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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश आदेश / ORDER आदेश आदेश
PER D. KARUNAKARA RAO, AM :
This is the appeal filed by the Revenue against the order of CIT(A)- 1, Nashik dated 20-06-2016 for the A.Y.2012-13.
Grounds raised by the Revenue are extracted as under :
“1. Whether on the facts and in the circumstances of the case, and in law, the Ld CIT(A)-I, Nashik was justified in allowing the interest at Rs. 73,74,401/- on Rs. 6,09,53,345/ - given to the associate concerns as interest free loans/advances?
Whether on facts and in the circumstances of the case, the Ld CIT(A)-I, Nashik was justified in allowing interest debited of Rs. 1,34,65,779/- in the Profit and loss account on loans, as against assessee had given interest free loan/ advances to associates concerns?
Whether on the facts and in the circumstances of the case, the Ld CIT (A)-I, Nashik was justified in allowing the interest holding that it is assessee's discretion to utilize its cash and reserves?
The appellant prays the order of the Assessing Officer may be restored.
2 ITA No. 1816/PUN/2016 M/s. Bharat Glass Tube Ltd.
The appellant prays to adduce such further evidence to substantiate his case.
The appellant prays leave to add, alter, clarify, amend and or withdraw any grounds of appeal as and when the occasion demands.”
Briefly stated relevant facts of the case are that the assessee is a
company engaged in the business of manufacturing and selling of
Rolled, Figured & wired glasses. Assessee filed the return of income on
30-09-2012 declaring total income at Nil. On examination of the
financial statements and the books of accounts, AO noticed that the
assessee made interest free advances amounting to Rs.6,09,53,345/- to
some of the concerns. The details are given below :
Sr.No. Name of Parties Amount advanced (Rs.) 1 Chandra Laxmi Safety Glass 9,73,007/- 2 Haryana Sheet Glass Ltd. 3,82,84,567/- 3 KFG Glass Industries 50,96,710/- 4 Sugar Glass Enterprises 37,50,000/- 5 Sumangal Glass Industries 1,28,49,061/- Pvt. Ltd. Total 6,09,53,345/-
The AO asked the assessee as to why proportionate interest
disallowance should not be made on the said interest free advances.
The assessee in its reply submitted that the submissions made for
A.Yrs. 2009-10, 2010-11 and 2011-12 holds good. Assessee explained
that the above advances to the associate concerns have been financed
through interest free funds in the form Share Capital and Reserve which
works out to Rs.25,20,44,978/-. Thus, assessee submitted that
assessee has sufficient interest free funds for advancing the above sum.
Assessee relied on the decision of Hon’ble High Court in the case of CIT
Vs. Reliance Utilities and Power Ltd. 313 ITR 340. He further submitted
that the CIT(A) has deleted the interest disallowance for the A.Y. 2009-
3 ITA No. 1816/PUN/2016 M/s. Bharat Glass Tube Ltd.
However, rejecting the explanation given by the assessee the AO
made interest disallowance at Rs.73,14,401/- (@12% on the interest free
funds).
In the First Appellate proceedings, the CIT(A) deleted the interest
disallowance made by the AO. Contents of Para No.5.2 to 5.2.4 are
relevant.
Aggrieved with the order of CIT(A) the Revenue is in appeal before
the Tribunal with the aforesaid grounds.
We heard both the sides on the solitary issue of allowing of
interest disallowance and perused the order of Revenue authorities. We
find the CIT(A) decided the issue in favour of the assessee by holding as
under :
“5.2 I have carefully considered the facts of the case, the assessment order and the submissions of the appellant. The appellant company has given interest free loans to its sister concerns viz. Sumangal Glass Industries Ltd. Rs.1,28,49,061/-, Haryana Sheet Glass Ltd.. Ankaleshwar Rs.3,82,84,567/-,Chandra Laxmi Safety Glass Rs. 9,73,007/-, Sagar Glass Enterprises Rs. 37,50,000/- and K.F.G. Glass Industries Rs.50,96,710/- aggregating to Rs. 6,09,53,345/-. The appellant company has demonstrated that it had in the balance sheet as on 31/03/2011 non-interest bearing funds i.e. share capital and reserves of Rs. 24,58,75,771/- which were sufficient to finance the non interest bearing advance of Rs. 6,09,53,345/- given to its associate concerns. It is an undisputed fact that the appellant company borrowed Rs. 15 Crore for purchase of factory land and building, & plant and machinery at Ankleshwar from Cosmos Co-operative Bank, Fort, Mumbai. The payment of Rs. 15 Crore was directly made to IFCI Ltd. No nexus therefore is established between the amount borrowed and interest free advances given to these sister concerns. Therefore, there is no justification to make any disallowance out of the interest. This view is fortified in the case of Gandhi Bhandari & Co v/s ACIT (2003) 78 TTJ (Pune) 161 wherein it is held as under:-
"This Tribunal has been holding that interest disallowance is to be made only if the AO is able to establish nexus between the funds with interest to the amounts advanced free of interest. This view also gets support from the judgment of the Hon'ble Bombay High Court in CIT Vs. Bombay Samachar (1969) 74 ITR 723 (Bom.)".
4 ITA No. 1816/PUN/2016 M/s. Bharat Glass Tube Ltd.
Therefore, it is held that the appellant company had sufficient funds available in the form of share capital and reserves other than the borrowed money for advancing a sum of Rs. 6,09,53,345/-. Thus, it cannot be said that the amount of loan advanced to the sister-concerns is out of the borrowed fund.
5.2.1 In the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.), it has been held that if there are funds available, both, interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with company, provided said funds are sufficient to meet investments. Thus as per the principle of precedent, it is the latest authority and needs to be followed. The ld. A.R. has correctly pointed out that the ratio of the contrary judgement of the Hon. Kerala High Court in the case of CIT Vs.V.I. Baby & Co. (2002) 254 ITR 248 (Ker.) is not applicable on the facts of the appellant's case. This is because of two reasons. Firstly, the said decision pronounced in 2001 is earlier and the decision of the Reliance Utilities and Power Ltd. is pronounced in 2009 is later and secondly, the decision of Reliance Utilities and Power Ltd. is by the Jurisdictional High Court, hence it is binding on the AO.
5.2.2 As may be seen, the ld. AO has proceeded on the assumption that there was no need for the assessee to borrow funds and pay interest thereon, when it has advanced interest free loans to its sister concerns. It is settled position of law that it is the assessee's discretion to utilize its profits and reserves. The ld. AO's contention, therefore, is presumptuous and not tenable in the eyes of law. What the AO was required to examine was whether the funds borrowed on which interest was paid were advanced interest free to its sister concern. The assessee has demonstrated before the AO as well as before me that the borrowed funds were utilized for the purchase of Ankleshwar Unit of. Haryana Glass Sheets for which payment of Rs. 15 Crore was payable which was paid by the Cosmos Bank Ltd. directly to the IFCI Ltd. with which the said unit was mortgaged. On the said bank loan, the assessee paid interest of Rs.1,34,65,779/-. This interest is purely for the purpose of business and, therefore, an allowable expenditure. Therefore, the ld. AO's contention with regard to commercial expediency in advancing the interest free loan to its sister concern, has no relevance because it is settled position of law that if the interest free funds are sufficient to fund non -interest bearing funds, then it is to be assumed that non business purpose advances have been made from non interest bearing funds of the assessee. (East India Pharmaceutical Works Ltd. Vs. CIT (Supra). As is evident from the facts on record, the assessee had sufficient funds of its own to advance the impugned amounts of Rs. 6,09,53,345/-.
5.2.3 The Hon’ble ITAT Pune, considering the same issue in appellant’s own case for A.Y. 2009-10 in order ITA No.953/PN/2013, has held inter- alia as under :
" 5. We have heard the parties and perused the record. The Ld. Counsel supported the order of the Ld. CIT(A) and also place his heavy reliance on the decision in the case of Reliance Utilities and Power Ltd. (Supra). He further submits that as per the balance sheet filed on record, there is not dispute that the assessee has sufficient interest free funds in the form of share capital and general reserves which are to the extent of Rs. 25.75 Crores, He argued that at the most, even if it is presumed that assessee has given interest free advances to non business purposes to the
5 ITA No. 1816/PUN/2016 M/s. Bharat Glass Tube Ltd.
extent of Rs. 5.38 crores which are much more less than the available interest free funds with the assessee. He submits that the decision of the Hon'ble High Court of Kerala in the case of V.I Baby and Company (Supra) is not applicable as there is direct decision of Hon’ble jurisdictional High Court. He accordingly pleaded for dismissing the grounds raised by the revenue.
Per contra the Ld. Departmental Representative pleaded for restoring the order of the Assessing Officer. In our opinion, the ground taken by the Revenue has to be dismissed. Admittedly, the assessee has sufficient interest free funds in the form of capital and general reserves of the extent of Rs. 25.75 crores as against that the assessee has given the interest free advances to the extent of Rs. 5.38. One of the arguments of the assessee is that there is a commercial and business expediency but even if it is assumed that those advances are not given on commercial expediency but even if it is assumed that those advances are not given on commercial expediency but at the same time the legal principles laid down in the case of Reliance Utilities and Power Ltd. (Supra) are squarely applicable to the assessee's case as per the facts on record. We, therefore, uphold the order of the Ld. CIT (A) and dismiss the ground taken by the Revenue."
5.2.4 In my considered view, such an observation made by the Ld. AO tantamount to presumption that per se, notional interest has to be disallowed on all the interest free advances in all cases. In view of the decisions referred to above, the disallowance on a/c of interest of Rs.73,74,401/- is unjustified and the same is directed to be deleted. This view is fortified by the decision in the case of CIT Vs. Radico Khaitan 274 ITR 354 (All.).”
From the above, it is evident that the CIT(A) has rightly considered
that, as on 31-03-2011, the assessee has non-interest bearing funds in
the form of Share Capital and Reserves at Rs.25,48,771/-. CIT(A) also
considered that borrowed funds of Rs.15 crores was utilized for
purchase of Ankleshwar unit of Haryana Glass Sheets and the payment
was made by the Cosmos Bank Ltd. directly to the IFCI Ltd. The unit
was mortgaged. The interest payment of Rs.1,34,65,779/- is purely for
the purpose of business which is an allowable expenditure. Further, the
CIT(A) while concluding the issue in favour of the assessee has also
considered decision of ITAT, Pune in assessee’s own case in ITA
No.953/PN/2013, dated 17-10-2014 for the A.Y. 2009-10.
6 ITA No. 1816/PUN/2016 M/s. Bharat Glass Tube Ltd.
It is not the case of the Revenue that the assessee does not have interest free funds at the relevant point of time. Further, it is not the case of the Revenue that giving such advances constitutes ‘an investment activity’ and not a business activity. Since the issue of allowing of interest disallowance has been laid to rest by the ratio laid down by the jurisdictional High Court (supra), we find the order of CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, the grounds raised by the Revenue are dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced on this 18th day of July, 2018.
Sd/- Sd/- िवकास अव�थी /Vikas Awasthy) (डी डी डी. क�णाकरा राव डी (िवकास अव�थी िवकास अव�थी िवकास अव�थी क�णाकरा राव क�णाकरा राव/D. KARUNAKARA RAO) क�णाकरा राव �याियक सद�य �याियक सद�य/JUDICIAL MEMBER लेखा सद�य �याियक सद�य �याियक सद�य लेखा सद�य लेखा सद�य/ACCOUNTANT MEMBER लेखा सद�य
पुणे / Pune; �दनांक / Dated : 18th July, 2018. Satish
आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-1, Nashik 4. The Pr. CIT-1, Nashik िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “बी बी बी” ब�च, बी 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER,
// True Copy // व�र� िनजी सिचव/Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune