MARTIN & HARRIS LABORATORIES LTD.,MUMBAI vs. DCIT - 1(2), MUMBAI

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ITA 501/MUM/2014Status: DisposedITAT Mumbai10 February 2016AY 2004-054 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that since the assessee had substantial interest-free surplus funds exceeding the borrowed funds, the advances were presumed to be from these surplus funds. Therefore, the disallowance of interest was not sustainable.

What were the facts?

The assessee advanced interest-free funds to certain parties. The Assessing Officer disallowed a portion of the interest expenses on borrowed funds, presuming they were used for these advances. The CIT(A) confirmed this disallowance.

What were the issues?

Whether interest expenses on borrowed funds can be disallowed when the assessee has sufficient interest-free surplus funds to cover advances made to related parties and whether disallowance under Section 14A is permissible without exempt income.

Which sections of the Income-tax Act were involved?

Section 40A(2)(b),Section 14A

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(3)Show list

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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI

Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR

For Appellant: Shri Sanjiv M Shah

ORDER �ी अिमत शु�ला, �या. स.:- PER AMIT SHUKLA, J. M.: The aforesaid appeal has been filed by the assessee against impugned order date dated 18.09.2013 passed by CIT(A)-2, Mumbai for the quantum of assessment passed under section 143(3) r.w.s. 263 for the assessment year 2004-05, on following grounds of appeal.

2.

Brief facts qua the issue raised in ground no. 1 is that, the assessee had advanced Rs. 49,40,812/- as interest-free advances to the following persons: 1. P G Infrastructure P. Ltd. Rs. 1,15,440/- 2. G M Infrastructure P Ltd. Rs.38,25,000/- 3. Saffire Chemicals P Ltd. Rs. 3,20,372/- 4. Mr. B V Garg (Director) Rs. 1,80,000/-

1.

2 M/s Martin and Harris Laboratories Ltd The AO noted that, assessee has borrowed funds which as on 31st March, 2004 stood at Rs. 4,53,60,782/- on which the assessee has incurred interest expenses of Rs.34,19,167/- and these interest free advances given to the persons were covered under the provisions of section 40A(2)(b). In response to the show cause notice as to why disallowance of interest should not be made, the assessee submitted that, these advances were given in the course of the business and there was no nexus between the amounts borrowed and funds advanced to the these persons. It was further contended that assessee had huge surplus funds which has exceeded the borrowed funds, therefore, no disallowance should be made. The Ld. AO, however, rejected the contention of the assessee and relying upon certain decisions calculated the disallowance at Rs. 3,34,375/-. The Ld. CIT(A) too confirmed the said addition after referring to various judicial pronouncements which has been dealt and incorporated by him at page 5 and 6 of the appellate order.

3.

Before us, the Ld. Counsel submitted that, assessee had own funds of Rs. 11.60 crores which included reserves and surplus fund of Rs. 5.97 crores and once that is so, then amount of Rs. 44 lakhs given to the concerned persons should be presumed to have been given out of these funds only. In support of his contention, strong reliance was placed on Bombay High Court decision in the case of CIT vs Reliance Utilities and Power Ltd. reported in [2009] 313 ITR 34 (Bom); in the case of CIT v HDFC Bank Ltd., reported in [2014] 366 ITR 505. Thus, he argued that no disallowance should be made.

4.

On the other hand, Ld. DR relied upon the order of the CIT(A) and submitted that onus is on the assessee to show that the borrowed funds were not utilized for giving advances to the concerned persons.

5.

After considering the rival submissions and on perusal of the impugned orders, we find that it is not in dispute that assessee

3 M/s Martin and Harris Laboratories Ltd CIT(A) i.e. Rs.11.60 crores, whereas the borrowed funds were Rs. 4.6 crores. In such a case, advance of only Rs.44 lakhs to the concerned persons cannot be said to be given from the borrowed funds as the presumption would be that these advances have been given out of surplus funds. This proposition has been upheld by the Hon’ble Bombay High Court right from the decision of Reliance Utilities Ltd (supra) to CIT vs HDFC Bank Ltd (366 ITR 505), wherein the Hon’ble High Court have reiterated the principle that if there were funds available, both interest free and loan taken on interest, then presumption would arise that investment or advances have been given out of interest free funds. On this principles we hold that, disallowance of Rs. 3,34,735/- as sustained by the CIT(A) cannot be sustained, hence deleted.

6.

So far as the disallowance under section 14A of Rs. 54,448/-, the Ld. Counsel submitted that assessee has not earned any exempt income and, therefore, there is no question of making any disallowance under section 14A. In support, he has relied upon the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT, reported in [2012] 347 ITR 272 (Del) wherein it has been held that, if assessee does not have any exempt income, then disallowance under section 14A cannot be triggered. He further pointed out that, assessee has own huge surplus funds, therefore, investment aggregating to Rs. 24,31,530/- can be very well held to be made out of own funds. The Ld. DR, on the other hand, relied on order of the CIT(A).

7.

After considering the rival contention and on perusal of impugned orders, we find that, firstly, there is no exempt income earned by the assessee, therefore, in view of the principles laid down by the Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra) no disallowance under section 14A can be made; and secondly, a huge surplus funds was available with the assessee

4 M/s Martin and Harris Laboratories Ltd and, therefore, presumption is that such an interest free funds has been utilized for investment and consequently disallowance of interest under Rule 8D cannot be made. Accordingly, the disallowance under section 14A as confirmed by the CIT(A) stands deleted.

8.

In the result, appeal of the assessee is allowed. Order pronounced in the open court on 10th February, 2016.

Sd/- Sd/- (रिमत कोचर) (अिमत शु�ला) लेखा सद�य �याईक सद�य (RAMIT KOCHAR) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 10th February, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -34, Mumbai. 4) The Commissioner of Income Tax- 24 Mumbai. 5) िवभागीय �ितिनिध ““डी” ”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “D” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /

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