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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND ASHWANI TANEJA, AM (A.Y:2011-12) Taiyo Lucid P. Ltd. The Dy. Commissioner of 401-A, Navbharat Estates, Income Tax Vs. ZakariaBunder Road,Sewri (W) 8(3)(1), Mumbai Mumbai-400015 Appellant .. Respondent .. Assessee by Shri. Nitesh Joshi Shri Hitesh Trivedi, AR .. Revenue by Miss. Arju Garodia, DR Date of hearing .. 24-11-2016 .. Date of pronouncement 24-11-2016 O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of CIT (A)-14, Mumbai in appeal No. CIT (A)-14/IT-318/13-14 dated 19-02-2015. The Assessment was framed by DCIT Circle-7(3), Mumbai for the A.Y. 2011-12 vide order dated 30-12-2013 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of interest expenditure on external commercial borrowings. For this assessee has raised following three grounds: - “1. The learned Commissioner of Income-tax (Appeals) erred in disallowing a sum of Rs.9,84,328/- out of interest expenditure incurred on External Commercial Borrowings (ECB) on the ground that the appellant advanced interest free loans to its sister concern out of interest bearing funds and the same is not used for the purpose of business of the appellant.
The appellant submits that it had obtained ECB loan during the previous year 2003-04 for setting up factory building and installation of plant and machinery. The construction of factory building completed and plant and machinery installed and commercial production commenced during the previous year 2004-05.
The appellant submits that the learned Assessing Officer be directed to delete the disallowance of interest expenditure of Rs.9,84,3281- and to modify the assessment in accordance with the provisions of the Act.”
3. Briefly stated facts are that during the course of assessment proceedings the AO noticed that the assessee has made interest free advances to closely hold company namely Lucid Colloids Ltd. It was also noticed that by the AO that the assessee has claimed interest expenses of Rs.54, 40,572/- on the funds taken by it on loans. Accordingly, he disallowed the interest expenses amounting to Rs.54,40,572/-. Aggrieved, assessee preferred appeal before CIT(A), who restricted the disallowance of interest to the extent of Rs.9,84,328/- being proportionate amount of advance being interest free out of interest on external commercial borrowings paid to Taiyo Kagaku Co. Ltd. For this CIT(A) observed as under: - “3.4. I have considered all these facts. I have also considered the details available on record. Undisputedly, the fact is that the appellant has taken loan on which interest are being paid and loan has been utilized for erecting building bringing Plant & Machinery and other equipments for the purpose of business. It is also a fact that the advances arc given to the water concern to maintain the regular supply of raw material at the contracts puce, and in absence of no fund flow, given only on the basis of confirmation given, it has to be admitted that advances available from their buyer CEO CO. Ltd. Japan to the appellant. On these given facts, so far as the amount advanced is managed out of amount received as advances, it can be assumed that there is no nexus of interest bearing find taken for the purpose of at up of factory at Auranagabad to the amount advanced by the appellant to its sister concern viz. Lucid colloids Ltd. However, it is noted from balance sheet that as On 31/3/2011 advances received from CBC Co. Ltd, and others were Rs 8,07,24,676/- only, whereas advances given by the appellant to its sister concern on the someday were Rs.I0,44.18000/-. It is here that the direct linkage of advances given to the sister concern being much higher than the advances received by the appellant from its buyer, even if it Is presumed to be totally interest free even in case of defaults and delay in the contract of sale. Thus it is coming out clearly that advances made to sister concern out of the advances received only constitute a part of it i.e. Rs.8,07,24,676/- out of Rs.10,44,18,100/- i.e. 77.30%. This clearly shows that at least 23% of Interest bearing funds were diverted by the appellant or advancing amount to their sister concern and the purpose being not covered by exigencies of business cannot be said to be business or trade advances and hence came is attracted by the provisions of sect 36(1)(iii). It is for the simple reason that the advances against sale price has to be higher than advances for raw material as the whole manufacturing process undertaken by the appellant add to the value of the product manufactured so by the appellant. So put it simply, the advances given for raw material it made out of advances received against anticipated sale price from the buyer, the amount of advances for raw material has to be much less than advances received against anticipated sale
of the product where such raw is utilized for manufacture. In view of this, I am in agreement with Assessing Officer in Principle, that having direct nexus with interest bearing fund with interest free advances made and also the amount being much more than the value of raw material, part of the funds have been given by the appellant not for the purpose of business as trade advances but named so and hence proportionately interest expenses have to be disallowed. Now from the bifurcation of interest paid, as it is richer that out of Rs.54,40,572/-, Rs.5,58,6db/- are bank charger for report of goods and the amount of Rs.572,260/- is the amount of interest paid for procurement of row material, the balance amount of Rs.42.79,589/- only has to be considered no diverted in the ratio of 80,77,24,676/- to the amount advanced i.e. Rs.10,44,18,000/- i.e. 77% is advanced in the course of trade i.e. for the purpose of business and balance 23% is advanced is not for the purpose of business by the appellant. Hence out of the amount of be 42,70891/-, the internet debited for ECB, an amount in the proportion of 23% i.e. Rs.9,84,328/- can only be disallowance of Rs. 54,40,572/-, only disallowance of Rs.9,84,3281/- and is sustained and for the balance the appellant gets relief. Ground No.3 (a) & (b) are treated as partly allowed.” Aggrieved, assessee is in second appeal before Tribunal.
We have heard rival contentions and gone through the facts and circumstances of the case. The assessee paid advance along with purchase order against the contractive price to contain the escalating price rise in the market to get the continuous supply of raw material on contractive price irrespective of the price rise in the market throughout the year. The assessee obtain ECB loan during the previous year 2003-04 relevant to A.Y. 2004-05 for the purpose of setting up of factory building at Aurangabad. The said ECB were utilised for the purpose of construction and setting up of factory building which was completed and factory commence the production during previous year 2004-05 relevant to A.Y. 2005- 06. The assessee also obtain working capital loan from The Bank of Tokoyo Mitsubushi Ltd. which is utilised for the purpose of procurement of raw material. It was claimed by the assessee that non-interest bearing advances were given solely for business purpose, which is contractual to its associate enterprise, Lucid Colloids Ltd. towards regular supply of raw material. This contractual advance was paid in the ordinary cause of business to secure the raw material at a favourable price to avoid any volatile price fluctuation in the commodity market. We find from the facts of the case that the assessee obtain of ECB loan during the previous year 2003-04 relevant to A.Y. 2004-05 for the purpose of setting up of 2004-05 relevant to A.Y. 2005-06. We also find that for and from A.Y. 2005-06 this interest has regularly being allowed and for this assessee produced copy of assessment order passed by the department u/s 143(3) i.e. for A.Y. 2006-07, 2007-08, 2008-09 and 2010-11. The assessee claimed that this interest on ECB loan has all along been claimed and allowed by department except this A.Y. 2011-12. We are of the view, in the given facts and circumstances that interest paid on ECB loan is incurred for the purpose of its business and is to be allowed as deduction u/s 36(1)(iii) of the Act. Even otherwise, for the sake of consistency also this expense is to be allowed as deduction for the reason that Revenue in earlier years, as noted above, has already allowed the deduction. In view of these facts we allow the claim of the assessee. The orders of the lower authorizes on this issue are reversed and the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 24-11-2016.