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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI , MANISH BORAD
आदेश/O R D E R
PER SHRI MANISH BORAD, A.M:
This is an appeal filed by the assessee against the order of CIT(A)-6, Ahmedabad dated 20.02.2018 pertaining to assessment year 2015-16 which is arising out of the order u/s 143(3) of the Income Tax Act 1961(hereinafter called as the ‘Act’) framed on 14.11.2017 by DCIT, Circle-1, Bhavnagar
Natural Dehydrated Vegetables For AY 2015-16 2 2. Brief facts of the case as culled out from the records are that the assessee is a Private Limited Company engaged in business. Income of Rs.57,38,490/- declared in the e-return of income filed on 30.09.2016. Case selected for limited scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. During the course of assessment proceedings Ld. AO found mismatch of Rs.58,295/- in the import invoice value which resulted into an addition of Rs.58,295/-.
Ld. Assessing Officer also observed that in the preceding year interest free advances was given to M/s. Rai Metal Works Pvt. Ltd., which was not for business purpose. During this year assessee has incurred interest expenses. Since the interest free loan was given to related party for non-business purpose Ld. AO made an addition for notional interest of Rs.11,62,396/- on the amount which remained outstanding during the year. Income assessed at Rs.69,59,181/-.
Aggrieved, assessee preferred an appeal before the Ld. CIT(A) but could not succeed.
Natural Dehydrated Vegetables For AY 2015-16 3 5. Now, assessee is in appeal before the Tribunal raising following grounds of appeal: “1. The Ld. CIT(A)-6, Ahmedabad has erred in law and on facts in confirming action of assessing officer of going beyond limited scrutiny jurisdiction and not following board circular issued in this regard with respect to disallowance of interest expenses. She has also erred in ignoring submission made in this regard and not adjudicating this issue in the order passed by her.
2. The Ld. CIT(A)-6, Ahmedabad has erred in law and on facts in confirming action of assessing officer of disallowance of interest expenditure of Rs.11,62,396/-.
3. The ld. CIT(A)-6, Ahmedabad haws erred in law and on facts confirming action of assessing officer in making addition of Rs.58,295/- on account of difference found on reconciliation of CBEC data as per ITS and as per books.
4. The appellant craves leave to add, alter, amend or modify any of the grounds of appeal.
6. At the outset, the Ld. counsel for the assessee requested for not pressing ground no.3 relating to addition of Rs. 58,295/-. Therefore, the ground no.3 is dismissed as not pressed.
7. As regards ground No.1, Ld. counsel for the assessee submitted that the case of the assessee was selected for limited scrutiny for the reasons mentioned in the Natural Dehydrated Vegetables For AY 2015-16 4 notice. But the additions were made on other basis which were out of the purview of the limited scrutiny proceedings.
Per contra Ld. Departmental Representative (DR) submitted that in the notice issued u/s 143(2) of the Act by the Ld. AO for limited scrutiny five issues were to be examined. Out of which one of the reason was payment to related persons mismatch. Interest free loan given to M/s. Rai Metal Works Pvt. Ltd. is a limited party of the assessee and therefore, the Ld. AO has traveled within its jurisdiction of the limited scrutiny.
We have heard the rival contentions and perused the record placed before us and carefully gone through the contentions of both the parties. Legal ground is raised in ground no.1 contending that the Ld. AO selected the case for limited scrutiny but made addition for other reasons thus acted beyond jurisdiction. Addition for disallowance of interest made by Ld. AO for the interest free loans and advances given to M/s. Rai Metal Works Pvt. Ltd. at Rs.6,37,09,085/-. This amount was given in the preceding year.
Natural Dehydrated Vegetables For AY 2015-16 5 10. Ld. counsel for the assessee has not disputed the fact that the disallowance was interest free and was not for any business purpose. It is also not disputed that the M/s. Rai Metal Works Pvt. Ltd. is a related/sister concern of the assessee and the transactions between the two concerns needs to pass through the lens of section 40(A(2)(b) of the Act. Ld. AO issued notice u/s 143(2) of the Act for limited scrutiny of following five issues: i. Custom Duty Payment Mismatch ii. Sales Turnover Mismatch iii. Payment to related persons mismatch iv. Duty drawback received/receivable v. Loss from currency fluctuations
From perusal of the above issues we observe that issue no.3 is payment to related persons mismatch. There is no specific name of a party for which the information is to be called. It is general phrase that payment to related persons mismatch needs to be examined. In the instant case the transactions was with the related party i.e. M/s. Rai Metal Works Pvt. Ltd. and the basis of the addition is the related party transaction.
Natural Dehydrated Vegetables For AY 2015-16 6 12. We, therefore, are of the considered view that since in the limited scrutiny notice one of the issue relates to payment to related concern the AO was well within his jurisdiction to examine all the transactions with the related parties. Thus, the assessee fails in the legal issue raised in ground no.1 of this appeal. Thus, ground no.1 of the assessee’s appeal stands dismissed.
Now we take ground no.2 to the disallowance of interest of Rs.11,62,396/-. Ld. counsel for the assessee submitted that the assessee is having sufficient interest free funds in the form of share capital and reserves and surplus which are more than the alleged loans and advances which was recovered in the year under appeal. Referring to the decisions in the case of CIT vs. Max India ltd. (P & H, HC) (2017)398 ITR 209, Hon’ble High Court of Bombay in the case of CIT vs. Reliance Utilities & Power Ltd. dated 09.01.2009 and Hon’ble Apex Court in the case of CIT vs. Reliance Industries Ltd. vide Civil Appeal No.10 of 2019 on 02.01.2019. He contended that the disallowance needs to be deleted.
Natural Dehydrated Vegetables For AY 2015-16 7 14. Per contra Ld. Departmental Representative (DR) vehemently argued supporting the orders of lower authorities.
We have heard the rival contentions and perused the record placed before us. The issue relates to notional interest disallowance of Rs.11,62,396/-. The assessee gave interest free loans for non-business purpose in the preceding year to its related party M/s. Rai Metal Works Pvt. Ltd. and the outstanding debit balance as on 1.04.2014 at Rs.6,37,09,085/-. This loan account was finally settled on 3rd June, 2014. The assessing officer had made disallowance for notional interest calculated for the period of 1st April 2014 to 3rd June, 2014. The assessee enjoys cash credit facility and the interest of Rs.1,21,818/- was paid for the period of 1st April 2014 to 3rd June, 2014.
From perusal of the audited balance sheet we observe that the assessee possessed paid up share capital of Rs.58 lacs and accumulated reserves and surplus at Rs.10,08,85,548/- and Rs.10,73,65,302/- as on 31.03.2014 and 31st March 2015 respectively. The total of these two figures i.e. share capital and Natural Dehydrated Vegetables For AY 2015-16 8 accumulated reserves and surplus exceeds the amount of loan and advances given to related party in the preceding year which is received back during the year.
Similar issue came up before Hon’ble High Court of Bombay in the case of CIT vs. Reliance Utilities & Power Ltd. dated 09.01.2009 wherein Hon’ble Court observed as follows:
If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen.. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the Natural Dehydrated Vegetables For AY 2015-16 9 contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft 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 C.I.T. (Appeals) and I.T.A.T.
Similar set of issues came up before the Hon’ble Apex Court in the case of CIT vs. Reliance Industries Ltd. vide Civil Appeal No.10 of 2019 on 02.01.2019 wherein their lordship observed as follows: “ Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for assessment year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.”
We, therefore, respectfully following the above judgments after examining the facts of the instant case, are of the considered view that the issue stands covered in favour of the assessee by the above judgments. Since
Natural Dehydrated Vegetables For AY 2015-16 10 the assessee has accumulated interest free reserves and share capital which exceeded the interest free loans given to the related party to M/s. Rai Metal Works Pvt. Ltd. thus, no interest disallowance was called for. We, accordingly delete the disallowance and allow ground no.2 of the assessee’s appeal.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 25 .02.2020.