M/s Longowalia Yarns Limited, Ludhiana V. DCIT, CC-1, Chandigarh

ITA 428/CHANDI/2022

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4941 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 11-05-2022
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Capital asset; Proportionate interest
• Section: 132; 133(6)

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ,च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH, “A”, CHANDIGARH BEFORE SHRI AAKASH DEEP JAIN , VICE PRESIDENT AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER आयकरअपीलसं./ITA No.428/CHD/2022 नधा रणवष / Assessment Year :2014-15 M/s Longowalia Yarns Ltd., G.T. Road, Near Toll Tax Barrier Doraha, Ludhiana-141421 बनाम DCIT, Central Circle-1, Chandigarh थायीलेखासं./PAN NO: AABCA 4409R अपीलाथ /Appellant यथ /Respondent नधा रतीक ओरसे/Assessee by : Sh. Ashwani Kumar, CA राज वक ओरसे/ Revenue by : Sh. Vivek Nangia, CIT-DR स ु नवाईक तार$ख/Date of Hearing : 15.09.2022 उदघोषणाक तार$ख /Date of Pronouncement : 21.09.2022 आदेश/Order Per Vikram Singh Yadav, Accountant Member: This appeal has been preferred by the assessee against the order dated 07.03.2022 passed by the Commissioner of Income Tax (Appeals)- 3, Gurgaon [in short ‘CIT(A)’] for Assessment Year 2014-15 wherein the sole ground of appeal raised by the assessee reads as under: “That order passed u/s 250(6) of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals)-3, Gurgaon is against law and facts on the file in as much as he was not justified to arbitrarily uphold the action of the Learned Assessing Officer in disallowing a sum of Rs. 4,04,200/- out of interest account by resort to the provisions of Section 36(1)(iii).” 2 2. The brief facts of the case are that a search action was carried out at the business and residential premises of M/s Longowalia Group on 04.09.2014 and assessee was one of the persons whose premises were searched u/s 132 of the Act. Consequentially, the case of the assessee was assessed u/s 153A/143(3) of the Act dated 13.12.2017. During the course of assessment proceedings, the AO asked the assessee to furnish details regarding advance for capital goods given during the year under consideration. In response, the assessee furnished ledger account of various entities to whom advance for capital goods was given. Upon perusal of one such ledger account by the AO, it was noted that the opening balance of ledger account of M/s Mirage Infrastructure Pvt Ltd as on 01.04.2013 was Rs 60,00,000/- and closing balance was Rs 30,00,000/- since the assessee received back Rs.30,00,000/- vide cheque no. 331244 on 15.012014. During the year under consideration, the AO issued notice u/s 133(6) of the Act to M/s Mirage Infrastructure Pvt. Ltd. calling for details in regard to the advance received from the assessee. In response, M/s Mirage Infrastructure Pvt Ltd replied that it never received any advance from the assessee for supplying capital goods rather interest free unsecured loan amounting to Rs.30,00,000/- was received from the assessee and was paid back also during the year under the consideration. Further, the AO confronted the reply received from M/s Mirage Infrastructure Pvt Ltd to the assessee which, in response, submitted before the AO that the amount of Rs.60,00,000/- advanced to M/s Mirage Infrastructure Pvt Ltd was reflected under the head “Advance for capital goods” which was for buying the office space in the upcoming project of M/s Mirage Infrastructure Pvt Ltd and the amount was in the nature of business advance paid from its current bank account. However, no documentary evidence was furnished to substantiate the 3 same. Thereafter, a show cause was issued to the assessee as to why disallowance of proportionate interest may not be made u/s 36(1)(iii) of the Act. In response, the assessee filed its submissions relying on certain decisions which were considered but not found acceptable to the AO. As per the AO, the assessee had paid so called capital advance from its cash credit account and the assessee has not submitted any documentary evidence like vouchers, communication letter between the parties regarding payment of advance for capital goods, detail regarding capital asset to be acquired and the capacity of M/s Mirage Infrastructure to provide the capital assets. It was accordingly held by the AO that interest bearing funds have been given to M/s Mirage Infrastructure on which no interest has been charged and as the payment has been made through the cash credit bank account of the assessee, there is a direct nexus to show that interest bearing funds from the cash credit account has been diverted for non business activities. and thereafter, applying the average rate of borrowing @ 7.5%, an amount of Rs 4,04,200/- was disallowed u/s 36(1)(iii) of the Act. 3. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) and it was submitted that it had sufficient share capital and reserves which were much more than the amount advanced and therefore, the AO was not justified in making such disallowance. 4. As per ld CIT(A), the assessee utilized interest bearing funds available in its cash credit limit account as evident from the findings recorded in the assessment order and no interest was charged on such amount advanced. In order to claim interest expenditure, the onus to establish nexus between the amounts advanced and business purposes was on the assessee which has not been discharged. Further, no nexus 4 has been proved between interest free unsecured loans given and interest free funds such as share capital at the disposal of the assessee and further, the assessee has failed to put forth any plausible explanation/documentary evidence to explain that the advanced was due to any business expediency. In view of the same, the addition of Rs.4,04.200/- made u/s 36(1)(iii) was sustained. Against the said findings and order of the ld CIT(A), the assessee is in appeal before us. 5. During the course of hearing, the ld AR reiterated the submissions made before the ld CIT(A) and drawn our reference to the balance sheet of the assessee company and submitted that from the balance sheet, it is clearly evident that the assessee had sufficient share capital and reserves which were much more than the amount advanced and therefore, the ld CIT(A) was not justified in sustaining the disallowance so made by the AO invoking provisions of section 36(1)(iii) of the Act. 6. Per contra, the ld CIT DR submitted that the amount has been advanced from the assessee’s cash credit bank account and it is thus evident that there is a direct nexus between interest bearing funds and the amount advanced by the assessee on which no interest has been charged by the assessee and therefore, there is no infirminity in the findings of the ld CIT(A) in confirming the disallowance so made by the AO u/s 36(1)(iii) of the Act. He relied upon the order and the findings of the lower authorities. 7. We have heard the rival contentions and purused the material available on record. Both the lower authorities have returned a finding that interest bearing funds available in the assessee’s cash credit account have been utilized for making the advances to M/s Mirage Infrastructure Pvt Limited. However, the assessee company’s contention 5 is that it has sufficient share capital and free reserves which were much more than the amount advanced and it is not disputed that the advance has been given out of the assessee’s cash credit account. It has thus been contended by the assessee that no specific borrowings have been made for purposes of giving the advances and the same were made out of its internal accruals/business operations routed through the cash credit account. On perusal of the records, it is noted that neither of the lower authorities have referred to the funds movement in the cash credit account during the financial year relevant to the impugned assessment order. Even the copy of the cash credit account is not on record which could shed some light on movement of funds during the year and in particular, the position and availability of funds at the time of advancing the funds to M/s Mirage Infrastructure Private limited. As generally understood, the cash credit limit is in nature of a credit facility provided by the banks for working capital purposes to its clients and there are withdrawals and deposits from time to time for meeting business expenditure and receipts from business operations. Depending on the position of the funds in the said cash credit account on a given day, where the withdrawals are more than the deposits, the surplus withdrawals are in the nature of short term borrowings from the bank on which the bank charges interest at the prescribed rate. Where such borrowings are used for the purposes of giving the loans/advances, then there is clearly a nexus between the borrowings and the loans/advances and interest to that extent is directly related to giving of loans/advances. Similarly, where the deposits are more than the withdrawals on a given day and such excess deposits are utilised by the assessee for the purpose of making any loans and advances, no interest would be charged by the bank as the assessee would in effect be using its own funds at the given 6 point of time. Further, nature of deposits in such cash credit account needs to be examined as to whether the deposits are from business operations or there are also deposits by way of fund transfer from other bank accounts and the nature of such funds from other bank accounts – in the nature of borrowings or from business operations. In case of borrowed funds have been transferred to this particular cash credit account and such funds are then utilized in giving loans and advances, again a nexus is established between the borrowed funds and the loans/advances. In our view, this particular aspect of the matter in terms of nature and movement of funds in the cash credit account through which the advances have been given to M/s Mirage Infrastructure Private Limited has not been examined by either of the lower authorities. Merely because the advances were given from assessee’s cash credit account, a simplistic presumption cannot be drawn that advances were from borrowed funds given that the cash credit account is likely to have credits/deposits from assessee’s business operations and/or other bank accounts. The credits and withdrawals in such cash credit account need to be examined and a clear nexus is required to be established between the borrowed funds and making of loans/advances to M/s Mirage Infrastructure Private Limited. On the same footing, the argument of the assessee regarding availability of its own funds need to be tested and examined after analyzing the nature and position of funds at the relevant point of time of making such advances. We, therefore, deem it appropriate to remand the matter to the file of the Assessing Officer to examine this matter afresh in light of above discussions. Needless to say, the Assessing officer shall provide reasonable opportunity to the assessee and the latter shall submit the 7 desired information/documentation as so desired by the Assessing officer. 8. In the result, ground of appeal is allowed for statistical purposes. (Order pronounced in the open Court on 21.09.2022). Sd/- Sd/- (A.D. Jain) (Vikram Singh Yadav) Vice President Accountant Member Dated : 21.09.2022 Aks/- आदेशक त+ल,पअ-े,षत / Copy of the order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकरआय ु .त/ CIT 4. आयकरआय ु .त (अपील)/ The CIT(A) 5. ,वभागीय त न1ध, आयकरअपील$यआ1धकरण, च3डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड फाईल/ Guard File आदेशान ु सार/ By order, सहायकपंजीकार / Assistant Registrar