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TMI Blog2022 (2) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... mprehend as to on what basis the assessee is claiming that no disallowance of the interest expenditure was called for with respect to the opening balance of the outstanding interest free advance that was given to the aforementioned party. Accordingly, we are unable to persuade ourselves to subscribe to the aforementioned claim of the assessee, and thus, reject the same. Whether no disallowances u/s 36(1)(iii) is called for to the extent the assessee was found to be in possession of interest free funds during the year under consideration and as the assessee had funds in the form of capital deployed by the partners on which interest was being paid @3% per annum, therefore, the disallowances, if any, u/s 36(1)(iii) of the Act was to be restricted in the backdrop of availability of the aforementioned amount of concessional interest bearing funds to 3% p.a. and not 8% p.a as worked out by the AO - As interest free funds are available with the assessee, then, a presumption would arise that the investments made were from its interest free funds. See RELIANCE UTILITIES POWER LTD. [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] As the assessee was admittedly having interest free funds of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding company were exclusively for business purposes and case of assessee is squarely covered by the decision of jurisdiction high court of Punjab Haryana in the case of Bright Enterprises Pvt. Ltd. Vs. CIT ITA No. 224 of 2013. 3. That the worthy CIT(A), Jalandhar was erred in law in upheld the addition of ₹ 6,48,000/- made u/s 36(i)(iii) of the Act, without appreciating the fact that assessee firm paid interest on partners capital @ 3% only. Apart from that the assessee has raised before us the following additional grounds of appeal:- 1. That having regard to the facts and circumstances of the case, Hon ble CIT(A) has erred in law and on facts in confirming the action of the AO in disallowing interest amounting to ₹ 6,48,000/- without considering the fact that no disallowance of interest u/s 36(1 )(iii) can be made on the opening balance/amount. 2. Before us, it is submitted by the ld Authorised Representative (for short AR ) for the assessee that as the adjudication of the aforementioned additional ground of appeal involves purely a legal issue which is based on the facts available on record and no new facts are required to be looked into, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckdrop of the aforesaid facts, the AO, being of the view that the assessee had advanced an interest free amount to the aforesaid party out of its interest bearing funds that were raised in the form of secured loans from the banks, thus, called upon the assessee to explain as to why the interest corresponding to the aforesaid interest free advance/loan may not be disallowed u/s 36(1)(iii) of the Act. In reply, it was claimed by the assessee that though the aforesaid amount was advanced to the above mentioned party in question by the assessee for purchase of rice, however, as the said transaction did not materilise, therefore, the said amount of advance had remained outstanding in the books of account of the assessee firm. Alternatively, it was the claim of the assessee that as it had suffices interest free funds amounting to ₹ 16,99,632.68 available with it in the form of unsecured loans that were raised from the family members of the partners of the assessee firm, therefore, no disallowances of the interest expenditure qua the said amount was called for u/s 36(1)(iii) of the Act. In order to verify the genuineness and veracity of the aforesaid claim of the assessee of havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee firm on the capital contribution of the partners. 9. In support of his aforesaid contention that no disallowances u/s 36(1)(iii) was called for with respect to Opening balance of the outstanding loan/advance appearing in the books of account of the assessee firm, the ld AR had relied on the order of this Tribunal in the case of Bhagwati Rice Vs. ITO, Ward 3(2), Firozpur in ITA No. 288/ASR/2014 dated 26.07.2019. Our attention was drawn by the ld AR to the relevant observation of the Tribunal qua the aforesaid issue at Para 6.9 of the aforesaid order. Alternatively, it was averred by the ld AR that the disallowances u/s 36(1)(iii), if any, was liable to be restricted after taking cognizance of the interest free funds that were available with the assessee firm, while for the disallowance as regards the balance amount of such interest free advance was liable to be restricted to 3% per annum i.e. the rate of interest that was being paid on the capital deployed by the partners, as against the disallowance that was worked out by the AO @8% per annum. 10. Per contra, the ld Departmental Representative (for short DR) relied on the orders of the lower authorities. Qua the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured loans from the banks, therefore, the AO being of the view that the assessee had diverted his interest bearing funds for advancing interest free loans for non business purposes to a third party, viz. M/s. Khaira Trading Company, had therein worked out the disallowance of the interest corresponding to the aforesaid amount of advance. Insofar, claim of the Ld. AR that as the amount was advanced by the assessee in the immediately preceding year and, the same was only in the nature of an Opening balance during the year under consideration, therefore, de hors advancing of any such amount during the year under consideration no disallowance of any interest expenditure was warranted u/s 36(1)(iii) of the Act, the same, we are afraid does not find favour with us. In our considered view, as stated by the Ld. DR, and rightly so, as the assessee had during the year under consideration continued to pay interest on the interest bearing loans raised from the banks in the preceding years, therefore, there being a direct nexus between the outstanding balance of the interest free loans that were advanced to the aforementioned party and the said interest bearing funds, there can be no justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04.2011 1,54,38,270.10 .3% Total 1,71,37,902.78 Advance made to Khaira Trading co. 54,00,000/- 0% Disallowance made during assessment 6,48,000/- 12% 13. Accordingly, as the assessee was admittedly having interest free funds of ₹ 16,99,632.68 i.e. unsecured loans raised from family members, therefore, no disallowance to the said extent qua the loan/advances given by the assessee to M/s. Khaira Trading company was called for. Our aforesaid view is supported by the judgments of the Hon ble High Court of Bombay in the case of HDFC Bank Ltd vs. ACIT, 368 ITR 505 (Bom) and that in the case of Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom). In its aforesaid orders, the Hon ble High Court had held that where interest free funds are available with the assessee, then, a presumption would arise that the investments made were from its interest free funds. In the backdrop of the facts involved in the case before us r.w the aforesaid settled posi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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