MADHAV COTTON GINNING & PRESSING FACTORY,BOTAD vs. THE INCOME TAX OFFICER,WARD-2(3), BHAVNAGAR

The assessee has raised following grounds of appeal:- “1.1 The order passed u/s.25(j on 02.07.2014 for A.Y.2011-12 by CIT(A)-XX, Abad upholding the disallowances of Rs.57,91,569 is wholly illegal, unlawful and against the principles of natural justice.

2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have upheld the disallowance of above said expenses.

1 The Ld.CIT(A) has erred in holding that the appellant was required to maintain daily cash balance of Rs. 4 cr. and the excess balance was idle so that interest exp to that extent was not admissible. The entire exercise of working out the disallowance of Rs, 56,26,424 was mere presumption and estimate without considering the relevant factors such as nature and volume of business, treading period etc. The Ld. CIT(A) also failed to consider the contention of the appellant that the funds were advanced to M/s. Om Kailash Cotton out of commercial expediency. In the alternative the disallowance of interest exp. made by AO was highly excessive and required to be reduced substantially. It is, therefore, prayed that the disallowances of Rs. 57,91,569 made by the AO and confirmed by CIT(A) may kindly be deleted.”

At the time of hearing ld. counsel of the assessee has not pressed ground nos. 2.1(i), (ii) & (iv) therefore the same are dismissed All other grounds of appeal are connected to the issue of disallowance of interest expenses therefore they are adjudicated together as under.

The brief fact of the case is that during the course of assessment, the assessing officer observed that the assessee has paid interest of Rs. 1,55,96,370/- to the bank on cash credit facilities availed. He has also noticed that on the other side the assessee was maintaining huge cash balance in hand in the books of accounts. The assessing officer was of the view that maintenance of such a huge cash balance in hand and keeping it idle and paying the interest thereupon to the bank was not a prudent decision which a businessman would take. Therefore, the assessing officer has estimated cash in hand requirement of the assessee at Rs. 4 crores and held that interest of Rs. 56,26,424/- on idle cash in excess of Rs. 4 cores was not allowable u/s. 36(1)(3) of the act. Accordingly, the assessee has made the impugned addition of Rs. 56,26,424/- to the total income of the assessee.

Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee reiterating the reason mentioned by the assessing officer.

We have heard the rival contentions and perused the material on record carefully. The assessing officer has made disallowance of Rs. 56,26,424/- in respect of interest expenses u/s. 36(1)(iii) of the act paid to the bank on cash credit on the ground that the assessee was maintaining huge cash balance in its books of accounts. The assessee explained that its nature of business was seasonal and cash in hand was required to be maintained as it had to make cash payment to farmers for purchase of raw cotton and it was difficult to estimate the cash requirement on day to day basis. It is undisputed fact that borrowing by way of CC account with bank were utilized for the purpose of the business of the assessee. It is observed that assessing officer has made the impugned disallowance on hypothesis basis without considering that requirement of cash in hand for its business has to be decided by the assessee company for running of its business . In the light of the above facts, the decision of ld. CIT(A) is not justified , therefore, the appeal of the assesse is allowed.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 18-02-2019 (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 18/02/2019