2017 (12) TMI 1335

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....ncome at Rs. 11,60,61,126/-. Apart from other additions above, AO made an addition u/s.36(1)(iii) r.w.s. 14A of the Act. The same is subject matter of the present appeal and it relates to the disallowance made u/s.36(1)(iii) of the Act amounting to Rs. 81,52,033/-. Relevant facts are discussed by the AO in Para No.4.3 and the same is summarized as under : Assessee claimed financial expenses aggregating Rs. 9,60,86,241/-. During the assessment proceedings, AO noticed granting of interest free advances/loans to the related concerns/ or partners of the firm-the assessee amounting to Rs. 12.46 crores (Rounded off) as on 31-03-2010. Assessee was asked to explain as to why proportionate interest amount should not be disallowed out of the deduction claim made under financial expenses on account of diversion of interest bearing funds for the purpose of giving interest free loans and advances to the relates parties. In response, the assessee furnished the written submissions dated 22-02-2013. In the said reply, it is the claim of the assessee that entire funds have been utilized solely for the business purposes and therefore, no disallowance is warranted. Assessee's explanation was not acc....

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....o the principle of commercial expediency (S.A. Builders Ltd. Vs. CIT 288 ITR 1 (SC), CIT Vs. H.R. Sugar Factory Pvt. Ltd. 187 ITR 363 (All.)) etc. CIT(A) favourably considered the fact of reducing the amount of Rs. 56,25,000/- from the total financial expenses of Rs. 9,60,86,241/- and eventually, the AO was directed to rework the disallowance on proportionate basis taking into consideration the financial expenses of only Rs. 9,04,61,241/- (netting of after reducing the said amount Rs. 56,25,000/- wrongly booked). To that extent, the claim of the assessee was partly allowed by the CIT(A). 5. Aggrieved with the same, the assessee is in appeal before us. There is no appeal filed by the Revenue on the part relief granted by the CIT(A). 6. Before us, Ld. Counsel for the assessee narrated the above facts of the case and submitted that no disallowance is called for on account of interest disallowance on the reasoning of diversion of interest bearing funds towards interest free advances granted by the assessee firm to the related concerns or partner of the firm. Ld. counsel brought our attention to Page No.8 of the paper book (copy of balance sheet as on 31-03-2009 to 31-03-2010) and men....

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....al normally constitutes an interest bearing fund. It always comes as a liability of the firm to pay interest by the firm. Further, bringing our attention to the breakup of Schedule 18 relating to financial expenses (page 9 of the paper book is relevant), Ld. DR submitted that Schedule 18 does not indicate any payment of interest by the firm to the partners capital or otherwise. He read out the financial expenses amount of Rs. 9.60 crores (rounded off) and inferred for him that payment of Rs. 61,281,445/- on account of 'interest paid to others' may relate to the said interest payment made to the partners capital. Considering the absence of commercial nexus of the said diverted loans and also considering the use of funds by the partner, Ld. DR submitted that the decision of the CIT(A) is fair and reasonable and the same should be confirmed. Ld. DR also was critical of the decisions cited by the Ld. Counsel for the assessee and submitted that they are all distinguishable on facts. 8. During the rebuttal time, Shri Nikhil Pathak, Ld. Counsel for the assessee clarified the details relating to the interest paid to others and submitted the same relates to unsecured loan creditors which i....

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....r Ltd. and CIT Vs. HDFC Ltd. (supra) are rightly invoked and applied to the facts of the present case. 11. Regarding the business nexus and use of the said diverted funds for business purposes of the assessee, we are of the view that this issue now stands covered in favour of the assessee by various decisions including our decision in the case of ACIT Vs. Kumar Urban Development Limited for A.Y. 2010-11 vide order dated 31-10-2017. For the sake of completeness of this order, we proceed to extract the relevant paragraphs from the said order of the Tribunal. It is finding of the Tribunal in the said case that the provisions of section 36(1)(iii) cannot be invoked in respect of funds diverted when such diverted funds are much less than the interest free funds available in the common kitty of the assessee. Relevant operational paragraph is reproduced here as under : "8.4 In respect of ground No. 4 relating to disallowance of interest expenditure u/s. 36(1)(iii), the ld. AR submitted that the Assessing Officer has made disallowance of interest Rs. 3,34,62,116/-. This disallowance was made by Assessing Officer in respect of interest paid by the assessee to its sister concerns. In firs....