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Income Tax Appellate Tribunal, A Bench, Mumbai
Before: Shri D.T. Garasia & Shri Rajesh Kumar
These appeals have been filed by the Revenue against the orders of the CIT(A)-12, Mumbai dated 23.10.2015 for assessment years 2011-12 and 2010-11. Since both these appeals pertain the same assessee and the grounds are identical, these are being heard together and disposed off by this consolidate order for the sake of convenience and brevity.
First we will take up appeal in ITA No. 93/Mum/2016. The issue raised in the first ground is against deletion of addition or `1,32,94,241/- by the CIT(A) as made by the AO under Section 36(i)(iii) of the Income Tax Act, 1961 (hereinafter “the Act”) without appreciating the fact that borrowed funds were utilised for the purpose of investment for non- business purposes.
The brief facts of the case are that during the course of assessment proceedings the AO noticed that the assessee has advanced interest free loans to the tune of `11,07,85,345/- to its subsidiaries whereas assessee
2 & 94/Mum/2016 M/s. Amma Lines Pvt. Ltd. paid interest of `1,39,13,698/- on borrowed funds. Accordingly the AO issued show cause notice dated 26.12.2013 to show cause as to why proportionate interest under Section 36(i)(iii) of the Act should not be disallowed on the loans advanced to related companies which was replied by the assessee vide letter dated 15.01.2014 wherein it was submitted that the investments made/advances given to subsidiary companies were made from the strategic point of view and has commercial expediency. The assessee is engaged in the business of construction of ports and the company executed various jobs work through the subsidiary companies for which contracts of minor works were assigned to them and the advances were also given for the same purposes. It was also stated before the AO that the assessee, in order to facilitate dredging and construction work essential to initiate the construction of a port assessee, has formed a subsidiary company in the name of “Meka Dredging Co. Pvt. Ltd.” and “Meka Mix Concrete & Construction Pvt. Ltd.”. The assessee has commercial transactions with both these entities in the form of contract receipts and payments. The assessee has also entered into a concessional agreement with M/s. Maharashtra Maritime Board, an organ of the Government of Maharashtra to develop an all weather port in Rewas, Maharashtra for which the assessee incorporated a Special Purpose Vehicles in the name of Rewas Port Development Co. Ltd. and Rewas Port Ltd. As per the agreement the assessee has to subscribe to the share capital of both these companies and investments in these companies were made out of the share capital and Reserves and Surplus of the assessee company. Copy of the agreement was also filed with the AO. Similarly, the assessee also formed a joint venture with M/s. Meka Dredging Co. Pvt. Ltd. in order to execute a work project of dredging of Shipyard Quayside granted by M/s. Cochin Shipyard Ltd. and copy of the joint venture agreement was also filed. Finally the assessee submitted before the AO that in view of these facts it is abundantly clear that the investments in share application and advances given to the above entities were purely made on commercial basis and it was essential to make such investments/advances for the purposes of business of the assessee. The 3 & 94/Mum/2016 M/s. Amma Lines Pvt. Ltd. assessee relied on the decision of the Hon'ble Apex Court in the case of S.A. Builders Ltd. 288 ITR 1 and the decisions of the Hon'ble Supreme Court in the case of CIT vs. Marudhar Chemicals & Pharmaceuticals (P) Ltd. 319 ITR 75. However, the AO was not convinced with the contention of the assessee on the ground that the test of availability of funds is not the decisive factor under Section 36(1)(iii) of the Act and thus denied the claim of the assessee and disallowed interest on proportionate basis @12% at `11,07,85,343/- which comes to around Rs.1,32,94,241/- and added the same to the income of the assessee by framing assessment under Section 143(3) of the Act vide order dated 22.01.2014 assessing the income at `2,01,42,151/-. Aggrieved, assessee went in appeal before the CIT(A).
In the appellate proceedings the learned CIT(A) allowed the appeal of the assessee by observing that the advances made to subsidiary companies were purely out of commercial expediency and therefore there is no question of disallowance under Section 36(1)(iii) of the Act.
The learned D.R. submitted before the Bench that interest bearing funds were transferred out of the company by way of share application money and advances to various entities including subsidiary companies and the commercial expediency was not proved before the AO. Thus the order of the CIT(A) reversing the assessment order is wrong and deserved to be set aside. The learned D.R. prayed that the learned AO has rightly disallowed the interest under Section 36(1)(iii) of the Act on proportionate basis and the argument that the assessee has own surplus funds carry no weight. Thus the ld DR prayed for restoration of order of AO.
The learned A.R., on the other hand, relied heavily on the order of the CIT(A) and submitted that all these investments/advances were made in the subsidiary companies and other concerns with which the assessee has business dealings and all these transactions were specifically made from the commercial point of view and has commercial expediency. The investments in the subsidiaries/Special Purpose Vehicle were made for the purpose of getting the work done through these entities and advances to 4 & 94/Mum/2016 M/s. Amma Lines Pvt. Ltd. the concerns were given only under the terms of Joint Venture Agreements and none was advanced without commercial expediency. The learned A.R. relied heavily on the order of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT 288 ITR 1 and the decision of the Hon'ble Bombay High Court in the case of CIT vs. Marudhar Chemicals & Pharmaceuticals (P) Ltd. 319 ITR 75 wherein it was held that on interest free advances to sister concerns given as a major commercial expediency, no disallowance of interest is called for under Section 36(1)(iii) of the Act. The learned A.R. also submitted that the interest free funds were available with the company to the tune of `174.94 crores and all the investments/advances were made out of said funds and not out of borrowed funds. In view of the said facts the learned A.R. prayed that the order of the CIT(A) deserved to be upheld.
We have heard the rival submissions and perused the relevant material on record placed before us. A perusal of the facts on record reveals that the assessee has invested in the form of share application money/advances in its subsidiaries and Special Purpose Vehicle to be used in the construction of port, which is the business of the assessee. The assessee has also given advances to various other concerns to which assessee has assigned construction work. Taking all these facts into consideration we are of the view that the order passed by the CIT(A) is a very reasoned order and does not suffer from any infirmity, legally or otherwise as all the advances were made out of commercial expediency. The case of the assessee is directly covered by the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra). We, therefore, respectfully following the ratio laid down in the above said decision uphold the order passed by the CIT(A). Ground raised by the Revenue is rejected.
In the result, appeal filed by the Revenue is dismissed.
In A.Y. 2010-11 the Revenue has raised identical issues as raised in except variation in
In the result, the appeals filed by the Revenue are dismissed.