M/S MOIRA STEEL LTD.,INDORE vs. THE DCIT 1(1), INDORE

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ITA 593/IND/2013Status: DisposedITAT Indore02 March 2017AY 2005-0611 pages

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

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the assessee failed to discharge its onus to prove that the interest-free advances were given out of interest-free funds or for business purposes. Therefore, the disallowance of interest was justified.

What were the facts?

The assessee claimed interest expenses while also providing interest-free advances to certain parties, some of whom were directors. The Assessing Officer (AO) disallowed a portion of the interest expenses, considering it a diversion of interest-bearing funds for non-business purposes.

What were the issues?

Whether the disallowance of interest expenses is justified when interest-free advances are given to parties without establishing a business nexus or proving they were not out of interest-bearing funds.

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(5)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

PER O.P. MEENA, ACCOUTANT MEMEBR

This appeal is filed by the assessee against the order of ld.

Commissioner of Income tax (Appeals)-I, Indore,[hereinafter

referred to as the CIT(A)] dated 30.08.2013. This appeal

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 2 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 pertains to Assessment Year 2005-06 as against appeal

decided in respect of assessment order dated 16.12.2010

passed u/s. 143(3)/147 of Income Tax Act, 1961(herein after

referred to as "the Act) by the DCIT, 1(1), Indore [hereinafter

referred to as the AO].

1.

The sole ground relates to confirming the disallowance of

interest of Rs. 4,36,874/-.

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

authorities are that the assessee has filed return of income

declaring loss of Rs. 13,48,849/- on 31.10.2005. The assessee

company has not paid any MAT as claimed to be sick company

registered with BIFR. During the course of assessment

proceedings, it was noticed that the assessee has claimed

interest of Rs. 8,07,778/-, whereas the assessee has given

advance of Rs. 1,15,51,278/-. Therefore, the assessee was

asked to furnish details of these advances and interest charged

thereon. In response to which, it was submitted that no

interest on loans of Rs. 47,94,670/-was charged as these were

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 3 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 given to parties as business transaction. On perusal of the

details, the AO found that there may not be any business

transaction looking to the nature of the business of the

assessee in respect of following parties. Hence, the assessee

was required to explain as to why interest on the same has not

been charged and to be disallowed.

Rs. Disallowance of interest 1.Smt. Sadhna Todi 3,08,484/- 24,049/-

2.NICG Combines 19,20,735/- 2,48,497/- Pvt.Ltd. 3.Shri Vimal Todi 3,00,762/- 42,106/-

4.AVI Educational & 19,00,000/- 22,166/- Cultural Society 5.Smt. Nidhi 3,25,000/- 45,500/- Singhania 6.Shri Pawan 39,689/- 54,556/- Singhania Total 47,94,670/- 4,36,874/-

Since the assessee has failed to furnish explanation regarding

non-charging of interest on the loans/advances given as

mentioned above. Hence, the AO worked out disallowable

interest in respect of above parties as mentioned in column

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 4 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 no.3 above table and disallowed the same by observing that the

assessee has diverted its interest bearing funds for non-

business purposes and has, thus, inflated the expenditure of

interest, which was otherwise not required at all. In support of

his contention, the AO also placed reliance on the decision of

Hon'ble Allahabad High Court in the case of CIT vs. H.R. Sugar

Factory Pvt. Limited, (1991) 187 ITR 363 (All) and also placed

reliance on the decisions in the case of CIT vs. Motor General

Finance Limited, 254 ITR 449 (Del), Indian Metals & Ferro

Alloys Limited vs. CIT, (1992) 193 ITR 344 (Orissa) and

Phalthan Sugar Works Ltd. vs. CWT, (1994)208 ITR 989 (Bom).

1.2 Being aggrieved with the order, the assessee carried the

matter before the ld. CIT(A). In the appeal, the ld. CIT(A) noted

that initially the assessee replied that the loans and advances

are related to business, but when the AO asked to specify the

nature of business with these six parties, the assessee could

not establish any business relation. Hence, the CIT(A) observed

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 5 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 that the loans and advances of Rs. 47,94,670/- given to the six

parties is without any business purpose. The onus was on the

assessee to show that such advances were not out of interest

bearing funds, but the assessee failed to establish the same. If

interest bearing funds from Bank, MPFC and others has gone

into extending such non-interest bearing and non-bearing

advance, then the disallowance u/s 36(1)(iii) of the Act is fully

justified. The ld. CIT(A) also placed reliance to fortify his view

on the decision of Abhishek Industries Limited, 286 ITR 1 ( P &

H) & Madhav Prasad Jatia,1 18 ITR 200 (S.C.) and confirmed

the disallowance so made.

1.3 Being aggrieved, the assessee has filed this appeal before

the Tribunal. The Ld. Counsel for the assessee submitted that

the assessee has paid interest of Rs. 3,58,074/- to Bank, Rs.

4,02,148/- to MPFC and Rs. 42,556/- to others totalling to Rs.

8,02,778/- and the assessee company has earned interest

income of Rs. 3,48,683/- ( Rs. 2,93,583 + Rs. 55,100/- ) as

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 6 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 reflected in Schedule I to profit and loss account. The Ld.

Counsel for the assessee submitted that there was no interest

payment except the interest payment of Rs. 8,02,778/- paid to

Bank, MPFC and others as against which the assessee was

having interest free loans of Rs. 1,48,59,514/- as against

alleged interest free advances of Rs. 47,97,670/-. Therefore,

prima facie, there is no element of not charging the interest

from the parties as stated in the assessment order and

appellate order. The payment of interest to financial institution

and Bank has no nexus with the advancing non-interest

bearing loans. As against interest payment of Rs. 42,556/- paid

to others, the assessee has received interest of Rs. 2,93,583/-

and Rs. 55,100/-. As such, no disallowance of interest is called

for.

1.4 On the other hand, the ld. DR submitted that during the

course of assessment proceedings except claiming that the

loans given to parties were business transactions, no other

explanation was provided in support of their claim that the

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 7 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 loans and advances amounting to Rs. 47,94,670/- to six

parties were given for business purposes, whereas, On the

other hand, the assessee has taken loan from Bank as well as

MPFC on which interest of Rs. 3,58,074/- and interest of Rs.

4,02,148/- respectively has been paid. The AO has clearly

established that the loans and advances given to six parties

were not for the business purposes or motive. Therefore, the

AO has correctly made disallowance of interest on account of

diversion of interest bearing funds for non-business purposes

by relying on the decision of Hon'ble Allahabad High Court in

the case of CIT vs. H. R. Sugar Factory Private Limited, (1991)

187 ITR 363 (All), wherein it was held that had this money

been not advanced to the directors, it would have been

available to the assessee for its business purposes and to that

extent it may not have been necessary to borrow from the

banks. The ld. DR further submitted that the assessee has

also not been able to establish any business relation with the

aforesaid parties and also failed to establish that the same were

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 8 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 not given out of interest bearing funds from the Bank, M.P.F.C.

and others. Therefore, the order of the ld. CIT(A) may be

upheld.

1.5 We have considered the facts, rival submissions and

perused the material available on record. We find that the

assessee has paid interest of Rs. 3,58,074/- to Bank, Rs.

4,02,148/- to MPFC and Rs. 42,556/- to others totalling to Rs.

8,02,778/- on the loans and advances taken. It is noticed that

the assessee had given advances of Rs. 1,15,51,278/- as is

reflected in the balance sheet of the assessee. The AO examined

the same and found that the advances of Rs.47,94,670/- to

aforesaid six parties as mentioned in table given in para 1.1

above, no interest was charged. Therefore, it is a clear cut case

of diversion of interest bearing funds for non-business

purposes and, thus, inflating of expenditure on account of

interest. We also find that the abovesaid six parties including

Directors of the assessee company to whom interest free loans

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 9 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 and advances were given, have no business dealing with the

assessee company. We find that Ld. Authorized Representative

of the assessee has claimed that interest free loans of Rs.

1,48,59,514/- were available with the assessee company.

However, no evidence has been adduced to establish that

interest free advances were given out of these interest free

loans/advances. We further find that the assessee has made

investment in fixed assets of Rs. 5,03,72,792/- and investment

of Rs. 5,09,780/-, hence, there is no surplus fund which could

have been utilized for giving interest free advances or loans..

Further, we find that the assessee has failed to furnish any

explanation regarding non-charging of interest on the aforesaid

advances before the AO during the course of assessment

proceedings and also before the CIT(A). We find that the

assessee has failed to discharge its primary onus in support of

his claim that interest free funds were available out of which

the aforesaid interest free advances were given and that the

advances given were for the business purposes. Therefore, the

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 10 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06 AO was right in applying the ratio of the decision of Hon'ble

Allahabad High Court in the case of CIT vs. H.R. Sugar Factory

Pvt. Limited, (1991) 187 ITR 363 (All), wherein it was held as

under :-

“Had this money been not advanced to the directors, it would have been available to the assessee for its business purposes and to that extent it may not have been necessary to borrow from the banks.”

Further, our view is also supported by the decision in the case of Abhishek Industries Limited, 286 ITR 1 ( P & H) & Madhav Prasad Jatia,1 18 ITR 200 (S.C.) as relied upon by the ld. CIT(A). In the light of above facts, the ground of appeal taken by the assessee is dismissed. 1.6 In the result, the appeal of the assessee is dismissed.

The order pronounced in the open court on 3rd March, 2017.

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

�दनांक /Dated :3rd March, 2017

DCIT vs. M/s.MOIRA STEEL LTD.,INDORE Page 11 of 11 I.T.A.NO. 593/IND/2013 – A.Y.2005-06

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