Dharam Pal Aggarwal v. ACIT, Circle-6 Ludhiana, Punjab
[Citation -2019-LL-0826-21]

Citation 2019-LL-0826-21
Appellant Name Dharam Pal Aggarwal
Respondent Name ACIT, Circle-6 Ludhiana, Punjab
Court ITAT-Chandigarh
Relevant Act Income-tax
Date of Order 26/08/2019
Assessment Year 2013-14
Judgment View Judgment
Keyword Tags proportionate interest expenditure • sustenance of disallowance • loans and advances • transfer of funds • claim of interest • expenses incurred • books of account • capital borrowed • interest income • interest paid • other sources • surplus funds • tax deduction • disallowance of expenses
Bot Summary: The assessee filed the reply to the A.O. as under: Your Honour asked the assessee to justify the claim of interest paid u/s 57 of the act, against interest income, a reply to the same has already been submitted during the course of assessment proceedings on 15.03.2016. The borrowing in which interest was paid and the advances given out of the interest bearing funds has been shown in his individual capacity. The possibility of borrowed funds used by the assessee in his proprietary concern carrying business was there and that part of the interest is otherwise allowable as expenses to the assessee under the head of income from business and profession. Accordingly, no disallowance of proportionate interest expenditure amounting Rs. 15,44,043/- under Section 57 of the Income-Tax Act, 1961 could be made, and, such interest expenditure is an allowable business expenditure. Accordingly, no disallowance of proportionate interest expenditure could be made, since interest paid on capital borrowed was used for the purposes of Business of the appellant, and, hence an allowable expenditure. In the present case the A.O. made the disallowance for the reasons that the assessee could not explain to his satisfaction that the interest paid on the loans was having any nexus with interest income earned under section 57 of the Act. On the contrary the claim of the assessee is that interest bearing funds were utilized for the business purposes and the interest paid in similar circumstances was allowed in the earlier year i.e 2012- 13 by the ITAT vide order dt.


IN INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCHES, SMC CHANDIGARH BEFORE SHRI. N.K.SAINI, VICE PRESIDENT .ITA No. 91/Chd/2019/ Assessment Year 2013-14 Shri Dharam Pal Aggarwal ACIT 59-K, Sarabha Nagar Circle-6 Ludhiana, Punjab Ludhiana, Punjab PAN NO: AAYPA9723E Appellant Respondent Assessee by Shri Ashwani Kumar, CA Revenue by Smt. Chandrakanta, Sr. DR Date of Hearing 16/07/2019 Date of Pronouncement 26/08/2019 Order PER N.K. SAINI, VICE PRESIDENT This is appeal by Assessee against order dt. 19/12/2018 of Ld. CIT(A)-3, Ludhiana. 2. In present appeal Assessee has raised following grounds: 1. That order passed u/s 250(6) of Income Tax Act, 1961 is against law and facts on file in as much as Ld. Commissioner of Income Tax (Appeals)-3, Ludhiana was not justified to arbitrarily uphold action of Ld. Assessing Officer in disallowing sum of Rs. 15,44,043/- out of interest account by resort to provisions of Section 57(iii). 2. That he was further not justified to arbitrarily uphold action of Ld. Assessing Officer in disallowing sum of Rs. 2,01,874/- out of car expenses, depreciation, telephone and travelling expenses on account of estimated personal use thereof in addition to disallowance already made by appellant at Rs. 1,74,371/-. 3. Vide Ground No. 1 grievance of assessee relates to confirmation of disallowance of Rs. 15,44,043/- out of interest account made by A.O. 4. Facts related to this issue in brief are that assessee filed his return of income on 19/09/2013 declaring income of Rs. 19,08,250/- which was processed under section 143(1) of Income Tax Act, 1961 (hereinafter referred to as Act ), later on case was selected for scrutiny. 5. During course of assessment proceedings A.O. noticed that Annexure-D(Loans and Advances) enclosed with balance sheet for year 2 under consideration revealed that assessee had given interest free advances to friends and family which were not for purpose of earning income from other sources as per requirement of Section 57(iii) of Act. He also observed that assessee had debited Rs. 5,66,645/- on account of interest on car loan in Profit & Loss Account and had claimed deduction on interest expenditure under section 57 to extent of Rs. 40,22,756/-. A.O. also observed that loans to friends and relative outstanding in balance sheet were at Rs. 5,00,000/- to M/s Dev Bhoomi Angora Spng & Allied Industries and Rs. 11,65,869/- to M/s Shakti Alpha Securities Pvt. Ltd. He also observed that following accounts were squared up loans in proprietorship firm during year: Sr. No. Particular Amount Squared up during year 1. Sh. S.P. Bansal Rs.60,00,000/- 2. Sh. Sanjay Bansal Rs.65,00,000/- 3. M/s Fab Texere India P. Ltd. Rs.44,60,000/- 4. Sh. Amit Aggarwal Rs.19,00,690/- 5.1 A.O. asked assessee to provide breakup of deduction claimed under section 57 and draw nexus between interest paid and received for purpose of allowability of expenses under section 57 of Act. assessee submitted that no fresh loans had been raised during year rather loans had been squared up for which interest was being paid in past. assessee filed reply to A.O. as under: "Your Honour asked assessee to justify claim of interest paid u/s 57 of act, against interest income, reply to same has already been submitted during course of assessment proceedings on 15.03.2016. Further, it is submitted that assessee is maintaining books of account both in respect of transaction of his proprietary concerns namely M/s Shakti International and also transactions in his individual capacity. borrowing in which interest was paid and advances given out of interest bearing funds has been shown in his individual capacity. assessee has duly received interest on these advances. However, during year there are certain transaction/ transfer of funds which were made between assessee and his proprietary concern. No interest has been charged on such funds transferred since taxability of income as well as allowance of expenses is under same hands i.e. in his individual capacity. Otherwise due to large amount of transactions, this exercise has not been carried out and claim of interest paid has been made under one hear i.e. u/s 57 of Act. As such, possibility of borrowed funds used by assessee in his proprietary concern carrying business was there and that part of interest is otherwise allowable as expenses to assessee under head of income from business and profession. 3 5.2. A.O. did not find merit in submissions of assessee and was of view that in absence of direct tax deduction under section 57(iii) interest could not be allowed and further there was no business purpose involved in loans and advances which had been squared up during year, same could not be allowed under section 36(1)(iii) of Act. A.O. worked out disallowance at Rs. 15,44,043, calculations had been given at page 6 to 8 of assessment order dt. 21/03/2016 for cost of repetition same are not reproduced herein. 6. Being aggrieved assessee carried matter to Ld. CIT(A) and submitted as under: This is in continuation to earlier submissions filed on 23.10.2018 against order under Section 143(3) of Income-Tax Act, 1961 in case of Sh. Dharam Pal Aggarwal (herein after referred to as "the appellant") for above captioned assessment year. At outset, it is also respectfully submitted that, from perusal of chart enclosed, amount of interest-free funds available with appellant on dates of advance more than theamount of interest-free advances, extract of which is tabulated as below: Date of Advance Interest-Free Funds [ Capital + Interest-Free Loans Given Interest-Free Loans Received) 12.04.2010 7,64,25,090.38 3,56,17,542.00 28.06.2010 7,64,36,758.00 4,33,20,542.00 13.08.2010 7,86,71,310.00 4,89,60,542.00 13.01.2011 8,13,62,852.00 5,85,62,632.00 14.02.2011 8,06,37,577.00 5,59,90,232.00 05.03.2013 4,71,35,845.00 1,10,83,450.00 From above, it could be deduced that amount of Interest-Free Loans advanced were effected out of appellant's capital and interest-free loans received. No borrowed funds (Interest-Bearing Funds) were used for making such advances. Accordingly, no disallowance of proportionate interest expenditure amounting Rs. 15,44,043/- under Section 57 (ill) of Income-Tax Act, 1961 could be made, and, such interest expenditure is allowable business expenditure. Without prejudice to submissions made above, if amount of interest-free funds advanced to Mr. S.P. Bansal and Mr. Sanjay Bansal were effected out of interest- bearing borrowed funds, then also no disallowance of proportionate interest expenditure could be effected, since such advances were made for purposes of business. appellant, being, indenting agent has to talk to various overseas constituents regarding supply of material, availability of new products and payment matters etc. appellant acts as indenting agent on behalf of M/s Bansal Spinning Mills Limited, of which Mr. S.P. Bansal and Mr. Sanjay Bansal are directors. Accordingly, appellant procured huge value of orders [ one Container costs Rs. 1 Crore] for M/s Bansal Spinning Mills Limited from Australia. In turn, appellant earned commission on such orders from M/s Bansal Spinning Mills Limited amounting Rs. 54,51,451/-. However, in order to safeguard interest of its client i.e. owing to quality specifications in products, appellant offered them security in form of advance to directors of M/s Bansal Spinning Mills Limited i.e. Mr. S.P. Bansal and Mr. Sanjay Bansal, so that M/s Bansal Spinning Mills Limited could securely make payments against import purchases, even if M/s Bansal Spinning Mills Limited encountered quality related issues. If such security was not given to M/s Bansal Spinning Mills Limited or any other client, then appellant would not able to do its Business successfully i.e. 4 to act as indenting agent on behalf of buyers desirous of purchasing overseas. No one would like to entrust upon appellant, if appellant ensures complete quality specifications in imported product by guaranteeing them in form of security (advance to Mr. S.P. Bansal and Mr. Sanjay Bansal, Directors of M/s Bansal Spinning Mills Limited). Thus, advance to Mr. S.P. Bansal and Mr. Sanjay Bansal, Directors of M/s Bansal Spinning Mills Limited was out of commercial/business expediency. Accordingly, no disallowance of proportionate interest expenditure could be made, since interest paid on capital borrowed was used for purposes of Business of appellant, and, hence allowable expenditure. Hope Your Honor would find above position in order, and, shall proceed to adjudicate appeal accordingly. 7. Ld. CIT(A) inclined to agree with contention of A.O. and held that assessee had failed in clear terms to distinguish between source of borrowed funds or own funds for purpose of claim under section 57 of Act. Accordingly disallowance of Rs. 15,44,043 made by A.O. under section 57 of Act was upheld. Reliance was placed on following case laws: Smt. Padmawati Jaikrishna Vs. Addl. CIT 166 ITR 176 (SC) Mrs. Arundhati Balkrishna Vs. CIT, Ahmedabad. 177 ITR 275 (SC) Vijay Laxmi Sugar Mills Ltd. Vs. CIT 191 ITR 647 (SC) Karnataka Forest Plantations Corpn. Ltd. 156 ITR 275 (Karnataka HC) CIT Vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) Smt. Virmati Ramakrishan Vs. CIT 131ITR 659 (Guj. HC) 8. Now assessee is in appeal. 9. Ld. Counsel for Assessee reiterated submissions made before authorities below and further submitted that similar interest paid on loans was disallowed by A.O. in preceding year i.e; 2012-13, however same was deleted when matter was taken before ITAT in ITA No. 315/Chd/2017, vide order dt. 22/04/2019 and that in this year assessee reduced interest from interest income earned under section 57 of Act. It was submitted that interest bearing loans were raised by Assessee for business purposes and had been used for purposes of earning income as per requirement of Section 57(iii) of Act. It was further submitted that interest free advances and loans were given out of surplus funds available with assessee therefore disallowance made by A.O. and sustained by Ld. CIT(A) was not justified. reliance was placed on judgment of Hon'ble Apex Court in case of CIT Vs. Hero Cycles P. Ltd. reported at 379 ITR 347 (SC) 5 10. In her rival submissions Ld. Sr. DR strongly supported orders of authorities below and reiterated observations made in their respective orders. 11. I have considered submissions of both parties and perused material available on record. In present case A.O. made disallowance for reasons that assessee could not explain to his satisfaction that interest paid on loans was having any nexus with interest income earned under section 57 of Act. On contrary claim of assessee is that interest bearing funds were utilized for business purposes and interest paid in similar circumstances was allowed in earlier year i.e 2012- 13 by ITAT vide order dt. 22/04/2019 in ITA No. 315/Chd/2017 in assessee s own case, copy of said order was furnished which is placed on record. However said order was not available either to A.O. or to Ld. CIT(A), I therefore deem it appropriate to set aside this limited issue to file of A.O. to be adjudicated by keeping in view observations given in aforesaid order, in accordance with law. 12. Vide Ground No. 2 grievance of assessee relates to sustenance of disallowance of Rs. 2,01,874/- out of car expenses, depreciation, telephone and travelling expenses when assessee himself had disallowed sum of Rs. 1,74,371/- out of above said expenses. 13. facts related to this issue in brief are that A.O. during course of assessment proceedings noticed that expenses incurred by assessee were mixed in nature, he disallowed 1/5th of expenses incurred by assessee on Telephone, Car Repair, Car Insurance, Car Expenses and Depreciation as per following details: Sr. No. Particulars Amount 1/5th addition 1 Telephone Expenses 267081 Rs. 53416/- 2 Car Repair 58258 Rs. 11652/- 3 Car Insurance 160916 Rs. 32183/- 4 Car expenses 205522 Rs. 41104/- 5 Depreciation 1189447 Rs. 237889 Grand Total 1881224 Rs. 376245/- Since assessee had himself disallowed sum of Rs. 1,74,371/-, difference of Rs. 2,01,874/- (Rs. 3,76,245.00 Rs. 1,74,371.00) was added to income of assessee. 6 14. Being aggrieved assessee carried matter to Ld. CIT(A) who sustained disallowance by observing that disallowance made @ 1/5th of aforesaid expenses was not excessive. 15. Now Assessee is in appeal. 16. Ld. Counsel for Assessee reiterated submissions made before authorities below and further submitted that disallowance made by A.O. and sustained by Ld. CIT(A) was highly excessive. 17. In her rival submissions Ld. Sr. DR strongly supported orders of authorities below. 18. I have considered submissions of both parties and perused material available on record. In my opinion in such type of cases use of Telephone and Car for personal purposes cannot be ruled out, however disallowance made by A.O. and sustained by Ld.CIT(A) @ 1/5th of expenses appears to be excessive, I therefore to meet ends of justice, deem it appropriate to restrict disallowance to 1/10th of expenses incurred by assessee on Telephone, Car and depreciation instead of 1/5th worked out by A.O. while restricting above disallowance A.O. should also give benefit of disallowance already made by assessee at Rs. 1,74,371/-. 19. In result, appeal of Assessee is partly allowed for statistical purposes. (Order pronounced in open Court on 26/08/2019 ) Sd/- (N.K. SAINI) VICE PRESIDENT AG Date: 26/08/2019 Copy of order forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, CHANDIGARH 6. Guard File Dharam Pal Aggarwal v. ACIT, Circle-6 Ludhiana, Punjab
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