Shri Narendra Kumar Khandelwal Prop. M/s Ranjana Textiles Vs ITO (ITAT Jaipur)
Interest free funds available: The law is well settled that where assessee is having mixed i.e. interest free/interest bearing funds both, but where the interest free funds are larger than the interest free advances/utilization than there will a presumption that the interest free utilization was made out of the interest free funds (but not out of interest bearing fund) and hence, no interest can be disallowed
The only dispute is for disallowance of Rs. 9,24,820/- sustained by the CIT(A) out of the total disallowance of Rs. 14,81,068/- made by the AO. The sum and substance of the detailed arguments of the ld. AR of the assessee is that total interest free funds stood and available with the assessee is at Rs.71.23 lakhs as against interest free utilization at 59.01 lakhs only (From Rs.124.71 lakh excluded bajaj nagar land-Rs. 41.09 for which no claim of interest made and CIT(A) already deleted, old investments-8.4 lakhs, old advances-16.21 lakh), still leaving Rs.2.17 lakh excess interest free funds (71 lakh-59.01-10.05). The ld. AO was not able to pin pointedly come a definite finding that the interest bearing fund has been directly utilized for non interest bearing purpose and in fact based on the analysis placed before us the revenue did not convtrovert the arguments of the ld. AR of the assessee that the assessee is sufficiently having interest free funds on hand. The ld. AR of the assessee has relied upon the various judgement for his contention and has heavily relied upon the jurisdictional High Court judgment in the case of CIT Vs. Ram Kishan Verma 132 DTR 107 (Raj)(HC). The relied upon finding of the Honourable High Court on the issue is as under ;
13. Taking into consideration the fact as noticed hereinabove, in our view as well, when there was no agreement to charge interest from the persons, to whom the assessee advanced short term loan/advance, the AO could not disallow part of the interest. It is also an admitted fact, as observed by the Tribunal, that the AO .vas not able to pin pointedly come to a definite conclusion that how interest bearing loans had been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-a-vis interest free loans/advances, therefore, in our view as well, once the AO was not able to come to a definite conclusion as to nexus having been established about interest bearing loans having been diverted towards interest free loans/advances, and such being a finding of fact based on appreciation of evidence, in our view no substantial question of law arise on this question as well. It can be observed that this court in similar circumstances and on identical facts, when the capital of the partners/proprietor being more than the interest free short term advances, has in the case of CIT v. Vijay Solvex Ltd. [2015] 59 taxmann.com 294 (Raj.) while relying on the judgment rendered in (a) S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC); (b), Munjal Sales Corpn. v. CIT [2008] 298 ITR 298/168 Taxman 43 (SC); (c), CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All.); (d), CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377/121 Taxman 706 (Delhi); (e), CIT v. Britannia Industries Ltd. [2006] 280 ITR 525/[2005] 148 Taxman 654 (Cal.) and (f) CIT v. Motor Sales Ltd. [2008] 304 ITR 123 (All.), held as under:—
“16. In view of the authoritative pronouncement of the Apex Court and other judgments referred supra, in our view, the assessee admittedly had its own funds, as referred to earlier, and admittedly such funds/reserves being substantially higher than, even otherwise, the advances to the debtors, no notional interest or hypothetical interest could have been disallowed on such facts. The revenue has failed to prove nexus. In our view, the ITAT has correctly appreciated the facts and law.”
14. Therefore, the finding reached by the Tribunal is essentially a finding of fact based on appreciation of evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT.
15. In the light of the facts discussed above, the assessee has sufficient interest free funds and the revenue has not co-related the interest bearing fund used for non interest bearing purpose. Not only that the in the subsequent year the interest is also not disallowed in the proceedings u/s. 143(3). Thus, the facts of the case on hand and cited by the ld. AR of the assessee similar respectfully following Jurisdictional High Court decision the disallowance of interest sustained by the CIT(A) to the extent of Rs. 9,24,820/- is here by vacated and in terms of these observations the Cross objection filed by the assessee is allowed.
In the result, cross objection of the assessee is allowed.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This cross objection is filed by the assessee aggrieved from the order of the Commissioner of Income Tax (Appeal)-1, Jaipur [ herein after referred as Ld. CIT(A) ] for the assessment year 200809 dated 05.06.2014 for which in turn arises from the order passed by the assessing officer passed under Section 143(3) of the Income tax Act, 1961 (in short ‘the Act’) dated 03.12.2010.
2. In this case aggrieved from the order of the Commissioner of Income Tax (Appeal)-1, Jaipur for the assessment year 2008-09 dated 05.06.2014 filed an appeal before us and in turn the assessee has filed the cross objection (CO). The appeal of the revenue was listed as appeal no. 568/JP/14 and the cross objection of the assessee was listed as co no. 27/JP/14. Vide order dated 18.12.2015 the appeal of the revenue as well as co of the assessee was disposed by a common order on account of revision in the monetary limit of appeal to be filed before ITAT as part of litigation policy of the Government. Thereafter, the assessee moved a Miscellaneous Application which was registered as MA No.155/JP/2018. In this MA the assessee contended that the issue had already been decided by the Honourable Orissa High Court in the case of Tata Sponge Iron Limited Vs. CIT 191 Taxman 407 in the event of dismissal of Revenue`s appeal the cross objection would not be dismissed. Based on these set of fact vide order dated 31.03.2021 the MA of the assessee was allowed and thus this CO is heard as it is a separate appeal of the assessee on its merits.
3. In this cross objection the assessee has marched only one issue as reproduced here in below;
“Under the facts & circumstances of the case the ld. Commissioner of Income Tax (Appeals), Jaipur-1 has erred in facts and in law sustaining the disallowance of Rs. 9,24,820/- out of the interest claimed by the assessee’s proprietary firm M/s Ranjana Textile Agency treating the loans on which interest paid as used for non business purposes.”
4. The fact as culled out from the records is that the assessee deals in the trading of gray clothes and for the year under consideration has filed his return of income on 25/09/2008 declaring the total income of Rs. 1,06,400/-. The case of the assessee was selected for scrutiny and an order u/s 143(3) was passed on 06/12/2010 determining the income of the assessee of Rs. 24,11,580/-.
5. Aggrieved from the assessment order assessee filed an appeal before the Commissioner of Income Tax, Appeals-I, Jaipur. As the appeal of the assessee allowed in part both the party moved an appeal before us. The appeal of the revenue was dismissed on account of low tax effect. In this CO only one issue is marched before us on account of confirmation of disallowance of interest expenses to the extent of Rs. 9,24,820/- by ld. CIT(A). In the assessment proceeding the AO noted that there was an increase in the amount of loan by Rs. 47,96,488/- this year and the payment of interest made last year at Rs. 13,67,238/-, increased to Rs. 38,04,671/-. He alleged that however only one half of the interest bearing loan were utilized for the purposes of the business and more than half of such loans were utilized towards the investment made in the properties & towards the payment of advances. At page 9 the AO provided that the details of the utilization of the unsecured loans under different heads/towards different assets totaling to Rs 1,24,77,000/- The AO noted at page 10 that the assessee had taken secured & unsecured loans of Rs 3,17,96,000/- (last years) which were partly utilized for business purposes & partly for non-businesses purposes & net interest of Rs. 37,74,308/- was debited to the P&L account. Further considering the figure of the total amount of loans taken at Rs 3,17,96,000/-, the alleged utilization towards non-businesses purpose at Rs 1,24,77,000/-, he computed the proportionate interest of Rs.14,81,068/- as amount disallowable out of the interest claimed by the assessee’s proprietary firm M/S Ranjana Textile Agency treating the loans on which interest paid as used for non-business purposes.
6. In the first appeal detailed submission was made by the assessee before the ld. CIT(A). The CIT(A) restricted the disallowance form Rs. 14,81,068/- to Rs. 9,24,820/- by holding as under :
“12.2 It is, however, also noted from the detailed break-up of the loans, as mentioned in para 11 above, that interest of Rs. 3.50 lacs in respect of loan for Bajaj Nagar land amounting to Rs. 41.09 lacs has already been capitalized. It is further noted that interest has been charged on the amount of Rs. 3.77 lacs paid to Shri Mahesh Khandelwal and Rajkumar Laddar. Rs. 2 lacs have been withdrawn from share business. Hence, interest in respect of these amounts cannot be disallowed. The interest in respect of the remaining amount which has been utilized from non-business purposes has to be disallowed. This amount comes to Rs. 77.91 (124.77 – 46.86) lacs. Since the appellant has failed to give the bifurcation of the amounts advanced for business purposes and for non-business purpose, the methodology adopted by the AO is upheld. The AO is, however, directed to disallow the interest in the same proportion i.e., in the formula adopted by him, Rs. 124.77 shall be substituted with Rs. 77.91 lacs. This will result in the disallowance of Rs. 9,24,820/-. The rest of the disallowance is deleted.”
7. Before us on merits, it was submitted by the ld. AR, that based on the set of facts, the entire loan taken is used for the purpose of business and even the addition sustained by the ld. CIT(A) is also required to be deleted. The ld. AR appearing on behalf of the assessee has placed their detailed written submission on this issue which is extracted here in below;
On Merits
1.1 Investment in the Properties
