M/S. MATRIX CELLULAR INTERNATIONAL SERVICES LTD.,NEW DELHI vs. DCIT, NEW DELHI

Brief facts of the case are as under: Assessee is a company engaged in the business of telecommunication and other related services. Return for year under consideration was filed on 27/09/10, declaring total income of Rs.1,31,944/-. The case was selected for scrutiny and notice under section 143 (2) was issued on assessee. In response to notices issued, assessee filed required documents as called for by Ld. AO. Ld. AO observed that assessee had entered into international transaction, because of which reference was made to Transfer Pricing Officer. Apart from making adjustment in Transfer Pricing issues, Ld.AO observed that assessee has incurred financial expenses of Rs.3,58,33,289/- in the form of interest payment to bank, during financial year relevant to assessment year under consideration. Ld. AO observed that assessee has extended interest free advances of Rs.1,16,83,080/- to Mrs. Urvashi Kaur, wife of Director of assessee. Ld. AO further observed that Mrs. Urvashi Kaur was a shareholder with assessee, holding 15, 00, 000 shares during assessment year 2010-11 and, therefore, Ld. AO termed it to be related party transaction, under section 40A(2)(b) of the Act. Ld. AO, accordingly, show-caused assessee to explain details of advances given in subsequent assessment year. In reply to show cause, assessee vide letter dated 24/02/14 submitted that Mrs. Urvashi Kaur was a fashion designer and advance was given to her since assessee was planning for a common uniform for all staff. Later on, as assessee was in losses, idea of common uniform was dropped and money paid to Mrs. Urvashi Kaur was recovered in subsequent assessment year. Ld. AO disagreeing with explanation offered by assessee, made disallowance of Rs.1,16,83,080/-.

Aggrieved by order of Ld. AO, assessee raised objections before DRP. DRP decided the issue, by observing as under: “15.0. Finding:

Ld. AO then while passing final assessment order computed proportionate disallowance on advance at Rs.36, 55, 636/-.

Aggrieved by final assessment order, assessee filed appeal before us.

The only issue raised by assessee is in respect of the disallowance made by Ld. AO under section 36 (1) (iii) of the Act. We are, therefore, disposing of all the grounds of appeal together as under: Ld.AR submitted that assessee was having substantial funds which can be seen from audited balance sheet. Referring to page 63 of appeal set, Ld.AR submitted that assessee had surplus interest free funds in the form of share premium, received during the year, on conversion of 3,50,00,000 debenture equity shares at premium of Rs.139.70 per share. Ld. AR thereafter referred to schedule B and D at page 65 of appeal set wherein the details of interest rate debentures and total interest-free funds as on 31/03/09 and 31/03/10 has been mentioned. Ld. AR submitted that assessee had taken interest-bearing loan of Rs.23,84,01,829/- as per schedule C of balance sheet and had given interest-free advance of Rs.1,16,83,083/- to Mrs. Urvashi Kaur. He submitted that at all point of time assessee had adequate non-interest-bearing funds by way of share capital and reserves. On the contrary Ld. DR relied upon the decision of authorities below. She submitted that section 36(1) (iii) relates to the amount of interest paid on capital borrowed for the purpose of business, profession and not for advancing interest-free amounts to related parties.

We have perused the submissions advanced by both the sides and the light of the records placed before us.

Admittedly interest-free funds have been advanced to related party by assessee. However, on perusal of balance sheet and schedule to balance sheet, it is observed that assessee had adequate non-interest-bearing funds by way of share capital and reserve, which was more than Advance paid to Mrs. Urvashi Kaur, amounting to Rs.1,16,83,070/-. No doubt assessee was maintaining bank account with mixed common funds, in which all deposits and withdrawals were made, Ld. AO has not made any specific instance in respect of direct nexus between borrowed funds and the advances made by assessee to Mrs. Urvashi Kaur. It is observed that Assessing Officer has made general observation without verifying the source established by assessee. Before us assessee explained the source of advance made to Mrs. Urvashi Kaur which could not be linked to borrowed funds, since assessee had sufficient capital at the relevant period of time. Thus, in our considered opinion at the relevant period of time assessee was having adequate non-interest-bearing find by way of share capital and reserve which is reflected from the balance sheet as well as the notes to audited account. We are, therefore, of the considered opinion that the entire addition made by Ld. AO deserves to be deleted. Accordingly grounds raised by assessee stands allowed.

In the result appeal filed by assessee stands allowed.