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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
O R D E R
PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of the CIT (A)-6, Mumbai passed in appeal No.CIT (A)-6/IT.3 & 04/set aside/Rg.2 (3)/2014-15 dated 24-10-2014. Assessment was framed by the ITO 2(3)-1, Mumbai for assessment year 2005-06 vide his order dated 12-12-2007 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter “the Act”).
The only issue in this appeal of the assessee is against the order of the CIT (A) confirming the addition made by the AO on account of disallowance of interest expenses for the reason that the assessee has advanced interest-free advances to its subsidiaries out of interest bearing funds.
I have heard the rival contentions and have also gone through the facts and circumstances of the case. The learned Counsel for the assessee before me stated that the AO has disallowed interest payment to the tune of Rs.9,39,149/- for the reason that interest bearing funds are advanced as interest free loans to its subsidiaries. The CIT (A) partly deleted the addition after averaging the advances and interest free funds available by observing in Para 3.6 of his order as under:- “3.6 The appellant has not submitted any fund flow statement along with copies of bank statements to directly establish that loans and advances given are directly from out of its own funds. In these circumstances, therefore, it cannot be accepted that the whole of the loans and advances to subsidiaries and sister concerns are from out of own funds. Hence one will have to compute the interest expenditure corresponding to interest-free loans and advances given to subsidiaries and sister concerns on a proportionate basis in the case of the appellant, the share capital and reserves and surplus in the beginning and the end of the year are Rs.1,52,54,586/- and Rs.1,53,79,725/- respectively and the average comes to Rs.1,53,17,157/-. The interest bearing borrowings at the beginning and end of the year are Rs.1,28,90,142/- and Rs.99,54,156/- respectively and the average comes to Rs.1,14,22,149/-. It indicates that own funds on an average during the year were 48% and the borrowed funds were 42%. The loans and advances to subsidiaries/sister concerns at the beginning and end of the year are Rs.1,58,27,669/- and Rs.1,12,80,671/- respectively. The average amount of loans and advances is Rs.1,35,54,170/-. Out of this amount, 42% i. e. Rs.56,92,751/- shall be deemed to have come from interest- bearing borrowed funds, the interest thereon @12% would be Rs.6,83,130/-, which in my opinion should be disallowed and the balance amount of Rs.2,58,019/- (out of Rs.9,39,149/-) should be deleted”. The CIT (A) restricted the addition to Rs.6,83,130/-. Aggrieved the assessee is now in second appeal before the Tribunal.
I find from the facts of the case that the assessee has taken interest bearing loans from family members and also Canara Bank and paid interest to the tune of Rs.9,39,149/- and claimed the same as expenditure. On verification of the balance sheet the AO found that the assessee Company has given interest free advances to the tune of Rs.1,12,80,671/- to the following 3 parties:- 1. M/s. Select Packaging Machinery Pvt. Ltd. Rs.73,08,351/- 2. M/s. Samarpan Converters Pvt. Ltd. Rs.12,04,421/- 3. M/s. Neelkanth Spares and Services Pvt. Ltd. Rs. 4,88,090/-
The learned Counsel for the assessee before me stated that the issue is now covered by the decision of t he Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 178 Taxman 135 (Bom.), wherein the presumption that when interest free funds are available to the assessee sufficiently to make interest free advances, no disallowance can be made in regard to interest payment. The relevant portion of the judgment of the Hon’ble Bombay High Court reads as under: “10. If there is interest-free fund available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court
East India Pharmaceutical Works Ltd.’s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.’s case (supra) 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 deduction. 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 (supra) 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 overdraft 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 are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments in this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT”.
In the present case before me, I find that the assessee is having interest free funds available at Rs.1,58,27,669/- as against the advance of Rs.1,12,80,671/-. This fact has also been noted by the CIT (A) but, he went on averaging which would distort the result. In terms of the above, I allow the issue in favour of the assessee.