M/S. RAHUL DEVELOPERS PVT. LTD.,BURHANPUR vs. THE ACIT, KHANDWA

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ITA 645/IND/2015Status: DisposedITAT Indore28 February 2017AY 2010-1110 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Assessing Officer failed to establish a nexus between interest-bearing funds and the non-business advances. Given the availability of substantial interest-free funds, it was presumed that the advances were made from these funds.

What were the facts?

The Assessing Officer disallowed interest expenses on the grounds that borrowed funds were diverted for non-business purposes, specifically interest-free advances. The assessee contended it had sufficient interest-free funds to cover these advances.

What were the issues?

Whether interest expenses are disallowable when interest-free advances are made, despite the assessee having sufficient interest-free funds available.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(8)Show list

Detected automatically from the text. Citations are also linked where they appear in the judgment. The count shows how many other judgments on BharatTax rely on the same authority.

Income Tax Appellate Tribunal, INDORE BENCH, INDORE

Before: SHRI C.M.GARG & SHRI O.P. MEENA

For Appellant: Shri S.N. Agarwal, CA, Shri Mohd. Javed, D.R
For Respondent: Shri Mohd. Javed, D.R

PER O.P. MEENA, ACCOUTANT MEMEBR. This appeal by the assessee is directed against the order of learned Commissioner of Income tax (Appeals)-II, Indore [in short CIT (A)]

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 2 of 10 dated 30.04.2015 for the Assessment Year 2010-11 on following

grounds:

1.

The Ld. CIT (A) has erred in confirming the addition of Rs.12,78,415/- on account of interest payments on the ground that the borrowed funds have been diverted for non business purposes. 1.1. It was proved before the lower authorities that the assessee had sufficient capital and interest-free funds. No nexus has been proved; by the Ld. AO, that borrowed funds have been utilized for interest free advances. 1.2. The Ld. CIT (A) did not consider the cases cited before him. 2. The addition of Rs.12,78,415/- may please be deleted or in the alternative restricted to reasonable figure. 1. Ground no. 1 and 2 relates to confirmation of disallowance of interest of Rs. 12,78,415/- hence, these being considered together.

1.1. Succinctly, facts as culled out from the orders of lower

authorities are that the assessee derives income from trading of

soya oil. F.P., tuar, Mustard and cottonseeds. The assessee has filed

return of income on 30.09.2010 declaring total income of

Rs.69,00,010/-. The AO found that the assessee has advanced

interest bearing funds to some of persons from which either no

interest is charged or the same is charged at lesser rate whereas the

assessee has paid interest @ 12% on loan taken. The AO therefore,

worked out disallowance of interest as detailed below:

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 3 of 10

Name of the Perio Amount Interest Disallowance of concern d in charged interest @ 12% days 1.Kaushik 365 1,00,00,00 Nil 12,00,000 Apparels 0 2.Shree 19 3,80,430 Nil 71,840 Venkateshw ar Cotton Co. 3.Shree 10 20,00,000 Not 6,575 Venkateshw charged ar Cotton Co. Total interest disallowed 12,78,415

1.1.1. In view of above, the AO disallowed the interest of Rs.

12,78,415/- by observing that the assessee has diverted interest

bearing funds for advancing the same without interest or on lesser

side.

1.2. Being, aggrieved the assessee filed an appeal before the ld. CIT

(A). However, ld. CIT (A) confirmed the action of the AO by observing

that the assessee has failed to controvert the finding of the AO. The

contention of the assessee that it had sufficient interest-free funds

available out of which interest-free funds advances were given was

not found acceptable.

1.3. Being, aggrieved the assessee filed this appeal before the

Tribunal. The Ld. A.R. submitted that the observation of the AO is

not correct on the facts of the case. The Ld. A.R. submitted a table

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 4 of 10

demonstrating that the assessee has substantial interest-free funds

of Rs. 55.12 crores (consisting of shares and capital of Rs. 79.54

Lakhs and reserves and surplus of Rs. 8.85 crores, unsecured loans

of Rs. 14.88 crores and current liabilities & provisions of Rs. 30.64

crores) as against the interest bearing funds of Rs.17.84 crores.

The Ld. A.R. has filed a table depicting the details of funds

utilization of interest-free funds and interest bearing funds, which

is supported by the copy of balance sheet appearing at page No 16

to 23 of Paper Book. According to which funds of Rs. 73.02 crores

have been utilized for business purpose in fixed assets, loan and

advances, sundry debtors, cash and bank balances, etc. From the

above facts and data, the Ld. A.R. contended that the assessee has

not diverted its interest bearing funds for non-business purposes.

The Ld. A.R. fur submitted that the assessee has received interest of

Rs. 96,44,264/- as against the payment of interest of Rs.

47,43,231/- and finally earned net interest income of Rs.

49,01,033/-. Therefore, there was no question of diversion of

interest bearing funds by the assessee. Thus, the disallowance as

made by the AO is totally wrong. The Ld. A.R. further submitted

that above facts of the case shows that advances to above persons

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 5 of 10

as mentioned in assessment order from whom interest was not

charged was given out of interest-free funds available with it.

1.3.1. The Ld. A.R. relying on the decision of Hon`ble Supreme

Court in the case of S.A. Builders vs. CIT (2007) 288 ITR 1(SC)

contended that the onus on the revenue to show that interest

bearing fund alone were invested in investment on which no income

was earned. The Ld. A.R. further relied on the decision of Hon`ble

Supreme Court in the case Munjal Sales Corporation vs. CIT (2008)

298 ITR 298 (SC) wherein it was held that where assessee had

sufficient profits in the current year then interest free advances can

be considered flowing from such profits.

1.3.2. The Ld. A.R. also place reliance on the judgement of

Hon`ble Bombay High Court in the case of CIT vs. Reliance

Utilities & Power Ltd. (2009) 313 ITR 340(Bom) wherein it was held

that if there are fund available both interest free and interest

bearing, then a presumption would arise that investment were out

of interest free funds generated or available with the assessee. If the

interest-free funds were sufficient to meet the investment no

disallowance of interest paid on borrowed funds would be

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 6 of 10

necessary. Once such presumption is established claim of interest

was allowable.

1.3.3. The Ld. A.R. also placed reliance on the judgement of

Hon`ble Supreme Court in the case of S. A. Builders vs. CIT (2007)

(288 ITR 1) (SC) wherein it was held that where the assessee has

made investment out of mixed funds for the commercial expediency

then no disallowance could be made under section 36 (1) (iii) of the

Act.

1.3.4. The Ld. A.R. further placed reliance on following

judgement in the case of CIT vs. Hero Cycles Ltd. (2010) 323 ITR

518 (P&H) wherein it was held that no disallowance out of interest

payment is permissible if AO does not establish nexus between the

expenditure incurred and income generated. The Ld. A.R. submitted

that in the present case the AO has failed to establish that the

assessee had diverted interest bearing funds for non business

purposes or advanced the same without interest. When the

assessee has utilized the interest bearing funds for business

purpose and justified the same , then no disallowance of interest

can be made.

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 7 of 10

1.3.5. The Ld. A.R. further cited following judicial

pronouncements in support of his contention as follows: Ram

Kishan Oil Mills vs. CIT 56 ITR 186 (MP), Birla Gwalior Pvt. Ltd. vs.

CIT 44 ITR 847(MP), D & H Secheron Electrodes Ltd. 142 ITR 529

(MP), Regal Theatre vs. CIT 225 ITR 205(Del), Sarvodya Kela Group

vs. ITO 25 ITJ 409(Indore-Trib), and others as per his written

submissions.

1.4. On the other hand, the Ld. D.R. relying on the orders of lower

authorities submitted that the assessee is not able to substantiate

that interest free advances were given out of interest-free funds

available with the assessee, hence, finding of the AO/Ld. CIT(A) may

be upheld.

1.5. We have heard the rival submissions of both the parties and

have perused the material available on record. We find that the ld.

A.O. has failed to establish that interest free advances to above

stated parties were out of interest bearing funds. It is the

contention of the assessee that it had sufficient non-interest

bearing funds to the tune of Rs.55.18 crores as per balance sheet

as on 31.03.2010 as against interest bearing funds offered 17.84

crores. Hence, interest-free funds of Rs. 55.18 crores have been

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 8 of 10

utilised for giving interest-free advances to aforesaid above parties

on which no interest was charged. Thus interest-free advance were

given out of interest-free funds available with the assessee during

the year for which sufficient interest-free funds were available.

Therefore, we are of the view that the Ld. A.O. has failed to

establish that interest free advances to above stated four parties

were out of interest bearing funds. The Ld. A.R. has, also placed

reliance on the judgement of Hon`ble Supreme Court in the case of

S. A. Builders vs. CIT (2007) 288 ITR 1(SC) wherein it was held that

where the assessee has made investment out of mixed funds for the

commercial expediency then no disallowance could be made under

section 36 (1) (iii) of the Act. We find that the AO has not been able

to establish the nexus between interest bearing funds utilized for

non business purpose as held in above quoted decision of Hon`ble

Supreme Court. The ld. A. R. has placed reliance in the case of CIT

vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom)/ 178

Taxman 135 (Bom) wherein it was held that if there was funds

available both, interest-free and overdraft and or/loans taken, then

a presumption would arise that investments would be out of the

interest-free funds generated or available with the company, if the

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 9 of 10

interest free funds were sufficient to meet the investments. In the

present case, the sufficient interest free funds were available at the

disposal of the assessee. Therefore, presumption would go in favour

of the assessee that the interest free funds were given out of interest

free funds available at the disposal of the assessee as per balance

sheet of the assessee. We further rely on the decision of Hon`ble

Punjab & Haryana High Court in the case of CIT vs. Hero Cycles

Ltd. (2010) 323 ITR 518(P&H) wherein it was held that no

disallowance out of interest payment is permissible if AO does not

establish nexus between the expenditure incurred and income

generated. Therefore, by applying the ratio as laid down by the

Hon’ble Bombay High Court in in the case of CIT vs. Reliance

Utilities & Power Ltd. (2009) 178 Taxman 135 (Bom) and the

decision of CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) and

other judgements as cited above, we are of the considered opinion

that no disallowance of interest is warranted in this case. In view of

these facts and circumstances, the disallowance of interest of

Rs.12,78,840/- made by the AO is deleted. Accordingly ground no.

1 and 2 of appeal is therefore, allowed.

2.

In the result, the appeal of the assessee stands allowed.

M/s. Rahul Developers Pvt. Ltd. vs. ACIT-Khandwa/ I.T.A. No.645/Ind/2015/A.Y.:10-11 Page 10 of 10

3.

The order pronounced in the open Court on 28.02.2017.

Sd/- Sd/- (ओ.पी.मीना) (सी.एम.गग�) लेखा सद�य �याियक सद�य (O.P.MEENA) (C. M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

�दनांक /Dated : 28th February, 2017/opm

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