ORDER
1. This appeal under Section 260A of the Income Tax Act, 1961 (‘Act’) is directed against the order dated 21-9-2005 passed by the Income Tax Appellate Tribunal (ITAT’), New Delhi in ITA No. 2926/2001 pertaining to assessment year 1997-98.
2. After hearing learned counsel for the parties, we admit the appeal and frame the following substantial question of law for the consideration of this Court:
Has the assessed discharged its burden of showing, for the purposes ofclaiming deduction on account of interest under Section 36(1)(iii), thatthe funds borrowed by it were utilized for the purpose of business and notgiven as interest-free advances for non-business purposes and does notthe matter require to be remanded to the assessing officer for examiningthe agreements on record in order to determine whether there is a nexusbetween the funds borrowed and the interest-free advances given by the assessed.
3. The facts in brief are that the respondent-assessed, which was incorporated on 31-7-1991 has for its main objects the cultivation and dealing with agricultural produce, vegetable produce and other vegetable products and “setting up farms, agricultural houses, orchards, gardens business of horticulture etc.” During the course of the assessment proceedings for the assessment year 1997-98, the assessing officer noticed that the assessed had received an amount of Rs. 4.25 crores from M/s. Delhi Brass and Metal Works Limited on 11 -10-1996 of which a sum of Rs. 3 crores was refunded by it on 21 -1 -1997. The assessed had also received a sum of Rs. 2.5 crores from the same com pany on 27-3-1997. It was claimed that the assessed had paid liquidated damages to Delhi Brass & Metal Works Limited in the sum of Rs. 29 lakhs. This was disallowed by the assessing officer on the ground that as per the agreement that the assessed had with said M/s. Delhi Brass& Metal Works Limited, liability for liquidated damages could not be said to arise at the commencement of the agreement since the profitability could be worked out only at the final stage of the agreement.
4. The assessing officer further noticed that the assessed had advanced, on 15-10-1996, sums of Rs. 1.10 crores and Rs. 1.11 crores respectively to M/s. Krishna Estate Private Limited and M/s. Prem Apartment Private Limited. It had also, towards the end of the previous year, advanced Rs. 11,42,500 each to M/s. Esteem Apartment, Happy Days Properties Limited and Hind Land Private Limited respectively. The total outstanding amount from these parties as on 31-3-1997 was Rs. 3,88,43,500. While the assessed did not receive any interest or liquidated damages from any ” of these parties, it received Rs. 5 lakhs from Krishna Estate Private Limited. The assessed claimed that it had paid interest of Rs. 25,79,692 to Delhi Brass & Metal Works Limited on the sum borrowed by the assessed. After allowing a deduction of Rs. 5 lakhs which was received as liquidated damages, the assessing officer disallowed the interest paid to the extent of Rs. 20,79,692. After adding the disallowed liquidated damages, the carried forward loss of the assessed was re-computed at Rs. 58,698 instead g of Rs. 50,38,390 as claimed by it.
5. Allowing the assessed’s appeal, the Commissioner of Income-tax (CIT)(Appeals) held as follows :
The fact that the advances, given and received by the appellant-company are project financing arrangements, without any fixed rate of interest has not been denied by the assessing officer. The assessing officer has not established any nexus between the advances taken and given. Admit- p tedly the appellant-company is engaged in project development activities in its business and in the course thereof has received and given the “project finance from and to various companies. In these circumstances it: cannot be stated that the appellant-company utilized the interest bearing funds for giving interest-free advances. As such, the disallowance of Rs. 20,79,692 is not sustainable and accordingly it is deleted.
6. The matter was carried further in appeal to the ITAT, by the revenue. The ITAT, in a cryptic order, held as follows :
We have heard the parties, perused the records and have gone through the orders of the tax authorities below. We find that there is no reason to interfere with the impugned order inasmuch as the assessing officer has not established the nexus between the interest-free advances and the borrowed fund. We, therefore, uphold the order passed by the Commissioner (Appeals).
7. Mr. R.D. Jolly, learned counsel for the appellant submits that the impugned order of the Tribunal, affirming the order of the Commissioner (Appeals),deleting the disallowance of Rs. 20,79,692 on account of the interest paid by the assessed was not sustainable in law particularly since in terms of ‘ Section 36(1)(iii) of the Act the onus of showing that the funds borrowed was for the purposes of its business had to be discharged by the assessed itself. He submits that assessed had failed to discharge this onus. The only inference that could be drawn was that the assessed had utilized the funds borrowed for giving interest-free advances and, therefore, the Commissioner (Appeals) and the ITAT were not justified in deleting the disallowance as ordered by the assessing officer.
8. Dr. Rakesh Gupta, learned counsel for the assessed was unable to categorically state if in fact the evidence forming part of the assessment record showed that the funds borrowed were for the purposes of the assessed’s business and that there was no nexus between the advances made by the assessed and the funds borrowed by it. He sought to tender copies of certain agreements referred to in the order of the assessing officer to show that even though the loans advanced by the assessed to third parties as part of the proj ect finance arrangement were interest-free, that would not necessarily imply any nexus between the moneys borrowed by it for business purposes and the advances given by it.
9. We find that none of the Authorities below has in fact discussed the clauses of the agreements referred to and forming part of the record in order to ascertain whether any nexus exists between the funds borrowed and loans/advances given by the assessed-company. It is undeniable that the onus is on the assessed, if it wants to claim deduction under Section 36()(iii) of the Act on account of interest expenditure, to show that the funds borrowed were for business purposes and not utilized for making advances for non-business purposes. Since the assessed is relying on certain agreements, those will have to be examined in order to determine whether the onus on the assessed stands discharged. We do not think it proper for us to examine the agreements ourselves. Instead, the appropriate course would be to remand the matter to the assessing officer to examine the matter afresh in light of the agreements that constitute a part of the assessment record.
10. We accordingly set aside the orders of the Commissioner (Appeals) and the ITAT and remand the matter to the assessing officer ( i.e. the Income Tax Officer, Co. Ward 2(2), New Delhi or any other Officer who may now be seized of the assessment concerning the assessed herein) for a fresh determination in the manner indicated hereinabove.
11. The appeal is accordingly allowed with the above directions and with no order as to cost.