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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI O.P. MEENA, HONBLE
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)–18, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 21.03.2017 for the Assessment Year 2012-13.
The Revenue has raised following grounds in its appeal: - a) "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in granting relief of Rs. 89,71,506/- to the assessee by ignoring the fact that the direct nexus between the surplus fund being given to subsidiary company is not established and that the subsidiary company has applied such loan for business purpose only?". b) Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in granting relief of Rs. 25,94,362/- to the assessee by ignoring
(A.Y: 2012-13) M/s. Veto Electropowers India Pvt. Ltd., the fact that the assessee failed to provide the nexus between the surplus fund and its use. c) "The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the A.O. be restored". d) The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”
The first issue in grounds of appeal of the Revenue is relating to the disallowance of interest of ₹.89,71,506/- u/s. 36(1)(iii) of the Act.
4. The Assessing Officer while completing the assessment u/s. 143(3) of the Act noticed that assessee raised loans of ₹.9.99 Crores from banks for working capital requirements and paid interest of ₹.89,71,506/-. Assessing Officer also noticed that assessee advanced interest free loan of ₹.23.64 Crores to its sister concern M/s. Veto Electric Components Pvt. Ltd. The assessee was required to explain as to why proportionate interest should not be disallowed as the assessee advanced loans to sister concerns without any interest. Assessee submitted that it had sufficient interest free funds in the form of share capital and reserves and therefore no interest is liable to be disallowed. However not convinced with the submissions of the assessee the Assessing Officer disallowed proportionate interest at ₹.89,71,506/-. Assessing Officer also disallowed interest of ₹.25,94,362/- on the ground that assessee has not charged interest on debtors and at the same time assessee paid interest on overdue purchases to the creditors.
(A.Y: 2012-13) M/s. Veto Electropowers India Pvt. Ltd., 5. On appeal, the Ld.CIT(A) accepted the contentions of the assessee that when assessee had sufficient interest free funds no interest is liable to be disallowed in view of the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [313 ITR 340].
Before us Ld. Counsel for the assessee reiterated the submissions made before the lower authorities.
Ld. DR vehemently supported the orders of the Assessing Officer.
We have heard the rival submissions, perused the orders of the authorities below. It is not in dispute that the assessee has sufficient interest free funds for making investments or for advancing loans to sister concerns. This is very much evident from the submissions of the assessee which is extracted by the Ld.CIT(A) in his order at Page No. 9 Para 2.3:- “2.3. The appellant on 22-03-2017 filed a further written, submission, the contents of which are reproduced below: 1. In regard to proportionate disallowance of Interest on loan advanced to subsidiary company, we wish to clarify that a. loan of Rs.23.64 crore had been advanced by the appellant company to its subsidiary - Veto Electric Components Pvt Ltd.. The details of loans advanced and repaid is indicated as follows: Particulars Amount (In Rs.) Loan advanced in FY 2010-11 7,70,02,707 Less: Loan repaid in FY 2010-11 (1,14,83,690) Balance as on 31-03-2011 6.55,19,017 Add. Loan advanced in FY: 2011-12 26,55,75,000 Less: Loan repaid in FY 2011-12 (9,46,70,000) Balance as on 31.03.2012 23,64,24,017
(A.Y: 2012-13) M/s. Veto Electropowers India Pvt. Ltd., 2. Your Honor’s attention is invited to the fact that the interest free funds of the appellant stood as follows: - As On As on Particulars 31.03.2012 31.03.2011 (in ₹.) (in ₹.) Share Capital 13,10,50,000 13,10,50,000 Reserves & Surplus 35,69,83,954 34,94,14,248 Own Funds (A) 48,80,33,954 48,04,64,248 Interest free owned 20,93,479 2,06,47,604 funds (B) Total 49,01,27,433 50,11,11,852 Your Honour would appreciate that the appellant possessed adequate own fund during the period when the loan was advanced to the subsidiary company. In view of above, Your Honour would appreciate that the presumption laid down in the case of CIT v. Reliance Utilities [2009] 313 ITR 340 (Bombay HC) apply to the facts of the present case. In the said case, the Hon'ble Bombay High Court has held as follows: “… If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from interest free funds available. … The Principle therefore would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment.”
This fact is not disputed by the Revenue. In view of the of the decision of the Hon'ble Jurisdictional High Court in the case of CIT v.
Reliance Utilities and Power Ltd. (supra), wherein it has been held that, if assessee has sufficient interest free funds to meet its investments and assessee had raised a loan it may be presumed that the investments were made from interest free funds available to the assessee. In view of this position, we are of the view that the Ld.CIT(A) had rightly deleted the disallowance. Hence, we reject the ground raised by the Revenue on this issue.
(A.Y: 2012-13) M/s. Veto Electropowers India Pvt. Ltd., 10. The second ground in the grounds of appeal of the Revenue is in respect of disallowance of interest of ₹.25,94,362/- which was disallowed by the Assessing Officer on the ground that assessee paid interest to the creditors and no interest has been charged on debtors.
11. Assessee made its submissions before the Ld.CIT(A) as under: -
“3.2 The appellant has submitted as follows in relation to the aforesaid ground:
1. 1. As regards to interest paid on overdue payment on the purchases, we would submit to Your Honour that the said payment was paid as per the terms of agreement with the supplier. The Id. Assessing Officer disallowed the said interest payment u/s. 36(l)(iii) on the ground that no interest is charged on debtors. The said interest was not charged on debtors based on the decision taken by the management of the appellant company.
2. In this regard, we submit to Your Honour that it is the business decision of the appellant company whether to charge interest on debtors or not Various courts have held that the Id. Assessing Officer cannot decide whether a particular expenditure should be incurred or not but has to determine whether the expenditure claimed is legitimate or not. Thus, no disallowance of interest paid to supplier can be made u/s. 36(l)(iii) on the ground that no interest is charged on the debtors.
3. In view of the aforesaid discussion and judicial pronouncements, the advances made by the appellant company to its subsidiary for the for the purpose of the business is a measure of commercial expediency. Further the appellant has lent money out of own funds and, hence the disallowance made u/s, 36(l)(iii) of the Act should be deleted, 4. In this regard, we wish to place reliance on the decision of Hon'ble Mumbai ITAT in the case of DCIT v. Kamdar Constructions (ITA No. 965/Mum/2009) (enclosed at page no 15 to 21 of the PB) wherein the Hon'ble Bench held as under. Under section 36(1)(iii) to sustain a claim for deduction of the amount of interest, all that is necessary is that the capital must have been borrowed by the assessee, it must have been borrowed for the purpose of business or profession of the assessee and thirdly, that the assessee should have paid that amount by way of interest. Consideration for paying interest to trade creditors and for not charging interest from trade debtors can be different, and therefore, just because the assessee has not charged interest from its trade debtors, interest paid by it to it trade creditors could not be disallowed as a deduction especially when there is no dispute about the genuineness of the payment. Therefore, we confirm the order of the Ld.CIT(A) and dismiss the department appeal.”
(A.Y: 2012-13) M/s. Veto Electropowers India Pvt. Ltd., 12. The Ld.CIT(A) considering the submissions of the assessee and the decision of the Coordinate Bench in the case of DCIT v. Kamdar Constructions (supra) deleted the disallowance observing as under: - “Under this ground of appeal, the appellant has disputed disallowance of interest amounting to Rs.25,94,362/- u/s 36(1)(iii). On perusal of the assessment order I find that the Appellant has not charged interest on debtors but paid interest on overdue purchases. In this regard the Appellant submitted that this is the business policy of the Appellant and out of commercial expediency. Moreover, the Appellant has got sufficient interest free funds on account of share capital and reserves. I have carefully considered the rival submission and find that the disallowance made by the AO deserves to be deleted on the facts as well as on the case laws relied upon by the Appellant. This ground of appeal succeeds.”
13. On a careful consideration of the submissions of the assessee as well as the findings of the Ld.CIT(A), we do not see any valid reason to interfere with the decision of the Ld.CIT(A), as the issue is squarely covered by the decision of the Coordinate Bench in the case of DCIT v. Kamdar Constructions (supra). Thus, this ground of the Revenue is rejected.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on the 05th April, 2019