M/S. SAISIDHA SUGAR EQUIPMENT & ENGINEERING CO. P. LTD.,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,

आदेश/ ORDER

PER D. KARUNAKARA RAO, AM :

This appeal is filed by the assessee against the order of CIT(A)-9, Pune dated 23.05.2016 for the Assessment Year 2010-11.

ITA No.1725/PUN/2016

appearance before us despite service of notice in the first instance. Another

notice sent on 10.07.2018 was returned unserved by the Postal Authority

with remark “Address Left”. On considering the smallness of issue, we find

it relevant to adjudicate the issue with the available assistance from the

side of the ld. DR for the Revenue.

Limited Company engaged in the business of manufacturing of sugar

machinery and allied products. The assessee filed the return of income for

the assessment year 2010-11 declaring total income of Rs.60,27,840/-.

The assessment was completed u/s 143(3) determining the total income at

Rs.73,51,035/-. The Assessing Officer made the following additions :-

Income as per Return of Income Rs.60,27,839/- Add : 1. Disallowance of interest u/s 36(1)(iii) Rs.7,66,498/- 2. Disallowance u/s 40A(3) Rs.1,25,000/- 3. Interest income not disclosed Rs.1,81,690/- 4. Other disallowances Rs.2,50,000/- Total Income Rs.73,51,035/- Total Income rounded off u/s 288A Rs.73,51,035/-

relating to the disallowance of interest u/s 36(1)(iii) of the Act and ad-hoc

disallowance of Rs.2,50,000/- are the disputed issues raised before us in

the grounds extracted above.

Act. The assessee reported having taken the secured and unsecured loans

to the extent of Rs.2.01 crores. The assessee paid interest thereon at the

rate of 12%. Further, the assessee gave the loan to its sister concern

namely M/s Saisidha Enterprises of Rs.61.31 lakhs. The Assessing Officer

ITA No.1725/PUN/2016

proposed to disallow the interest attributable to the advance given to the

sister concern. The Assessing Officer held that the said loan of Rs.61.32

lakhs is given for non-business purposes of the assessee. In reply, the

assessee submitted that the said loan was given to the sister concern and,

in lieu of the same, the assessee used the office premises owned by the

sister concern for the last 15 years. He also filed the details of having the

running account with Saisidha Enterprises. On considering the assessee’s

reply, the Assessing Officer held that given loan constitutes the case of

diversion of interest-bearing funds for non-business purposes. Accordingly,

the interest charged to the profit and loss account is restricted to

Rs.17,36,038/- and disallowed balance amount of Rs.7,66,498/-

(Rs.25,02,536/- minus Rs.17,36,038/-). The Assessing Officer adopted the

interest rate of 12.50% on the loan of Rs.61.32 lakhs u/s 36(1)(iii) of the

Act.

the assessee filed a written submission giving the details of interest-bearing

funds available with the company. According to the written submission,

the assessee has adequate interest-free funds by way of share capital of

Rs.1,86,20,000/- and reserves and surplus of Rs.73,34,807/-. Against this

interest-free funds available with the company, the assessee gave interest-

free loan of Rs.61.32 lakhs to its sister concern. In this regard, assessee

relied on various decisions against the Assessing Officer’s decision of

disallowing interest on proportionate basis. Eventually, the CIT(A)

considered the above arguments of the assessee and the contents of written

submission and confirmed the decision of the Assessing Officer holding that

the assessee failed to establish the nexus between the interest-free funds

ITA No.1725/PUN/2016

and interest-bearing funds one side and the interest-free loans given to the

sister concern on the other. The CIT(A) also upheld the failure of the

assessee in commercial expediency for given loan to the sister concern.

the impugned order, the assessee raised the ground no.1.

the Revenue explained the above facts of the case and relied heavily on the

orders of the Assessing Officer and the CIT(A).

Assessing Officer as well as CIT(A). We find the CIT(A) confirmed the

decision of the Assessing Officer relying merely on the principle of

commercial expediency and ignored the binding judgments mentioned in

the written submission of the assessee filed before the CIT(A). We find

there is no dispute about the facts and figures. The availability of the

adequate interest-free funds and giving of interest free loan of Rs.61.32

lakhs to the sister concerns are undisputed. The principle of ‘presumption’

laid down by the Jurisdictional High Court in the case of CIT vs. Reliance

Utilities and Power Ltd., 313 ITR 340 and judgment in the case of CIT vs.

HDFC Bank Ltd. (ITA No.330 of 2012 dated 23.07.2014) is guiding

principle. The nexus and principle of commercial expediency are subject to

principle of presumption laid down by the above binding judgments on this

issue. The said principle is extracted hereunder :-

CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 Held, dismissing the appeal, that if there were funds available both interest- free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available

ITA No.1725/PUN/2016

with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. CIT vs. HDFC Bank Ltd. (ITA No.330 of 2012 dated 23.07.2014) Held, dismissing the appeal, (i) that the finding of fact given by the Tribunal was that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position was not one that was disputed. Undisputedly, the assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee.

free funds, we are of the opinion that the order of the CIT(A) required to be

reversed on this issue. In this regard, the principle of presumption comes

to the assessee’s rescue. The same weight more than the requirement of

establishing the nexus as well as the principles of commercial expediency.

Accordingly, ground no.1 raised by the assessee is allowed. Accordingly, ground no.1 raised by the assessee is allowed.

made by the Assessing Officer. During the first appellate proceedings, the

CIT(A) restricted the same to Rs.1,00,000/- as per discussion given in para

8 of the order of the CIT(A).

12.1 In this regard, the background facts include that the assessee

reported incurring of Rs.30.82 lakhs on account of petrol, travel, vehicle,

repair and maintenance expenses. The Assessing Officer disallowed the

same stating that there are no third party bills in support of the expenses.

On ad-hoc basis, the Assessing Officer disallowed a sum of Rs.2.50 lakhs of

the said expenditure.

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12.2 Before the CIT(A), the assessee made written submission. According

to the same, no disallowance is called for in case of company where books

of account are subjected to audit by the Statutory Auditors. The assessee

argued that the addition of Rs.2.50 lakhs is baseless and is based on the

surmises. The request for deleting the same, the CIT(A) considered the

same and discussed the facts relating to the final conclusion of the

Assessing Officer one side and also noted the fact about the audited books

of account u/s 44AB of the Act on the other. Further, on ad-hoc basis, the

CIT(A) restricted the said disallowance of Rs.1,00,000/-.

ground.

paragraphs from the orders of the Assessing Officer and the CIT(A)

pertaining to this issue. The relevant lines from the operational para of the

order of the CIT(A) on this issue is extracted hereunder :-

“………. The AO has not brought any instances of such expenses which are not supported by proper bills on record. Moreover, the AO has not pointed out any other defects in the books. Thus, the adhoc disallowances cannot be justified. ……..”

to bring out any specific instance of such expenses which are not

supported by proper bills. The reasoning given by the Assessing Officer

and CIT(A) is very general and based on the surmises. Further, it is a

settled legal proposition that the expenditure of this account cannot be

disallowed in case of company where books of account are subjected to

audit u/s 40AB of the Act. Thus, there can be a personal expenditure in

cases of a company where books of accounts are audited and the financial

7 ITA No.1725/PUN/2016

statements are prepared under the supervision of the internal/external auditors. Considering the settled legal proposition on this issue, we are of the opinion that the ad-hoc disallowances of this type are unwarranted as they are unsustainable in law. Accordingly, ground no.2 raised by the assessee is also allowed.

Order pronounced on this 12th day of December, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO) �या�यकसद�य/ JUDICIAL MEMBER लेखासद�य/ ACCOUNTANT MEMBER पुणे/ Pune; �दनांकDated : 12th December, 2018. Sujeet Sujeet आदेशक���त�ल�पअ�े�षत/Copy of the Order is forwarded to : अपीलाथ�/ The Appellant; 1. ��यथ�/ The Respondent; 2. 3. The CIT(A)-9, Pune; 4. The Pr. CIT-5, Pune; �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, पुणे“ए” / DR ‘A’, 5. ITAT, Pune; गाड�फाईल/ Guard file. 6.

// True Copy // आदेशानुसार/ BY ORDER,

स�या�पत ��त//True Copy// Senior Private Secretary आयकरअपील�यअ�धकरण ,पुणे/ ITAT, Pune