Case Law Details

Case Name : Shri Narendra Kumar Khandelwal Prop. M/s Ranjana Textiles Vs ITO (ITAT Jaipur)
Appeal Number : C.O. No. 27/JP/2014
Date of Judgement/Order : 26/07/2022
Related Assessment Year : 2008-09

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

S.No. Detail of Property Cost (In Lac) Date Of Acquisition PB
1. Land at Mahapura 2.25 01/02/2003 PB/5

8

2. Land at Patel Nagar 3.00 06/12/1999 PB/60
3. Land at Ramgarh Road 3.15 05/01/2006 PB/61
4. Land at Bajaj Nagar 41.09 21/06/2007 PB/5

9

5. Farm House under construction at Mahapura 1.65 F.Y. 2007-08 PB/6

2

Total 51.14

1.1.1 It can be seen from a perusal of the above chart that various lands shown at serial no. 1 to 3 were acquired long back prior to the year 2007 which was sourced by the assessee from his own capital. There was no new addition made in this year hence, there was no question nor the AO has established nexus between any the interest bearing fund and interest free utilization thereof. It is only the land at Bajaj Nagar which was purchased during the year at Rs 41,09,000/- however, the interest relating thereto to the extent of Rs. 3,50,000/- has already being capitalized and was not claimed as such therefore, the ld. CIT (A) granted relief on that part and is not under dispute. The further investment was only of Rs 1,65,000/- in the construction of the farm house at Mahapura, the land of which was already purchased on 01.02.2003. The appraisal of the ledger account titled as Farmhouse under construction (PB/62) clearly show that only some invoices were raised towards the purchase of building and borewell construction material, which have been debited. There was no condition to make payment of interest hence neither any interest was paid to the supplier/ contractor nor it was notionally charged in its account. Lastly, there was no nexus established by the AO which is a condition precedent.

1.2 Advances made against the Purchase of Property

S.no Details Of Advances Amount (In Lac) Date Of Advance Purpose Of Advance PB
1. Ashok Singhi 18.00 19/05/2007 Advance Against Property PB/63
2. Fortune Enterprises 4.00 15/07/2006 Advance against Property PB/64
3. Grass Wood Resorts Pvt. Ltd. 4.71 30/09/2006
& 03/05/2007
Advance against Property PB/65
4. Jyoti Agarwal 23.81 29/08/2007 Advance against Property PB/66
5. Renu Agarwal 7.50 F.Y.2004-05 Advance against Property PB/67
Total 58.02

1.2.1 With regard to amount of Rs 18,00,000/- advanced to Shri Ashok Singhi it was submitted that it was an advance to purchase the property however later on a dispute occurred between the parties and the sale deed could not have finalized. Consequently, the entire amount of advance was returned back by the said party to the assessee on dated 24.03.2009 AY 10-11. Kindly refer ledger account (PB/63).

1.2.2 Similar is the position of Fortune Enterprises when advance of Rs 4,00,000/- given was return back in A.Y. 2010-11. Similar is the position with Jyoti Agarwal. Kindly refer ledger their account (PB/64 & PB/66).

1.2.3 In case of Grass Wood Resorts Pvt. Ltd. Rs. 4.71 Lakh were advanced in AY 07-08 & AY 08-09. Finally, the deal matured and the registered sale deed was executed in AY 14-15. Therefore, it cannot be considered for the present purpose.

1.2.4 Similarly in case of Renu Agarwal, Rs. 7.50 Lakh were advanced in A.Y. 2005-06 and not in this year. Finally, the deal matured and the registered sale deed was executed in AY 09-10. Since, no amount was given this year hence, it cannot be considered for the present purpose.

1.3 Advances given at concessional rate:

S.no Details Amount (In lacs) Rate Of Interest Charged PB
1. Mahesh
Khandelwal
2.50 18% PB/69
2. Rajkumar Laddar 1.27 12% PB/70
Total 3.77

1.3.1 It is not disputed that the assessee gave advance to Mahesh Khandelwal in AY 08-09 and Rajkumar Ladddar in AY 07-08 & 08-09 and interest @ 18% and 12% respectively was charged as evident from the copies of their respective ledger accounts (PB/69) and (PB/70). The interest was charged at the prevailing market rate. It depends while dealing with the person as to what is the prevalent interest rate as per the free market forces. Admittedly, in both the cases the rate of interest charged from those parties were more than the bank interest rates. The A.O. has also not brought any prevailing market rate of interest nor invoked S.40A(2)(b).

1.4 Other interest free Advances and investments:

S.no Details of Investment Amount (In lacs) PB
1. In LIC, PPF, Shares etc. 9.00 PB/71-72
2. Debit balance of Capital Account of the account of the assesse in the firm 2.00 PB/56-57
Total 11.00

1.4.1 Regarding Rs. 9 Lakh invested in the LIC and PPF, the A.O. failed to establish a nexus hence, no disallowances was called for. The assessee had already given this amount out of his own capital.

1.4.2 As regard Rs. 2 Lakh, it was submitted that the assessee had withdrawn for the purposes of share business, and was added to the capital as evident from his Capital Account (PB/56) wherein, the closing balance was of Rs. 11.23 Lakh, the amount of Rs. 2 Lakh is also included therein. Thus, the amount of Rs. 2 Lakh though not related to trading business but was admittedly related to the share business hence, was fully allowable.

2. 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 (as was not claimed). The assessee was also having huge interest free funds, as submitted hereunder:

2.1 It is not denied that the assessee this year sold a building at Ajmer Road on 25.08.2007 for Rs 60,00,000/-. Needless to say that entire Rs. 60,00,000/-was an interest free funds available in the hands of the assessee. In the impugned orders of the authorities below, there is no whisper of the utilization of this fund of Rs 60,00,000/- for any purpose/elsewhere, meaning thereby the investment in the land at Bajaj Nagar or advances given, were sourced from this interest free funds.

2.2 There apart, the assessee’s interest free capital was at Rs. 11,23,057 (PB-57) which, even though relates to share business with a separate Balance Sheet but the assessee owner being common the entire availability of funds viz. a viz. utilization merely seen at consolidatedly.

Accordingly, total interest free funds stood 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).

3. Funds utilizes for business purposes: While rejecting contention of the assessee of the availability of larger interest free funds and interest free utilization, the lower authorities proceeded on the assumption, without examining the accounts to ascertain the nexus between the two. It is clearly evident form the Balance Sheet (PB/47) that assessee is having Sundry Debtors of Rs.2,43,14,658/- which stood impliedly blocked hence to that extent, the interest bearing loans had to be utilized as working capital towards business purposes, more so, when the incremental difference in the debtors was of Rs. 80,67,499/-, whereas such incremental difference in the Sundry Creditors was only upto Rs 10,63,438/-. Further, against which Sundry Creditors were available only of Rs.1,24,48,528/-. Therefore, it shows the blocked funds of the assessee and the requirement of which was fulfilled by the assessee through interest bearing funds. Thus, availability of this interest free fund was wrongly ignored by the authorities. Undisputedly, part of the funds was utilizing for share business and deleted by the CIT(A).

However, his allegation that “the appellant has failed to show that he had sufficient non-interest bearing funds which were utilized for investment purposes”, is against the principle propounded in R.K. Verma (supra) that There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. His further allegation that “also failed to furnish the break-up of interest paid on each loan” is also against the decision in R.K. Verma (supra) by Hon’ble Rajasthan HC.

4.1 No Nexus established: The law is settled that in such cases it is always for the AO to have established a physical nexus between the interest bearing funds and the interest free advances so made, which condition has not at all been fulfilled in the present case in as much as none of the investment made in the properties nor towards the advances made or investment in the LIC premium etc., the A.O. has whispered, even remotely, the nexus between the interest bearing funds and the interest fee utilization of funds. It is not disputed that various advances were made long back by the assessee out of his own capital.

Unless this is done no charging of notional income is permissible nor any disallowance could have at all been made. Kindly refer CIT v/s Hotel Savera (1999) 239 ITR 795 (Mad.), Shree Digvijay Cement Co. Ltd. v/s CIT (1982) 138 ITR 45 (Guj), Ganesh Chawala v/s ITO (2008) 9 DTR 162 (JP), Gujarat Narmada Valley Fertilizers Co. Ltd. v/s DCIT (2001) 73 TTJ 787 (Ahd) and CIT v/s Tin Box Co. (2003) 260 ITR 637 (Del).

4.2 Supporting Case Laws:

4.2.1 In the case of ACIT v/s Ram Kishan Verma (2012) 147 TTJ_UO (Jp)(UO) 1 (DPB 7-26), the disallowance made by the AO u/s 36(i)(iii) was fully deleted by holding that

“10.4 We have heard both the parties. The assessee is having sufficient capital. If there are mixed funds, then non-interest-bearing funds are to be considered as utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surpluses are used for making fixed deposits as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans used the AO could not have disallowed the interest. There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is placed on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon’ble Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. (2011) 51 DTR (Del) 98 : 2010-TIOL-

51-HC-Del. There is no provision in the Act which may compel an assessee to earn income.

11.1 x————– x————- x————– x————– x———— x—–x

11.2 After considering the facts as above, we feel that the AO was not justified in making any disallowance. Hence, disallowance is deleted.”

4.2.2 The Hon`ble Rajasthan High Court has also affirmed the above orders vide para 12 & 14 in the case of CIT v/s Ram Kishan Verma (2016) 132 DTR (Raj) 107 (DPB 1-6) holding as under:

“12. As far as the disallowance of interest is concerned, admittedly the assessee had an opening capital of Rs. 5,70,74,967/- of his own and the advances, if at all, being interest free, is to the extent of Rs. 98,93,950/- which is far below the capital of the assessee and, therefore, the tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest. It is also noticed by the lower authorities that assessee earned bank interest to the extent of Rs. 24,48,843/- out of which he paid total amount of Rs. 10,99,099/- to the bank against loan and over draft, and it is out of the amount which has been paid by the assessee at 10,99,099/- that the AO has disallowed the interest.

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 advance short term loan/advance, the AO could not disallow part of interest. It is also an admitted fact, as observed by the tribunal, that the AO was not able to pin pointedly come to a definite conclusion that how interest bearing loans has been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-à-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 application 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 partner/proprietor being more than the interest free short term advances, has in the case of CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CRT (Raj.) 384 while relying on the judgments rendered in (a) S.A. Builders Ltd. V/s CIT (2007) 288 ITR 0001 (SC); (b) Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC) ; (c) CIT V/s Radico Khaitan Ltd. (2005) 274 ITR 354; (d) CIT v/s Dalmia Cement (Pvt.) Ltd. (2002) 254 ITR 377; (e) CIT v/s Britannia Industries Ltd. (2006) 280 ITR 525; and (f) CIT v/s Motors Sales Ltd. (2008) 304 ITR 123 (Allahabad), held as under:-

x————— x—————- x—————- x——————- x——- x

14. Therefore, the finding reached by the Tribunal is essentially a finding of fact based on the appreciation of the evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT.”

4.2.3 Also refer CIT v/s Radico Khaitan Ltd. (2005) 194 CTR 451/274 ITR 354 (All) (HC) held that

“Business expenditure – Interest on borrowed capital – Interest free advances to sister-concern – Tribunal having found on facts that assessee had sufficient funds in the form of capital reserve and surplus other than the borrowed funds, assessee was entitled to full allowance of interest on borrowed money.”

4.2.4 In fact, such principle was based on the case of East India Pharmaceutical Works Ltd. v/s CIT (1997) 139 CTR 0372 (SC), where in it was held that

“Business expenditure—Interest on borrowings—Interest on money borrowed for payment of income-tax is not an allowable deduction under s. 37(1)—Contention that the entire profits were deposited in the overdraft account which were more than tax liability and, therefore, the payment came out of profits having never been advanced before the IT authorities or the Tribunal or the High Court in proceedings under s. 256(2), though forceful, could not be entertained as the same would necessitate investigation into facts and the amplitude of the question referred does not bring into its sweep the said contention”

4.2.5 Also in the case of Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC) held that

“Business expenditure—Interest on borrowed capital—Interest free advances to sister concerns—Scope and ambit of s. 40(b)(iv) vis-a-vis s.36(1)(iii)—Sec. 40(b)(iv) places limitations on the deductions under ss. 30 to 38 and, therefore, is not a stand-alone section—Every assessee, including a firm has to establish, in the first instance, its right to claim deduction under ss. 30 to 38 and a firm has also to prove that it is not disentitled to claim deduction by reason of applicability of s. 40(b)(iv)—Even if an assessee is entitled to deduction under s. 36(1)(iii), the assessee (firm) will not be entitled to claim deduction for interest payment exceeding the rate prescribed in s. 40(b)(iv)—Sec. 36(1)(iii) and s. 40(b)(iv) both deal with payment of interest by the firm for which deduction could be claimed, therefore, keeping in mind the scheme of Chapter IV-D, every assessee who claims deduction under ss. 30 to 38 is also required to establish that it is not disentitled under s. 40(b)(iv)—Assessee firm granted interest free advances to sister concerns in August/September, 1991, which got wiped out in asst. yr. 1997-98—For asst. yrs. 1992-93 and 1993-94, disallowance of interest paid by assessee to third parties on amounts borrowed made by AO deleted by the Tribunal on the ground that interest free advances were made by assessee out of its own funds and for business purposes but disallowance was upheld for asst. yrs. 1994-95 to 1997-98 on the ground of change of law brought about by the Finance Act, 1992, w.e.f. 1st April, 1993—Not justified—Once it is found that interest free loans granted by assessee to its sister concerns in August/September, 1991, continued upto asst. yr. 1997-98 and that the said loans were advanced out of its own funds for business purposes and that the interest paid thereon did not exceed the rate prescribed under s. 40(b)(iv), assessee was entitled to deduction under s. 36(1)(iii) r/w s. 40(b)(iv) for asst. yrs. 1993-94 to 1997-98—So far as asst. yr. 1995-96 was concerned in which assessee advanced a further interest free loan of Rs. 5 lacs, the opening balance of Rs. 1.91 crores as on 1st April, 1994, was sufficient to cover the said loan”

4.2.6 In the case of CIT vs. HDFC Bank LTD. (2016) 284 CTR 0409 (Bom), it was held that

“Where assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”

4.2.7 Latest decision on 36(1)(iii) SEL Manufacturing Co. Ltd. vs. DCIT 206 TTJ 937 (Chd.) in para 70-71 and headnote at Pg-942 held as under:

“Business Expenditure-Interest on borrowed Capital-Interest free advances to other concern-Assessee having sufficient interest free funds to cover the interest free advances, no disallowance of interest paid by assessee on borrowed funds was called for.”

Hero Cycles (P) Ltd vs. CIT (2015) 379 ITR 347 (SC), CIT vs. Kapsons Associates (2016) 381 ITR 204 (P&H), ACIT vs. Janak Global Resources (P) Ltd. (ITA No. 470/Chd/2018 dt. 16.10.2018), Avon Cycles Ltd. vs CIT (IT Appeal No. 277 of 2013) and the judgment and order dt. 22nd/23rd Aug., 2017 of the Bombay High Court in IT Appeal Nos. 1550, 1592, 1775 & 1811 of 2014, reported as CIT vs. Reliance Industries Ltd. (2018) 161 DTR (Bom) 420 affirmed by Hon`ble Apex Court in CIT vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) relied on.

4.2.8 CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CTR 384 (Raj.)

4.2.9 Allen Career Institute v. JCIT, (2017) 190 TTJ (Jp) 823 (DPB 27-34)

The ratio laid in the said decision squarely apply on the facts of the present case, hence the impugned disallowance kindly be deleted in full.

5. Claim accepted in other years: Issue involved attained finality:

5.1 Pertinently, the issue involved viz. disallowance of the interest on the allegation of utilization for non-business purposes, is not new to this year alone but has also been a point in controversy in various Later years. However, in all those years, the disallowances were made on similar facts and circumstances in a similar manner raising more or less similar allegations, were deleted by the CIT(A), as per the following table:

A.Y. Disallowance of Interest made (Rs.) CIT(A) Order Date PB
2010-11 Rs. 8,79,893/- Pg. 14-18 Pr. 3.6.2 11.05.2015 PB/77-82
2011-12 Rs. 10,54,286/- Pg. 14-19 Pr. 3.6.2 03.03.2016 PB/83-89
2012-13 Rs. 9,87,385/- Pg. 14-19 Pr. 3.4.2 04.01.2017 PB/90-101
2013-14 No disallowance made by the A.O. himself 01.12.2015 PB/102-105
2014-15 -do- 22.11.2016 PB/106-108
2015-16 -do- 23.12.2017 PB/109-110

Copies of all the related CIT(A) order or assessment order (PB/77-110), are enclosed in the paper book as indicated above. Undisputedly, in some of the cases, the interest free utilization was made long back yet no disallowance was made.

5.2 Notably, the department has not gone in further appeal in any of these years. Therefore, the issue involved has attained finality. The role of consistency, therefore, requires that unless there is a material change in the facts and circumstances of the case, the concerned authority must consistency follow the stand once taken- in other years. In the orders of the authorities below, no special reason has been shown justifying the departure from the settled history and stand taken in the later years. When there are no material changes in the facts and circumstances in all the below mentioned years, nor any such disallowance was made in the past, hence, the AO was bound by the rule of consistency not to take a departure. This sudden and numb departure from the Rule of Consistency is not permissible.

5.2.1 Kindly refer Radhasoami Satsang v/s CIT (1992) 193 ITR 321 (SC), wherein it was held as under:

“Strictly speaking, res judicata does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following, year, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year”.

5.2.2 Supporting Case Laws-: CIT v. Excel Industries Ltd. – [2013] 358 ITR 295 (SC)/ [2013] 262 CTR 261 (SC)[08-10-2013]; Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC); CIT v. Dalmia Promoters Developers (P.) Ltd.- [2006] 281 ITR 346 (Delhi); Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. and Another- 2007 SCC OnLine SC 1118.

5.2.3 This doctrine was further upheld by the Hon’ble Apex Court in Godrej Boyce Mfg. Co. v/s DCIT (2017) 295 CTR (SC) 121 (DPB 35-50), holding that:

“38. —————-  While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC).

“We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”

6. The lower authorities however did not appreciate the above legal and factual submission in a right perspective.

In view of these undisputed facts, and settled legal position, the impugned disallowances be deleted in full.

Accordingly, total interest free funds stood 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).

8. Per contra, the ld. DR appearing on behalf of the revenue submitted that the CO of the assessee is not maintainable as the main appeal of the revenue is dismissed and thus, the CO does not survive. The AO has made a detailed discussion while making the disallowance and ld. CIT(A) has already granted the sufficient relief the interest is rightly sustained by the lower authorities. The assessee is having many assets like, firm house, vehicle investment in LIC, PPF and the assessee failed to substantiate the source of all these investments. The assessee has invested in property in this year also. Based on all these facts the addition should be sustained.

9. We have heard the rival contentions and perused the material placed on record and decision cited before us. 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.

11. In the result, cross objection of the assessee is allowed.

Order pronounced in the open Court on 26/07/2022.

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