EZEEGO ONE TRAVEL & TOURS LTD,MUMBAI vs. ACIT 2(1)(2), MUMBAI

Aforesaid appeal by assessee for Assessment Year [in short referred to as ‘AY’] 2014-15 contest the order of Ld. Commissioner of Income-Tax (Appeals)-4, Mumbai [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-4/IT-284/ACIT 2(1)(2)/2016-17 dated 31/08/2018, on the following grounds of appeal:-

Without prejudice to the above, not justified in disallowing the interest expenses without appreciating that since the owned funds in the financial year ('FY') 2008-09, FY 2009-10 and FY 2010-11 were more than the amount of loan advanced, the loans have been deemed to be given out of owned funds and not borrowed funds; 4. without prejudice to the above, erred in confirming the action of the learned AO in applying the interest rate of 16.17% (applied on an ad-hoc basis) disregarding the fact that the average cost of borrowing of the Appellant is 14.19%; and Initiation of penalty proceedings under Section 271(1)(c) of the Act 5. erred in confirming the action of the learned AO and initiating penalty proceedings under Section 271(1)(c)of the Act. As evident, the sole ground which form subject matter of present appeal is interest disallowance u/s 36(1)(iii). Ground No.1 is general in nature whereas Ground No. 5 is related with initiation of penalty. These grounds would not require any specific adjudication on our part.

In the above background, we have heard rival submissions and perused relevant material on record including documents placed in the paper-book. The ld. Authorized Representative for Assessee (AR), Shri Rajan Vora, pleaded that disallowance may be restricted to the extent of incremental investments / loans advanced by the assessee in AYs 2013- 13 & 2014-15. The computations have been placed on record. The Ld. DR supported the disallowance computed by lower authorities.

1 Briefly stated, the assessee being resident corporate assessee stated to be engaged as tour operator and travel agent was assessed for year under consideration u/s 143(3) on 29/12/2016 wherein the 3 Ezeego One Travel & Tours Limited Assessment Year: 2014-15 assessee was saddled with interest disallowance u/s 36(1)(iii) for Rs.167.86 Lacs.

2 During assessment proceedings, it transpired that the assessee claimed interest / financial expenditure of Rs.3916.63 Lacs. Accordingly, the assessee was directed to prove the nexus between own funds and interest free advances of Rs.1239.20 Lacs granted by it and also to prove the commercial expediency in the light of decision of Hon’ble Supreme Court in the case of S.A.Builders. However, the assessee could not submit any evidence in support of the claim that the funds were advanced for business purposes and also could not demonstrate the commercial expediency of advancing interest free loans to associate / sister concerns. Consequently Ld. AO, in terms of provisions of Section 36(1)(iii), observed that an amount of Rs.1085.35 Lacs has been advanced from mix funds and therefore, computed the disallowance as under:

95 Average

54 Interest free Advances 12,39,20,660 Interest free Advances from borrowed funds 10,38,13,202 Average interest rate for the year 16.17% Interest disallowable u/s.36(1)(iii) 1,67,86,595

The learned first appellate authority, relying upon appellate orders for AY 2013-14, confirmed the said disallowance, against which the assessee is in further appeal before us.

Upon due consideration, we find that the prime argument of Ld. AR revolves around the fact that no such disallowance was made till AY 2012-13 and revenue accepted the position that own funds were quite sufficient to make the interest free advances / investments and therefore, no such disallowance would be warranted on such advances made up-to 31/03/2012. The said fact is uncontroverted fact which is evident from assessment orders of earlier years as placed on record. It is also evident that interest disallowance u/s 36(1)(iii) has been made for the first time starting from AY 2013-14. The plea of Ld. AR is that the disallowance should be computed based on incremental advances / investments made starting from AY 2013-14. Keeping in view the given factual matrix, we find substance in the same. The Ld. AR has placed on record a computation chart to submit that the disallowance, in this manner, would work out to Rs.60.42 Lacs considering the incremental advances made by the assessee in AYs 2013-14 & 2014-15. Concurring with the same, Ld.AO is directed to verify the computations and if found correct, restrict the disallowance to that extent, as worked out by the assessee. No other substantial argument has been made and no other relief has been sought in the appeal.

In the result, the appeal stands partly allowed in terms of our above order. Order pronounced in the open court on 12th December, 2019. (C.N. Prasad) (Manoj Kumar Aggarwal) "ाियक सद" / Judicial Member लेखा सद" / Accountant Member