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TMI Blog2023 (10) TMI 1032X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest-bearing funds were utilized by the assessee for making gifts to his nephews, and, thus, vacate the said disallowance so made/sustained by them u/s. 36(1)(iii) of the Act. Decided in favour of assessee. - Shri Ravish Sood, Judicial Member And Shri Arun Khodpia, Accountant Member For the Assessee : Shri Ravi Agrawal, CA For the Revenue : Shri Satya Prakash Sharma, Sr. DR ORDER PER RAVISH SOOD, JM: The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 14.10.2022, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income-tax Act, 1961 (in short the Act ) dated 25.03.2013 for the assessment year 2010-11. The assessee has assailed the impugned order on the following grounds of appeal: 1. That, the Learned Commissioner of Income-tax (Appeals) erred in law as well as on facts by upholding the disallowance of interest made by the Income Tax Officer and thereby, making addition of Rs. 7,56,000/-. The same is unjust unfair and it be allowed in full as claimed. 2. That the appellant reserves t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome by raising a bogus claim for deduction of interest paid on the respective loans that were received from them, thus, disallowed an amount of Rs. 7,56,000/- (i.e., Rs. 3.78 lacs each) u/s. 36(1)(iii) of the Act. The A.O in order to fortify his aforesaid conviction was of the view that now when the assessee was already heavily burdened with interest-bearing loans of Rs. 10.51 crore as of 01.04.2009, which included the outstanding interest-bearing loan/credit on 01.04.2009 of Rs. 26,71,016/- from Shri Brijesh Agrawal, it was, thus, beyond comprehension that instead of squaring up the outstanding loan of Shri Brijesh Agrawal (supra) by repayment/part-repayment of his outstanding loan/credit, he would have gifted an amount of Rs. 21 lacs to him, which in turn, and then receive back the said amount as an interest-bearing loan. Accordingly, the A.O. held the gift transaction as ingenuine and, being of the view that the assessee had diverted his interest-bearing funds for a purpose other than business, disallowed the assessee s claim for deduction of corresponding interest expenditure of Rs. 7,56,000/- u/s. 36(1)(iii) of the Act. 6. Aggrieved the assessee carried the matter in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it lacks the necessary condition of being voluntary in nature and has treated the same as repayment of loan and as a result disallowed the interest of Rs. 3,78,000/- u/s 36(1)(iii) of the Act. The appellant has also entered into transaction of similar nature with another nephew named Sh. Kamal Agrawal. The interest of Rs. 3,78,000/- paid to Sh. Kamal Agrawal has also been disallowed on the same lines. 5.3 During the course of appellate proceedings, the appellant has submitted that to fulfill the financial needs of the business, the appellant preferred to take unsecured loans over the secured loan in view of various difficulties faced while obtaining secured loans such as legal formalities, collateral securities, brokerage etc. He, therefore, obtained the unsecured loans from relatives as per the need of business. It was further submitted that funds borrowed, and interest paid on it are wholly and exclusively for the purpose of business. The appellant has relied on various judgements and contended that it is not for the Income-tax Department to examine whether there was no need to borrow money because he had ample fund of his own. He has further submitted that his relatives are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a reasonable person stepping into the shoes of the directors/partners of the assessee firm and working solely in the interest of the assessee firm/company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advance when the assessee firm/company itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of mixed funds which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended. 5.6 In the instant appeal, the money was first diverted by the appellant from his business disguising it as gift to the two nephews and thereafter the same money was taken back from them as unsecured loans on which interest@18% was paid and claimed as deduction. Therefore there is no actual/genuine borrowing of capital. Further, instead of repaying existing loans taken from the creditors including the nephews Shri Brijesh Agarwal and Shri Kamal Agarwal, the appellant first chose to give an amount of Rs. 42 lakhs as gift to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is received as loan from these persons just after 3 days that is on June 22, 2007. This action of the assessee clearly transpires that business exigency was over looked and unreasonable interest was paid to the above persons. Therefore, the interest paid to the above persons on the amount gifted is not allowable as per section 40A(2)(b) of the Income-tax Act. Accordingly, I calculate the excessive payment of interest on the amount gifted as under: The same came to be deleted by the Commissioner of Income-tax (Appeals) and in appeal the Income-tax Appellate Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and confirmed the addition made by the Assessing Officer. While restoring order passed by the Assessing Officer, the Income-tax Appellate Tribunal in the impugned order has observed and held as under (emphasis added): 17. We have heard both the parties. Observations made in the assessment order indicate that Rs. 60,00,000 were diverted by the assessee from his business in favour of three persons, namely, Shri Bhavik J. Shah, Shri Tejas R. Shah and Shri Jignesh R. Shah allegedly by way of gift. After the so-called gift, the assessee got back the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of section 36(1)(iii) which was relevant for deciding the issue under appeal. Ground 2 is allowed. 5. We are in complete agreement with the reasoning given by the Income-tax Appellate Tribunal. The Submissions on behalf of the assessee that out of the aforesaid three persons, two persons, namely, Mr. Tejas Shah and Mr. Jignesh Shah Cannot be said to be related to the assessee within the meaning of section 40A(2)(b) of the Act is concerned, it is required to be noted that as such the aforesaid persons are found to be nephews of the assessee and the finding that money was first diverted by the assessee from his business as a gift to the aforesaid three persons and thereafter the Same money was given to the assessee at the rate of 16 per cent per annum and on which the assessee claimed the benefit under section 40A(2)(b) of the Act and the entire series of transactions were illusory, colourable and not genuinely for the Purpose of the business. It is rightly held that there is no borrowing of Capital and, therefore, the requirement of Section 36(I)(iii) is not fulfilled and, therefore, the Income-tax Appellate Tribunal has rightly restored the disallowance by the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any part of the interest-bearing funds had been diverted/utilized by the assessee for making gifts to his nephews, viz. S/shri Brijesh Agrawal and Kamal Agrawal. Carrying his contention further, the Ld. AR had taken us through the capital account of the assessee with M/s. Chhattisgarh Steel Traders, Raipur, Page 4 of APB, which revealed an Opening balance of Rs. 37.63 lacs (approx.) on 01.04.2009. The Ld. AR further submitted that the assessee had during the year generated a profit of Rs. 1.14 crore (approx.); and as a result, the capital account of the assessee on 31.03.2010 amounted to Rs. 1.51 crore (approx.). Backed by the aforesaid facts, the Ld. A.R submitted that now, when the assessee had sufficient interest-free/self-owned funds available with him both by way of the opening balance of capital and profit garnered during the year, which sufficed to source the gifts transactions in question, therefore, the disallowance of the assessee s claim for deduction of interest expenditure made by the A.O on a presumption that the interest bearing funds were diverted/utilized for a non-business purpose was absolutely incorrect and based on misconceived facts. He further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Vs. CIT, Ludhiana Anr. (supra) are culled out as under: 17. One aspect needs to be mentioned during the AY 1995- 96, apart from the loan given in August/September 1991, the assessee advanced interest free loan to its sister concern amounting to Rs. 5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee-firm out of its Own Funds and, therefore, it was not entitled to claim deduction under Section 36(1)(iii). This finding is erroneous. The Opening Balance as on 1.4.94 was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lacs. (emphasis supplied by us) 14. Backed by the aforesaid facts, we are of the considered view that as the self-owned funds available with the assessee as the opening balance of his capital on 01.04.2009, along with the net profit of Rs. 1.14 crore (approx.) earned by him during the year under consideration, which, therein, aggregated to Rs. 1.51 crore, was sufficient to source the gifts of Rs. 42 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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