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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: SHRI R.C. SHARMA(AM) & SHRI SANDEEP GOSAIN (JM)
Date of Hearing : 26/07/2016 Date of pronouncement : 29/07/2016 O R D ER PER SANDEEP GOSAIN, JM :
The present appeal has been filed by the Revenue against the order of Ld. CIT(A)-20, Mumbai dt. 20/06/2011, on the ground mentioned herein below:
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in deleting the disallowance of interest to the extent of Rs. 5,72,344/- inspite of the facts brought out in the assessment order that the assessee had utilized interest-bearing borrowed funds for non-business purposes by advancing part of the borrowed funds as interest-free advances, without considering the ratio of the Supreme Court’s decision in the case of S.A. Builders (158 Taxmann 82).
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in granting relief to the extent of Rs. 1,67,98,291/- to the assessee in respect of interest disallowed u/s 36(1)(iii) of the IT Act. 1961. 2. Firstly we deal with the ground no. 1. The said ground has been dealt by the Ld. CIT(A) in para 2.1 to 2.6 of his order which is reproduced hereunder:
2.1 During the year under consideration the Appellant has shown loans and advances of Rs. 6,06,70,898/- in the Balance Sheet. Out of the total loans and advances Rs. 2 crores were shown as advances made to M/s. Mangalya Trading & investment Pvt. Ltd. The DCIT by applying the ratio of interest free loans and advances to total funds disallowed proportionate interest out of interest debited to P&L A/c. The DCIT worked out the disallowance as under: Total Funds Rs. 310,88,60,000 Borrowed funds Rs. 133,90,00,000/- Ratio of Total funds to Borrowed Funds = 43.07% Interest free loans and advances = Rs. 2,00,00,000 Ratio of interest free loans and advances to total funds = 0.64% Interest debited to P&L A/c = Rs. 8,80,53,000/- Therefore, disallowance u/s 37(1) = Rs. 8,80,53,000/- x 0.65% = Rs. 5,72,344/- 2.2 The DCIT in his order has observed that the assessee has given interest free loans and advances of Rs. 2 cr. out of interest bearing borrowed funds and hence proportionate interest has been workout for computing disallowance out of the interest paid on interst bearing borrowed funds. The appellant submitted that Rs. 2crs. advance to M/s. Mangalya represent advances given in F.Y. 1994-95 (A.Y. 1995-96) and they have remained outstanding since then year after year. Interest on this loan of Rs. 2 crs. was received in earlier years and a part of it (to the extent of Rs. 46.03 crs.) is also reflected in the books of accounts as interest receivable. No interest has been provided on these loan of Rs. 2 crs. to Mangalya in past few years as it was doubtful of recovery and hence there is no justification to disallow a part of interest paid on account of such non-recoverable loan, trade advances and TDS. The Appellant therefore submits that the proportionate disallowance of Rs. 5,72,344/- is based on wrong facts, presumption and surmises and hence shall be deleted. 2.3 The Appellant further submitted that in its computation of total income that it has already disallowed interest of RS. 5,03,84,967/- u/s 43B of the I.T. Act and further disallowance of interest of Rs. 572,344/- would amount to double addition and hence shall not be made. 2.4 The Appellant drew attention to the fact that on this identical issue for Asstt. Years 2005-06 and 2007-08 in the appellant’s own case, vide order dt. 02/02/2010 and 08/11/2010 respectively, the earlier CIT(A) has deleted the addition made by the DCIT.
2.5 I have perused the facts of this recurring issue. The C.I.T(A) in his order for A.Y. 2005-06 at para 4.3 has given his finding on this issue. The amount appearing in the name of Mangalya Trading & Investment is found advanced during the accounting year 1994-95 and interest thereon were received in earlier years. A part of it of Rs. 46.03 crores is also reflected as interest receivable in the books of accounts of the assessee. No interest was provided on this advance since last a couple of years in view of doubts of recovery. In any case, it cannot be said this year that the borrowed funds have been diverted for non-business purposes. 2.6 As such, concurring with the view taken by the first appellate authority in AY 2005-06 and followed in AY 2007-08, it is held that AO was not justified in making a disallowance of interest of Rs. 5,72,344/-. The same is, therefore, deleted.
Ld. CIT(A) after appreciating the facts and after considering the order of his predecessor for AY 2005-06 has rightly held that the amount appearing in the name of M/s Mangalya Trading & Investment is found advance during the accounting year 1994-95 and interest thereon were received in earlier year.
The Ld. CIT(A) has also considered that from the above, Rs. 46.03 Crores is also reflected as interest receivable in the books of account of the assessee. And therefore while concluding that since no interest was provided on this advance since last a couple of years. In view of doubts of recovery therefore it cannot be said that borrowed funds have been diverted for this year for non-business purposes. Moreover the Ld. CIT(A) has concurred with the view taken by is predecessor in AY 2005-06 and followed in AY 2007-08. No new material has been placed before us by the Ld. DR therefore we found no reason to interfere or deviate from the findings so recorded by the Ld. CIT(A), since the order of Ld. CIT(A) is well reasoned and judicious, therefore we find no reason to deviate from the said finding. Hence, we uphold the finding recorded by the Ld. CIT(A) and dismissed this ground of appeal raised by the Revenue.
Now we deal with the second ground of appeal which is mentioned herein above.
4. Before we decide the merit of the case it is necessary to evaluate the orders passed by Ld. CIT(A) while dealing with the said issue. The operative para of Ld. CIT(A) is reproduced below:
3.1 This ground relates to disallowance of proportionate interest of Rs. 2,47,25,137/- u/s 36(1)(iii) of the Act on the ground that a part of the borrowed funds have been used for capital work in progress. 3.2 In the course of assessment proceeding, the DCIT observed that the Appellant company has capital work in progress of Rs. 37,59,89,000/-. The DCIT on the ground that the capital assets amounting to Rs. 37,59,89,000/- has been shown as work in progress and hence not put to use disallowed proportionate interest expenses by applying proviso to sec 36(1)(iii) of the Act. The DCIT worked out the disallowance of interest u/s 36(1)(iii) as under: Particulars Amount Total Capital WIP 37,59,89,000 Total borrowed funds 1,33,90,00,000/- Ratio of total capital WIP to total borrowed 28.07% funds Total interest paid during the previous year 8,80,53,000 Therefore attributable interest to Capital WIP 2,47,25,137/- 3.3. The DCIT thus disallowed Rs. 2,47,25,137/- out of interest expenses debited to P&L A/c during the year under consideration. The DCIT instead of restricting the disallowance of interest relatable to the term loan attributable to capital work in progress considered working capital loans also as used for capital work in progress and disallowed the interest u/s 36(1)(iii) accordingly. 3.4 The appellant added that the AO has wrongly allocated the total interest of Rs. 8,80,53,000/- in proportion of capital work in progress to the total borrowings. It will be evident that the interest paid on term loan is to be extent of Rs. 2,12,27,867/- only and not Rs. 8,80,53,000/- considered by the AO for allocation of interest relatable to the capital work in progress. The other interest payment are on working capital and also in the nature of bill discounting and finance charges and not relatable to the term loan relatable to capital work in progress.
The Appellant, therefore, contended that the interest relatable to term loan which can be attributable to capital work-in-progress for the year under consideration works out to only Rs. 79,26,846/- (2,12,27,867/- x 37,59,89,000 / 1,00,68,87,812/-) and not Rs. 2,47,25,137/-arrived at by the DCIT by wrongly considering the total interest including finance charge, discounting charges and other payments to banks and other financial institution. The Appellant, therefore prayed that the disallowance of interest u/s 36(1)(iii) shall be restricted to Rs. 79,26,846/- relatable to capital work-in-progress u/s 36(1)(iii) of the Act. 3.5 The Appellant further submits that in its computation of total income it has already disallowed interest of Rs. 5,03,84,967/- u/s 43B of the I.T. Act and further disallowance of interest of Rs. 79,26,846/- would amount to double addition and hence shall not be made. 3.6 The Appellant drew attention to the fact that identical issue has been a subject matter of appeal for Asstt. Years 2005-06 and 2007-08 in the Appellant’s own case and vide C.I.T(A)’s order dtd. 02/02/2010 and dtd. 08/11/2010 respectively, the disallowance has been restricted to the term loan taken and utilized for the capital work in progress. 3.7 I have perused the facts of this recurring issue, which was considered at length by the CIT(A) at para 4.3 while deciding the appeal for A.Y. 2005-06 and followed in AY 2007-08. After taking into account all the facts and circumstances, the CIT(A) had restricted disallowance to interest relatable to term loan, which has been utilized in capital work-in-progress. Applying the same principle, the disallowance u/s 36(1)(iii) in view of the amended provisions of the Act, comes to Rs. 79,26,846/- instead of Rs. 2,47,25,137/- carried out by the AO. Even this disallowance stands covered by the suo moto addition made by the appellant u/s 43B. In the result, this ground is partly allowed.
We have considered the rival submissions carefully and perused the material placed on record before us.
We found that the Ld. CIT(A) has taken into consideration the orders on this issue of his predecessor who decided the appeal for Assessment Year 2005- 06 and Assessment Year 2007-08 in the assesses own case and the Ld. CIT(A)in those years had restricted the disallowance to the interest relatable to the term loan taken and utilized for the capital work in progress so in this year also, the Ld. CIT(A) after taking into account all the facts and circumstances and while applying the same principle and keeping in view the amended provision under section 36(1)(iii) restricting the disallowance to Rs. 79,26,846/- instead of Rs. 2,42,25,137/-carried out by the AO.
We found no reason to interfere or deviate from the findings so recorded by the Ld. CIT(A), since the order of Ld. CIT(A) is well reasoned and judicious therefore we found no reason to deviate from the said finding. Hence, we upheld the finding recorded by the Ld. CIT(A) and dismissed this ground of appeal raised by the Revenue.
In the result appeal of the Revenue stands dismissed.