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TMI Blog2023 (3) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and to this extent, we agree with the ld. AR and the order passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of the Revenue and the findings of the ld. PCIT are set-aside to this extent. Interest expense for availing cash credit limits from Punjab National Bank - The credits and withdrawals in such cash credit account need to be examined and a clear nexus is required to be established between the borrowed funds and making of loans/advances to Sister concerns. On the same footing, the argument of the assessee regarding availability of its own funds need to be tested and examined after analyzing the nature and position of funds at the relevant point of time of making such advances. In light of aforesaid discussions, we uphold the order of the ld. PCIT to this extent and the assessment order is set-aside to this limited extent to examine the matter afresh in light of above discussions and as per law. Needless to say, the Assessing officer shall provide reasonable opportunity to the assessee and the latter shall submit the desired information/documentation as so desired by the Assessing officer. Appeal of the assessee is partly al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. A.O as per law during the course of impugned asstt. proceedings and he has taken a possible view on the aspect, hence, the impugned asstt. order on this issue is neither erroneous nor prejudicial to the interest of the revenue so as to allow to proceed u/s. 263 of the I.T. Act. 6. That under the facts and circumstances, the issue of nature and reasonableness of expenses claimed in the P I. A/c was examined by the Ld. A.O as per law during the course of impugned asstl. proceedings whereby he also made a disallowance of Rs. 78,620/- out of such expenses and has taken a possible view on the aspect, hence, the impugned asstt. order on this issue is neither erroneous nor prejudicial to the interest of the revenue so as to allow to proceed u/s. 263 of the I.T. Act. 7. That under the facts and circumstances, the impugned order u/s. 263 further stands vitiated in law on the ground of no enquiry being done by the PCIT himself for finding of as to how and in what manner the impugned order u/s. 143(3) Dtd. 23.09.16 is erroneous and prejudicial to the interest of revenue. 2. At the outset, the Ld. AR submitted that the assessee does not wish to press Ground Nos. 4 and 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed u/s. 36(1)(iii) of the Act and interest of Rs. 17,24,442/- for availing cash credit limits from Punjab National Bank. 2.4. In this regard, it was submitted that the capital of the Partners is Rs. 1,20,93,976/- as apparent from the balance sheet of the assessee firm and in addition, a sum of Rs. 42,25,539/- is available interest free to the assessee, which has been shown under the head payable to others , in the balance sheet. It was submitted that it is a settled law that to the extent of partners capital, the interest free amount given should be set off. It was accordingly submitted that to the extent of Rs. 1,63,19,515/-, the amount should be deemed to be available with the assessee for giving interest free loans. 2.5. It was further submitted there is no nexus between the interest bearing funds availed and interest free loans given. The Ld. Pr. CIT has not been able to point out that any interest bearing funds have been used for giving interest free loans. It was further submitted that out of the total interest, Rs. 17,24,442/- has been paid to the bank for availing cash credit limit which has been availed since earlier period and no disallowance has ever been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise is not verified by the A.O. 6.4 The essential test to be applied for disallowance u/s. 36(1)(iii) of the act is whether there is direct nexus between diversion of interest- bearing funds for interest free advances. In this case, from the perusal of Balance Sheet, it is observed that in the year under consideration, there is a increase of Rs. 1.58 crore as secured loan and Rs. 42 lakhs as payable to others by the assessee on the liability side; and increase of Rs. 2.04 crore as recoverable from others shown on asset side. It clearly shows that this increase in liability side is used to provide interest free advances. Besides, from the perusal of the list of parties available on assessment record, it is noticed that only one party (namely Deepak Industries, Chambaghat) is a supplier. Further, it is also noted that during the year under consideration there is a decrease in outstanding balance shown as advances to this supplier vis- -vis previous year. All other parties are sister concerns of the assessee to whom interest free advance have been given and from those no goods or services are to be received. The AO has completely failed to conduct any enquiry to verify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed in the profit/loss account and the same therefore should have been subject to examination and verification by any reasonable yardstick which may be employed by the AO. The said claim of interest expense is coupled with the movement in the secured loan taken by the assessee which has increased by Rs. 1.58 crores during the year and increase of Rs. 2.04 crores as recoverable from others as shown in the asset side of the assessee's balance sheet. There is however nothing on record that the AO has raised any query to the assessee seeking any information/documentation relating to loan transactions and interest expenses claimed in the profit/loss account. There is thus no enquiry or verification initiated and undertaken by the AO during the course of entire assessment proceedings regarding the claim of interest expense and therefore, we agree with the findings of the ld. PCIT that it is a case where the AO has failed to conduct any enquiry and verification. In light of the same, we are unable to accept the ld. AR's contention that there was no requirement in law to raise queries even on the issues on which the AO after examining the record feels satisfied as it is case where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances, then there is clearly a nexus between the borrowings and the loans/advances and interest to that extent is directly related to giving of loans/advances and test of business expediency needs to be satisfied. Similarly, where the deposits are more than the withdrawals on a given day and such excess deposits are utilised by the assessee for the purpose of making any loans and advances, no interest would be charged by the bank as the assessee would in effect be using its own funds at the given point of time. Further, nature of deposits in such cash credit account needs to be examined as to whether the deposits are from business operations or there are also deposits by way of fund transfer from other bank accounts and the nature of such funds from other bank accounts - in the nature of borrowings or from business operations. In case of borrowed funds have been transferred to this particular cash credit account and such funds are then utilized in giving loans and advances, again a nexus is established between the borrowed funds and the loans/advances. In our view, the nature and movement of funds in the cash credit account through which the advances to sister concerns have been g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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