M/S. VISURA (INDIA) LIMITED [ FORMERLY M/S. VISURA TRADING & INVESTMENT (INDIA) LTD.,],KOLKATA vs. ITO, WARD - 8(1), KOLKATA, KOLKATA

The assessee in the present case is a company which is engaged in the business of trading & consignment agency. The return of income for the year under consideration was filed by it on 25.10.2005 declaring a total income of Rs. 3,67,260/-. In the assessment originally completed u/s 143(3) vide an order dated 31.12.2007, the disallowance inter alia was made by the AO on account of interest amounting to Rs. 11,94,715/-. On appeal, the Ld. CIT(A) allow a part relief to the assessee on the issue of disallowance of interest. On Assessment Year: 2005-06 M/s. Visura (India) Ltd. further appeals filed by the assessee as well as by the department, the tribunal restored the issue relating to disallowance on account of interest to the file of the A.O. for fresh adjudication. During the course of set aside proceedings, it was submitted on behalf of the assessee company that it had sufficient own funds at the relevant time to give advances to M/s. Tarajyot Polymers Ltd. and since there was no divergence of borrowed funds for giving such advances, no disallowance on account of interest was called for. It was also submitted on behalf of the assessee company that it had earned interest and other income from its customers and bank which was more than interest expenditure of Rs. 24,01,734/- incurred by it and therefore the disallowance on account of interest was not warranted. These submissions of the assessee were not found acceptable by the A.O. According to him, the advances of Rs. 71,45,161/- having been paid by the assessee company out of its overdraft account with ICICI bank, there was a case of divergence of borrowed funds warranting disallowance out of interest attributable to such advances. He accordingly calculated the average rate of interest paid by the assessee on the total funds employed at 6.23% and applying the said rate to the advances given by the assessee to M/s. Tarajyot Polymers Ltd., he made a disallowance of Rs. 5,71,281/- out of interest in the assessment completed under section 254/143(3) vide an order dated 31.03.2013.

Against the order passed by the A.O. under section 254/143(3), an appeal was preferred by the assessee before the Ld. CIT(A) disputing the disallowance made by the A.O. out of interest. During the course of appellate proceedings before the Ld. CIT(A),

Assessment Year: 2005-06 M/s. Visura (India) Ltd. submissions made before the A.O. were reiterated by the assessee company in support of its case on this issue. The Ld. CIT(A) however did not find merit in the same and confirmed the disallowance made by the A.O. out of interest for the following reasons given in his impugned order: “From the above extract of the ledger it is observed that funds of Rs. 71,45,561.00 has gone to M/s. Tarajyot Polymers Pvt. Ltd. directly from this over draft account. The assessee has secured loan from ICICI Bank to the extent of Rs. 2,24,71,426/- on which interest of Rs. 16,72,150/- was paid. Further, interest of Rs. 7,29,584/- was paid on unsecured loans. In the assessment order the A.O. has given a definite finding that the activities of the assessee with Tarajyot Polymers Pvt. Ltd. can be divided into two parts (a) Consignment Sale and (b) Pure Advancing of Funds. It has been held that consignment sale represents business activity. However, pure advances given are not related to business and interest pertaining to such interest free advances has been treated as incurred for non-business purposes and not allowable as an interest expenditure u/s 36(1)(iii). The relevant extract from the assessment order are as follows:

The learned counsel for the assessee invited my attention to the balance-sheet of the assessee company as on 31.03.2005 to show that sufficient own funds in the form of share capital and reserves & surplus were available with the assessee company to the tune of Rs. 1.26 crores. He contended that since the said own funds were sufficient to give the advances in question to M/s. Tarajyot Polymers Pvt. Ltd., the disallowance of interest made by the A.O. and confirmed by the Ld. CIT(A) is not justified. He contended that there was thus no case of divergence of borrowed funds and the assessee company having utilised such borrowed funds entirely for the purpose of its business, the disallowance made by the A.O. and confirmed by the Ld. CIT(A) out of interest is liable to be deleted.

The learned DR, on the other hand, contended that the advances in question were paid by the assessee to M/s. Tarajyot Polymers Ltd. from its over draft account with ICICI Bank and this fact alone was sufficient to establish that it was a case of divergence of borrowed funds by the assessee company for non business purpose. He contended that there is nothing brought on record by the assessee to show that the said advances were paid from its own funds and there being a direct nexus between the funds borrowed by the assessee and the advances paid to Tarajyot Polymers Ltd., the disallowance made by the A.O. and confirmed by the Ld. CIT(A) out of interest deserves to be confirmed.

I have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the disallowance out of interest has been made by the A.O. and confirmed by the Ld. CIT(A) mainly on the ground that the advances in question were given by the assessee company to M/s. Tarajyot Polymers Ltd. for non business purpose from its over draft account with ICICI Bank. According to them, there was thus a direct nexus between the funds borrowed by the assessee and the advances given to Tarajyot Polymers Ltd. warranting disallowance out of interest. I am unable to subscribe to this view taken by the authorities below. In my opinion, overall financial position of the assessee company at the relevant time has to be seen in order to ascertain as to whether the advances in question were given to Tarajyot Polymers Ltd. out of its own funds by the assessee company or from the borrowed funds. In this regard, the learned counsel for the assessee has placed on record a balance sheet of the assessee company as on 31.03.2005 at page no 7 of the Paper Book and perusal of the same shows that the assessee company at the relevant time had own funds in the form of share capital and reserves to the extent of Rs. 1.26 crores. The borrowed funds, on the other hand, were to the extent of about Rs. 2.30 crores which were mainly utilised for the purpose of its business in the form of working capital. The own funds of the assessee company, on the other hand, were available for giving advances to M/s. Tarajyot Polymers Ltd. and since the same were sufficient to give the advances, I am of the view that it cannot be said that the said advances were given by the assessee company out of borrowed funds merely because the payment of such advances was made by the assessee company out of its over draft

In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 18th July, 2018.