SAMIDHA FOODS PVT LTD.,RAIGARH vs. ASST. CIT 8 (1)(2), MUMBAI

Brief facts on this issue are that the disallowed interest of Rs. 9,19,800/- on borrowed funds of the assessee under section 36(1)(iii) of the Act by applying average rate of borrowing of 12% on the alleged ground that borrowed funds to the extent of Rs. 76,65,000/- were utilized to give interest free advances to Mrs. Usha Devi Sharma and NSIL Exports.

Upon assessee’s appeal Ld.CIT(A) upheld the disallowance by observing as under:- I have considered the facts of the case and reasons recorded by the AO. I am not in agreement with the submission of the appellant that no interest disallowance was called for under section 36(1) (iii) of the IT Act because the appellant had sufficient own funds for making advances of Rs.76,65,000/-. It is seen from the balance sheet of the appellant that the interest-free funds available with the appellant in the form of own capital and the Reserves and Surplus are Rs. 16,52,80,004/- as on 31/03/2013 and Rs. 16,63,37,269/- as on 31/03/2012, As against this non-current investments of the appellant made by the appellant as on 31/03/2012 and 31/03/2013 are Rs. 17,86,21,100/-. No disallowance of interest has been made by the AO in respect of these investments apparently because these investments are continuing from a long time and no interest dissallowance was made in the past on this issue. Since the interest-free funds available with the appellant have already deemed to have been consumed for making non-current investments, interest expenditure for which is not allowable, the appellant can not take the plea of availability of these funds for making interest-free advances. Therefore, the decision of the jurisdictional High Court in the cases of Reliance Utilities and Power Ltd.(313 ITR 340) and HDFC Bank Ltd. in appeal no. 330 of 2012 vide order dated 23.07.2014 is not applicable to the facts of the case of the appellant. As regards, submission of the appellant regarding applicability of the ratio of decision of honourable Supreme Court in the case of SA Builders (supra), the appellant has not demonstrated any, commercial expediency behind this interest-free advance. The appellant has not demonstrated as to how its business benefited from advancing these interest-free loans. Moreover, the correctness of the decision in the case of SA Builders has already been doubted by the honourable Supreme Court in the case of Addl. CIT Vs Tulip Star Hotels Ltd [2012] 21 taxmann.com 97 (SC). Therefore, arguments of the appellant against disallowance of interest under section 36(l)(iii) of the IT Act are rejected and disallowance of Rs. 9.19.800/-made under section 36(l)(iii) of the IT Act by the AO is confirmed. Accordingly, this ground of appeal is dismissed.

Against the above order, assesee has filed this appeal.

I have heard both the parties and perused the records. I find that Ld.CIT(A) has erred in distinguishing the decision of jurisdictional High Court in the cases of Reliance Utilities and Power Ltd. (313 ITR 340) and HDFC Bank Ltd appeal no. 330 of 2012 vide order dated 23.07.2014 referred by him. The above case laws provided that if assessee has sufficient interest free funds, no disallowances on account of diversion of interest is to be allowed. It was further held that there is no onus on the assessee to make one to one connection between the available fund and utilized fund. Furthermore, it is settled law that right of attribution is with the assessee. Hence, revenue cannot sit into the shoes of the assessee and decide the attribution of the available funds. Hence, once it is clear that assessee has sufficient interest free funds to cover the interest free advances, no disallowances on the ground of absence of one to one nexus can be done. Hence, holding that the decision of Hon’ble jurisdictional High Court in the case of Utilities and Power Ltd.(supra) and HDFC Bank Ltd.(supra) are squarely applicable on the facts of the case, I set aside the orders of the authorities below and decide the issue in favour of the assessee.

In the result, appeal of the assessee stands allowed.