No disallowance u/s 40A(3) for cash payment if the deal got cancelled subsequently

section 40A(3)

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the deal got cancelle

Cash paid towards purchase is disallow if it is in the nature of expenses. If the deal is cancelle, no disallowance u/s 40A(3) is warrant.

The same was perfect held by Jodhpur Tribunal as under:

YAMUNA PRASAD PESHWA vs. DEPUTY COMMISSIONER OF INCOME TAX

ITAT, ITAT, JODHPUR BENCH

R.K. Gupta, J.M. & N.L. Kalra, A.M.

ITA No. 416/Jd/2009; Asst. yr. 2006-07

9th December, 2011

(2011) 30 CCH 0628 JodhTrib

(2012) 143 TTJ 0615

Legislation Referred to

Section 36(1)(iii), 40A(3)

Case pertains to

Asst. Year 2006-07

Decision in favour of:

Assessee

Business expenditure—Disallowance under s. 40A(3)—Advance for purchase of land—Entire advance of Rs. 1 crore was receive back as deal for sale could not materialise—Disallowance under s. 40(A)(3) can be make where the assessee incurs any expenditure, whereas the assessee has not claim the expenditure in respect of purchase of land—Revenue has not collect any material from the concerne party to suggest that what is apparent is not real—Disallowance not justifie

Held:

The immovable properties were purchased by the firm and during the partnership, the partner cannot have exclusive right over the assets of the firm. The disallowance under s. 40A(3) can be made where the assessee incurs any expenditure. In the instant case, the assessee has not claimed the expenditure in respect of purchase of land. The Revenue has not collected any material to suggest that what is apparent is not real. The assessee has filed the copy of the cancellation of the sale agreement by the assessee with JM. The AO has not examined JM to show that what is apparent is not real. The assessee has given the reasons as to why the agreement was cancelled. Therefore the CIT(A) was not justified in confirming the addition of Rs. 19.84 lacs.

(Para 3.7)

Conclusion:

Where the entire advance was received back by assessee as the deal could not materialise, payment made for purchase of land cannot be disallowed under s. 40A(3).

In favour of:

Assessee

Business expenditure—Interest on borrowed capital—Interest-free loan to others—Since interest-free advances are less than the capital, no disallowance was called for—Asstt. CIT vs. Ram Kishan Verma (ITA No. 960/Jp/2010, dt. 8th July, 2011) followed

(Paras 4.6 & 4.7)

Conclusion:

Where the amount advanced without interest including investment in shares is less than the capital of the assessee, addition made on account of diversion of interest-bearing funds was not justified.

In favour of:

Assessee

Case referred to

Asstt. CIT vs. Hotel Harbour View (2010) 44 DTR (Coch)(Trib) 41

Kejriwal Iron Stores vs. CIT (1987) 62 CTR (Raj) 227 : (1988) 169 ITR 12 (Raj)

Sajowanlal Jaiswal vs. CIT 1976 CTR (Ori) 204 : (1976) 103 ITR 706 (Ori)

Counsel appeared:

Mahendra Gargieya, for the Assessee : G.R. Kokani, for the Revenue

ORDER

N.L. KALRA, A.M. :

ORDER

The assessee has filed an appeal against the order of the learned CIT(A), Jodhpur, dt. 12th May, 2009 for the asst. yr. 2006-07.

2.1 First ground of appeal is general in nature and will therefore, stand disposed of in view of the findings recorded against other grounds of appeal.

3.1 Second ground of assessee is that the learned CIT(A) has erred in confirming the disallowance under s. 40A(3) of IT Act amounting to Rs. 19,84,000.

3.2 Brief facts are that the assessee in the relevant year derived income from wholesale trading of cement, hiring of marriage hall, purchase and sale of plots and commission from J.K. Laxmi Cement through his proprietorship concern M/s Vinayak Traders. The AO noted that on perusal of the balance sheet of the assessee as on 31st March, 2006 and other details furnished by him from time to time it was seen that he had given advance of Rs. 1 crore to one Shri Jethmal S/o Rama Kishore in lieu of purchase of 33 Bigha 15 Biswa and 5 Bigha and 12 Biswa land at Khasra No. 60, 33 Barni Third Village Chopasni Tehsil and District Jodhpur on various dates during this year 2006.

However the deal could not be materialized and was cancelled on 30th April, 2006. As per assessee’s submission, the said amount of Rs. 1 crore towards purchase of land was only paid as advance and since the deal could not be materialized, the entire amount of Rs. 1 crore was received back in the next financial year (i.e. asst. yr. 2007-08). The AO gave the date-wise details of the payments such as advance in lieu of purchase of land (by way of bank draft dt. 21st April, 2006).

The assessee submitted detailed replies reproduced in the assessment order. The AO however, alleged that since the assessee was engaged in the business of purchase and sale of land, the payment made towards advance should be treated as payment made towards purchase of land. Moreover, the assessee never produced initial copy of agreement of purchase before her despite repeated reminders and thus, was emphasizing only a hypothetical situation of non-passing of title. He further alleged that on perusal of the agreement of cancellation of deal it was seen that the agreement of purchase of land would have stipulated certain conditions to be fulfilled in the wake of which the deal stood cancelled.

Thus, the assessee wrongly presented the accounts. Further, Rs. 1 crore was not a paltry amount to be just passed on as an advance. Moreover, subsequent to the cancellation of agreement the land was purchased by one Shri Praveen R/o Anand Bhawan, which is the residential address of the assessee also. The said land was repurchased by the assessee from Shri Praveen in the capacity of partner of M/s Vinayak Developers & Colonizers. This clears the fact that the assessee had to cancel the initial agreement due to some legal embargo under some other legislations of the State Government.

Thus, the cancellation agreement was nothing but a self-supporting statement. Hence, she concluded that the claim of the assessee that the payment made in cash was advance was, not tenable. The assessee was engaged in the business of purchase and sale of plots and thus, the payment was covered within the provision of s. 40A(3). Consequently, she disallowed 20 per cent of the expenditure made in cash in excess of Rs. 20,000 amounting to Rs. 19,84,000. The AO also took an alternative argument by relying on the cases of the Kejriwal Iron Stores vs. CIT (1987) 62 CTR (Raj) 227 : (1988) 169 ITR 12 (Raj) and Sajowanlal Jaiswal vs. CIT 1976 CTR (Ori) 204 : (1976) 103 ITR 706 (Ori) if the assessee’s argument of the same be treated as advance is accepted.

3.3 In the first appeal, the learned CIT(A) held as under :

“Also I have given careful thought to the elaborate submissions made by the appellant. I find that the appellant has failed to produce any evidence in support of assertions and claims made by him before the AO as well as during the appellate proceeding, more particularly as regards the claim that the possession of the land had not passed to him. Also I find that the AO has rightly pointed out that the claim.
Whether the possession of land had passed to the assessee and whether the transaction of purchase had materialized remains unverifiable in the absence of agreement of purchase because in absence of this agreement, the terms and conditions of the agreement as also the rights passed on and relinquished by the seller as well as conditions to be fulfilled prior to completion of transactions cannot be ascertained.

Obviously, the onus lies on the assessee to establish with evidence that the transaction ultimately did not materialize despite payment having been made, as such claim has been made by him and it is settled law that the claimant has to establish the truthfulness of its claim. In the instant case, it is apparent that while the assessee is vehement in claiming that the transaction of purchase did not materialize but has failed to produce any evidence whatsoever in support of such claim.

The rule of preponderance of probability in commercial transaction establishes that the assessee having made the full payment (for it is never the claim of the assessee that full consideration had not passed on) over a prolonged period starting from 30th July, 2005 to 14th Feb., 2006, the transaction of purchase had materialized on payment of full consideration of the price of the land.

This inference can only be negatived by any evidence to the contrary which the assessee has fail to produce despite requirement by the AO. Even if for argument sake, it is accepted that the payment made by the assessee was an advance towards purchase of stock-in-trade, yet, it tantamount to expenditure within the meaning of s. 40A(3) as has been hold Hon’ble High Court of Gujarat in the case of Nathalal Jethalal vs. CIT (1992) 106 CTR (Guj) 270 : (1993) 199 ITR 757 (Guj) in which it has been hold that the contention of the assessee.

That the aforesaid payment was made to the aforesaid two parties towards advance payment for purchase of stock-in-trade stands directly answered by the aforesaid observation of the Supreme Court. I therefore, hold that the conclusion of the AO that the assessee had purchased the land by paying the sum of Rs. 1 crore in cash to Shri Jethmal is well founded on the basis of correct appreciation of relevant facts and evidences.

As it has been held that the payment has been made for purchase of land being admittedly stock-in-trade of the assessee, the payment having been made in cash, the payment of Rs. 1 crore is covered by the provisions of s. 40A(3). Thus, the AO has rightly made addition of the sum of Rs. 19,84,000 which is confirmed.

As regards the appellant’s contention that neither any expenses on this transaction have been claimed in the P&L a/c nor any transaction related to the trading has been affected and it has not been shown in the trading account because no purchase has been made, it is well-settled that the value of stock-in-trade has to be taken into account while determining the gross profit under s. 28 on the principles of commercial accounting, as has been held by the Hon’ble apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC).

As it has been held as discussed above that the transaction entered into by the assessee by making payment of Rs. 1 crore is nothing but purchase of land being stock-in-trade, the assessee by not showing the said amount in its P&L a/c has apparently violated the principles of commercial accounting, as has been settled by the Hon’ble apex Court in the case of Attar Singh Gurmukh Singh (supra).

In the light of the decision of the Hon’ble apex Court, it has to be held that the AO has rightly drawn the P&L a/c as mentioned in the assessment order from which it is clear that the expenditure on purchase of land has been debited in the accounts of the assessee. Under these circumstances, the payment made by the assessee is covered by the provisions of s. 40A(3).

The appellant has also make an elaborate list of judicial decisions numbering to 54 such orders on which reliance has been place but beyond listing the citations of such judgments, no word has been uttere to explain how these judgments go to advance the cause of the assessee.

I, therefore, hold that the payment of Rs. 1 crore made by the assessee is covered by the provisions of s. 40A(3) of the IT Act 1961.

In view of the above discussion, the appeal on this ground is not allowed.”

3.4 Before us, the learned Authorised Representative has filed the following submissions :

“2.1 The only dispute appears to be on the facts whether the assessee paid Rs. 1 crore in consideration of the purchase of the subjected property or it was a mere advance. In other words whether it was a case of purchase/sale of immovable property or cancellation of transaction ? The authorities below however, presumed the former and therefore invoked s. 40A(3) on the said payment.

It is not denied by any of the authorities below that what the appellant paid was only an advance to purchase the land from Shri Jethmal, the seller however, it is an established fact on record that no sale could finally take place in absence of the possession of the land and registration thereof in favour of the assessee under the provisions of Transfer of Property Act, 1882 read with Registration Act, 1908, without which the assessee could not have been a legal owner and therefore, there was no purchase made as such.

Also it is not shown that under the provisions of Sales of Goods Act, the transaction of purchase by the appellant and the sales by the seller Shri Jethmal stood completed. Therefore, nobody could have legally or otherwise said that the subjected amount was paid towards the purchase.

In any case notably, by referring to the cancellation agreement (paper book 68), the AO also agreed that the payment of subjected advance was towards purchase of land, which could not materialize in para 1.2, p. 2.

2.2 This contention was rejected simply on the ground that the onus was on the assessee to prove with evidence which it failed by not filing agreement to sale. Both the authorities however, strangely failed to judiciously appreciate that after the cancellation of the earlier transaction between the appellant and Shri Jethmal, the same very land was ultimately sold to a third buyer Shri Praveen S/o Shri Oma Ram through a registered sale deed (paper book 88-94) and Shri Praveen again sold to M/s Vinayak Developers & Colonizers, a partnership firm (paper book 95-99).

The AO rejected this fact on mere suspicion that the new buyer M/s Vinayak Developers & Colonizers was a firm in which the assessee was a partner but ignoring the legal implication thereof as also ignoring the very fact that under the IT Act itself a firm is an absolutely different person under s. 2(31) of the Act. The registered agreements (paper book 88-91) clearly mentioned in para 4 that possession of the land has been handed over to the new buyer. In para 5 (paper book 91) and in para 7 (paper book 98) it is made clear that the said land was not sold to any other person. The AO and learned CIT(A) ignored this aspect.

2.3.1 Secondly, it is not denied that the entire transaction was cancelled vide a separate cancellation agreement dt. 29th April, 2006 (paper book 68) which is validly executed agreement and was binding upon the parties. The existence, validity and the genuineness of the said cancellation agreement have not been denied nor have the legal impligations flowing therefor, been judiciously considered. As per the provisions of Transfer of Property Act, 1882, the law is established in as much as under s. 53A.

The buyer assessee neither performed nor was willing to perform his part of the contract therefore, it was neither a completed contract for sale nor even a case of part performance. On the contrary as per provision of s. 53A, the right of a transferee for a full consideration (here Shri Praveen) having no notice of the earlier contract/part performance, shall not be affected.

2.3.2 The reason behind the cancellation of the agreement was explained before the AO that :

‘..since the land belongs to the schedule caste candidate and the registration as per the law cannot be make in the name of person other than the member of schedule castes/tribe, therefore, the agreement has not materialize because as it has come to the notice of the assessee after the agreement and obtaining the legal advice that the agreement is illegal and the money cannot be recovere back. Therefore, the agreement was cancelle and the copy of the cancellation of the agreement has been enclose with the submission make herein before.’

..There is no wrong depiction of facts by the assessee, therefore, the proceedings of the notice may kindly be dropped looking at the following legal position :

(i) That the agreement with a person of a scheduled cases or tribe cannot be enforceable if the agreement is made with a person other than a person belonging to that scheduled case/scheduled tribe.

(ii) For performance of the contract it is essential condition as regards the purchases of the goods or properties.

Performance of a contract takes place when the parties to contract fulfil their obligation arising from the contract within the time and manner prescribed and in the case of immovable property the agreement of the purchase is complete when the title is transferred to the purchases and that is only after the registration of the document in the Registration Department.

Since the registration could not take place because it has come to the notice of the assessee that the person Shri Jeth Mal Binawara is by caste Dhobhi and belongs to scheduled cast and the agreement cannot be performed being forbidden by law, therefore, the amount of Rs. 1 crore has been received back through demand draft in the subsequent financial year.

(iii) There are three stages in the performance of a contract of sale of goods by the seller viz.

(a) Transfer of property in the goods.

(b) Transfer of possession of the goods (i.e. delivery), and

(c) The passing of the risk.

Transfer of property in goods from the sale to the buyer is the main object of a contract of sale, the term ‘property in goods’ must be distinguishe from possession of the goods; ‘property in goods’ means the ownership of the goods whereas possession of the goods refers to the custody or control of the goods.

Since the possession of the goods has not been transferre, title of the goods has also not been transferre and the deliver has also not make either in part or in full, therefore, the same payment make cannot be treate as purchases.

2.3.3 There was one more reason that the buyer did not find any entry from Khasra No. 59 hence also, cancelled the deal by mutual consent. However, there does not appear any rebuttal of these reasons.

2.4 Even assuming the appellant failed to file agreement to sale, the contents of the cancellation agreement duly signed by both the earlier parties fully evidenced the fact of making payment of advance on 14th Feb., 2006 which could not materialize.

2.4.1 It is wrong to say that the onus was upon the assessee to prove that the transaction could not materialize despite payment, in as much as s. 40A(3) essentially requires the AO to establish that the assessee really incurred an expenditure. The incurrence of expenditure in this case, could happen only when the subjected property was purchased i.e. got transferred in the name of the buyer. The assessee made no claim by debiting any such expenditure in its audited trading and P&L a/cs (paper book 59-60) hence, there was no question of making disallowance now.

The AO however totally failed to bring any evidence to prove that the asset was transferred in the name of the assessee buyer. In Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC) relied upon by AO the incurrence of expenditure has been considered with reference to completed transaction only. Hence, the same do not help the assessee. Hence, the onus was upon the AO.

What is apparent is real—Onus not discharged—It is a settled law that what is apparent is real unless controverted. The onus lay upon the person, who alleges that what is apparent is not real. Kindly refer CIT vs. Daulatram Rawatmull 1972 CTR (SC) 411 : (1973) 87 ITR 349 (SC), followed recently in CIT vs. Bedi & Co. (P) Ltd. (1998) 145 CTR (SC) 309 : (1998) 230 ITR 580 (SC). In the present case, what was apparent was that the advance paid was receive back, transaction cancelle hence there was no purchase. The property stand sale to third parties.

2.4.2 It cannot be denied that the complete name and address of the seller Shri Jethmal (paper book 88) were mentioned on the registered sale deed. Yet however, the AO chose not to make any enquiry from him. Although Shri Jethmal expired however, even after his death, required inquiry could be made from the successor/s.

2.4.3 Also there were valid reasons behind inability of the assessee in producing the initial agreement dt. 14th Feb., 2006 which was that at the time of receipt of the refund of the advance, the seller had taken back the original agreement (and understood to have been destroyed) which was his legal right as the transaction stood cancelled. It is as per human probability that based on the original agreement the buyer could have misused the same. Unfortunately thereafter, Shri Jethmal, the seller has also expired.

2.4.4 The authorities below have laid unwarranted stress on the non-availability of the initial agreement to sale which was not possible to be produced. Still however, the subsequent agreements, other evidence, facts and circumstances are sufficient to support the assessee’s contention.

2.4.5 No suit of specific performance is reported from the seller against the assessee. Absence of agreement to sale (purchase) is in favour of assessee.

2.5 The allegation of the CIT(A) that the rule of preponderance of probability in commercial transaction establishes that the assessee having made the full payment over a prolonged period starting from 30th July, 2005 to 14th Feb., 2006, the transaction of purchase had materialized on payment of full consideration of the price of the land, is not correct.

The learne CIT(A) has clearly presume the facts which are completely wrong in as much as the said land was sale for total consideration of Rs. 5,33,20,000 to Shri Praveen therefore, to presume that only Rs. 1 crore was the full sale consideration was against facts and without evidence. This clearly proves that this was only an advance and it was not the case of the AO also that the entire sum was paid but still transaction did not materialize.

2.5.1 At the same time however the learned CIT(A) ignored the vital facts that the Pravin S/o Shri Oma Ram, who purchased the land from Shri Jethmal for Rs. 5.33 crores on 21st May, 2007, further sold the same to M/s Vinayak Developers & Colonizers for Rs. 6.68 crores (paper book 97), with a substantial difference of Rs. 1.35 crore. Shri Praveen Meghwal is a scheduled caste and not related to the assessee remotely who is a Brahmin.

The Department has initiated some enquiry in his case which is stated to be pending. However, it may be clarified that except 2-3 lacs out of Rs. 1.35 crore was nothing but the cost of development incurred by Shri Praveen.

Similarly, the Department has initiated some enquiry in the case of Shri Jethmal’ case which is stated to be pending.

2.5.2 The admitted fact of the refund of the advance is also a case of human probability supporting the contention of the assessee.

3.1 Colorable device—McDowell not universally applicable—The learned AO has also applied McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), however, much water has flown thereafter and it has been repeatedly held by the Courts that every attempt of reduction of tax liability can’t be said to be an attempt of tax evasion and hence, cannot be covered by McDowell & Co. Ltd. (supra).

Kindly refer M.V. Valliappan & Ors. vs. CIT (1988) 67 CTR (Mad) 289 : (1988) 170 ITR 238 (Mad), CWT vs. Arvind Narottam (Indl.) (1988) 72 CTR (SC) 94 : (1988) 173 ITR 479 (SC) and Banyan & Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj). Therefore, the learned AO should not have confined itself to McDowell (supra). Otherwise also the facts of this case are not such, to have such an allegation.

The AO at p. 13 has referred to a decision in the case of Kejriwal Iron Stores vs. CIT (1987) 62 CTR (Raj) 227 : (1988) 169 ITR 12 (Raj) however, the same is distinguishable in as much as there the decision was given in the context of the admitted fact of completed transactions of the purchases and sales between the parties. The advance paid by the buyer assessee was adjusted towards the final sale consideration, whereas in this case, admittedly transactions could not materialize and the advance paid was refunded back.

3.2 The allegation of the AO (at p. 9) that ultimately the assessee purchased the subjected land, which is a misconception of law in as much as admittedly the land was firstly, sold to Shri Praveen and thereafter, he sold to M/s Vinayak Developers & Colonizers, which is a partnership firm consisting of two partners and is an independent entity.

Further Shri Praveen did not sale the land as it is but divided the same into various plots (paper book 95-98). The said firm is a separate assessee and has shown this land in its balance sheet as on 31st March, 2008. Also kindly refer para 2.2 of this working sheet. Moreover, Praveen permanently resided in a Village Miyasani, Post Office Banar, Tehsil Lunee, District Jodhpur.”

3.5 The learned Authorised Representative has relied upon the decision of Tribunal, Cochin Bench in the case of Asstt. CIT vs. Hotel Harbour View (2010) 44 DTR (Coch)(Trib) 41.

3.6 On the other hand, the learned Departmental Representative supported the orders of the authorities below.

3.7 We have heard both the parties. The Revenue authority has mentioned that assessee has not produced the copy of the agreement so as to enable the Revenue authority to verify the contentions of the assessee. The immovable properties were purchase by the firm and during the partnership, the partner cannot have exclusive right over the assets of the firm. The disallowance under s. 40A(3) can make where the assessee incurs any expenditure. In the instant case, the assessee has not claim the expenditure in respect of purchase of land.

The Revenue has not collected any material to suggest that what is apparent is not real. The assessee has filed the copy of the cancellation of the sale agreement by the assessee with Shri Jeth Mal. The AO has not examined Shri Jeth Mal to show that what is apparent is not real. The assessee has given the reasons as to why the agreement was cancelled. We therefore, feel that the learned CIT(A) was not justified in confirming the addition of Rs. 19.84 lacs.

4.1 The third ground of assessee is that the learned CIT(A) has erred in confirming the addition on account of diversion of interest-bearing funds amounting to Rs. 2,43,177.

4.2 The AO in his order has notice that the assessee has not charge interest on advances/loans to third persons. The amounts advance are to the extent of Rs. 48,68,657. On such advances, the interest would have been to the extent of Rs. 2,43,177. The AO accordingly held that interest expenditure to the tune of Rs. 2,43,177 is held to be expend for non-business purpose and disallow the same.

4.3 The learned CIT(A) has held as under :

“I find that the appellant has make general submissions but has fail to produce any material and evidence to establish that the sums/loans were advance for business purpose and were out of its fund. The fact that the assessee had take substantial amount of loan on which interest was being pay also remains dispute. In this set of facts and circumstances, the ratio of the decision in the case of CIT vs. Abhishek Industries Ltd. (2006) 205 CTR (P&H) 304 : (2006) 286 ITR 1 (P&H) squarely applies. The action of the AO is therefore, upheld. The disallowance of Rs. 2,43,177 is confirm. The appeal on this ground fails and is not allowed.”

4.4 Before us, the learned Authorised Representative has submitted as under :

“1. No nexus establishe : The law is settle that in such cases it is always for the AO to have establish a physical nexus between the interest-bear funds and the interest-free advances so made, which condition has not been fulfill in the present case. On the contrary the subject interest-free advances were out of the interest-free funds as evidence from the audit balance sheet (paper book 61) wherein the assessee was having capital of Rs. 56,23,976 apart from interest-free advances as against the interest-free advances of Rs. 48.69 lacs only.

Unless this is done no charging of notional income is permissible nor any disallowance could have at all been made. Kindly refer CIT vs. Hotel Savera (1998) 148 CTR (Mad) 585 : (1999) 239 ITR 795 (Mad), Shree Digvijay Cement Co. Ltd. vs. CIT (1982) 26 CTR (Guj) 184 : (1982) 138 ITR 45 (Guj), Ganesh Chawala vs. ITO (2008) 9 DTR (Jp)(Trib) 162, Gujarat Narmada Valley Fertilizers Co. Ltd. vs. Dy. CIT (2001) 73 TTJ (Ahd) 787 and CIT vs. Tin Box Co. (2003) 182 CTR (Del) 171 : (2003) 260 ITR 637 (Del).

Kindly refer CIT vs. Radico Khaitan Ltd. (2005) 194 CTR (All) 451 : (2005) 274 ITR 354 (All) which supports on this aspect. Therefore, the decision in CIT vs. Abhishek Industries Ltd. (2006) 205 CTR (P&H) 304 : (2006) 286 ITR 1 (P&H) is clearly distinguishable on facts as elaborated in the w/s CIT(A).

  1. Covered matter : This issue is directly by a recent Tribunal order in Ram Kishan Verma in ITA No. 960/Jp/2010 for asst. yr. 2005-06 vide order dt. 8th July, 2011 holding that :

‘10.4 We have heard both the parties. The assessee is have sufficient capital. If there are mix funds then non-interest-bear funds are to be consider as utilize for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally receive at the begin and surpluse are use for make fix deposit as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans use the AO could not have disallow the interest.

There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is place on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon’ble Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. (2011) 51 DTR (Del) 98 : 2010-TIOL-51-HC-Del. There is no provision in the Act which may compel an assessee to earn income.

11.1 The assessee in the cross-objection is aggrieved against confirming of addition.

11.2 After considering the facts as above, we feel that the AO was not justified in making any disallowance. Hence, disallowance is delete.’

  1. Past history/later years : Notably in the past also the appellant has been making such claim and the same stood allowed. The facts and circumstances being same, there appears no special reason to take a departure. Similarly in the later years also the appellant continues making payments but no disallowances is reporte. Kindly refer CIT vs. Sridev Enterprises (1991) 97 CTR (Kar) 80 : (1991) 192 ITR 165 (Kar).”

4.5 On the other hand, the learn Departmental Represent support the order of the authorit below.

4.6 We have heard both the parties. During the course of proceedings before us, the learned Authoris Represent has submit that the AO has notionally charged the interest and included in the income. However, it is notice from the order of the AO that he has disallowed the expenditure debited under the head interest. The balance sheet is available at p. 61 of the paper book file by the learn Authoris Represent. The capital account at the end of the previous year is to the extent of Rs. 56,23,976.

The interest-bearing advances under consideration are to the extent of Rs. 48,68,657. There are investments in shares to the extent of Rs. 6,49,450. Hence, the amount advanced without interest and including investment in shares is less than the capital of the assessee. Therefore, following the decision of Tribunal Jaipur Bench in the case of Asstt. CIT vs. Ram Kishan Verma (ITA No. 960/Jp/2010, dt. 8th July, 2011), we hold that the learned CIT(A) was not justified in confirming the addition of Rs. 2,43,177. It will be useful to reproduce para 10.4 from the order of the Tribunal in the case of Asstt. CIT vs. Ram Kishan Verma (supra) :

“10.4 We have heard both the parties. The assessee is having sufficient capital. If there are mix funds then non-interest-bearing funds are to be consider as utilize for non-interest-bear advance. It is the assessee who has to take a business decision. Fees is generally receive at the beginning and surplus are use for make fix deposit as receipt are in advance while expense are spread out throughout the year.

Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans use the AO could not have disallow the interest. There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is place on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon’ble Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. (2011) 51 DTR (Del) 98 : 2010-TIOL-51-HC-Del. There is no provision in the Act which may compel an assessee to earn income.”

4.7 In view of the facts and circumstances of the case, this ground of appeal of the assessee is allow.

5.1 During the course of hearing, the learned Authoris Representative of the assessee has not press the ground No. 5. Hence, the same is dismiss being not press.

6.1 The ground No. 6 of the assessee is pertaining to charging of interest under ss. 234B, 234C and 234D which is mandatory and consequential in nature.

  1. In the result, the appeal of the assessee is allow

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