M/S. MAA KAMAKHYA HERBALS LTD.,HARIDWAR vs. ADDL. CIT, HARIDWAR

This appeal by the assessee is preferred against the order of the CIT(A), Dehradun dated 03.12.2015 pertaining to A.Y 2011-12.

The solitary grievance raised by the assessee is that the CIT(A) erred in confirming the addition of Rs. 16.67 lakhs made towards disallowing the interest charged by the bank and debited to the Profit and Loss Account.

During the course of scrutiny assessment proceedings and on perusal of the balance sheet, the Assessing Officer found that the assessee has shown loans and advances of Rs. 2.41 crores. The assessee was asked to give details of the said loans and advances and was asked to show cause as to why interest @ 12% be not disallowed against the interest paid by the assessee on unsecured loans.

In its reply, the assessee stated that the advances have been made against business activities and, therefore, no disallowance may be made.

The contention of the assessee was dismissed by the Assessing Officer. The Assessing Officer was of the opinion that the interest debited by the assessee amounting to Rs. 17.50 lakhs on unsecured loans needs to be disallowed as the assessee has given interest free loans and advances and, accordingly, made the disallowance of Rs. 16.67 lakhs.

The assessee carried the matter before the CIT(A) but without any success.

Before us, the ld. AR vehemently stated that the Assessing Officer has grossly failed in demonstrating any nexus between the borrowings and the interest free advances made by the assessee. It is the say of the ld. AR that most of the advances were made in earlier A.Ys and no such adverse inference has been drawn by the Assessing Officer. The ld. AR further stated that the alleged interest free advances have been given out of interest free funds available with the assessee and, therefore, no part of the borrowings have been advanced interest free, hence no disallowance should have been made by the Assessing Officer.

Per contra, the ld. DR strongly supported the findings of the Assessing Officer and in support, relied upon the decision of the Hon'ble Delhi High Court in the case of M/s Punjab Stainless Steel Inds. in Tax Appeal No. 47 of 2008 and the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. 286 ITR 1.

We have given thoughtful consideration to the orders of the authorities below. The loans and advances given by the assessee can be understood from the chart annexed to the order.

From the chart annexed, it can be seen that the loans and advances are coming from earlier A.Ys. Total outstanding balance as on 31.03.2011 is Rs. 2.38 crores. The paid up capital and available reserves and surplus as on 31.03.2011 is 10.99 crores. Therefore, it can be safely concluded that the assessee was having sufficient free funds to make advances. Moreover, it can be seen from the chart annexed that in every F.Y, the assessee was having surplus own funds to make advances. On the given facts, the ratio laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 followed in HDFC Bank Ltd 366 ITR 505 squarely apply. Respectfully following the judgment of the Hon'ble Bombay High Court [supra] we do not find any merit in the disallowance made by the Assessing Officer and confirmed by the CIT(A). We direct the AO to delete the impugned disallowance.

Before closing, the decisions relied upon by the ld. DR are misplaced in as much as in the case of Punjab Stainless Steel [supra] the Revenue has demonstrated that the borrowed capital was used for giving interest free advances which is not the fact of the case in hand. Similar is the position in the case of Abhishek Industries [supra]

In the result, the appeal of the assessee in is allowed.