KIRLOSKAR ELECTRIC COMPANY LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(3)(1), BANGALORE

Firstly, we take up appeal in ITA No.1316/Bang/2024 as a lead appeal and the facts are culled out therefrom.

Briefly stated facts of the case are assessee is engaged in the business of manufacturing / trading of Electric Motors, Alternators, Traction equipment, Transformers, DG sets, Circuit Breakers / Starts / Contractors, filed its return of income declaring income as Nil under normal provisions and Rs.50,59,46,016/- under section 115JB of the Act. The return of income was summarily processed under section 143(1) of the Act. The case was subsequently selected for scrutiny. Notice under section 143(2) of the Act dated 27.08.2011 was issued and served on the assessee. Thereafter, notice under section 142(1) of the Act on various dates were issued and served on the assessee calling for details. In response to the notice, the assessee’s Authorized Representative [in short ‘AR’] appeared from time to time and produced the details called for. The learned Assessing Officer [in short ‘AO’], after examining all the details on record, concluded the assessment by making the following additions:

On being aggrieved by the Order of the learned AO, assessee carried the matter before the learned CIT(A). The learned CIT(A) partly allowed appeal of the assessee.

On being aggrieved by the order of the learned CIT(A), the assessee carried the matter before the Tribunal. The Tribunal remanded the matter back to the CIT(A) for examining the matter afresh. Thereafter, the learned CIT(A), in compliance of the direction of the Tribunal, after examining the submissions made by the assessee, being not satisfied, dismissed the appeal of the assessee.

The learned AR submitted that the assessee has made investments in its subsidiary viz., M/s. Kirsons BV, Netherlands, out of the accumulated interest free funds available with the assessee. He further submitted that the learned AO, observing that the assessee has secured and unsecured loans and has claimed interest expenditure of Rs.22,56,74,000/-, concluded that assessee has utilized borrowed funds for the purpose of granting advances and investing in subsidiary companies. He further submitted that the company has accumulated share capital and reserves amounting to Rs.19527.61 lakhs whereas the advances to sister concern is only Rs.9118.76 lakhs. The learned AR drew our attention to Page No.28 of the Annual report for the Financial Year 2009-10 demonstrating the availability of share capital, reserves and surplus and the investments correspondingly made against them. He also drew our attention to Page No.29 wherein the interest and finance charges on the loans taken by the assessee stood at Rs.225 lakhs in the Profit and Loss account for the Financial Year 2009-10. He further submitted that interest on the borrowings has not increased when

Per contra, the learned Departmental Representative [in short ‘DR’] referred to Page No.28 of the Annual Report and stated that the assessee has availed loans and there is no divisible pool maintained by the assessee between the own funds and the borrowed funds. He vehemently supported the orders of the learned AO wherein the AO has analyzed the cash flow statement filed by the assessee and concluded that the assessee does not have sufficient cash balance for making investments / advances to assessee concern. He, therefore, pleaded that the order of the learned CIT(A) be upheld.

We have heard rival contentions and perused the material available on record including the written submissions filed by the assessee. The main contention of learned AO is the assessee has invested huge sums in the subsidiary companies out of the borrowed funds by stating that the

The Hon’ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd., (supra), relied on by the learned AR in paragraphs 7 and 8 observed as follows: 7. 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.

Similarly, the Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities and Power Ltd., (supra) on identical facts and circumstances in para 10 has held as follows: 10. 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.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (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 Woolcombers of India Ltd.'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 overdraft 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 contention before the High Court. 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

In the instant case, Revenue is not disputing the availability of shareholders own funds but Revenue’s objection is with respect to non- availability of divisible pool between own funds and borrowed funds for the purpose of making investments / advances to subsidiary / sister concerns. Various judicial decisions have consistently held and affirmed the view that when funds available, in the form of both interest free and loan funds, the presumption would arise that investments would be out of funds generated from the company provided the said funds are sufficient to making the investments. In the instance case, the share capital and reserves and surplus as at 31st March 2010, aggregating to Rs.19527.61 lakhs are sufficient enough to making an investment of Rs.8579.43 lakhs. Respectfully following the judicial pronouncements as discussed above, we are of the opinion that since the interest free funds are available, it can be safely presumed that the investments were out of interest free funds of the assessee. Hence the learned AO is directed to delete the disallowance of Rs.9,69,40,630/-. We therefore allow the grounds raised by the assessee. It is ordered accordingly.

ITA Nos.1317 & 1318/Bang/2024 (AY: 2011-12 & 2012-13)

In the result, all the appeals of the assessee are allowed.