M/S GARG FURNACE LTD.,LUDHIANA vs. DCIT, CC-3, LUDHIANA

This is assessee's appeal for assessment years 2017-18 against the order of the ld. Commissioner of Income Tax (Appeals)-5, Ludhiana dated 17.05.2023 contending that the ld. Commissioner of Income Tax(Appeals) [hereinafter referred to as ‘ld. CIT(A)’] has erred in upholding the disallowance of Rs.34,16,610/- u/s 36(1)(iii) of the Income

The Assessing Officer (in short ‘the AO’) observed that the assessee company was engaged in the business of manufacturing of all kinds of ferrous and non-ferrous metals, alloy castings, non-alloy steel rounds, wire rods, M.S. Billets, etc.; that the assessee had filed its return pertaining to assessment year 2017-18, declaring current year loss of Rs.13,82,61,785/-. The AO observed that the assessee had been asked to give details of all loans and advances given and was further asked to submit their certified copies of ledger accounts and to give details of the bank account, or the CC limit from which such payments were made. The assessee was asked to explain as to why no interest was charged on the loans and advances given to all the persons, except M/s King Trader and Asian Bikes Pvt. Ltd.; that the assessee filed reply and stated that the payments were old and no interest was charged because of the terms so agreed; that the assessee did not submit any documentary evidence in support of the claim that these advances had been given out of the assessee's own funds; that the assessee's claim that no interest was paid to the ITA 382/CHD/2023 A.Y.2017-18 3 bank and the interest paid to India Bulls was not having any nexus with these funds was not acceptable, as the borrowed funds constitute a common pool and the interest expense cannot be considered separately; that the assessee had failed to provide a satisfactory reply to show cause. The AO observed that the case did not fall within the ambit of commercial expediency; that all conditions for disallowance of proportionate interest u/s 36(1)(iii) of the Income Tax Act for the advances were satisfied, as the assessee had given interest free advances, there being no commercial expediency involved in giving the advances and the assessee had paid interest on borrowed funds; that the assessee had availed long term borrowings amounting to Rs.5,31,88,026/- and short term borrowings of Rs.60,85,59,323/- and had incurred finance cost of Rs.1,05,79,906/-. The AO observed that despite having heavy loans and paying interest, the assessee had not charged interest on the advances given to the said persons and these amounts had been given through the borrowed funds; that the expenditure was not expended wholly and exclusively for the purpose of the business; and that thus, proportionate interest u/s 36(1)(iii) read with Section 37 of the Income Tax Act, calculated @ 12% of the ITA 382/CHD/2023 A.Y.2017-18 4 interest expense, amounting to Rs.34,16,610/- was being disallowed and added to the income of the assessee.

Confirming the assessment order, the ld. CIT(A) observed, inter-alia, that during the year under consideration, interest free advances to the tune of Rs.2,84,71,743/- were outstanding; that also, the assessee had incurred finance cost to the extent of Rs.1,05,79,906/- on long term and short term borrowings; that it had been argued that the advances were given out of interest free funds available with the assessee, but no proof of the same had been submitted by the assessee despite issuance of Show Cause and repeated opportunities of hearing; that the AO had observed that the funds were not used for the business purpose and also, these were advanced without any commercial expediency; that the AO had given the factual position and had also elaborately discussed the legal aspect of the issue in the assessment order; and that it had been highlighted that the assessee could not explain the commercial expediency involved in giving the interest free advances to the persons mentioned in the assessment order.

Challenging the impugned order, the ld. Counsel for the assessee has reiterated the stand taken by the assessee

The ld. DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that as correctly observed by the ld. CIT(A), though the advances have been stated to have been given out of interest free funds available with the assessee, no proof thereof has been submitted, despite issuance of Show Cause Notice and despite repeated opportunities of hearing granted by the ld. CIT(A). It has been contended that thus, there being no error therein, the order passed by the ld. CIT(A) be upheld and the appeal filed by the assessee, carrying no merit whatsoever, be ordered to be dismissed.

We have heard the parties and have perused the material on record. APB-8 is a copy of the assessee's balance sheet as on 31.03.2017, as submitted before the authorities below. As per the same, there was a total of share capital and reserves and surplus amounting to ITA 382/CHD/2023 A.Y.2017-18 8 Rs.4,37,98,803/- available to the assessee at that time. This is much more than the amount of the advances made. In such a situation, in keeping with “CIT Vs Reliance Industries Ltd.” 410 ITR 466 (S.C.), it is to be presumed that the advances or investments were made from the interest free funds available and so, no disallowance u/s 36(1)(iii) of the Income Tax Act requires to be made.

In view of the above, finding force in the grievance sought to be raised by the assessee by way of the ground of appeal raised, the same is accepted. The order under appeal is reversed. The disallowance made by the AO, to the tune of Rs.34,16,610/- is deleted.

In the result, the appeal is allowed.