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TMI Blog2012 (5) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. 2. For the sake of clarity grounds in the case of Mr. Sudhir S. Chhajed in ITA No. 4913/Mum/2010 for A.Y. 2004-05 is extracted as under:- 1. Disallowance of interest Rs.2,13,429/- u/s.36 (i) (iii). a. The Ld, CIT(A) erred in confirming the disallowance of interest calculated on proportionate basis (proportionate investment towards non-business assets and loan and advances given) ignoring the submissions given during the appellate proceedings explaining in detail that borrowings have been used for advancing loans and investment in partnership firm as capital. He failed to observe that withdrawals from partnership firm during the year under appeal were used mainly to repay loans or interest. b. The Ld, CIT(A) failed to appreciate that the appellant had earned business income from the Partnership firm totalling to Rs.483,813/- (Share in profit Rs.278,378/- + Remuneration Rs.180,000/- and interest on capital Rs.25,435/-) c. The Ld CIT (A) failed to appreciate that Appellant had earned Rs.299,759/- as interest on loans given. d. The Ld CIT(A) ignored that the Ld. A.O only made assumption that borrowed funds have been Used for non-business ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business. It was assessee's submission that all the investments shown in the Balance Sheet considered by the A.O. as for non-business purpose were assets purchased earlier. It was submitted before the CIT(A) vide para 3.0(b) that the flat at Residency was purchased for Rs.2,74,150/- in 1987, the land at Igatpuri was purchased for Rs.1,35,000/- in 1995, office at Chandragupta for Rs.4,30,318/- in 1992 and shares for Rs.6,75,939/- prior to 1993 and other old investments of Rs.3,24,938/- totalling to Rs.18,40,345/-. It was submitted that these investments are very old and no investments were made during the year out of the borrowed funds. It was further submitted that out of the borrowals made during the year most of the amount was advanced to the partnership firm and balance as loans on which interest was charged. These details were filed before the CIT(A). However, in the common order passed for assessment years 2004-05 and 2006-07, the CIT(A) confirmed the additions so made holding that there is mixture of own funds and borrowed funds and assessee could not establish that the borrowed funds were utilized exclusively for the purpose of business. 5. The learned counsel d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of business and, therefore, the A.O. and the CIT(A) were correct in disallowing on proportionate basis. He referred to the findings of the CIT(A) in para 2.2. of the order and also para 2.3 to submit that the CIT(A) has examined the issue correctly on facts and confirmed the disallowance. Therefore, there is no need to differ from the findings of the A.O. and the CIT(A). 8. We have considered the issue and examined the facts on the basis of rival contentions. We are of the opinion that the A.O. has wrongly considered the amounts as on 31.03.2004 for making the disallowance on the basis of the statement of affairs without examining the fund flow or the payment of interest. In fact the A.O. did not even consider the amount of interest received during the year and the interest paid on these amounts. It was the contention that assessee has also borrowed interest free funds for certain advances. This aspect has not been examined at all. Moreover, as seen from the statement of affairs assessee has investments in flats, office premises, shares, etc. totalling to Rs.18,40,345/-, which was stated to have been made in earlier years and not in this year. Therefore, arriving at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/Mum/2010 9. In this case assessee borrowed funds to an extent of Rs.73,75,086/-on which claimed an amount of Rs.3,79,850/- as interest claim. An amount of Rs.2,45,722 paid as interest was not claimed. But still AO considered total amount of borrowals in disallowing interest on proportionate basis. He also did not consider the investments made in earlier years. For the reasons stated in AY 2004-05, since facts are similar to AY 2004-05, the appeal in ITA 4894/Mum/2010 is also set side to the file of AO to examine the borrowals and its utilisation keeping in mind the submissions made before CIT(A) and decide the issue of disallowance u/s 36(1)(iii) in this year as well. The decision taken in AY 2004-05 may have a bearing on old borrowings. AO is directed to examine the fund flow and decide the issue on facts. Needless to state assessee should be given proper opportunity to make submissions on facts and law. Grounds are considered allowed for statistical purposes. 10. Appeals in ITA No. 4913/Mum/2010 and ITA No. 4894/Mum/2010 are allowed for statistical purposes. ITA No. 4914 and 5915/Mum/2010 - A.Y. 2004-05 and 2006-07 11. In these years, assessee Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission that all the investments shown in the Balance Sheet considered by the A.O. as for non-business purpose were assets purchased before the assessment. It was submitted before the CIT(A) vide para 2.7(b) in AY 2004- 05 that assets totalling to Rs.18,40,345/- were old and purchased much earlier. It was submitted that these investments are very old and no investments were made during the year out of the borrowed funds. It was further submitted that out of the borrowals made during the year most of the amount was advanced to the partnership firms and also loans of which interest were charged. These details were filed before the CIT(A). However, in the common order passed for assessment years 2004-05 and 2006-07 the CIT(A) confirmed the additions so made holding that there is mixture of own funds and borrowed funds and assessee could not establish that the borrowed funds are utilized exclusively for the purpose of business. 13. The submissions made before us are same as considered in the case of Mr.Sudhir S Chhajed above. As in that case the assessing officer has not considered the fund flow and has not examined the submissions made. The CIT(A) also rejected the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 8.14% (the interest bearing Borrowed funds is Rs.4991448/- and interest cost debited to P and L Account is Rs.406455/-). Hence, an amount of Rs.356042/- (being 8.14% of Rs.4373982/-, which is 42.89% of the amount utilized for other Investments and other purposes other than investments in proprietary business of Rs. 10198139/-) is hereby disallowed u/s 36(1)(iii) and added back to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) read with Explanation 1 thereto are initiated separately for filing of inaccurate particulars of income." 15. Similar orders were passed in AY 2005-06 and AY 2006-07.Before the CIT(A) it was submitted that assessee had its own funds as well as interest free loans and filed paper book explaining the fresh borrowing during the year and its investment/utilization for the purpose of business. It was assessee's submission that all the investments shown in the Balance Sheet considered by the A.O. as for non-business purpose were assets purchased before the assessment. It was submitted that these investments are very old and no investments were made during the year out of the borrowed funds. It was further submitted that out of the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statistical purposes. Appeals in ITA No. 4895/Mum/2010, ITA No. 4896/Mum/2010 and ITA No.4897/Mum/2010 are allowed for statistical purposes. ITA No. 4892 and 4893/Mum/2010 - A.Y. 2006-07 and 2005-06 17. In these years assessee Late Mr. Sanchalal C. Chhajed filed returns of income declaring income declaring total income of Rs.1,96,309/- and Rs.5,380/- respectively. The A.O. noticed that assessee has accepted unsecured loans of Rs.56,88,359/- in AY 2005-06 on which assessee has incurred an amount of Rs.5,73,477/- as interest in AY 2005-06 and shown unsecured loans of Rs.42,86,693/- on which interest of Rs.4,30,176/- was incurred in A.Y. 2006- 07. The A.O. noticed that assessee has not proved the nexus between the source of funds and its utilization in business. Assessee submitted that it was in the business of advancing loans and advances and received interest. Further assessee is also partner in a firm M/s. Paco Pack(India) in which amounts were invested and received interest, share of profit. It was further submitted that the entire borrowed funds is used for the purpose of carrying out the business, not only the partnership firm but also in the consultancy and adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bringing legal heirs on record. During the present appeals the assessee filed revised form 36 duly verified by legal heir Mr Sandeep S Chhajed. Legal heir is to be brought on record by the AO. For this reason, we are of the opinion that orders of CIT(A) require to be set aside. 20. However even on merits the issue require re- examination by AO. The submissions made before us are same in the case of Mr.Sudhir S Chhajed above. As in that case the assessing officer has not considered the fund flow and has not examined the submissions made. The CIT(A) also rejected the contentions. For the detailed reasons discussed in the case of MR. Sudhir S Chhajed above which equally apply to the assessee, we set aside the orders in both the years and restore the issue of disallowance to AO to examine the facts and nexus with borrowed funds and investments and consider the disallowance if any, after determining the diversion of borrowed funds on which interest was claimed as deduction afresh. As seen from the facts we are of the opinion that the A.O. has not made out a proper case for disallowance under section 36(1)(iii) by examining the funds borrowed of which interest was paid and its u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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