AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1582
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..... These disallowances have been made by the AO with the aid of Section 36(1)(iii) of the Act on the ground that assessee has made advances out of interest bearing funds for non-business purposes, hence interest expenditure is not admissible to the assessee. 3. The ld. counsel for the assessee, at the very outset submitted that assessee has sufficient interest free funds and it has not used interest bearing funds. He drew our attention to page No. 45 of the Paper Book in assessment year 2009-10 where copy of the Balance Sheet is available. He pointed out that reserve and surplus of the assessee is more than Rs. 79 Cr whereas advances given by him are far less than the interest free funds available with the assessee. He submitted that ld. First Appellate Authority has made a detailed analysis and thereafter deleted the disallowance. He also placed on record details of alleged loans in tabular form right from 2007 upto assessment year 2012-13. Since assessee was having more interest free funds than the advances in each year, therefore, no disallowance ought to have been made. He relied upon following judgements: a) ACIT Vs Janak Global Resources Pvt. Ltd. 175 ITD 365 (Chd)....
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....were also having transactions with one group company of the assessee namely M/s Rana Sugar Ltd. The Learned AO passed assessment order in the case of M/s Rana Sugar Ltd. for AY 2011-12 on 26.12.2018 in which he had made addition on account of the unexplained credit received from there two paper company namely M/s Century Agro Pvt. Ltd. and M/s R J Texfab Pvt. Ltd. to the tune of the Rs. 19.13 crores. Such addition were confirmed by Learned CIT (A) vide order dated 17.06.2019. From the above facts it is clear that he assessee Rana Polycot Ltd. has received the funds from banks and diverted these funds to these paper Companies and later on these paper Companies had diverted these funds to group Company namely M/s Rana Sugar Ltd. The copies of AO's order and Leaned CIT (A)'s order are attached as Annexure 1 and 2. The assessee has filed appeal before the Hon'ble Bench in the case of M/s Rana Sugar Ltd. against the said orders of the AO (dated 26.12.2018) and CIT(A) (dated 17.06.2019), and these appeals are still pending before the Hon'ble Bench. During the course of above hearing the undersigned has pleaded that the cases of M/s Rana Polycot Ltd. and ....
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....ke note of the brief finding of the ld. CIT (Appeals) in each year, which reads as under : ITA 1050/CHD/2018 "5. Ground of appeal No. 2: Brief facts are that the appellant engaged in business of manufacturing cotton yarn, dyed yarn and knit yarn. The AO has observed in the order as under:- "2.0 The assessee has during the year under consideration, diverted substantial amount of funds to its sister concern namely M/s Camelot Exports Pvt. Ltd. During the course of the assessment proceedings, the assessee was duly confronted with the fact that amounts have been advances to its sister concern without any business consideration. 2.1 The assessee company has raised both secured and unsecured loans during the year under consideration and is also paying huge interest on these loans. A perusal of the balance sheet as on 31.3.2009 filed alongwith the return of income reveals that the total loan funds are amounting to Rs. 2,53,47,44,039/-. The secured loans are amounting to Rs. 2,32,35,33,266/- and unsecured loans are amounting to Rs. 21,12,10,773/- as on 31.3.2009. In the immediately preceding year, the total loan funds as on 31.3.3008 were only Rs. 2,30,8....
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....company has given advances of Rs. 19,10,00,000/- to M/s Camlot Exports Pvt. Ltd. for the purchase of cotton yarn. These advances were made during the last year and the company had surplus funds in the shape of capital reserves plus amounting to Rs. 79.4 crores as on 31.03.2008 and no interest bearing funds were transferred by the appellant company to the Camlot Exports Pvt. Ltd. As these advances were given for business purposes and out of own funds, hence no disallowance u/s 36(l)(iii) be made out of interest expenses charged in profit & loss account by relying on the judgement of Hon'ble Punjab & Haryana High Court in the case of Brite Enterprises Pvt. Ltd." 5.2 I have perused the assessment order and examined the reply of the assessee. The advances were verified and were found to be made from the current account of the assessee representing non-interest bearing funds. Hence, no disallowance u/s 36(l)(iii) is sustainable. Thus, ground of appeal No. 2 is allowed." ITA 1013/CHD/2018 5. Ground of appeal No. 2: Brief facts are that the appellant is engaged in business of manufacturing cotton yarn, dyed yarn and knitted yarn. The AO observed that the ass....
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.... and PNB (C/A No. 0376). The amount reflected in R.J. Texfab Ltd is transfer entry from advance for purchase of land to R.J. Texfab Ltd and no interest bearing funds were transferred. The statement of Sound Music were not made available by the assessee. The statement of account of M/s Ajay Bharat & Company clearly shows that all payment/ transfer of funds was made from current account of the Company with Indus Ind Bank." 5.2 I have perused the assessment order and examined the reply of the assessee. (i) Ajay Bharat Kumar & Co. Baroda, Gujarat: On examination of copy of account of Ajay Bharat Kumar & Co. Baroda, it is seen that the opening balance was Rs. 4,84,43,000/- and closing balance was Rs. 27,50,00,000/-. No debit entries have been made during the year. In earlier years the debits were on account of funds transfer from current accounts of the appellant. Hence, no adverse view is taken on this issue. Addition is therefore deleted. (ii) Century Agros Pvt. Ltd: On examination of the ledger account of this concern and submission of the appellant, it is seen that the funds transferred to the party was made from the current bank....
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....el Ltd Rs.25,00,000/- 4 Jiwan Overseas Pvt. Ltd. Rs.95,00,000/- 5 Preet Bansal Rs.6,00,000/- 6 Pro Eye Protection World Pvt. Ltd. Rs. 16,39,510/- 7 R.J. Tex fab Pvt. Ltd. Rs.23,18,67,376/- 8 SF Industries Rs.7,50,000/- 9. Sahil Kakkar Rs. 7,00,000/- 10. Total Rs. 36,99,56,886/- The AO asked the assessee to give the business expediency and observed that there was no business relations with the persons to whom the loan is given. The AO has further observed that funds diverted for non-business purposes are not its own funds but borrowed at a high interest rate. The AO thus disallowed the interest claimed by the assessee as expense u/s 36(l)(iii) of the Act. The AO mainly relied on the judgement of M/s Abhishek Industries Ltd. (286 ITR 1) and similar other judgements to support his case. 5.1 In response to the appeal filed by the appellant u/s 250 of the Act, authorized representative Sh. T.N. Singla, C.A. (in short "Ld. AR") filed written submission on behalf of the appellant as under: "The Ld. Assessing Officer has wrongly disallowed expenses of Rs. 4,43,94,826/ -u/s 36(l)(iii) on advances. ....
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.... R.J. Texfab Pvt. Ltd. Rs.26,22,37,376/- 8 SF Industries Rs.7,50,000/- 9 Sh. Sahil Kakkar Rs.7,00,000/- Total Rs.49,96,46,886/- The AO asked the assessee to give the business expediency and observed that there was no business relations with the persons to whom the loan is given. The AO has further observed that funds diverted for non-business purposes are not its own funds but borrowed at a high interest rate. The AO thus disallowed the interest claimed by the assessee as expense u/s 36(1)(iii) of the Act. The AO mainly relied on the judgement of M/s Abhishek Industries Ltd. (286 ITR 1) and similar other judgements to support his case. 5.1 In response to the appeal filed by the appellant u/s 250 of the Act, authorized representative Sh. T.N. Singla, C.A. (in short "Ld. AR") filed written submission on behalf of the appellant as under: "The Ld. Assessing Officer has wrongly disallowed notional interest of Rs. 5,9,57,626/- u/s 36(l)(iii) on advances. The appellant company has given advances of Rs. 49,96,46,886/- to various parties. The company has surplus funds in the shape of share capital amounting to Rs. 6....
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.... All the advances were verified and were found to be made from the current account of the assessee representing non-interest bearing funds. Hence, no disallowance u/s 36(l)(iii) is sustainable. Thus, ground of appeal No. 2 is allowed." 5.1 A perusal of the Balance Sheet would reveal that assessee has reserve and surplus of Rs. 79.4 Cr. Similar Balance Sheet is being placed on record in each year. The assessee has demonstrated that it has more interest free funds in every year than the advances. The ld. CIT (Appeals) has observed that assessee has interest free funds of Rs. 79.4 Cr whereas it has advanced Rs. 19,10,00,000/-. The assessee has demonstrated that it has not transferred any interest bearing funds for non business purposes. If we peruse the written submissions of ld. CIT DR, it would reveal that he has emphasized that AO has observed that these loans were given without any business exigency and without business purposes. It is pertinent to mention that assessee is not claiming the deduction of interest expenses on the ground that it has made advances for business purpose. The case of the assessee is that loans given to these concerns is out of interest free loans and A....