TaxTMI 
TaxTMI 
2026 (9) TMI 241
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case, the Ld. CIT (Appeals) has erred in law and on facts in sustaining the action of the Ld. Assessing Officer in making disallowance of Rs. 12,92,111 out of interest expenses claimed u/s 36(1)(iii) of the Income Tax Act 1961. 3. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in law and on facts in sustaining the action of the Ld. Assessing Officer in making addition of Rs. 66,26,524/- being Net Profit as declared in the Profit and Loss Account on the allegation that the appellant was mandatorily required to charge depreciation in its books, 4. That the appellant craves leave to add, amend, alter, withdraw any of the grounds of appeal before hearing." 3. Briefly stated, the facts of the case are that the assessee is a partnership firm engaged in the business of working as a contractor for excavating chrome ore from the mines of Ferro Alloys Corp. Ltd., Bhadrak, Orissa. For the year under consideration, the assessee filed its return of income on 24.10.2017 declaring a loss of Rs. 43,04,518. The case was selected for scrutiny and the AO completed the assessment under section 143(3) of the Act on 23.12.2019 at a total ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion were made out of interest free funds. The CIT(A) was not persuaded and confirmed the disallowance by holding as under: "In view of the above facts and circumstances, it is held that the appellant has failed to substantiate the allowability of interest expenditure relatable to such advances. Accordingly, the disallowance of Rs. 12,92,111/- made by the Ld. AO is found to be justified and is confirmed, and Ground No. 2 is dismissed." 7. Before us, the learned Authorised Representative (hereinafter referred to as "the learned AR") reiterated the submissions made before the lower authorities. He submitted that the interest free funds available with the assessee in the form of partners' capital were many times the interest free advances and that the AO had not brought on record any material to show that the borrowed funds had been diverted towards these advances. The learned Departmental Representative (hereinafter referred to as "the learned DR"), on the other hand, supported the orders of the authorities below highlighting that the amount is lent to a related party. 8. We have heard both the parties and perused the material available on record. The facts are not in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dvances, the onus shifted to the AO to establish a nexus between the interest bearing borrowings and the interest free advances. The AO has not discharged that onus. He has neither identified any particular borrowing out of which the advances are said to have been made nor traced the movement of any borrowed fund into these advances. In the absence of such a nexus, the disallowance rests only on the coexistence of borrowings and interest free advances in the balance sheet, which by itself is not a permissible basis for a disallowance under section 36(1)(iii) of the Act. The CIT(A) has confirmed the disallowance by casting the entire onus on the assessee, which approach runs contrary to the ratio of Hero Cycles (P.) Ltd. (supra) and Allen Career Institute (supra). 12. In view of the above discussion, we hold that the disallowance of Rs. 12,92,111 made under section 36(1)(iii) of the Act is not sustainable in law. The same is directed to be deleted. Ground No. 2 is accordingly allowed. 13. Ground No. 3 relates to the addition of Rs. 66,26,524 made under section 68 of the Act. The assessee had disclosed a net profit of Rs. 66,26,524 in its Profit and Loss Account and had credite....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll leads to artificially increase in book profit considered in computation of partner remuneration." 15. Before us, the learned AR submitted that the sum of Rs. 66,26,524 is nothing but the book profit of the firm disclosed in its audited Profit and Loss Account, which stood appropriated to the partners in their profit sharing ratio. He submitted that such an appropriation of the firm's own disclosed profit is not a credit of which the nature and source require to be explained, that depreciation under section 32 of the Act is an allowance claimed in the computation of total income and not an entry which the Act obliges an assessee to make in its books, and that the entire figure stands reflected in the return of income filed by the assessee. The learned DR relied upon the orders of the authorities below and submitted that in the absence of depreciation being charged in the books of account the credits appearing in the capital accounts of the partners remained unexplained. 16. We have heard both the parties and perused the material available on record. Section 68 of the Act, in so far as it is material for the present purpose, reads as under: "68. Where any sum is fou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Even if the matter is tested on the touchstone of nature and source, the explanation stands furnished on the face of the record. The nature of the credit is the book profit of the firm for the year under consideration. Its source is the business receipts of the year, which are recorded in the books of account, are supported by the audited financial statements and were placed before the AO in the course of the assessment proceedings. The AO has not doubted the turnover disclosed by the assessee, nor has he disputed any item of receipt or of expenditure appearing in the Profit and Loss Account. Having accepted the receipts and the expenditure out of which the figure of Rs. 66,26,524 emerged, he could not treat the resultant profit as a sum of unknown origin. There is no unidentified creditor in the picture and there is no unexplained inflow of money which requires to be traced to its source. 21. The finding recorded by the AO is itself destructive of the addition. He states in terms that the amount represents the profit credited in the capital accounts of the partners. Once the AO has himself identified the sum as the profit of the firm, the nature and the source of the credit st....