AI Drafter 
TaxTMI 
TaxTMI 
2024 (11) TMI 487
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....ed Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre was justified in disallowing interest expenditure claimed under section 36(1)(iii) to the tune of Rs. 6,07,99,913. 3. Briefly stated, the assessee is a partnership-firm, engaged in the business of real estate. The assessee had filed its return of income for the assessment year 2018-19 on October 30, 2018, declaring total income at Rs. 2,22,06,446. Return of the assessee was process under section 143(1) of the Act on February 14, 2019. Subsequently, the case of the assessee was selected for complete scrutiny under the "computer assisted scrutiny selection", for verification of following issues : (i) Income from real estate business (ii) Unsecured loans (iii) Share capital/other capital In due course of proceedings, statutory notice under section 143(2) was issued and duly served on the assessee. Thereafter, notice under section 143(1) assisted with questionnaire were issued on June 4, 2020, December 29, 2020, January 18, 2021, February 17, 2021 and March 23, 2021. In response to the said notices, the assessee filed submissions through e-assessment proceedings. On perusal of submi....
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....volves the assessment of the assessee, Avinash Builders, for the assessment year 2018-19. The Department selected the case for a complete scrutiny under the computer assisted scrutiny selection (CASS) to verify several issues related to income, unsecured loans, and capital. During capital account examination, it was seen by the Assessing Officer that partners Mukesh Singhania and Ashok Singhania had overdrawn capital. Finance cost of Rs. 6,07,99,913 was debited. The assessee asked to explain if interest was charged on the overdrawn capital. The assessee's responded that no interest was paid or received from partners but the assessee failed to provide the ledger account of partners, raising concerns. The Assessing Officer observed that the assessee did not provide ledger accounts, making it difficult to ascertain the actual overdrawn capital. Balance-sheet showed partner's capital, current accounts, secured and unsecured loans. Despite substantial capital, it was deployed in assets, investments, and inventories. No proof or explanation for partners' overdrawing from interest-bearing loans. The Assessing Officer concluded that the assessee failed to provide the fund flow stat....
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....it should always be presumed that the investments/interest-free advances/overdrawn by the partner's have been made out of interest-free fund.' 4.5 I have carefully considered the record available and noticed that the assessee had sufficient interest-free funds, as mentioned in the above table, available to cover the overdrawn amount. The assessee claims to have sufficient interest-free funds and provides details of these funds. Although the partners have overdrawn a substantial amount from the firm, and the firm also received secured and unsecured loans. Whereas overdrawn amount by the partners are concerned, it is not disputed by the Assessing Officer that the assessee did not have sufficient own, interest-free credit balance. Therefore, the assessee-firm could in any case, utilise those funds for overdrawing by the partners. The assessee has stated that it was having sufficient own amount to give overdrawn to the partners. In the details of funds provided, it is evident that the assessee was having sufficient balances to make such overdrawn. Therefore, grounds raised in this appeal is allowed. In the result, the addition of Rs. 6,07,99,913 is deleted. 5.....
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....ional Faceless Appeal Centre : The learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre has allowed the appeal of the assessee and deleted the addition made by the Assessing Officer by holding that the assessee has sufficient interest-free funds available to cover the overdrawn amount. Although, the partners have overdrawn a substantial amount from the account of the firm, and the firm also received secured and unsecured loans. Whereas, overdrawn amount by the partners are concerned, it is not disputed by the Assessing Officer that the assessee did not have sufficient own, interest-free credit balance. Therefore, ground raised in this appeal is allowed. In the result, the addition of Rs. 6,07,99,913 is deleted. (Tapan Kumar Chatterjee), Dy. Commissioner of Income-tax-1(1), Raipur (C. G.). 4. The order of the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre is not acceptable on merits and needs to be challenged before the hon'ble Income-tax Appellate Tribunal. Moreover, the tax effect involved in this case is Rs. 2,06,65,890 only which is more than the monetary limit of Rs. 50,00,0....
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.... 2. Ground No. 1 'On the facts and in the circumstances of the case, the learned Assessing Officer has erred in making disallowance of Rs. 6,07,99,913 on account of interest expenditure claimed under section 36(1)(iii) of the Income-tax Act, 1961. The disallowance made by the learned Assessing Officer is unjustified, unwarranted and uncalled for.' 2.1 The case of the assessee was selected for complete scrutiny and notice under section 143(2) was issued on September 22, 2019. Dur ing the course of assessment proceeding various queries were raised from time-to-time and the compliances of the said queries were made time-to-time. During the course of assessment proceeding, the learned Assessing Officer found that the assessee has not charged any interest on capital overdrawn by two partners. The detail of partner capital as on March 31, 2021 is as under : Name of the partners Amount as on 31-3-2021 Nature of account Avinash Developers (P.) Ltd 67,38,20,072 (credit balance) Partners current account 5,000 (credit balance) Partners fixed capital account Mukesh Singhania 5,000 (credit balance) Partners fixed capital accou....
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....failed to explain as to how the capital overdrawn by the partners were utilised and such utilisation was for the purpose of the business. (c) The assessee failed to prove that the loan taken was for the purpose of the assessee business and the interest debited had direct nexus to the business of the assessee. 2.2 That the appellant vehemently object to the disallowances made by the learned Assessing Officer. In this regard it is to submit that during the year under consideration, two partners out of three partners are having debit balance as stated above in para 2.1 and the assessee-company has neither received nor paid any interest to the partners. Copy of capital account of all the partners are enclosed herewith (kindly refer annexure 3). As no interest have been received from the partner, the learned Assessing Officer has issued show-cause notice (SCN)-cum-draft assessment order dated June 15/16, 2021 (copy of show-cause notice-cum-draft assessment order is enclosed. Kindly refer annexure 1), wherein the learned Assessing Officer has stated that the assessee has not charged any interest on capital overdrawn by the partners namely Shri Anand Singhania and Shri M....
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.... sale proceeds, internal accruals, borrowed funds, advance from customers and all other deposits are deposited in current bank account where from the amount has been transferred to various persons including partners. The assessee is having mixture of fund (interest-free and interest-bearing) and it is a settled principle that where there is a mixture of borrowed funds and internal accruals it should always be presumed that the investments/interest-free advances/overdrawn by the partner's have been made out of interest-free fund. 2.4 The aforesaid contentions of the assessee is squarely covered by the judgment of the hon'ble Supreme Court in the case of CIT (LTU) v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC) ; (2019) 20 SCC 478 ; 2019 SCC OnLine SC 222 ; [2019] 104 CCH 38 (SC), where in it was held that 'When interest-free funds available to assessee are sufficient to meet its investment then, it can be presumed that investments are made from said funds and hence, same is allowable as deduction under section 36(1)(iii)'. 2.5 Further the aforesaid contention of the assessee is also supported by various other judicial pronouncement of various Hi....
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....5, it was held that (page 116 of 381 ITR) : ". . . if there are interest-free funds available, presumption would arise that investment would be out of interest-free funds generated or available with company if the interest-free funds were sufficient to meet investment". * In the case of Dy. CIT v. Priyal International P. Ltd. [2020] 84 ITR (Trib) (S.N.) 50 (Ahd) ; [2020] 60 CCH 333 (Ahd), it was held that, "When there are substantial interest-free and own funds, presumption would be that the investment and/or advances were made out of such funds". * In the case of, Jaypee Capital Services Ltd. v. Dy. CIT [2020] 58 CCH 47 (Delhi), where in it was held that 'In case the assessee-company is having sufficient own interest-free funds, it is to be presumed that the investment is not made out of borrowed funds but out of its own interest-free funds'. 2.6 That at para 4.3 of the show-cause notice-cum-draft assessment order, the learned Assessing Officer have stated that interest-free partners capital of Rs. 67,38,20,072 has been deployed by the assessee into assets, investment and inventories so it cannot be said that the interest-free capital brought in ....
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....hat in para 4.4 of the show-cause notice, the learned Assessing Officer have mentioned that it has not been proved or explained by the assessee that why the partners has overdrawn the said capital and as to how the capital so overdrawn was utilised hence, it cannot said that the capital overdrawn was advanced as a measure of commercial expediency. In this regard, it is to submit that, the asses see is a partnership-firm and is an artificial person driven by its partner's. Both the partner's, namely, Mr. Mukesh Singhania and Mr.Anand Singhania are actively engaged in the business of the assessee. Both the partners have also given their personal guarantee for loans obtained from bank by the assessee-firm. Copy of loan sanction letter is enclosed herewith. Kindly refer annexure 5. Therefore, in order to safeguard the interest of the partnership-firm and its partner's, as a measure of commercial expediency, the assessee-firm has given fund to both the partners. Further, as has already been explained in forgoing para's the fund has been given out of interest-free funds available with the firm and there is no revenue loss to firm out of the above transactions. 2.....
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....ant portion of the written submission dated February 24, 2021 is reproduced as under for your ready reference : '1.1 Further, in order to substantiate the genuineness of the transaction the assessee has submitted the statement explaining the source of capital introduction. However, your honour has mentioned that the assessee has not furnished the bank statement of the partner. In this regard it is to submit before your honour that the assessee has duly submitted the bank statement of Avinash Developers P. Ltd. highlighting the transaction with the assessee-firm. Kindly refer annexure 8 of reply dated January 13, 2021 and annexure 2 (part 2) of reply dated February 4, 2021. However, for the sake of conveyance bank statement is again enclosed herewith evidencing the availability of the fund with Avinash Developers P. Ltd. Refer annexure 1 1.2 Further, it was explained before your honour that partners has invested in the assessee-firm from the sale receipts and loans obtained. In order to substantiate the above contention relevant sale ledger account and other relevant documents of Avinash Developers P. Ltd., sanction letter of loan from Tata Housing in case of p....
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....nts of the assessee, therefore, the observations of the learned Assessing Officer qua the utilisation of interest-bearing funds in the excess withdrawal by the partners was factually incorrect, therefore, the addition made on the foundation of such wrong inference is liable to be struck down. The order of the learned Commissioner of Income-tax (Appeals) which was on a proper appreciation of facts and interpretation of the same in accordance with the provisions of law deserves to be upheld. The learned authorised representative further placed his reliance on the order of the Income-tax Appellate Tribunal, Raipur in Dy. CIT v. Avinash Builders I. T. A. Nos. 122 to 124/Raipur/2014, dated November 21, 2016 in the assessee's own case, wherein this specific issue was deal and deliberated upon by the Tribunal, the relevant observations of the Tribunal are culled out as under : "10. On careful consideration of the above rival submissions, we observe that the Commissioner of Income-tax (Appeals) has granted relief to the assessee on this ground by observing as follows : '10. I have carefully gone through the assessment order, and submissions of the appellant. The A....
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....the interest-free finds were sufficient to meet the investments." Decisions of the hon'ble Allahabad High Court in the case of CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354 (All) ; 2004 SCC OnLine All 1745, the hon'ble Delhi High Court in the case of CIT v. Tin Box Co. [2003] 260 ITR 637 (Delhi) ; 2002 SCC OnLine Delhi 1480 ; [2002] 70 CCH 1042 (Delhi) and the hon'ble Madras High Court in the case of CIT v. South India Corporation (Agencies) Ltd. [2007] 290 ITR 217 (Mad) ; 2006 SCC OnLine Mad 1324 are also in favour of the appellant. Looking to the facts and circumstances of the case as also decisions cited above, the disallowance of interest made by the Assessing Officer amounting to Rs. 74,88,497 cannot be sustained. Hence, the disallowance is deleted.' 11. In view of the above, on vigilant perusal of the balance-sheet of the assessee for the relevant financial year 2007-08, pertaining to amply clear that the assessee had received advances/deposits from customers amounting to more than Rs. 9 crores and the impugned amount of interest-free advances/loans which are verifiable from the balance-sheet is only Rs. 1,03,33,409. In view of the above, when the ass....