BALAJI ELECTRICAL INSULATOR PRIVATE LIMITED,,MEHSANA vs. THE INCOME TAX OFFICER, WARD-1(1)(2),, AHMEDABAD

PER Ms. MADHUMITA ROY - JM:

The instant appeal filed by the assessee is against the order dated 13.10.2016 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad under section 143(3) r.w.s. 144 of the Income Tax Act, 1961 (hereinafter referred as to “The Act”) arising out of the order dated 02.03.2015 passed by the Income Tax Officer, Ward – 1(1)(2), Ahmedabad for the Assessment Year 2012-13.

- 2 - ITA Nos.73/Ahd/2017 Balaji Electrical Insulator Pvt. Ltd. vs. ITO Asst.Year – 2012-13 15.09.2014, a questionnaire was also served upon the assessee along with a notice u/s 142(1) of the Act.

During the course of assessment proceeding, the details of the interest free loans and advances extended by the assessee company to various parties have been submitted upon perusal of which the AO came to a finding that the assessee did not have any business transaction with those parties, unlike the parties whom it has extended business advances during the year under assessment. The appellant duly submitted before the Learned AO that the funds have been advanced for the business of the assessee company and utilized accordingly. It was the case of the Learned AO that the assessee has diverted the funds raised for the purpose of business to provide advances to related parties without fulfilling the actual purpose of such loans. The assessee was not in the money lending business to earn interest. Further that, the interest on borrowed capital is allowed as a deduction from business only if it satisfies the condition that the same is used for the business purposes. When the borrowed fund was diverted for giving interest free loans, the proportionate interest attributable to such loans could be legitimately disallowed. The following details of interest free fund available with the assessee produced by the assessee on 25.02.2015 were also considered by the Learned AO: Interest free Funds Amount in Rs. SHARE CAPITAL 139320000 Share application 500000 Reserve and Surplus 25158606 Deferred tax liability Prov. Net 22132121 Depreciation reserves 35395402 NON INTEREST BEARING Unsecured loan 8562459 Total Interest free fund A 231068588 Interest bearing fund SECURED LOAN Bank OD 67756949 Term Loan 8744200 Differed Payment (car loans) 215568 INTEREST BEARING Unsecured Loan 30331445 Total B 107048162

- 3 - ITA Nos.73/Ahd/2017 Balaji Electrical Insulator Pvt. Ltd. vs. ITO Asst.Year – 2012-13 Gross Fund Employed in business 338116750 PERCENTAGE OF INTEREST BEARING FUND 31.66 PERCENTAGE OF NON INTEREST BEARING 68.33 FUND TOTAL INTEREST PAID DURING THE YEAR BANK INTEREST ON OD EXP. 10895287 BANK INTEREST ON TERM LOAN 2202071 INTEREST ON UNSECURED LOAN 4419973 INTEREST ON CAR LOAN 26768 TOTAL INTEREST PAID 17544099 RATE OF INTEREST ON TOTAL FUND 5.19% EMPLOYED IN BUSINESS

The Learned AO ultimately after considering the above chart of interest fund including the value of depreciation reserves, interest expenses in proportion to the funds diverted for non business purpose disallowed an amount of Rs.20,78,380/- u/s 36(i)(iii) and added to the total income of the assessee. In appeal, the same was confirmed by the Learned CIT(A). Hence, the instant appeal before us.

- 4 - ITA Nos.73/Ahd/2017 Balaji Electrical Insulator Pvt. Ltd. vs. ITO Asst.Year – 2012-13 utilized for other specific purpose and advances given to parties was out of the own funds of the appellant company. Since the interest on borrowed fund is allowable as business expenditure by virtue of income tax provision u/s 36(1)(iii) hence payment made for interest on borrowed fund should be allowed as interest expenses in its totality and interest free loans and advances granted out of the interest free own funds even not used for business and no actual interest is received by the assessee than notional interest on such fund cannot be disallowed by interest expenses. If that be so, disallowance of proportionate notional interest expenses of Rs.20,78,380/- on the basis of interest free advances i.e. Rs.353.34 lacs is not in terms of law and liable to be deleted. The Learned AR also contended that interest expenses has to be allowed as deduction where interest bearing fund are advanced without interest. It is necessary that advances given by the businessman at all times must be for earning interest. The reasonableness of the expenditure would be covered into only for the purpose of the determining whether, in fact, the amount was spent. Once it is established that the nexus between the expenditure and the purpose of business, the revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. In support of his contention he relied upon the judgment passed by the Hon’ble Delhi High Court in the case of Dalmia Cement (B) Ltd. (2002) 254 ITR 377. On the other hand, Learned DR relied upon the order passed by the authority below.

- 5 - ITA Nos.73/Ahd/2017 Balaji Electrical Insulator Pvt. Ltd. vs. ITO Asst.Year – 2012-13 The details of the party wise advance and owned funds as submitted by the assessee is as follows: Sr. Name of the Party Amount in Rs. No. 1. Dineshchandra A Patel 14379486.00 2. Shree Balaji Corporation 70000.00 3. Subhaubhai M. Shah (Real 13791000.00 Estate) 4. Subhaubhai M. Shah 1093660.00 5. Vibrat P Patel (Real Estate) 1000000.00 6. Shree Shyam Distributors (Real 4500000.00 Estate) 7. Shakarbhai Chaturbhai Patel 1000000.00 (Real Estate) Total 35834146.00

Following details of interest free fund consisting of capital fund, free reserves, interest free unsecured loans, provision for deferred tax liabilities created out of surplus and accumulated depreciation reserve out of the company had given interest free loan and advances: Fund Amount Share Capital 139320000 Share Application money 500000 Reserve and surplus 25158606 Interest free unsecured loans 8562459 Deferred Tax liabilities Net of 22132121 Depreciation reserve 35395402 Trade payable 141288991 Total 372357579

We have also gone through the other financial details of the assessee company. We find sufficient interest free fund was available with the assessee out of which interest free loan and advances were provided to parties. Whether the decision as to how much is a reasonable expenditure ought to have been decided by the assessee company; the revenue cannot question that once the nexus between the expenditure and the purpose of business

- 6 - ITA Nos.73/Ahd/2017 Balaji Electrical Insulator Pvt. Ltd. vs. ITO Asst.Year – 2012-13

has been established as already decided by the number of judgments pronounces by different legal forum including the judgment passed by the Hon’ble Delhi High Court in the case of CIT-vs-Dalmia Cement (P.) Ltd. (2002) 254 ITR 377.

In that view of the matter, we do not find any reason for disallowance u/s 36(1)(iii) of the Act as made by the authorities below. The addition is thus deleted.

Sd/- Sd/- ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER

Ahmedabad; Dated 29/03/2019 Priti Yadav, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Ahmedabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad