SARDAR DAIRY LTD.,,MEHSANA vs. THE ACIT, MEHSANA CIRCLE,, MEHSANA

By way of this appeal, the assessee-appellant has challenged correctness of the order dated 6th August, 2015 passed by the by the learned CIT(A), Gandhinagar, Ahmedabad, in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2012-13.

Grievances raised by the assessee, as summed-up in the concise grounds of appeal filed before me, are as follows:-

So far as the first grievance of the assessee is concerned, the relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assessee has extended an interest free advance of Rs.35,02,305/- to Super Finance & Trading Co. and that the assessee had also borrowed the funds, for which interest was being paid. It was in this backdrop that the Assessing Officer inferred that the interest bearing funds have been used for non-business purposes, and, accordingly, he disallowed interest computed @ 12% on this interest free advance extended to Super Finance & Trading Co. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A) but without any success. The assessee is not satisfied and is in further appeal before me.

I have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

I find that the legal position is fairly well settled by now that as long as the assessee has sufficient interest free funds, the presumption is that the interest free advances are extended out of such funds. In other words, to the extent the assessee has interest free funds and the interest free advances do not exceed such interest free funds, no disallowance for diversion of borrowed funds can be made. As against the interest free advances of Rs.35,02,305/-, the assessee has paid up share capital of Rs.345 lacs. Clearly, therefore, the presumption regarding non-business use of borrowed funds was unjustified on the facts of this case. I, therefore, hold that the impugned disallowance of Rs. 4,20,277/- is unsustainable in law and direct the Assessing Officer to delete the same.

Ground no.1 is thus allowed.

As regards ground no.2 of appeal, the only issue pressed before me was disallowance of Rs.1,60,000/- in respect of rent and it was pointed out that the deduction has been declined “in the absence of any notarized agreement entered into by the appellant and landlord”. However, it is only elementary that absence of notarized rent agreement cannot a reason enough to decline the deduction for rent expenses which are otherwise admissible. Nothing really turns on the notarization of the rent agreement and there is no other defect pointed out in the rent agreement. I am, therefore, of the considered view that the deduction for rent of Rs.1,60,000/- should indeed have been allowed.

As regards the other small expenses of Rs.1,33,287/- and Rs.10,645/-, I have noticed that undisputedly the evidence to the extent of Rs.87,973/- were furnished, but the same were held to be reimbursable on the ground that the bill was in the name of landlord. I find that the assessee was operating its business from the hired premises and the rent for the same is held to be deductable. I do not see any reason to decline the deduction in respect of electricity bill only on the ground that the said bill is in the name of landlord. I, therefore, hold that deduction to the extent of Rs.87,973/- out of electricity bill of Rs.1,33,287/- should indeed have been allowed.

To sum-up, out of total disallowance of Rs.3,03,932/- sustained by CIT(A), Rs.1,60,000/- out of the rent expenditure and Rs.87,973/- out of electricity expenses should be allowed as deduction. The Assessing Officer is accordingly directed to delete the disallowance to this extent.

Ground no.2 is thus partly allowed as indicated above.

In the result, the appeal is partly allowed. Pronounced in the open court today on the 23rd day of July, 2018.