M/S. CONWOOD CONSTRUCTION & DEVELOPERS PVT.LTDCONSTRUCTION,MUMBAI vs. DCIT CENTRAL CIR-6, MUMBAI

In both the appeals, the assessee is aggrieved by the decision of learned CIT(A) in confirming the disallowance of part of interest expenditure.

The assessee is engaged in the business of development and construction of the properties. The Assessing Officer completed the assessment of both the years by disallowing part of interest expenditure, for the reason that the assessee has advanced interest free loans to its sister concerns. We notice that the Assessing Officer has mentioned that the disallowance is being made under section 14A read with rule 8D in respect of interest free loans given by the assessee to the sister concerns.

In A.Y. 2003-04 the Assessing Officer computed proportionate amount of interest expenditure at Rs. 33,01,216/- attributable to interest free loans given to sister concerns and reduced the same from “Work in progress” relating to “Shagun Project”. In the similar manner, the Assessing Officer computed the amount of interest expenditure attributable to interest free loans given to sister concerns at Rs. 23,57,733/- in AY 2004-05 and reduced the same from “Work in progress” relating to “Shagun Project”.

The Learned CIT(A) confirmed the addition made by the Assessing Officer in both the years by way of reducing the “Work in Progress” and hence the assessee has filed these appeals before the Tribunal.

We have heard the parties and perused the record. We noticed that there appears to be lack of clarity in the mind of Assessing Officer in mentioning the section under which the impugned disallowance is made. The case of the Assessing Officer is that the assessee has given interest free loans to sister concerns and hence proportionate interest expenditure attributable to such loans should be disallowed. However, the AO has mentioned that the provisions of section 14A read with rule 8D are applicable. However, the said provisions are applicable only if the assessee has earned any exempt income. The Learned AR submitted that the assessee has not earned any exempt income and hence the question of invoking the provisions of section 14A will arise in the both the years under consideration.

Under the above set of facts, it has to be taken that that the Assessing Officer has made impugned disallowance in both the years under section 36(1)(iii) of the Act, since according to the Assessing Officer the assessee has given interest free advances to its sister concerns out of interest bearing funds. The Learned AR submitted that the assessee has also borrowed interest free loans. The amount of interest free loans taken by the assessee together with its own funds would exceed the amount of interest free loans

We find merit in the above said contentions of Ld A.R, as the same is in accordance with the decision rendered by Hon'ble Bombay High Court referred supra, i.e., if the amount of interest free loans given to sister concerns is less than the amount of aggregate of own funds and interest free loans taken by the assessee, then no disallowance under section 36(1)(iii) of the Act is called for. However, we notice that the factual aspects relating to quantum of own funds and interest free funds available with the assessee in both the years vis-à-vis interest free advances given to sister concerns require verification at the end of the Assessing Officer. Accordingly, we set aside the order passed by learned CIT(A) in both the years and restore this issue to the file of AO for the limited purpose of verifying the factual aspects discussed above. If the aggregate amount of own funds and interest free funds available with the assessee exceeds the amount of interest free advances given to the sister concerns, then no disallowance under section 36(1)(iii) of the Act is called for as per the decision rendered by Hon’ble Bombay High Court in the case of Reliance Utilities and Power (supra). With these directions, we restore this issue in both the years to the file of the Assessing Officer.

In the result, both the appeals filed by the assessee are treated as allowed for statistical purposes.