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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: SHRI MAHAVIR PRASAD & SHRI AMARJIT SINGH
PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. These two appeals filed by the Revenue is directed against the order of the Ld. CIT(A)-9, Ahmedabad dated 29.06.2017 pertaining to A.Ys. 2004-05 & 2005- 06. The Revenue has taken following grounds of appeal:
& 1969/Ahd/2017 2 . A.Ys. 2004-05 & 2005-06 1.The ld. CIT(A) has erred in law and on facts by deleting the issue relating to disallowance of Rs. 21,26,11,000/- made on account of interest on borrowed capital pertaining to acquisition of Capital Assets. 2.The ld. CIT(A) has erred in law and on facts by deleting the disallowance of interest of Rs. 19,81,45,000/- treated by the A.O. as Capital Expenses. 3.The ld. CIT(A) has erred in law and on facts by allowing the disallowance of interest attributable to interest free loans and advances to subsidiary Company Rs. 4,77,04,203/-.
In this case, assessee company has claimed an amount of Rs. 21,26,11,000/- as being interest paid as deferred revenue expenditure in the books of account but claimed as expenses in the statement of income filed with the return.
During the previous year, interest paid on borrowings made for the purpose of business of the company amounting to Rs. 21,26,11,000/- has been treated as deferred revenue expenditure in the books of account of the company and as per assessee this amount is fully deductible u/s. 36(1)(iii) of the Income Tax Act. The company has satisfied all the conditions for allowability of expenditure of interest and funds have been utilized for the purpose of business of the company which has already set up.
But ld. A.O. was not agree with the contention of the assessee and held that interest paid prior to the date of such asset put to use shall be capitalized as per the provisions accordingly above said interest will not be allowed as revenue expenditure and same is to be considered as capital expenditure.
5. Thereafter assessee preferred first statutory appeal before the ld. CIT(A) who granted relief to the assessee on the ground that assessee claim is permissible & 1969/Ahd/2017 3 . A.Ys. 2004-05 & 2005-06 under the Income Tax Act. An identical issue was held by the Hon’ble Supreme Court in favour of the appellant its own appeal for assessment year 1992-93.
6. Now revenue has come before us against the order of the ld. CIT(A).
7. We have gone through the relevant record and impugned order. Similar issue was decided in appellant’s own case by the Hon’ble Supreme Court for A.Y. 1992-93 and 1993-04 assessee’s own case and ld. CIT(A) granted relief to the assessee on the basis of the Supreme Court judgment. Therefore in our considered opinion, same does not required any kind of interference at our end. Thus, this ground of revenue is dismissed.
Now we come to ground relating to deleting disallowance of interest of Rs. 19,81,45,000/-.
Ld. A.R. stated that similar ground was decided in favour of assessee by the Supreme Court and similar issue was decided in appellant’s own case by the Hon’ble High Court vide order dated 26.07.2016 for A.Y. 1998-99 to A.Y.2002-03 in Tax Appeal No. 73 of 2010 to 76 of 2010 with following observation: 2. The main issue involved in the consideration of these appeals is as to whether the Tribunal is right in law and on facts in confirming the order passed by CIT(A) in deleting the addition made on account of disallowance of interest relating to the borrowed funds which is diverted to the sister concern, without charging interest. 3. The Tribunal had dismissed the appeals filed by the revenue against the decision of CIT(A) deleting additions made on account of disallowance of interest relating to the borrowed funds diverted to the sister concern without charging interest. Being aggrieved and dissatisfied with the impugned judgment and order & 1969/Ahd/2017 4 . A.Ys. 2004-05 & 2005-06 passed by the ITAT, the revenue has preferred the present Tax Appeals for consideration of the aforesaid substantial question of law. 4. Mr.Nitin Mehta, learned advocate appearing for the revenue has drawn the attention of this Court to para 6 of the assessment order and submitted that the company had advanced loans to subsidiary/other companies and therefore the assessee was asked to furnish details and explain the advances. He submitted that the assessee vide its written submissions stated as under: (Rs. In Lacs) Share Capital 3398.79 Reserves & Surplus (Share Premium, Capital 31218.54 Reserve, Capital redeem reserve etc.) Total 34617.33
(Rs. In Lacs) Gross investment in fixed assets 97202.22 Inventories 3422.24 Receivables 10009.15 Total 110633.61 4.1 The Assessing Officer in para 6 of the assessment order has further observed as under: “... As shown above, above advances have been taken by the company wholly and exclusively for the purpose of the business of the company. The advances have been given for sufficient, adequate and apparent consideration and therefore the same are not in the nature of loans. By advancing these amounts the company had obtained benefit by way of acquisition of international business for export (Which increased company’s turnover and profitability), development of all India distribution network, participation in a project for manufacture of a component required for company’s products, acquisition of facilities by way of office buildings etc and research and development work for company’s products. 4.2 Mr. Mehta submitted that the CIT(A) as well as the Tribunal have committed an error in deleting the disallowance based on the assessment year 1996-97. He submitted that the Tribunal has erred in relying on the decision of the Apex Court in the case of Munjal Sales Corp. vs. Commissioner of Income Tax reported in [2008] 298 ITR 298 (SC) in view of the fact that the facts of the case of the assessee are not identical to the facts of the case relied upon by the Tribunal.
Mr. S.N. Soparkar, learned Senior Counsel appearing with Mr. B.S. Soparkar, learned advocate on behalf of the respondent – assessee has submitted that the & 1969/Ahd/2017 5 . A.Ys. 2004-05 & 2005-06 advances were either for commercial expediency to its sister concern or the assessee was having surplus interest free funds available with it. He has relied upon a decision of this Court in the case of Commissioner of Income Tax vs. Raghuvir Synthetics Ltd. reported in [2013] 354 ITR 222 (Guj).
Having heard Mr. Mehta, learned advocate appearing on behalf of the Department and Mr.Soparkar, learned Senior Advocate appearing on behalf of the assessee and the question posed for consideration by us we are of the opinion that the Tribunal has not committed any error in deleting the addition made on account of disallowance of interest relating to the borrowed funds which is diverted to the sister concern without charging interest. In the case of Raghuvir Synthetics Ltd. (supra), this Court has held as under: “We may refer to the judgment of Apex Court at this stage given in case of S.A.Builders Ltd. v. Commissioner of Income Tax (Appeals) reported in 288 ITR 1 (SC) where the question was whether interest on funds borrowed by the assessee to give an interest free loan to sister concern should be allowed as deduction and the Apex Court ruled thus : “We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. xxx In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income Tax Authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. xxx The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. xxx We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377, that once it is established that there was nexus between the expenditure and the purpose of the business (which need not & 1969/Ahd/2017 6 . A.Ys. 2004-05 & 2005-06 necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The Income Tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits Accordingly, the question is answered in favour of the assessee by the Apex Court. In this Tax Appeal it is to be specified here that considering the material on record and keeping in view substantial interest free funds and business expediency that the CIT(A) and Tribunal held the issue in favour of assessee. There is absolutely no perversity in such findings. On the contrary, they are conforming to the well laid down guiding principle on the subject. In the premise, question of law needs to be answered in favour of assessee and against the Revenue. Tax Appeal is dismissed accordingly and stands disposed of. “
6.1 From the above, it is clear that the Tribunal has correctly approached the issue which has been proposed in the present Tax Appeals. When there was no evidence brought on record by the Department for the Tribunal to hold otherwise, we hold that the issue is appropriately concluded in favour of the assessee and against the Revenue. The Tribunal has rightly relied upon the decision of the Apex Court in the case of Munjal Sales Corporation (Supra). It is borne out that the advances were either for commercial expediency given to its sister concern or the assessee was having surplus interest free funds. The issue is therefore squarely covered by the aforesaid two decisions.
In view of the above, the question raised for consideration in the present appeals are answered in favour of the assessee and consequently, the impugned judgment and order passed by the ITAT is confirmed. Hence, the present Tax Appeals are dismissed. No costs.
& 1969/Ahd/2017 7 . A.Ys. 2004-05 & 2005-06 10. Thus, respectfully following the judgment of Hon’ble Supreme Court and Jurisdictional High Court, we are not inclined to interfere in the order passed by the ld. CIT(A). Therefore same is dismissed.
Now we come to next ground allowing interest of Rs. 4,77,04,203/-.
Ld. A.R. cited a decision of Hon’ble Supreme Court in the case of Munjal Sales Corporation 298 ITR 298 (SC): “Under the Income-tax Act, 1961, after amendment of the Act by the Finance Act, 1992, in order that interest paid on borrowings can be allowed as a deduction in computing the business profits, every assessee, including a firm, has to establish, in the first instance, that it was allowable under section 36(l)(iii); and, in the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv).
Held, however, on the facts, in this case, that since the assesses had borrowed the moneys from its partners as early as 1991, and the Appellate Tribunal had held that the loans were given by the partners for business purposes and the interest did not exceed 18 per cent, per annum simple interest the assessee-firm was entitled to deduction of interest on the borrowings for the assessment years 1993-94 to 1997-98.
Held also, that since the opening balance of the profits of the assessee-firm as on April 1, 1994, was Rs. 1.91 crores, and the profits were sufficient to cover the loan given to a sister concern of Rs. 5 lakhs only, the Appellate Tribunal ought to have held that the loan given was from the assessee's own funds.
& 1969/Ahd/2017 8 . A.Ys. 2004-05 & 2005-06 Decisions of the Punjab and Haryana High Court in Munjal Sales Corporation v. CIT [2008] 298 ITR 288 and CIT v. Munjal Sales Corporation [2008] 298 ITR 294 reversed on the facts.)”
And further stated that similar issue was decided by the Hon’ble Jurisdictional High Court in appellant’s own case which we have discussed in earlier ground. Therefore, in our considered opinion, same does not require any kind of interference at our end. We hold that ld. CIT(A) has passed reasoned order.
In the result, appeal filed by the Revenue is dismissed.
Now we come to for A.Y. 2005-06, the revenue has taken following grounds of appeal:
1.The ld. CIT(A) has erred in law and on facts by deleting the issue relating to disallowance of Rs. 21,26,11,000/- made on account of interest on borrowed capital pertaining to acquisition of Capital Assets. 2.The ld. CIT(A) has erred in law and on facts by allowing the disallowance of interest attributable to interest free loans and advances to subsidiary Company Rs. 4,63,09,680/-/-.
3. It is therefore, prayed that the order of the ld. CIT(A) may be set-aside and that of the assessing officer be restored.
Since in connected we have confirmed order of ld. CIT(A) and decline to interfere in the impugned order. Therefore, this appeal of Revenue is also dismissed. & 1969/Ahd/2017 9 . A.Ys. 2004-05 & 2005-06 17. In the result, both the appeals filed by the Revenue are dismissed.
Order pronounced in Open Court on 08 - 01- 2020