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Income Tax Appellate Tribunal, MUMBAI BENCH “J” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-14, Mumbai [in short ‘CIT(A)’]and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
filed by the assessee read as under:
1. The learned Commissioner of Income-tax (Appeals) erred in disallowing a sum of Rs.18,76,050/- out of interest expenditure incurred on External Commercial Borrowings (ECB) and other interest expenses on the ground Taiyo Lucid Pvt. Ltd. that the appellant advanced interest free loans to its sister concern out of interest bearing funds and the same is not used for the purpose of business of the appellant.
2. The appellant submits that it had obtained ECB loan during the previous year 2003-04 for setting up factory building and installation of plant and machinery. The construction of factory building completed and plant and machinery installed and commercial production commenced during the previous year 2004-05.
3. The appellant submits that the learned Assessing Officer be directed to delete the disallowance of interest expenditure of Rs.18,76,050/- and to modify the assessment in accordance with the provisions of the Act.
3. The assessee is a manufacturer of water soluble dietary fibre. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had made advances to M/s Lucid Colloids Ltd. (associate concern) in which it had substantial interest. Further the assessee had claimed interest expenses of Rs.76,94,837/- on the funds taken by it on loans. It had not charged any interest on advances given to its associate concerns. In response to a query raised by the AO, the assessee submitted that it had obtained working capital loan from bank of Tokyo Mitsubushi Ltd. which was utilized for the purpose of procuring the raw materials. Further, it was submitted that the advances given to Lucid Colloids Ltd. was for the purpose of procuring raw materials and it paid the above advance to secure raw materials at a favorable price to avoid any volatile price fluctuation in the commodity. However, the AO was not convinced with the above explanation of the assessee and held that the onus to prove that the interest-free Taiyo Lucid Pvt. Ltd. advances made to its associate concern had been made out of interest- free sums available with the assessee, and no cost of interest had been directly or indirectly borne by the assessee for advancing interest-free loans, was upon the assessee. And the assessee had not discharged the said onus cast on it. In view of the above, the AO made a disallowance of interest expenses of Rs.76,94,837/-.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) vide is order dated 29.07.2016 held as under: “5.1 In this year, the interest free advances received is Rs.9,31, 13,478/- and interest free advances given is Rs.20,48,06,200/- and following the decision in last year 54.54% of interest is held to be diverted. In the appellate order for A.Y 2011-12 copy of which is submitted by the appellant, the Id CIT(A) observed that ‘now from the details of bifurcation of interest paid it is clear that out of 54,40,572/-, Rs.5,88,63/- is bank charges for export of goods and the amount of Rs.5,72,260/- is the interest paid for procurement of raw material, the balance amount of Rs.42,79,689/- has only to be considered as diverted in the ratio of 80,77,24,676/- to the amount advanced i.e.10,44,18,000 i.e. 77% is advanced in the course of trade i.e. for the purpose of business by the appellant and balance 23% is advanced which is not for the purpose of business of the appellant. Hence out of the amount of Rs.42,79.689/- the interest debited for ECB, an amount in the proportion of 23% i.e. Rs.9,34,328/-can only be disallowed being not for the purpose of business and hence against the total disallowance of Rs.54,40,572/- only Taiyo Lucid Pvt. Ltd. Rs.9,84,328/- is sustained and for the balance appellant gets relief. The facts in this year are exactly same. Rs.42,55,069/- is the interest for procurement of raw material and therefore following the decision in the earlier year disallowance is restricted to 54.54% of the balance interest of Rs.34,39,768/- amounting to Rs.18,76,050/-. The AO is to take action accordingly.”
5. Before us, the Ld. counsel of the assessee submits that the present issue has been decided in favour of the assessee by the order of the ITAT ‘E’ Bench, Mumbai in assessee’s own case (ITA No. 1933/Mum/2015) for the AY 2011-12. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. We find that the same issue arose before the ITAT ‘E’ Bench, Mumbai in the case of the assessee for the immediate preceding assessment year. The Tribunal held at para 4 as under: “4. We have heard rival contentions and gone through the facts and circumstances of the case. The assessee paid advance along with purchase order against the contractive price to contain the escalating price rise in the market to get the continuous supply of raw material on contractive price irrespective of the price rise in the market throughout the year. The assessee obtain ECB loan during the previous year 2003-04 relevant to A.Y. 2004-05 for the purpose of setting up of factory building at Aurangabad. The said ECB were utilised for the purpose of construction and setting up of factory building which was completed and factory Taiyo Lucid Pvt. Ltd. 2004-05 relevant to A.Y. 2005- 06. The assessee also obtain working capital loan from The Bank of Tokoyo Mitsubushi Ltd. which is utilised for the purpose of procurement of raw material. It was claimed by the assessee that non-interest bearing advances were given solely for business purpose, which is contractual to its associate enterprise, Lucid Colloids Ltd. towards regular supply of raw material. This contractual advance was paid in the ordinary cause of business to secure the raw material at a favourable price to avoid any volatile price fluctuation in the commodity market. We find from the facts of the case that the assessee obtain of ECB loan during the previous year 2003-04 relevant to A.Y. 2004-05 for the purpose of setting up of factory building and commenced its production during the previous year 2004-05 relevant to A.Y. 2005-06. We also find that for and from A.Y. 2005-06 this interest has regularly being allowed and for this assessee produced copy of assessment order passed by the department u/s 143(3) i.e. for A.Y. 2006-07, 2007-08, 2008-09 and 2010-11. The assessee claimed that this interest on ECB loan has all along been claimed and allowed by department except this A.Y. 2011-12. We are of the view, in the given facts and circumstances that interest paid on ECB loan is incurred for the purpose of its business and is to be allowed as deduction u/s 36(1)(iii) of the Act. Even otherwise, for the sake of consistency also this expense is to be allowed as deduction for the reason that Revenue in earlier years, as noted above, has already allowed the deduction. In view of these facts we allow the claim of the assessee. The orders of the lower authorizes on this issue are reversed and the appeal of the assessee is allowed.” 6.1 Facts being identical, we follow the above order of the Co-ordinate Bench and delete the disallowance of Rs.18,76,050/- made by the Ld. CIT(A).