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Before: Shri Abraham P. George & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against different orders of the Commissioner of Income Tax (Appeals) 1, Chennai both dated 29.11.2017 relevant to the assessment years 2013-14 and 2014-15. The only common effective ground raised in the appeal of the Revenue is that the ld. CIT(A) has erred in deleting the disallowance made under section 36(1)(iii) of the Income Tax Act, 1961 [“Act” in short] of ₹.4.26 crores & ₹.3.97 crores in the assessment year 2013-14 & 2014-15 respectively.
At the outset, the ld. Counsel for the assessee has submitted that similar issue was subject matter in appeal before the Tribunal in assessee’s own case for assessment year 2008-09 vide its order dated 18.02.2014 and prayed that the same should be followed for the assessment years under consideration.
On the other hand, the ld. DR has submitted that the order of the Tribunal for the assessment year 2008-09 has not been accepted and preferred further appeal before the Hon’ble Madras High Court and pleaded that the order of the ld. CIT(A) should be reversed.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. In the assessment order, The Assessing Officer made the addition towards interest paid on borrowed funds on the ground that the advances have been made to sister concern without charging of interest for both the assessment years. Further, the Assessing Officer has held that similar additions have been made in the assessment year 2008-09 and the issue is pending before the Hon’ble Madras High Court and thus, the above addition was made. After considering the submissions of the assessee and similar addition was deleted for the assessment year 2010-11 and 2012-13 by following the decision of the Tribunal for the assessment year 2008-09, the ld. CIT(A) also 3 & 452/Chny/18 by following the above decision, deleted the addition for the assessment years 2013-14 and 2014-15. 4.1 We have carefully gone through the order for the assessment year 2008-09 in filed by the assessee and I.T.A. No. 1031/Mds/2013 filed by the Revenue, wherein the Tribunal has observed and held as under: “ 7. Ground 3 of assessee’s appeal & Ground Nos.2.1./2.2 of the Revenue’s Appeal - Interest for borrowed funds:- During the course of assessment year, it was observed by the Ld. Assessing Officer that the assessee had claimed an amount of ₹.3,40,40,000/- as financial charges. It was further observed by the Ld. Assessing Officer that the assessee had given interest free loans to its sister concerns as on 31.03.2008 Rs.24,35,69,500/-. The balance of loan outstanding as on 01.04.2007 to the assessee’s sister concerns were ₹.24,51,32,000/-. Since the amount advanced to sister concerns was not utilized by the assessee for its business, relying on the decision in the case Abhishek Industries Ltd. Vs. Ld. CIT, reported in 286 ITR 1, the Ld. A.O disallowed interest expenditure of ₹.1,82,67,713/- and added to the income of the assessee. On appeal, Ld. CIT (A) confirmed the disallowance of interest relatable to an amount of ₹.7.88 crores advanced to the subsidy company of the assessee M/s. CIN. However, the Ld. CIT(A) held that for the amount advanced to the extent of ₹.14.17 crores should not be treated as diversion of interest bearing borrowed fund for the purpose of disallowing interest proportionately, because this amount represented transfer of accumulate loss to sister concerns and not advances.
Ld. A.R. submitted before us that the appellant had sufficient own funds by way of share capital and reserve & surplus to grant loan to sister concerns and therefore, the disallowance of interest by the Ld. Assessing Officer is erroneous. Ld. D.R on the other hand, relied on the order of the Ld. Assessing Officer and argued that the entire disallowance of ₹.1.33 crores made by the Ld. Assessing Officer may be confirmed.
We have heard both the parties and carefully perused the materials available on record. From the order of the Ld. Assessing Officer, it is apparent that the assessee has share capital of approximately ₹.43.30 crores and reserve and surplus of ₹.35.61 crores as on 31/03/2008 and further from the balance sheet it is apparent that the assessee has share capital of Rs. 43.30 crores and Rs. 37.30 crores reserves & surplus as on 31/03/2007, thus the assessee has own funds far exceeding the advance for `.24.36 crores made to its sister concerns. Further the claim of the assessee that it had transferred accumulate losses to the extent of Rs.14.17 to its sister concerns has not been looked into by the Ld.AO, need less to mention that in such case disallowance of interest expense on the premises that interest bearing funds have been diverted would be incorrect. However the following decisions rendered by various higher judiciary has held that if the assessee has own funds exceeding the advances made to sister concerns, then interest expenditure cannot be disallowed on the premises that the assessee has diverted interest bearing fund to its sister concerns. (i). CIT Vs. Reliance Utilities And Power Ltd. ( [2009] 313 ITR 340(Bom)) Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans take, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the funding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. (ii). CIT Vs. Bharti Televenture Ltd. ([2011] 331 ITR 502(Del)) Held, dismissing the appeal, that the order of the Commissioner (Appeals) and the Tribunal showed that the assessee was maintaining a bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by the AO of direct nexus between the borrowed funds and the advances made to the subsidiaries. The AO had made general observations without pointing out any specific instance where an interest bearing borrowing was advanced to the subsidiaries or establishing that the borrowings made by the assessee were not for business purposes. Both appellate authorities were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee’s own capital. At the relevant time the assessee was found to have adequate non-interest bearing funds by way of share capital and reserves. Even otherwise, the advances were found to be made to the subsidiaries for business considerations, i.e out of commercial expediency of the assessee. That being the factual position reflected from the record of the assessee, the onus that lay on it stood discharged. There was no ground to interfere with those findings.
Considering the above decisions of the Hon’ble High Court of Bombay in the case CIT Vs. Reliance Utilities And Power Ltd. & the decision of Hon’ble High Court of Delhi in the case CIT Vs. Bharti Televenture Ltd., which are identical to the facts of the case before us, we are of the opinion that the Ld. Assessing Officer has erred by disallowing the interest expenditure incurred by the assessee on the premises that interest bearing funds have been diverted to the sister concerns. Therefore, we hereby delete the addition made by the Ld. Assessing Officer, which was further confirmed by the Ld. CIT (A) on this issue. Thus, the ground No.3 raised by the assessee in its appeal is allowed in its favour and consequently the ground Nos.2.1 & 2.2 raised by the Revenue is decided against the Revenue.” The ld. DR could not controvert the above findings of the Tribunal by filing order of higher forum having modified or reversed the findings of the Tribunal. The above decision of the Tribunal has been followed in the assessment years 2010-11 and 2012-13 by the ld. CIT(A) in deleting the similar addition, which was followed by the ld. CIT(A) for the assessment years under appeal. Thus, we find no reason to interfere with the order passed by the ld. CIT(A) on this issue. In view of the above, the ground raised by the Revenue stands dismissed for both the assessment years.