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Income Tax Appellate Tribunal, PUNE BENCH, ‘B’ PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
This appeal by the Revenue is directed against the order dated 19-09-2017 passed by the CIT(A), Pune-1 in relation to the assessment year 2014-15.
The only issue raised in this appeal is against the deletion of addition of interest on interest free advances given by the assessee.
Briefly stated, the facts of the case are that the assessee paid interest of Rs.2.29 crore on term loan, unsecured loan and car loan etc. During the course of assessment proceedings, the M/s. Associated Blenders Pvt. Ltd., Assessing Officer (AO) noted that the assessee, inter alia, made security deposit of Rs.29.00 crore to Adlers Bio Energy Ltd. Pune (in short ‘ABEL’) on which no interest was charged. On being called upon to explain the reasons for not charging interest and simultaneously paying interest to banks etc., the assessee submitted that advance was given to ABEL for purchase of material. It was further explained that ABEL was going to set up a grain distillery in the backward district of Osmanabad, Maharashtra, which was to become the assessee’s major source of raw material. The assessee further submitted that it mortgaged its own land and building as security for the term loan availed by ABEL from the bank. Since production could not take place in the facility of ABEL, the assessee as a strategic partner, did not charge any interest. Not convinced, the AO computed the disallowance of interest on Rs.29.00 crore @12%, which resulted into an addition of Rs.3.48 crore. The ld. CIT(A) deleted the addition.
Having heard the rival submissions and perused the relevant material on record, it is seen that the assessee has set up a case before the authorities below that a sum of Rs.29.00 crore was M/s. Associated Blenders Pvt. Ltd., given as advance to M/s. ABEL for business purpose. On further examination, it transpires that the shareholders of the assessee company and another group of Bapat family purchased shares in ABEL in the year 2010. At the year ending 31-03-2011, the assessee was to receive a sum of Rs.19.58 crore from this company. The related party transactions of the assessee company for the relevant year showed that the assessee charged interest of Rs.71,73,286/- on such balance of Rs.19.58 crore. In the year ending 31-03-2012, the assessee advanced further loan to ABEL swelling the balance to Rs.31.65 crore. Interest of Rs.3,51,98,490/- was charged by the assessee from this company for the A.Y. 2012-13. Thereafter, no interest was charged for the preceding year as well as the year under consideration. From the narration of facts above and also the position noted by the authorities below, it is clear that the amount was advanced by the assessee company to ABEL not for purchase of raw material but for its general facilitation of business. When the assessee charged interest from ABEL for earlier two years leading to the presumption that the advance was given for non-business purposes, we fail to appreciate as to how all of a sudden the same
M/s. Associated Blenders Pvt. Ltd., advance became for business purpose during the year under consideration, when there is no change of facts. It is crystal clear that the assessee advanced the money to its sister concern for enabling it to set up and carry on the business, which is alien to the assessee’s purchase of raw material etc. from it. The ld. CIT(A) seems to have been swayed by the extraneous factors and deleted the disallowance. Restoring the AO’s point of view, in principle, we hold that the money was advanced for non-business purpose.
The ld. AR submitted that the assessee has interest free funds available at its disposal and hence, the benefit of availability of such interest fee funds should be allowed in computing the disallowance of interest.
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 gets established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of M/s. Associated Blenders Pvt. Ltd., interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In reaching this conclusion, the Hon’ble High Court relied on the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC).
Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. More recently, the Hon’ble Supreme Court in CIT(LTU) Vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) has reiterated the same view. In view of the above enunciation of law by the Hon’ble Supreme Court and the other Hon’ble High Courts, it is clear that where interest free funds are available with the assessee and there is net availability of funds, a presumption has to be drawn that the advance made for non-business purposes were advanced by such interest free funds available at the disposal of the assessee. We, therefore, set- aside the impugned order and remit the matter to the file of the M/s. Associated Blenders Pvt. Ltd., AO for examining the availability of interest free funds and then compute the disallowance of interest u/s.36(1)(iii) accordingly.
Needless to say, the assessee will be allowed reasonable opportunity of hearing.
In the result, the appeal is allowed for statistical purposes.
Order pronounced in the Open Court on 18th day of October, 2022.