Kapil Mehra,, Amritsar. vs Assessee

I.T.A. No.248/Asr/2014 Assessment year 2006-07

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IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR

[Coram:Pramod Kumar AM and A.D. Jain JM]

I.T.A. No.248/Asr/2014 Assessment year:2006-07

Sh. Kapil Mehra, ..........................Appellant Prop. M/s. Amritsar Woollen Mills, 1, Katra Sher Singh, Amritsar. [PAN:ADYPM 8733 A]

Vs.

Asstt. Commissioner of Income-tax, ............................Respondent Circle - 1, Amritsar

Appearances by:

Sudhir Mehra for the appellant Tarsem Lal for the respondent

Date of concluding the hearing: June 05, 2015 Date of pronouncing the order : June 09, 2015

Per Pramod Kumar:

1. By way of this appeal, the assessee has called into question correctness of order dated 20th February, 2014 passed by the CIT (A) in the matter of assessment under section 143(3) of the Income Tax Act 1961 for the assessment year 2006-07.

2. The only grievance of the assessee, as pressed before us, is that the CIT(A) has erred, in law and on facts, in sustaining the disallowance of Rs. 2,41,830/- in respect of interest on interest free advances to the sister concerns.

I.T.A. No.248/Asr/2014 Assessment year 2006-07

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3. To adjudicate on this issue, only a few facts need to be taken note of. During the scrutiny assessment proceedings, the Assessing Officer disallowed Rs. 2,41,830/-, out of interest expenses, by observing as follows:

"0.3 During the course of assessment proceedings it is noticed that the assessee has advanced interest free loan of Rs. 2996000/- to M/s Rohan Industries in which Smt. Minakshi Mehra is the proprietor whereas assesse is maintaining cash credit account with Bank of India on which interest to the bank @ 12% on the over draft availed by the assessee is being paid. Tota interest paid in the account to the bank is Rs. 345585/-. The assessee has advanced Rs. 2996000/- to his wife Smt. Meenakshi Mehra on which he has not charged any interest where he has paid interest in the cash credit account to the bank. The assessee was asked to explain as to why the proportionate interest should not be added from the interest free loan advanced to his wife who is proprietor of M/s Rohan Industries. The proportionate on this loan comes to Rs. 241830/-. However the assessee's counsel submitted that the assessee has transferred funds to the sister concern out of the capital and interest free advances taken from the relatives and as such there was no nexus between the interest bearing funds with the interest free loan given to the sister concern. 0.4 I have pursued the explanation tendered by the assessee's counsel which is not tenable as the assessee had also made similar advances to the sister concern in the Asstt. Year 2004-05 and the interest was disallowed by the A.O. which was confirmed by the Commissioner of Income tax (Appeal).

0.5 Following the decision of CIT(Appeal) and also that the interest free loan has been advanced out of the over draft limit from the bank on which the assessee has paid interest to the bank whereas he has not charged any interest from the sister concern of which his wife Smt. Meenakshi Mehra is the proprietor. Therefore, I find direct nexus between the loan raised from the bank and advance made to the sister concern without charging of any interest. Therefore, the interest of Rs. 241830/- out of the interest paid to the bank and claimed by the assessee at Rs. 341585/- is disallowed in respect of interest free loan advanced to the sister concern out of the over draft account maintained with the Bank of India. The same is to be added back to the income of the assessee."

I.T.A. No.248/Asr/2014 Assessment year 2006-07

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4. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.

5. Having heard the rival contentions, and having perused the material on record, we find that this issue is covered, in favour of the assessee, by this Tribunal's order dated 1st October, 2008 in assessee's own case for the assessment year 2004-05 wherein the Tribunal has observed as follows:

"8.1 We have heard both the parties and perused the material placed on record. The lower authorities have not brought on record any material to show that the assessee has advanced interest bearing funds to the sister concern and friends. It is mandatory on the part of the lower authorities to establish the nexus between the interest bearing funds and funds advanced to sister concern and friends. The assessee is having own funds and reserves and borrowings only when interest bearing funds were advanced to the sister concern or friends free of interest then only an addition can be made. In the absence of any material to suggest that the money was advanced to sister concern from interest bearing funds, we decline to sustain the addition. Actually, once it is established that there was nexus between the expenditure and purpose of business, which need not necessarily be the business of the assessee itself, the Revenue cannot justifiably claim to put itself in the arm chair of the businessman and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The Income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman could act. The authorities himself not looking at the matter from own viewpoint but that of a prudent businessmen. We have to see a transfer of funds to sister concern from the point view of commercial expediency and not from the point of view whether the amount was advanced for earning profit. It was held in the case of Munjal Sales Corp. Vs. C.I.T. Ludhiana, (2008) 168 Taxman 43(SC), wherein it has been held as under:

" Section 36(1)(iii), read with section 40(b) of the Income-tax Act, 1961- Interest on borrowed capital- assessment years 1993-94 to 1997-98- assessee's I.T.A. No.248/Asr/2014 Assessment year 2006-07

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claim for deduction u/s 36(1)(iii) was disallowed on ground that it had given interest-free advances to its sister concerns from interest-bearing loans taken from third parties-On appeal, Tribunal deleted the disallowance for the assessment years 1992-93 and 1993-94, holding that assessee had given such advance from its own funds, but upheld disallowances for the assessment years 1994-95 to 1996-97 - Whether once it was found that interest free loans granted in August/September, 1991 continued up to assessment year 1997-98; that said loans were advanced for business purpose; and that interest paid to third parties (partners) did not exceed 18/12 per cent per annum, assessee was entitled to deduction u/s 36(1)(iii), read with section 40

(b)(iv)-Held yes."

6. We see no reasons to take any other view of the matter than the view so taken by us in assessee's own case. Respectfully following the same, we uphold this grievance of the assessee and delete the impugned disallowance of Rs. 2,41,830/-. The assessee gets the relief accordingly.

7. In the result the appeal is allowed in the terms indicated above. Pronounced in the open court today th on 9 day of June, 2015.

Sd/- Sd/- A D Jain Pramod Kumar Judicial Member) (Accountant Member)

Dated: the 9 th day of June 2015 *aks/-

Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File

By order

Assistant Registrar Income Tax Appellate Tribunal Amritsar Bench, Amritsar