M/S SURYA AUTOMOBILES PRIVATE LIMITED,ABOHAR vs. DY. COMMISSIONER OF INCOME TAX CIRCLE-II, BATHINDA

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ITA 589/ASR/2018Status: DisposedITAT Amritsar06 August 2019AY 2012-136 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that since the assessee had sufficient own funds (reserves, surplus, and profits) to cover the expenses and investments, the disallowance of interest was not justified. The Tribunal followed Supreme Court and High Court judgments on the matter.

What were the facts?

The Assessing Officer disallowed foreign travel expenses of a director and proportionate interest on loans. The CIT(A) deleted the travel expenses but disallowed proportionate interest, and also restricted the disallowance on loan interest.

What were the issues?

Whether proportionate interest disallowance is justified when the company has sufficient interest-free funds to cover expenses and investments. Applicability of Section 2(22)(e) regarding deemed dividend.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 2(22)(e)

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(2)Show list

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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR

Before: SH. VIKRAM SINGH YADAV & SH. N.K.CHOUDHRY

Hearing: 26.07.2019Pronounced: 06.08.2019

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR BEFORE SH. VIKRAM SINGH YADAV, ACCOUNTANT MEMBER AND SH. N.K.CHOUDHRY, JUDICIAL MEMBER

ITA No.589(Asr)/2018 Assessment Year:2012-13

Surya Automobiles Pvt. Ltd. Vs. Dy. CIT, Hanumangarh Raod, Circle-II, Bathinda Abohar-152116 [PAN:AAFCS 2711N] (Appellant) (Respondent)

Appellant by: Sh. P.N. Arora (Ld. Adv.) Respondent by: Sh. Dheeraj Garg (Ld. DR) Date of hearing: 26.07.2019 Date of pronouncement: 06.08.2019

ORDER PER N.K.CHOUDHRY, JM: The instant appeal has been preferred by the Assessee against the order dated 11/09/2018 impugned herein, passed by the Ld. CIT(A)-Bathinda u/s. 250(6) of Income Tax Act, 1961 (hereinafter called as the ‘Act’) wherein the Ld. CIT(A) partly allowed the appeal of the assessee.

2.

The brief facts of the case are that the Assessing Officer disallowed the two amounts, first Rs.9,27,549/- incurred by the Director of company as expenses of foreign travel and second proportionate interest of Rs.2,40,000/- out of total claim of Rs.18,37,567/- under the provision of section 36(1)(iii) while relying upon the decision of jurisdictional High Court in the case of Abhisek Industries (286 ITR 01). The assessee challenged the

2 ITA No.589/Asr/2018 (A.Y.2012-13) Surya Automobile Pvt. Ltd. vs. DCIT

disallowance/additions before the Ld. CIT(A) who though deleted the amount of Rs.9,27,549/-, however, disallowed the interest @ 12% on the said amount and further directed the Assessing Officer to examine the applicability of deemed dividend u/s 150(1) of the Income Tax Act. Further the Ld. CIT(A) also restricted the amount of Rs.2,40,000/- to Rs.1,02,516/- on account of proportionate disallowance of interest expenses @ 12%. The Assessee challenged the sustaining of the additions by the Ld. CIT (A) before us and in support of its case ld. Counsel Mr. Arora submitted that more or less the case of the assessee is that the assessee has sufficient funds available and therefore disallowance of interest @ 12% in respect of addition of Rs.9,27,549/- which has been deleted by the Ld. CIT(A), is not sustainable. Further the assessee in respect of disallowance of interest to the tune of Rs.2,40,000/- which has been reduced to Rs.1,02,516/- by the Ld. CIT(A), argued that no interest bearing borrowed funds have been diverted for acquiring shares and the interest claimed as deduction is covered by the provisions of sec.36(1)(iii) of the Act. Further the investment of Rs.40 lacs in acquiring 40,000 shares of Surya Auto Engineering (P) Ltd. is covered by current year’s cash profit Rs.89,17,495/-, of the company . Further the interest of Rs.2,25,404/- has been charged in current year from Surya Auto Engineering (P) Ltd. on money advanced.

3.

On the contrary, the Ld. DR refuted the claim of the assessee and submitted that the order impugned herein does not suffer from any perversity or illegality or impropriety and therefore not liable to be interfered with.

3 ITA No.589/Asr/2018 (A.Y.2012-13) Surya Automobile Pvt. Ltd. vs. DCIT

4.

Having heard the parties at length and perused the material available on record. The Assessing Officer made an addition of Rs.9,27,549/- under the head “Foreign Travel Expenses by Director “ . Before the Ld. CIT(A), it was claimed by the assessee that though the said expenses were personal in nature, however, the same has not been claimed as expenses in P&L Account and therefore, no disallowance can be made. The Ld. CIT(A) though deleted the amount of Rs.9,27,549/-, however, disallowed the proportionate interest @ 12% on the said amount by observing that the assessee is not entitled to incur personal expenses of the Director even if the same are not routed through P&L Account and this will partake the character of interest free loans advanced to the Directors and therefore, proportionate interest to be disallowed. The Ld. CIT(A) also directed the Assessing Officer to examine the applicability of provisions of deemed dividend as provided u/s 2(22)(e) of the Act.

Further the Assessing Officer made an addition of Rs.2,40,000/- on the grounds that the assessee has purchased 40000 shares of Surya Auto Engineering (P) Ltd. by investing Rs.40 lacs and has been charging interest expenses to the tune of Rs.18,37,567/- to its P&L Account, because it has huge secured and unsecured loans. The investment made by the assessee does not have any commercial expediency and has been made only due to personal indulgence of the persons controlling the appellant and therefore, the Assessing Officer on proportionate basis disallowed the interest expenses @ 12%.

4 ITA No.589/Asr/2018 (A.Y.2012-13) Surya Automobile Pvt. Ltd. vs. DCIT

The assessee before the Ld. CIT(A) contended that the assessee has interest free funds available and even otherwise the proportionate disallowance worked out to be Rs.1,02,516/- only. Though, the Ld. CIT(A) did not accept the contention qua availability of the interest free funds, however, accepted the calculation of proportionate interest and thereby reduced the amount of Rs.24,0000/- to Rs.1,02,516/- only.

As both the additions are based on the disallowance of interest and therefore, for the sake of brevity and convenience have been taken into consideration for adjudication simultaneously. The Ld. CIT(A) disallowed the proportionate interest on both of the additions, however it is a fact that the assessee has reserve and surplus to the tune of Rs.1,57,58,615.79 as 1st April, 2011 and Rs.1,82,04,877/- as on 31st March, 2012 and the paid up capital of the company is Rs.40,15,000/- and the assessee company has earned the profit of Rs.89,17,495/-. It is the case of the assessee that the investment of Rs. 40 lacs in acquiring 40,000 shares of Surya Auto Engineering (P) Ltd. is covered by current year’s cash profit of the company amounting to Rs.89,17,495/- and the interest of Rs.3,25,401/- has been charged in current year from the said company on the money advanced. It is also a fact that the Assessing Officer while making the addition of Rs.2,40,000/- relied upon the judgment passed by the jurisdictional High Court in the case of Abhisek Industries (supra), which has already overruled by the Apex Court in the case of Hero Cycle Pvt. Ltd. vs. CIT reported in [2015] 379 ITR (Page 347). The jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. vs. CIT,

5 ITA No.589/Asr/2018 (A.Y.2012-13) Surya Automobile Pvt. Ltd. vs. DCIT

Jalandhar, ITA No. 224/2013 order dated 24.07.2015 [2016] 381 ITR 107 held that if the reserve funds of the appellant were sufficient to cover the interest free advances, then no addition can be made u/s 36(1)(iii) of the Act. Further it is categorically held by various High Courts that where both borrowed funds as well as interest free funds are available, then the discretion lies in the hands of the assessee for utilization of those funds and no inference can be made that borrowed funds have been diverted for non-business purpose. Further if there are interest free funds available, a presumption would arise that investment would be out of interest free funds generated or available with the company and the interest free funds were sufficient to make the investment.

Now coming to the instant case It is not in dispute that the assessee has reserved and surplus funds to the tune of Rs.1,57,58,615.79 as 1st April, 2011 and Rs.1,82,04,877/- as on 31st March, 2012 and paid up capital to the tune of Rs.40,15,000/- in the relevant financial year. Further it is not the case of the Revenue that the interest bearing funds have been utilized for incurring the expenses of the foreign tour of the assessee's director and for purchasing the shares as stated above. Hence while following the dictum of Apex Court in the cases of Hero Cycle Pvt. Ltd. (supra) and the jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. vs. CIT, Jalandhar, (supra), we do not have any hesitation to delete both the disallowances under consideration as sustained by the Ld. CIT(A).

6 ITA No.589/Asr/2018 (A.Y.2012-13) Surya Automobile Pvt. Ltd. vs. DCIT

4 5. In the result, the appeal filed by the assessee stands allowed. Order pronounced in open court on 06.08.2019.

Sd/- Sd/- (VIKRAM SINGH YADAV) (N.K.CHOUDHRY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 06.08.2019 /PK/ Ps. Copy of the order forwarded to: (1) M/s Surya Automobiles Pvt. Ltd., Hanumangarh Road, Abohar. (2) The Dy. CIT, Circle-II, Bathinda (3) The CIT(A)-Bathinda (4) The CIT concerned (5) The SR DR, I.T.A.T., Amritsar True copy By order

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