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Income Tax Appellate Tribunal, Hyderabad ‘ SMC ‘ Bench, Hyderabad
Before: Shri Rama Kanta Panda
O R D E R Per Shri Rama Kanta Panda, A.M. This appeal filed by the assessee is directed against the order dated 04.03.2022 of the Learned Commissioner of Income Tax (Appeals)-11, Hyderabad relating to AY 2014-15. 2. The only effective ground raised
by the assessee reads as under:-
1. The ld.DR.CIT(A) erred in confirming the disallowances under section 36(1)(iii) of the Act, of Rs. 7,43,750/- made by the Assessing Officer being disallowance of interest on the amount advanced to its sister concern M/s. Egwood Industries Private Limited, out of Over Draft from Bank, without appreciating the facts of the case and for untenable reasons.
3. Facts of the case in brief are that the assessee is a private limited company and filed its return of income on 30.09.2014 declaring total income of Rs. 81,440/-. During the course of assessment proceedings, the AO noted that the assessee had advanced Rs. 3,50,00,000/- to M/s. Egwood Industries Pvt.Ltd on 2 ITA 129/Hyd/2022 03.02.2014, which is a sister concerns of the assessee company. M/s. Egwood Industries Private Limited repaid the amount to the extent of Rs. 2,50,00,000/- on 31.03.2014. He noted that the advances were made out of the O.D. account, which is interest bearing and interest is being paid @12.75% per annum. He therefore asked the assessee to explain as to why the interest expenses claimed on the O.D. availed from the bank should not be disallowed to the extent of interest on the amount of advances given to its siter concern free of interest u/s. 36(1)(iii) of the I.T.Act. In response to the same, the assessee filed the following reply.
Note on Interest: During the year under consideration the company availed a loan (c/c limit) of Rs. 80 crores and paid a sum of Rs. 93,73,889/- as interest during the year. To avail the loan the company had given the security of land belonging to shri Pramod Gupta and Amit Gupta for who also happens to be directors of Egwood Industries Pvt.Ltd. The company advanced certain a sum of Rs. 17,02,000/- each to Pramod Gupta and Amit Gupta for land conversion charges of the land given as security to bank. A sum of Rs. 1,00,00,000/-(net) was due from M/s. Egwood Industries Pvt.Ltd. as on 31st March, 2014. No interest was charged. The sum advanced tothem was on account of necessity to get the loan sanctioned from bank and as such no disallowances is warranted under the provision of section 36(1)(iii) of the Income tax Act.
However, the AO was not satisfied with the explanation advanced by the assessee and made addition of Rs. 7,43,750/- being interest for the two months @12.75% on Rs. 3,50,00,000/-.
In appeal, the ld.CIT(A) upheld the action of the AO.
Aggrieved with such order of the ld.CIT(A), the assessee is in appeal before the Tribunal.
The ld.Counsel for the assessee submitted that during the year under consideration, the assessee company had taken cash credit limit of Rs. 80 crores for the purpose of its business by 3 ITA 129/Hyd/2022 giving the properties of Shri Pramod Gupta and Sri Amit Gupta, the Directors of M/s. Egwood Industries Private Limited as collateral security. The assessee had advanced a sum of Rs. 3,50,00,000/- in February, 2014 to M/s.Egwood Industries Private Limited, in which the land owners namely Shri Promod Gupta and Shri Amit Gupta were Directors, who had given their land as security to Bankers for availing cash credit of Rs. 80 crores to the assessee company. He submitted that no interest is to be disallowed as the lending of money is incidental for obtaining of loan from bank for commercial expediency. He submitted that the assessee had paid an amount of Rs. 17,02,000/- to the said land owners for conversion of their agricultural land to non-agricultural land so as to make the said land eligible for security. These facts clearly show that the funds were advanced for commercial expediency only and therefore no disallowances should be made.
In his alternate contention, he submitted that the assessee company has capital and free reserves of about Rs. 13 crores, which is more than the interest free advances and therefore when the assessee company advances interest free loan to it’s sister concern without charging any interest, no disallowances should be made, since assessee has not diverted any interest bearing fund to sister concerns for which no interest has been charged. Referring to the decision of the Co-ordinate bench of the Tribunal in the case of ITO vs KLR Industries Limited vide & 1156/Hyd/2017 order dated 05.04.2018 for AY 2012-13 & 2013- 14, he submitted that the Tribunal had restored the issue to the file of the AO upholding the decision of the ld.CIT(A), where the ld.CIT(A) had restored the issue to the file of the AO to verify the fact that assessee company has sufficient own capital and free reserves, which is more than the amount given to sister concerns
4 ITA 129/Hyd/2022 free of interest and in case, such own capital and free reserves exceeds the amount of interest free loan given to the sister concerns, then no disallowance should be made. He, accordingly submitted that he has no objection if the matter is restored to the file of the AO for verification of the own capital and free reserves and if the same is more than the interest free advances given to the sister concerns then no disallowances should be made. He also relied on the following decisions:-
1.Delhi High court CIT v Dalmia Cement(B.) Ltd.[2002 (254) ITR 377] 2.Punjab & Haryana High court in CIT v. U.G.Hospitals(P.) Ltd. 386 ITR 520 3.Gujarat High court Pr.CIT v. Atul Ltd. 2018 TaxPub(DT) 5252(Guj-HC) 9. The Ld.DR on the other hand heavily relied on the order of the AO and CIT(A). He submitted that the assessee could not justify the reason for interest free advances given to M/s. Egwood Industries Private Limited, whereas the assessee obtained loan from the bank which carries interest @ 12.75% per annum. Therefore, the ld.CIT(A) was fully justified in sustaining the addition made by the AO.
I have heard the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find the AO in the instant case made addition of Rs. 7,43,750/- u/s. 36(1)(iii) of the I.T.Act, on the ground that assessee has advanced interest free advance of Rs. 3,50,00,000/- to M/s. Egwood Industries Pvt.Ltd. out of which an amount of Rs. 2,50,00,000/- was returned before 31.03.2014 and an amount of Rs. 1 crore outstanding as on 31.03.2014 and the assessee could not explain to his satisfaction regarding the reasons for such interest free advances given to the sister
5 ITA 129/Hyd/2022 concern. It is the submission of the ld.counsel for the assessee that the directors of M/s. Egwood Industries Pvt.Ltd. had given their land as collateral security against the cash credit limit of Rs. 80 crores availed by the assessee from the bank and therefore, there is commercial expediency for giving such interest free advances to the sister concern. It is his alternate contention that the assessee company is having capital and free reserves of about Rs. 13 crores, which far exceeds the interest free advances of Rs. 3,50,00,000/- given to the sister concern and therefore, on this count also, no disallowance is called for. I find the alternate contention of the assessee is acceptable. However, the ld.counsel for the assessee could not demonstrate with documentary evidence before me to substantiate that the own capital and free reserves of the assessees company far exceeds the amount of interest free advances given to the sister concern. I, therefore deem it proper to restore the issue to the file of the AO with the direction to verify the record and if the own capital and free reserves of the assessee company far exceeds the amount of interest free advances given to the sister concerns, then no disallowances is called for. Needless to say, the AO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. I hold and direct accordingly. This ground raised by the assessee is accordingly allowed for statistical purposes.
In the result, appeal filed by the assessee is allowed for statistical purpose