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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
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.
The grounds raised by the assessee are as under :- “1) The authorities below erred in facts and circumstances of the case and in law in making disallowance of interest of Rs.766498/- being proportionate interest on advance to sister concern where the share capital and reserves of the company are in excess of the advance given to sister concern. The addition made on this account be deleted and just and proper relief be granted to the assessee in this respect. 2) The Commissioner Of Income Tax has erred in confirming the addition to the extent of Rs.100000/- out of total addition of Rs.250000/- made by assessing officer on ad hoc basis for various expenses debited to profit and loss account. Just and proper relief be granted to the assessee in this respect. 3) The Appellant prays to be allowed to add, amend, modify, rectify, delete, raise any ground of appeal before or at the time of hearing.”
ITA No.1725/PUN/2016
At the outset, ld. Counsel for the assessee did not make any
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.
Briefly stated the relevant facts include that the assessee is a Private
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/-
Out of the above additions, the additions at Sl. No.1 and 4 (above)
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.
Ground no.1 relates to disallowance of interest u/s 36(1)(iii) of the
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.
During the first appellate proceedings on this issue, ld. Counsel for
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.
Aggrieved with the above decision of the CIT(A) given in para 5.3 of
the impugned order, the assessee raised the ground no.1.
There is none to represent on behalf of the assessee. The ld. DR for
the Revenue explained the above facts of the case and relied heavily on the
orders of the Assessing Officer and the CIT(A).
We have heard ld. DR for the Revenue and perused the orders of the
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.
Considering the above legal principle as well as the adequate interest-
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.
Ground no.2 relates to the ad-hoc disallowance of Rs.2.50 lakhs as
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.
ITA No.1725/PUN/2016
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/-.
Aggrieved with the same, the assessee is in appeal before us on this
ground.
We have heard the ld. DR for the Revenue and perused the relevant
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. ……..”
From the above extract, it is evident that the Assessing Officer failed
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.
In the result, the appeal of the assessee is 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