TaxTMI 
TaxTMI 
2017 (2) TMI 558
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....ee has taken a secured loan from bank of Rs. 5,27,47,388 on which the assessee paid interest of Rs. 42,89,106. The Assessing Officer noted that the assessee has given loans and advances of Rs. 2,07,64,779 to its sister concerns, directors and relatives of directors on which no interest was charged. The contention of the assessee that it was having interest-free funds being the share capital and reserves of Rs. 9,91,01,938 as against interest-free advances of Rs. 2,07,64,779, apart from other contentions, were rejected on the ground that the assessee had given interest-free loans and advances in the absence of the availability of surplus fund, the nexus of which the assessee could not prove. The assessee also failed to establish that the assessee had ample own funds adequate to cover the aggregate interest-free loans. He also relied upon the decisions in the cases of CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H) ; [2006] 156 Taxman 257 (P&H) and S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) various other decisions. Lastly, applying the average rate of interest on bank loans of 12.84 per cent. per annum on the amount of loans and advances of Rs. 2,07,64,779, he ....
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....our goodself along with the earlier submission dated December 17, 2012. It is further respectfully submitted that during the year under consideration the other current assets of the assessee-company was decreased from Rs. 1,14,86,134 to Rs. 1,00,588 in compare to the previous year on account of realisation of Rs. 113.78 lakhs from Agrasen Jewellers to whom the assessee sold the gold in the previous year. We are furnishing herewith the copy of ledger account of M/s. Agrasen Jewellers for your kind consideration. The realisation from sale of gold is more than the amount increased under the head loans and advances, which itself establish that the assessee-company has not diverted the interest bearing funds for making the interest-free advances. The credit facilities obtained by the assessee-company are solely used for the business purpose. The various credit facilities sanctioned by the State Bank of India is against the hypothecation of raw material, store which itself establish that the credit facilities is exclusively for the purpose of business and the assessee-company make the proper compliances and maintain the level of stock, book debts etc. as per the terms and conditions ....
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....red matter : This issue is directly covered by the case of Asst. CIT v. Ram Kishan Verma [2012] 143 TTJ (Jaipur) 1 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 considered as utilised for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surplus funds are used for making fixed deposits as receipts are in advances while expenses are spread throughout the year. Since interest-free advances are less than the capital and the Assessing Officer has not brought on record any nexus of interest-bearing loans being used the Assessing Officer could not have disallowed the interest. There is no onus on the asses see 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 v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) ; [2009] 221 CTR (Bom) 435; [2009] 18 DTR (Bom) 1 and the hon'ble Delhi High Court in the case of CIT v. Bhart....
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....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. Vijay Solvex Ltd. [2015] 274 CTR (Raj) 384 while relying on the judgments rendered in (a) S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) ; (b) Munjal Sales Corporation v. CIT [2008] 298 ITR 298 (SC) ; (c) CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354 (All) ; (d) CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi) ; (e) CIT v. Britannia Industries. Ltd. [2006] 280 ITR 525 (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 others 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 Income-tax Appellate Tribunal has correctly appreciated the facts and law." 14. Therefore, the finding reache....
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....ing investment in shares is less than the capital of the assessee. Therefore, following the decision of the Tribunal Jaipur Bench in the case of Asst. CIT v. Ram Kishan Verma (I. T. A. No. 960/JP/2010, dated July 8, 2011) we hold that the learned Commissioner of Income-tax (Appeals) was not justified in confirming the addition of Rs. 2,43,177. It will be useful to reproduce paragraph 10.4 from the order of the Tribunal in the case of Asst. CIT v. Ram Kishan Verma (supra). . . . 4.7 In view of the facts and circumstances of the case, this ground of appeal of the assessee is allowed.' Shyam Oil Cake v. Asst. CIT [2004] 83 TTJ (Jodhpur) 414-Refer paper book 23-24 for the contents. ITO v. Kundanmal Surana [2004] 83 TTJ (Jodhpur) 582-Refer paper book 25-26 for the contents. Assessing Officer v. Dilip Kumar [2003] 82 TTJ (Jodhpur) 193- Refer paper book 26-27 for the contents. Asst. CIT v. Shri Manohar Lal Anjana (I. T. A. No. 219/Jodhpur/2014 for the assessment year 2009-10 vide order dated September 18, 2014). Asst. CIT v. Wolkem India Ltd. (I. T. A. Nos. 501 and 502/Jodhpur/2013 for the assessment years 2009-10 and 2010-11 vide order dated October 9, 2014). 2.4 While ....
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.... not be entertained as the same would necessitate investigation in to facts and the amplitude of the question referred does not bring into its sweep the said contention.' 2.5.3 Also in the case of Munjal Sales Corporation v. CIT [2008] 298 ITR 298 (SC) (DPB 20-28) held that 'Business expenditure-Interest on borrowed capital-Interest- free advances to sister concerns-Scope and ambit of section 40(b)(iv) vis-a-vis section 36(1)(iii)-Section 40(b)(iv) places limitations on the deductions under sections 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 sections 30 to 38 and a firm has also to prove that it is not disentitled to claim deduction by reason of applicability of section 40(b)(iv)-Even if an assessee is entitled to deduction under section 36(1)(iii), the assesses (firm) will not be entitled to claim deduction for interest payment exceeding the rate prescribed in section 40(b)(iv)-Section 36(1)(iii) and section 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....
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....nd in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Wool combers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considerin....
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...., is entitled and free to use his own capital in whatever manner he wants. Even for commercial expediency or not or granting such interest-free loans and advances to his relatives etc. 4. No disallowance in past years : Notably in the past also (see balance-sheet for the assessment year 2009-10 (paper book 1) showing interest-free loans and advances at Rs. 1,10,78,684) the appellant has been making such claim and the same stood allowed. The facts and circumstances being same, there appears no special reason to take a departure. Similarly in the later years also the appellant continues making payments but no disallowances is reported. Kindly refer CIT v. Sridev Enterprises [1991] 192 ITR 165 (Karn) and CIT v. Excel Indus tries Ltd. [2013] 358 ITR 295 (SC) ; [2013] 93 DTR 457 (SC). 5. Cases cited by the Revenue are completely distinguishable : The various decisions cited by the Assessing Officer in the assessment order, are completely distinguishable because they were rendered in altogether different factual context and hence, deserve to be ignored. The cases of Workmen, Associated Rubber Industry Ltd. (supra) and Playworld Electronics (supra) were rendered in the context of diff....
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....disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the Commissioner of Income-tax (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee-company could in any case, utilise those funds for giving advance to its directors.' There was one more issue before the hon'ble Supreme Court as regards the advance of Rs. 1.16 crore given by the assessee to its subsidiaries without interest and contention of the assessee was that it was only because of the undertaking given to the financial institutions, that it had to advance such amount interest-free to the subsidiaries hence was given for business purposes. It is in this context, the hon'ble court referred to S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) and held that it was imperative for the assessee as a business expediency to provide such advance and bear interest expenses allowable under section 36(1)(iii). Thus, notably so far as the aspect relating to loans to directors is concerned the assessee never pleaded that it were given for the bu....
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....t (supra). I also find support from the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom). I am also having the benefit of a comparatively recent decision of the hon'ble Supreme Court in the case of Hero Cycles P. Ltd. v. CIT [2015] 379 ITR 347 (SC) wherein the hon'ble court held that in so far as the loans to directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the Commissioner of Income-tax (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee-company could in any case, utilise those funds for giving advance to its directors. 7. Apropos, the contention of the learned Commissioner of Income-tax (Appeals) that it was not the case of the assessee that such interest-free loans were advanced for business purposes, I agree with the contention of the authorised representative that in the cases where interest-free funds are admittedly available larger than the interest-free loans, it was not necessary to examine the purpose behind such advancement a....