ALCHEMIC DYE CHEM PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 15(1)(1), MUMBAI

The present Appeal filed by the assessee is against the order of Ld. CIT (Appeal) – 24, Mumbai dated 11.09.17 for AY 2012-13. Alchemic Dye Chem Pvt. Ltd.

The brief facts of the case are that assessee is a Company engaged in the business of Finance and Investment Activity. The return of income for the year under consideration was filed on 26.09.2012 declaring total income of Rs. 58,88,990/-. Thereafter, assessment u/s 143(3) was completed by the AO on 23.03.2015 determining income at Rs.66,74,195/-. During the year, assessee had shown revenue from operations at Rs. 3,53,04,817/- and net profit as per P & L Account has been computed at Rs. 58,84,259/-.

Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties, dismissed the appeal of the assessee.

Now before us, the assessee has preferred the present appeal.

The solitary ground raised by the assessee relates to challenging the order of Ld. CIT(A) in upholding the disallowance of Rs. 7,85,206/- u/s 36(1)(iii) r.w.s. 137 of the Act.

Ld. AR of the assessee reiterated the same arguments as were raised by him before Ld. CIT(A) and relied upon the contentions and submissions mentioned in para no. 4 & 5 of the order of Ld. CIT(A) and submitted that the order of Ld. CIT(A) in upholding the disallowance of Rs. 7,85,206/- u/s 36(1)(iii) r.w.s. 137 of the Act is bad in law and thus the same be set aside.

We have heard the counsels for both the parties at length and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities. We find from the records that Ld. CIT(A) had made disallowance of Rs. 7,85,206/- u/s 36(1)(iii) r.w.s. 137 of the Act on the ground that the assessee had advanced loans to M/s Aarti Drugs Ltd amounting to Rs. 2.50 crores and had charged interest @ 10%, whereas the assessee had huge borrowed funds on which interest @ 14% was being paid by the assessee, therefore in these circumstances, the difference of 4% was computed at Rs. 7,85,206/- and was thus added to the income of the assessee.

From the records, we notice that assessee is engaged in the business of lending and as per contention of the assessee, it had sufficient own funds at its disposal and that majority of funds advanced by the assessee to M/s Aarti Drug were out of its own Alchemic Dye Chem Pvt. Ltd. fund and not out of borrowed funds. The loans granted by the assessee were part of business activity of the assessee and during the year, assessee had earned a gross interest income amounting to Rs. 3,53,04,817/- from its lending business and correspondingly interest expenditure amounting to Rs. 2,93,86,219/- had been incurred thereby resulting into net interest income of Rs. 59,18,598/-. Whereas the AO had not considered the above facts in the correct perspective.

As per the contention of the assessee, the AO had failed to appreciate that assessee had sufficient interest free own funds of Rs. 2.28 crores which have been advanced to M/s Aarti Drugs. Thus, interest only to the extent as attributable to balance amount be subject to disallowance u/s 36(1)(iii) of the Act.

In this way, we rely upon the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities 18 DTR 1 (Mumbai) (2009), wherein it was held that if there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be Alchemic Dye Chem Pvt. Ltd. out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. The discretion of the Appellant to invest his own funds in the manner considered appropriate by him is not to be questioned. The said decision had quoted and relied upon the Hon’ble Supreme Court decision in the case of East India Pharmaceutical Works Limited 224 ITR 627 (SC) which had upheld similar ratio laid down by the Hon’ble Calcutta High Court in the case of Woolcombers of India Limited 134 ITR 219 (Calcutta).

Therefore, considering the above propositions as laid down as well as considering the submissions of the assessee that AO had failed to appreciate that assessee had sufficient interest free own funds of Rs. 2.28 crores which have been advanced to M/s Aarti Drugs. Thus, interest only to the extent as attributable to balance amount be subject to disallowance u/s 36(1)(iii) of the Act. We set aside the order of Ld. CIT(A) and remit the matter back to the file of AO with a direction to pass afresh order as per the decision of Hon’ble Bombay High Court in the case of Reliance Utilities 18 DTR 1 (Mumbai) (2009). It is needless Alchemic Dye Chem Pvt. Ltd. here to mention that before passing afresh order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee.

Before parting, we may make it clear that our decision to restore the matter back to the file of AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the AO independently in accordance with law. With these directions, this ground of appeal raised by the assessee is allowed for statistical purposes.

In the net result, the appeal filed by the assessee stands allowed for statistical purposes.