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TMI Blog2013 (2) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... ng liability to pay interest. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii) of the Act. Even where the interest free advances were made in the earlier years and the assessee incurs the liability of interest expenditure on secured loans in the later years – Interest relatable to such interest free advances is to be disallowed. The first advance is on account of amount outstanding under the head “M/s Rassini” totaling Rs.31,86,478 – Explanation of the assessee was that it was proposing to enter into a joint venture with M/s Rassini – certain expenditure incurred by its employees/Directors during the financial years 2000-01 to 2004-05 was not booked under the Profit & Loss Account but was booked under the head “Rassini” – And was reflected under “Loans & Advances” on the asset side of the balance sheet – Assessee had f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The cross appeals filed by the Revenue and the assessee are against the order of the Commissioner of Income-tax(Appeals), Karnal dated 18.01.2011 relating to assessment year 2006-07 against the order passed under section 143(3) of the Income Tax Act, 1961. 2. The assessee has raised the following grounds of appeal : 1. That the Ld. CIT(A) was not justified in sustaining the disallowance of Rs.15,09,844/- out of total disallowance of Rs.44,69,439/- on account of interest paid as under:- (i) Rs.3,82,377/- on account of project development expenses of Rs.31,86,478/- booked under the head Rassini under Loans Advances . (ii) Rs.42820/ - on account of advance of Rs.3,56,838/- to Fatu S/o Immamudin. (iii)Rs.3,00,000/- on account of advance of Rs.25,00,000/- to M/s Sonakshi Marketing Pvt. Ltd. (iv) Rs.12,000/ - on account of advance of Rs.1,00,000/- to M/s Maple Leaf Exim Pvt. Ltd. (v) Rs.17,265/- on account of advance of Rs.1,43,875/- to M/s Mass Global Logistic Pvt. Ltd. (vi)Rs.6,35,382/- on account of outstanding amount of Rs.52,94,846/- from M/s A. Nitin Co. (vii)Rs.1,08,000/- on account of ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd advances were made : i) Advance of Rs.31,86,478/- to M/s Rassini : The assessee claims the same to be the expenses recoverable on account of project development. The claim of the assessee was that it had entered into a joint venture with the said company which did not materialize and the expenses incurred for project development were recoverable from the said party. The Assessing Officer noted that the said expenditure was incurred by the assessee on account of M/s Rassini in the years 2000 to 2003. However, the said amounts were not recovered till date. In the absence of the assessee producing any document to establish the nature of the expenses incurred and the business expediency, the Assessing Officer held the assessee to have failed to justify the nexus of such advances with business expediency. ii) Advance of Rs.52,94,846/- to M/s A.Nitin Co. and Rs.9,00,000/- to M/s Associated Capital Market: The assessee explained that the said amount was outstanding against the sale of shares made through them in the year 2000. The Assessing Officer noted that the said advances had not borne any interest income to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he party-wise written submissions and the rejoinder submitted by the assessee are reproduced in the order of the CIT (Appeals) alongwith the remand report submitted by the Assessing Officer. We are making a reference to the above said reproduction by the CIT (Appeals). The CIT (Appeals) thereafter para-wise dealt with each of the advances and held as under : i) Advance of Rs.31,86,478/- to M/s Rassini : The explanation of the assessee in this behalf was that it had planned to enter into a joint venture with Rassini, Mexico for modernization cum expansion of its plants situated at Malanpur, Distt. Bhind, M.P. and Yamuna Nagar Haryana for which it had incurred certain expenses in the nature of traveling and professional expenses etc. mainly on its employees/directors/consultants during the financial years 2000-01 to 2004-05 aggregating to Rs.31,86,478/-. Such expenses had been directly booked under the head Rassini under Loans Advances" as per copies of accounts filed before the Assessing Officer placed at page 14-16. As the proposed joint venture, however, did not materialize and therefore the said expenses were not charged to profit loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. iv) Advance of Rs.26,17,604/- to M/s Bliss Holding Pvt.Ltd.,Rs.68,97,811/- to M/s Penwell Ltd. and Rs.1,51,47,889/- to M/s Novika Investment and Trading Co.Ltd.: The explanation of the assessee that the amount outstanding against the said party was on account of interest and not the principal loan, in view of the certificate filed from the said parties, was accepted by the CIT (Appeals) and it was held that the disallowance out of interest with respect to the amount outstanding in the account of the said party was not called for. v) Advances to Parties : In respect of Jai Spring Industry and Investment, the amount was stated to be advance for purchase of shares and the copy of the account of the said party reflecting the opening balance of Rs.1 lac was filed. The plea of the assessee being not verifiable was rejected by the CIT (Appeals). In respect of Maple Leaf Exim Pvt. Ltd., the explanation was that the said balance represented the advance made for normal business transaction and the amount remained unadjusted in the books of account as bills were misplaced. The plea of the assessee being non-verifiable for want of ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exure-A which goes to the root of the issue. Further plea of the learned A.R. for the assessee was that the expenses represented business transaction and the same could not be treated as loan. It was further pointed out by the learned A.R. for the assessee that the observation of the CIT (Appeals) in respect of transactions with M/s Rassini were incorrect and hence the affidavit filed alongwith the application under Rule 10 of Tribunal Rules. The learned A.R. for the assessee further submitted that in the remand report the Assessing Officer did not controvert that the said expenditure was for the business purpose. In the alternative, the contention of the learned A.R. for the assessee was that the advances were out of interest free funds available with the assessee. 13. The learned A.R. for the assessee pointed out that ground No.1(i) raised by the assessee was in connection with the expenses booked under the head Rassini . In respect of ground No.1(ii) it was pointed out by the assessee that the same related to the advances made to Fatu s/o Imamuddin. Ground No.1(iii) to (iv) raised by the assessee were in respect of loans and advances, which were old debit bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest expenditure being relatable to interest free advances made out of interest bearing funds. The Hon'ble Punjab Haryana High Court in CIT Vs. Abhishek Industries Ltd.(supra) had held as under : Section 36(1)(iii) of the Income Tax Act, 1961, provides for deductions of interest on loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee were used by business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be a very heavy onus on the assessee to discharge before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, there was justification to advance loans to sister concerns for non-business purposes without any interest and accordingly the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance is on account of amount outstanding under the head M/s Rassini totaling Rs.31,86,478/-. The explanation of the assessee in this regard was that it had was proposing to enter into a joint venture with M/s Rassini and certain expenditure incurred by its employees/Directors during the financial years 2000-01 to 2004-05 was not booked under the Profit Loss Account but was booked under the head Rassini and was reflected under Loans Advances on the asset side of the balance sheet. As proposal of joint venture did not materialize, the said expenses were not booked for capitalization in its books of account. In order to prove its stand the assessee had furnished an application under Rule 29 of the Tribunal Rules alongwith additional evidence i.e. correspondence between the assessee and M/s Rassini during the period 2001 to 2004 to establish its claim of proposal and entering into a joint venture agreement. The assessee claims that the said documentation was available with the assessee. However, only certain copies of account were furnished before the Assessing Officer, which were self explanatory in nature. In the interest of justice, we deem it fit to restore this i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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