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Income Tax Appellate Tribunal, BENCH “G”, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI PAWAN SINGH
O R D E R
PER PAWAN SINGH, JM:
This appeal filed by assessee against the order of CIT(A)-22, Mumbai dated 22.11.2010 for Assessment Year (AY) 2002-03 raising the following grounds of appeal: On the facts and in the circumstances of the case and in law, the learned CIT(A): Disallowance of interest expenditure 1. erred in upholding the disallowance of interest expenditure to the extent of Rs 3.584 crores under section 36(1)(iii) of the Act on the ground that such interest expenditure pertained to advancement of borrowed funds for grant of interest free advances. Disallowance of provision for doubtful debts 2. erred in upholding the disallowance of provision for doubtful debts of Rs 12.10 lakhs debited to Profit & Loss account (written off as bad debts) and reduced from debtors on the ground that the Appellant has failed to satisfy the conditions under sections 36(1)(vii and 36(2) of the Act. Disallowance of weighted deduction under section 35(2AB) of the Act 3. erred in upholding the disallowance of weighted deduction on revenue expenses of Rs 0.52 crores 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, copy of agreements under section 35(2AB) of the Act. 4. erred in upholding disallowance of entire expenses of capital in nature of Rs. 12.51 lakhs claimed as weighted deduction under section 35(2AB) on the ground that the Appellant failed to comply with procedural requirements and furnishing of information such as Form 3CL, copy of agreements under section 35(2AB) of the Act. 5. without prejudice to the above, should have directed to allow deduction of capital expenditure of Rs. 8.33 lakhs under section 35(1 )(iv) of the Act. Disallowance of provision for diminution in value of investments 6. erred in upholding the disallowance of provision for diminution in value of investment to the extent of Rs. 7.776 crores on the ground that the Appellant failed to explain the nature of diminution in value of investments and that the loss is capital in nature. Levy of interest under section 234D of the Act 7. erred in confirming levy of interest under section 234D, without appreciating that: a. The provisions of section 234D which came into effect from 1 June 2003 cannot be applied to the year under reference. b. In any case, no interest can be charged under section 234D in respect of refund which was granted prior to 1 June 2003 and that too, for period after date of regular assessment.
Though the assessee has raised as many as 7 Grounds of appeal
, however, at the time of making submission Ld. AR of the assessee made a statement that assessee does not press Ground No. 3 to 6. Further, Ground No. 7 is consequential in nature. Thus, Ground No. 1 & 2 are left for our considered decision.
3. Brief facts of the case are that the assessee filed its return of income for relevant AY on 31.10.2002 declaring total loss of Rs. 8,26,76910/-. The return was selected for scrutiny and while framing assessment u/s. 143(3) of the I.T. Act, the AO made a various disallowance including disallowance of bad debt of Rs. 12,10,000/- and interest expenditure of Rs. 3.584 Crore u/s. 36(1)(iii) of the Act. The AO determined total income at Rs. 38,55,99,275/-. Aggrieved by the order of AO, the assessee filed appeal before the CIT(A) but without any success. Hence, this second appeal is filed before us.
4. Ground No. 1 for our consideration relates to upholding of disallowance of interest expenditure of Rs. 3.584 Crore u/s 36(1)(iii) of the Act. We have heard Shri M.P.Lohia & Nikhil Tiwari, ld. AR’s of assessee and Shri K.P.R.R. Murty, ld. DR for Revenue and perused the material available on record. Ld. AR of the assessee argued that assessee has given interest free loan and advances to various parties and incurred interest expense amounting to Rs. 3.54 Crore on loan borrowed amounting to Rs. 184.80 Crore. The breakup of loan was provided to the authorities below. The assessee claims that the expenditure has been incurred wholly and exclusively for the purpose of business and the same is allowable u/s. 36(1)(iii) r.w.s. 37(1) of the Act. AR of the assessee submitted that ITAT, Mumbai in assessee’s own case for AY 2001-02 in allowed the claim of interest expenditure incurred by assessee. The ld. DR for the Revenue argued that interest expense was not incurred for the purpose of business. On hearing both the parties, we have seen that a similar disallowance was made in the assessment order for AY 2001-02 and assessee preferred appeal before CIT(A) wherein the disallowance was deleted by him. The Revenue filed appeal before ITAT vide ITA No. 5438/M/2006 and the same was dismissed vide order dated 21.01.2009 holding as under: “9. We heard both the parties.
10. 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.
11. 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 Murnbai Tribunal in the case of Grasirn Industries Vs DCIT 64 TTJ 357(Mum) has been held as under: "Having regard to the principles laid down by the Calcutta High Court in the cases of Woolcombers of India Ltd. Vs CIT 134 ITR. 217 (Cal), Reckitt & Colman of India Vs. CIT 135 ITR 698 (Cal.) and other authorities and position of deposits out of profit and own funds in the common account being more than withdrawals, the investment
in securities was to be presumed to be made by the assessee out of its own funds and not of borrowings. The AO wrongly placed onus on the assessee to link the investment and erroneously drew a conclusion aqain.st the assessee and allocated interest on proportionate basis.” 15. Respectfully following the decision (supra), we confirm the order of the Ld. CIT(A) and dismiss the Revenue's appeal.”
We have seen that this issue under consideration is squarely covered by the order of Co-ordinate Bench in assessee’s own case for AY 2001-02 referred above. Hence, keeping in view the principle of consistency this Ground of appeal
is allowed in favour of assessee.
6. Ground No.2 for our consideration is upholding of disallowance of doubtful debt of Rs. 12,10,000/-. Ld. AR of the assessee argued that this expenditure represent the effective write offs in respect of specific debtors and the claim is allowable u/s 36(1)(vii) & 37(1) of the Act. Ld. AR of the assessee further submitted that they had opening and closing balance appearing on Schedule-7 of Balance-sheet as on 31.03.2002 for the provision of doubtful debts. DR for Revenue supported the order of authorities below.
7. We have perused the order of authorities below and Schedule-7 of Balance-sheet of assessee as on 31.03.2002, wherein the assessee has shown the detail of “Provisions for Doubtful Debts” (page 23 of PB). The AO during assessment proceedings observed that 12,10,000/- was debited as Provision for Doubtful Debts and deduction of which could not be justified as the assessee has not filed any explanation. AO hold that provision is different from “Provisions for Doubtful Debts” and disallowed the claim for bad debts. Ld. CIT(A\) while considering this ground of appeal referred that it was submitted before him that this expenditure represent effective write off in respect of specific debtor which is covered by the provisions of section 36(1)(vii) of the Act, and it was not a provision but actual write off. The ld. CIT(A) was not satisfied with the submission of assessee and upheld the disallowance. We are conscious that entry by way of writing of is a prima facie evidence of debt having become bad. But the same is not a conclusive criteria and the onus rest upon the assessee to establish that the debt has become bad in the relevant year. The assessee submitted PB before us containing the extract of balance-sheet of assessee as on 31.03.2002 and the details of provision made for doubtful debts. We have noticed that the details for provision of doubtful debt were not made available