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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU
Per George George K, Vice President:
These appeals at the instance of the assessee are directed against CIT(A)’s orders dated 28.07.2023 and 27.07.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Years are 2017-18 and 2018-19.
2. Common issues are raised in these appeals. Hence, they were heard together and are being disposed off by this consolidated order. Identical grounds are raised in these appeals except for variation in figures. The solitary issue that is raised is whether CIT(A) is justified in confirming the addition of notional interest of Rs.40,21,980/- and Rs.32,44,200/- on the amounts due from related parties for Assessment Years 2017-18 and 2018-19 respectively.
Brief facts of the case for Assessment Year 2017-18 are as follows:
The AO vide Assessment Order dated 16.12.2019 passed under section 143(3) of the Act imputed notional interest on the amounts that are due from the related parties and added the same to the total income of the assessee. The relevant finding of the AO for Assessment Year 2017-18 reads as follows:
“4.1 It is seen from the balance sheet of the assessee company that during the year under consideration the assessee has outstanding borrowed funds as follows: Long term borrowings Rs.65,93,29,000/- Short Term Borrowings Rs.1,48,16,60,000/- Total Borrowings Rs. 2,14,09,89,000/- (Secured and Unsecured both) On the above said borrowings, the assessee has incurred the borrowings cost of Rs.31,95,01,000/- and the same is charged to the Profit and Loss account. While borrowing the above funds, for its business needs, it is noticed that the assessee has given the loans and advances to its related parties as under: Short Term Loans advanced to Related parties Rs.3,45,51,000/- 4.2 The assessee has not shown any interest earning on the above loans and advances given to the related parties. Therefore, the interest charged to the P&L account to the extent of above interest free Loans/advances to the related parties is not eligible for deduction as per the provisions of section u/s. 40A(2)(b) r.w.s 36(1)(iii) of the Act. 4.3 It is seen that the assessee company has borrowed funds and the outstanding liability of borrowed funds as at the end of the year i.e. 31/03/2017 stands at Rs.2,14,09,89,000/-and the finance cost charged to the profit and loss account is at Rs.31,95,01,000/- after deducting interest receivable from subsidiary company. This shows that the assessee is incurring expenditure of interest on borrowed funds and part of such funds borrowed for its business are being diverted by the assessee company to advance the interest free loans to its sister concerns for non-business purpose. Hence the same cannot be allowed. In this regard reliance is placed on the following decisions.
Bombay High Court -240 ITR 762 Hindustan Conductors P. Ltd.
Madras High Court -238 ITR 939 K. Somasundaram & Bros.
3. Punjab & Haryana High Court — 286 ITR 1 Abhishek Industries Ltd. 4.4 In view of the above facts, and considering the amount of interest charged to Profit and Loss account as borrowing cost, the average rate of interest @ 12% annum is considered as reasonable for disallowance and accordingly, an amount of Rs.40,21,980/- being interest @ 12% on interest free loans/advances of Rs. 3,45,51,000/-is disallowed u/s. 40A(2)(b) r.w.s 36(1)(iii) of the Act. [Addition: Rs.40,21,980/-]”
Aggrieved by the order of the AO, assessee filed appeal before the First Appellate Authority (FAA). The CIT(A) confirmed the view taken by the AO.
Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed a Paper Book enclosing therein copy of the financials for the Assessment Year (the year in which the advances were made to the related party), copy of the Tribunal order for Assessment Year 2009-10, order giving effect to the Tribunal order, submissions made before the AO and the CIT(A), etc. The learned AR submitted that the amounts due from the related parties are outstanding prior to Assessment Year 2009-10. It was submitted that when the advances were made to the related party, assessee had sufficient surpluses and the AO for that year had not imputed any cost for such advances. It was submitted that when AO has not imputed any interest disallowance in the year of advance, the AO cannot make such disallowance in later Assessment Year. In this context, the learned AR relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT Vs. Sridevi Enterprise reported in (1991) 192 ITR 165 (Kar.).
The learned DR supported the orders of the AO and the CIT(A).
We have heard the rival submissions and perused the material on record. We find that AO has imputed notional interest on amounts due from the related parties and had made the additions of Rs.40,21,980/- for the Assessment Year 2017-18. We find that the amounts were advanced by the assessee to the related parties prior to Assessment Year 2009-10. For the Assessment Year 2009-10, the AO, while completing the assessment, had imputed notional interest on those advances made and added notional interest to the income declared by the assessee. On further appeal by the assessee, the Tribunal for Assessment Year 2009-10 in (order dated 21.09.2016) had restored the matter to the AO. The AO, while giving effect to the order of the Tribunal, had not made any addition on account of notional interest on the advances made by the assessee to the related party. Such being the case, the AO is not justified in imputing notional interest on the advances outstanding from the related party (advance made prior to Assessment Year 2009-10). The Hon’ble jurisdictional High Court in the case of CIT Vs. Sridevi Enterprise (supra) had held that when no addition has been made in the earlier year on account of imputation of interest cost, the opening balance could not be considered in the year in question and the addition has to be limited only to the advances made during the relevant Assessment Year.
Moreover, on facts of the instant case, we find that even for the relevant Assessment Year, assessee has got sufficient reserves and surplus far exceeding the amounts that are due from the related parties. In light of the aforesaid reasoning, we hold that the addition made on imputation of notional interest is not warranted and we delete the same.
Since the facts pertaining to the Assessment Years 2017-18 and 2018-19 are identical, our findings rendered in paragraphs 7 and 8 above will apply mutatis mutandis for the Assessment Year 2018-19 also.
In the result, appeals filed by the assessee are allowed.