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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD & SHRI RATHOD KAMLESH JAYANTBHAI
ORDER PER RAVISH SOOD, J.M.:
The present appeal filed by the assessee is directed against the order passed by the CIT (Appeals)-1, Raipur, dated 28.07.2017, which in turn arises from the order passed by the A.O under section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) dated 26.12.2016 for Assessment Year 2014-15. The 2 Prithavi Realcon & Transportation P. Ltd V. ITO assessee has assailed the impugned order on the following solitary ground of appeal before us:
1. The ld. CIT(Appeal)-1, Raipur (C.G.) erred in law as swell as in fact while sustaining the addition of Rs.44,61,386/- made by the AO. The same is bad in law and is liable to be deleted.”
2. Controversy involved in the present appeal lies in a narrow compass i.e., sustainability of the disallowance of interest on borrowed funds made by the AO for the reason that the assessee company had diverted its interest bearing funds as interest free unsecured loans to various parties. On a perusal of the assessment order, it transpires that the assessee company had advanced interest free loans of Rs. 7.10 crores to certain related and unrelated parties. Observing that the assessee had raised interest bearing funds of Rs. 2.5 crores (CC limit) from PNB @ 14.75% on which it had borne a financial cost of Rs. 44,61,386/-, the AO disallowed the entire amount of the interest expenditure of Rs. 44.61 lacs by triggering the provisions of section 37(1) of the Act.
Aggrieved, the assessee carried the matter in appeal before the CIT (Appeals) but without any success.
The assessee being aggrieved with the order of the CIT (Appeals) has carried the matter in appeal before us.
3 Prithavi Realcon & Transportation P. Ltd V. ITO 5. We have heard the Ld. Authorised Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. Authorized Representative (for short ‘AR’) for the assessee to drive whom his contentions. At the very outset of the hearing of the appeal, it was submitted by the ld. AR that as the assessee company had sufficient interest free funds aggregating to Rs.7.91 crores available with it, therefore, the interest free advances given to the related and unrelated partis could safely or in fact irrefutably be presumed to have been made out of such interest free funds, and thus, no part of its claim for deduction of interest expenditure was liable to be disallowed. In support of his aforesaid contentions the ld. AR had relied on the following judicial pronouncements:
(i). Commissioner of Income Tax (Large Tax Payer Unit) Vs. Reliance Industries Limited (2019) 307 CTR 0121 (ii). Principal Commissioner of Income Tax Vs. Gaursons Realty Pvt. Ltd. (2020) 104 CCH 0733 (Del) (iii). Commissioner of Income Tax Vs. DD Industries Ltd. (2015) 92 CCH 0125 (Del) (iv). Commissioner of Income Tax Vs. Torrent Leasing & Finance Pvt. Ltd. (2014) 91 CCH 0117 (Guj)
4 Prithavi Realcon & Transportation P. Ltd V. ITO (v). Commissioner of Income Tax Vs. Reliance Utilities & Power Ltd. (2009) 77 CCH 0019 (Bom)
It was, thus, averred by the ld. AR that as both the lower authorities had gravely erred in law and the facts of the case in making/sustaining the disallowance of interest expenditure, and that too by triggering section 37(1) of the Act, therefore, the same could not be sustained and was liable to be vacated.
Per contra, the ld. Departmental Representative (for short ‘DR’) relied on the orders of the lower authorities.
After having given a thoughtful consideration to the issue in hand, we principally concur with the contention of the ld. AR that in case an assessee has sufficient interest free funds available with him, then, it is to be presumed that the interest free advances so made were out of the said funds and no disallowance of interest expenditure to the said extent would be called for in his hands. Before proceeding any further, we may herein observe that the disallowance of the assessee’s claim for deduction of interest expenses had wrongly been made by the AO u/s 37(1) of the Act, for the reason that the same would get triggered only qua an expenditure not in the nature of an expenditure contemplated in section 32 to 36 of the Act, which, inter alia, includes interest paid
5 Prithavi Realcon & Transportation P. Ltd V. ITO on capital borrowed for the purpose of business or profession. Be that as it may, on a perusal of the details furnished by the assessee as regards availability of interest free funds with it, we find that the same to the extent of Rs. 6,33,96,237/-, viz (i). Share capital: Rs. 10,00,000/-; (ii) Reserves and Surplus: Rs. 17,01,615/-; (iii) Interest free Unsecured loans: Rs. 6,06,94,622/- a/w the profit generated by the assessee during the year under consideration can safely be held to be in the nature of interest free funds available with it for sourcing the interest free advances that were given to certain parties. At the same time, we are unable to persuade ourselves to subscribe to the claim of the ld. AR that the amount of trade payable of Rs. 1,57,56,731/- was also to be construed as interest free funds available with the assessee. Our aforesaid conviction that in case interest free funds are available with an assessee, then, it is to be presumed that the investments were made from the said funds and no disallowance of interest expenditure to the said extent would be called for u/s 36(1)(iii) of the Act is fortified by the judgment of the Hon’ble Supreme Court in the case of CIT (Large Tax Payer Unit) v. Reliance Industries Limited (2019) 307 CTR 0121 (SC). We, thus, in terms of our aforesaid observations set-aside the order of the CIT(A) and direct
6 Prithavi Realcon & Transportation P. Ltd V. ITO the AO to vacate the disallowance of interest expenditure to the extent corresponding to the amount of interest free funds of Rs. 6,33,96,237/- a/w profit generated by the assessee during the year under consideration.
Resultantly, the appeal filed by the assessee is partly allowed in terms of our aforesaid observations.
Order pronounced in the open court on 10/06/2022.