Case Law Details
Sidiqbhai Usmanbhai Kaliwala Vs DCIT (ITAT Ahmedabad)
It is seen from record, the assessee paid interest free loan of Rs. 21,67,952/- to M/s. S.S. Enterprise, out of the interest free funds available with the assessee, who has made a profit of Rs. 31,04,682/- during the assessment year 2015-16. It is not the case of the assessee that “borrowed funds” were given interest free loans and advances to the sister concern. Therefore the ratio of the Hon’ble Apex Court judgment in the case of S.A. Builders is not applicable to the present facts of the case
Hon’ble Supreme Court judgment in the case of Reliance Industries reported in 410 ITR 466 which reads as follows:
Reliance Industries (SLP 37/2019 dated 02/01/2019) –SC (410 ITR 466)
Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.
Following the above judicial precedents, we hold that the addition of Rs. 2,60,154/- made u/s. 36(1)(iii) r.w.s. 40A(2)(b) by the lower authorities are hereby deleted and the grounds of appeal raised by the assessee are hereby allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The present appeal has been filed by the Assessee against the order dated 23.08.2018 passed by the Commissioner of Income Tax (Appeals)-6, Ahmedabad, as against the Assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2015-16.
2. The brief facts of the case is that the assessee is an individual and proprietor of M/s. S.K. Steel and is engaged in the business of trading of scrap. For the Assessment Year 2015-16, the assessee filed his return of income by e-filing on 30.09.2015, declaring total income of Rs. 30,98,830/. The return was processed u/s. 143(1) of the Act and then selected for scrutiny assessment.
3. During the course of assessment proceedings, the A.O. found that the assessee had given loan and advances to M/s. S.S. Enterprise which was a proprietary concern of the assessee’s son, a sum of Rs. 21,67,952/- during this assessment year. However, no interest is being charged by the assessee. The Ld. Assessing Officer invoking the provisions of Section 36(1)(iii) of the Act and applying 12% rate of interest, a sum of Rs. 2,60,154 made as addition on the ground that S.S. Enterprise is a specified person u/s. 40A(2)(b) of the Act. On further perusal of the records, the Assessing Officer found that the assessee borrowed a sum of Rs. 10,00,000/- from Ms. Rashmi Saraf. However the Rashmi Saraf has not filed a return of income and no PAN Number and therefore the A.O. added the same as undisclosed income u/s. 68 of the Act and also disallowed the interest of Rs. 13,480/- paid by the assessee. Thus, the Assessing Officer assessed the total income of the assessee as Rs. 57,78,272/- and demanded tax thereon.
4. Aggrieved against the assessment order, the assessee filed an appeal before the Ld. CIT(A)-6. The ld. CIT(A) after calling for a remand report from the Assessing Officer held that M/s. S.S. Enterprise is a proprietorship concern of the son of the assessee which is having a running account with assessee’s proprietorship concern. Though there are continuous transactions, the assessee failed to establish business/commercial expediency for advancing the amount to M/s. S.S. Enterprise. Thus, the Assessing Officer has rightly relied on the judgment of the Hon’ble Supreme Court in the case of CIT vs. S.A. Builders. Therefore the charging of interest u/s. 36(1)(iii) of the Act of Rs. 2,65,000/- was correct in law and thereby upheld the disallowance.
4.1. Regarding loan given by Ms. Rashmi Saraf, on perusal of Income Tax Return of the Lender it is seen that she has declared income of Rs. 2,62,900/ only. The assessee also filed copy of bank statement of Ms. Rashmi Saraf evidencing advance of the above loans of Rs. 10,00,000/. A perusal of bank statement shows that the loan is advanced on 19.02.2015 by RTGS and cash of Rs. 2,00,000/- is deposited on 18.02.2015. Further, it is seen that cash of Rs. 5,00,000/- is deposited on 30.01.2015. The assessee failed to explain this cash deposits before advancing the above loan. Thus the Ld. CIT(A) held that the lender does not have the creditworthiness to advance loan of Rs. 10,00,000/- and also before advancing above loan , a sum of Rs. 7,00,000/- has been deposited in cash, the source of which was not explained by the assessee and also explained by the lender. Therefore the entire loan of Rs. 10,00,000/- is confirmed as unexplained cash credit in the hands of the assessee.
5. Aggrieved against the same, the assessee is before us raising the Grounds of Appeal are as follows:
Ld. AO erred in law as well as on facts in making and Id. CIT(A) erred in law as well as on facts in confirming –
1. Disallowance of interest u/s. 36(l)(iii) of the act of Rs. 2,60,154/- in respect of interest free loan/ advance to sister concern M/s. S S Enterprise –
a. Particularly when the appellant is undisputedly and admittedly having huge interest free fund in form of capital.
b. By not considering and following decisions of Hon’ble Supreme Court in the case of Munjal Sales Corporation, Hon’ble Gujarat High Court in the case of Core Health Care Limited and R L Kalthia Engin and Auto Pvt. Ltd., which have been relied upon by the appellant but not considered.
2. Addition u/s. 68 of the act of Rs. 10,00,000/- in respect of loan from Ms. Rashmi Saraf without appreciating the submission of the appellant.
3. Addition u/s. 68 of the act by misreading cheque deposit of Rs. 5,00,000/-, in bank account of depositor, as cash deposit and thereby mistakenly adopted cash deposit of Rs. 7,00,000/- instead of Rs. 2,00,000/- only.
4. Disallowance of interest of Rs. 13,480/- in respect of interest paid to Ms. Rashmi Saraf.
All the grounds stated hereinabove are without prejudice to each other. The appellant craves leave to add, delete, amend, alter or withdraw one or more grounds of appeal.
6. The Ld. Counsel Shri Samir Bhuptani appearing for the assessee submitted that the lower authorities has misplaced the Hon’ble Supreme Court judgment in the case of S.A. Builders wherein the issue was about the application of “borrowed fund” in making advance to sister concern. Whereas the facts in the assessee’s case is that the assessee was in possession of “interest free fund” and there is no question of application of “borrowed fund” to sister concern. For the Assessment year 2015-16, the assessee has made a profit of Rs. 31,04,682/- and for the previous Assessment Year 2014-15, the assessee has made a profit of Rs. 21,81,996/- and it had advanced a loan of Rs. 21,67,952/- to M/s. S.S. Enterprise during the assessment year 2015-16. Thus, Ld. Counsel prayed in view of the above facts, the decision of the Hon’ble Supreme Court in the case of Reliance Industries 410 ITR 466 will be squarely applicable to the facts of the case and the case law namely S.A. Builders relied by the revenue is not applicable to the facts of the assessee’s case.
6.1. The Ld. Counsel further submitted assessee’s own case for immediate two preceding year namely assessment year 2013-14 and 2014-15, scrutiny assessment u/s. 143(3) were made, wherein no such disallowances is being made by the A.O. Further closing balance of the said years which eventually becomes opening balance of the year under consideration cannot be subject matter of disallowance for the present assessment year 2015-16 on the addition of Rs. 10,00,000/- as unexplained credit. The ld. CIT(A) wrongly presumed that there was cash deposit of Rs. 7,00,000/- in the bank account of Ms. Rashmi Saraf. But there was a cash deposit of Rs. 2,00,000/- only on 18.02.2015 whereas Rs. 5,00,000/- was deposited on 30.01.2015 is an account payee cheque deposit from HDFC Bank only. That the ld. CIT(A) misread the deposit of Rs. 5,00,000/- as wrongly as a “cash deposit” and confirmed the entire additions as unexplained credit and also disallowed the interest paid by the assessee to Ms. Rashmi Saraf after making TDS of Rs. 1348. This addition is also not correct in law.
7. Per contra, the Ld. Sr. D.R. Shri V.K. Singh appearing for the Revenue supported the order passed by the lower authorities and pleaded that no further interference and pleaded to dismiss the appeal field by the assessee.
8. We have given a thoughtful consideration and perused the materials available on record including the Paper Book filed by the assessee. It is seen from record, the assessee paid interest free loan of Rs. 21,67,952/- to M/s. S.S. Enterprise, out of the interest free funds available with the assessee, who has made a profit of Rs. 31,04,682/- during the assessment year 2015-16. It is not the case of the assessee that “borrowed funds” were given interest free loans and advances to the sister concern. Therefore the ratio of the Hon’ble Apex Court judgment in the case of S.A. Builders is not applicable to the present facts of the case. This view of ours is supported by the Co-ordinate Bench judgment dated 29.04.2013 in ITA No. 3408/Ahd/2010 in the case of Paresh Lalchand Shah vs. ITO when held as follows:
9. We may also briefly deal with learned CIT(A)’s reliance on SA Builders Ltd’s case (supra). It is very important to bear in mind the fact that it was a case in which borrowed funds were not used by the assessee in its business but diverted the same to the sister concern by giving interest free advances. It was not a case in which the interest free funds were used by the assessee for granting interest free advances to sister concern. On these facts, Their Lordships observed that “It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency”. Elaborating upon the connotations of ‘commercial expediency’, Their Lordships observed that “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 it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency”. Undoubtedly, this aspect of the matter is important for the reason that in case the fact of commercial expediency o: advancing interest free advances to the subsidiary companies is established, even if one is to come to the conclusion that interest free advances to the subsidiary companies are out of the borrowed funds, interest on borrowed funds is to be allowed in full nevertheless. However, having held that the assessee did have sufficient interest bearing funds to advance interest free advances to sister concerns, this aspect of the matter is somewhat academic. In a case which an assessee has sufficient interest free funds, to cover the interest free advances, the principles laid down by Hon’ble Supreme Court in SA Builders’ case (supra) dealing with governing commercial expediency in advancing interest free advances will not really be relevant. Learned Commissioner (Appeals)’s stand was thus devoid of legally sustainable merits on this aspect as well.
10. For the reasons set out above, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 6,32,980 out of interest expenses. The assesse gets the relief accordingly.
8.1. The Hon’ble Supreme Court judgment in the case of Reliance Industries reported in 410 ITR 466 which reads as follows:
Reliance Industries (SLP 37/2019 dated 02/01/2019) –SC (410 ITR 466)
Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.
8.2. Following the above judicial precedents, we hold that the addition of Rs. 2,60,154/- made u/s. 36(1)(iii) r.w.s. 40A(2)(b) by the lower authorities are hereby deleted and the grounds of appeal raised by the assessee are hereby allowed.
8.3. Regarding the addition of Rs. 10,00,000/- made as unexplained cash credit, we see from the Paper Book filed by the assessee at page no. 112. The bank statements of Ms. Rashmi Saraf, a sum of Rs. 5,00,000/- was deposited through cheque of HDFC Bank on 30.01.2015, which is misread by the Ld. CIT(A) as “cash deposit” and confirmed the addition in the hands of the assessee. The assessee also produced the bank statement of Ms. Rashmi Saraf wherein the entire loan with interest was repaid on 19.09.2015, a sum of Rs. 10,63,941 and the Return of Income filed by the Ms. Rashmi Saraf whereas interest on TDS of Rs. 1,348/-which was claimed as refund by for the Assessment Year 2015-16. Similarly for the Assessment Year 2016-17 is also placed on record claiming the TDS amount of Rs. 5,757/- by the said Ms. Rashmi Saraf. On going through the above documents, we found that the Assessing Officer in his assessment order stated no return of income filed by Ms. Rashmi Saraf and no PAN available and therefore made the addition u/s. 68 of the Act. Whereas the Ld. CIT(A) on going through the bank statement of Ms. Rashmi Saraf held that cash deposit of Rs. 5,00,000/- in her bank account but actually it is a cheque deposit made by the lender. Thus factually the Ld. CIT(A) is not correct in confirming the addition of the advances of Rs. 10,00,000/-. We further notice that the assessee has made TDS of Rs. 13,480/- in the case of Ms. Rashmi Saraf and the loan is also repaid by way of cheque by the assessee through her bank account on 19.09.2015 by way of RTGS. Thus, the assessee has proved the identity, creditworthiness and genuineness of the above loan transactions with proper evidences. Therefore, the above addition of Rs. 10,00,000/- as cash credit is hereby deleted and the grounds raised by the assessee are hereby allowed.
9. In the result, appeal filed by the Assessee is allowed.
Order pronounced in the open court on 13-07-2022
