M/S. ALP CONSULTING LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 11(1), BANGALORE

This appeal by the assessee is against the order dated 9.11.2018 of CIT(Appeals)-XIV, Bengaluru relating to assessment year 2010-11.

There is a delay of about 210 days in filing this appeal. Along with the application for condonation of delay, the director of the assessee company has filed an affidavit explaining the reasons for the delay stating that due to official trip, he could not sign the appeal and on his return from official trip, it was signed and filed. Though the particulars of official trip and other details have not been furnished, keeping in mind the principle that substantive rights should not be denied on technicalities, we condone the delay in filing the appeal.

Coming to the appeal, the first issue that needs adjudication is as to, whether the revenue authorities were justified in disallowing the claim of assessee for deduction on account of interest paid on borrowed funds u/s. 36(1)(iii) of the Income-tax Act, 1961 [the Act].

The assessee is a company engaged in the business of rendering HR Consultancy and supporting services. In the course of assessment proceedings, the AO noticed that the assessee had claimed deduction of a sum of Rs.1,74,86,837 on account of financial charges [interest], while computing income from business. The AO noticed that the assessee had given advances without interest to its related concern, M/s. Datacore Technologies Pvt Ltd. [DTPL]. The AO has further observed in the order of assessment that the assessee could not justify the business and commercial expediency in making loans to sister concern without charging interest. The AO accordingly held that borrowed funds on which interest was paid and which was claimed as a deduction while computing income from business had not been used for the purpose of business. The AO found that the opening balance of advances to the sister concern as on 13.3.2009 was Rs.78,60,037 and the closing balance as on 31.3.2010 was Rs.90,40,183, the average of which was a sum of Rs.84,50,110. He applied the notional interest rate of 13.50% which was the average cost on borrowing to the assessee and arrived at a sum of Rs.11,40,764, which was disallowed and added to total income of assessee.

Before the CIT(Appeals), the assessee relied on the decision of Hon’ble High Court of Karnataka in the case of CIT v. Sridev Enterprises, 192 ITR 165 (Karn) wherein it was held that if the opening balance of loans advanced and its nature is accepted in the earlier assessment year and if in the earlier assessment year those advances were considered as for the purpose of business, then a different view cannot be taken for the current assessment year. The assessee therefore submitted that disallowance of interest should be deleted. The CIT(Appeals), however, rejected the plea of assessee, holding that interest can be allowed as a deduction only when interest-free advances were owing to commercial expediency and since such commercial expediency was absent in the case of assessee, the same was rightly disallowed by the AO. With regard to the decision of the Hon’ble High Court of Karnataka in the case of Sridev Enterprises (supra), the CIT(Appeals) took the view that there is nothing brought on record to show that opening balance and outstanding loan given to sister concern was examined and accepted by the AO as a loan owing to commercial expediency. Aggrieved by the order of CIT(Appeals), the assessee preferred the present appeal before the Tribunal.

We have heard the rival submissions. The ld. counsel for the assessee brought to our notice that own funds available with the assessee were much more than the amounts borrowed. In this regard, it is seen that the borrowings as on 31.3.2010 was a sum of Rs.10,46,81,000. The assessee’s own funds in the form of share capital, reserve and surplus is a sum of RS.16,63,00,000. Though this fact has not been highlighted by the assessee before the revenue authorities, yet the fact remains that these figures are available in the Balance Sheet as on 31.3.2010 , a copy of which is at page 28 of assessee’s PB. It is thus clear that interest-free funds available with the assessee was much more than the borrowings on which interest was paid by the assessee and it was claimed as a deduction.

The Hon’ble Karnataka High Court in the case of CIT v. HDFC Bank Ltd., of 2012, judgment dated 23.7.14 has taken the view that where own funds are much more than the borrowed funds on which interest was paid, then there is a presumption that own funds have been used for the purpose of giving interest-free loans to the sister concern and therefore there could be no disallowance of interest expenses u/s. 36(1)(iii) on the ground that borrowed funds had been diverted interest-free to the sister concern.

In ITA.Nos.569/2015 & 229/2016 in the case of The Commissioner of Income-tax, CIT (A) and Another -Vs.- M/s. Chaitanya Properties Pvt. Ltd., order dated 15.6.2018 the Hon’ble Karnataka High Court held as follows:-

We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

The second issue that arises for consideration in this appeal is as to, whether revenue authorities were justified in making an addition of Rs.8,15,000 on the ground that assessee had a fixed deposit with ICICI Bank and assessee failed to explain the source of funds out of which the said deposit was made. The AO was in possession of the Annual Information Report [AIR] which mentioned that assessee had two Term Deposits of Rs.1,65,000 and Rs.6,50,000 in ICICI Bank, Alwarthirunagar Branch, Chennai. The assessee submitted before the AO in a letter dated 26.12.2012 that it did not have any such Term Deposits as claimed by the AO based on the AIR . The AO, however, proceeded to make an addition of Rs.8,15,000 u/s. 69 of the Act observing that the assessee failed to explain the source of funds for the aforesaid deposit as required u/s. 69 of the Act.

Before the CIT(Appeals), the assessee produced a letter from ICICI Bank, Alwarthirunagar Branch, Chennai dated 22.12.2012 in which the Bank clarified that the Term Deposits in question were held in M G Road Br., Bangalore and not its Branch. It was further clarified that the assessee did not have any Term Deposits in its Branch for FY 2009-10. The CIT(Appeals), however, came to the conclusion that deposits referred to in the reply in the letter of ICICI Bank, Alwarthirunagar Branch, Chennai were in M G Road Br., Bangalore and since it has not been clarified that the deposit in M G Road Br. also is not in the name of assessee, the CIT(A) held that addition made by the AO was justified.

Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal.

We have heard the rival submissions. We are of the view that the AIR information is not conclusive. The specific information received by the AO in the form of AIR is that assessee had Term Deposits with ICICI Bank, Alwarthirunagar Branch, Chennai and if that information is shown to be not true in the form of a letter dated 22.12.2012 given by the said Branch, there can be no other basis on which the AO should make the impugned addition. The fact that Term Deposits reflected in the AIR were in the M G Road Br., Bangalore does not mean that the deposits in M G Road Br. Bangalore is in the name of assessee. Perusal of the letter dated 22.12.2012 by ICICI Bank, Alwarthirunagar Branch, Chennai which is at page 38 of assessee’s PB does not show that the Term Deposits is in the name of assessee. In the given circumstances, we are of the view that the issue should be set aside to the AO for a fresh consideration to ascertain the correct facts with regard to Term Deposits in M G Road Br. Bangalore, as to whether the same is in the name of assessee. If so, then the assessee should explain the deposit in the parameters laid down u/s. 69 of the Act. Accordingly, we set aside the order of the CIT(Appeals) on this issue and remand it to the AO for fresh consideration in light of the observations made in this order.

In the result, the appeal by the assessee is partly allowed.