HAD NOT CHARGED ANY INTEREST FROM THE FOLLOWING PARTIES: NAME LOAN AMOUNT BEST VALUE HYPERMARKET 10,00,00,000/ - LES CONCEIGRES LIFE CARE SERVICES 330,00,893/ - PARK DEVELOPERS 830,00,000/ - DEBIT BALANCE OF CURRENT A/C. O F SMT. REKHA JHUNJHUNWALA -- ADMITTEDLY, THE CUMULATIVE BALANCE IN THE PARTNERS CURRENT ACCOUNT AS ON 31.03.2011 WAS ( - ) RS.14,62,15,453/ - (DR). APART THEREFROM, THE ASSESSEE HAD LIABILITY OF RS.391,40,64,824/ - WHICH INCLUDED SECURED LOANS AND UNSECURED LOANS AMOUNTING TO RS.383,56,00,824/ - AND RS.7,84,64,000/ - , RESPECTIVELY. THE ASSESSEE HAD DEBITED NET INTEREST EXPENSES OF RS.45,84,77,832/ - IN ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE A.O HAD DISALLOWED THE PROPORTIONATE INTEREST EXPENSES RELATABLE TO THE INTEREST BEARING FUNDS WHICH HE WAS OF THE VIEW THE ASSESSEE HAD DIVERTED FOR MAKING OF ADVANCES TO THE AFOREMENTIONED THREE PARTIES, VIZ. (I) BEST VALUE HYPER MARKET; (II) L ES C ONCEIRGES LIFE CARE SERVICES; AND (III) PART DEVELOPERS . FURTHER , THE INTEREST RELATABLE TO THE CUMULATIVE DEBIT BALANCE OF RS.14,62,15,453/ - ( DR ) IN THE PARTNERS CURRENT ACCOUNTS WAS ALSO DISALLOWED BY THE A.O UNDER SEC.36(1)(III ) OF THE I.T. ACT. THE CONTENTION OF THE ASSESSEE THAT THE INTEREST BEARING FUNDS HAD NOT BEEN UTILIZED FOR MAKING THE AFORESAID ADVANCES/OVERDRAWING BY THE PARTNERS DID NOT FIND FAVOUR WITH THE LOWER AUTHORITIES. IT WAS FURTHER OBSERVED BY THE A.O THAT TH E INFLOW/OUTFLOW OF FUNDS HAD TAKEN P A G E | 6 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) PLACE FROM THE COMMON BANK ACCOUNT IN WHICH THE ENTIRE FUNDS OF THE ASSESSEE STOOD MERGED. FURTHER, IT WAS NOTICED BY THE A.O THAT THE AMOUNT ADVANCED BY THE ASSESSEE TO THIRD PARTIES WERE NOT FOR COMMERCIAL EXPEDIENCY. THE OBSERVATIONS OF THE A.O IN CONTEXT OF THE DISALLOWANCE MADE UNDER SEC.36(1)(III) WERE DELIBERATED UPON AND UPH E LD BY THE CIT(A) . 8. THE LD. A.R HAS ASSAILED THE DISALLOWANCE OF RS.3,53,06,301/ - MADE BY THE A.O UNDER SEC.36(1)(III) BEFORE US ON MULTIPLE GROUNDS, VIZ. (I) THAT PART OF THE INTEREST FREE ADVANCES WERE GIVEN TO THE AFOREMENTIONED THREE PARTIES IN THE EARLIER FINANCIAL YEARS I.E. M/S BEST VALUE HYPER MARKET, (RS.10,00,00,000/ - ); VIZ. (A) M/S LES C ONCEIRAGES LIFE CARE SERVICES (RS.2,00 ,00,000/ - ); AND (B) M/S PARK DEVELOPERS (RS.2 , 30,00,000/ - ) ; (II) THAT THE AMOUNTS ADVANCED TO THE AFOREMENTIONED THREE PARTIES DURING THE EARLIER YEARS AND DURING THE YEAR UNDER CONSIDERATION I.E. FINANCIAL YEAR 2010 - 11 WERE OUT OF VARIOUS TRADING RECEIPTS AND NOT OUT OF THE INTEREST BEARING BORROWED FUNDS; (III) THAT THE DEBIT IN THE CURRENT ACCOUNT OF THE PARTNERS ON 01.04.2010 OF RS.49.75 CRORES (RS.37.31 CRORE (+) RS.12.44 CRORES) WAS ONLY A BOOK ENTRY ON ACCOUNT OF TRANSFER OF THE INVESTMENT OF THE A SSESSEE IN ITS SISTER CONCERN VIZ. M/S RARE INVESTMENT TO THE PARTNERS , AND THE SAME DID NOT INVOLVE ANY MOVEMENT OF FUNDS; AND (IV) THAT THE PROFIT OF RS.29.73 CRORES MADE BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION AND AS SUCH AVAILABLE WITH IT T O MAKE INTEREST FREE ADVANCES HAD NOT BEEN CONSIDERED. WE FIND THAT THE CIT(A) AFTER DELIBERATING AT LENGTH ON THE CONTENTION S ADVANCED BY THE ASSESSEE WAS HOWEVER NOT PERSUADED TO SUBSCRIBE TO THE SAME AND HAD UPHELD THE DISALLOWANCE OF INTEREST UNDER SEC .36(1)(III) MADE BY THE A.O. THE CIT(A) WHILE UPHOLDING THE DISALLOWANCE MADE BY THE A.O UNDER SEC. 36(1)(III) HAD OBSERVED AS UNDER: P A G E | 7 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) 15.0 I HAVE CAREFULLY EXAMINED THE FACTS OF THE CASE, THE STAND TAKEN BY THE A.O IN THE ASSESSMENT ORDER THE GROUNDS OF APPEAL AND THE WRITTEN SUBMISSIONS FILED BY THE APPELLANT DURING THE HEARING PROCEEDINGS. 15.1. THE A.O. FOUND THAT THE APPELLANT HAS NOT CHARGED ANY INTEREST FROM THE FOLLOWING PARTIES, ALTHOUGH THE SOURCE OF FUNDS UTILIZED BY THE APPELLANT FOR VARIOUS PURPOSES DURING THE YEAR WAS MAINLY BORROWED FUNDS I.E. TOTAL LOANS OF RS.391.4 CRORES, AS THERE IS NEGATIVE BALANCE IN THE PARTNER'S CAPITAL ACCOUNT AS ON 31.3.2011. NAME LOAN AMOUNT BEST VALUE HYPERMARKET 10,00,00,000/ - L ES CONCEIGRES LIFE CARE SERVICES 330,00,893/ - PARK DEVELOPERS 830,00,000/ - DEBIT BALANCE OF CURRENT A/C. OF SMT. REKHA JHUNJHUNWALA -- 15.2. DURING THE APPEAL PROCEEDINGS, THE APPELLANT HAS FILED SIMILAR DETAILS AND SUBMISSIONS AS IN ASSESSMENT PROCEEDINGS AND HAS SUBMITTED THAT PART OF THE INTEREST FREE LOAN TO ABOVE SAID THREE PARTIES WAS ADVANCED IN EARLIER FINANCIAL YEARS I.E RS.10,00,00,000/ - TO BEST VALUE HYPERMARKET, RS.2,00,00,000/ - TO LES CONCEIRGES LIFE CARE SERVICES AND RS.230,00,000I - TO PARK DEVELOPERS. IT HAS BEEN SUBMITTED THAT THE AMOUNTS ADVANCED TO THE ABOVE SAID THREE PARTIES DURING THE EARLIER YEARS AND DURING THE FINANCIAL YEAR 2010 - 11 WERE OUT OF VARIOUS TRADING RECEIPTS AND THERE IS NO NEXUS THAT THE AMOUNTS WERE GIVEN OUT OF LOAN FUNDS. IT HAS BEEN SUBMITTED THAT THERE WAS A DEBIT BALANCE IN THE LEDGER ACCOUNT FOR CITI BANK ON THE DATES WHEN THE AMOUNTS WERE ADVANCED EXCEPT FOR A FEW DAYS ON WHICH THE INTEREST AMOUNT WOULD BE VERY SMALL AND THE H UGE ADDITIONS MADE BY THE A.O. ON THIS ACCOUNT WAS NOT JUSTIFIED. AS REGARDS, THE DEBIT BALANCE IN THE CURRENT ACCOUNT OF PARTNER SMT. REKHA JHUNJHUNWALA AND THE DISALLOWANCE OF RS.108,16,203/ - ATTRIBUTABLE TO THE DEBIT BALANCE OF THE PARTNERS, IT HAS BEE N SUBMITTED THAT THE DEBIT IN CURRENT ACCOUNT OF PARTNERS ON 1.4.2010 OF RS.49.75 CRORES ( RS,37.31 CRORES RS.12.44 CRORES) WAS ONLY A BOOK ENTRY ON ACCOUNT OF TRANSFER OF THE INVESTMENT OF APPELLANT IN THE FIRM M/S. RARE INVESTMENT TO THE PARTNERS. THES E ENTRIES WERE ONLY ADJUSTMENT ENTRIES AND DID NOT INVOLVE MOVEMENT OF ANY FUNDS. IN CASE THE DEBIT ENTRIES OF RS.49.75 CRORES IS EXCLUDED FROM THE CURRENT ACCOUNT, THEN THERE IS DEBIT BALANCE IN THE ACCOUNT ONLY ON 7 DAYS AS UNDER: PERIOD CLOSING BALANCE (DR.) FROM 24/12/2010 TO 26/12/2010 81,924,425 27/12/2010 75,924,425 28/12/2010 125,924,425 P A G E | 8 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) 29/12/2010 123,924,425 30/12/2010 123,890,827 A CONSOLIDATED LEDGER ACCOUNT OF RAKESH AND REKHA FOR THE PERIOD 0.04.2010 TO 31.03.2011 EXCLUDING THE DEBIT ENTRY TOTALING TO RS.49.75 CRORES HAS BEEN SUBMITTED TO SHOW THAT THE INTEREST ATTRIBUTABLE TO THESE DEBIT BALANCES WOULD BE RS.2,28,637/ - . IT HAS BEEN SUBMITTED THAT THE SAID AMOUNT OF INVESTMENT OF APPELLANT FIRM IN M/S RAR E INVESTMENT REPRESENTED ACCUMULATION OF SHARE OF PROFITS. 15.3. IN THIS REGARD, I FIND THAT FROM THE DETAILS FILED, THE EXCESS CAPITAL WITHDRAWN FROM RARE INVESTMENT AND TRANSFERRED TO THE PARTNERS OF RARE ENTERPRISES ON 1.4.2010 AMOUNT TO RS.49.75 CRORES, I.E. RS.37.31 CRORES CREDITED TO SHRI RAKESH JHUNJHUNWALA AND RS.12.44 CRORES CREDITED TO SMT. REKHA JHUNJHUNWALA. FURTHER, THE SOURCES OF FUNDS AND ITS UTILIZATION IN THE CASE OF THE APPELLANT AS ON 31 .3.2010 AND 31.3.2011 CAN BE ANALYSED AS UNDE R: ITEMS OF BALANCE SHEET OF M/S RARE ENTERPRISES 31.03.2010 (AMT. IN CRORES) 31.03.2011 (AMT. IN CRORES) PARTNERS CAPITAL 28.16 ( - ) 14.62 LOANS 403.05 391.40 INVESTMENT 92.68 0.35 INVENTORIES 254.56 243.14 SUNDRY DEBTORS 40.11 0.84 OTHER CURRENT ASSETS 9.25 9.25 LOANS & ADVANCES 96.25 165.3 CURRENT LIABILITIES BANK OVERDRAFTS, (OUT OF ABOVE) 66.78 59.3 50.6 45.5 FROM ABOVE, IT CAN BE SEEN THAT THE INVESTMENT IN INVENTORIES OF SHARES ETC HAS REMAINED AT A SIMILAR LEVEL WHEREAS THERE IS SUBSTANTIAL DECREASE IN INVESTMENT FROM RS.92.68 CRORES TO RS.0.35 CRORES AND AN INCREASE IN LOANS AND ADVANCES FROM RS.96.25 CRORE S TO RS.165.3 CRORES. FURTHER, THE SOURCE OF FUNDS AS ON 31.3.2010 INCLUDED PARTNERS CAPITAL (RS.28. 16 CRORES), LOANS (RS.403 CRORES) AND BANK OVERDRAFTS RS.59.3 CRORES). PART OF THE LOANS AND ADVANCES ARE INTEREST FREE AND THAT WOULD HAVE BEEN SAID TO BE COVERED BY PARTNERS CAPITAL BALANCE. THUS, MAJOR PART OF THE INVESTMENT OF RS.92.33 CRORES BEING INVESTMENT IN THE FIRM M/S. RARE INVESTMENTS WAS FUNDED OUT OF INTEREST BEARING FUNDS AS ON 31.3.2010. OUT OF SAID AMOUNT, AN AMOUNT OF RS. 49. 75 CRORES HAS BEEN TRANSFERRED TO THE PARTNERS OF M/S. RARE ENTERPRISES AND IT HAS BEEN CLAIMED THAT SINCE THIS REPRESENTS ONLY A TRANSFER ENTRY AND THERE IS NO ACTUAL FLOW OF FUND, THERE WOULD NOT BE ANY INTEREST LIABILITY ON THE DEBIT BALANCE OF PARTNERS ON ACCOUNT OF SUCH TRANSFER ENTRY. 15 . 4 THE ABOVE CONTENTION OF THE APPELLANT IS NOT FOUND ACCEPTABLE SINCE THE ABOVE SAID TRANSFER WAS EFFECTED ON 1.4.2010 AND THE DEBIT BALANCE, CONSIDERING THE COMBINED CAPITAL ACCOUNT OF BOTH THE PARTNERS HAS STARTED RIGHT FROM 1.4.2010. EVEN THOUGH, THE SAID INVESTMENT OF RS.96.28 MAY NOT HAVE BEEN FINANCED BY THE INTEREST BEARING FUNDS OF THE APPELLANT, SINCE IT REPRESENTED ACCUMULATION OF SHARE PROFITS, THE POSITION OF FUNDS THERE UTILIZATION AS ON 31 . 0 3.2010 SHOW THAT MAJOR PART OF INVESTMENT OF RS.92.68 CRORES WAS FUNDED OUT OF INTEREST BEARING LOANS AND P A G E | 9 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) BANK OVERDRAFT SINCE THE PARTNERS CAPITAL WAS ONL Y R S.28.16 CRORES, PART OF WHICH CAN BE SAID TO BE USED FOR ADVANCI NG INTEREST FREE L OANS TO VARIOUS PARTIES AS ON 31.3.2010. THE TRANSFER OF APPELLANT'S INVESTMENT TO ITS PARTNERS CAN BE VIEWED AS RETURN OF THE SAID INVESTMENT AMOUNT TO THE APPELLANT WHICH IS THEN WITHDRAWN BY THE PARTNERS AND INVESTED IN CAPITAL OF THE FIRM RARE INVESTME NT. AS A RESULT, THE INCOME ON SUCH INVESTMENT WOULD NOW ACCRUE TO THE PARTNERS, WHO ARE SEPARATE PERSONS AND NOT TO THE FIRM. THUS, THIS WITHDRAWAL OF FIRM'S MONEY BY THE PARTNERS CANNOT BE SAID TO BE HAVING ANY BUSINESS EXPEDIENCY SO FAR THE APPELLANT FI RM IS CONCERNED. THEREFORE, IN MY CONSIDERED OPINION THE AO WAS CORRECT IN HOLDING THAT THE INTEREST BEARING FUND WERE DIVERTED TO FINANCE THE DEBIT CAPITAL BALANCE OF THE PARTNERS AND THE CORRESPONDING DISALLOWANCE OF INTEREST WORKED OUT BY THE A.O. IS UP HELD. 15.5. AS REGARDS, DISALLOWANCE OF INTEREST WITH RESPECT TO THE INTEREST FREE ADVANCES GIVEN, THE APPELLANT HAS ALSO SUBMITTED THAT PART OF THE INTEREST FREE ADVANCE WAS MADE DURING EARLIER FINANCIAL YEARS AND DISALLOWANCE WAS NOT JUSTIFIED ON SUCH A MOUNTS WHICH WERE OPENING BALANCE DURING 1.4.2010. AS NOTED ABOVE, THE POSITION OF SOURCE AND UTILIZATION OF FUNDS AS ON 1 .4.2010 HAS CHANGED FOLLOWING THE DEBIT ENTRIES IN THE ACCOUNT OF PARTNERS AND THE ENTIRE SOURCE OF FINANCE, AS REFLECTED BY THE ACCOUNTS ON 1.4.2010 AND THE BALANCE SHEET ON 31.3.2011 IS BORROWED FUNDS, I . E UNSECURED AND SECURED LOANS, BANK OVERDRAFTS AND DEBIT BALANCE OF PARTNERS. THE APPELLANT HAS , NOT ESTABLISHED THE BUSINESS EXPEDIENCY OF MAKING SUCH INTEREST FREE ADVANCES OR CONTINUING WITH THESE ADVANCES DURING THE CURRENT YEAR. SO, THE ACTION OF AO IN TREATING SUCH ADVANCES AS FOR NON BUSINESS PURPOSE AND DISALLOWING THE INTEREST EXPENSE U/ S36(1)(III) CAN NOT BE FAULTED. FURTHER, IT IS NOTED THAT THE INTEREST FREE ADVANCES HAVE BEEN MADE DURING THE YEAR TO M/S LES CONCEIRGES LIFE CARE SERVICES AND PARK DEVELOPERS AND THE SAME CANNOT BE CONSIDERED AS ADVANCE OUT OF INTEREST FREE FUNDS SINCE THERE ARE NO SUCH INTEREST FREE FUNDS. THE COMBINED CAPITAL ACCOUNT OF PARTNERS AS ON 1.4.2010 WAS A CREDIT BALANCE OF RS.28.16 CRORES WHICH TURNED INTO A DEBIT BALANCE OF RS.21.59 CRORES, AFTER CONSID ERING THE DEBIT OF RS.49.7 CRORES MADE IN THEIR ACCOUNT ON 1.4.2010. THE DEBIT BALANCE IN THE PARTNERS CAPITAL ACCOUNT AS ON 31.3.2011 IS RS.14.62 CRORES. APART FROM THE DEBIT BALANCE FROM THE PARTNERS CAPITAL ACCOUNT, THE OTHER SOURCES OF FUNDS ARE INTERE ST BEARING LOANS AND BANK OVERDRAFTS. THE APPELLANT HAS SUBMITTED THAT IT HAD MADE PROFIT OF RS.29.73 CRORES DURING THE YEAR WHICH WERE AVAILABLE TO MAKE THE INTEREST FREE ADVANCE IN QUESTION. HOWEVER, THIS SUBMISSION IS NOT ACCEPTABLE SINCE THE PROFITS AR ISING DURING THE YEAR WOULD ONLY GO TO REDUCE THE DEBIT BALANCES, OVERDRAFTS ETC. THEREFORE, THE DISALLOWANCE OF INTEREST WITH RESPECT TO INTEREST FREE ADVANCE MADE DURING THE YEAR TO ABOVE SAID THREE PERSONS IS UPHELD. IN THIS REGARD, RELIANCE IS PLACED O N THE DECISION OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF PUNJAB STAINLESS LTD 324 ITR 396 IN WHICH IT HAS BEEN OBSERVED AS UNDER: WHERE MIXED FUNDS ARE USED FOR THE PURPOSE OF GIVING INTEREST FREE ADVANCES, THE ONLY RELEVANT TEST IS AS TO WHETHER SUCH INTEREST FREE ADVANCES ARE DUE TO COMMERCIAL EXPEDIENCY OR NOT. P A G E | 10 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) 9. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE CONTENTION S ADVANCED BY THE LD. A.R BEFORE US IN THE BACKDROP OF THE OBSERVATIONS OF THE CIT( A). WE SHALL FIRST ADVERT TO THE CLAIM OF THE LD. A.R THAT THE TRANSFER OF THE INVESTMENT OF RS.49.75 CRORES OF THE ASSESSEE FIRM IN ITS SISTER CONCERN VIZ. M/S RARE INVESTMENTS TO THE ACCOUNTS OF ITS PARTNERS, VIZ. S H. RAKESH JHUNJHUNWALA (RS.37,31,17,5 00/ - ; AND SMT. REKHA JHUNJHUNWALA (RS.12,43,72,500/ - ) WERE MERELY ADJUSTMENT ENTRIES AND DID NOT INVOLVE ANY MOVEMENT OF FUNDS, THEREFORE, NO DISALLOWANCE UNDER SEC. 36(1)(III) WAS CALLED FOR IN RESPECT OF THE SAID AMOUNT. WE HAVE GIVEN A THOUGHTFUL CONSID ERATION TO THE AFORESAID CONTENTION OF THE LD. A.R AND ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE SAME. AS OBSERVED BY THE CIT(A) , THE AFORESAID INVESTMENT OF THE ASSESSEE FIRM IN ITS SISTER CONCERN I.E M/S RARE INVESTMENTS WAS TRANSFERRED IN F AVOUR OF THE AFORESAID PARTNERS OF THE ASSESSEE FIRM ON 01.04.2010. FROM A PERUSAL OF THE BALANCE SHEET EXTRACTS AS ON 31.03.2010 AND 31.03.2011 OF THE ASSESSEE FIRM AS HAD BEEN TABULATED BY THE CIT(A) IN HIS ORD ER, IT STANDS REVEALED THAT THE INVESTMENT OF RS. 49.75 CRORES [ I.E RS. 37.31 CRORE (+) RS. 12.44 CRORE] HELD BY THE ASSESSEE FIRM IN ITS SISTER CONCERN VIZ.M/S RARE INVESTMENTS FORM ED PART OF THE TOTAL INVESTMENTS OF RS.92.68 CRORE OF THE ASSESSEE FIRM ON 31.03.2010 . THE AFORESAID INVESTMENTS OF THE ASSESSEE FIRM WERE FUNDED/SOURCED OUT OF INTEREST BEARING FUNDS I.E LOANS (RS.403.05 CRORE S ) & BANK OVERDRAFTS (RS.59.3 CRORE S ) AS ON 31.03.2010. ADMITTEDLY, THE PARTNERS CAPITAL ACCOUNT AS ON 31.03.2010 STOOD REFLECTED AT RS.28.16 CRORES(CREDIT) . HOWEVER, AS THERE W ERE CORRESPONDING LOANS AND ADVANCES GIVEN BY THE ASSESSEE FIRM OF RS.96.25 CRORES (DEBIT) AS ON 31.03.2010, THEREFORE , IT HAD RIGHTLY BEEN OBSERVED BY THE CIT(A) THAT THE PARTNERS CAPITAL ACCOUNT OF RS.28.16 CRORES (CREDIT) COULD SA FELY BE RELATED TO HAVE BEEN PARTLY USED FOR ADVANCING OF P A G E | 11 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) INTEREST FREE LOANS TO VARIOUS PARTIES AS ON 31.03.2010. IN THE BACKDROP OF OUR AFORESAID OBSERVATIONS IT CAN SAFELY BE CONCLUDED THAT THE INVESTMENT OF RS. 49.75 CRORES THAT WAS HELD BY THE ASSESSEE IN ITS SISTER CONCERN I.E M/S RARE INVESTMENT ON 31.03.2010 FOUND IT S SOURCE IN THE INTEREST BEARING FUNDS OF THE ASSESSEE FIRM AS ON 31.03.2010 I.E LOAN S (RS.403.05 CRORE S ); AND BANK OVERDRAFT S (RS. 59.3 CRORE). WE ARE OF THE CONSIDERED VIEW THAT N OW WHEN IT CAN SAFELY BE CONCLUDED THAT THE INVESTMENT MADE BY THE ASSESSEE FIRM IN ITS SISTER CONCERN I.E. M/S RARE INVESTMENT WAS FUNDED /SOURCED OUT OF INTEREST BEARING FUNDS AS ON 31.03.2010, THEREFORE, IT WOULD BE INCORRECT IN CONCLUDING THAT THE TRANSFER OF SUCH INVESTMENT BY THE ASSESSEE FIRM IN FAVOUR OF THE PARTNERS WAS TO BE EXCLUDED WHILE WORKING THE DISALLOWANCE UNDER SEC.36(1)(III) ON THE GROUND THAT THE SAME WAS MERELY AN ADJUSTMENT ENTRY AND DID NOT INVOLV E ANY MOVEMENT OF FUNDS. IN SUM A ND SUBSTANCE, ON THE BASIS OF OUR AFORESAID OBSERVATIONS IT CAN SAFELY BE CONCLUDED THAT THE INTEREST BEARING FUNDS OF THE ASSESSEE FIRM I.E LOANS (RS. 403.05 CRORES) AND BANK OVERDRAFTS (RS. 59.3 CRORES) HAD BEEN UTILISED FOR MAKING OF INVESTMENTS BY THE ASSESSEE FIRM IN ITS SISTER CONCERN VIZ. M/S RARE INVESTMENTS IN THE PRECEDING YEARS. THE CIT(A) HAD RIGHTLY OBSERVED THAT THE TRANSFER OF THE INVESTMENT OF THE ASSESSEE FIRM TO ITS PARTNERS CAN BE VIEWED AS RETURN OF THE SAID INVESTMENT AMOUNT TO TH E ASSESSEE , WHICH IS THEN WITHDRAWN BY THE PARTNERS AND INVESTED IN THE CAPITAL OF THE SISTER CONCERN I.E. M/S RARE INVESTMENT. FURTHER, IT STANDS REVEALED THAT THE LOAN LIABILITY OF THE ASSESSEE HAD REDUCED TO A MINISCULE AMOUNT I.E RS.403.05 CRORES ON 31.03.2010 TO AN AMOUNT OF RS.391.40 CRORES ON 31.03.2011. SIMILARLY, THE BANK OVERDRAFTS TO RS.59.3 CRORE AS ON 31.03.2010 HAD STOOD REDUCED TO AN AMOUNT OF RS.45.5 CRORES ON 31.03.2011. IN SUM AND SUBSTANCE , AS THE MAJOR PART OF THE INVESTMENT OF RS. 49.7 5 CRORES MADE BY THE P A G E | 12 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) ASSESSEE IN ITS SISTER CONCERN I.E. M/S RARE INVESTMENT WAS FUNDED OUT OF THE INTEREST BEARING FUNDS AS ON 31.03.2010, THEREFORE, A TRANSFER OF THE SAID INVESTMENT TO THE PARTNERS OF THE ASSESSEE FIRM IN OUR CONSIDERED VIEW BEING IN TH E NATURE OF DIVERSION OF INTEREST BEARING FUNDS OF THE ASSESSEE FOR ADVANCING OF INTEREST FREE AMOUNTS TO THE AFORESAID PARTNERS, THOUGH NOT DIRECTLY BUT INDIRECTLY, THUS CLEARLY ATTRACTED THE PROVISION OF SEC.36(1)(III) OF THE ACT. WE THUS BEING PERSUADED TO SUBSCRIBE TO THE VIEW TAKEN BY THE CIT(A) IN CONTEXT OF THE ISSUE UNDER CONSIDERATION, UPHOLD THE SAME. 10. WE SHALL NOW ADVERT TO THE CONTENTION OF THE LD. A.R THAT NO DISALLOWANCE UNDER SEC.36(1)(III) WAS CALLED FOR IN THE HANDS OF THE ASSESSEE AS REGARDS THE PART OF THE INTEREST FREE LOANS THAT WERE ADVANCED TO THE AFOREMENTIONED THREE PARTIES IN THE EARLIER FINANCIAL YEAR I.E M/S BEST VALUE HYPER M ARKET (RS.10,00,00,000/ - ); (II) M/S LESCONCEIRAGES LIFE CARE SERVICES (RS.2,00,00,000/ - ); AND (III) M/ S PARK DEVELOPERS (RS.2,30,00,000/ - ). AS OBSERVED BY THE CIT(A), THE POSITION OF SOURCE AND UTILISATION OF FUNDS AS ON 01.04.2010 HAD CHANGED FOLLOWING DEBIT ENTRIES IN THE ACCOUNT OF THE PARTNERS AND THE ENTIRE SOURCE OF FINANCE THEREAFTER , AS COULD BE GATHERED FROM A PERUSAL OF THE BALANCE SHEET ON 31.03.2011 WERE THE BORROWED FUNDS OF THE ASSESSEE FIRM. IN OUR CONSIDERED VIEW THE CIT(A) HAD RIGHTLY OBSERVED THAT IN THE BACKDROP OF THE AFORESAID FACTS THE DISALLOWANCE UNDER SEC.36(1)(III) ON THE INTEREST FREE ADVANCES GIVEN TO THE AFOREMENTIONED PARTIES WAS JUSTIFIED. RATHER, THE CIT(A) HAS RIGHTLY OBSERVED THAT AS THE ASSESSEE HAD ALSO NOT ESTABLISHED THE BUSINESS EXPEDIENCY OF CONTINUING WITH THESE INTEREST ADVANCES DURING THE YEAR UNDER CON SIDERATION, THEREFORE , THE A.O RIGHTLY TREAT ING SUCH ADVANCES FOR NONE BUSINESS PURPOSE HAD DISALLOWED THE INTEREST EXPENDITURE UNDER SEC.36(1)(III) OF THE I.T. ACT. WE P A G E | 13 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) THUS FINDING OURSELVES TO BE IN AGREEMENT WITH THE OBSERVATIONS OF THE CIT(A) IN CONTEX T OF THE AFORESAID ASPECT OF DISALLOWANCE MADE BY THE A.O UNDER SEC.36(1)(III) , UPHOLD THE SAME . 11. WE SHALL NOW TAKE UP THE ISSUE AS REGARDS THE DISALLOWANCE OF INTEREST UNDER SEC.36(1)(III) ON THE INTEREST FREE AMOUNTS ADVANCED BY THE ASSESSEE DURING T HE YEAR TO THE AFOREMENTIONED PARTIES VIZ. (I) M/S LES C ONCEIRGES LIFE CARE SERVICES(RS.1,30,00,893/ - ); AND (II)M/S PARK DEVELOPERS (RS.6,00,00,000/ - ). WE FIND THAT THE CUMULATIVE CREDIT BALANCE IN THE CAPITAL ACCOUNT OF THE PARTNER S AS ON 01.04.2010 OF RS.28.16 CRORES (CR) TURNED INTO CUMULATIVE DEBIT BALANCE OF RS.21.59 CRORES ( DR ) AFTER CONSIDERING THE DEBIT OF RS.49.7 CRORES [RS. 37.31 CRORES (+) RS. 12.44 CRORES] MADE IN THEIR ACCOUNT S ON 01.04.2010. FURTHER, THE PARTNERS CAPITAL ACCOUNT AS ON 31.03.2011 STOOD REFLECTED AT A DEBIT BALANCE OF RS.14.62 CRORES ( DR ). APART THEREFROM , THE ONLY OTHER SOURCE OF FUNDS THAT WERE AVAILABLE WITH THE ASSESSEE FIRM DURING THE YEAR WERE THE INTEREST BEARING LOANS OR THE BANK OVERDRAFTS. WE THUS ARE UNABLE TO PERSUADE OURSELVES TO ACCEPT THE CLAIM OF THE ASSESSEE THAT THE AMOUNTS ADVANCED TO THE AFOREMENTIONED PARTIES DURING THE YEAR WERE SOURCED/FUNDED OUT OF THE SELF OWNED FUNDS OF THE ASSESSEE FIRM. WE ARE ALSO NOT INCLINED TO ACCEPT THE CONTE NTION OF THE LD. A.R THAT THE PROFIT OF RS.29.73 CRORES MADE BY THE ASSESSEE FIRM DURING THE YEAR WOULD BE AVAILABLE WITH IT TO EXPLAIN THE INTEREST FREE ADVANCES GIVEN DURING THE YEAR UNDER CONSIDERATION . IN OUR CONSIDERED VIEW, THE CIT(A) HAD RIGHTLY OBS ERVED THAT THE SAID PROFITS ARISING TO THE ASSESSEE FIRM DURING THE YEAR WOULD ONLY GO TO REDUCE THE DEBIT BALANCES, OVERDRAFTS ETC. RATHER, ON A PERUSAL OF THE RECORDS WE FIND THAT THE CUMULATIVE BALANCE IN THE CAPITAL ACCOUNT OF THE PARTNERS AS ON 31.03. 2011 AFTER CREDITING THE P A G E | 14 ITA NO. 3060/MUM/2016 AY 2011 - 12 M/S RARE ENTERPRISES VS. THE DY. CIT C.C. 7(1) PROFIT OF RS. 29,73,91,730/ - CRORES STANDS REFLECTED AT RS. 14.62,65,453/ - (DR.). WE THUS FINDING NO INFIRMITY IN THE OBSERVATIONS OF THE CIT(A) THAT THE AMOUNTS ADVANCED TO THE AFOREMENTIONED PARTIES VIZ. (I) M/S LES CONCEIRGES LI FE CARE SERVICES(RS.1,30,00,893/ - ); AND (II)M/S PARK DEVELOPERS (RS.6,00,00,000/ - ) WERE FUNDED/SOURCED OUT OF THE INTEREST BEARING FUNDS RAISED BY THE ASSESSEE FIRM, UPHOLD THE SAME 12. THE APPEAL OF THE ASSESSEE IS DISMISSED IN TERMS OF OUR AFORESAID OBSERVATIONS. ORDER PR ONOUNCED IN THE OPEN COURT ON 2 8 . 12.2018 S D / - S D / - ( G. MANJUNATHA ) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; 28.12.2018 PS. ROHIT / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI