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TMI Blog2016 (4) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... iness purposes only on the basis that the assessee was not able to recover its dues from a loanee to whom loan was given out of its surplus funds in earlier years. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Suraj Dev Dada (2014 (5) TMI 625 - PUNJAB & HARYANA HIGH COURT ) has held that where the recovery of principal amount was difficult the addition on account of notional interest on account of loan to said company cannot be made u/s 36(1)(iii) of the Act. In view of the above, entire facts and circumstances we hold that there was no nexus between interest paid and loans made by assessee and therefore, the disallowance made by Assessing Officer and partly confirmed by learned CIT(A) is not justified. - Decided in favour of assessee Charging of penal interest - Held that:- From the nature of penal interest charged by the Bank from assessee it is found that the charges are "compensatory" in nature as assessee has not violated any law but the extra payment has been made for lower valuation of stocks pledge with Bank. Therefore, we hold that the penal interest was in the nature of compensatory payment and allowable u/s 37(1) - Decided in favour of assessee - ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks pledged with Bank fluctuates significantly and which results into overdrawing of cash credit limit and therefore, interest charged by Bank in this regard was a normal business expenditure. However, the Assessing Officer did not agree with the contentions of the assessee and made addition of ₹ 2,58,086/-. 4. The Assessing Officer further observed that assessee had purchased shares of Sugarfed (Punjab) amounting to ₹ 53.82 lac during the earlier years but no dividend was received from the year 2003-04 to 2007-08. He further observed that assessee was not able to recover an amount of ₹ 40 lacs alongwith accrued interest of ₹ 58.59 lacs from M/s Zira Co-operative Sugar Mills Ltd. Therefore, he held that the borrowings made by assessee were not made for business purposes and accordingly interest payable on this amount at the market rate was proposed to be disallowed u/s 36(1)(iii). The assessee in its reply submitted that Punjab Government through Registrar Co-operative Societies, Punjab had invested a capital of ₹ 449.40 lacs and out of this amount the assessee had purchased shares of Sugarfed Punjab amounting to ₹ 53.90 lacs. 5. As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer had not held that these investments were not for business purposes nor any disallowance was made u/s 36(1)(iii) of the Act. In view of the above, it was submitted that disallowance made by Assessing Officer and parlty upheld by learned CIT(A) was not justified. Reliance in this respect was placed on the case law of Hero Cycles (P) Ltd. vs. CIT decided by Hon'ble Supreme Court and reported at 379 ITR 347. 10. As regards the loan to M/s Zira Co-operative Sugar Mills Ltd., the learned AR submitted that assessee had advanced a loan of ₹ 40 lacs to M/s Zira Sugar Mills Ltd. in the year 1990-91 and interest was being debited to M/s Zira Sugar Mill, Ltd. and up to 31.03.1998 interest was being recovered but after that no interest could be recovered as Zira Sugar Mill had gone sick and was ultimately wound up in Financial Year 2004-05 and in this respect our attention was invited to (PB-8) where a copy of order of Registrar Co-operative Societies was placed. The learned AR further submitted that detailed submissions were made to learned CIT(A) which the learned CIT(A) had recorded in his order but without considering the written submissions and without consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sugarfed, Punjab amounting to ₹ 53.90 lacs in earlier years. This submission was made by assessee before Assessing Officer and before learned CIT(A) also. Both the authorities simply brushed aside the submissions of assessee and held that the investment was made for non business purposes, therefore, arrived at the conclusion that disallowance out of interest payment be made. However, while arriving at this decision the learned CIT(A) has ignored that during the year no investment in the shares of Sugarfed was made and rather investment related back to earlier years and in earlier years, there was no disallowance made by the authorities u/s 36(1)(iii) of the Act. Further there is no nexus between the borrowed funds and investment made as the investment was not made out of borrowed funds but out of capital contribution. Further from the certificate of Bank placed at (PB-6), we find that the Bank has certified that interest charged to the assessee was on cash credit limits granted to assessee for clearing cane payments, therefore, it cannot be said that interest was incurred for non business purposes. Above all we find that Sugarfed is a controlling body of all Co-operative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee may be in the hope of recovering part of its dues from the liquidator had not written off in its books. However, the fact remains that the said loan was given way back in 1990-91 and at that point of time there was temporary availability of funds as is mentioned in the resolution itself and therefore loan was given out of surplus funds. The incurring of expenditure on account of interest on funds used for making payments to Cane growers cannot be said to be for non business purposes only on the basis that the assessee was not able to recover its dues from a loanee to whom loan was given out of its surplus funds in earlier years. The Hon'ble Punjab Haryana High Court in the case of CIT vs. Suraj Dev Dada 367 ITR 92(P H) has held that where the recovery of principal amount was difficult the addition on account of notional interest on account of loan to said company cannot be made u/s 36(1)(iii) of the Act. In view of the above, entire facts and circumstances we hold that there was no nexus between interest paid and loans made by assessee and therefore, the disallowance made by Assessing Officer and partly confirmed by learned CIT(A) is not justified. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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