SHREE FIBRE PVT. LTD.,,VADODARA vs. THE ITO, WARD - 2(1)(3),, BARODA

The solitary ground of appeal is directed against the order of ld. CIT(A) in confirming the disallowance of interest expenses claimed on cash credit account of Rs. 39,94,130/-.

The fact in brief is that return of income declaring total income at Rs. nil was filed on 25th Sep, 2014. The case was selected for scrutiny by issuing of notice u/s. 143(2) of the act on 28th August, 2015. During the course of assessment, the Assessing Officer noticed that assessee has claimed interest expenses of Rs. 39,94,130/- on cash credit account maintained with Central Bank of India. The Assessing Officer observed that assessee had made advance to its sister concern Shreeji Krupa Spinners Pvt. Ltd. in F.Y. 2011-12 of Rs. 2,30,50,000/- out of interest bearing borrowed fund. On query, the assessee explained that the aforesaid amount was advanced to its sister concern in F.Y. 2011-12 out of the mixed fund as in the cash credit account sale proceeds was also deposited in F.Y. 2011-12. It was also explained that assessee was having sufficient interest free funds along sale proceed as on 31st March, 2011. The Assessing Officer has not agreed with the submission of the assessee and he was of the view that assessee has withdrawn funds from the cash credit account and utilized the same for giving advances to its sister concern, therefore, interest expenses to the amount of Rs. 39,94,130/- claimed on cash credit account was disallowed and added to the total income of the assessee.

Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee reiterating the facts stated by the Assessing Officer.

During the course of appellate proceedings at the outset the ld. counsel has submitted that the impugned amount on loan was advanced to the sister concern of the assessee during the F.Y. 2011-12 and the similar Page No 3 Shree Fiber Pvt. Ltd. vs. ITO issue of addition of interest payment on the identical facts has been adjudicated by the Co-ordinate Bench of the ITAT in the case of assessee itself vide dated 4-08-2016 in favour of the assessee. The ld. Departmental Representative is fair enough not to controvert these undisputed facts that the issue contested in the appeal has been covered in favour of the assessee in view of the aforesaid decision of the ITAT Ahmedabad for assessment year 2011-12.

Heard both the sides and perused the material on record. It is undisputed fact that the amount of loan of Rs. 2,30,50,000/- was advanced to the sister concern of the assessee namely M/s. Shreeji Krupa Spinners Pvt. Ltd. in the F.Y. 2011-12 and the identical issue on similar fact in respect of payment of interest was examined and adjudicated by the Co-ordinate Bench of the ITAT as referred supra. With the assistance of the ld. representatives, we have gone through the referred decision and the relevant part of the decision of the C-ordinate Bench is discussed as under:- “7. I have duly considered rival contentions and gone through the record carefully. A perusal of the assessment order would reveal that the AO has not considered increase in financial cost as a point to doubt the books of accounts of the assessee. This issue has been considered for the first time by the Id.CIT(A). But the ld.CIT(A) has not issued any show cause notice to the assessee before deliberating on this aspect. It is pertinent to mention that the books of accounts can only be rejected if it is demonstrated that it is difficult for the AO to deduce true income from the accounts. There should be a disallowance out of financial cost, if the assessee has used interest bearing funds for non-business purpose. But that cannot be an issue which would authorize the ld.CTT(A) to doubt the book results. Where is hindrance in the passage of the ld.CIT(A) to compute the true income of the assessee ? this aspect has been considered by the ld.CTT(A) with an angle that once book results arc rejected, then the loss claimed by the assessee at Rs.99,33,822/- will not be available. Otherwise, even after making addition of Rs.38,17,633/- the resultant income of the assessee would be in negative, because it will be set off against the alleged loss shown by the assessee in the return. Considering all these aspects, I am of the view that ld.CTT(A) failed to follow the procedure, and therefore, his order is not sustainable on this issue. Apart from the above, the ld. counsel for the assessee has pointed out that the assessee has only one bank account, which is for the purpose of business. It has deposited all its sale proceedings in this very account. Sales during the year under consideration were aggregating to Rs.2,82,06,868/-. He also pointed out that the assessee has sufficient interest free funds. The details are placed on page no. 67 of the paper book. The assessee has shown interest free funds of Rs.41,75,403/-. Had an opportunity was granted to the assessee. it could have explained its position with regard to the Page No 4 Shree Fiber Pvt. Ltd. vs. ITO

In the result, the appeal of the assessee is allowed.