IN INCOME TAX APPELLATE TRIBUNAL SMC BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER ITA No. 795/CHD/2016 Assessment Year: 2011-12 M/s Namdhari Industrial Traders Vs ACIT, Pvt. Ltd., 515/5, Indl. Area-B, Circle - V, Ludhiana. Ludhiana. PAN: AACCN2429B (Appellant) (Respondent) Appellant by : Shri Ashwani Kumar Respondent by : Shri S.K.Mittal Date of Hearing : 31.08.2016 Date of Pronouncement : 15.09.2016 ORDER This appeal by assessee has been directed against order of ld. CIT(Appeals)-2 Ludhiana dated 21.03.2016 for assessment year 2011-12 challenging disallowance of Rs. 4,15,992/- out of interest under section 36(1)(iii) of Income Tax Act. 2. Briefly facts of case are that assessee filed return of income declaring income of Rs. 22,23,340/-. assessee was engaged in business of manufacturing of pre- structured engineering goods during period under consideration. During course of assessment proceedings, on perusal of accounts of sundry debtors of 2 assessee, it was observed that assessee has various outstanding debit balances in account without any entries. Assessing Officer asked assessee as to why interest under section 36(1)(iii) of Act should not be capitalized keeping in view long outstanding debit balance. Assessing Officer observed that assessee has not been able to provide any substantive documentary evidence to suggest that these were regular business advances. assessee also had loan liability of Rs. 6.75 Crores on which huge financial expenses of Rs. 78,22,446/- was incurred. On one hand, assessee has incurred interest expenses on borrowed funds and on other hand, advances have been kept outstanding un- reasonably for long period without any charging of interest. Assessing Officer, therefore, disallowed Rs. 4,15,992/- under section 36(1)(iii) of Act. 3. addition was challenged before ld. CIT(Appeals) and written submission of assessee is reproduced in impugned order in which assessee explained party-wise facts relating to debit balances. In case of M/s Raj Engineering Works, Mohali, it was submitted that statement of accounts showing that amounts have been coming up from financial year 2008-09 till date and balance recoverable in earlier year was Rs. 12,77,002/- which is continuing in assessment year under appeal. delay in realization of outstanding amount was due to bad financial condition of customer. This party is not related to assessee. In case of M/s Reinforced 3 Earth India Pvt. Ltd., this party is regular customer of assessee and has several branches all over India such as Mumbai, Mohali, Chennai, Hyderabad, Bangluru etc. assessee has sold goods to all these branches and amount could not be received for some branches, therefore, disallowance is unjustified. 3(i) ld. CIT(Appeals) noted that assessee has failed to prove that advances were given for purpose of business. Accordingly, confirmed addition and dismissed appeal of assessee. 4. ld. counsel for assessee reiterated submissions made before authorities below. He has referred to PB-25 which is list of sundry debtors in books of account of assessee and submitted that these are trade debtors with whom assessee has business dealing. No advances have been given to these parties and no additions have been made in subsequent year. PB-28 to 31 are accounts of these parties in which in subsequent year, amounts have been received and accounts have been squared up. ld. counsel for assessee submitted that total outstanding against these parties is approximately Rs. 39 lacs and referred to PB-17 to show that capital and interest free advances available to assessee are much more in crores, therefore, addition is wholly unjustified. On other hand, ld. DR relied upon orders of authorities below. 4 5. After considering rival submissions, I am of view addition is wholly unjustified. Assessing Officer has given list of amount of advances against M/s Raj Engineering Works, Mohali in sum of Rs. 12,77,002/- and against M/s Reinforced Earth India Pvt. Ltd., Hyderabad, Chennai and Navi Mumbai. total of these advances are approximately Rs. 39 lacs. PB-25 is list of debtors in balance sheet of assessee. In case of M/s Raj Engineering Works, Mohali, same amount is coming up from earlier years and payments have been received in subsequent years (PB-28) and in case of other party, payments have been received in subsequent year, copies of accounts are PB- 29 to 31. Therefore, assessee is justified in contending that these are trade debtors with whom assessee has business dealing. Therefore, these are not advances as is noted by authorities below. PB-17 is balance sheet of assessee showing availability of source of funds with assessee which is more than amounts outstanding against these parties. Hon'ble Punjab & Haryana High Court in case of Kapson Associates 381 ITR 204 held that, Assessee having sufficient interest free advances to cover interest free advances, nodis allowance under section 36(1)(iii) is permissible . In case of assessee, assessee has been able to prove that amounts outstanding are in respect of trade debtors with whom assessee has business dealing and in case of M/s Raj Engineering Works, similar amount is coming up from earlier year. Nothing is brought on record, if any addition 5 was made in earlier year. Sufficient funds are also available to assessee as is noted above, therefore, disallowance of interest is wholly unjustified. I, accordingly, set aside orders of authorities below and delete addition of Rs. 4,15,992/-. 6. In result, appeal of assessee is allowed. Order pronounced in Open Court. Sd/- (BHAVNESH SAINI) JUDICIAL MEMBER Dated : 15 t h September,2016. Poonam Copy to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT,DR Assistant Registrar, I TAT Chandigarh M/s Namdhari Industrial Traders Pvt. Ltd. v. ACIT, Circle-V, Ludhiana