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Income Tax Appellate Tribunal, DELHI BENCH: ‘SMC’, NEW DELHI
Before: SH. H.S. SIDHU
The assessee has filed the appeal against the impugned order dated 2.2.2018 passed by Ld. CIT(A)-2, New Delhi relevant to assessment year 2014-15 on the following grounds:-
1. That under the facts and circumstances, both the lower authorities erred in law and on merits in disallowing the interest expenses of Rs. 19,66,506/- out of total interest expenses claimed at Rs. 26,22,008/- on the ground that the funds taken on higher rate of interest have been given to sister concerns at lower rate of interest.
2. That under the facts and circumstances, Ld. CIT(A) erred in law as well as on merits in enhancing the disallowance of interest by Rs. 6,55,502/- thereby making the total disallowance of interest by Rs. 6,55,502/- thereby making the total disallowance of interest at Rs. 26,22,008/-, thus in disallowing the 100% of the interest expenses claimed.
2.1 That without prejudice to ground no. 2, Ld. CIT(A) exceeded his jurisdiction in enhancing the disallowance of interest by Rs. 6,55,502/-.
That without prejudice, even on the basis of findings of AO, the calculations of disallowable amount of Rs. 19,66,506/- is erroneous and excessive.
The brief facts of the case are that assessee filed its return of income on 12.10.2014 declaring income of Rs. 24,66,410/-. Notice u/s. 143(2) of the Income Tax Act, 1961 (in short “Act”) dated 18.9.2015 was issued and questionnaire was served upon the assessee alongwith the notice u/s. 142(1) of the Act dated 29.4.2016, asking to submit the required information. In response to statutory notices, the AR of the assessee appeared from time to time and filed necessary details. The assessee company during relevant assessment year is engaged in the business of flour mailing machineries and equipments. Later on its activities were changed in exporting the ferrous and non-ferrous i.e. Carbon Ferro, Manganses, Ferro Silicon, Ferro Chrome etc. On perusal of P&L account of the assessee, AO noted that assessee has claimed interest expenses on others under the head of ‘Financial Coast’ of Rs. 26,22,008/-. Vide note sheet entry dated 3.8.2016 assessee was show caused that why interest on funds borrowed have been diverted @3% whereas assessee is paying interest at above 9% to its related partners.
Assessee vide its letter dated 17.8.2016 has submitted the reply. After considering the reply of the assessee, the AO observed that assessee has borrowed funds @12% per annum and claimed expenses of Rs. 26,22,008/- while he has received interest on the same @3% amounting to Rs. 2,89,308/- as income and observed that the interest disallowance amounting to Rs. 19,65,506/- was added back to the total income of the assessee and assessed the income of the assessee at Rs. 44,32,916/- vide order dated 23.12.2016 passed u/s. 143(3) of the Act.
Against the assessment order dated 23.12.2016, assessee appealed before the ld. CIT(A), who vide his impugned order dated 2.2.2018 has dismissed the appeal of the assessee by enhancement of income of Rs. 6,55,502/-. Aggrieved with the impugned order the assessee is in appeal before the Tribunal.
3. Ld. A.R. for the Assessee has stated that the lower authorities erred in law and on merits in disallowing the interest expenses of Rs. 19,66,506/- out of total interest expenses claimed at Rs. 26,22,008/- on the ground that the funds taken on higher rate of interest have been given to sister concerns at lower rate of interest. He further submitted that Ld. CIT(A) has erred in law as well as on merits in enhancing the disallowance of interest by Rs. 6,55,502/- thereby making the total disallowance of Rs. 26,22,008/-, thus in disallowing the 100% of the interest expenses claimed and without prejudice to above, he submitted that Ld. CIT(A) has exceeded his jurisdiction in enhancing the disallowance of interest by Rs. 6,55,502/- and also stated that even on the basis of findings of AO, the calculations of disallowable amount of Rs. 19,66,506/- which is erroneous and excessive. It was further submitted that M/s Murliwala Agrotech (P)
Ltd. is a sister concern of the assessee and the advances given by assessee to Murliwala since that concern needs fund for the purpose of business; hence, advance given by assessee to M/s Murliwala Agrotech P Ltd. is due to commercial expediency. It was further submitted that the total loan given to sister concern was about Rs. 2,25,00,020/- while interest free funds available were Rs. 17,35,72,590/- and no interest disallowed ever in the past. In support of his contention, filed a Paper Book containing pages 1-19 in which he has attached the audited balance sheet for AY 2014-15; Ledger A/c of Murliwala AGrotech (P) Ltd. in the books of assessee; Leger a/c of Brindavan Entt. P Ltd. in the books of assessee; sub. to CIT(A) dated 23.11.2017 and sub. to CIT(A) dated 22.1.2018. To support his contention, he also relied upon the following case laws:-
- CIT vs. SA Builders 288 ITR 1 (SC). - CIT vs. Tin Box Co. 260 ITR 537 (Del.) 4. On the contrary, Ld. DR heavily supported the order of the Ld.
CIT(A) which does not need any interference. He stated that on perusal of P&L account of the assessee, AO noted that assessee has claimed interest expenses on others under the head of ‘Financial Coast’ of Rs. 26,22,008/-.
Vide note sheet entry dated 3.8.2016 assessee was show caused that why interest on funds borrowed have been diverted @3% whereas assessee is paying interest at above 9% to its related partners. Assessee vide its letter dated 17.8.2016 has submitted the reply. After considering the reply of the assessee, the AO observed that assessee has borrowed funds @12% per annum and claimed expenses of Rs. 26,22,008/- while he has received interest on the same @3% amounting to Rs. 2,89,308/- as income and observed that the interest disallowance amounting to Rs. 19,65,506/- was added back to the total income of the assessee and in appeal Ld. CIT(A) has rightly enhanced the income by Rs. 6,55,502/-.
She relied upon the case laws cited by the Ld. CIT(A) in his order.
I have considered the rival submissions and gone through the orders of lower authorities as well as the case laws cited by both the parties and the Paper Book, as aforesaid. I note that in P&L A/c, assessee claimed interest exp of Rs. 26,22,008/-. Assessee also earned interest income of Rs. 58.58,451/-. It is further noted that AO observed that assessee is paying interest @12%, however, charging intt. @3% from its sister concerns namely “Murliwala Agrotech (P) Ltd.” and no interest charged from “Brindavan Enterprises (P) Ltd.” Thus the A.O. held that rate of interest charged from sister concerns was lesser by 9%. Hence he disallowed 3/4th of the interest expenses claimed in P&L A/c for Rs.26,22,008/-, 3/4th of which being disallowance calculated Rs. 19,66,506/-. In appeal, Ld. CIT(A) held that complete interest exp is liable to disallowed as the interest free funds available were nominal, hence he enhanced the disallowance by Rs.6,55,502/-, resulting into disallowance of total interest claimed at Rs.26,22,008/-. I note that Ld. CIT(A) is wrong in mentioning that loan given to M/s. Murliwala Agrotech (P) Ltd. reached to Rs. 21,85,61,355/- at the end of the year.
However, correctly it was only Rs. 50,36,252/-. It is also noted that Ld. CIT (A) wrongly adopted the total of credit side being Rs.21,85,61,355/- as the figure of closing balance. However, Ld. CIT(A) also incorrectly stated the reserves and capital available is Rs.2 Crore approx against correctly the capital and reserves at Rs.4.25 Crore. M/s. Murliwala Agrotech (P) Ltd. (Murliwala) is a sister concern of assessee. Advances given by assessee to Murliwala since that concern needs funds for the purpose of business. Hence, advance given by assessee to Murliwala is due to commercial expediency. After perusing the Paper Book viz. the Audited balance sheet for AY 2014-15 (Page no. 1-9 of PB) of the assessee, it is noted that assessee was having sufficient interest free funds at it's disposal namely:
Share Capital Rs. 14,86,800/- Reserve and Surplus as on 31.03.14 Rs. 4,13,31,961/-
Intt. free adv. recd., from customers as on 31.03.14 Rs.13,07,53,829/-
Rs.17,35,72,590/- Total intt. free funds available 5.1 I further note that the loans given to Murliwala Agrotech was @3% and the amount given during the year was only Rs.2,03,00,020/- (22,35,57,607 - 19,82,61,355 - 50,36,252) which were also for business purposes thus for commercial expediency. The loans given to M/s Brindavan Enterprises, during the year was only Rs.22,00,000/-, rather Brindavan Enterprises gave interest free loans to assessee during the year and the closing loan payable by the assessee to M/s Brindavan was Rs.2,53,218.50. Thus, the total loan given to sister concerns was about Rs. 2,25,00,020/- while interest free funds available were Rs. 17,35,72,590/-. I note that the case laws relied upon by A.O. and CIT (A) are distinguishable on facts of the case. It is also noted that Ld. CIT(A) in his order vide para no. 7.8 at page no. 13-14 has mentioned that “Assessee have also been relying on the decision of the Hon’ble Supreme Court in the case of SA Builders 288 ITR 1,” but he did not discuss the said decision. However, the case law relied upon by the Ld. AR for the assessee is directly applicable in the present case i.e. CIT Vs. S.A. BUILDERS 288 ITR 1 (SC), wherein, it has been held that “If advance was given for commercial expediency then no disallowance for interest can be made.”
5.2 Keeping in view of the facts and circumstances of the case and respectfully following the precedent, as aforesaid, I set aside the orders of the authorities below and delete the addition in dispute allow the grounds raised by the assessee.
In the result, the appeal of assessee is allowed.
The decision is pronounced on 22-02-2019.