UB AJANTA BREWERIES PVT.LTD,,AURANGABAD vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 2,, AURANGABAD

UB Ajanta Breweries Pvt. Ltd., Breweries Pvt. Ltd. (UBPL) during the year with the closing balance standing at Rs.8.85 crore. The assesse had also paid interest amounting to Rs.5.21 crore on borrowed funds. Treating the amount paid to UBPL, a related concern, for non-business purposes, the AO made disallowance of interest u/s.36(1)(iii) of the Act at Rs.1,03,03,190/. The assessee remained unsuccessful before the ld. CIT(A), against which an appeal has been preferred before the Tribunal.

We have heard the rival submissions through Virtual Court and perused the relevant material on record. The AO has not accepted the assessee’s contention of having advanced money to UBPL, its sister concern, for business purposes. In fact, the assessee failed to substantiate the advancement of such money to its sister concern for any business purposes. However, it is seen that the assessee’s share capital with Reserves and Surplus as at the end of the year stands at Rs.96.55 crore with the opening balance at Rs.96.88 crore. As against that, the amount of advance given to sister concern during the year is Rs.1.30 crore with closing balance at Rs.8.55 crore. Thus, it is manifest that the assessee’s shareholders’ fund is much more than the amount of advance given to sister concern.

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 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.

When we examine the amount of Investments at Rs.8.55 crore as against the availability of Share Capital and Reserves at Rs.96.55 crore, it becomes evident that the amount of such Investments is much less than the amount of shareholders’ fund.

In the result, the appeal is allowed.