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Income Tax Appellate Tribunal, ‘’SMC’’ BENCH, AHMEDABAD
(Applicant) (Respondent) Assessee by : Shri Tushar Hemani, with Shri P.B. Parmar, A.Rs Revenue by : Shri Deelip Kumar, Sr. D.R सुनवाई क� तार�ख/Date of Hearing : 14/07/2020 घोषणा क� तार�ख /Date of Pronouncement: 24/07/2020 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-3, Ahmedabad [Ld. CIT(A) in short], dated 10/01/2018 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 15/12/2016 relevant to Assessment Year (A.Y) 2014-15.
The assessee has raised the following grounds of appeal:
1. The Id. CIT(A) has erred in law and on the facts of the case in making disallowance of Rs.21,10,007/- u/s. 36(l)(iii) of the Act in respect of interest expenditure on unsecured loan as claimed by the appellant.
The Id. CIT(A) has erred in law and on facts in not properly appreciating and considering various submissions, evidences and supporting placed on record during the course of the assessment proceedings and not properly appreciating various facts and law in its proper perspective. 3. That on the facts and circumstances of the case the entire additions is merely based on estimates and is arbitrary based on mere surmises and conjectures and is liable to be deleted. 4. The Id. CIT(A) has erred in law and on facts in proposing to charge interest u/s 234A/B/C of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
2. The only issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by sustaining the addition of Rs. 21,10,007/- representing interest expenses on account of diversion of borrowed fund for the non-commercial purposes.
The facts in brief are that the assessee in the present case is an individual and proprietor of M/s Manoj Automotive which is engaged in the business of trading of auto parts. The assessee is also a director in the company namely M/S KMD Automotive Pvt. Ltd. which is engaged in similar business.
3.1 The AO during the assessment proceedings found that the assessee on one hand has provided loans and advances amounting to Rs. 2,76,89,460/- to its associated company namely M/s KD Automotive Pvt. Ltd. without charging any interest thereon and on the other hand he has incurred interest expenses amounting to Rs. 21,10.007/- on the borrowed fund. Accordingly, the AO was of the view that the assessee has diverted borrowed fund for non-commercial activities. Thus the AO disallowed the amount of interest of Rs. 21,10,007/- and added to the total income of the assessee.
3.2 The assessee carried the matter to the learned CIT (A) but could not succeed. The assessee against the order of the learned CIT (A) filed an appeal before us.
3.3 The learned AR for the assessee before us filed a paper book running from pages 1 to 26 submitted that the assessee has its own fund amounting to Rs. 86,80,526/- in form of capital as evident from the financial statement placed on page 2 of the paper book. The learned AR also contended that the assessee also has obtained interest free unsecured loan amounting to Rs. 1,18,96,794/-.
3.4 Accordingly the learned AR claimed that up to the amount of capital fund of the assessee (own fund plus interest-free borrowing) amounting to Rs. 2,05,77,320/-, there cannot be diversion of interest bearing fund for non- commercial purposes. As such, there cannot be any allegation for the diversion of fund against the assessee to the extent of the amount of its capital and interest free borrowing.
On the other hand the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we note that there is no ambiguity to the fact that the assessee has provided interest-free advances to its associated concern namely M/s KMD Automotive Pvt. Ltd. amounting to Rs. 2,76,89,460/- without any commercial purposes. But the question arises whether such loan and advance was provided from the own fund of the assessee or it was provided out of the borrowed fund which was subject to interest. To resolve the controversy on hand, it is presumed that the assessee in providing such loan and advances has utilized its own fund and interest free borrowing. In this regard we find support and guidance from the judgment of Hon’ble Punjab and Haryana High court in case of CIT vs Max India ltd. reported in 80 Taxmann.com 98 where it was held as under:- Page 3 of 5
5. With regard to the first issue qua disallowance of interest expenditure under section 36(1)(iii) of the Act, admittedly, the assessee company had given interest free loans and advances amounting to Rs. 2297.83 lacs upto the end of the relevant year including Rs. 704 lacs during the relevant year to its three subsidiary companies. The Assessing officer did not make any disallowance in respect of expenditure incurred on borrowed funds under section 36(1)(iii) of the Act in relation to interest free loans and advances given to the said three subsidiary companies in the earlier years. After perusing the cash flow statement of the assessee company for the assessment year in question, the Tribunal observed that the assessee company had received substantial proceeds from preferential issue of shares capital amounting to Rs. 99999.98 lacs. It had also received dividend income of Rs. 166.13 crores from various investments. After giving interest free loans of Rs. 7.04 crores to its subsidiary companies, the assessee was left with surplus interest free funds of Rs. 53.86 crores which were utilized for giving interest free advances. Thus, there was no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance under section 36(1)(iii) of the Act. After considering the relevant provisions and the case law on the point, the Tribunal deleted the disallowance of interest expenditure made under section 36(1)(iii) of the Act Learned counsel for the appellant has not been able to show that the findings recorded by the Tribunal are illegal or perverse warranting interference by this Court.
5.1 We also find guidance and support from Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- “The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal”.
5.2 Similarly, we also draw support and guidance from the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:-
“Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”
5.3 Similarly, we also draw support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under :
“If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”. 5.4 A question may also arise whether the interest free borrowing by the assessee should be treated at par with the capital of the assessee. In our considered view, the interest-free borrowing by the assessee should be treated as part of the capital of the assessee for the purpose of working out the diversion of fund in the instant case. It is for the reason that there was no interest cost incurred by the assessee on such borrowing. However, we note that there is no information emanating from the order of the AO about the amount of interest free borrowing by the assessee. Accordingly, we direct the assessee to furnish the necessary details about the interest-free borrowing held by him in the year under consideration. Accordingly the AO is directed to limit the disallowance of the interest expenses, after giving the benefit of the own fund of the assessee and interest-free borrowing, on account of diversion of interest-bearing fund. Thus the ground of appeal of the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 24/07/2020 at Ahmedabad.