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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI R.S. SYAL & SHRI VIKAS AWASTHY
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.
The only issue pressed by the ld. AR in respect of these appeals is against the confirmation of disallowance of interest,
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 :
Briefly stated, the facts for the assessment year 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.
We have heard both the sides and gone through the
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.
Section 36(1)(iii) provides for deduction of interest paid
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 :
Facts for the subsequent three assessment years under
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.
In the result, all the appeals are allowed to this extent. Order pronounced in the Open Court on 09th January, 2019.
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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