Parikshit Aggarwal, CA for the Assessee. Arvind Sudarshan, JCIT-DR for the Revenue.

1. The present appeal has been filed by the assessee against the order passed by the ld. Commissioner of Income Tax (Appeals)-I, Ludhiana [in short CIT(A)] dated 22/10/2018, U/s 250(6) (of Income Tax Act, 1961) (hereinafter referred to as the Act) for the A.Y. 2014-15.

The grounds raised by the assessee are as under:

"1. That the Learned Commissioner of Income Tax (Appeals)-l, Ludhiana has erred in confirming the addition of Rs. 53,57,352/-made u/s 36(1)(iii) (of Income Tax Act, 1961) by the learned Assessing Officer on account of Less interest charged from the partners, without any basis and without giving any reasons in his order. Therefore, addition confirmed by the Learned Commissioner of Income Tax (Appeals)-1, Ludhiana is illegal, uncalled for unwarranted and needs to be deleted.

2. That the Learned Commissioner of Income Tax (Appeals)-1, Ludhiana has erred in confirming the addition of Rs. 1,24,954/-made u/s 36(1)(iii) (of Income Tax Act, 1961) by the Learned Assessing Officer on account of Less Interest charges from Mr. Vikas Chail, without any basis and without giving any reasons in his order. Therefore, addition of Rs. 1,24,954/- confirmed by the Learned Commissioner of Income Tax (Appeals)-1, Ludhiana is illegal, uncalled for unwarranted and needs to be deleted.

3. That the Learned Commissioner of Income Tax (Appeals)-1, Ludhiana has erred in confirming the addition of Rs. 5,90,000/-made u/s 68 (of Income Tax Act, 1961) by the Learned Assessing Officer on account of loan received from Smt. Bindu Khemka at Rs. 5,00,000/- and interest paid to Smt. Bindu Khemka at Rs. 84,000/-and commission paid to Shri Amit Kalia at Rs. 6,000/- without any basis and without giving any reasons in his order, whereas identity, creditworthiness and genuineness of the creditors proved by the assessee before the learned Commissioner of Income Tax (Appeals)- 1, Ludhiana as well as before the learned Assessing Officer. Therefore, addition of Rs. 5,90,000/- made by the learned Assessing Officer and confirmed by the learned Commissioner of Income Tax (Appeals)-1, Ludhiana is illegal, uncalled for unwarranted and needs to be deleted.

4. That the Learned Commissioner of Income Tax (Appeals)-1, Ludhiana has erred in confirming the addition of Rs. 1,00,83,240/-made u/s 68 (of Income Tax Act, 1961) by the learned Assessing Officer on account of loan received from various parties at Rs. 96,00,000/- and interest paid on loans to various parties at Rs. 4,40,000/- and commission paid at Rs. 42,840/-, without any basis and without giving any reasons in his order, whereas identity, creditworthiness and genuineness of the creditors proved by the assessee before the learned Commissioner of Income Tax (Appeals)- 1, Ludhiana as well as before the learned Assessing Officer. Therefore, addition of Rs. 1,00,83,240/- made by the learned Assessing Officer and confirmed by the learned Commissioner of Income Tax (Appeals)-1, Ludhiana is illegal, uncalled for unwarranted and needs to be deleted.

5. That the appellant craves to leave or to amend the ground of appeals before or at the time of hearing."

2. Ld.Counsel for the assessee took up Grounds No. 1 and 2 of the appeal together, pointing out that they related to the same issue of disallowance of interest expenses made U/s 36(1)(iii) (of Income Tax Act, 1961) vis a vis debit balance in the account of the partners of the assessee firm, and on loan advanced respectively and stated that his arguments against both the disallowances was the same.

3. Drawing our attention to the facts of the case, the ld. counsel for the assessee pointed out that the assessee being a partnership firm had paid interest on debit balance in the capital account of two partners Shri K.K. Chadha and Shri Sumesh Chadha @12% of the outstanding amount. Similarly, it was pointed out, that the assessee had given loan/advance to one Shri Vikas Chail and charged interest thereon @ 12%. It was pointed out that the Assessing Officer (A.O.) noted that the assessee had borrowed unsecured loans from various parties at an interest rate ranging from 12% to 18%. Accordingly, he noted that the average rate of interest paid by the assessee was 15% and he held that the assessee had used borrowed funds for the purpose of making these advances to partners and others, and accordingly the interest rate charged on them should have been 15%. Therefore, the A.O. disallowed the difference of the interest actually charged i.e. @12% and the interest that should have been charged, i.e @15%, which amounted in all to Rs. 54,82,306/-, U/s 36(1)(iii) (of Income Tax Act, 1961). The ld. CIT(A) upheld the same.

4. Before us, the ld. counsel for the assessee has pointed out that the AO has misappreciated the facts of the case while making the disallowance since the assessee, in fact, had paid interest on its unsecured loans at an average rate of 10% and not 15% as computed by the A.O. and therefore, having charged interest at a higher rate @ 12% on the impugned debit balance in the partners capital account and advances made, there was no reason for making any disallowance of interest in the present case. The ld. counsel for the assessee drew our attention to the audited financial statements of the assessee firm for the impugned year placed at paper book page Nos. 59 to 73 and pointed out from the balance sheet for the impugned year placed at paper book page No. 59 that the total unsecured loans taken by the assessee during the year amounted to Rs. 10,35,05,000/-, while the interest paid on unsecured loans as reflected in the schedule of financial expenses at paper book page No. 62 was Rs. 1,02,85,680/-. The ld. counsel contended that it is evident that the assessee had paid interest at an average rate of approximately 10% on the unsecured loans taken. He, thereafter, referred to the assessment order at para 3.9 where the A.O. had worked out the average rate of interest charged by the assessee on the unsecured loans and pointed out that the A.O. had calculated average rate by averaging interest rates paid by it on its unsecured loans of 12% to 18%[(12 + 18)/2]. The ld. counsel pointed out that the method adopted by the A.O. was incorrect and as factually pointed out the assessee had paid interest at lower rate as compared to that charged on the debit balance of the partner's capital account and the advances made. He therefore pleaded that there was no reason for making any disallowance of interest U/s 36(1)(iii) (of Income Tax Act, 1961).

5. The ld DR, though was unable to controvert the factual contentions of the assessee, however, relied on the order of the CIT(A).

6. We have heard the rival contentions and have gone through the orders of the authorities below and also the documents to which our attention was drawn. We find merit in the contention of the ld. counsel for the assessee that the facts of the case occasion no disallowance of interest U/s 36(1)(iii) (of Income Tax Act, 1961). In the facts of the present case, as pointed out by the ld counsel for the assessee, the assessee we find has paid interest on unsecured loans during the impugned year at an average rate of 10% which is demonstrated from the facts and figures of unsecured loan and interest paid thereon reflected in the financial statements of the assessee which are duly audited. This fact, the revenue has been unable to controvert before us. Since the basic premise with the revenue for making disallowance in the present case U/s 36(1)(iii) (of Income Tax Act, 1961) was that the assessee had charged less interest on the advances made to its partners and others as opposed to that paid on borrowings made by it, the same does not survive since the assessee has demonstrated that it had actually paid less interest on borrowings and charged more from the partners and others. In view of the above, the disallowance made U/s 36(1)(iii) (of Income Tax Act, 1961), we hold, amounting to Rs. 53,57,352/- and Rs. 1,24,954/- is not sustainable and the same is directed to be deleted. Accordingly, grounds No. 1 and 2 of the appeal are allowed.

7. Ld.Counsel for the assessee thereafter took up Ground Nos. 3 and 4 of the appeal together stating that they related to the same issue of addition made u/s 68 (of Income Tax Act, 1961) by treating loans received by the assessee amounting in all to Rs. 1.01 crores, interest paid thereon amounting to Rs. 5.24 lacs and commission paid thereon amounting to Rs. 48,800/- as ingenuine and unexplained. It was pointed outthat the impugned addition U/s 68 (of Income Tax Act, 1961) related to unsecured loans taken from the following seven different entities including individuals and private company.

S. No. Name Party of the Unsecured Loan taken by the assessee

Interest paid by the assessee Commission paid to broker

Total can credit to be disallowed u/s 68 (of Income Tax Act, 1961)

01. Sunil Kumar Mittal 20,00,000/- 1,20,000/- 12,000/- 21,32,000/-

02. Sudesh Batta Ram 7,00,000/- 63,000/- 6,300/- 7,69,300/-

03. Puran Chand Sachdev 25,00,000/- 1,13,400/- 11,340/- 26,24,740/-

04. Lakhvinder Singh Dsor 4,00,000/- 12,000/- 1,200/- 4,13,200/-

05. V.R. Finvest Pvt.Ltd. 30,00,000/- 90,000/- 9,000/- 30,99,000/-

06. Nidhi Sachdeva 10,00,000/- 42,000/- 3,000/- 10,45,000/-

Total 1,00,83,240/-

07. Bindu Khemka 5,00,000/- 84,000/- 6,000/- 5,90,000/-

The ld. counsel for the assessee drew our attention to the assessment order and pointed out that the A.O. had made the impugned addition for the reason that the summons issued to the said party had remained unserved and the assessee had not been able to produce them before the A.O. and in some cases, the assessee had not submitted even the copy of income tax returns or the PAN details and the bank details of these parties. The A.O., therefore, had held that the assessee had not been able to prove the identity of the givers of unsecured loans and also the genuineness and creditworthiness of the givers and accordingly had made the addition U/s 68 (of Income Tax Act, 1961). The ld. Counsel for the assessee pointed out that before the ld. CIT(A), the assessee had filed all relevant details i.e. ITRs, bank statements of the loan givers and confirmations and the evidences had been sent to the AO for his comments who had dismissed the same for the reason that either the bank statements were incomplete or bank statements had not been provided or were unreadable. Our attention was drawn to the remand report of the A.O. placed at paper book page Nos. 23 to 33 pointing out the findings of the A.O. in this regard vis a vis each of the loan givers. The ld. counsel for the assessee submitted that all relevant details had been filed before the A.O. as well as before the ld. CIT(A) including the bank statements of the parties showing that the impugned transactions had taken place through banking channels. Our attention was drawn to the said documents placed at paper book page Nos. 84 to 145. The ld. counsel, therefore contended that all the bank statements were there before the A.O. along with other relevant documents proving the identity, genuineness and creditworthiness of the parties as mentioned in the paper book filed before us and therefore, the addition made needed to be deleted.

8. The ld. DR, on the other hand, relied on the orders of the authorities below.

9. We have heard the rival contentions and have carefully perused the orders of the authorities below. We find that the ld. CIT(A) has upheld the addition made by the A.O. on account of the impugned seven loan creditors holding them to be ingenuine primarily for the reason that the bank statements submitted of these parties showing transactions were either unreadable or incomplete or were not submitted at all. The revenue, therefore, was of the view that the explanation of the assessee that the transactions had had taken place through banking channels remained unsubstantiated. Since the assessee has demonstrated before us that the bank statements of all the loan givers was filed to the revenue authorities and is therefore, available, we consider it fit to restore the issue back to the A.O. to consider the bank statements of all the loan depositors alongwith other evidences filed and adjudicate the issue afresh thereafter in accordance with law. Accordingly, ground No. 3 and 4 of the appeal are allowed for statistical purposes only.

10. In the result, the appeal of the assessee is allowed in part for statistical purpose.

Order pronounced in the open court on 28 February, 2020.

Sd/- Sd/-

(SANJAY GARG) (ANNAPURNA GUPTA)

Judicial Member Accountant Member