M/S. CHHAGANLAL KISHANLAL & CO., Burhanpur V. THE DCIT, Khandwa

ITA 817/IND/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 5781 (ITAT-INDORE)
• Duration Of Justice: 2 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 22-02-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 30-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MOHD JAVED
• Assessee Lawyers: S N AGARWAL
• Keywords: Business expenditure; Difference of opinion; Notional interest; Commercial expediency; Change of opinion

Judgement Text

M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 1 OF 22 , , IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE . . , .. , $ BEFORE SHRI C.M. GARG, JUDICIAL MEMBER AND SHRI O.P. MEENA, ACCOUNTANT MEMBER . . /. I.T.A. NO.817/IND/2014 / ASSESSMENT YEAR:2011-12 M/S. CHHAGANLAL KISHANLAL & CO. 14, RAJENDRA BHAWAN CHOWK BAZAR, BURHANPUR (MP) VS. DCIT KHANDWA / / / / APPELLANT / / / / RESPONDENT .../ PAN: AACFA 0854 C / / / / APPELLANT BY SHRI S. N. AGARWAL, CA / / / / RESPONDENT BY SHRI MOHD. JAVED, D.R. / / / / DATE OF HEARING 22.02.2017 / / / / DATE OF PRONOUNCEMENT 28 .02.2017 / / / / O R D E R PER O.P. MEENA, ACCOUTANT MEMEBR. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-II, IN DORE [IN SHORT CIT (A)] DATED 31.10.2014 FOR THE ASSESSMENT YEAR 2011-12 ON FOLLOWING GROUNDS: M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 2 OF 22 1.1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN CONFIRMING THE DISALLOWANCE AS MADE BY THE AO OF RS. 35,02,536/-OUT OF INTEREST PAID BY HOLDING THAT ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS WITHOUT INTEREST, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND SUBMISSION MADE BEFORE HIM. 1.2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) ERRED IN MAINTAINING THE ADDITION, MADE ON ACCOUNT OF INTEREST PAID BY HOLDING THAT THE ASSESSEE HAS NOT OFFERED INTEREST INCOME EVEN WHEN INTEREST WAS CREDITED IN THE ACCOUNT OF THE ASSESSEE BY THE PARTIES TO WHOM ADVANCES WERE GIVEN BY IT WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND SUBMISSION MADE BEFORE HIM. 1.0. THE SOLE GROUND OF APPEAL RELATES TO CONFIRMATION OF DISALLOWANCE OF INTEREST OF RS. 35,20,536/- 1.1. SUCCINCTLY, FACTS AS CULLED OUT FROM THE ORDERS OF LOWER AUTHORITIES ARE THAT THE ASSESSEE IS A PARTNE RSHIP FIRM AND DERIVES INCOME FROM TRADING OF F.P BALES, PURCHASE AND SALE OF COTTON SEEDS AND ALL TYPE OF G RAINS. THE RETURN OF INCOME WAS FILED ON 28.09.2011 DECLAR ING TOTAL INCOME OF RS.9,77,070/-. ON VERIFICATION OF A IR INFORMATION, IT WAS NOTICED THAT M/S. SHUBHAM KELA AGENCY, RAVER, M/S. SHRI RAM KELA AGENCY, RAVER AN D M/S. SAIBABA COTTON INDUSTRIES HAVE PAID THE INTER EST OF RS. 1,31,735/-, RS. 93,289/- AND RS. 27,00,000/- M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 3 OF 22 RESPECTIVELY TO THE ASSESSEE AND DEDUCTED DUE TAX A T SOURCE. EVEN THEN THE ASSESSEE HAS FAILED TO DISCLO SE THE ABOVE INTEREST INCOME, THEREFORE, IT IS A CLEAR-CUT CASE OF DIVERTING OF INTEREST BEARING FUNDS FOR ADVANCING T HE SAME WITHOUT INTEREST. THE AO ALSO NOTED THE ASSESSEE HA S NOT CHARGED INTEREST ON SOME OTHER PARTIES ALSO ASPER GIVEN TABLE BELOW: NAME OF THE CONCERN PERIOD IN DAYS INTEREST @12% INTEREST @9% LESS INTEREST CHARGED 1.SHUBHAM KELA AGENCY 254 3,66,692 4,34,630 3,66,692 2.SRI RAM KELA AGENCY 254 2,60,737 3,38,160 2,60,737 3.SUDHA GARG 254 51,578 NOT CHARGED 51,578 4. PRAMESH SHAH (HUF) 254 16,701 NOT CHARGED 16,701 5.SWETA ENTERPRISE 254 41,753 NOT CHARGED 41,753 6.ANKIT GOYAL &CO. 254 2,59,870 NOT CHARGED 2,59,870 7. SHRI SAIBABA COTTON INDUSTRIES 254 25,05,205 NOT CHARGED 25,05,205 TOTAL INTEREST DISALLOWED 35,02,538 1.1.1. ACCORDINGLY, THE AO DISALLOWED THE INTEREST OF RS. 35,02,536/- BY OBSERVING THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS FOR ADVANCING THE S AME WITHOUT INTEREST. M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 4 OF 22 1.2. BEING, AGGRIEVED THE ASSESSEE FILED AN APPEAL BEFOR E THE LD. CIT (A) WHEREIN DETAILED SUBMISSION WERE FI LED WHICH HAS BEEN REPRODUCED BY THE LD. CIT (A) IN HIS ORDER. HOWEVER, THE LD. CIT (A) CONFIRMED THE ACTION OF TH E AO BY OBSERVING THAT THE CLAIM OF THE APPELLANT THAT IT H AD SUBSTANTIAL OWN FUNDS HAS NOT BEEN SUBSTANTIATED, W ITH CORROBORATING EVIDENCES. THE FACTS THAT THREE PARTI ES HAVE PROVIDED INTEREST IN THEIR BOOKS OF ACCOUNTS AND TD S WAS ALSO DONE, WHICH HAS NOT BEEN CONTROVERTED BY THE APPELLANT. IT IS ALSO FACT THAT THE ASSESSEE HAS SH OWN INTEREST FROM THESE PARTIES IN A.Y. 2010-11 AND WHI LE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING THE ASSE SSEE HAS NOT SHOWN THIS INTEREST ON THE GROUND THAT INTE REST WAS NOT RECEIVED FROM THESE PARTIES. THE CONTENTION OF THE ASSESSEE THAT IT HAD PARTNERS CAPITAL OF RS. 1.20 C RORES BESIDE UNSECURED LOANS OF RS. 8.91 CRORES TOTALING TO INTEREST-FREE FUNDS OF RS. 10.11 AS AGAINST INTERES T BEARING FUNDS OF RS. 8.16 CRORES WAS NOT FOUND ACCEPTABLE B Y THE LD. CIT (A). ACCORDINGLY, THE LD. CIT (A) ECHOED TH E FINDINGS OF THE AO. M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 5 OF 22 1.3. BEING, AGGRIEVED THE ASSESSEE FILED THIS APPEAL BEF ORE THE TRIBUNAL. THE LD. A.R. SUBMITTED THAT THE AO HA S DISALLOWED INTEREST IN RESPECT OF DEPOSITS GIVEN TO FOLLOWING PARTIES:- NAME OF THE CONCERN AMOUNT OUTSTANDING AS ON 31.03.2010 AMOUNT OUTSTANDING AS ON 09.12.2010 INTEREST DISALLOWED @12% 1.SHUBHAM KELA AGENCY 43,91,167 43,91,1667 3,66,692 2.SRI RAM KELA AGENCY 31,22,346 31,22,346 2,60,737 3.SMT. SUDHA GARG 6,17,654 6,17,654 51,578 4. PRAMESH SHAH (HUF) 2,00,000 2,00,000 16,701 5.SWETA ENTERPRISE 5,00,000 5,00,000 41,753 6.ANKIT GOYAL &CO. 41,11,952 31,11,952 2,59,870 7.SHRI SAIBABA COTTON INDUSTRIES 3,00,00,000 NIL(HOWEVER, CHEQUE GIVEN BY THE SAID PARTY HAD BEEN RETURNED BACK AS UN- CLEARED AND SAID AMOUNT OF RS. 3 CRORE AGAIN REFLECTED IN ERSTWHILE COMPANY 25,05,205 TOTAL INTEREST DISALLOWED 35,02,538 M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 6 OF 22 1.3.1. THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS ADVANCED FUNDS TO THE ABOVE MENTIONED PARTIES IN TH E PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2010-11 A ND IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2011- 12. HOWEVER, DUE TO DISPUTE WITH THE SAID PARTIES, THE ASSESSEE WAS NOT ABLE TO EVEN RECEIVE THE FUNDS BACK WHICH W ERE ADVANCED EARLIER. THE LD. A.R. FILED COPY OF ACCOUN TS OF ABOVE PARTIES APPEARING AT PAGE NO 60,65, AND 87 OF THE PAPER BOOK WHICH WERE ALSO FILED BEFORE THE LD.AO. IT WAS SUBMITTED THAT THE PERUSAL OF COPY OF ACCOUNT WOULD SHOW THAT THE ASSESSEE HAS DEBITED INTEREST AMOUNT IN TH E ACCOUNT OF THESE PARTIES BUT THE ASSESSEE HAS FAILE D TO REALIZE THE PRINCIPAL AND INTEREST FROM THESE PARTI ES. THE ASSESSEE HAS OFFERED INTEREST FROM THESE PARTIES AS ITS INCOME IN A.Y. 2010-11 AND ALSO PAID LEGITIMATE TAX DUE THEREON. HOWEVER, IN SPITE OF PAYING THE TAX ON THE AMOUNT OF INTEREST IN A.Y. 2010-11 , THE ASSESSEE WAS NOT ABLE COLLECT THE AMOUNT OF INTEREST AND PRINCIPAL. HENCE , IN THE YEAR UNDER APPEAL FOR THE ASSESSMENT YEAR 2011-12, THE ASSESSEE HAD NOT OFFERED THE INTEREST INCOME AS SHO WN BY THESE PARTIES BY MERELY DEDUCTING TDS ON THE AMOUN T OF M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 7 OF 22 INTEREST CREDITED BUT NOT PAID TO THE ASSESSEE. IT WAS SUBMITTED THAT THE EVEN THE PRINCIPAL AMOUNT OF ADV ANCE GIVEN TO ABOVE PARTIES WAS DOUBTFUL OF RECOVERY, I T WAS FOR THIS REASON, THE ASSESSEE HAS NOT OFFERED ANY INTER EST RECOVERABLE FROM THESE PARTIES. THEREFORE, IT WAS A RGUED THAT DISALLOWANCE OF INTEREST OUT OF INTEREST PAID IS NOT JUSTIFIED WHEN THE ASSESSEE HAS NOT RECEIVED THAT I NTEREST DURING THE YEAR. IN SUPPORT OF HIS CONTENTION, THE LD. A.R. RELIED IN THE CASE OF M/S. MARUTI SECURITIES LTD. V S. ADDL CIT IN I.T.A. NO. 468/HYD/2009NND 1939/HYD/2011 FOR THE ASSESSMENT YEAR 2005-06 OF ITAT HYDERABAD, WHER EIN IT WAS HELD THAT THE INTEREST INCOME HAS BEEN RECOG NIZED IN THE BOOKS OF ACCOUNTS ONLY TO THE EXTENT OF ACTUAL COLLECTION, WHICH IS THE RECOMMENDED/RECOGNIZED MET HOD AS PER ACCOUNTING STANDARD 9 OF ICAI. THE LD. A.R. ALSO QUOTED THE RELEVANT PARA OF THE ORDER WHICH IS AS U NDER: 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE IMPUGNED ORDERS OF THE REVENUE AUTHORIT IES AND OTHER MATERIAL ON RECORD. WE HAVE ALSO GONE THR OUGH THE WRITTEN SUBMISSIONS FILED AND THE DECISIONS REL IED UPON BY THE PARTIES BEFORE US. WE ARE OF THE OPINIO N THAT TO ARRIVE AT A REAL INCOME, ACCRUAL BASIS CANNOT BE A JUSTIFYING FACTOR AND THE COMMERCIAL AND BUSINESS REALTIES OF THE ASSESSEE, SHOULD BE CONSIDERED. THE INTEREST INCOME HAS BEEN RECOGNIZED IN THE BOOKS OF M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 8 OF 22 ACCOUNTS ONLY TO THE EXTENT OF ACTUAL COLLECTION, W HICH IS THE RECOMMENDED/ RECOGNIZED METHOD AS PER ACCOUNTIN G STANDARD 9 OF ICAI WHICH LAYS DOWN THAT WHEN UNCERTAINTIES EXIST REGARDING THE DETERMINATION OF THE AMOUNT OR ITS COLLECTABILITY, THE REVENUE SHALL NOT BE TREATED AS ACCRUED AND HENCE SHALL NOT BE RECOGNIZE D UNTIL COLLECTION. THE RECOGNITION OF REVENUE ON ACC RUAL BASIS PRESUPPOSES THE SATISFACTION OF TWO CONDITION S- (A) THE REVENUE IS MEASURABLE (B) THE REVENUE IS COLLECTABLE WITH CERTAINTY. THE INTEREST INCOME HAS BEEN ADMITTEDLY RECOGNISED ONLY ON RECEIPT BASIS. THE CONTENTION OF THE REVENU E THAT THE LOAN AGREEMENTS HAVE INTEREST CLAUSE PERMITTING THE ASSESSEE TO CHARGE INTEREST AT THE RATE OF 14% IS N OT TENABLE. THE TERMS OF THE AGREEMENTS, WHICH ENABLED THE ASSESSEE COMPANY TO DEMAND INTEREST WERE ONLY ENABLING PROVISIONS AND THOSE ENABLING PROVISIONS D ID NOT GUARANTEE THE COLLECTION OF OVERDUE INTEREST. T HEY ONLY GAVE A CAUSE OF ACTION TO THE APPLICANT. 22. THE METHOD OF ACCOUNTING, AS FOLLOWED BY THE ASSESSEE, DOES NOT CREATE ANY INCOME; BUT THE METHO D OF ACCOUNTING ONLY RECOGNIZES INCOME. THERE IS SOME ME RIT IN THE SUBMISSION OF THE ASSESSEE THAT WHEN THE PRINCIPAL ITSELF IS OVERDUE AND NOT COLLECTED, THER E IS NO BASIS FOR MAKING OUT A CASE THAT INTEREST INCOME WO ULD BE COLLECTABLE WITH CERTAINTY. EVEN WHERE AN ASSESS EE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT I S ONLY ACCRUAL OF REAL INCOME WHICH IS CHARGEABLE TO TAX, THAT ACCRUAL IS A MATTER TO BE DECIDED ON COMMERCIAL BEL IEF HAVING REGARD TO THE NATURE OF BUSINESS OF THE ASSE SSEE AND CHARACTER OF THE TRANSACTION. ACCORDINGLY, FOR THE PURPOSE OF DETERMINING WHETHER THERE HAS BEEN ACCRU AL OF REAL INCOME OR NOT, RECOURSE IS TO BE MADE TO AS CERTAIN THE NATURE OF BUSINESS AND CHARACTER OF THE TRANSAC TION AND THE REALITIES AND PECULIARITIES OF THE SITUATIO NS. THE DECISION VERY HEAVILY RELIED UPON BY THE FIRST APPE LLATE AUTHORITY IN THE CASE OF STATE BANK OF TRAVANCORE V S CIT M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 9 OF 22 (1986) 158 ITR 102 WAS SUBSEQUENTLY OVERRULED IN IT S LAND MARK DECISION IN THE CASE OF UCO BANK VS CIT 2 37 ITR 889. IN THIS REGARD, WE PLACE RELIANCE ON THE R ATIO LAID DOWN BY VARIOUS JUDICIAL AUTHORITIES ON THE PROPOSITION THAT THE INCOME CANNOT BE TAXED ON HYPOTHETICAL BASIS, AND IT IS ONLY THE REAL INCOME THAT IS TO BE BROUGHT TO TAX. IN THIS BEHALF, WE ALSO RELY, GIVING BELOW SUMMARY OF THE RATIO LAID DOWN, ON THE FOLLOW ING DECISIONS A) CIT VS. GODHRA ELECTRICITY CO. 225 ITR 746 (SC), THE VIEW EXPRESSED WAS THAT IF INCOME DOES NOT R ESULT AT ALL, THERE CANNOT BE ANY TAX AND THAT IF AN INCO ME HAS NOT MATERIALIZED, THEN MERELY AN ENTRY MADE ABOUT A HYPOTHETICAL INCOME BY FOLLOWING BOOK KEEPING METHO DS, THE LIABILITY TO TAX CANNOT BE ATTRACTED. B) ANDHRA BANK(225 ITR 447)(SC): IT WAS HELD, THAT THERE CANNOT BE A TAX IF NO INCOME RESULTED, DESPITE THE ENTRY IN THE BOOK KEEPING. TH E CASE DEALS WITH S. 148. ASSESSEE CHANGED METHOD OF ACCOUNTING FROM AY 1960 ONWARDS. BUT DURING AY 1963 - 64, THE AO OBJECTED THE CHANGE AND REOPENED ASSESSMENTS FOR AY 1960 ONWARDS. APEX COURT HELD TH AT THIS AMOUNTS TO CHANGE OF OPINION AND RE-ASSESSMENT IS NOT VALID. 23. FURTHER, THE LEARNED COUNSEL FOR THE ASSESSEE R ELIED ON THE DECISION OF THE HONBLE SUPREME COURT CIT VS . EXCEL INDUSTRIES LTD. & ORS. (358 ITR 295) AND SUBMITTED THAT GOING BY THE ACCOUNTING STANDARD THO UGH THE REVENUE IS COLLECTIBLE BY CERTAINTY, THE ASSESS EE IN THE PRESENT CASE, IN FACT, HAD NOT RECEIVED ANY INT EREST AND HENCE, INTEREST IN QUESTION REMAINED ONLY NOTIO NAL INTEREST. AS CANVASSED BY THE LEARNED COUNSEL FOR T HE ASSESSEE, SOME OF THE PARTIES DID NOT REPAY EVEN TH E PRINCIPAL AMOUNT AND SOME OF THE PARTIES SETTLED TH E ACCOUNTS BY PAYING SOME INTEREST AND HENCE, WE AGRE E THAT COMPUTATION OF NOTIONAL INTEREST AT 14% ON ALL THE M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 10 OF 22 ADVANCES AND MAKING ADDITIONS ON THAT BASIS TO THE INCOME OF THE ASSESSEE, IS NOT JUSTIFIED. 1.3.2. THE LD. A.R. FURTHER PLACED RELIANCE ON THE DECISION OF HON`BLE DELHI HIGH COURT IN THE CASE OF CIT VS. M/S. VASISTH CHAYVYAPAR LTD. IN I.T.A. NO. 552 OF 2 005 DTD. 29.11.2010, WHEREIN IT WAS HELD THAT WHERE TH E ASSESSEE COMPANY BEING NBFC IS GOVERNED BY THE PROVISIONS OF RBI ACT, IN SUCH CASE INTEREST INCOME CANNOT BE SAID TO HAVE ACCRUED HAVING REGARDS TO THE ENTI TY PROVISION OF SECTION 45Q OF RBI AND PRUDENTIAL NORM S ISSUED BY THE RBI AND WHERE INTEREST WAS NOT RECEI VED AND POSSIBILITY OF RECOVERY WAS ALMOST NIL, IT COULD NO T BE TREATED TO HAVE BEEN ACCRUED IN FAVOUR OF THE ASSES SEE. 1.3.3. THE LD. A.R. FURTHER SUBMITTED THAT THE AO HIMSELF HAS NOT TAXED THE SAID AMOUNT OF INTEREST O F RS. 29,25,024/- TO THE INCOME OF THE ASSESSEE BUT HE HA S DISALLOWED AN AMOUNT OF RS. 35,02,536/- OUT OF INTE REST PAID. 1.3.4. THE LD. A.R. SUBMITTED THAT ON THE FACTS OF THE CASE AS THE ASSESSEE HAS SUBSTANTIAL INTEREST-FREE FUNDS OF RS. 10,11,43,069/-, (CONSISTING OF CAPITAL OF PARTN ERS OF RS. M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 11 OF 22 1,20,00,000 AND UNSECURED LOAN OF RS. 8,91,43,069/- FROM PARTNERS) AS ON 09.12.2010 AS AGAINST TOTAL INTERES T BEARING FUNDS OF RS. 8,16,45,023/- MAINLY BORROWED FROM BANK. THE INTEREST BEARING FUNDS WERE UTILIZED TOWA RDS THE OBJECTS FOR WHICH THE SAID LOAN WAS TAKEN BY THE FI RM FOR BUSINESS PURPOSES. ACCORDINGLY, THE LD. A.R. CONTEN DED THAT THE ASSESSEE HAS NOT DIVERTED ITS INTEREST BEA RING FUNDS FOR NON BUSINESS PURPOSES. THE LD. A.R. FURTH ER SUBMITTED THAT ABOVE FACTS OF THE CASE SHOWS THAT A DVANCES TO ALL THE SEVEN PARTIES AS MENTIONED IN ASSESSMENT ORDER FROM WHOM INTEREST WAS NOT CHARGED OR CHARGED AT TH E LESSER RATE WAS GIVEN OUT OF INTEREST-FREE FUNDS AV AILABLE WITH IT. 1.3.5. THE LD. A.R. RELYING ON THE DECISION OF HON`BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT (2007) 288 ITR 1(SC) CONTENDED THAT THE ONUS ON THE REVENU E TO SHOW THAT INTEREST BEARING FUND ALONE WERE INVESTED IN INVESTMENT ON WHICH NO INCOME WAS EARNED. THE LD. A .R. FURTHER RELIED ON THE DECISION OF HON`BLE SUPREME C OURT IN THE CASE MUNJAL SALES CORPORATION VS. CIT (2008) 29 8 ITR 298 (SC) WHEREIN IT WAS HELD THAT WHERE ASSESSEE HA D M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 12 OF 22 SUFFICIENT PROFITS IN THE CURRENT YEAR THEN INTERES T FREE ADVANCES CAN BE CONSIDERED FLOWING FROM SUCH PROFIT S. 1.3.6. THE LD. A.R. ALSO PLACE RELIANCE ON THE JUDGEMENT OF HON`BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BOM) WHEREIN IT WAS HELD THAT IF THERE ARE FUND A VAILABLE BOTH INTEREST FREE AND INTEREST BEARING, THEN A PRE SUMPTION WOULD ARISE THAT INVESTMENT WERE OUT OF INTEREST FR EE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE. IF THE IN TEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT NO DISALLOWANCE OF INTEREST PAID ON BORROWED FUNDS WOU LD BE NECESSARY. ONCE SUCH PRESUMPTION IS ESTABLISHED CLA IM OF INTEREST WAS ALLOWABLE. 1.3.7. THE LD. A.R. ALSO PLACED RELIANCE ON THE JUDGEMENT OF HON`BLE SUPREME COURT IN THE CASE OF S. A. BUILDERS VS. CIT (2007) (288 ITR 1) (SC) WHEREIN IT WAS HELD THAT WHERE THE ASSESSEE HAS MADE INVESTMENT OUT OF MIXED FUNDS FOR THE COMMERCIAL EXPEDIENCY THEN NO DISALLO WANCE COULD BE MADE UNDER SECTION 36 (1) (III) OF THE ACT . 1.3.8. THE LD. A.R. FURTHER PLACED RELIANCE ON FOLLOWING JUDGEMENT : CIT VS. HERO CYCLES LTD. (2010) 323 ITR 518 M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 13 OF 22 (P&H) WHEREIN IT WAS HELD THAT NO DISALLOWANCE OUT OF INTEREST PAYMENT IS PERMISSIBLE IF AO DOES NOT ESTA BLISH NEXUS BETWEEN THE EXPENDITURE INCURRED AND INCOME GENERATED. THE LD. A.R. SUBMITTED THAT IN THE PRESE NT CASE THE AO HAS FAILED TO ESTABLISH THAT THE ASSESSEE HA D DIVERTED INTEREST BEARING FUNDS FOR NON BUSINESS PU RPOSES OR ADVANCED THE SAME WITHOUT INTEREST. WHEN THE AS SESSEE HAS UTILIZED THE INTEREST BEARING FUNDS FOR BUSINES S PURPOSE AND JUSTIFIED THE SAME , THEN NO DISALLOWAN CE OF INTEREST CAN BE MADE. 1.3.9. THE LD. A.R. FURTHER CITED FOLLOWING JUDICIAL PRONOUNCEMENTS IN SUPPORT OF HIS CONTENTION AS FOLL OWS: RAM KISHAN OIL MILLS VS. CIT 56 ITR 186 (MP), BIRLA GWALIOR PVT. LTD. VS. CIT 44 ITR 847(MP), D & H SE CHERON ELECTRODES LTD. 142 ITR 529 (MP), REGAL THEATRE VS. CIT 225 ITR 205(DEL), SARVODYA KELA GROUP VS. ITO 25 IT J 409(INDORE-TRIB), AND OTHERS AS PER HIS WRITTEN SUBMISSIONS. 1.4. ON THE OTHER HAND, THE LD. D.R. RELYING ON THE ORDE RS OF LOWER AUTHORITIES SUBMITTED THAT THE ASSESSEE IS NOT ABLE TO SUBSTANTIATE THAT INTEREST FREE ADVANCES WERE GI VEN OUT M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 14 OF 22 OF INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE, HENCE, FINDING OF THE AO/LD. CIT (A) MAY BE UPHELD. 1.5. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE LD. A.O. HAS FAILED TO ESTABLISH T HAT THE ASSESSEE HAS RECEIVED ANY INTEREST FROM THE ABOVE S EVEN PARTIES DURING THE YEAR UNDER CONSIDERATION AND THE INTEREST FREE ADVANCES TO ABOVE STATED SEVEN PARTIE S WERE OUT OF INTEREST BEARING FUNDS. IT IS THE CONTENTION OF THE ASSESSEE THAT IT HAD SUFFICIENT NON-INTEREST BEARIN G FUNDS TO THE TUNE OF RS. 10.11 CRORES AS ON 09.12.2010, W HICH INTER-ALIA INCLUDED PARTNERS CAPITAL OF RS.1.20 CRO RES, AND UNSECURED LOAN FROM PARTNERS OF RS. RS. 8.91 CRORES AS AGAINST INTEREST BEARING FUNDS OF RS. 8.16 CRORES. THE LD. A. R. CONTENDED THAT THE ASSESSEE HAD UTILISED THESE F UNDS FOR GIVING INTEREST-FREE ADVANCES TO AFORESAID PARTIES ON WHICH NO INTEREST WAS SHOWN BY THE ASSESSEE EVEN THOUGH M /S. SHUBHAM KELA AGENCY, M/S. RAM KELA AGENCY AND M/S. SAIBABA COTTON INDUSTRIES HAVE SHOWN TO HAVE PAID INTEREST OF RS. RS. 1,31,735/- , RS. 93,289/- AND R S. 27,00,000/- RESPECTIVELY TO THE ASSESSEE AS PER AIR M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 15 OF 22 INFORMATION ON WHICH TDS WAS ALSO DEDUCTED. WE FIND THAT AS PER BOOKS OF ACCOUNTS OF THE ASSESSEE , THE ASSE SSEE HAS NOT RECEIVED ANY INTEREST DURING THE YEAR UNDER CONSIDERATION EVEN THOUGH INTEREST RECEIVED IN PREC EDING YEAR WAS DULY SHOWN BY THE ASSESSEE AS ITS INCOME F OR ASSESSMENT YEAR 2010-11. IT IS THE CONTENTION OF TH E ASSESSEE THAT THE ASSESSEE HAS DEBITED INTEREST IN TO ACCOUNT OF THESE PARTIES BUT FAILED TO REALIZE THE SAID INTEREST FROM THESE PARTIES HENCE, IT WAS NOT OFFER ED TO TAX. IT WAS NOTICED THAT THE ASSESSEE WAS NOT ABLE TO EV EN RECEIVE PRINCIPAL AMOUNT FROM THESE PARTIES AND CHE QUES ISSUED COULD NOT BE REALIZED. IN VIEW OF THIS MATT ER, WE ARE OF THE VIEW THAT INTEREST INCOME HAS BEEN RECOGNIZE D IN THE BOOKS OF ACCOUNTS ONLY TO THE EXTENT OF ACTUAL COLL ECTION, WHICH IS THE METHOD RECOGNIZED AS PER ACCOUNTING STANDARD 9 OF ICAI. THE LD. A.R. ALSO RELIED IN THE CASE OF MARUTI SECURITIES LTD. VS. ADDL CIT (I.T.A. NO. 468/HYD/2009 AND 1939/HYD/2011 FOR THE ASSESSMENT YEAR 2005-06 DTD. 05.09.2014 WHEREIN PARA 22 IS REPRODUCED AS UNDER: 22. THE METHOD OF ACCOUNTING, AS FOLLOWED BY THE ASSESSEE, DOES NOT CREATE ANY INCOME; BUT THE METHO D OF M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 16 OF 22 ACCOUNTING ONLY RECOGNIZES INCOME. THERE IS SOME ME RIT IN THE SUBMISSION OF THE ASSESSEE THAT WHEN THE PRINCIPAL ITSELF IS OVERDUE AND NOT COLLECTED, THER E IS NO BASIS FOR MAKING OUT A CASE THAT INTEREST INCOME WO ULD BE COLLECTABLE WITH CERTAINTY. EVEN WHERE AN ASSESS EE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT I S ONLY ACCRUAL OF REAL INCOME WHICH IS CHARGEABLE TO TAX, THAT ACCRUAL IS A MATTER TO BE DECIDED ON COMMERCIAL BEL IEF HAVING REGARD TO THE NATURE OF BUSINESS OF THE ASSE SSEE AND CHARACTER OF THE TRANSACTION. ACCORDINGLY, FOR THE PURPOSE OF DETERMINING WHETHER THERE HAS BEEN ACCRU AL OF REAL INCOME OR NOT, RECOURSE IS TO BE MADE TO AS CERTAIN THE NATURE OF BUSINESS AND CHARACTER OF THE TRANSAC TION AND THE REALITIES AND PECULIARITIES OF THE SITUATIO NS. THE DECISION VERY HEAVILY RELIED UPON BY THE FIRST APPE LLATE AUTHORITY IN THE CASE OF STATE BANK OF TRAVANCORE V S CIT (1986) 158 ITR 102 WAS SUBSEQUENTLY OVERRULED IN IT S LAND MARK DECISION IN THE CASE OF UCO BANK VS CIT 2 37 ITR 889. IN THIS REGARD, WE PLACE RELIANCE ON THE R ATIO LAID DOWN BY VARIOUS JUDICIAL AUTHORITIES ON THE PROPOSITION THAT THE INCOME CANNOT BE TAXED ON HYPOTHETICAL BASIS, AND IT IS ONLY THE REAL INCOME THAT IS TO BE BROUGHT TO TAX. IN THIS BEHALF, WE ALSO RELY, GIVING BELOW SUMMARY OF THE RATIO LAID DOWN, ON THE FOLLOW ING DECISIONS A) CIT VS. GODHRA ELECTRICITY CO. 225 ITR 746 (SC), THE VIEW EXPRESSED WAS THAT IF INCOME DOES NOT R ESULT AT ALL, THERE CANNOT BE ANY TAX AND THAT IF AN INCO ME HAS NOT MATERIALIZED, THEN MERELY AN ENTRY MADE ABOUT A HYPOTHETICAL INCOME BY FOLLOWING BOOK KEEPING METHO DS, THE LIABILITY TO TAX CANNOT BE ATTRACTED. B) ANDHRA BANK(225 ITR 447)(SC): IT WAS HELD, THAT THERE CANNOT BE A TAX IF NO INCOME RESULTED, DESPITE THE ENTRY IN THE BOOK KEEPING. TH E CASE DEALS WITH S. 148. ASSESSEE CHANGED METHOD OF ACCOUNTING FROM AY 1960 ONWARDS. BUT DURING AY 1963 - 64, THE AO OBJECTED THE CHANGE AND REOPENED ASSESSMENTS FOR AY 1960 ONWARDS. APEX COURT HELD TH AT THIS AMOUNTS TO CHANGE OF OPINION AND RE-ASSESSMENT IS NOT VALID. M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 17 OF 22 1.5.1. THEREFORE, IN THE LIGHT OF FINDING OF COORDINATED BENCH MENTIONED AS ABOVE, WE ARE OF THE VIEW THAT W HEN NO INTEREST IS RECEIVED SAME CANNOT BE TAXED ON NOTION AL BASIS. 1.5.2. WE FURTHER FIND THAT THE HON`BLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIES LTD. 358 IT R 295 (SC HAD HELD AS UNDER THAT GOING BY THE ACCOUNTING STANDARD THOUGH THE REVENUE IS COLLECTIBLE BY CERTAINTY, THE ASSESSEE I N THE PRESENT CASE, IN FACT, HAD NOT RECEIVED ANY INTERES T AND HENCE, INTEREST IN QUESTION REMAINED ONLY NOTIONAL INTEREST. AS CANVASSED BY THE LEARNED COUNSEL FOR T HE ASSESSEE, SOME OF THE PARTIES DID NOT REPAY EVEN TH E PRINCIPAL AMOUNT AND SOME OF THE PARTIES SETTLED TH E ACCOUNTS BY PAYING SOME INTEREST AND HENCE, WE AGRE E THAT COMPUTATION OF NOTIONAL INTEREST AT 14% ON ALL THE ADVANCES AND MAKING ADDITIONS ON THAT BASIS TO THE INCOME OF THE ASSESSEE, IS NOT JUSTIFIED. 1.5.3. IN VIEW OF ABOVE, RELYING ON DECISION OF APEX COURT AS REFERRED TO ABOVE, WE ARE OF THE VIEW THE WHEN INTEREST INCOME IS NOT REALIZED OR COLLECTED , SAME CANNOT BE TAXED ON NOTIONAL BASIS. WE FURTHER FIND TO THE AO HAS ALSO NOT TAXED THE INTEREST INCOME CREDITED BY THE ABOVE MENTIONED PARTIES IN THEIR BOOKS OF ACCOUNTS , BUT DISALLOWANCE OF INTEREST HAS BEEN MADE ON THE BASIS OF DIVERSION OF INTEREST BEARING FUNDS TO NON-BUSINESS PURPOSES. HOWEVER, WE FIND THAT THE LD. A.R. HAS FU LLY M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 18 OF 22 DEMONSTRATED THAT THE INTEREST-FREE ADVANCE WERE GI VEN OUT OF INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE DURING THE ASSESSMENT YEAR 2010-11 AND DURING A.Y. UNDER CONSIDERATION FOR WHICH INTEREST-FREE FUNDS OF RS.1 0.11 CRORES [ RS. 1.20 CRORE + RS. 8.91 CRORE] AS MENTIO NED IN ABOVE PARAS OF THIS ORDER, AS AGAINST INTEREST BEAR ING FUNDS OF RS. 8.19 CRORES. THE LD. A.R. ALSO PLACED RELIA NCE ON THE JUDGEMENT OF HON`BLE SUPREME COURT IN THE CASE OF S. A. BUILDERS VS. CIT (2007) (288 ITR 1) (SC) WHEREIN IT WAS HELD THAT WHERE THE ASSESSEE HAS MADE INVESTMENT OUT OF MIXED FUNDS FOR THE COMMERCIAL EXPEDIENCY THEN NO DISALLO WANCE COULD BE MADE UNDER SECTION 36 (1) (III) OF THE ACT . WE FIND THAT THE AO HAS NOT BEEN ABLE TO ESTABLISH THE NEXU S BETWEEN INTEREST BEARING FUNDS UTILIZED FOR NON BUS INESS PURPOSE AS HELD IN ABOVE QUOTED DECISION OF HON`BLE SUPREME COURT. THE LD. A. R. HAS PLACED RELIANCE I N THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. (2 009)313 ITR 340(BOM)/ 178 TAXMAN 135 (BOM) WHEREIN IT WAS H ELD THAT IF THERE WAS FUNDS AVAILABLE BOTH, INTEREST-FR EE AND OVERDRAFT AND OR/LOANS TAKEN, THEN A PRESUMPTION WO ULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST -FREE M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 19 OF 22 FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENTS. IN THE PRESENT CASE, THERE SUFFICIENT INTEREST FREE FUNDS WERE AVAILABLE AT THE DISPOSAL OF THE ASSESSEE. WE FURTHER FIND SUPPORT FROM DECISION IN THE CASE OF CIT VS. H ERO CYCLES LTD. (2015) 379 ITR 347(SC)/63 TAXMANN.COM 3 08 (SC)/ (2016) 236 TAXMAN 447 (SC)WHEREIN IT WAS HELD AS UNDER: 11. WE ARE OF THE OPINION THAT SUCH AN APPROACH IS CLEARLY FAULTY IN LAW AND CANNOT BE COUNTENANCED. 12. INSOFAR AS LOANS TO THE SISTER CONCERN/SUBSIDIARY COMPANY ARE CONCERNED, LAW IN THIS BEHALF IS RECAPITULATED BY THIS COURT IN THE CASE OF S.A. BUI LDERS LTD. V. CIT (APPEALS) [2007 (288) ITR 1/158 TAXMAN 74 ]. AFTER TAKING NOTE OF AND DISCUSSING ON THE SCOPE OF COMMERCIAL EXPEDIENCY, THE COURT SUMMED UP THE LEGA L POSITION IN THE FOLLOWING MANNER: '26. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET I T IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCUR RED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 27. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979 (118) ITR 200 (SC) ], IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENTIMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY, THE INTEREST THEREON COULD NOT HAVE BEE N ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. IN MAD HAV PRASAD'S CASE [ 1979 (118) ITR 200 (SC) ], THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIEW TO COMMEMORATE THE MEMORY OF THE ASSESSEE'S DECEASED M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 20 OF 22 HUSBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED, IT WAS HELD BY THIS COURT THAT THE INTEREST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIA'S CASE [ 1979 (118) ITR 200 (SC) ] IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECT ION 36(1)(III) OF THE ACT. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHE R THE AMOUNT ADVANCED TO THE SISTER CONCERN WAS BY WA Y OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER I N SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNI NG PROFITS' VIDE CIT V. MALAYALAM PLANTATIONS LTD. [ 1964 53 ITR 140 (SC) , CIT V. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [ 1971 82 ITR 166 (SC) ], ETC.' 13. IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIE W TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEME NT (P) LTD. [2002] 254 ITR 377/121 TAXMAN 706 WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS ESTABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNO T JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BU T THAT OF A PRUDENT BUSINESSMAN. 14. APPLYING THE AFORESAID RATIO TO THE FACTS OF THIS CASE AS ALREADY NOTED ABOVE, IT IS MANIFEST THAT TH E M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 21 OF 22 ADVANCE TO M/S. HERO FIBRES LIMITED BECAME IMPERATIVE AS A BUSINESS EXPEDIENCY IN VIEW OF THE UNDERTAKING GIVEN TO THE FINANCIAL INSTITUTIONS BY THE ASSESSEE TO THE EFFECT THAT IT WOULD PROVIDE ADDITI ONAL MARGIN TO M/S. HERO FIBRES LIMITED TO MEET THE WORKING CAPITAL FOR MEETING ANY CASH LOSES. 15. IT WOULD ALSO BE SIGNIFICANT TO MENTION AT THIS ST AGE THAT, SUBSEQUENTLY, THE ASSESSEE COMPANY HAD OFF- LOADED ITS SHARE HOLDING IN THE SAID M/S. HERO FIBR ES LIMITED TO VARIOUS COMPANIES OF OSWAL GROUP AND AT THAT TIME, THE ASSESSEE COMPANY NOT ONLY REFUNDED BACK THE ENTIRE LOAN GIVEN TO M/S. HERO FIBRES LIM ITED BY THE ASSESSEE BUT THIS WAS REFUNDED WITH INTEREST . IN THE YEAR IN WHICH THE AFORESAID INTEREST WAS RECEIV ED, SAME WAS SHOWN AS INCOME AND OFFERED FOR TAX. 16. INSOFAR AS THE LOANS TO DIRECTORS ARE CONCERNED, I T COULD NOT BE DISPUTED BY THE REVENUE THAT THE ASSESSEE HAD A CREDIT BALANCE IN THE BANK ACCOUNT WHEN THE SAID ADVANCE OF RS. 34 LAKHS WAS GIVEN. REMARKABLY, AS OBSERVED BY THE CIT (APPEAL) IN HIS ORDER, THE COMPANY HAD RESERVE/SURPLUS TO THE TUNE OF ALMOST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPA NY COULD IN ANY CASE, UTILISE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. 17. ON THE BASIS OF AFORESAID DISCUSSION, THE PRESENT APPEAL IS ALLOWED, THEREBY SETTING ASIDE THE ORDER OF THE HIGH COURT AND RESTORING THAT OF THE INCOME TAX APPELLATE TRIBUNAL. 1.5.4. THEREFORE, PRESUMPTION WOULD GO IN FAVOUR OF THE ASSESSEE THAT THE INTEREST FREE FUNDS WERE GIVEN OU T OF INTEREST FREE FUNDS AVAILABLE AT THE DISPOSAL OF TH E ASSESSEE AS PER BALANCE SHEET OF THE ASSESSEE, BY APPLYING T HE RATIO AS LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. (2 009) 178 M/S. CHHAGANLAL KISHANLAL & CO. VS. DCIT-KHANDWA/ I .T.A. NO.817/IND/2014/A.Y.:11-12 PAGE 22 OF 22 TAXMAN 135 (BOM) AND THE DECISION OF HON`BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES LTD. (2010) 323 ITR 518 (P&H) AND OTHER DECISION AS RELIED BY T HE LD. A.R., WE ARE OF THE CONSIDERED OPINION THAT NO DISA LLOWANCE OF INTEREST IS WARRANTED IN THE CASE. ACCORDINGLY, DISALLOWANCE OF INTEREST OF RS.35,02,536/- IS DELET ED. THE ABOVE GROUNDS OF APPEAL IS THEREFORE, ALLOWED. 1.6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. 1.7. THE ORDER PRONOUNCED IN THE OPEN COURT ON 28.02.2017. SD/- ( . . ) (C. M. GARG) JUDICIAL MEMBER SD/- (..) (O.P.MEENA) ACCOUNTANT MEMBER / DATED : 28 TH FEBRUARY, 2017/OPM