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TMI Blog2024 (11) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... as made in earlier years despite similar advances. The principle of consistency was disregarded. CIT(A) s emphasis on the absence of a fund flow statement is unjustified, as the assessee s financial statements clearly indicated the sufficiency of interest-free funds. CIT(A) s reliance on S.A. Builders [ 2006 (12) TMI 82 - SUPREME COURT] is misplaced. While that case emphasizes the requirement of commercial expediency, the principles laid down in CIT v. Reliance Industries Ltd. [ 2019 (1) TMI 757 - SUPREME COURT] a subsequent Hon ble Supreme Court s decision, clarify that where sufficient interest-free funds are available, the presumption arises that such advances are made from those funds. Following the principle established in CIT v. Relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se: 2. The assessee Siwana Agri Marketing Limited (now merged with Vital Connections LLP ), filed its return of income for AY 2017-18, declaring a total income of Rs. 31,91,560/-. The case was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS), and notices under Sections 143(2) and 142(1) of the Act were issued. After examining the submissions and documents, the AO completed the assessment under Section 143(3) of the Act on 27-11-2019, determining total income at Rs. 97,85,762/-. 2.1. The AO disallowed Rs. 65,86,200/- under Section 36(1)(iii) of the Act, observing that the assessee had advanced interest-free loans amounting to Rs. 5.48 crores while incurring significant interest expenses on unsecured borrowings. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has sufficient own funds to advance the loan. The AR pointed out from the sufficiency of own funds from the financial statements which are detailed as follows: Particulars As on 31-3-2017 As on 31-3-2016 Share Capital in Rs. 1,025,000 1,365,400 Reserves and Surplus in Rs. 270,037,683 301,768,032 Total in Rs. 271,062,683 303,133,432 5.1. The AR also stated that, during the year under consideration, the amount of loan given is Rs. 15,75,000/- only and all other amounts are opening balances. The AR also highlighted that no disallowance was made in earlier years, despite the existence of similar advances amounting to Rs. 5.33 crores and the assessee earned net interest income of Rs. 1.10 crores during the year, further negatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he grounds that interest-free advances were made without establishing a business purpose or demonstrating the nexus between interest-free funds and such advances. The disallowance of Rs. 8,002/- on account of sundry balances written off, citing non-compliance with Section 36(2) of the Act. 6.1. The CIT(A) observed that the assessee failed to substantiate its claim that interest-free funds were utilized for the interest-free advances. It was noted that no fund flow statement or evidence was provided by the assessee to establish a clear nexus between interest-free funds and advances of Rs. 5.48 crores. The CIT(A) emphasized that the assessee failed to demonstrate any business purpose or commercial expediency for the advances, which is a key r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from those funds. Following the principle established in CIT v. Reliance Industries Ltd. (supra) , it is presumed that such advances are made from interest-free funds. The Revenue has failed to establish a direct nexus between borrowed funds and these advances. Therefore, the disallowance of interest expenses under Section 36(1)(iii) of the Act cannot be sustained. 6.3. The write-off of Rs. 8,002/- pertains to non-recoverable advances given to employees, which are incidental to the assessee s business operations. Such advances, though not strictly satisfying Section 36(2) of the Act, qualify as deductible business expenses under Section 37. Further, considering the nominal amount involved, disallowance on this account is unwarranted. 6.4. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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