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TMI Blog2024 (11) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... d to, the settled position of law emerges is that, if there is availability of sufficient interest-free funds with the assessee and to the extent of such interest-free funds are advanced without charging of interest, then the disallowance u/s 36(1)(iii) on such advances on account of notional interest is not justifiable. Apropos, the facts of the present case, admittedly, it is a proved fact apparent from the audited accounts of the assessee that the assessee had sufficient interest-free funds, as rightly observed by CIT(Appeals), also such interest-free funds are adequate to cover the amounts overdrawn by the partners, therefore, the addition made by AO u/s 36(1)(iii) apprehending that the assessee had utilised the interest-bearing funds for over withdrawal of capital by the partners, can be construed as misreading of the facts by the AO, leading to an adverse inference. No merit in the ground raised by the Revenue in the present appeal, which cannot be substantiated by way of any cogent explanation or evidence, contrary to the documented facts furnished by the assessee. Decided in favour of assessee. - Ravish Sood (Judicial Member) And Arun Khodpia (Accountant Member) For the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On further investigating, it was the finding of the learned Assessing Officer that the interest-bearing funds were overdrawn by the partners without any interest, while explaining in the matter, the assessee has failed to prove the business/commercial expediency for which the loan was given, and the assessee also failed to prove that the capital overdrawn by the partners were wholly and exclusively for the purpose of the business. Accordingly, interest attributable towards the overdrawn capital for Rs. 52,80,12,830 at 12 per cent., i. e., Rs. 6,33,61,540, restricting to same to the extent of finance costs debited by the assessee in its profit and loss account at Rs. 6,07,99,913 has been disallowed under section 36(1)(iii) of the Income-tax Act. 4. Being aggrieved by the aforesaid addition, the assessee challenged the issue in appeal before the learned Commissioner of Income-tax (Appeals), wherein the learned Commissioner of Income-tax (Appeals) had considered the material on record as well as the submissions of the assessee and have decided the appeal in favour of the assessee. In decision, the learned Commissioner of Income-tax (Appeals) had noted the following observations : 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prove the source and commercial expediency, the interest debited to the profit and loss account is disallowed under section 36(1)(iii). 4.4 During the appeal proceedings, the assessee has filed written submission which as follows : That it is to submit that the assessee-firm is having sufficient interest-free fund which was overdrawn by the two partners. The detail of interest-free fund and amount over drawn by the partner are as under: Interest-free fund Amount (Rs.) Partners capital account 15,000 Partners current account 67,38,20,072 Advance from customer 21,56,23,823 Total interest-free fund 88,94,58,895 Amount over drawn by the partners 52,80,12,830 2.2 From the above chart it is quite clear that the assessee-firm is having sufficient interest-free fund as against amount over drawn by the two partners. The assessee-firm is having Rs. 88.94 crores of interest-free fund as against amount over drawn by the partner of Rs. 52.80. It is important to bring in notice of your honour that the assessee-firm has not paid any interest on the capitals brought by the partner's. Where interest-free fund is sufficient to cover the interest-free overdrawn of capital by the partner then in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted by the Department, therefore, the matter is taken up for hearing on the basis of submission of the assessee and material available on record. 7. To consider the Departments argument against the decision of the learned Commissioner of Income-tax (Appeals) in the impugned order, statement of facts submitted by the Department along with appeal memo in form 36 are extracted as under : Name of the assessee M/s. Avinash Builders, Avinash House, G. E. Road, Raipur PAN AAEFA4328B A.Y. 2018-19 DIN and order No. ITBA/NFAC/S/250/2023-24/1059282098(1) dated 2-1-2024 Date of receipt of order in O/o PCIT-1, Raipur 2-1-2024 Tax effect Rs. 2,06,65,890 Limitation date 1-3-2024 Statement of facts In this case the assessee filed return of income on October 30, 2018 declaring total income of Rs. 2,22,06,446 for the assessment year 2018-19. The case was selected for scrutiny and assessment order was passed on September 9, 2021 under section 143(3) of the Income-tax Act, 1961 with assessed income at Rs. 8,30,06,360 by disallowing interest expenditure claimed under section 36(1)(iii) to the tune of Rs. 6,07,99,913. The addition was made by the Assessing Officer as the assessee-firm was having inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limit of Rs. 50,00,000 prescribed for filing appeal before the learned Income-tax Appellate Tribunal as per Circular No. 17 of 2019, dated August 8, 2019. Therefore, filing of further appeal before the learned Income-tax Appellate Tribunal is recommended in this case with the following grounds of appeal. 8. In rebuttal, to support the contentions of the assessee, the learned authorised representative Shri Amit M. Jain, (in short learned AR ) have placed a copy of the written submission dated July 4, 2023 furnished before the learned Commissioner of Income-tax (Appeals), same is culled out for the completeness of facts : 4-7-2023 To The National Faceless Appeal Centre (NFAC), Delhi. Dear Sir, Reg. :Avinash Builder (PAN-AAEFA4328B) (assessee/appellant) Avinash House, Maruti Business Park, Raipur (C.G.) Ref. :Appeal No. CIT(A)NFAC/2017-18/10080176 for the assessment year 2018-19. Sub. :Written submission. The appellant submits as under for your kind consideration : 1. Brief facts: The assessee is a partnership-firm and is engaged in the business of real estates. The appellant has filed its return electronically for the assessment year 2018-19 under section 139 on 30-10-2018 declaring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloper Pvt. Ltd. of Rs. 67,38,20,072 was already deployed by the assessee into assets, investment and inventories so it cannot be said by the assessee that the interest-free capital brought in by the partner were given to the overdrawing partners. The learned Assessing Officer further stated that even if it was so than the assessee should have furnished fund flow statement explaining source of each entry of the capital over drawn by the partner. In response to the show-cause notice, the appellant submitted detailed reply vide submission dated June 18, 2021 (copy of written submission enclosed. Kindly refer annexure 2) and stated that the appellant was having sufficient interest-free fund to cover the debit balance of partners capital. The assessee also substantiated that the contention of the learned Assessing Officer is not correct that the credit balance of one partner, namely, Avinash Developer Pvt. Ltd of Rs. 67,38,20,072 was already deployed by the assessee into assets, investment and inventories and not utilised for overdrawn capital by the partner. However, the learned Assessing Officer without properly considering the submission of the assessee, made an disallowances of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner are as under : Interest-free fund Amount (Rs.) Partners capital account (refer Schedule A of audit report) 15,000 Partners current account (refer Schedule B of audit report) 67,38,20,072 Advance from customer (refer balance-sheet page under the head current liabilities and provision of the audit report) 21,56,23,823 Total interest-free fund 88,94,58,895 Amount over drawn by the partners (refer balance-sheet page under the head loans and advances of the audit report) 52,80,12,830 Copy of audited financial statement is enclosed herewith. Kindly refer annexure 4. In view of above chart it is quite clear that the assessee-firm is having sufficient interest-free fund as against amount over drawn by the two partner's. The assessee-firm is having 88.94 crores of interest-free fund as against amount over drawn by the partner of Rs. 52.80. It is important to bring in notice before your honour that the assessee-firm has not paid any interest on the capitals brought by the partner's. Where interest-free fund is sufficient to cover the interest-free over drawn of capital by the partner, then in such circumstances it should always be presumed that the said investment/advance has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out of interest bearing funds (page 344 of 313 ITR) : 'The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments.' In the case of CIT v. Tin Box Co. [2003] 260 ITR 637 (Delhi) ; 2002 SCC OnLine Delhi 1480 ; [2002] 70 CCH 1042 (Delhi) , it was held that, 'Where the capital and interest-free unsecured loan with the assessee far exceeded the interest-free amount advanced to the sister concern, disallowance of part of interest out of the total interest paid by the assessee to bank was not justified ; findings of the Tribunal being based on the relevant evidence on record, no substantial question of law arises'. In the case of CIT v. DD Industries Ltd. [2016] 6 ITR-OL 294 (Delhi) ; 2015 SCC OnLine Delhi 14710 ; [2015] 92 CCH 125 (Delhi) , it was held that When the assessee is possessed of mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilised for the advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,62,08,300 52,80,12,830 29,18,04,530 Excess of credit balance of partners capital over total increase in assets and partners over withdrawal E = C-D 76,54,169 *All the above figures in the table are verifiable from the audited financial statement of the assessee. The same may be kindly be referred to. From the above table it is evident that the observation of the Assessing Officer that the partner's capital was deployed in invento ries, investment and in other assets is not correct. There is surplus of Rs. 29.94 crores of partners capital over increase in assets and after utilising the available partner capital of Rs. 29.94 crores in partners overdrawn account of Rs. 29.18 crores, net surplus available is of Rs. 76.54 lakhs. Hence, it can safely be concluded that overdrawn of partners capital of Rs. 29.18 crores was made out of interest-free part ners capital only and therefore no disallowance of interest can be made. Therefore, the contention of the Assessing Officer that the capital was already deployed by the assessee into assets investment and inventories is not correct. 2.7 That in para 4.4 of the show-cause notice, the learned Assessing Officer have mentioned that it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partners Shri Mukesh Singhania and Shri Anand Singhania had over drawn interest-bearing funds from the assessee-firm and had routed the same funds through the company, i. e., M/s. Avinash Developers Pvt. Ltd. Further, it is stated by the Assessing Officer that since the assessee failed to explain the source through which the capital was introduced and source through which the capital was overdrawn, the test of human probabilities can be applied and it can be presumed that the partners of the assessee-firm with the intention to reduce profits had routed the interest-bearing funds of the assessee-firm to its partners so that the same can further be routed through its other partner as its capital contribution. The said contention of the learned Assessing Officer is not correct. The assessee has elaborately explained the source of capital introduced by M/s. Avinash Developers Pvt. Ltd. vide written submission dated February 4, 2021 and February 24, 2021. Copy of both the written submissions are enclosed herewith. Kindly refer annexure 6. Further, the relevant portion of the written submission dated February 24, 2021 is reproduced as under for your ready reference : '1.1 Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 4. In view of above facts and circumstances and various evidence, it is evident that the appellant has elaborately explained that the interest-free fund have been utilised for overdrawing of capital by the partners and not out of interest-bearing funds. The borrowed funds have been utilised for the business purpose only, therefore the appellant has correctly claimed deduction under section 36(1)(iii) of the Income-tax Act, 1961. Therefore, the disallowances made by the Assessing Officer may kindly be deleted. It is prayed accordingly. Thanking you Yours faithfully, Sd/- (Assessee). 9. Based on aforesaid submissions, it was the prayer of the learned authorised representative that the assessee-firm was having sufficient interest-free fund of Rs. 88.95 crores whereas, the overdrawn amount by the partners was only of Rs. 52.80 crores, this fact has duly been recorded and verified by the learned Commissioner of Income-tax (Appeals) from the audited final accounts of the assessee, therefore, the observations of the learned Assessing Officer qua the utilisation of interest-bearing funds in the excess withdrawal by the partners was factually incorrect, therefore, the addition made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -free advances to two members of HUF partner It is evident from the balance-sheet of the appellant-firm that there was sufficient fund in the account of the HUF as found by the Tribunal Besides, profit of Rs. 46,81,943 accrued to the firm in the relevant financial year In these circumstances, the findings recorded by the Tribunal that no evidence is available on record to show that the borrowed funds were not utilised by the appellant for its own business but were diverted advance to members of the HUF free of interest and, therefore, there is no justification in mab art disallowance out of interest paid on borrowed funds. The hon'ble Bombay High Court CIT v. Reliance Utilities and Power Ltd. [2019] 313 ITR 340 (Bom) ; 2009 SCC OnLine Bom 2169 ; [2009] 77 CCH 19 (Bom) has held that and/or loan 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 finds were sufficient to meet the investments. Decisions of the hon'ble Allahabad High Court in the case of CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354 (All) ; 2004 SCC OnLine All 1745 , the hon'ble Delhi High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra), wherein the decisions of the hon'ble juris dictional High Court of Chhattisgarh in the case of Jt. CIT v. Beekay Engineering Corporation [2010] 325 ITR 384 (Chhattisgarh) , order of the hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2019] 313 ITR 340 (Bom) ; 2009 SCC OnLine Bom 2169 ; [2009] 77 CCH 19 (Bom) are referred to along with certain other case law. In terms of observations of the hon'ble courts in the said case laws referred to, the settled position of law emerges is that, if there is availability of sufficient interest-free funds with the assessee and to the extent of such interest-free funds are advanced without charging of interest, then the disallowance under section 36(1)(iii) on such advances on account of notional interest is not justifiable. 11. Apropos, the facts of the present case, admittedly, it is a proved fact apparent from the audited accounts of the assessee that the assessee had sufficient interest-free funds, as rightly observed by the learned Commissioner of Income-tax (Appeals), also such interest-free funds are adequate to cover the amounts overdrawn by the partners, therefore, the addition made by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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