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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 ..... nd Jitendra Singh for the Appellant V.V. Shastri and P.C. Maurya for the Respondent ORDER Bench: All these appeals pertain to a group of family members on similar additions made by the A.O. under section 36(1)(iii). The assessees are partners in family concern (firms) and also have incomes from advancing funds, consultancy apart from income from proprietary concern or firm. Assessing Officer decided issue after discussing various case law making disallowance on the same manner in all cases. The Ld.CIT(A) also passed similar orders in these cases. Therefore, these are heard together and decided by this common order. Assessees in these appeals raised various grounds on disallowance of interest pertaining to various assessment years under section 36(1)(iii). The grounds are in fact submissions with reference to the facts. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed funds are Rs.4958507/-). The average rate of interest is 13.25% (the Borrowed funds is Rs.4958507/- and interest cost debited to P and L Account is Rs.656976/-). Hence, an amount of Rs.213429/- (being 13.25% of Rs.1610780/-, which is 75.48% of the amount utilized for other Investments and other purposes other than investments in Firm) 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." 4. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statement of borrowals and advances placed in page 20 to submit that there is no diversion of borrowed funds. It was submitted that fresh borrowing during F.Y. 2003-04 were only to the tune of Rs.16,33,924/- out of which an amount of Rs.7,84,243/- was repaid also with interest in some cases. It was also submitted that during the year assessee has advanced amounts to the tune of Rs.52,860/- and received back amount of Rs.23,34,689/- with interest of Rs.2,99,754/-. Without examining the fund flow and cash flow A.O. took the closing balance for arriving at the disallowance. He has no objection if the matter was referred to the A.O. for examination of facts. 7. The learned D.R., however, submitted that assessee could not establish utilization of funds for the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es alone. Moreover the A.O. also has not considered the interest received from some of the advances in calculating the proportionate disallowance. Therefore, without deciding the issue on legal principles alone, we remand the matter back to the file of the A.O. by setting aside the orders to examine assessee's contentions and to obtain a fund flow statement and see whether the borrowed funds were diverted for non-business purposes. Only in the event borrowed funds are diverted for non-business purposes, the interest claim to that extent can be disallowed under section 36(1)(iii). With this direction, the matter in this appeal is restored to the file of the A.O. for fresh examination. Grounds are considered allowed for statistical purposes. ITA No. 4894/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 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d L Account is Rs.656976/-). Hence, an amount of Rs.303440/- (being 13.25%(sic) of Rs.2870767/-, which is 65.09% of the amount utilized for other Investments and other purposes other than investments in Firm) 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." 12. Similar order was passed in 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 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 bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed funds were used for the purpose of carrying out the business, not only the partnership firm but also in earning interests. Therefore, assessee claimed entire interest as exclusively and wholly allowable under section 36(1)(iii). The A.O., relying on various case laws as discussed from para 5.3 to para 5.10, analysed the case laws to arrive at the conclusion that proportionate disallowance has to be made. Accordingly in AY 2004-05 he arrived at the disallowance working out as under:- "5.11 In the present case, it is noticed that the percentage of borrowed funds to the total funds is 42.89% (the total funds are Rs.16280780/- and borrowed funds are Rs.6983448/-). The average rate of interest 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 initia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived from some of the advances in calculating the proportionate disallowance. Therefore, without deciding the issue on legal principles alone, we remand the matter back to the file of the A.O. by setting aside the orders in these years and direct AO to examine assessee's contentions and obtain a fund flow statement and see whether the borrowed funds are diverted for nonbusiness purposes. Only in the event the borrowed funds are diverted for non-business purposes the interest claim to that extent can be disallowed under section 36(1)(iii). With this direction the matter in these appeals are restored to the file of the A.O. for fresh examination. Grounds are considered allowed for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowed funds. It was further submitted that out of the borrowals made during the year most of the amount was advanced for the purposes of business. These details were filed before the CIT(A). However, in the common order passed for assessment years 2005-06 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. 19. At the outset, It was noticed that assessee Mr Sanchalal Chhajed expired on 19.03.2009. The CIT(A) passed his orders on 02.03.2010 ie. after the death of assessee without 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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