OVAL DEVELOPERS PVT. LTD.,KOLKATA vs. ITO, WD-4(1), KOLKATA, KOLKATA

The assessee in the present case is a company which is engaged in the business of property development and builders. The return of income for the year under consideration was filed by the assessee on 25.09.2009 declaring total income of Rs.11,560/-. During the course of assessment proceedings, it was noticed by the AO that the assessee has paid interest of Rs.26.88 lakhs @ 16% on the unsecured loans taken from body corporate. He also noticed that the assessee company has given net advance of Rs.28.16 lakhs (advance given Rs.71.98 lakhs – advance received Rs.43.82 lakhs) to its sister concern. According to him, the assessee company thus had utilised the loans borrowed on interest for giving interest free advances to its sister concern and accordingly interest attributable to such an advance worked out at Rs.4,50,000/- was disallowed by him. Developers Private Limited,A.Y.2009-10 1

The disallowance made by the AO out of interest amounting to Rs.4,50,000/- was challenged by the assessee in the appeal before ld. CIT(A). During the course of appellate proceedings before ld. CIT(A), it was pointed out by the assessee that the advances in question were given by it to its sister concern in the financial year 2006- 07 itself out of its own funds received in the form of share application money and share premium and since the same advance continued even in the year under consideration, it was not a case of diversion of the interest bearing borrowed funds for giving interest free advances to the sister concern as alleged by the AO. This stand of the assessee was not found acceptable by the ld. CIT(A) and he proceeded to confirm the disallowance of Rs.4,50,000/- made by AO on account of interest for the following reasons given in paragraph 4.1. of his order.

At the time of hearing, the learned counsel for the assessee reiterated before me the stand taken before the ld. CIT(A) that the interest free advances to its sister concern having been given by the assessee out of its own funds in the earlier year i.e. F.Y.2006-07, there was no diversion of interest bearing borrowed funds for giving such advances calling for any disallowance on account of interest. He has also taken me through a balance sheet of the assessee for the F.Y.2006-07 as well as for the year Developers Private Limited,A.Y.2009-10 2 under consideration to show that the interest free advances were given by the assessee company to its sister concern out of its own funds.

The learned DR, on the other hand, strongly relied on the order of ld. CIT(A) and particularly drew my attention to the findings and observations recorded by the ld. CIT(A) in para 4.1. of his impugned order.

I have considered the rival submissions and also perused the materials available on record. A perusal of the balance sheet of the assessee as on 31.03.2007 (copy placed on record) clearly shows that interest free advances to its sister concern were given by the assessee in the financial year 2006-07 itself and that too out of its own funds generated in the form of share application money and share premium. Moreover, a copy of the relevant ledger account placed on record by the learned counsel for the assessee also clearly shows that the same advances given in the financial year 2006-07 continued even in the year under consideration. In my opinion, this documentary evidence filed by the assessee clearly shows that the interest free advances in question were given by the assessee to its sister concern out of own funds and it was not the case of diversion of interest bearing borrowed funds by the assessee for giving such advances as alleged by the AO as well as by the ld. CIT(A). Having regard to all these facts of the case, I am of the view that the disallowance made by the AO and confirmed by the learned CIT(A) on account of interest is not sustainable and deleting the same, I allow ground nos. 1 and 2 of the assessee’s appeal.

The next issue raised in ground no.3 relates to the disallowance made by the AO on account of payment made by the assessee to Export Promotion Council which is sustained by the ld.CIT(A) to the extent of Rs.15,000/-.

In the return of income filed for the year under consideration, a sum of Rs.50,000/- was claimed by the assessee on account of payments made to the Export Promotion Council. In the absence of any documentary evidence to support and substantiate the said payment to the extent of Rs.35,000/-, the disallowance of Rs.35,000/- was made by the assessee out of payment made by the assessee to the Export Promotion Council. Before the ld. CIT(A), the assessee filed additional Developers Private Limited,A.Y.2009-10 3 evidence to support and substantiate its claim of having made payment of Rs.35,000/- by cheque to Export Promotion Council. The learned CIT(A) admitted the said additional evidence filed by the assessee in the interest of justice and found the same to be acceptable on verification. He however held that the claim of the assessee on account of payment made to Export Promotion Council was established to the extent of Rs.35,000/- as against the total claim of Rs.50,000/- made by the assessee on this count and sustained the disallowance made by the AO on this issue to the extent of Rs.15,000/-.

I have heard the rival submissions and also perused the relevant materials available on record. As rightly submitted by the learned counsel for the assessee, the claim of the assessee on account of payment made to Export Promotion Council to the extent of Rs.15,000/- was allowed by the AO himself and the dispute before the ld. CIT(A) was only to the extent of the balance amount of Rs.35,000/- which was disallowed by AO for want of relevant supporting evidence. In these circumstances, when the proof of payment of Rs.35,000/- was filed by the assessee before the ld. CIT(A) and the same was found to be acceptable by him on verification, I am of the view that the learned CIT(A) ought to have deleted the entire disallowance of Rs.35,000/- and there was no justification on his part to sustain the disallowance made by AO on this issue to the extent of Rs.15,000/-. In view of the matter, I delete the disallowance sustained by the ld. CIT(A) on this issue and allow ground no.3 of the assessee’s appeal.

In the result, appeal of the assessee is allowed.