Arun Udyoga Vs ACIT (ITAT Jaipur)
Sufficient Own Funds Protect Interest Deduction on Interest-Free Advances; Book Profit Credited to Partners Cannot Be Unexplained Cash Credit; No Section 36(1)(iii) Disallowance When Interest-Free Funds Exceed Advances; Section 68 Cannot Tax Firm’s Disclosed Profit Credited to Partners; Double Taxation of Book Profit Under Section 68 Impermissible: ITAT Jaipur
Summary: ITAT Jaipur allowed the assessee-firm’s appeal for AY 2017-18 and deleted additions of Rs. 12,92,111 under section 36(1)(iii) and Rs. 66,26,524 under section 68 of the Income Tax Act, 1961. The assessee, a partnership firm engaged as a contractor for excavating chrome ore, had returned a loss of Rs. 43,04,518. The Assessing Officer completed assessment at total income of Rs. 40,05,650 after making three additions. Before the Tribunal, the assessee challenged the interest disallowance and the section 68 addition.
On the interest issue, the AO noticed interest-free advances aggregating to Rs. 1,07,67,596 while the assessee had claimed interest expenditure of Rs. 54,99,632. Holding that business purpose or commercial expediency had not been established, the AO computed interest at 12% and disallowed Rs. 12,92,111. The assessee contended that partners’ interest-free capital amounted to Rs. 8,57,50,609 and was substantially higher than the interest-free advances.
The Tribunal found that the assessee’s interest-free funds were nearly eight times the interest-free advances and also exceeded the entire borrowed funds. The AO had brought nothing on record to establish diversion of borrowed funds. Relying upon Hero Cycles (P.) Ltd. v. CIT [2015] 379 ITR 347 (SC) and Allen Career Institute v. JCIT [2023] 147 taxmann.com 390 (Jaipur – Trib.), it held that where mixed funds exist and interest-free funds exceed interest-free advances, a presumption operates that the advances came from interest-free funds. Once sufficient interest-free funds were demonstrated, the burden shifted to the AO to establish nexus with interest-bearing borrowings. As no such nexus was shown, the Rs. 12,92,111 disallowance was deleted.
