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Income Tax Appellate Tribunal, KOLKATA BENCH “D” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
Soumyajitd Dasgupta, Addl. CIT-DR अपीलाथ� क� ओर से/By Appellant Shri Siddharth Agarwal, Ld.Advocate ��यथ� क� ओर से/By Respondent 20-03-2018 सुनवाई क� तार�ख/Date of Hearing 03-05-2018 घोषणा क� तार�ख/Date of Pronouncement आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals), Siliguri dated 10.05.2016. Assessment was framed by DCIT, Circle-1, Siliguri u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 27.03.2015 for assessment year 2012-13. The grounds raised by the Revenue per its appeal are as under:- “1. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred by deleting disallowance of interest paid of Rs.38,65,837/- made by the AO being not incidental to the business activity of the assessee. The Ld. CIT(A) has not appreciated the clear findings given by the AO in para 2.2 at page-2 of the assessment order.
2. Whether in the facts and circumstances of the case, the interest on borrowed funds is to be disallowed as not meant for business purpose when funds have been diverted as investment in shares of group companies.
DCI, Cir-1, Slg. Vs. M/s Durga Automotives Pvt. Ltd. Page 2 Reliance is placed on the following judgment: (a) Punjab Stainless Steel Ltd. vs. CIT 196 taxman 404 (Del) (b) CIT-1, Lucknow vs. Sahu Enterprises Ltd. 214 taxman 225 (All) 3. That the Department reserves the right to add, delete, review, change or modify any ground in the course of hearing.” Shrii Soumyajit Dasgupta, Ld. Departmental Representative appeared on behalf of assessee and Shri Siddharth Agarwal, Ld. advocate appeared on behalf of assessee.
Solitary issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹38,65,837/- on account of diversion fund.
Briefly stated facts are that assessee is a private limited company and holding dealership of Hyundai Motor. The assessee in the year under consideration has shown following investments:- Sl.No. Name of the company Cl. balance as on Cl. Balance as on 31.03.12 31.03.11 (i) Bansal Automotives 22,47,250 22,47,250 Pvt. Ltd. (ii) Dinodia Academy Pvt 30,00,000 30,00,000 Ltd (iii) Durga Autocare Pvt 1,09,20,000 1,09,20,000 Ltd (iv) NRSM Infratech Ltd 96,05,000/- 96,05,000 Total 2,57,72,250 The assessee has incurred an interest cost of ₹3,37,57,078/- on the total borrowing of ₹23,62,85,916/- only. Accordingly, the AO was of the view that assessee has diverted its borrowed fund to the tune of ₹2,57,72,250/- and claimed the corresponding interest expense in its books of account. The AO was of the view that the borrowed fund for ₹2,57,72,250/- has not been utilized for the business of assessee. Therefore, the amount of interest expense claimed by the assessee corresponding to the investment made in its sister concern was not eligible for deduction u/s. 36(1)(iii) of the Act. Therefore, the AO disallowed the same and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that all the investments were made in sister concern for the purpose of holding the controlling interest in those companies. Therefore, the DCI, Cir-1, Slg. Vs. M/s Durga Automotives Pvt. Ltd. Page 3 investments are in the nature of strategic investment and therefore no disallowance can be made out of interest expense claimed by it. The assessee also submitted that its own fund including the free reserve and surplus exceeds the amount of investment made in the sister concern. Therefore, the presumption can be drawn that no borrowed fund has been utilized in making the investment in sister concern. The assessee in support of its claim furnished the details of its own fund vis-à-vis investment made in sister concern, which is reproduced as under:- Particulars As on 31.03.12 As on 31.03.11 Share capital 1,76,87,000 1,29,65,000 Reserves and surplus 4,95,18,476 3,11,77,956 Total owned funds 6,72,05,476 4,41,42,956 Investment in concerns 2,57,72,250 2,57,72,250 Ratio 2,61 times 1,71 times The assessee also submitted that the borrowed fund has been utilized for its business activity and there was no diversion of fund at all as alleged by the AO. The assessee in support of its claim also filed the details of interest expenses incurred by it which is reproduced:- Particulars Amount Bank loan processing fees 7,05,731.64 Interest on cash credit account 1,65,69,241.00 Interest on term loan 4,30,254.00 Interest on inventory funding 1,48,44,244.90 Interest paid to body corporate 1,00,378.00 Interest paid on statutory 11,17,229.00 liabilities Total 3,37,67,078.54 The assessee in view of above submitted that there was no possibility for using the borrowed fund for making the investment in the sister concern. Ld. CIT(A) after DCI, Cir-1, Slg. Vs. M/s Durga Automotives Pvt. Ltd. Page 4 considering the submission of assessee deleted the addition made by AO by observing as under:- “3.2 The submission of the assessee has been considered in the light of the facts of the case and the ratio of the case laws referred to. The assessee is a dealer of Hyundai Motors. The balance sheet of the assessee company reflects brought forward investments in the capital of four sister / group companies aggregating to Rs.2,57,72,250/-. No fresh investment was made during the year in question. The AO, however, held that the assessee had diverted interest bearing funds towards investments in the shares of the sister / related companies and disallowed proportionate interest @ 15% even though there was no fresh investment in the relevant year. Ld. AR has contended that the assessee had its own interest-free funds of Rs.6.72 crores comprising of shares capital and reserve & surplus and entire investments in sister/group companies were made out of that interest-free funds. Ld. AR has also given a bifurcation of total finance cost of Rs.3,37,67,078/-, quoted hereinabove, showing utilsation of borrowed funds for specific purposes. On the other hand, the AO failed to brought on record any material evidence that the borrowed funds were utilized for investments in the capital of the sister / group companies. In view of the facts of the case that there was no fresh investments in the capital of the sister / group companies in the relevant year; that assessee had enough interest-free funds in the form of share capital and reserve & surplus; borrowed funds for which interest was paid were utilized for specific business purposes as well as relying upon the judgments referred to by the assessee and quoted hereinabove, I do not find merit in the decision of AO in disallowing proportionate finance cost. The addition of Rs.38,65,837/- is therefore, deleted.” Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Before us Ld. DR vehemently relied on the order of AO whereas Ld. AR for the assessee filed paper book which is running pages from 1 to 16 and relied on the order of Ld. CIT(A).
We have heard the rival contentions of both the parties and perused the materials available on record. In the instant case, the AO has alleged that assessee has diverted its interest bearing fund by giving non-interest bearing advances to its sister concerns. Therefore, the AO made the disallowance of interest expenditure as claimed by assessee corresponding to the interest free advance made by it to its sister concerns. However, the view taken by the AO was reversed by Ld. CIT(A) by observing that own fund of assessee exceeds the amount invested in its sister concerns. It is undisputed fact that the own fund of assessee exceeds the amount of investment made in sister concerns as discussed in the order of ld. CIT-A. Therefore, the presumption can be inferred that the own fund has been used in making the investment in sister concern. In holding so, we find support and guidance from the judgment of Hon'ble