HARIYANA SHIP BREAKERS LTD,MUMBAI vs. ACIT CC 38, MUMBAI

The Ld. Counsel for assessee [AR], first of all drew our attention to the financial statements of the assessee, to contend that the assessee at the beginning as well as at the end of the year had large self owned funds in the shape of Share Capital and Free reserves to make investments in shares and hence, no interest disallowance could be made. There being no direct nexus between borrowed funds and investments, a presumption has to be drawn that the investments were out of owned funds in view of the judgment of Hon’ble Bombay High Court in CIT Vs. HDFC Bank Limited [366 ITR 505].

Per contra, Ld. DR placed reliance on the findings of lower authorities and contended that unsecured loans raised by the assessee were increased during the year and the assessee has debited interest 4 Hariyana Ship Breakers Limited Assessment Year-2007-08 expenditure of Rs.6.01 crores as against interest income 1.43 crores and therefore, rightly saddled with impugned disallowance. Moreover, adequate relief was already granted by Ld. CIT(A) to the assessee with respect to administrative expenditure and therefore, no further relief could be granted to the assessee.

We have heard the rival contentions and perused relevant material on record. A perusal of financial statements produced before us reveals that the assessee is having owned funds in the shape of Share Capital & Free Reserves to the extent of Rs.30.78 crores & Rs.31.37 crores as on 31/03/2006 & 31/03/2007 respectively. Against the same, investment stood at Rs.7.34 crores & Rs.2.43 crores as on 31/03/2006 & 31/03/2007 respectively. In fact, investments have reduced drastically from Rs.7.34 crores at the beginning to Rs.2.43 crores at the end of the year and therefore, the finding by lower authorities that unsecured loans have been raised during the year to make new investment in shares, prima facie, seems erroneous. A further perusal of financial statements also reveals that although unsecured loans obtained by the assessee have increased by Rs.11.42 crores, however, loans advanced by assessee have also increased by Rs.14.66 crores. Therefore, we find strength in the argument of Ld. AR that there being no nexus between borrowed funds and investments, a presumption has to be drawn that the investments were out of owned funds as observed by Hon’ble Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340] which was followed in CIT Vs. HDFC Bank Ltd. [supra]:- “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 5 Hariyana Ship Breakers Limited Assessment Year-2007-08 presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 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 Woolcombers of India Ltd.'s case (1982) 134 ITR 219 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 over draft 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 were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.”

In nutshell, the assessee’s appeal stands partly allowed.