THE ITO, WARD-1(1)(2),, AHMEDABAD vs ANIL TRADECOM LTD.,, AHMEDABAD

Income Tax Appellate Tribunal, AHMEDABAD SMC BENCH, AHMEDABAD

I.T.A. No.3196/Ahd/2015 Assessment Year: 2011-12 Page 1 of 5 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD SMC BENCH, AHMEDABAD [Coram: Pramod Kumar AM] I.T.A. No.3196/Ahd/2015 Assessment Year: 2011-12 Income Tax Officer, ....................…Appellant Ward – 1(1)(2), Ahmedabad. Vs. Anil Tradecom Limited, ..........……. Respondent 201, Aniket, C.G. Road, Navrangpura, Ahmedabad – 380 009. [PAN: AAECA 7864 M] Appearances by: Deepak Sutharia for the appellant None for the respondent Date of concluding the hearing: 21.08.2017 Date of pronouncing the order: 25.09.2017 O R D E R

By way of this appeal, the Assessing Officer has challenged correctness of the order dated 3rd September 2015, passed by the learned CIT(A)-3, Ahmedabad for the assessment year 2011-12, on the following grounds :- “1. The learned CIT(A) has erred in law and on facts in deleting the disallowance of Rs.41,74,048/- out of total disallowance of Rs.45,97,702/- made on account of interest payment u/s.36(1)(iii) of the Act and restricting it to Rs.4,23,655/-. “2. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit. 3. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored to the above extent.

I.T.A. No.3196/Ahd/2015 Assessment Year: 2011-12 Page 2 of 5 To adjudicate on this appeal only a few material facts need to be taken note 2. of. It is a case in which the assessee has given interest-free advances of Rs.35.91 crores to certain concerns. There is, however, no dispute that the interest-free funds on account of share capital, reserves and surplus and current liabilities aggregating to Rs.73.35 crores were available to the assessee. However, the Assessing Officer proceed to make disallowance of Rs.45,97,702/- as interest proportionate to advances relatable to interest bearing funds available to the assessee by observing as follows :-

4.6 Taking the facts and circumstances of the case in totality into consideration as well as various judicial pronouncements as discussed above, the total amount so diverted as interest free loans and advances and advances to customers comes to Rs.35,90,60,902/- out of which fund advanced to Anil Mines Limited – promoters of Rs.35,00,00,000/- on verification of ledger a/c it is found that the said fund has been t/fd. In the month of 6th June 2011 to 31st March 2011 i.e. for three month, therefore interest @ 12% on Rs.35,00,00,000/- on daily basis calculated which comes to Rs.35,10,394/- and for balance loans & advances of Rs.90,60,902/- interest thereof at the @ 12% would work out at Rs.10,87,308/-. In view of the above facts, therefore total disallowance of interest on interest free loans and advances and advances to customers comes to Rs.45,97,702/-. (Rs.35,10,394 + Rs.10,87,308). Hence, the claim of the assessee on account of interest payment of Rs.5,25,89,797/-is restricted to Rs.4,79,92,095/- and therefore balance amount of Rs.45,97,702/- is disallowed and added back to the total income of the assessee. Penalty proceedings u/.s.271(1)(c) of the Act for furnishing inaccurate particulars of income are being initiated on this account.”

However, when the assessee carried the matter in appeal before the learned CIT(A), the learned CIT(A) restricted the disallowance to Rs.4,23,655/- by observing as follows :- On careful consideration of material facts, observations of Assessing Officer and contentions of appellant. The arguments and observations made by Assessing Officer and appellant are dealt for each advances in subsequent paras. (i) The Assessment Officer observed that major advances was given to Anil Mines & Minerals Limited for Rs.35 crores and as such advances

I.T.A. No.3196/Ahd/2015 Assessment Year: 2011-12 Page 3 of 5 were given from the month of January 2011 to March 2011, only proportionate interest is disallowed computed at Rs.35,10,394 on aforesaid advances on daily basis. I have perused the details given by Appellant and it is seen that in the case of Anil Mines and Minerals Ltd. advances were made as promoters contribution during the course of business. The Ledger Accounts of Anil Mines and Minerals Ltd. (payable account) and Promoters Account clearly represents outstanding amount payable on year end is Rs.39.27 crores, as against which appellant has made payment of Rs. 35 crores to the said party. If the ledger accounts of both the transactions are merged together, there would be credit balance of Rs.4.27 crores. It is clearly pageant in the Audited Annual Accounts, that amount received against business transaction and amount advanced as promoter's contribution was separately shown by appellant. The appellant has not paid any interest on amount received from such party nor received any interest from advances given to such party and cumulative balance at the year end reflects, amount payable to party referred supra, the interest disallowance in such respect is not justified. Assessing Officer is therefore directed to delete the addition made for Rs.35,10,394 being proportionate interest calculated @12% of Rs.35 crores. (ii) Further, in respect of advances made to Manik Trading Pvt. Ltd. amounting to Rs.55,30,450/-, appellant argued that it has regular business transactions with the said party and during the year under consideration, it has made total purchases amounted to Rs.6,21,42,430/-, and total sales amounted to Rs.1,93,76,813/-, and the advances were against purchases made for business purpose. On perusal of Ledger account of the said party, I found that the contention of appellant is found correct and amount outstanding from the party is arising out of regular business activity carried out with such party. Considering this fact, disallowance of interest on outstanding balance from such account cannot be made. The Assessing Officer is directed to delete the disallowance of interest in respect of advances made to such party. Thus, disallowance of interest expenditure made by Assessing Officer for Rs.6,63,654/-is deleted. (iii) As regards to advances made to other parties being Kantibhai S Patel, Dinesh S Patel, Harshad M Patel and Anil Commodities Limited, Appellant submitted that these were not loans given but outstanding balances on account of business transactions of purchases pertaining to previous years which have been carried forward and during the year under consideration no new purchases were made, therefore disallowance of interest cannot be made. I have considered the facts in detail and found that the appellant has failed to establish that the advances were made for the purpose of business as a measure of commercial expediency. On perusal of Ledger A/c submitted by appellant it is not proved that the advances

I.T.A. No.3196/Ahd/2015 Assessment Year: 2011-12 Page 4 of 5 made are in the nature of business. Therefore the interest disallowance in respect of the aforesaid advances is justified. I, hereby, upheld the disallowance of interest made by Assessing Officer in respect of advances made to such parties. The appellant additionally argued that ample of interest free funds in the form of share capital, reserves and surplus and current liabilities totaling to Rs.73.35 crores is available to cover all the interest free advances of Rs.35.91crores made, hence no disallowance under section 36(1)(iii) can be made. In response to the said contention, I resolutely reckon that current liabilities requires to be excluded while calculating interest free owned funds available, as appellant has current assets of Rs.142.43 crore which means that current liabilities need to be set off against above referred current assets. Considering these facts, if in the present case interest free funds are calculated excluding current liabilities, it works out to Rs.39,45,011/-, that is far in scarcity with the interest free advances of Rs.35.91 crores made to the aforesaid parties. On that reason, this contention of appellant becomes irrelevant and therefore is not acceptable. Considering the facts discussed herein above Assessing Officer is directed to delete proportionate interest disallowance pertaining to advances given to Anil Miners & Minerals and Manik Trading Company. On this basis, the appellant gets relief of Rs.41,74,048/- out of total disallowance of Rs.45,97,702/- made by Assessing Officer. The disallowance so made by Assessing Officer is restricted to Rs.4,23,655/-. The ground of appeal is partly allowed.”

The Assessing Officer is aggrieved by the relief so granted by the learned CIT(A) and is in appeal before the Tribunal. 5. I have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 6. I find that the law is very well settled in this regard as long as the assessee has sufficient interest-free funds to meet interest-free loans. Presumption to be drawn is that interest-free loans have been advanced out of interest-free funds. There are number of decisions of various Hon’ble High Courts starting with Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Limited, 330 ITR 40 upholding the school of thought. In this view of the matter, learned CIT(A)’s stand that current

I.T.A. No.3196/Ahd/2015 Assessment Year: 2011-12 Page 5 of 5 liabilities are to be reduced from available interest-fee funds is not only devoid of legally sustainable basis but also in defiance of the judicial discipline. Once a superior court has taken a view, the lower authorities of judicial hierarchy have to respectfully and unhesitatingly follow the same. I, therefore, cannot approve the approach by the learned CIT(A). Accordingly, I uphold the plea of the assessee on having noted that there were several interest-free funds to meet the interest-free loans given by the assessee. I direct the Assessing Officer to delete the impugned disallowance. Assessee gets the relief accordingly.

In the result, the appeal is dismissed. Pronounced in the open court today on the 25th day of September, 2017.

Sd/- Pramod Kumar (Accountant Member) Dated: Ahmedabad, the 25th day of September, 2017. PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order

Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad

THE ITO, WARD-1(1)(2),, AHMEDABAD vs. ANIL TRADECOM LTD.,, AHMEDABAD