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Income Tax Appellate Tribunal, HYDERABAD ‘B’ BENCH : Hyderabad
Before: Shri S.S. GODARA & Shri L.P. SAHU
O R D E R PER S.S. GODARA, J.M. This assessee’s appeal for AY 2013-14 arises against the CIT(A)-1, Hyderabad’s order dated 30.05.2018 in case no. 0009/2018-19 involving proceedings u/s 143(3) of the Income Tax Act, 1961 (in short ‘the Act’). Heard both the parties. Case file perused.
The assessee’s sole substantive grievance raised in the instant appeal challenges the correctness of sec. 36(1)(iii) interest disallowance of Rs.65,41,100/- made by the Assessing Officer in AY: 2013-14 BSPN Industries P Ltd. Hyd.
his assessment order dated 21.3.2016 and affirmed in CIT(A)’s detailed discussion as follows. “5. Only Ground is regarding disallowance of Rs.65,41,100/- towards Proportionate Interest received from interest free advances 5.1 During the assessment proceedings, the Assessing Officer noticed that the assessee has claimed expenditure on account of interest paid of Rs.65,41,100/- on interest bearing loans of RsA,57,66,902-. On the other hand, the assessee has given interest free advances of Rs.6,31,05,522/- to its related parties. However, the assessee has failed to establish the business expediency of these advances, The Assessing Officer took support of the judgments in the case CIT Vs. Abhishek Industries Ltd & CIT Vs. Baby & co, which clarified as follows: "even the plea of loans raised by the assessee with funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. Entire money in a business entity comes in a common kitty and they do not have a different color. Whatever are the receipts of the business, have the color of business receipts & have no separate identification source has no concern whatsoever. The only thing sufficient to disallow the interest paid on borrowing to the extent the amount is lent of sister concern without carrying any interest for non-business purposes would but that the assessee has some loans or other interest bearing debts to be repaid". Further, in the judgment of CIT YS. Baby & Co, the court held that "If non-interest bearing cash balances are available, the borrowing itself is not for the purpose of business. An assessee with liquidity can't claim that it can give interest advances to the partners & others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Thus interest in proportion to the advances made has to be disallowed". In view of the above, the Assessing Officer concluded that disallowance of proportionate interest is attracted, if one hand, the assessee has borrowed interest bearing funds & on the other hand, he is advancing money interest free, for non-business purposes. Hence, the Assessing Officer show caused the assessee as to why proportionate interest should not be disallowed on interest free advances in view of the judgments in the cases of CIT Vs. Abhishek Industries and CIT Vs. Baby & Co. In response, the assessee could not provide any plausible explanation during the assessment proceedings. Thus, the AY: 2013-14 BSPN Industries P Ltd. Hyd.
Assessing Officer disallowed proportionate interest and computed the same as follows: Interest free advances without business Rs.6,38,05,522/- Less: Advances taken Rs.70,00,000/- Net Interest free advances -- (A) Rs.6,31,05,522/- Interest bearing loans - (B) Rs.4,57,66,907/- Interest Paid - (C) Rs.65,41,100/- Proportionate interest to be disallowed: Rs.90,19,171/- A x C = 6,31,05,522 x 65,41,100 B 4,57,66,902 The Assessing Officer made disallowance subject to maximum interest paid, hence the same was restricted to interest paid. In view of this, the Assessing Officer disallowed Rs.65,41,100/- and added to the returned income of the assessee. 5.2 Before me, the appellant submitted that the breakup of the interest free advance to its sister concern, which is as follows: Long term loans and advance Rs. 11,30,000 Short term loans and advances Rs.6,26,75,522 Total Rs.6,38,05,522
It emerges during the course of hearing that the Assessing Officer has quoted CIT vs. Abhishek Industries (2006) 286 ITR 1 (P&H) that such advances made to sister concerns indeed deserve the impugned interest disallowance. We hold that the instant reasoning cannot be taken as a valid precedent going by the honorable Apex court’s decision in Hero Cycles (P) Ltd. (2015) 379 ITR 347 (SC) that advances given to a subsidiary having business expediency establishes nexus between the expenditure and business purpose which need not be the business of the assessee itself anymore. Their lordships have reiterated the reasoning in S.A.Builders Limited vs. CIT (2007) 288 ITR 1 (SC) in other words. And also that such an arrangement ought to be analyzed from the viewpoint of a taxpayer than that of the Assessing Officer. We thus find no force in the assessee’s or CIT(A)’s reasoning on the foregoing legal aspect. 3 AY: 2013-14 BSPN Industries P Ltd. Hyd.
Next comes the equally significant aspect of quantification of the impugned disallowance. The assessee appears to have filed all of its books of accounts prima facie indicating that its interest free funds were to the tune of Rs.6,38,05,522/- as against the net interest free advances of Rs.6,31,05,522/- which leads us to a presumption that the necessary inference in such a factual backdrop is that all advances made that are interest free funds only. Case law CIT vs. Reliance Industries 410 ITR 466 (SC) ad CIT vs. Reliance Utilities & Power 313 ITR 340 (Bom.) hold that when interest free funds exceed the interest free advances, it cannot be held that interest bearing funds have been diverted for non-business purposes. We thus reverse the impugned disallowance on merits as well. The assessee succeeds in this sole substantive grievance. This assessee’s appeal is allowed. Order pronounced in Open Court on 19/04/2021.