M/S RAJSHREE VANIJYA PVT. LTD.,KOLKATA vs. ITO, WD-2(1), KOLKATA, KOLKATA

This appeal filed by the assessee is directed against the order of Ld. CIT(A) – 1, Kolkata dated 25.03.2015 and the solitary issue raised therein relates to the disallowance made by the A.O. on account of interest attributable to the interest free advance given by the assessee to M/s. Phool Commercial Pvt. Ltd. which is partly sustained by the Ld. CIT(A).

The assessee in the present case is a company which is engaged in the business of trading of textile machines, scrap, iron & steel and yarn. The return of income for the year under consideration was filed by it on 04.10.2010 declaring a total income of Rs. 21,75,440/-. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has advanced substantial amount free of 2 Assessment Year: 2010-11 M/s. Rajshree Vanijya Pvt. Ltd. interest to M/s. Phool Commercial Pvt. Ltd. Since the said amount was not advanced by the assessee company for the purpose of its business as found by the A.O., interest expenditure to the extent attributable to the amounts so advanced as worked out at Rs. 22,48,695/- was disallowed by the A.O. 3. The disallowance made by the A.O. inter alia on account of interest expenditure attributable to the interest free advance given to M/s. Phool Commercial Pvt. Ltd. was disputed by the assessee in the appeal filed by the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) decided the said issue vide paragraph no 4.2.1 of his impugned order which reads as under: “With regard to M/s. Phool Commercial Pvt. Ltd., it is seen that the advances made to this concern during the year were to the extent of Rs. 6,29,55,000/- including the advances of Rs. 2,71,00,000/- brought forward as on 01.04.2009 which has already been considered in A.Y. 2009-10. However, it is seen from the copy of ledger account of this concern in the books of account of the appellant that the advance carried forward from earlier year of 2,71,00,000/-. However, again advances have been given to this concern from 06.11.2009 onwards to 12.11.2009 and returned from 31.12.2009 onwards with a closing balance of Rs. 1,92,00,000/- outstanding as on 31.03.2010. The A.O. is accordingly directed to disallow interest @F 15% P.A. on the advances given to the appellant from 16.11.2009 to 23.03.2010 (on the reducing balance) in excess of the reserves of Rs. 2,35,10,682/- only. Further on the amount of Rs. 51,00,000/- (which was the amount considered for disallowance of interest in A.Y. 2009-10) from 01.04.2009 to the time when such amount has been returned by the appellant in the current year, interest @F 15% per annum is also to be disallowed on the reducing balance.” The Ld. CIT(A) thus sustained partly the disallowance made by the A.O. on account of interest attributable to the interest free 3 Assessment Year: 2010-11 M/s. Rajshree Vanijya Pvt. Ltd. advance given to M/s. Phool Commercial Pvt. Ltd. and aggrieved by the same, the assessee has preferred this appeal before the Tribunal.

We have heard the arguments of both the sides and also perused the relevant material available on record. The first contention raised by the learned counsel for the assessee is that the Ld. CIT(A) has directed the A.O. to recompute the disallowance to be made on account of interest by applying rate of 15% per annum on the advances given by the assessee company to M/s. Phool Commercial Pvt. Ltd. from 16.11.2009 to 23.03.2010 in excess of reserves of Rs. 2,35,10,682/- while the interest @ 13% was only paid by the assessee on the borrowed funds during the year under consideration. In this regard, he has invited our attention to the relevant portion of the assessment order which clearly shows that the disallowance on account of interest attributable to the interest free advance given by the assessee to M/s. Phool Commercial Pvt. Ltd. was worked out by the A.O. himself at 13% P.A. being the rate of interest charged by the bank on the assessee’s overdraft account. Keeping in view the same, we find merit in the contention of the learned counsel for the assessee and direct the A.O. to compute the interest to be disallowed as per the direction of the Ld. CIT(A) given in the impugned order @ 13% instead of 15%.

The second contention raised by the learned counsel for the assessee is that the amount of Rs. 51,00,000/- separately mentioned by the Ld. CIT(A) in his impugned order was forming part of the opening balance of the advance given to M/s. Phool Commercial Pvt. Ltd. He has contended that since the said amount was already 4 Assessment Year: 2010-11 M/s. Rajshree Vanijya Pvt. Ltd. considered in the opening balance and the same was repaid during the year under consideration, the Ld. CIT(A) is not justified in directing the A.O. to disallow interest attributable to the said amount separately. We are unable to accept this contention of the learned counsel for the assessee. It is observed that the total amount of Rs. 2,71,00.000/- was advanced by the assessee to M/s. Phool Commercial Pvt. Ltd. in the immediately preceding year and while deciding the issue relating to the disallowance of interest attributable to the said amount in A.Y. 2009-10, it was found that the said amount to the extent of Rs. 2.2 crores was advanced by the assessee company out of its own funds in the form of reserves and equity capital. The disallowance made by the A.O. on account of interest accordingly was sustained in A.Y. 2009-10 to the extent it was attributable to the balance amount of Rs. 51,00,000/- advanced to M/s. Phool Commercial Pvt. Ltd. Since the said amount which remained outstanding in the immediately preceding year was paid by the assessee during the year under consideration before 14.10.2009, the disallowance on account of interest attributable to the said amount was liable to be made for the period from 01.04.2009 to the time when the said amount had been returned back by M/s. Phool Commercial Pvt. Ltd. to the assessee company during the year under consideration. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) directing the A.O. to disallow interest attributable to the amount of Rs. 51,00,000/- advanced by the assessee company to M/s. Phool Commercial Pvt. Ltd. for the period from 01.04.2009 till the date when such amount has been refunded by M/s. Phool Commercial Pvt. Ltd. in the year under consideration @ 13% P.A.