Sh. Sunil Grover, Pathankot V. The Assistant commissioner of Income Tax, Pathankot

ITA 97/ASR/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3301 (ITAT-AMRITSAR)
• Duration Of Justice: 2 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 20-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 24-01-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 17-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P N ARORA
• Keywords: Depreciation; Source of fund; Proportionate interest
• Section: 143(3); 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER I.T.A. NO. 97/ASR/2017 ASSESSMENT YEAR: 2012-13 SUNIL GROVER, PROP. J.S. GROVER STONE CRUSHER, G.T. ROAD, MALIKPUR, PATHANKOT [PAN: ABFPG 0019B] VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-VI, PATHANKOT (APPELLANT) (RESPONDENT) APPELLANT BY : SH. P. N. ARORA (ADV.) RESPONDENT BY: SH. CHARAN DASS (D.R.) DATE OF HEARING: 24.01.2019 DATE OF PRONOUNCEMENT: 20.03.201 9 ORDER PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-2, AMRITSAR ( CIT(A) FOR SHORT) DATED 10.11.2016, PARTLY ALLOWING THE ASSESSEES APPEAL C ONTESTING HIS ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE AC T HEREINAFTER) DATED 30.03.2015 FOR ASSESSMENT YEAR (A.Y.) 2012-13. 2. THE ONLY ISSUE ARISING IN THIS APPEAL IS THE DIS ALLOWANCE OF THE INTEREST EXPENDITURE UNDER SECTION 36(1)(III), MADE AT RS. 3 ,83,761, BY WORKING OUT THE INTEREST EXPENDITURE ATTRIBUTABLE TO THE APPLICATIO N OF THE BORROWED FUNDS FOR NON- BUSINESS PURPOSES. ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 2 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE, A FIRM IN STONE CRUSHING AND TRANSPORT BUSINESS, RETURNED ITS INCOME FOR THE YEAR AT RS. 56.80 LACS ON 31/3/2013. IT WAS DURING ASSESSMENT PROCEEDINGS FOUND TO HAVE ADVANCE D RS. 15.48 LACS DURING THE YEAR TO ONE, SHIKHA GROVER, DAUGHTER OF THE ASSESSE E WHO, ALONG WITH SOME OTHER MEMBERS OF THE FAMILY, HAD ALREADY BEEN ADVANCED RS . 25.50 LACS DURING AN EARLIER YEAR/S, INCLUDING RS. 7.50 LACS TO HER. THE PURPOSE OF THE ADVANCE/S BY THE ASSESSEE-BORROWER, STATED AT PAGE 6 OF THE ASSESSME NT ORDER (FOLLOWED BY DISCUSSION AT PARAS 5.2 & 5.3/PGS. 7-8 OF THE SAID ORDER) IS CLEARLY PERSONAL IN NATURE. THE NON-BUSINESS USER OF THE CAPITAL TO THA T EXTENT IS NOT DISPUTED; IN FACT, ADMITTED. THE ASSESSEES ARGUMENT BEFORE US IS TWO- FOLD. ONE, THAT NO DISALLOWANCE, NEVERTHELESS, COULD YET BE MADE FOR T HE CURRENT YEAR QUA AN ADVANCE MADE DURING A PRECEDING YEAR. IN FACT, SIMILAR DISA LLOWANCE MADE FOR THE PRECEDING YEAR STANDS DELETED BY THE FIRST APPELLATE AUTHORIT Y ON THE BASIS THAT THE ASSESSEE HAD SUFFICIENT INTEREST-FREE FUNDS. THE SAME HAS NOT BE EN APPEALED AGAINST BY THE REVENUE, SO THAT IT HAS ATTAINED FINALITY. AS REGAR DS THE ADVANCE/S MADE DURING THE CURRENT YEAR (RS. 15.48 LACS), THE SAME WOULD STAND TO BE DELETED ON THE SAME BASIS, I.E., SUFFICIENT INTEREST-FREE CAPITAL, AS THE ASSE SSEES BALANCE-SHEET (AS ON 31/3/2012) SHOWS THE PROPRIETORS CAPITAL (WHICH IS INTEREST-FREE) AT RS. 155.61 LACS, AS AGAINST THE TOTAL SUCH (NON-BUSINESS) ADVA NCES AT RS. 40.98 LACS (AS AT 31.03.2012 / PB PG. 10)(THE AO HAS INADVERTENTLY TA KEN THE FIGURE AT RS. 31.98 LACS; THE ADVANCE TO PARAMJIT SINGH, MADE DURING AN EARLIER YEAR, BEING AT RS. 10 LACS, AND NOT RS. 1 LAC). THAT THE AVAILABILITY OF SUFFICIENT NON-INTEREST BEARING FUNDS WOULD IMPLY OR INVITE A PRESUMPTION OF THEIR APPLICATION FOR NON-BUSINESS PURPOSES, PRECLUDING ANY DISALLOWANCE OF INTEREST ( TO THAT EXTENT) IS A PROPOSITION THAT HAS FOUND FAVOUR WITH THE HONBLE COURTS, INCL UDING THE HONBLE JURISDICTIONAL HIGH COURT IN GURDAS GARG V. CIT (IN ITA NO. 413 OF 2014, DATED 16/7/2015), REFERENCE TO WHICH STANDS IN FACT MADE BY THE FIRST APPELLATE AUTHORITY IN HIS ORDER ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 3 FOR THE PRECEDING YEAR (PB PGS. 13 - 24). NO DISALL OWANCE, ACCORDINGLY, IS CALLED FOR. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. DISCUSSION 4.1 A BALANCE-SHEET AS AT ANY PARTICULAR DATE GIVES A SNAP SHOT OF THE SOURCES AND THE APPLICATION OF FUNDS (AS ON THAT DATE), STATED ON THE TWO SIDES OF A HORIZONTAL DIVIDE, MORE PROPERLY TERMED AS LIABLITIES AND A SSETS RESPECTIVELY. WE SAY SO AS NOT ALL LIABILITIES WOULD STAND TO BE CLASSIFIED AS A SOURCE OF FUNDS, I.E., LIQUID FUNDS, WHICH ONLY COULD BE DIVERTED OR APPLIED BY WAY OF C ASH LOANS (FOR A NON-BUSINESS AS IN THE PRESENT CASE, OR EVEN A BUSINESS PURPOSE) . TRADE CREDITORS, ALSO CALLED SPONTANEOUS LIABILITIES, ARE, FOR EXAMPLE, IN THAT SENSE, NON-FUND LIABILITIES, AS THEY REPRESENT AMOUNTS PAYABLE AGAINST GOODS PURCHASED ( ON SERVICES AVAILED). MONEY BECOMES AVAILABLE ONLY ON THE REALIZATION OF THE SA LE PROCEEDS OF THE GOODS/ SERVICES, SOLD EITHER AS SUCH OR UPON CONVERSION IN TO SOME OTHER FORM, I.E., ON COMPLETION OF WHAT IS CALLED THE WORKING CAPITAL C YCLE. LIQUID FUNDS IN RESPECT OF TRADE LIABILITIES, THUS, GET GENERATED ONLY AFTER A GESTATION PERIOD MARKING THE STOCKING PERIOD OF RAW MATERIAL, WORK-IN-PROGRESS, FINISHED GOODS, THROUGH WHICH STAGES THE GOODS PURCHASED PASS BEFORE BEING SOLD, AS WELL AS THE BILLS RECEIVABLE (OR TRADE DEBTORS) PHASE, I.E., UPON THEIR SALE. RA THER, IF THIS PERIOD, IN AGGREGATE, I.E., THE CASH TO CASH CYCLE, IS MORE THAN THE CRED IT PERIOD ALLOWED BY THE TRADE CREDITORS, AS IS USUALLY THE CASE, LIQUID FUNDS WOU LD BE REQUIRED TO FINANCE THE WORKING CAPITAL, EITHER THROUGH BORROWED OR PROPRIE TARY CAPITAL, WHICH COULD BE EITHER INTEREST BEARING OR OTHERWISE, AS INTEREST I S PAID IN SOME CASES EVEN ON EQUITY, AS PARTNERS CAPITAL IN A PARTNERSHIP FIRM. FROM THIS STAND-POINT, THE VERTICAL FORM OF THE BALANCE-SHEET BETTER REPRESENTS THE SOU RCES AND APPLICATION OF FUNDS IN- AS-MUCH AS IT HIGHLIGHTS ONLY THE FUND BASED LIABIL ITIES AND ASSETS, I.E., FINANCED BY ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 4 EQUITY OR BORROWED CAPITAL, THOUGH IN SOME CASES EV EN THE EQUITY CAPITAL COULD BE INTEREST BEARING, SO THAT TO THE EXTENT IT FINANCES THE NON-BUSINESS ASSETS, PROPORTIONATE INTEREST IS LIABLE TO BE DISALLOWED. A TYPICAL VERTICAL FORM (V-FORM) OF BALANCE-SHEET IS AS UNDER: TABLE 1 (SAY) FIXED ASSETS (AFTER DEPRECIATION) XXX 1000 CURRENT ASSETS (NET) STOCK IN TRADE XXX TRADE DEBTORS XXX OTHER CURRENT ASSETS XXX XXX LESS: TRADE CREDITORS XXX OTHER CREDITORS XXX XXX 1000 NON-CURRENT ASSETS XXX 100 XXX 2100 EQUITY CAPITAL XXX (1000) BORROWED CAPITAL XXX (1100) XXX (2100) NB: FIGURES UNDER COLUMN SAY ARE REPRESENTATIVE F IGURES. THE ASSETS OF A BUSINESS ENTERPRISE ARE, ACCORDINGL Y, FINANCED BY EQUITY AND BORROWED CAPITAL AND, GENERALLY SPEAKING, IN THAT R ATIO. THE TRADE LIABILITIES WOULD, AS SHALL BE APPARENT, CONTRIBUTE THERETO ONLY WHERE THEY EXCEED THE CURRENT ASSETS, I.E., WHERE THE NET CURRENT ASSETS (I.E., CURRENT A SSETS (-) CURRENT LIABILITIES) IS AT A NEGATIVE, WHICH IS A RARITY, AS INDEED AS WE SHAL L PRESENTLY SEE, IS IN THE INSTANT CASE [AT (-) RS. 108.95 LACS, AS ON 31.3.2012]. THE NON-BUSINESS LOANS/ADVANCES, ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 5 WHICH ARE AT RS. 40.98 LACS AS ON 31.3.2012, FALL I N THE CATEGORY OF NON-CURRENT ASSETS. THE V-FORM, THUS, REVEALS THE FUNDING PATTE RN OF THE ASSETS, AT (SAY) X% AND Y% AS AT THE YEAR END. (BEING AT 47.62% AND 52.38% IN THE EXAMPLE). THIS MAY BE, AS INDEED IT WOULD BE, DIFFERENT AT THE BEGINNI NG OF THE YEAR OR, FOR THAT MATTER, AT ANY TIME OF THE YEAR, WHICH COULD BE ASCERTAINED BY DRAWING A STATEMENT OF THE OBTAINING ASSETS AND LIABILITIES AT THE TIME, WITH EQUITY CAPITAL BEING THE BALANCING FIGURE, I.E., WHERE NOT ACCOMPANIED BY, TO SAVE THE TEDIUM, THE PREPARATION OF THE OPERATING STATEMENT ALONG WITH. 4.2 THE FUNDS IN A GOING CONCERN BEING IN A STATE O F FLUX, THE FUNDING PATTERN AT DIFFERENT TIMES OF THE YEAR WOULD REVEAL AS TO HOW IT HAS VARIED OVER THE YEAR, OR THAT WHICH OBTAINS ON AN AVERAGE DURING THE YEAR. C LEARLY, A HIGHER NUMBER OF DATA POINTS WOULD GIVE A BETTER AVERAGE, WHICH IS RELEVA NT IN-AS-MUCH AS INTEREST IS BASED ONLY ON THE ACTUAL FUNDING AS OBTAINING OVER THE YEAR (AS AGAINST THAT AT ANY GIVEN POINT OF TIME). AGAIN, WITHOUT DOUBT, THE PUR PORT BEING TO ARRIVE AT AS GOOD AN AVERAGE AS POSSIBLE, A HIGHER VARIABILITY (IN TH E FUNDING PATTERN) OVER THE YEAR WOULD WARRANT A LARGER SAMPLE SET. THE CHANGE IN TH E FUNDING PATTERN OVER TWO POINTS OF TIME, BE IT A YEAR OR A MONTH (OR ANY OTH ER), IS ALSO CAPTURED BY WHAT IS CALLED THE CASH FLOW STATEMENT, WHICH CLEARLY SHO WS WHERE THE FUNDS (OVER THE SAID PERIOD) COME FROM AND ARE APPLIED. TO PUT THIS IN PERSPECTIVE, THE FUNDS LOCKED IN FIXED ASSETS NORMALLY REMAIN SO. RATHER, THOUGH NOT CAST IN STONE, AND COULD ALTER WITH TIME, THE OPENING BALANCE-SHEET, D EFINING THE FINANCING AS OBTAINING AT THE BEGINNING OF THE YEAR, CRYSTALLIZE S THE FUNDING OF THE VARIOUS ASSETS OF AN ENTERPRISE. ONLY THAT OBTAINING DURING THE YE AR, CAPTURED BY THE CASH FLOW STATEMENT AFORE-REFERRED, BECOMES RELEVANT. THE SAI D STATEMENT, IT MAY BE CLARIFIED, WOULD ALSO DEPICT THE CHANGES IN THE FUNDING PATTER N OF THE FIRMS BROUGHT FORWARD ASSETS, AS WHERE THE BROUGHT FORWARD LOANS ARE REPA ID. ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 6 FURTHER, TO THE EXTENT THE BORROWING IS DEDICATED, VIZ., THE FIXED ASSETS FINANCED BY TERM LOAN/S, OR CURRENT ASSETS BY WORKI NG CAPITAL LOAN/S OR ADVANCE/S, THE RELEVANT ASSETS HAVE TO BE REGARDED AS FINANCED ACCORDINGLY. WHERE SO, THIS WOULD SIGNIFICANTLY ALTER THE RATIO OF FINANCING, I .E., THE X% AND Y% REFERRED TO EARLIER, WHICH MAY NOW BE PRESENTED AS FOLLOWS: TABLE 2.1 TOTAL DB BALANCE FIXED ASSETS XXX(1000) XXX(400) XXX (6 00) NET CURRENT ASSETS XXX(1000) XXX(400) XXX (600 ) NON-CURRENT ASSET XXX (100) _______ XXX (100) TOTAL XXX(2100) XXX(800) XXX(1300) EQUITY CAPITAL XXX(1000) BORROWED CAPITAL XXX (300) XXX(1300) DB => DEDICATED BORROWING EXCLUDING DEDICATED BORROWINGS (RS. 800 IN OUR EXAM PLE), IT IS ONLY THE ASSETS TO THE EXTENT NOT COVERED THEREBY, WHOSE FUNDING WOULD THEREFORE NEED TO BE EXAMINED, AND RELEVANT FOR THE PURPOSE OF ATTRIBUTI ON OF THE BORROWED CAPITAL, IF ANY, AND THEREFORE, INTEREST THEREON, I.E., FOR NON -BUSINESS PURPOSES. THAT IS, THE QUESTION, IF AT ALL, COULD ARISE ONLY IN RESPECT OF THE ATTRIBUTION OF THE INTEREST ON THE UNDEDICATED BORROWING (OF RS. 300, IN THE EXAMPLE); THE BALANCE RS. 800 BEING FOR BUSINESS PURPOSES, WHERE THE NON-CURRENT ASSETS (RS . 100 IN THE EXAMPLE) IS FOR NON-BUSINESS PURPOSE. IN FACT, THE FIGURES IN THE E XAMPLE CLEARLY SHOW ADEQUATE OWN (EQUITY) CAPITAL, SO THAT THE SAME WOULD APPL YING THE PRESUMPTION AFORE-SAID (REFER PARA 3), FINANCE THE NON-BUSINESS PURPOSE AS SET OF RS. 100 IN FULL, ATTRACTING NO DISALLOWANCE U/S. 36(1)(III). FURTHER, HERE IT N EEDS TO BE CLARIFIED THAT AS BORROWING AGREEMENTS NORMALLY PROVIDE FOR A MARGIN, IMPLYING RISK CAPITAL (EQUITY), WHICH, ACCORDINGLY, IS TO BE REGARDED AS DEDICATED TO THAT EXTENT, EVEN AS ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 7 THE REPAYMENT OF BORROWED CAPITAL THOUGH COULD BE F ROM EITHER EQUITY OR NON- DEDICATED BORROWING. THAT WOULD, THUS, MODIFY THE F UNDING PATTERN STILL FURTHER, AS MAY BE EXEMPLIFIED BY REDRAWING THE TABLE AFORE-STA TED: TABLE 2.2 TOTAL DB EC BALANCE FIXED ASSETS XXX(1000) XXX(400) XXX(20 0) XXX (400) NET CA XXX(1000) XXX(400) XXX(200) XXX (400) NON-CA XXX (100) --- --- XXX (100) TOTAL XXX(2100) XXX(800) XXX(400) XXX (900) EQUITY CAPITAL XXX (600) BORROWED CAPITAL XXX (300) XXX (900) DB => DEDICATED BORROWING EC => EQUITY CAPITAL AS BORROWING ARRANGEMENTS ARE NOT WITHOUT MARGIN ST IPULATION, IT IS TABLE 2.2, A VARIANT OF TABLE 2.1, THAT IS TO BE NORMALLY REGARD ED. FURTHER, THE PRESUMPTION AS TO THE EQUITY CAPITAL GOING TO FINANCE THE NON-CURRENT ASSETS, WHICH SURELY COULD BE VALIDLY DRAWN, IS ONLY WITH REFERENCE TO THE UNDEDI CATED RISK (EQUITY) CAPITAL. TO CLARIFY THE IMPLICATION OF THIS PRESUMPTION, EVEN A S ALL THE (UNCOVERED) ASSETS COULD REASONABLY BE REGARDED AS FINANCED BY BORROWED CAPI TAL IN THE RATIO OF 200:1300 (2:13, AS PER TABLE 2.1, OR 1:3 AS PER TABLE 2.2) ( ASSUMING THESE FIGURES TO REPRESENT THE AVERAGE FINANCING FOR THE YEAR), CONS IDERING AVAILABILITY OF SURPLUS EQUITY, THE SAME CAN BE CONSIDERED AS FUNDED SOLELY BY EQUITY CAPITAL. THIS, OF COURSE, IS SUBJECT OF ANY CONTRACTUAL OBLIGATION. T HIS ALSO CLARIFIES THAT IF THE OPENING NON-CURRENT ASSETS HAVE BEEN REGARDED AS FI NANCED BY EQUITY CAPITAL, DRAWING THE PRESUMPTION AFORE-REFERRED, THE SAME SH ALL HOLD FOR THE CURRENT YEAR AS WELL, UNLESS, OF COURSE, FINANCING BEING A DYNAMIC PHENOMENON, THE SAME IS SUBSTITUTED BY BORROWED CAPITAL DURING THE CURRENT YEAR. IT MAY BE FURTHER CLARIFIED THAT THE PRESUMPTION OF OWN CAPITAL, WHERE OTHERWIS E AVAILABLE, FOR FUNDING NON- ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 8 CURRENT ASSETS, SHALL APPLY EVEN IF THE SAME IS APP ARENTLY FINANCED BY BORROWED CAPITAL, AS BY ISSUING A CHEQUE FROM AN OVERDRAFT A CCOUNT, ETC. THIS IS AS, AS FAMOUSLY STATED, MONEY HAS NO BONES. FINALLY, THE A VAILABILITY OF EQUITY CAPITAL, TO THE EXTENT ATTRIBUTABLE TO THE PROFITS FOR THE YEAR , HAS TO BE REGARDED AS INURING EVENLY DURING THE YEAR. AS INTEREST IS ESSENTIALLY A CHARGE TOWARD THE TIME COST OF FUNDS, WHERE OWN FUNDS ARE AVAILABLE WHETHER INTR ODUCED OR GENERATED LATER DURING THE YEAR, THE SAME MAY GIVE RISE TO SOME INT EREST ATTRIBUTION, I.E., RELATABLE TO THE PERIOD FOR WHICH THE ADEQUATE CAPITAL WAS NOT A VAILABLE, I.E., WAS IN DEFICIT, FOR A PART OF THE YEAR, THOUGH STOOD MET BY THE END OF THE YEAR, AS WHERE THE SAME WAS INTRODUCED, OR THE PROFITS CAME TO BE GENERATED, LA TER. 4.3 THE FINANCING OF A FIRMS ASSETS CAN THEREFORE BE ASCERTAINED WITH REASONABLE ACCURACY. THE AFORE-STATED EXERCISE CAN, IN FACT, B E DONE ON A DAILY BASIS IN CASE OF COMPUTERIZED ACCOUNTS, FEEDING THE ALGORITHM THEREI N, YIELDING THE BORROWED CAPITAL APPLIED FOR NON-BUSINESS PURPOSE/S FOR EACH DATE AND, THUS, ON AN AVERAGE. THE ADEQUACY OR OTHERWISE OF EQUITY (RISK) CAPITAL IS TO BE EXAMINED WITH REFERENCE TO THE CONTRACTUAL OBLIGATIONS AND THE CORRESPONDIN G ASSETS IN WHICH THE SAID CAPITAL, AS ANY OTHER, COULD BE REGARDED AS HAVING BEEN APPLIED, I.E., AS PER THE BUSINESS PLAN/PROJECT FINANCING. MERELY COMPARING T HE (ABSOLUTE) VALUE OF THE CAPITAL WITH REFERENCE TO SPECIFIC BUSINESS OR OT HER-THAN-FOR-BUSINESS, ADVANCE/S, AND CONCLUDE ON THAT BASIS THAT THE ENTERPRISE HAS SUFFICIENT INTEREST-FREE FUNDS, IS FALLACIOUS. WHERE, HOWEVER, THE ASSESSEE HAS SUFFIC IENT INTEREST-FREE FUNDS A FINDING OF FACT, THE PRESUMPTION THAT IT IS THESE T HAT FINANCE THE NON-CURRENT OR NON- BUSINESS APPLICATION (OF FUNDS), IS APPOSITE, I.E., IN CONTRAST TO THE BORROWED FUNDS BEING SO APPLIED OR BEING SO EVEN PROPORTIONATELY. THE EQUITY CAPITAL LOCKED IN FINANCING FIXED ASSETS AND NON-CURRENT ASSETS AS AT THE BEGINNING OF THE YEAR IS DETERMINED WITH REFERENCE TO THE OPENING BALANCE-SH EET. CASH FLOW FOR THE YEAR ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 9 WOULD REVEAL THE FINANCING PATTERN OBTAINING OVER T HE YEAR. THE PRESUMPTION OF EQUITY CAPITAL FUNDING THE NON-CURRENT ASSETS GENER ATED DURING THE YEAR WOULD APPLY, SUBJECT, OF COURSE, AS AFORE-STATED, THE AVA ILABILITY OF THE SAID CAPITAL, GIVEN THE OPENING POSITION AS WELL AS THE CONTRACTUAL OBL IGATION THE MARGIN REQUIREMENTS, AFORE-REFERRED. FOR EXAMPLE, THE OPEN ING EQUITY CAPITAL COULD BE REGARDED AS FINANCING, AMONG OTHERS, THE NON-CURREN T ASSETS TO THE EXTENT OF RS. 25.50 LACS IN THE PRESENT CASE. AS WE SHALL PRESENT LY SEE, THE EQUITY CAPITAL IS HOWEVER NOT SUFFICIENT EVEN TO FINANCE THE FIRMS B USINESS ASSETS, NOT TO SPEAK OF ITS NON-BUSINESS ASSETS. FINDINGS 5. THE INTEREST, IF ANY, ON BORROWED CAPITAL RELATA BLE TO THE PERSONAL (NON- BUSINESS) LOANS/ADVANCES, THUS, WOULD REQUIRE BEING WORKED OUT ON THE FORE-GOING BASIS, BEING PURELY A MATTER OF FACT, DRAWING PRESU MPTIONS, AS AFORE-EXPLAINED, AS ADMISSIBLE OR FEASIBLE IN THE GIVEN FACTS AND CIRCU MSTANCES. THIS IS ALSO THE RATIO OF THE CASE LAW CITED. IN GURDAS GARG (SUPRA) (PB PGS. 37-46), RELIED UPON BY THE ASSESSEE, THE DECISION BY THE HONBLE COURT RESTED ON THE FINDING BY THE TRIBUNAL OF THE ASSESSEE HAVING SUFFICIENT INTEREST-FREE FUNDS - A MATTER OF FACT, WHICH IT DISCERNS AS THE QUESTION AT LARGE. IN THE FACTS OF THAT CASE, THE AO HAD HIMSELF ACCEPTED THE SAME (REFER PARA 11 OF THE JUDGMENT). IN THE PRESENT CASE, ON THE CONTRARY, NO SUCH PLEA (OF SUFFICIENT INTEREST-FREE CAPITAL) STANDS RAISED BEFORE THE AO, OR EVEN BEFORE THE CIT(A). AS IT APPEARS, THE S AME IS A CONSCIOUS DECISION IN- AS-MUCH AS THE ASSESSEE HAS A NET NEGATIVE WORKING CAPITAL AS AT 31.03.2012 (BALANCE-SHEET AT PB PGS. 4-12), WITH, AS AFORE-STA TED, THE NET CURRENT ASSETS BEING AT (-) RS.108.95 LACS. THE FINDING BY THE FIRST APPELL ATE AUTHORITY FOR AY 2011-12, NOT CARRIED TO THE TRIBUNAL, IS BASED ON A MISREADING O F THE DECISION IN GURDAS GARG (SUPRA), WHICH IT PURPORTEDLY FOLLOWS. THE SUFFICIE NCY OR OTHERWISE OF FUNDS HAS ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 10 NECESSARILY TO BE WITH REFERENCE TO THE CORRESPONDI NG APPLICATION OF FUNDS AND NOT REGARDED IN ISOLATION, I.E., BY COMPARING ONE ITEM ON THE LIABILITY (SOURCE OF FUNDS) SIDE WITH ONE ITEM ON THE ASSET (APPLICATION OF FUN DS) SIDE OF THE BALANCE-SHEET, AS THE FIRST APPELLATE AUTHORITY HAS. FURTHER, THE SAM E CAN DEFINITELY BE EXAMINED IN THE PROCEEDINGS FOR THE CURRENT YEAR IN-AS-MUCH AS IT H AS A DIRECT BEARING ON THE DISALLOWANCE UNDER REFERENCE. IN FACT, BUT FOR THIS FINDING BY THE FIRST APPELLATE AUTHORITY (FOR AY 2011-12), WHICH THOUGH IS NOT BIN DING ON US, THE ASSESSEES CASE WOULD STAND TO BE DISMISSED AT THE THRESHOLD IN-AS- MUCH AS NO PLEA OF SUFFICIENT INTEREST-FREE FUNDS, I.E., QUA A MATTER OF FACT, WAS TAKEN EARLIER, AND ON WHICH THERE IS NO THEREFORE NO FINDING BY ANY OF THE REVENUE AU THORITIES. THE NON-APPEALING BY THE REVENUE FOR AY 2011-12 WOULD NOT HIT IT ADVERSE LY ( GANGADHARAN (C.K.) V. CIT [2008] 304 ITR 61 (SC)). THIS WOULD ALSO MEET THE ASSESSEES ARGUMENT OF NO DISALLOWANCE OF INTEREST FOR THE CURRENT YEAR WHERE NO DISALLOWANCE QUA THE OTHER THAN FOR BUSINESS PURPOSE ADVANCE/S HAS BEEN MADE IN THE PAST. THE NON- DISALLOWANCE OF INTEREST IN THE PAST, WHERE BASED O N A FINDING OF FACT, WOULD NORMALLY OBTAIN. TO STATE IT AS A PROPOSITION, I.E. , THAT NO DISALLOWANCE FOR THE CURRENT YEAR COULD BE MADE BECAUSE NO DISALLOWANCE WAS MADE IN THE PAST, CANVASSED WITH REFERENCE TO THE DECISION IN ITO V. EUROPE INFRASTRUCTURE AND POWER LTD. (IN ITA NO. 571/ASR/2013, DATED 26.03.2015), IS, H OWEVER, DIFFICULT TO ACCEPT. IN FACT, IT HAS NOT BEEN IN MANY A CASE BY THE TRIBUNAL, AS IN CIT V. AUTOLITE (INDIA) LTD. [2017] 81 TAXMANN.COM 436 (TRIB, JAIP); LIBERTY MARKETERS (IN ITA NOS. 409/COCH/2014 AND 85 & 86/COCH/2016, DATED 03. 04.2018 REFER PARA 8.2). THE REASON IS SIMPLE. NON-DISALLOWANCE IN THE PAST DOES NOT BY ITSELF SIGNIFY THAT THE NON-BUSINESS PURPOSE ADVANCE/S IS OUT OF INTERE ST-FREE FUNDS, BEING ESSENTIALLY A QUESTION OF FACT. ON A CONCEPTUAL PLANE, IF THE INT EREST ON FUNDS BORROWED IN THE PAST, APPLIED FOR BUSINESS PURPOSES, WOULD STAND TO BE ALLOWED FOR THE CURRENT YEAR, I.E., IN THE ABSENCE OF ANY FINDING OF A CHANGE OF USER, THE SAME POSITION WOULD ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 11 OBTAIN FOR SAID FUNDS WHERE FOUND TO BE APPLIED FOR NON-BUSINESS PURPOSES, IRRESPECTIVE OF WHETHER ANY DISALLOWANCE WAS OR WAS NOT MADE THEREAT. IN SHORT, THE MATTER IS QUINTESSENTIALLY FACTUAL, AND DOES NOT AD MIT OF ANY PROPOSITION AS SOUGHT TO BE ADVANCED. THE MATTER, THEN, ORDINARILY SPEAKING, SHOULD BE RE STORED BACK FOR FRESH DETERMINATION IN LIGHT OF THE FORE-GOING. HOWEVER, THE FIRM, AS A MERE BROWSE OF THE BALANCE-SHEET AS AT 31.03.2012, THE RELEVANT YE AR-END, REVEALS, IS HEAVILY OVER- FINANCED. AS AGAINST A FIXED ASSET PORTFOLIO OF RS. 483.83 LACS, THE ASSESSEE HAS A TERM FINANCE OF RS.127.36 LACS ONLY. THE BALANCE RS .356.47 LACS IS MET BY OWN CAPITAL (RS.155.61 LACS) WHICH THUS GETS FULLY AB SORBED, AND OTHER BORROWED CAPITAL OF RS.139.63 LACS, LEAVING STILL A SHORTFAL L OF RS.61.23 LACS. THE SAME (I.E., THE FIXED ASSETS) TO THE EXTENT OF RS.61.23 LACS, A S WELL AS THE ENTIRE NON-CURRENT ASSETS (RS.47.73 LACS), I.E., INCLUDING AN ADVANCE OF RS.6.75 LACS TO SMT. REKHA GROVER AGAIN, A RELATIVE, IS MET BY TRADE CREDIT, AN INTEREST-FREE SOURCE OF FINANCE. THE ASSESSEE THUS DOES NOT CLEARLY HAVE SUFFICIENT FUNDS OF HIS OWN . THE SHORTFALL, HOWEVER, IS MADE GOOD BY TRADE CREDIT AN INTEREST -FREE SOURCE, IN SURPLUS BY RS.108.95 LACS (AS ON 31/3/2012). NO DISALLOWANCE O F INTEREST U/S. 36(1)(III) IS THEREFORE CALLED FOR AS PER THE CLOSING BALANCE-SHE ET. THIS, THOUGH, CANNOT BE SAID WITH REGARD TO THE OPENING STATE OF FINANCING, WHIC H WOULD REQUIRE, SIMILARLY, AN ANALYSIS OF THE OPENING BALANCE-SHEET, I.E., AS AT 01.4.2011. THIS IS AS FINANCING IS DYNAMIC, AND INTEREST WHICH IS THE TIME COST OF F UNDS, RELATABLE TO THE PERIOD FOR WHICH IT OBTAINS, WOULD ARISE. THE ADDITIONAL RELIA NCE ON BORROWED CAPITAL AS ON THAT DATE IS, AGAIN, PATENT. THE FIRM HAS REPAID BO RROWED CAPITAL TO THE EXTENT OF RS.230.13 LACS DURING THE CURRENT YEAR, SO THAT IT WAS INDEBTED BY BORROWED CAPITAL TO THAT ADDITIONAL EXTENT AS AT THE BEGINNING OF TH E YEAR, AND WHICH IS MUCH HIGHER THAN THE NON-BUSINESS ADVANCE OF RS.25.50 LACS AS O BTAINING THEREAT. THE AVERAGE NON-BUSINESS ADVANCE FOR THE YEAR, THUS, WORKS TO R S.33.24 LACS ((RS.25.50 LACS + ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 12 RS. 40.98 LACS)/2). WE DO SO AS THE DATE OF THE ADD ITIONAL ADVANCE (RS.15.48 LACS) MADE DURING THE YEAR IS NOT CLEAR. APPLYING THE RAT E OF 12% P.A. (AS BY THE AO) YIELDS AN INTEREST OF RS.3.989 LACS FOR THE YEAR. T HE BORROWED CAPITAL (AS AT THE BEGINNING OF THE YEAR) HAS BEEN SUBSTITUTED BY TRAD E CREDIT AS AT THE YEAR-END. THE DATE/S OF SUBSTITUTION IS THOUGH NOT CLEAR. IT IS A CCORDINGLY PRESUMED TO HAVE OCCURRED EVENLY DURING THE YEAR. THIS IN FACT IS SU PPORTED BY THE FACT THAT THE TOTAL INTEREST FOR THE YEAR (RS.43.31 LACS) WORKS TO ABOU T 11% (I.E., CLOSE TO THE RATE OF 12%) OF THE AVERAGE ADVANCE RECKONED AT THE AVERA GE OF THE OPENING AND CLOSING BORROWED CAPITAL, OF RS.382.04 LACS (RS. 497.10 LAC S + RS. 266.97 LACS)/2). THE INTEREST DISALLOWANCE THUS WORKS TO RS.1,99,450 (RS . 3.989 LACS / 2). WE HAVE PROCEEDED TO DETERMINE THE EXTENT OF RELIAN CE ON BORROWED CAPITAL FOR FINANCING NON-BUSINESS ADVANCES, OURSELVES, RAT HER THAN REMITTING THE MATTER BACK, FOR TWO REASONS. FIRST, THE AMOUNT INVOLVED I S NOMINAL, AND THEREFORE REMISSION WOULD BURDEN BOTH THE PARTIES. TWO, WE HA VE ALREADY FOUND THAT NO BORROWED CAPITAL IS INVESTED IN THE AMOUNT ADVANCED AS AT THE YEAR-END, WHILE THE FIRM IS INDEBTED TO A MUCH LARGER EXTENT AS AT THE BEGINNING OF THE YEAR, SO THAT ITS BEING ACUTELY SHORT OF INTEREST-FREE CAPITAL AT THE BEGINNING OF THE YEAR IS PATENT. THE ONLY PRESUMPTION THEREFORE IS WITH REGARD TO TH E DATE/S OF THE SUBSTITUTION OF THE BORROWED CAPITAL WITH INTEREST-FREE FUNDS (IN T HE FORM OF TRADE CREDIT), AND WHICH WE HAVE, ACCORDINGLY, PRESUMED AS EVENLY DURI NG THE YEAR. THE PRESUMPTION GETS VALIDATED WITH REFERENCE TO THE AVERAGE INTERE ST RATE ON THE BORROWED CAPITAL, WHICH AGREES WITH A MINOR DIFFERENCE, WITH THE IN TEREST RATE APPLIED, SO THAT THE MATTER, WHICH SOME APPROXIMATION, GETS RESOLVED. WE DECIDE ACCORDINGLY. ITA NO. 97/ASR/2017 (AY: 2012-13) SUNIL GROVER V. ASST. CIT 13 6. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON MARCH 20, 201 9 SD/- SD/- (N. K. CHOUDHRY) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 20.03.2019 /GP/SR PS. COPY OF THE ORDER FORWARDED TO: (1) THE APPELLANT: SUNIL GROVER, PROP. J.S. GRO VER STONE CRUSHER, G.T. ROAD, MALIKPUR, PATHANKOT (2) THE RESPONDENT: ASST. COMMISSIONER OF INCOM E TAX, CIRCLE-VI, PATHANKOT (3) THE CIT(APPEALS)-2, AMRITSAR (4) THE CIT CONCERNED (5) THE SR. DR, I.T.A.T. TRUE COPY BY ORDER