M/S KEM AUTO COMPONENTS LTD. vs. DCIT, BANGALORE

The only issue arises for our consideration and adjudication is whether in the facts and circumstances of the case the CIT (Appeals) has erred in confirming the disallowance of interest on account of the loan/advances of Rs.1,58,54,874 to its three Directors. In the scrutiny assessment, the Assessing Officer noticed from the details filed by the assessee that the assessee claimed the interest of Rs.2,82,57,064 on loans aggregating to Rs.21,72,89,376. The Assessing Officer further noticed that the assessee has given advances amounting to Rs.1,58,64,874 to its three Directors as under :

S.No. Name of the Director Advance Given (Rs.) 1. Deepak Gandhi 5,86,000 2. S.K. Gandhi 92,72,000 3. Manish Gandhi 60,06,874 Total : 1,58,64,874 Accordingly, the Assessing Officer has worked out the proportionate interest of Rs.20,62,434 and disallowed the same on the ground that it is not laid out for the purpose of business of assessee. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) and explained that the assessee's own fund is sufficient for advancing the loan to the Directors. The assessee has given the details that its own interest free fund is more than Rs.10 Crores and therefore no interest can be disallowed for advancing of loan amounting to Rs.1,58,64,874 to the Directors. The CIT (Appeals) did not accept the contention of the assessee.

Before us, the ld. AR of the assessee has reiterated the contention that the assessee's own fund is sufficient to advance the amount in question to the Directors. He has referred the Balance Sheet and submitted that the assessee's own fund is Rs.10.35 Crores whereas the advances given to the Directors are at Rs.81.58 Crores. Therefore the assessee's own interest free fund is more than sufficient to advance the amount to Directors. In support of his contention, he has relied upon the judgment of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) as well as the decision of the co-ordinate bench of this Tribunal dt.29.4.2016 in the case of KBD Sugars & Distilleries Ltd. Vs. ACIT in & 1073/Bang/2014 and submitted that even if the assessee's own fund as well as borrowed fund are pooled together the presumption can be raised that the assessee's own fund is utilized for the purpose of giving interest free advances to the Directors.

On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the assessee has failed to show the direct nexus

We have considered the rival submissions as well as the relevant material on record. The assessee has claimed that the assessee's own fund comprising share capital, share application money, reserves and surplus comes to Rs.10.35 Crores as under :

Apart from that we have noted earlier that both in the order of the CIT(A) as also the Tribunal, a clear finding is recorded that the assessee had interest- free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by CIT(A) and Tribunal as to availability of interest-free funds really cannot be faulted.

If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and ITAT.” Thus the contention raised by the revenue that own fund has been utilized for the purpose of fixed assets was not accepted by the Hon'ble High Court and it was held that if there are funds available both interest free and loan then the presumption would arise that the investment would be out of interest free fund generated or available with the company if the interest free fund was sufficient to meet the investment. We are of the view that the judgment of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. (supra) is applicable in the facts of the present case. Accordingly, following the judgment of Hon'ble Bombay High Court (supra), addition made by the Assessing Officer in question is deleted.

In the result, the appeal of the assessee is allowed.