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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: HON’BLE S/SHRI JOGINDER SINGH (JM), & RAJESH KUMAR,(AM)
O R D E R
Per RAJESH KUMAR, Accountant Member:
These are the two appeals filed by the assessee against the two separate orders of ld.CIT(A)-2, Thane, dated 12.2.2015 for the assessment years 2009-10 and 20010-11. Since these appeals pertain to the same assessee, these appeals are being decided by this common order for the sake of convenience.
The common issue raised by the assessee in the sole ground of appeal is against the confirmation of addition on account of notional interest u/s 36(1)(iii) of the Income Tax Act, 1961 on loan given to sister concerned by the company.
The facts of the case are that the assessee has advanced a sum of Rs.2,32,54,964/- to Indo German Vacu Treat (IGVT) a sister concern of the assessee without charging any interest. During the course of assessment proceedings, the assessee was confronted with the query as to why the interest should not be charged and added to the income of the assessee as it has advanced interest free loan to the sister concern whereas the assessee has borrowed interest bearing funds. The assessee explained that the said loan was advanced out of own funds in the form of share capital reserve and was not out of interest bearing funds. However, the AO did not agree with the submissions of the assessee on the ground that the assessee paid interest of Rs.1,53,70,866/- on term loans, cash credits and unsecured loans and added a sum of Rs.11,13,912/- u/s 36(1)(iii) of the Act on the ground that the assessee has failed to prove any nexus between the own funds and interest bearing borrowed funds and the money advanced to the sister concern. The matter was carried before the ld.CIT(A) who also dismissed the appeal of the assessee. The ld.AR submitted before us that the issue is fully covered by the decision of the Tribunal in for the assessment year 2008-09 vide order dated 17.3.2015 wherein an identical issue was decided in favor of the assessee in its own case. The ld. DR fairly conceded the contentions of the ld.AR.
We have carefully considered the rival submissions, perused the material placed before us including the orders of authorities below. We find from the record before us that the identical issue in assessee’s own case has been decided in is favour by the Tribunal in assessee’s own case. The operative portion of the said order is reproduced below: “We have heard the rival submission and perused the material before us. We find that the assessee advanced loan of Rs. 2.32 Crore to its sister concern,that it had not charged any interest for the amount advanced, that AO had disallowed proportionate interest payment invoking the provisions of section 36(1)(iii) of the Act. We find that the assessee had opening balance of Rs. 12.62 Crores in form of share capital and reserves and surpluses as against owe funds of Rs. 9.10 Crores for the immediately preceding year. The Hon’ble Bombay High Court in the case of Reliance Utility and Power Ltd. (Supra) has decided the issue of interest payment,when assessee is having its own funds,as under: “14. We have heard learned counsel for both the parties. In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets in terms of the balance-sheet as on March 31, 1999, is fallacious. Firstly, we are not concerned with the balance-sheet as on March 31, 1999. What would be relevant would be the balance-sheet as on March 31, 2000. Apart from that, the learned counsel has been unable to point out to us from the balance-sheet that the balance-sheet as on March 31, 1999, showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance- sheet would not show whether the shareholders funds have been utilised for investments. The argument has to be rejected on this count also.
Apart from that we have noted earlier that both in the order of the Commissioner of Incometax (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest-free funds of its own which had been generated in the course of the year commencing from April 1, 1999. Apart from that in terms of the balance-sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal as to availability of interest-free funds really cannot be faulted.
If there be interest-free funds 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 in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 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 deductions. 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 [1982] 134 ITR 219 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 over draft 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 over draft and/or loans taken, then a presumption would arise that investments would be out of the interestfree 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 Commissioner of Income- tax (Appeals) and the Income-tax Appellate Tribunal.
Considering the above, in our opinion, there is no merit in this appeal which is accordingly dismissed.” Respectfully,following the above and considering the fact that the assessee had sufficient own funds during the year under consideration,we are reversing the order of the FAA.Effective ground of appeal (grounds of appeal-1 to 4) is decided in favour of the assessee.” As a result, appeal filed by the assessee stands allowed”.