METRO EXPORTERS PVT LTD,MUMBAI vs. ASST. C.I.T.-6(3), MUMBAI

On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) failed to appreciate that the advances were given towards the purchase of hoods and therefore were business advances required by commercial expediency and therefore could not have been disallowed U/s.36(1)(iii) of the I.T. Act.

Briefly stated the facts are, assessee a company, filed return of income for the year under consideration on 31st October 2001, declaring total income at nil. Assessment in assessee’s case was completed under section 143(3) of the Income Tax Act, 1961 (for short "the Act") on 10th February 2004, by determining total income of ` 5,17,24,400, after making various additions / disallowances. Being aggrieved of the assessment order, the assessee preferred appeal before the first appellate authority. Being unsuccessful in getting the desired relief before the first appellate authority, the assessee went in further appeal before the Tribunal. The Tribunal, while disposing off assessee’s appeal in ITA no.1693/Mum./2005 dated 20th February

In pursuance to the directions of the Tribunal, the Assessing Officer took up the proceedings again. As far as interest expenditure is concerned, the Assessing Officer noticed that the assessee has given interest free loan to its sister concern Paks Veterinary Drugs Co. Ltd. amounting to ` 8,16,41,865. He, therefore, called upon the assessee to prove its claim that such interest free loan was advanced out of surplus interest free funds. He also called upon the assessee to prove the commercial expediency for advancing such loan. As observed by the Assessing Officer, though, the assessee claimed that it had sufficient surplus funds amounting to ` 39, crore out of which the interest free loan was given to the sister concern, however, he alleged that the assessee did not furnish any evidence to back its claim. He, therefore, relying upon certain judicial precedent held that as the assessee has failed to establish the nexus between the interest free

The first appellate authority also sustained the disallowance by observing that the assessee has not established the commercial expediency by furnishing relevant material in terms with the directions of the Tribunal.

The learned Counsel for the assessee submitted before us that the assessee had sufficient interest free funds available with him to make advances to the sister concern, therefore, no disallowance of interest expenditure can be made without establishing the fact that the assessee has diverted interest bearing funds to its sister concern. He submitted, once it is established that sufficient interest free fund is available with the assessee the presumption would be the interest free loan advanced to sister concern is out of interest free surplus funds and the assessee is not even required to prove commercial expediency. In this context, the learned counsel relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities and Power Ltd., [2009] 313 ITR 340 (Bom.) and the decision

The learned Departmental Representative, on the other hand, relying upon the order of the learned Commissioner (Appeals), submitted that as the assessee has failed to establish a nexus between surplus fund and the interest free advance made to the sister concern disallowance made is justified.

We have considered the submissions of the parties, perused the orders of the authorities below and the material available on record. It is a fact that in the earlier round, the addition made on account of disallowance of interest expenditure was restored back to the file of the Assessing Officer by the Tribunal while deciding assessee’s appeal. While doing so, the Tribunal directed the Assessing Officer to verify whether the assessee had sufficient reserve and surplus to advance interest free loan and also to examine the commercial expediency. On a perusal of the Balance Sheet of the assessee company for the year under consideration, a copy of which is submitted in the paper book, it is noticed that the assessee had sufficient cash inflow available with it by way of own capital, reserve and surplus, advances received against orders, and sundry loans which is more than enough to take care of the interest free advances to the sister concern. Moreover, as held by the Hon'ble Jurisdictional High Court in Reliance Utilities and Power Ltd. (supra) and the Hon'ble Delhi High Court in Bharti Tele Venture Ltd., (supra) when mixed funds viz. both interest bearing and non– interest bearing are available with assessee, presumption would be interest free loan has been given out of non–interest bearing funds available with the assessee. Therefore, keeping in view the aforesaid principle laid down by the Courts, when the assessee had sufficient interest free funds available with it, the plea of the assessee that it has M/s. Metro Exporters Pvt. Ltd. 7 advanced the interest free loan to the sister concern out of such non– interest bearing funds is acceptable. Therefore, in our view, no disallowance of interest expenditure can be made. As far as commercial expediency is concerned, it has been brought to our notice by the learned Counsel for the assessee that almost the entire product manufactured by the sister concern to which interest free loan was advanced was sold to the assessee. This very fact reveals that assessee has a business interest in the sister concern, therefore, advancement of interest free loan to the sister concern can be considered to be for commercial expediency. In view of the aforesaid, we delete the addition made by the Assessing Officer on account of disallowance of interest expenditure, grounds no.1 and 2 are allowed.

In ground no.3, the assessee has challenged the disallowance of ` 2,76,251 under section 14A of the Act.

The learned Counsel for the assessee submitted before us that as the assessee during the relevant year has not earned any exempt income no disallowance under section 14A of the Act can be made.

The learned Departmental Representative raising preliminary objection submitted that the assessee has not raised this ground before the first appellate authority, therefore, he cannot raise this issue at this stage.

In the rejoinder, the learned Counsel for the assessee though admitted that this ground was not raised before the first appellate authority due to oversight, but, he nevertheless submitted that the issue emanates from the assessment order and the Tribunal is competent to entertain the ground raised by the assessee. For such proposition, he relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Pruthvi Brokers & Shareholders, [2012] 349 ITR 336 (Bom.).

We have considered the submissions of the parties and perused the material available on record. There is no doubt that assessee has not raised this issue before the first appellate authority. However, on examination of record, it is found that this issue was not only the subject matter of dispute in the earlier round of litigation but is also a subject matter of disallowance by the Assessing Officer in the second round. Therefore, in our view, the issue emanates from the assessment order. However, considering the fact that the assessee has not challenged the disallowance before the first appellate authority, and a plea was taken before us by the learned counsel that the assessee did not earn any exempt income during the impugned assessment order, hence, no disallowance under section 14A is called for, we consider it appropriate to restore the issue to the file of the M/s. Metro Exporters Pvt. Ltd. 9 Assessing Officer for examining assessee’s claim and decide it in accordance with law after due opportunity of being heard to the assessee. This ground is, therefore, allowed for statistical purposes.

In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 20.11.2015