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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M This is an appeal filed by the assessee. The relevant assessment year is 2006-07.
The appeal is directed against the order of Commissioner (Appeals)-20 Mumbai and arises out of the assessment made u/s 143(3) of the Act.
The first ground raised by the assessee in this appeal is that the ld. CIT(A) erred in holding that the Assessing Officer (AO) was justified in disallowing Rs.17,95,050/- out of interest expenditure on the ground that interest bearing funds were allegedly utilized for advancing interest free funds.
2.1 The AO observed that the assessee has advanced money free of interest to its group concerns. He relied on the assessment order of the assessee for the preceding two years wherein interest at 15% was disallowed. The only difference this year being that the loan advance to M/s National Leather Manufacturing Co. is not outstanding as on 31/3/2006. The AO disallowed interest @ 10% of the loan given of Rs.1,35,85,107/- and @ 15% on the other two loans totalling to Rs.29,10,262/-. The disallowance works out to Rs.17,95,050/- (Rs.13,58,511 (+) Rs.4,36,539).
2.2 The ld. CIT(A) came to a finding that no business purpose is involved in diversion of borrowed funds to sister concerns. He was not convinced with the explanation of the assessee that interest free loans advanced to sister concerns was for mutual benefit and in turn for the purpose of business. Therefore, he confirmed the addition made by the AO.
2.3 The ld. Counsel of the assessee submitted that it has been using business premises of its sister concern free of rent in lieu of interest free advances made to them.
It was also submitted that interest free loans advances were made to the sister concerns for mutual benefit and in turn for the purpose of business.
2.4 The ld. DR supported the order passed by the ld. CIT(A) upholding the above addition made by the AO.
2.5 After considering the rival submissions and perusing the relevant material on record, it is noticed that the AO has disallowed the interest in the impugned assessment year as it was disallowed in the preceding two years. In Ipoh (MM) vs. CIT and Chettiappan (M) Vs. ITO (1968) 67 ITR 106 (SC), the Hon’ble Supreme Court has held that the doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. We find that in the impugned assessment year, the AO has not brought on record, material facts so as to disallow the interest @ 10% or 15%. There was also no material before the ld. CIT(A) to sustain the disallowance made by the AO. In view of the above, the disallowance of Rs.17,95,050/- made by the AO is deleted.
The second ground raised by the assessee is that the ld. CIT(A) erred in holding that the AO was justified in disallowing Rs.27,48,148/- out of interest expenditure on the ground that interest bearing funds were allegedly utilized for investment in capital works-in-progress.
3.1 The AO observed from the balance sheet as on 31/03/2006 that the own funds of the assessee were Rs.91.14 crores including share application money whereas loans taken as on 31/03/2006 were Rs.212.54 crores. The onus is on the assessee to prove the nexus or otherwise between specific funds and those utilized in capital WIP. He referred to the decision in the case of CIT vs. Motor General Finance Co. Ltd. 254 ITR
In view of this the AO disallowed 12% of the average capital WIP of Rs.2,29,01,233/- which comes to Rs.27,48,148/-.
3.2 The ld. CIT(A) observed that the assessee was not having enough own funds to source the capital WIP. In view of it, he upheld the disallowance of Rs.27,48,148/- relatable to the capital WIP made by the AO.
3.3 The ld. Counsel of the assessee submitted that out of total interest paid of Rs.36,21,90,809/- a sum of Rs.30,95,95,988/- has been disallowed u/s 43B of the Act. It is stated that the interest which has been disallowed u/s 43B cannot be disallowed again under a different head.
3.4 The ld. DR supported the order of the ld. CIT(A) upholding the disallowance of interest of Rs.27,48,148/- made by the AO.
3.5 We have heard the rival submission and perused the relevant material on record.
We find that the reliance placed by the AO in making the disallowance of Rs.27,48,148/- in the case of Motor General Finance Co. Ltd.(supra) is misplaced. In the said case the AO while making assessment noticed that the assessee had advanced interest free loans to sister concern while it had itself borrowed money and paid interest. Therefore, the AO disallowed the interest liability of amount advanced to its sister concern. Therefore, the case of the assessee is distinguishable from the above decision relied on by the AO. It has been held by the Hon’ble Supreme Court in India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) that interest is allowable irrespective of the fact whether the amount has been borrowed for working capital or for acquiring a capital asset. We find that CIT(A) does not dispute the submission of the assessee before him that out of total interest paid of Rs.36,21,90,809/- a sum of Rs.30,95,95,988/- has been disallowed u/s 43B. In view of the above, the disallowance of Rs.27,48,148/- made by the AO is deleted.
The third ground of appeal raised by the assessee is that the ld. CIT(A) erred in confirming the disallowance of claim of deduction u/s 40(a)(ia) of Rs.2,23,71,710/-.
4.1 The AO found that the assessee in its computation of total income claimed deduction of Rs.2,23,71,710/- for the disallowances made in A.Y. 2005-06 u/s 40 (a)
(ia). The AO noted that it has to be seen whether this is allowable in A.Y. 2005-06 itself, in view of the retrospective amendment to section 40 (a)(ia) by Finance Act, 2008 for which verification is to be made separately in A.Y. 2005-06. Therefore, he disallowed the above sum in the impugned assessment year.
4.2 The ld. CIT(A) followed the disallowance made by the AO and upheld it.
4.3 The ld. Counsel of the assessee submitted that the disallowance made by the AO of Rs.2,23,71,710/- u/s 40 (a) (ia) is without any reasons as it is not as per law.
4.4 The ld. DR supported the disallowance made by the AO which latter on has been upheld by the ld. CIT(A).
4.5 We have carefully considered the matter. We find that the Hon’ble Gujarat High Court in the case of CIT vs. Om Prakash R. Chaudhary (TA No.412 of 2013) has held that “the amendment made in section 40 (a) (ia) of the Income Tax Act, 1961 by the Finance Act 2010, as retrospective in operation, having effect from 1st April 2005 i.e., from the date of insertion of section 40 (a) (ia) of the Act.”
The observation of the AO that the disallowance of Rs.2,23,71,710/- to be made in A.Y. 2005-06 or A.Y. 2006-07 is not clear. The ld. CIT(A), without any reasons, has followed the above peculiar stand of the AO. In view of the above, the order of the ld. CIT(A) on the above point is set aside and the above issue is restored to the file of the AO to examine it afresh in the light of the judgment of the Hon’ble Gujarat High Court in the case of Om Prakash R. Chaudhary (supra) and pass an order after giving reasonable opportunity of being heard to the assessee. In view of the above, the third ground filed by the assessee is allowed for statistical purpose.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 30/09/2016.