HEM KIRAN DIESELS,,KOLHAPUR vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE -KOLHAPUR , KOLHAPUR

PER R.S.SYAL, VP :

These four appeals by the assessee relating to the assessment years 2003-04 to 2006-07 involve a common issue. For the sake of convenience, we have clubbed such appeals for disposal by this consolidated order.

2 ITA Nos.1084 to 1087/PUN/2018 Hem Kiran Diesels

which was claimed by the assessee as deductible u/s. 36(1)(iii)

of the Income-tax Act, 1961 (hereinafter also referred to as

`the Act’).

A.Y. 2003-04 :

are that the original assessment in this case was completed

u/s.143(3) of the Act, in which the disallowance of interest

was made, which was claimed by the assessee as deductible

u/s.36(1)(iii). The matter finally travelled to the Tribunal,

which remitted the matter to the AO for de novo adjudication.

In the fresh proceedings, the AO noted that the assessee

advanced various sums to its two related concerns, namely

M/s. Jaykumar Patil Transports Pvt. Ltd. – Rs.46,35,793/- and

M/s. Ghatge Patil & Sons – Rs.11,14,495/-. He noted that the

assessee did not charge any interest on these advances whereas

it was paying interest on certain loans obtained by it. On

being called upon to explain as to why interest should not be

disallowed, the assessee tendered an explanation which has

been reproduced on page 4 onwards of the assessment order.

The assessee mainly contended that the loans were advanced

3 ITA Nos.1084 to 1087/PUN/2018 Hem Kiran Diesels

to the above sister concerns during the period 1994 to 1997

when cash profits were much more than the amount of loans

advanced. The AO made disallowance of interest @ 16% of

advances made to sister concerns by noticing that during the

years in question the amount of partners’ capital was less than

the amount of advances given to the sister concerns. The ld.

CIT(A) sustained the disallowance, against which the assessee

has approached the Tribunal.

relevant material on record. It is seen that the loans were

advanced to the sister concerns during the period 1994 to

1997. The assessee stated in writing before the AO, which has

been reproduced in the assessment order, that cash profits

during the above years were much more than the amount of

advances given to the sister concerns. In the year 1996-97,

the assessee paid Rs.20.11 lakhs to M/s. Jaykumar Patil

Transports Pvt. Ltd. and Rs.3,08,168/- to M/s. Ghatge Patil &

Sons as against the cumulative cash profits of Rs.61.25 lakhs

and the total advances pending on 31-03-1998 at Rs.28.47

lakhs. During the year ending 31-03-1999, cash profits was

Rs.11.02 lakhs and the total advances paid amounted to

4 ITA Nos.1084 to 1087/PUN/2018 Hem Kiran Diesels

Rs.30.35 lakhs against the cumulative cash profit up to 31-03-

1999 at Rs.72.28 lakhs and the total advances amounting to

Rs.58.82 lakhs. This shows that at the time of making

advances to the sister concerns, the assessee was having

sufficient cash profits/interest free funds available at its

disposal. If in later years, capital account balance of the

assessee has reduced vis-à-vis the amount of advances, no

adverse inference can be drawn against the advances given

when admittedly the amount of interest free funds in the shape

of capital etc. were more than the advances, meaning thereby,

that such advances were funded out of interest free funds. It is

further relevant to mention, as stated by the ld. AR which has

not been controverted, that the advances to the sister concerns

were also in the course of business in as much as M/s.

Jaykumar Patil Transports Pvt. Ltd. were transporting the

goods sold by the assessee.

in respect of capital borrowed for the purpose of business or

profession. The essence of this provision is that the interest

should be allowed so long as the capital borrowed, on which

such interest is paid, is used for the purpose of business or

5 ITA Nos.1084 to 1087/PUN/2018 Hem Kiran Diesels

profession. If, however, an assessee is having its own interest

free surplus funds and such funds are utilised as interest free

advances even for a non-business purpose, there cannot be any

disallowance of interest paid on interest bearing loans. The

Hon'ble Bombay High Court in CIT vs. Reliance Utilities and

Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an

assessee possessed sufficient interest free funds of its own

which were generated in the course of relevant financial year,

apart from substantial shareholders’ funds, presumption stands

established that the investments in sister concerns were made

by the assessee out of interest free funds and, therefore, no part

of interest on borrowings can be disallowed on the basis that

the investments were made out of interest bearing funds. The

judgment of the Hon’ble Supreme Court in the case of East

India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627

(SC) and also the judgment of the Hon’ble Calcutta High

Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR

219 (Cal) also fortify this view. In view of the foregoing

discussion, we are satisfied that the disallowance made by the

AO has been wrongly sustained in the first appeal. We,

therefore, order to delete the same.

6 ITA Nos.1084 to 1087/PUN/2018 Hem Kiran Diesels

A.Y. 2004-05 to 2006-07 :

consideration, namely, 2004-05 to 2006-07 are admittedly

mutatis mutandis similar to those for the assessment year

2003-04. Following the view taken hereinabove, we order to

delete the sustenance of disallowance of interest.

Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 09th January, 2019 सतीश आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / 3. The CIT (Appeals),-11, Pune 4. The Pr. CIT Central, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “SMC” / 5. DR ‘SMC’, ITAT, Pune; गाड� फाईल / Guard file. // True copy // 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA Nos.1084 to 1087/PUN/2018 Hem Kiran Diesels

Date 1. Draft dictated on 08-01-2019 Sr.PS 2. Draft placed before author 08-01-2019 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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