M/S. MAHAKSYNTHETICS MILLS PVT. LTD.,AHMEDABAD vs. ACIT, CIRCLE-2(1)(2), AHMEDABAD

This appeal filed by the assessee is directed against the order of learned Commissioner of Income-Tax (Appeals)-2, Ahmedabad (“CIT(A)” in short) dated 22.06.2018. The common issue raised in Ground Nos. 1 & 2 relates to the disallowance of Rs.7,23,994/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of belated payments made by the assessee towards employees’ contribution to Provident Fund (PF) and Employees’ State Insurance (ESI).

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Learned Counsel for the assessee has submitted that all the impugned payments towards employees’ contribution to PF and ESI were made by the assessee before the grace period allowed under the respective Act and there being no delay on the part of the assessee for making such payments, the disallowance made by Mahak Synthetics Mills Pvt Ltd Vs. ACIT AY : 2015-16 2 the Assessing Officer and confirmed by the learned CIT(A) is not sustainable. Although she has also invited our attention to the relevant portion of the orders of the Assessing Officer as well as CIT(A) to support and substantiate her contention that all the payments in question were made during the grace period allowed under the respective Act, we are of the view that this claim made by the assessee for the first time requires verification by the Assessing Officer. We accordingly restore this issue to the file of the Assessing Officer for deciding the same after verifying the claim of the assessee that all the payments in question were made during the grace period allowed under the respective Act and there being no delay in making such payments, there is no question of any disallowance. Ground Nos. 1 & 2 of the assessee’s appeal are accordingly treated as allowed for statistical purposes.

Ground Nos. 3 & 4 of the assessee’s appeal involve a common issue relating to disallowance of Rs.22,27,104/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of interest.

The assessee, in the present case, is a company which is engaged in the business of manufacturing of all types of textiles garments and clothing accessories. The return of income for the year under consideration was filed by it on 29.09.2015 declaring total income of Rs.2,07,98,900/-. The said return was selected for scrutiny under CASS and during the course of assessment proceedings, it was noticed by the Assessing Officer that interest expenditure of Rs.8.18 crores was incurred by the assessee during the year under consideration on the money borrowed. He also noted that advances of Rs.1,85,59,205/- were given by the assessee against capital goods. Since the interest attributable to the borrowed funds utilized for giving advances against capital goods was liable to be disallowed as per proviso to Section 36(1)(iii) of the Act, he required the assessee to offer his explanation in the Mahak Synthetics Mills Pvt Ltd Vs. ACIT AY : 2015-16 3 matter. In reply, it was submitted by the assessee that sufficient interest free funds were available at its disposal at the relevant time to give advances against capital goods and there being no utilization of interest-bearing borrowed funds for giving the said advances, the disallowance on account of interest was not called for. This explanation of the assessee was not found acceptable by the Assessing Officer in absence of any fund flow statement furnished by the assessee to support and substantiate the same. He accordingly worked out the interest attributable to the borrowed funds utilized for giving advances against capital goods at Rs.22,27,104/- and made a disallowance to that extent in the assessment completed under Section 143(3) of the Act vide an order dated 15.12.2017.

The disallowance made by the Assessing Officer on account of interest was challenged by the assessee in appeal before the learned CIT(A). During the course of appellate proceedings before the learned CIT(A), it was submitted on behalf of the assessee-company that it had sufficient own funds in the form of share capital and reserves & surplus aggregating to Rs.19.02 crores at the relevant time and since the same were sufficient to give advances of Rs.1.85 crores against capital goods, there was no utilization of interest bearing borrowed funds for giving such advances; and, the disallowance made by the Assessing Officer on account of interest was not sustainable. The learned CIT(A) did not find merit in the submission of the assessee. He noted that the advances against capital goods were paid by the assessee from Cash Credit Account and since interest was paid on the cash credit balance to the bank, disallowance made by the Assessing Officer on account of interest attributable to the borrowed funds as utilized for giving advances against capital goods was fully justified. He accordingly confirmed the disallowance made by the Assessing Officer. Mahak Synthetics Mills Pvt Ltd Vs. ACIT AY : 2015-16 4

We have heard the arguments of both sides on this issue and also perused the relevant material available on record. It is observed that the assessee-company, at the relevant time, had own funds in the form of share capital, reserves and surplus to the extent of Rs.19.02 crores; and, since the same were sufficient to give advances of Rs.1.85 crores against capital goods, it’s claimed that there was no utilization of interest bearing borrowed funds for giving such advances. It is also observed that a similar stand was taken by the assessee before the Assessing Officer as well as before the learned CIT(A). However, keeping in view that the advances against capital goods were paid by the assessee from Cash Credit Account, it was held by the authorities below that there was a direct nexus between the interest-bearing borrowed funds and the advances given by the assessee-company against capital goods and this contention raised on behalf of the assessee-company was rejected by them. In our opinion, it is necessary to see overall financial position of the assessee as reflected in the balance-sheet as well as in the cash-flow statement to ascertain exactly as to whether the advances given by the assessee-company against capital goods are made by the assessee from its owned funds or borrowed funds and the nexus theory as applied by the authorities below is not always a correct test which may sometime gives a misleading picture. In this regard, the learned Counsel for the assessee has made an attempt to support and substantiate the assessee’s case on this issue by referring to the relevant balance-sheet and cash-flow statement of the assessee-company (copies of which are placed in the paper-book). However, keeping in view that this aspect of the matter has not been examined either by the Assessing Officer or by the learned CIT(A) having regard to the overall financial position of the assessee-company at the relevant time, we consider it fair and proper and in the interest of justice to restore this issue to the file of the Assessing Officer for such examination. The Assessing Officer is directed to verify the claim Mahak Synthetics Mills Pvt Ltd Vs. ACIT AY : 2015-16 5 of the assessee of having been made the advances by the assessee-company against capital goods from its own funds from the overall financial position of the assessee-company as reflected in the relevant balance-sheet and cash- flow statement and decide the issue afresh on such verification in accordance with law after giving the assessee a proper and sufficient opportunity of being heard. Ground Nos. 3 & 4 of assessee’s appeal are thus treated as allowed for statistical purposes.

In the result, the appeal of the assessee is treated as allowed for statistical purposes.