AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (3) TMI 1760
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....essment proceedings found to have advanced Rs. 15.48 lacs during the year to one, Shikha Grover, daughter of the assessee who, along with some other members of the family, had already been advanced Rs. 25.50 lacs during an earlier year/s, including Rs. 7.50 lacs to her. The purpose of the advance/s by the assessee-borrower, stated at page 6 of the assessment order (followed by discussion at paras 5.2 & 5.3/pgs. 7-8 of the said order) is clearly personal in nature. The non-business user of the capital to that extent is not disputed; in fact, admitted. The assessee's argument before us is two-fold. One, that no disallowance, nevertheless, could yet be made for the current year qua an advance made during a preceding year. In fact, similar disallowance made for the preceding year stands deleted by the first appellate authority on the basis that the assessee had sufficient interest-free funds. The same has not been appealed against by the Revenue, so that it has attained finality. As regards the advance/s made during the current year (Rs. 15.48 lacs), the same would stand to be deleted on the same basis, i.e., sufficient interest-free capital, as the assessee's balance-sheet (as on 31/3....
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....pital, either through borrowed or proprietary capital, which could be either interest bearing or otherwise, as interest is paid in some cases even on equity, as partners' capital in a partnership firm. From this stand-point, the vertical form of the balance-sheet better represents the sources and application of funds inas- much as it highlights only the fund based liabilities and assets, i.e., financed by equity or borrowed capital, though in some cases even the equity capital could be interest bearing, so that to the extent it finances the non-business assets, proportionate interest is liable to be disallowed. A typical vertical form (V-Form) of balance-sheet is as under: Table 1 (say) Fixed Assets (after depreciation) xxx 1000 Current Assets (Net) -Stock in trade xxx -Trade debtors xxx -Other current assets xxx/xxx Less: -Trade creditors xxx -other creditors xxx xxx 1000 Non-current assets xxx xxx 100 2100 Equity Capital xxx (1000) Borrowed Capital xxx xxx (1100)(2100) NB: Figures unde....
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....e-referred, becomes relevant. The said statement, it may be clarified, would also depict the changes in the funding pattern of the firms' brought forward assets, as where the brought forward loans are repaid. Further, to the extent the borrowing is dedicated, viz., the fixed assets financed by term loan/s, or current assets by working capital loan/s or advance/s, the relevant assets have to be regarded as financed accordingly. Where so, this would significantly alter the ratio of financing, i.e., the X% and Y% referred to earlier, which may now be presented as follows: Table 2.1 Total DB Balance Fixed Assets xxx(1000) xxx(400) xxx (600) Net Current Assets xxx(1000) xxx(400) xxx (600) Non-current asset xxx (100) _______ xxx (100) Total xxx(2100) xxx(800) xxx(1300) Equity Capital xxx(1000) Borrowed Capital xxx (300) xxx(1300) DB => Dedicated Borrowing Excluding dedicated borrowings (Rs. 800 in our example), it is only the assets to the extent not covered thereby, whose funding would therefore need to be examined, and relevant for the purpose of attribution of the borrowed capital, if any, and....
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....rred, the same shall hold for the current year as well, unless, of course, financing being a dynamic phenomenon, the same is substituted by borrowed capital during the current year. It may be further clarified that the presumption of own capital, where otherwise available, for funding non- current assets, shall apply even if the same is apparently financed by borrowed capital, as by issuing a cheque from an overdraft account, etc. This is as, as famously stated, money has no bones. Finally, the availability of equity capital, to the extent attributable to the profits for the year, has to be regarded as inuring evenly during the year. As interest is essentially a charge toward the time cost of funds, where own funds are available - whether introduced or generated later during the year, the same may give rise to some interest attribution, i.e., relatable to the period for which the adequate capital was not available, i.e., was in deficit, for a part of the year, though stood met by the end of the year, as where the same was introduced, or the profits came to be generated, later. 4.3 The financing of a firms' assets can therefore be ascertained with reasonable accuracy. The afore-sta....
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....fficient interest-free funds - a matter of fact, which it discerns as the question at large. In the facts of that case, the AO had himself accepted the same (refer para 11 of the judgment). In the present case, on the contrary, no such plea (of sufficient interest-free capital) stands raised before the AO, or even before the CIT(A). As it appears, the same is a conscious decision inas- much as the assessee has a net negative working capital as at 31.03.2012 (balance-sheet at PB pgs. 4-12), with, as afore-stated, the net current assets being at (-) Rs. 108.95 lacs. The finding by the first appellate authority for AY 2011-12, not carried to the tribunal, is based on a misreading of the decision in Gurdas Garg (supra), which it purportedly follows. The sufficiency or otherwise of funds has necessarily to be with reference to the corresponding application of funds and not regarded in isolation, i.e., by comparing one item on the liability (source of funds) side with one item on the asset (application of funds) side of the balance-sheet, as the first appellate authority has. Further, the same can definitely be examined in the proceedings for the current year in-as-much as it has a direc....
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..... 127.36 lacs only. The balance Rs. 356.47 lacs is met by own capital (Rs. 155.61 lacs) - which thus gets fully absorbed, and other borrowed capital of Rs. 139.63 lacs, leaving still a shortfall of Rs. 61.23 lacs. The same (i.e., the fixed assets) to the extent of Rs. 61.23 lacs, as well as the entire non-current assets (Rs. 47.73 lacs), i.e., including an advance of Rs. 6.75 lacs to Smt. Rekha Grover - again, a relative, is met by trade credit, an interest-free source of finance. The assessee thus does not clearly have sufficient funds of his own. The shortfall, however, is made good by trade credit - an interest-free source, in surplus by Rs. 108.95 lacs (as on 31/3/2012). No disallowance of interest u/s. 36(1)(iii) is therefore called for as per the closing balance-sheet. This, though, cannot be said with regard to the opening state of financing, which would require, similarly, an analysis of the opening balance-sheet, i.e., as at 01.4.2011. This is as financing is dynamic, and interest - which is the time cost of funds, relatable to the period for which it obtains, would arise. The additional reliance on borrowed capital as on that date is, again, patent. The firm has repaid b....