Availability of self owned interest free funds for disallowance u/s 36(1)(iii) can only be determined by examining the accounts

In a recent judgment, Amritsar has held that issue of availability of self owned interest free funds for making disallowance u/s 36(1)(iii) can only be determined by examining the accounts.

Case Details:
ITA No.66(Asr)/2016 Assessment year:2008-09  
M/s. Sehdev Enterprises vs. Income Tax Officer
Date of Order/Judgment: 21/04/2016

Brief Facts of the Case:
In the present case, the Assessing Officer made addition under section 40A(2)(b)(ii) of the Income Tax Act, 1961 for trade advances made by the assessee to various parties totalling Rs. 10,50,000/- However while disposing the appeal of the assessee against the additions, CIT(Appeals) confirmed the same but under the provisions of section 36(1)(iii). Thus  it was for the first time that CIT(A) invoked the provisions of section 36(1)(iii) on the assessee’s objections against AO invoking the provisions of section 40A(2)(b)(ii). 

Contentions of the Assessee:
The assessee contended that CIT(A) has not taken into consideration the substantial self owned ‘Interest free funds’ which were available with the assessee firm in the form of Capital A/c of the partners, especially when no interest on capital was being paid by the assessee firm to its said partners. It was also contended that for such availability substantial interest free funds with the assessee firm, no adverse inference regarding any part of the interest on borrowed capital pertaining to the aforesaid trade advances of Rs.10,50,000/- could be drawn.

Contentions of the Revenue:
That the powers of CIT(A) are co-terminus with those of the AO, therefore there was no error on the part of CIT(A) in making addition by invoking the provisions of section 36(1)(iii).

Held:
The issue of availability of substantial self owned interest free funds could only be determined by examining the accounts of the assessee, which were not examined. Accordingly, the matter was remitted back to the file of the Assessing Officer to be decided afresh in accordance with law on examining the accounts of the assessee.