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Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
Before: Shri S.S. Godara & Shri Laxmi Prasad Sahu
This appeal is filed by the Revenue against the order dt.29.04.2019 passed by the Commissioner of Income Tax (Appeals) - 4, Hyderabad for the assessment year 20014- 15 involving proceedings u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”) on the following grounds of appeal :
“1. The Ld. CIT(A) erred both in law and on facts of the case.
2. Ld. CIT(A) erred in deleting the disallowance made by the AO u/s 36(1)(iii) amounting to Rs.2,17,06,404/- holding that the assessee is having surplus funds ignoring the fact that the assessee is not having sufficient funds to advance moneys to its sister concerns.”
The brief facts of the case are that the assessee company, engaged in the business of power and energy, e-filed his return of income on 30.11.2014 admitting a loss of Rs.18,53,67,194/-. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee had debited a sum of Rs.28,91,61,973/- towards finance cost to the Profit and Loss account and on perusal of the financial statements, it was observed by the Assessing Officer that the assessee had given interest free loans to the parent / associated / group / sister concerns which is as under :
1 Shalivahana MSW Green Energy Ltd 79542906 2 Rake Power Limited 34300546 3 Shalivahana (Biomass) Power 31964472 Projects Ltd 4 Konark Power Projects Ltd 15270427 5 Bhuvan Bio Energy Limited 1270624 6 Yeshaswi Green Energy Ltd 663227 7 Pallavi Power and Mines Ltd 809719 163821921 The Assessing Officer noted that the assessee could not prove the commercial expediency of advancing interest free loans to the sister concerns. Accordingly, he disallowed the interest income on interest free loans given as per section 36(1)(iii) of Rs.2,17,06,404/- and added to the total income of the assessee.
Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the CIT(A), who allowed the appeal of the assessee by holding as under :
“8.2 I have carefully considered the assessment order and AR’s submissions in this regard. It is seen from the assessment order, the Aa has made disallowance of Rs. 2,17,06,404/- towards disallowance u/s 36(1)(iii) of the Act stating that the appellant had debited Rs.28,91,61,973/- towards finance cost to the P&L Account, which consists of interest on borrowings and borrowing cost. On the other hand, it is noticed from the details of parent/associated/sister business concerns, the appellant has given interest free loan to the 7 parties totaling of Rs.16,38,21,921/-. However, the appellant contended that it has own funds amounting to Rs.227,14,99,045/- and the investment is Rs.16,38,21,921/- only. As the appellant has demonstrated that lending money to the sister concerns was out of interest free funds available with the appellant, the action of the AO is not justified in making interest disallowance of Rs.2,17,06,404/- and hence directed to be deleted. As a result, the ground raised in this regard is allowed.”
4. Aggrieved from the order of the CIT(A), the Revenue is in appeal before us.
The learned DR relied on the order of the Assessing Officer and submitted that the assessee did not have sufficient own funds on the date of advancing interest free loans to its sister concerns / parent company / associated / group and the assessee also could not prove the commercial expediency of these loans. He submitted that there should be direct nexus for utilization of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii) of the Income Tax Act and the assessee failed to substantiate the commercial expediency.
On the other hand, the learned Authorised Representative relied on the order of CIT(A) and submitted that the assessee has sufficient own funds which is more than the funds advanced as loans to the seven parties under commercial expediency. The learned Authorised Representative relied on the following decisions :
a. Munjal Sales Corporation Vs. CIT reported in 298 ITR 298 (Supreme Court). b. CIT Vs. Reliance Industries Limited reported in 410 ITR 466 (Supreme Court) c. Principal CIT Vs. Shapoorji Pallonji & Co., Ltd reported in 423 ITR 220 (Bombay High Court) d. BSPN Industries Pvt. Ltd., Vs. DCIT, Circle 1(2), Hyderabad in
On the rejoinder, the learned DR submitted that the case laws relied upon by the learned Authorised Representative are not applicable to the present facts of the case because the assessee company has suffered a huge loss of Rs.29,24,12,058/-.
After hearing both the sides and perusing the entire material available on record, we observe that the CIT(A) has allowed the appeal of the assessee by holding that the assessee has sufficient own funds to make interest free loans / advances given to the seven parties totaling of Rs.16,38,21,921/-. The ground taken by the ld. CIT(A) for allowing the assessee’s appeal, we would like to reproduce the financial statements of the assessee to ascertain whether the assessee has sufficient 4 own funds in the impugned Assessment Year for advancing loans to the seven parties as cited supra, which are as under:
Left blank intentionally 8.1 On perusal of the financial statements, we find that the assessee had shareholders’ fund to the tune of Rs.256.39 crores and the non-current assets of Rs. 470.08 crores, which is more than the shareholders’ fund. It clearly shows that the own funds have already been utilized/exhausted in previous financial year i.e., as on 31.03.2013. The current liabilities has also been decreased by Rs. 17.00 crores during this year, it shows the liabilities have been paid off. In the current Financial Year, the assessee has suffered a loss of Rs.29.24 6 crores, it shows there is no sufficient internal cash accruals after considering the depreciation of Rs. 9.76 crores for advancing from the own funds as submitted by the assessee. From the above analysis of the financial statements, it is clear that the assessee has given interest free advances to its subsidiaries as cited supra from the long term borrowing of Rs.45.59 crores (Rs.2,13,71,32,092/- – 1,73,12,16,817/-) taken during the year. Therefore, the findings recorded by the CIT(A) are contrary in nature and hence, the arguments advanced by the ld. AR of the assessee are hereby rejected. Further, we observe that the ld. CIT(A) has decided the issue only on the basis of funds availability that the assessee has sufficient own funds, but, the AO has taken a view that the assessee failed to prove commercial expediency which has not been addressed by the CIT(A) while allowing the appeal of the assessee. We, therefore, deem it fit and proper to remit the issue back to the file of the CIT(A) with a direction to decide the issue after addressing the objections raised by the AO in his order. Accordingly, the grounds raised by the revenue are treated as allowed for statistical purposes.
In the result, the appeal of Revenue is allowed for statistical purposes.