KIRLOSKAR PNEUMATIC CO. LTD.,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX,,

The assessee has raised the following ground of appeal:-

The only issue raised in the present appeal is against disallowance of interest of ₹ 5,88,091/-.

Briefly, in the facts of the case, original assessment was completed on 15.12.2008, wherein disallowance was made out of interest expenses to the tune of ₹ 5,88,091/-. The assessee went in appeal before the CIT(A) and then before the Tribunal. The Tribunal in its order vide ITA No.242/PN/2011, dated 30.04.2012 restored the issue back to the file of Assessing Officer to verify the Capital and Reserves & Surplus as on 31.03.2005 and 31.03.2006 and decide the issue in the light of the decision of jurisdictional High Court. The assessee in the second round before the Assessing Officer explained that the issue stands covered by the order of the Hon’ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. reported in 313 ITR 340 (Bom) and pointed out that as disclosed in the Balance Sheet, shareholder’s funds shows that the Capital & Reserves & Surplus as at 31.03.2005 are Rs.35.87 crores & as at 31.03.2006 are Rs.46.36 crores. The average of the same comes to Rs.41.11 crores. Thus, the company has sufficient Capital and Reserves & Surplus to advance such interest free advance to the sister concern. The advance paid to the sister concern Kirloskar Macquay Pvt. Ltd. is only Rs.74,28,520/-. In the view of the above the disallowance may be deleted. The Assessing Officer however, rejected the plea of assessee observing as under:- “6.2 However, on perusal of relevant clauses of the purchase order of Mazgaon Dock, Mumbai submitted by the assessee, it is seen that clause-9

The CIT(A) upheld the order of Assessing Officer on the ground that certain documents were not filed i.e. in respect of purchase orders from the said concern.

The assessee is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee took us through the factual aspects of the case and pointed out that the issue stands covered by the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (supra), wherein the assessee had sufficient interest free advances available with it. He also pointed out that even otherwise, the advances made to sister concern were for the purpose of business and there was no merit in disallowing any part of interest relatable to such interest from advances, in view of the ratio laid down by the Hon'ble Supreme Court in SA Builders Vs.CIT reported in 2006 TIOL – 179-SC-IT.

The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

We have heard the rival contentions and perused the record. The limited issue which arises before us in the present appeal is in respect of disallowance of interest out of interest paid on secured loans, relatable to interest free advances made by the assessee. The assessee had given interest free advances of ₹ 74,28,520/- to its associated concern. The case of assessee in the first instance is that it had sufficient interest free advances available with it. Both the Assessing Officer and CIT(A) have noted the plea of assessee in this regard i.e. Capital and Reserves & Surplus as on 31.03.2005 were to the tune of ₹ 35.87 crores and as on 31.03.2006 were to the tune of ₹ 46.36 crores. The average of the same comes to ₹ 41.11 crores. The assessee had advanced sum of ₹ 74,28,520/- to its sister concern Kirloskar McQuay Pvt. Ltd. Without going into any other details referred by the learned Authorized Representative for the assessee, we are of the view that where the interest free funds available with the assessee were sufficient to cover interest free advances made by the assessee, then no part of interest expenditure incurred by the assessee on its secured loans can be disallowed in the hands of assessee. For this, we find support from the proposition laid down by the Hon’ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (supra), wherein it was held as under:- “If there were funds available both interest-free and overdraft and/or loan taken, then a presumption would arise that investment would be out of the interest free fund generated or available with the company, if the interest-free funds were sufficient to meet the investment.”

Applying the said principle to the facts of present case, we find there is no merit in disallowance made at ₹ 5,88,091/- and the same is deleted. The ground of appeal No.1 raised by the assessee is thus, allowed.

In the result, appeal of assessee is allowed.