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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ : NEW DELHI
Before: SHRI ANIL CHATURVEDI & SHRI AMIT SHUKLA
objection filed by the assessee are against the impugned order dated 30.08.2018 passed by the ld. CIT (A)-35, New Delhi for the quantum of assessment passed under section 143(3) read with section 147 of the Income-tax Act, 1961 (for short ‘the Act’) for the assessment year 2015-16.
The grounds of appeal raised by the Revenue read as under:-
“1. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in restricting the disallowance of interest expenses of Rs.3,36,00,000/- made by the AO u/s 36(1)(iii) of the Income Tax Act ('the Act') to Rs.40,75,121/-, not appreciating the fact that the borrowed funds were utilized by the assessee for purposes other than its business activity, having been invested in the form of zero percent debentures in a sister concern. a) Whether the Ld CIT(A), in restricting the disallowance of interest expenses to Rs.40,75,121/-, has erred in ignoring the findings of the AO that on the one hand the assessee has claimed huge interest expenses and on the other hand substantial amount have been placed at the disposal of the sister concern on interest-free basis and therefore, the ratio of the judgment in the case of CIT vs Abhishek Industries Ltd 286 ITR 1 was squarely attracted in terms of which there can be no separate identification of source of funds coming into the common kitty in such cases and the only thing sufficient to warrant the disallowance of interest paid would be that the assessee has some loans and other interest-bearing debts to be repaid. b) Without prejudice to the above, whether the Ld CJT(A) has erred in calculating the proportionate disallowance of interest at Rs. 49,75,1211- wrongly.”
Whereas the ground taken in cross objections is as under :-
“1. That Restricting addition to Rs.40,75,121/- against Rs.3,36,00,0001- u/s 36(1)(iii) by the Ld.CIT(A) is not sustainable in law as well as on merits. The Ld A.O has made disallowance assuming that interest bearing funds have been invested for non interest bearing purposes. The investment is in made in shares and provisions of see 14A are not applicable as no exempt income has been earned. The addition of Rs.40,75,1211- as restricted by CIT(A) is unjustified, illegal, not sustainable in law as well as on merits.”
Facts in brief of the issue involved are that the AO during the course of assessment proceedings observed that assessee has diverted interest bearing funds for making investment of Rs.28 crores in M/s. Moderate Leasing & Capital Services Limited, a related company. Ld. AO observed that assessee has also debited an amount of Rs.24,93,81,512/- as interest expenses in its profit & loss account. Facts which were gathered during the assessment proceedings u/s 143(3) of the Act for AY 2014-15 suggested that assessee has diverted interest bearing funds for making investment of Rs.28 crores in the said company. Based on this premise, the assessee’s case was reopened u/s 148 of the Act as per the reasons recorded in the assessment order. Accordingly, the ld. AO worked out the proportionate disallowance of Rs.3,36,00,000/- by working out the notional interest expenses @ 12% on the amount of Rs.28 crores.
Before the ld. CIT (A), the assessee took a plea that AO has not analyzed the balance sheet of the assessee and availability of interest free funds with the assessee nor has he seen, copy of account with the said company. The fact of the matter was that assessee converted its debit balance in M/s. Moderate Leasing & Capital Services Limited into convertible debentures on 30.04.2011 when its debit balance with the company was about Rs.29.13 crores; and out of this sum, a sum of Rs.28 crores was converted into convertible debentures. It was not a case of any interest bearing funds being converted into non-interest bearing instrument.
The convertible debentures were converted into equity shares on 25.03.2014. Thus, in this year, the amount is appearing as opening balance of shares of M/s. Moderate Leasing & Capital Services Limited in the balance sheet. Apart from that, assessee had share capital and free reserves of Rs.51.13 crores as on 31.03.2015. The long term borrowings of Rs.122.33 crores in the earlier years were reduced to Rs.6.21 crores during the year. Apart from that, assessee had trade payable of Rs.49.53 crores which was again non-interest bearing funds. Ld. CIT (A), after considering the submissions made by the assessee and also observing the finding given by the ld. AO, had given part relief by holding as under :-
“4.3.3.1 The facts of the case are that the appellant company had earlier invested an amount of Rs.28,00,00,000/- in zero percent debentures of M/s. Moderate Leasing of Capital Services Limited, a related company, on which no interest was earned during the year. These debentures got converted in equity shares on 25.03.2014. The AO has observed that the appellant company has debited an amount of Rs.23,77,89,906/- towards interest on borrowings. The AO held that the interest expenses of Rs.3,36,00,000/- @12% on the fund of Rs.28,00,00,000/- is to be disallowed, the interest being disallowed for the entire financial year as the debentures got converted only at the fag end of the year i.e. on 25.03.2014. Accordingly, the AO disallowed the interest to the extent of Rs.3,36,00,000/- u/s. 36(1)(iii) of the I.T. Act, 1961. 4.3.3.2. The Appellant has submitted that the allegation of the AO that the interest bearing funds have been diverted by the appellant for purchasing these debentures is factually incorrect as Appellant Company has not subscribed to any debentures during the year. The Appellant has stated that during the year under consideration this amount is appearing as opening balance of shares of Moderate Leasing & Capital Services Ltd and the facts is that the appellant company converted its debit balance with M/s Moderate Leasing & Capital Services Ltd into convertible debentures on 30.04.2011 when its debit balance with the company was about Rs.29.13 crores and out of this sum, a sum of Rs. 28 crores was converted into convertible debentures and it was not a case of interest bearing funds being converted into non interest bearing instrument. The appellant has further stated that the convertible Debentures were converted into equity shares on 25.03.2014. The AR of the appellant company has submitted that the company was having share capital & free reserves of Rs. 51.13 crores as at 31.03.2015; That the appellant company's long term borrowings were reduced from Rs 122.33 crores to Rs 116.21 crores during the year meaning they came down by Rs 6.12 Crores during the year; That the appellant company was having trade payable of Rs. 49.53 crore which was again non-interest bearing funds; That during the year under consideration the appellant company had paid interest on certain loans which are always given for specific purpose, i.e vehicle loan & equipment loan, Bill discounting, cash credit loan, packing credit loan and all these loans were taken for specific purposes and they were utilized for that very purpose only. Further it has been stated that the appellant has also earned interest of Rs 4.55 Crores during the year under reference and so the net interest outflow of non specific interest amounted to Rs.8,78,17,193 -4,55,29,535 = Rs 4,22,87,658/-. 4.3.3.3. During the appellate proceedings, the appellant company has submitted without prejudice to the main submission; if any disallowance is to be made then the same should be made in proportion to the interest bearing funds and non interest bearing funds available with the company. The total interest bearing funds are Rs.1,89,18,92,662/- and non interest bearing funds are Rs.1,00,65,22,625/- which comes to Rs.2,90,55,68,565/-. The disallowance on this basis will amount to Rs.28,00,00,000 X 4,22,87,658 = 40,75,121/- 2,90,55,68,565 The submission of the appellant has been considered. The addition on this ground is restricted to Rs.40,75,121/-.”
Before us, ld. counsel for the assessee drew our attention to the copy of profit & loss account of M/s. Moderate Leasing & Capital Services Limited, appearing on pages 1 to 6 of the paper book, and pointed out that the assessee has advanced money/loan to the said company right from FY 2006-07 and there was always a debit balance. On 30.04.2011, the assessee had converted the debit balance of Rs.29.13 crores into convertible debentures of Rs.28 crores. This was done in the FY 2011-12. Thus, debentures were subscribed out of outstanding loan with the said party. Thus, it is not a case of diversion of interest being funds into non-interest bearing purposes. Apart from that, the said amount was converted into equity shares and was appearing as opening balance and there was no question if any interest bearing funds have been diverted by the assessee. He also drew our attention to non-interest bearing funds as available in the balance sheet and relied upon the following judgments in support of the contention that if there are interest bearing funds then there cannot be any presumption that any loan advanced in the earlier years is out of secured/unsecured loan on which interest has been paid :-
(i) CIT vs. Ms. Sushma Kapoor 319 ITR 299 (Del.); (ii) CIT vs. Radico Khaitan Ltd. 274 ITR 354 (All.)
(iii) CIT vs. Reliance Utilities Power Ltd. 313 ITR 340 (Bom.) (iv) CIT vs. Bharti Televenture Ltd. 200 Taxman 39 (Del.)(Mag.) (v) CIT vs. Prem Heavy Engineering Works Pvt. Ltd. (2006) 285 ITR (All.) (vi) S.A. Builders vs. CIT 288 ITR 1 (SC).
Thus, he pleaded that no disallowance could be made.
Ld. DR for the Revenue strongly relied upon the order of the AO and submitted that when assessee has mixed fund then it is difficult to point out that the loan and advances given to the sister concern are out of own funds because there cannot be any separate identification of source of fund coming into common kitty. Thus, ld. CIT (A) has erred in reducing the interest expenses of Rs.3,36,00,000/- to Rs.40,75,121/-.
We have heard the rival submissions, also perused the relevant finding given in the impugned order and documents placed on record. It is undisputed fact that the assessee has not given any loan or advances during the year. As can be seen from the copy of account of M/s. Moderate Leasing & Capital Services Limited, assessee has been paying advances and loan to the said company from time to time and was also being repaid by the said company.
All throughout, there were debit balances right from the assessment year 2006-07. In the FY 2011-12, the assessee has converted its debit balance of Rs.29.13 crores into convertible debentures on 30.04.2011 for a sum of Rs.28 crores. The said debentures were converted into equity shares on 25.03.2014 i.e. for the assessment year 2014-15. This amount was standing as opening balance to which AO has treated that the amount advanced of Rs.28 crores which was converted into convertible debentures from an advance given out of interest bearing funds. First of all, nowhere AO has analyzed as to when assessee had been advancing loan right from AY 2006-07 from out of any interest bearing funds or during the relevant year any further interest bearing funds have been diverted.
Converting of debentures on 30.04.2011 out of debit balance with the said party cannot be treated as diversion of funds to the sister concern out of interest bearing funds for the year under consideration. As stated by the assessee, the long term borrowings were reduced to Rs.6.12 crores during the year. Thus, we do not find any reason as to why disallowance can be made on such a premise. Without going into the merit, whether interest free funds were available or not, we hold that under these facts and circumstances, no disallowance can be made. Accordingly, entire disallowance made by the AO is deleted.
In the cross objection, the assessee has challenged the disallowance upheld by the ld. CIT (A) of Rs.40,74,121/-, since we have already deleted the entire disallowance, therefore, ground raised
in the cross objection also stands allowed.
9. In the result, the appeal filed by the Revenue is dismissed and cross objection filed by the assessee is allowed. Order pronounced in open court on this 8th day of December, 2021 after the conclusion of the hearing.