INDONET GLOBAL LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 2(3), CHENNAI

आदेश आदेश /O R D E R आदेश आदेश

PER MAHAVIR SINGH, VP:

The Assessing Officer noted that the Assessee has advance interest free loans to its group concerns amounting to Rs.2,71,04,581/- which is as follows:

Sl.No. Name of the Party Opening Closing Balance Average Balance (1) M/s. Bekae Properties 1,89,75,000 28,84,424 1,09,29,712 Private Limited (2) M/s. Ind Eco Ventures 0 34,35,526 17,17,763 (3) Loyal Credit and 81,49,460 74,49,460 77,99,460 Investment Limited (4) Ravello Advertisements 66,57,646 66,57,646 2,71,04,581 Private Limited Total 3,37,82,106 2,04,27,056 2,71,04,581

Interest @ 12% fpr Rs.2,71,04,5681 = Rs.32,52,550/-

:: 3 :: As the Assessee has advanced interest free loan to its group concerns, the Assessing Officer had charged notional interest on the interest free loan given to its group concerns by calculating at the rate of 12% and added to the returned income of the Assessee amounting to Rs.34,58,681/-. Aggrieved, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) also confirmed the action of the Assessing Officer on identical reasoning. Aggrieved, the Assessee came before the Tribunal.

The second argument made by the learned Counsel for the Assessee was that it has ample interest free loans available in the shape of accruals, share funds and reserve and surplus to the tune of Rs.11,08,79,343/- as against advances made to group companies to the tune of Rs.3,37,82,106/-. The learned Counsel for the Assessee, before us filed the complete balance sheet, i.e. financial statement in its paper-book and drew our attention to the share capital and reserve and surplus. We noted that this issue is squarely covered by the decision of the Hon’ble Bombay High Court in the case of the Commissioner of Income Tax Vs. Reliance Utilities and Power Limited reported in [2009] 313 ITR 340 (Bombay), wherein in page no.16 it is held that if there are funds available, both interest free and overdraft and / or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with the company, provided, the said funds are sufficient to meet investments. Hon’ble Bombay High Court in paragraph no.10 has held as under:

“If there are funds available both, interest free and overdraft and / or less are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. In the instant case, said presumption was established considering the findings of fact, both by the Commissioner (Appeals) and the Tribunal.”

“8. Further, there is no finding by the ITO or the AAC that the money borrowed has been spent for non-business purposes. The addition made by the ITO was on the basis that the money advanced to Savera Hotels (P) Limited

:: 5 :: 10 percent and in that view he disallowed the amount of Rs.7,72,769. The AAC held that the advance to Savera Hotels (P.) Limited would have come proportionately out of the own funds as well as borrowed funds is not based on any principle of law. There is no finding even by the AAC that the money borrowed by the Assessee was actually diverted for non-business purposes. In the absence of any clear finding both the assessing authority and the finding of the appellate authority and in the absence of any such finding by the Tribunal, we have to hold that the ITO was not justified in disallowing the sum of Rs.72,769 or by the AAC a sum of Rs.30,063/-.

Once this is the factual position and the Assessing Officer is unable to brief the nexus between the interest bearing loan

:: 6 :: diverted towards the interest-free advances, no disallowance of interest expenses or no notional interest can be charged as interest income as in the present case. Hence, in the given facts, we delete the disallowance and allow the appeal of the Assessee.