YASH SYNTHETICS P.LTD,MUMBAI vs. ITO WD 13(3)(4), MUMBAI

The present appeal has been preferred by the assessee against the order dated 02.11.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2013-14.

The various grounds raised

The only issue raised by the assessee is against the confirmation of addition of Rs.14,15,700/- by Ld. CIT(A) as made by the AO under section 36(1)(iii) of the Act relating to advances made for purchase of property without appreciating the fact that there is no direct nexus of borrowed funds utilised for advances made and the assessee company was having its own sufficient funds available with it.

The facts in brief are that during assessment proceedings the AO noticed that the assessee has advanced money for the purpose of purchase of property out of borrowed funds. Accordingly, a show cause notice was issued to the assessee which was replied by the assessee vide letter dated 15.01.2016 submitting therein that the investments by way of advance was made out of own funds and no borrowed funds were used for this purpose. Again a show cause notice was issued on 26.02.2016 calling upon the assessee to explain as to why the disallowance as per proviso to section 36(1)(iii) Act should not be made because the is not put to use which was replied by the assessee by submitting that the disallowance if any should be restricted to interest amount attributable to the advance given during the year of Rs.18,45,000/- for the purchase of property. The reply of the assessee did not find favour with the AO and he disallowed a sum of Rs.14,15,700/- being 13.25% on the advance for property of Rs.1,06,84,527/- and added the same to the income of the assessee.

In the appellate proceedings, Ld. CIT(A) dismissed the appeal of the assessee by observing and holding as under: “7. I have considered the submissions carefully. It is clear that moneys have been advanced on which no interest is charged. Though the diversion of loans are explained as advance against purchase of flats, t here is in reality no pur cha s e of f lats. The same is not f or any business purpose. Further, by its own admission, the funds have been routed through cash credit account and thus borrowed funds have been used. The cash credit borrowings have gone up from Rs 149 lakhs to Rs.175 lakhs. The finance costs are mainly in respect of bank interest and bank charges. Even though there are investments, no disallowance u/s 14A are computed and offered by the appellant. In these circumstances, dis-allowance of interest expenditure upheld. The grounds of appeal are dismissed.”

The Ld. A.R. vehemently submitted before us that the confirmation of disallowance by the Ld. CIT(A) is totally wrong and against the statute and the decisions of the various judicial forums. The Ld. A.R. submitted that the advance given for the purchase of property was started in the earlier year and during the year only Rs.18,44,000/- was paid. Whereas in the earlier year the assessment was framed under section 143(3) in scrutiny proceedings and the issue was considered and allowed without there being any disallowance on this count. The Ld. A.R. drew our attention to the page No.14 of the paper book to point out that the advance as on 31.03.2012 was Rs.88,39,527/- vis-à-vis Rs.10684,527/- as on 31.03.2013. The Ld. A.R. submitted that the assessee has own sufficient funds available with it to make the investment in the said properties by referring to the page No.8 of the paper book corroborating that assessee’s own funds were Rs.26.51 crore whereas advance for the property given was only Rs.1.06 crores and therefore the presumption has to be 4 M/s. Yash Synthetics P. Ltd. drawn that the investment was made out of own funds and not out of interest bearing funds borrowed by the assessee. Finally, the Ld. A.R. prayed that the addition so made deserved to be deleted.

The Ld. D.R., on the other hand, relied on the order of authorities below:

We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has given advance for property which was Rs.1.06 crore as on 31.03.2013 and the assessee’s own funds in the form of share capital and reserves were Rs.26.51 crores. The assessee has taken up this plea before both the authorities below that interest free own funds available with the assessee were more than the investments in the properties/advances and the presumption has to be drawn that the investment was made out of own funds and not out of interest bearing funds. We find merit in the contentions of the assessee that the presumption has to be drawn in such case. The case of the assessee is also supported by a series of decisions by the Jurisdictional High Court laying down the ratio that where the assessee’s own funds are more than the investments, then the present presumption has to be drawn that assessee’s own interest free funds were invested in the said investments. We, therefore, do not concur with the conclusion drawn by the Ld. CIT(A) and accordingly set aside the order of Ld. CIT(A) and direct the AO to delete the addition.