MERIND LTD,MUMBAI vs. ACIT CEN CIR 14, MUMBAI

This appeal has been preferred by the assessee against order dated 22/11/2010 passed by the Ld. CIT(Appeals)-22, Mumbai, for the Asst. year 2003-04.

Brief facts of the case are that the assessee engaged in the business of manufacturing of Pharmaceutical products, filed its return of income declaring the total loss of Rs. 2,09,53,498/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the assessment was completed u/s 143(3) of the Act, determining total income of the assessee at Rs. 16,58,880/- after making disallowance of Rs. 44,92,382/-claimed u/s 35(2AB) of the Act and Rs. 1,81,20,000/-claim as interest expenditure. In appeal the Ld. CIT(A) partly allowed the appeal of the assessee, however, upheld the disallowance in respect of deduction of Rs. 44.42 lacs claimed u/s 35(2AB) and interest expenditure claimed u/s 36(1)(iii) of the Act.

Aggrieved, the assessee has challenged the impugned order on the following grounds of appeal:- “On the facts and in the circumstances of the case and in law, the learned CIT(A): Disallowance of weighted deduction under section 35(2AB) of the Act 1. erred in upholding the disallowance of weighted deduction to the extent of Rs. 44.92 lakhs under section 35(2AB) of the Act on the ground that the Appellant failed to comply with procedural requirements and furnishing of information such as Form 3CL, Form 3CM, copy of agreements under section 35(2AB) of the Act.

Before us the Ld. Authorised Representative (AR) submitted that the assessee does not want to contest ground no. 1 of the appeal. Hence, ground no. 1 of the appeal is dismissed as not pressed. As regards the ground no. 2, the Ld. AR submitted that the identical issue i.e., interest expenses u/s 36(1)(iii) of the Act, has already been decided in favour of the assessee by the ITAT Mumbai in assessee’s own case (ITA No. 904/Mum/2011) for the A.Y. 2002-03. The Ld. AR further submitted that the loans relatable to the said interest pertain to earlier years. The claim of interest was made in A.Y. 2001-02 onwards. Assessee got relief in 2001-02. Therefore, the issue is covered by the said decision of the ITAT.

On the other hand the Ld. Departmental Representative (DR) did not controvert the contention of the assessee, however, relying on the findings of the authorities below, submitted that since each case has to be decided on its own merit, the present appeal is required to be decided accordingly.

We have heard the rival submissions and also perused the documents placed on record in the light of the respective contentions of the parties. We notice that the coordinate Bench of ITAT has decided the identical issue in favour of the assessee in assessee’s own case for the A.Y. 2002-03, aforesaid, by following the decision dated 21.01.2009, rendered by the co-ordinate Bench in assessee’s own case (ITA No 5438/M/2006) for the A.Y. 2001-02. The relevant portion of the decision rendered by the coordinate Bench in assessee,s case for the assessment year 2002-03 reads as under:-

We heard both the parties.

First, the AO cannot disallow the interest expenses for the year under consideration as the advance in question has not been made during the year under consideration. Following the decision in the case of CIT(A) Vs Sridev Enterprises 192 ITR 165 (Kar.), the AO cannot disallow the interest expense for the year under consideration on the premise that interest bearing funds are used to advance interest free advances, if no such disallowances are made in any prior assessment year. Therefore the assessee's claim is to be allowed.

Secondly, it is essential to prove diversion of borrowed funds for non business purpose before disallowing interest paid on borrowed capital in ACIT Vs Claridges Investments & Finance Pvt. Ltd. 18 SOT 390(Mum) it has been held as under: "There is no case for making any disallowance on the interest paid on the monies borrowed as the facts clearly reveal that the borrowed funds have been utilized for the purpose of business. Merely because there was huge overdraft account it cannot be held that such borrowed funds were utilized for non-business purpose. The assessee had sufficient interest free funds taken from its group concerns.”

The AO has not proved the diversion of funds for non business purposes. Therefore the assessee's claim is to be allowed.

Thirdly, since capital plus reserves exceeds the investments, no disallowance of interest is warranted, in respect of interest bearing borrowings. This proposition has been laid out in the case of CIT Vs Radico Khaitan Ltd 274 ITR 354 (All.) wherein it has been held as under: "Tribunal having found on facts that assessee had sufficient funds in the form of capital reserve and surplus other than the borrowed funds, assessee was entitled to full allowance of interest on borrowed money.

The Co-ordinate Bench of the Mumbai Tribunal in the case of Grasim Industries Vs DCIT 64 TTJ 357(Mum) has been held as under:

Respectfully following the decision (supra), we confirm the order of the Ld. CIT(A) and dismiss the Revenue's appeal.”

Since, this issue has already been decided in favour of the assessee by the Co-ordinate bench in assessee’s own cases for the A.Y. 2001-02 and 2002-03, we, respectfully following the view taken by the coordinate Bench in assessee’s case for the assessment years 2001-02 and 2002-03, allow this ground of appeal of the assessee.

In the result appeal filed by the assessee for the A.Y. 2003-04 is partly allowed. Order pronounced in the open court 12th August, 2016.