Friday, July 19, 2013

[aaykarbhavan] Sum incurred on interior decoration in a leasehold premises for a newly set-up business is a capital exp.



IT: Expenditure incurred for interior decoration on leased premises, for purpose of setting up a new business is capital in nature
IT: Charity given for non-business purposes is not allowable as business expenditure
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[2013] 35 taxmann.com 181 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
P.A. Jose
v.
Assistant Commissioner of Income-tax, Circle-1, Kottayam*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NOS. 233 & 282 (COCH.) OF 2010
[ASSESSMENT YEAR 2007-08]
JUNE  7, 2013 
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Repairs] - Assessment year 2007-08 - Whether expenditure incurred for interior decoration and other works on leased premises for first time for purpose of setting up of business, is not in course of profit earning process, but is in course of establishing a new capital asset/profit earning apparatus - Held, yes - Whether, therefore, expenditure incurred by assessee for interior decoration of premises taken on lease, for purpose of setting up a new showroom was capital in nature - Held, yes [Paras 7 & 8] [In favour of revenue]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Contributions] - Assessment year 2007-08 - Whether contribution made to temples, churches and educational institutions, in nature of charity, not incurred for business purposes or for welfare of employees, is not allowable as business expenditure - Held, yes [Para 16] [In favour of revenue]
FACTS-I
 
 The assessee took a new premises on lease and incurred expenditure for setting up a new showroom. The lease period was for 15 years and interior work was carried out on the said building. The assessee claimed expenditure incurred on interior work, repair and replacement as revenue expenditure.
 However, the revenue disallowed the claim on ground that the expenditure incurred by the assessee was not for any business activity or for the purpose of earning profit, but was for the purpose of expanding the profit making apparatus which in turn would expand the capital base of the assessee. Therefore, held that the expenditure was to be treated as capital in nature.
 On the other hand assessee contended that the building belonged to the third party and it had no right of ownership over the premises. Also, the interior work carried out in the building belonging to third person could not be treated as capital expenditure.
HELD-I
 
 It is not in dispute that the assessee took the premises on lease. The lease period is 15 years with an option to extend the same for further period. The intention of the assessee in taking the premises on lease is to set up a new showroom in the lease premises. After taking the premises on lease, the assessee incurred the expenditure in interior decoration like false ceiling, racks, change of flooring, etc. The question arises for consideration is when the assessee incurred the expenditure on the leased premises for the first time to set up the showroom, whether it has to be treated as capital expenditure or revenue expenditure. It is well settled principles of law that any expenditure incurred in the course of business for the purpose of earning profit has to be treated as revenue expenditure. However, if the expenditure was incurred for the purpose of acquisition of a capital asset, the same has to be treated as capital in nature. [Para 7]
 It is now to examine whether the expenditure incurred by the assessee for the purpose of establishing a new showroom is in the course of earning profit/ in the course of business or it is an expenditure for establishment of a capital asset. Setting up of a new showroom is an expansion of the existing business. It increases the capital base of the assessee for doing the business. In other words, the establishment of a new showroom expands the profit making apparatus of the assessee. As a result of this expenditure, a new showroom which is a capital asset came into existence. Though the building belongs to third party, the assessee had the benefit of doing business in the new showroom by using the same as capital asset. It is to be remembered that lease is also a transaction in the immovable property. Though the entire title on the property is not transferred during the course of lease, an interest in the property was transferred in favour of the assessee during the lease period. The assessee would be in physical possession of the property on payment of the agreed amount as lease rent. Therefore, it is opined that the expenditure incurred by the assessee resulted in expansion of the capital base of the assessee. In other words, it resulted in expansion of the profit making apparatus. Therefore, the expenditure incurred by the assessee for interior decoration and other works on the leased premises for the first time for the purpose of setting up of business is not in the course of profit earning process, but in the course of establishing a new capital asset/profit earning apparatus. Therefore, the expenditure incurred by the assessee has to be treated as capital in nature. [Para 8]
CASE REVIEW-I
 
VeeraRaghavan v. CIT [1967] 64 ITR 63 (Ker.) (para 11) followed.
CASES REFERRED TO
 
CIT v. Madras Auto Service (P.) Ltd. [1998] 223 ITR 468/99 Taxman 575 (SC) (para 4), CIT v. Premier Cotton Spg. Mills Ltd. [1997] 223 ITR 440/93 Taxman 702 (Ker.) (para 5), Dy. CIT v. Chaya Lakshmi Creations (P.) Ltd. [2010] 40 SOT 513 (Hyd.) (para 5), Senapathy Synams Insulations (P.) Ltd. v. CIT [2001] 248 ITR 656/117 Taxman 216 (Kar.) (para 6) Modi Spinning & Weaving Mills. Co. Ltd. v. CIT [1993] 200 ITR 544 (Delhi) (para 6), Delhi Cloth & General Mills. Co. Ltd. v. Addl. CIT [1986] 160 ITR 857/26 Taxman 281 (Delhi) (para 6), M.N. Dastur & Co. Ltd. v. Dy. CIT [1997] 62 ITD 113 (Bang.) (para 6), ITO v. Pritam Juice [2010] 124 ITD 237 (Mum.) (para 6), Empire Jute Co. Ltd. v. CIT[1980] 124 ITR 1/[1980] 3 Taxman 69 (SC) (para 9), Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL) (para 10),Veeraraghavan v. CIT [1967] 64 ITR 63 (Ker.) (para 11), CIT v. V.I., Baby & Co. [2002] 254 ITR 248/123 Taman 894 (Ker.) (para 18), CIT v.South India Corpn. Agencies Ltd. [2007] 290 ITR 217/164 Taxman 249 (Mad.) (para 19), CIT v. Sambandham Spinning Mills Ltd. [2008] 298 ITR 306 (Mad.) (para 19), CIT v. India Carbon Ltd. [2001] 247 ITR 510/118 Taxman 207 (Gau.) (para 19) and S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) (para 19).
R. Krishna Iyer for the Appellant. Smt. Susan George Varghese for the Respondent.
ORDER
 
N.R.S. Ganesan, Judicial Member - The assessee and the revenue filed the appeals against the order of the CIT(A)-IV, Kochi dated 18-02-2010 for the assessment year 2007-08. Therefore, we heard both the appeals together and dispose of the same by this common order.
2. Let us first take the assessee's appeal in ITA No.233/Coch/2010.
3. The first issue arises for consideration in the assessee's appeal is disallowance of Rs. 15,04,000.
4. Shri R Krishna Iyer, the ld. representative for the assessee submitted that the assessee has taken on lease new premises and incurred the expenditure for setting up a new branch. According to the ld. representative, the lease period is 15 years. The interior work was carried out on the building. According to the ld. representative, the building belongs to third party and the assessee has no right of ownership over the premises. The interior work carried out by the assessee in a building belonging to third person cannot be treated as capital expenditure. According to the ld. representative, the expenditure incurred by the assessee is required for the business of the assessee. The ld. representative further submitted that the interior work carried out by the assessee is part and parcel of the structure of the building which belongs to somebody else. The ld. representative further submitted that the interior work cannot be detached from the super structure and it has no value. The ld. representative placed his reliance on the judgment of the Apex Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/99 Taxman 575. Referring to Explanation 1 to section 32(1) of the Income-tax Act, 1961, the ld. representative submitted that "current repairs" shall not include any expenditure in the nature of capital.
5. The ld. representative for the assessee further submitted that the interior work, repair, replacement in the showroom needs to be carried out from time to time. The work carried out by the assessee will last only for 2 to 3 years. Referring to the judgment of the Kerala High Court in CIT v. Premier Cotton Spg. Mills Ltd. [1997] 223 ITR 440/93 Taxman 702, the ld. representative submitted that unless an asset was brought into existence by incurring the expenditure it cannot be said that the assessee acquired an enduring advantage for the business. The ld. representative has also placed reliance on the decision of the Hyderabad Bench of this Tribunal in the case of Dy. CIT v. Chaya Lakshmi Creations (P.) Ltd. [2010] 40 SOT 513.
6. On the contrary, Smt. Susan George Varghese, the ld. DR submitted that admittedly, the assessee took the premises on lease and incurred expenditure for making it fit for establishing a new showroom. This expenditure, according to the ld. DR, expands the capital base of the assessee. The ld. DR further pointed out that this is not an expenditure incurred in the course of business activity for the purpose of earning profit, but for the purpose of expanding the profit making apparatus which will, in turn, expand the capital base of the assessee. Therefore, according to the ld. DR, the expenditure incurred by the assessee is for the purpose of creating a capital asset by establishing a new showroom. Once the expenditure was incurred for the first time to establish and set up a showroom, according to the ld. DR, the expenditure has to be treated as capital in nature. The ld. DR placed her reliance on the judgment of the Karnataka High Court in the case of Senapathy Synams Insulations (P.) Ltd. v. CIT [2001] 248 ITR 656/117 Taxman 216. The ld. DR has also placed reliance on the judgment of the Delhi High Court in Modi Spinning & Weaving Mills. Co. Ltd. v. CIT [1993] 200 ITR 544and Delhi Cloth & General Mills. Co. Ltd. v. Addl. CIT [1986] 160 ITR 857/26 Taxman 281 (Delhi). The ld. DR further relied upon the decision of the Bangalore Bench of this Tribunal in M.N. Dastur & Co. Ltd. v. Dy. CIT [1997] 62 ITD 113 and Mumbai Bench of this Tribunal in the case of ITOv. Pritam Juice [2010] 124 ITD 237.
7. We have considered the rival submissions on either side and also perused the material available on record. It is not in dispute that the assessee took the premises on lease. The lease period is 15 years with an option to extend the same for further period. The intention of the assessee in taking the premises on lease is to set up a new showroom in the lease premises. After taking the premises on lease, the assessee incurred the expenditure in interior decoration like false ceiling, racks, change of flooring, etc. The question arises for consideration is when the assessee incurred the expenditure on the leased premises for the first time to set up the showroom, whether it has to be treated as capital expenditure or revenue expenditure? It is well settled principles of law that any expenditure incurred in the course of business for the purpose of earning profit has to be treated as revenue expenditure. However, if the expenditure was incurred for the purpose of acquisition of a capital asset, the same has to be treated as capital in nature.
8. Let us now examine whether the expenditure incurred by the assessee for the purpose of establishing a new showroom is in the course of earning profit / in the course of business or it is an expenditure for establishment of a capital asset. Setting up of a new showroom is an expansion of the existing business. It increases the capital base of the assessee for doing the business. In other words, the establishment of a new showroom expands the profit making apparatus of the assessee. As a result of this expenditure, a new showroom which is a capital asset came into existence. Though the building belongs to third party, the assessee had the benefit of doing business in the new showroom by using the same as capital asset. It is to be remembered that lease is also a transaction in the immovable property. Though the entire title on the property is not transferred during the course of lease, an interest in the property was transferred in favour of the assessee during the lease period. The assessee would be in physical possession of the property on payment of the agreed amount as lease rent. Therefore, this Tribunal is of the considered opinion that the expenditure incurred by the assessee resulted in expansion of the capital base of the assessee. In other words, it resulted in expansion of the profit making apparatus. Therefore, the expenditure incurred by the assessee for interior decoration and other works on the leased premises for the first time for the purpose of setting up of business is not in the course of profit earning process, but in the course of establishing a new capital asset / profit earning apparatus. Therefore, the expenditure incurred by the assessee has to be treated as capital in nature.
9. We have carefully gone through the decision of the Hyderabad Bench of this Tribunal in the case of Chaya Lakshmi Creations (P.) Ltd. (supra). The assessee has taken five cinema theatres in a theatre complex on lease from Satyam Sayi Corporation for exhibition of feature films. After taking the premises on lease, the assessee carried on the business of exhibition of films. During the lease period the assessee incurred expenditure on repair of theatre complex such as change of floor tiles, false ceiling, landscaping, chairs, earth filling works, under ground sump repairing, drainage and cable works, wall paper fixing, dust opening, carpentry, plumbing works, false ceiling repair, seat repair, pest control, house keeping material, theatre cleaning, charges on bandobust and fixing of chairs, repairing of compound wall, water roofing of ceiling, interior painting, payment to temporary staff, maintenance of generator and other office equipments, etc. The assessing officer disallowed the claim of the assessee on the ground that the major renovation and modernization of the theatre complex was done. Referring to Explanation 1 to section 32(1) of the Act, the assessing officer found that the assessee has incurred capital expenditure and accordingly allowed depreciation at 10%. However, the CIT(A) found that the assessee has incurred the expenditure for the purpose of maintaining the cinema theatre in the course of its business activity, therefore, it is a revenue expenditure. On appeal by the revenue, the Hyderabad Bench of this Tribunal examined the scope of Explanation 1 to section 32(1) which was introduced by Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 with effect from 01-04-1988 and the legislative history of introduction of Explanation 1 to section 32(1) and found that the position of law as it remained after introduction of section 32(1A) with effect from 01-04-1971 continued to be the same in respect of revenue expenditure incurred by the assessee on the premises taken on lease. The Hyderabad Bench of this Tribunal further found that whenever the assessee incurred the expenditure in the process of earning of profit while carrying on the business in the leased premises, the expenditure has to be treated as revenue expenditure and neither section 32(1A) or Explanation 1 to section 32 would come in the way of allowing the same as revenue expenditure. However, in case, the assessee incurred the expenditure which is of a capital nature, then, the assessee has the benefit of claiming depreciation on such capital expenditure in relation to renovation, extension or improvement with effect from 01-04-1971 u/s 32(1A) and under the Explanation 1 to Sec.32 w.e.f. 1.4.1988. The Hyderabad Bench of this Tribunal placed its reliance on the judgment of the Apex Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/[1980] 3 Taxman 69. In the case before the Hyderabad Bench of this Tribunal, the expenditure was incurred in the course of running the cinema theatre. The Tribunal found that as a result of the expenditure incurred by the assessee, the cinema theatre remains a cinema theatre and the seating capacity did not increase. The Tribunal found that the assessee might have carried on the business in a profitable manner. Therefore, the assessee has not obtained any advantage in the capital field. However, in the case before us, the business was not commenced in the new premises. In the case before us, the asset was not an existing asset; nor was the expenditure incurred for maintenance of the existing asset. Rather, it was for the purpose of establishing a new asset. Therefore, the expenditure incurred for the first time in the lease premises for the purpose of establishing a new showroom has to be treated as capital expenditure. Hence, the decision of the Hyderabad Bench of this Tribunal in the case of Chaya Lakshmi Creations (P.) Ltd.(supra) may not be of any assistance to the assessee. The matter would have been entirely different had the assessee incurred similar kind of expenditure after establishing the new showroom and running the business for 2 - 3 years. Since it is an initial expenditure for establishing a showroom, this Tribunal is of the considered opinion that the decision of the Hyderabad Bench of this Tribunal in the case of Chaya Lakshmi Creations (P.) Ltd. may not be of any assistance to the assessee.
10. We have also carefully gone through the judgment of the Kerala High Court in the case of Premier Cotton Spg. Mills Ltd. (supra). In the case before the Kerala High Court, the assessee company formulated a scheme for providing houses to its employees. The land belonging to third parties was divided into plots and allotted to the employees. The assessee company made arrangements for laying road, construction of water tanks, pump sets, drainage, digging well and such other work in the land after allotment to the employees who had constructed a building in the lands allotted to them. The assessee claimed the expenditure for laying the roads, digging well, construction of water tanks and pumps, drainage, etc. as revenue expenditure. The Kerala High Court found that the expenditure incurred by the assessee is for the benefit of the employees, who purchased the properties and constructed building thereon. The land does not belong to the assessee. It did not bring into existence an enduring advantage to the assessee. The expenditure was in the nature of staff welfare expenditure. The Kerala High court further found that the expenditure was incurred for the purpose of business; therefore, it was deductible as business expenditure u/s 37 of the Act. In this case before us, it is not for the welfare of the employees; but for the purpose of establishing a new showroom. In fact, the Kerala High Court extracted the observations made by House of Lords in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), which is as under:
"When an expenditure is made …. With a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."
This Tribunal is of the opinion that this observation of the House of Lords as approved by the Kerala High Court is applicable to the facts of this case. The expenditure incurred by the assessee, in fact, brought into existence a new showroom which is an advantage of enduring benefit to the trade carried on by the assessee. Therefore, this judgment of the Kerala High Court, in fact, supports the case of the revenue.
11. We further find that the Kerala High Court had an occasion to consider an identical situation in the case of Veeraraghavan v. CIT [1967] 64 ITR 63 (Ker.) had an occasion to consider an identical issue. In the case before the Kerala High Court, the assessee incurred the expenditure for reclaiming a piece of land for which licence was granted to install a petrol pump by Burmah Shell Oil Distributing Company. The Kerala High Court found that the expenditure incurred by the assessee for filling up the ditches and raising the land and of constructing a wall are of capital in nature, therefore, it cannot be allowed as deduction. This Tribunal is of the considered opinion that this judgment of the Kerala High Court is squarely applicable to the facts of the case.
12. In view of the above, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.
13. The next ground of appeal is with regard to disallowance of Rs. 1 lakh.
14. Shri R Krishna Iyer, the ld. representative for the assessee submitted that the assessee incurred an expenditure of Rs. 7,20,99,724 towards advertisement including payment made to temples, churches, clubs, educational institutions and trade unions, etc. According to the ld. representative, the assessee was allowed advertising space by the institutions, which received contribution from the assessee. According to the ld. representative, the expenditure was incurred for the purpose of business. Therefore, it is to be allowed.
15. We heard Smt. Vijayaprabha, the ld. DR also. According to the ld. DR, there is an element of charity in making contributions to temples, churches and educational institutions. Therefore, this cannot be considered as business expenditure.
16. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the written submission filed by the assessee. In the written submission, the assessee claims that the prime motive for contribution is charity. If it is a charity, it has to be claimed u/s 80G if the same is approved by the respective Commissioner of Income-tax. Here, the assessee is claiming business expenditure. It is not the case of the assessee that the expenditure was incurred in connection with the welfare of the employees. Moreover, the assessee has incurred Rs. 7,20,99,724 but the assessing officer has disallowed only Rs. 1 lakh. In the absence of claim of the assessee that the expenditure was incurred for business purpose or for welfare of the employees, this Tribunal is of the considered opinion that the contribution made by way of charity cannot be allowed u/s 37 of the Act as business expenditure. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.
17. Now coming to the revenue's appeal, the only issue arises for consideration is disallowance of interest.
18. Smt. Susan George Varghese, the ld. DR submitted that during the year under consideration the assessee has debited an amount of Rs. 7,14,80,735 towards interest and bank charges and interest on advance. Referring to the chart at page 8 of the assessment order, the ld. DR submitted that all advances are personal nature and there is no commercial expediency in such advances. According to the ld. DR, the interest bearing business funds have been transferred for personal use, therefore, the assessing officer disallowed proportionate interest on the borrowed funds. According to the ld. DR, the interest free advances are not given from the capital or current account of the proprietor. It was given from the business funds which were borrowed on interest. Placing reliance on the judgment of the Kerala High Court in the case of CIT v. V.I., Baby & Co. [2002] 254 ITR 248/123 Taxman 894 the ld. DR submitted that an assessee who is not having liquid cash cannot claim that it gave interest free advances to the partners and others and then borrow funds from bank for business. According to the ld. DR such borrowing will not be for business purpose but for supplementing the cash diverted by the assessee for non business purpose. The ld. DR further submitted that since the assessee is not the beneficiary of the loan borrowed, interest cannot be deducted from the business income.
19. On the contrary, Shri Krishna Iyer, the ld. representative for the assessee submitted that it is not correct to say that interest free advances are not given from capital or current account. Referring to the balance-sheet which was extracted on page 9 of the order of the CIT(A), the ld. representative submitted that out of the proprietor's capital of Rs. 27.49 crores, an amount of Rs. 14.18 crores was invested in the fixed asset. A secured loan of Rs. 44.53 crores was obtained from bank and financial institutions for purchase of gold. All the borrowed funds were used for purchase of jewellery which is stock in trade. Apart from secured loan, the balance-sheet discloses Rs. 7.64 crores of unsecured loan on which no interest was paid. According to the ld. representative, the interest free unsecured loan of Rs. 7.64 crores and the capital of Rs. 27.49 crores is available with the assessee. After taking into consideration all the investments in fixed assets to the extent of Rs. 14.18 crores, according to the ld. representative, the interest free funds available with the assessee was Rs. 20.74 crores. The interest free advances given to the relatives are only Rs. 12.14 crores which is far below the interest free funds available with the assessee. Therefore, according to the ld. representative, the borrowed funds from the banks and financial institutions are invested only in jewellery for business purpose and it is not diverted for any other purpose. According to the ld. representative, what was given to the relatives is only from the interest free funds which would be clear from the balance-sheet of the assessee. The ld. representative further submitted that interest free funds were borrowed especially for the purpose of purchase of stock in trade and in fact the borrowed funds were invested in the stock in trade. Therefore, there is no question of any disallowance. The ld. representative placed his reliance on the judgment of the Madras High Court in the case of CIT v. South India Corpn. (Agencies) Ltd. [2007] 290 ITR 217/164 Taxman 249 ; CIT v. Sambandham Spinning Mills Ltd. [2008] 298 ITR 306 (Mad.) ; andCIT v. India Carbon Ltd. [2001] 247 ITR 510/118 Taxman 207 (Gau.) ; and S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC). Further reliance was placed on the decisions of the various benches of this Tribunal.
20. Referring to the judgment of the Kerala High Court in the case of V.I. Baby & Co (supra), the ld. representative submitted that on scrutiny of the accounts there was huge debit balances in the capital account of the partners of the firm was found. The assessee did not have credit balance in the capital account of the partners in the case before the High Court. When there was a debit balance in the capital account of the partners, the High Court found that borrowed funds was only for business purposes, therefore, the diversion of funds made to the relatives and the partners are not for business purposes. In the case before this Tribunal, according to the ld. representative, the proprietor is having credit balance in the capital account even after taking into consideration the investment made in the fixed assets. Therefore, according to the ld. representative, this judgment of the Kerala High Court may not be applicable to the facts of the case.
21. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the judgment of the Kerala High Court in the case of V.I. Baby & Co (supra). In the case before the Kerala High Court, the assessee, a registered partnership firm was doing business in piece goods. The assessee firm borrowed funds and paid interest on its borrowings from bank. The assessee transferred sizeable amount to the personal account of its partners and also advanced amounts to relatives of the partners and sister concerns; however, no interest was charged on such advances. The assessing officer disallowed proportionate interest payment on such amounts so advanced. On appeal by the assessee, the Tribunal found that the disallowance was not proper because the partners and relatives used the funds for business purpose such as construction of shop building. On a reference to the High Court, the department contended that there was a huge debit balance in the accounts of the firm in the name of the partners, near relatives and sister concern. On these facts, the High Court found that an assessee with liquidity cannot claim that it can give interest free advances to the partners and others, then borrow funds from the bank on interest for business purposes. From the above judgment of the Kerala High Court, it is obvious that there was a negative balance in the capital account of the partners.
22. Let us now examine the case before us in the light of the balance-sheet extracted by the CIT(A) on page 9 of his order. As rightly submitted by the ld. representative for the assessee, the proprietor's capital is Rs. 27.49 crores and unsecured loan was Rs. 7.64 crores. Sundry creditors were to the extent of Rs. 4.10 crores. The total interest free funds available with the assessee including the sundry creditors and unsecured loan were Rs. 39.23 crores. Out of this, the assessee invested Rs. 14.18 crores on the furniture and fittings including building. Another sum of Rs. 0.21 crore was shown as investment. Therefore, the total investment is Rs. 14.39 crores in the fixed asset. The assessee is showing Rs. 21.38 crores as deposits. However, the nature of the deposits is not known from the materials available on record. Therefore, it is obvious that the total utilization of the capital may be to the extent of Rs. 35.77 crores including the deposit of Rs. 21.38 crores. Thus, the funds available with the assessee including the sundry creditors of Rs. 4.10 crores is Rs. 39.23 crores and the funds invested by the assessee is Rs. 35.77 crores. Therefore, it is not known how the assessee claims that Rs. 20.74 crores of interest free funds is available with it. The assessee claims that the entire borrowed funds to the extent of Rs. 76.06 crores was invested in the stock in trade. Even if we take the deposits of Rs. 21.38 crores as assessee's investment, the balance amount claimed by the assessee to the extent of Rs. 20.74 crores as interest free funds may not be available. Therefore, it is not known how the CIT(A) came to the conclusion that the loan of Rs. 12.14 crores was given to the relatives out of the available interest free fund of Rs. 20.74 crores. If the assessee demonstrates that sufficient capital funds are available, then there may not be any diversion of funds. However, it is for the assessee to demonstrate that sufficient capital funds were available in the books of account. Therefore, this Tribunal is of the considered opinion that the assessing officer has to examine the same with regard to the available funds in capital / current account of the proprietor and the nature of deposit to the extent of Rs. 21.38 crores. Accordingly, the orders of lower authorities are set aside and the issue of disallowance of interest on the borrowed fund is remitted back to the file of the assessing officer. The assessing officer shall examine the issue with regard to the availability of funds in capital / current account of the proprietor on the basis of the books of account and other documents and thereafter decide the same in accordance with law after giving reasonable opportunity to the assessee.
23. In the result, appeal of the assessee is dismissed and the appeal of the revenue is allowed for statistical purpose.
ESHA


 
Regards
Prarthana Jalan


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