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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: Shri Waseem Ahmed & Shri Siddhartha Nautiyal
आदेश/ORDER
PER BENCH:- This assessee’s appeal for A.Y. 2014-15, arises from the order of the CIT(A), Rajkot-2 dated 17-01-2020, in proceedings under section 250 of the Income Tax Act, 1961; in short “the Act”.
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The assessee has raised the following grounds of appeal:-
“1. The learned Commissioner of Income tax-2, Rajkot erred in confirming action of assessing officer in disallowing Rs. 13,36,622/- u/s. 36(1)(iii) of the Act by computing proportionate interest expenditure incurred on borrowed capital corresponding to interest free advance of Rs. 4,59,25,000/- given to J Chandrakant & Co. 2. The Learned Commissioner of Income-tax (Appeals)-2, Rajkot failed to appreciate that the appellant had adequate pool of interest free funds by way of share capital and reserves, which were far in excess of impugned interest free advance. 3. The Learned Commissioner of Income-tax (Appeal)-2, Rajkot failed to appreciate that the order of the Hon’ble Tribunal in assessee’s own case for earlier years relied upon by the Commissioner (Appeals) were different than that of in the year under consideration. 4. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal. Total tax effect Rs. 4,33,670/-”
The brief facts of the case are that the assessee is a private limited company engaged in the manufacture of diesel oil engines, mono block pump sets, mini tractors etc. During the year, the assessee company had advanced interest free loans amounting to � 4,59,25,000/- to M/s Chandrakant and Co. The AO also observed that the outflow on account of interest income was � 59.10 lakhs and the long-term and short-term borrowings stood at � � 68.92 lakhs and 2.57 crores respectively. The AO accordingly drew inference that on one hand the assessee was paying huge
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interest and on the other hand it was giving interest free advances. In response to show cause notice, the assessee has replied that they had sufficient interest-free funds at their disposal to cover for the said interest free advance. However, the AO did not accept the contention of the assessee, and after detailed discussion (refer paras 3.3.3 to 3.9 of assessment order) disallowed interest expenses of � 13,36,662/- being interest expenses for non-business purpose.
In appeal against the assessment order, Ld. CIT(A) upheld the assessment order, and while dismissing the assessee’s appeal made the following observations:-
“6. Decision Having considered facts and circumstances of the case and rival contentions, that the AO has elaborately and cogently brought out that the assessee has advanced interest free advances to related party. The quantum business transactions does not justify such huge security deposit via-a-vis business turnover with a related party u/s 40AC(2)(b). These advances were about 11.7 times the average yearly transaction with that party. The assessee has paid about Rs.1.54 Crores interest to other parties on the short term loan taken from them and that the assessee not explained the nature of impugned interest free advance despite specific query by the AO thereby not establishing the business expediency of such advance. The pleas of the assessee that the advance was made out of interest free surplus funds and that interest free advances are normal as compared to such funds has been very cogently rebutted by the AO by bringing "but that the surplus funds and capital of the assessee are locked up in fixed assets and other non-liquid assets. AS against share capital and Reserves and surplus of Rs.33.48 crores, the assessee's
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non liquid assets/investments amounted to Rs. 19.03 crores. Therefore, the claim of the assessee that interest free advances were out of interest free surplus funds and capital is not tenable. It is also noteworthy that neither during the assessment nor at appellate stage, the appellant has been able to rebut the finding of the AO that the matter of advances and its business expediency has not been explained by the assessee. Further against the interest free advances, there is common pool of funds on liability side of the B.S. thus even if there is no one to one relation between interest free advances and borrowed capital there is one to one relation with the common part of funds. Therefore the agreement that advance is out of owned funds is not tenable. For same reason, the contention that there is decrease in borrowings, there is no borrowing in CC a/c. and profit of the current year is more than the advance amount are not tenable. Even otherwise when advance is claimed to have been made in earlier year, the reliance on profit of current year to explain availability of funds is not tenable.”
The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(A). At the outset, the counsel for the assessee submitted that the fact situation prevailing the earlier years does not apply to this assessment year and hence no disallowance is called for on this account. The counsel for the assessee drew our attention to page 46 of the paper book (assessment order for assessment year 2012-13) and submitted that in the earlier assessment year, the disallowance came to be sustained on the basis that interest free surplus funds (as on 31-03-2012) were fully used up in stocks and investments, and hence the AO held that no interest free funds were left to be available for giving interest free advances by the assessee. However, the fact situation in the present assessment year under consideration i.e. assessment year 2014-15 is different since the assessee is having capital of � 30 crores approximately, whereas it has made interest free advances only to the tune of � 4.90 crores. Therefore, the counsel for the assessee
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submitted that for assessment year 2012-13, the ITAT sustained the additions on the basis of peculiar facts available during that year, which fact situation does not apply to the instant assessment year. In the instant assessment year, the spare interest free surplus is much in excess of interest- free advances and hence no part of interest is disallowable. In response, Ld. Departmental Representative submitted that even for assessment year 2013- 14 i.e. immediately preceding assessment year, the ITAT had upheld the order of Ld. CIT(A) on identical set of facts as the present year. In assessment year 2013-14, the assessee had surplus funds to the tune of 14.26 crores, however the ITAT in its wisdom upheld the disallowance under section 36(1)(iii) of the Act. Therefore, though it may be a fact that on paper assessee does have surplus funds, but the fact needs to be appreciated that the assessee has not been able to show that it had surplus funds, and that too interest free for it to lend to M/s Chandrakant and Co.
We have heard the rival contentions and perused the material on record. In our view, on perusal of details submitted by the counsel for the assessee, it is evident that the share capital and reserves and surplus amounting to � 33.48 crores is sufficient, even if we take into consideration their application towards assets, stocks and investments (amounting � 19.02 crores) so as to be able to advance a sum of � 4.59 crores as interest free advances to M/s Chandrakant and Co. The Gujarat High Court in numerous decisions has consistently taken the position that if interest-free funds are available with the assessee exceed the investments made in funds yielding exempt income, then no disallowance is called for under the Act. In the case of Hitachi Home and Life Solutions (I) Ltd.[2014] 41 taxmann.com 540
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(Gujarat), the Gujarat High Court held that where assessee's interest free funds exceeded investment made for earning exempted dividend income, disallowance under section 14A was not justified. Again, in the case of UTI Bank Ltd[2018] 99 taxmann.com 392 (Gujarat), the Gujarat High Court held that no disallowance could be made where assessee's interest-free funds far exceeded its interest-free investments. In the case of Gujarat Narmada Valley Fertilizers Co. Ltd [2014] 42 taxmann.com 270 (Gujarat), the Gujarat High Court held that where assessee-company received dividend on UTI and shares and investment in same was made in earlier years and interest free funds available with assessee were much larger as compared to investment, disallowance of assessee's claim for interest expenditure by applying section 14A was incorrect. In case of Gujarat Fluoro chemicals Ltd. [2020] 120 taxmann.com 433 (Gujarat), the Gujarat High Court again reiterated that where interest free funds available with assessee were far more than gross investment, it could safely be harboured that interest bearing funds was not invested by assessee and, thus, no disallowance under section 14A to be made. In case of Torrent Power Ltd.[2014] 44 taxmann.com 441 (Gujarat), the Gujarat High Court held that where it was apparent from records that assessee had sufficient funds for making investments in shares and interest free bonds and it had not used borrowed funds for such purpose, Assessing Officer was not justified in invoking provisions of section 14A in order to disallow one per cent of interest expenses incurred for earning exempt income. The ITAT Ahmedabad in the case of Zaveri & Co. (P.) Ltd.[2020] 118 taxmann.com 429 (Ahmedabad - ITAT), held that where assessee had Rs. 305 crores in its share capital and reserves against which it had made investment of Rs. 32.73 crores, since
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interest free fund available with assessee was far more than investment, no interest expenditure could be disallowed. In the case of Reliance Utilities & Power Ltd.[2009] 178 Taxman 135 (Bombay), it was observed that in terms of balance-sheet there was an availability of Rs. 398.19 crores including Rs. 180 crores of share capital. Therefore, if there are funds available, both, interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with company, provided said funds are sufficient to meet investments. Again ITAT in the case of Assetz Infrastructure in ITA Number 563/ Bang/ 2019, held that since the interest free funds available with the assessee is more than the interest free loans given to subsidiaries, it should have to be presumed that the loans have been given out of interest free funds. Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd (2014)(49 taxmann.com 335)(Bom) held that if the own funds and “interest free funds” available with the assessee is more than the investment in tax free securities, then it should be presumed that the said investments have been made out of interest free funds available with the assessee.
6.1 In view of the consistent position taken by the Gujarat High Court and other Courts/ Tribunals discussed above, as applied to the facts of the instant case, in our considered view, no disallowance is called for in respect of interest expenses amounting to � 13,36,662/- on account of being interest expenses for non-business purpose, when the assessee is having sufficient interest-free funds at the disposal in excess of amount given as interest free advances.
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In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 27-07-2022
Sd/- Sd/- (WASEEM AHMED) (SIDHHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 27/07/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order,
Assistant Registrar, Income Tax Appellate Tribunal, Rajkot