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2015 (4) TMI 45 - ITAT DELHI

2015 (4) TMI 45 - ITAT DELHI - TMI - Disallowance on account of interest - Held that:- It is apparent the networth / non-interest bearing funds available with the company were much more than the Loan & Advances given. We find that the Inventories held by the assessee company has reduced from ₹ 47.79 cores to ₹ 36.79 cores i.e. by ₹ 11 cores. The cash and bank balances have reduced from ₹ 1.29 cores to ₹ 0.40 cores i.e. by ₹ 0.89 cores. Thus we find that the fu .....

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it is presumed that the interest advances were given out of borrowed funds, it will be considered as prudent business decision and to protect the earning of business income and the interest will be allowable as deduction not only under section 36 but also under section 37 of the Act.

We find that the assessee had sufficient amount of money towards Share Capital, Reserve & Surplus and the Interest Free Advances given were fully covered by amount of Share Capital, Reserve & Surplus, dis .....

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ri A. T. Varkey JJ. 26-03-2015 ITA No. 4617/Del/2011 For the Appellant : Sh.Amit Goel, Adv For the Respondent : Sh. Satpal Singh, Sr. DR ORDER Per A. T. Varkey, JUDICIAL MEMBER This is an appeal filed by the Assessee is directed against the Order of the Ld. CIT(A)-VIII, New Delhi dated 04/8/2011 pertaining to assessment year 2002-03. 2. The Assessee has raised the sole ground in its Appeal:- On the facts and circumstances of the case and in law, the CIT(A)erred in confirming the action of AO of .....

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an order dated 22.3.2007 was passed under section 263 of the Income Tax Act, 1961 (herein after the Act ) by the Commissioner of Income, Delhi-IV, New Delhi vide which the assessment was set aside on the issue of allowability of deduction for interest amounting to ₹ 175.27 lakhs paid on borrowed funds utilized in advancing interest free loans to a sister concern. In view of the order passed under section 263 setting aside the assessment on the aforesaid issue, a notice dated 12.10.2007 wa .....

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en that the assessee had advanced loans amounting to ₹ 518123177/- on which no interest had been earned. So according to AO, It was a clear cut case wherein interest bearing loan had been diverted as interest free loans given. Thus AO was of the opinion that the assessee had used the interest bearing loans funds for non - business purposes. Therefore, AO observed that prima facie the interest paid in respect of the loans taken was not allowable. In this regard, assessee filed its reply and .....

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which no interest is being charged by it. Thus he observed that the interest bearing loans taken have been diverted as interest free loans and held that the interest cost pertaining to these loans / advances, which are not for the business purpose of the assessee is not allowable to it. And since the assessee is not maintaining segregate accounts of its funds invested in the business and those given for the non business purpose therefore, the interest expenses pertaining to loan and advances gi .....

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ined the addition in dispute. 5. Now the Assessee assessee is aggrieved against the Ld. CIT(A) s order and filed the present appeal before us. 6. At the threshold, Ld. Counsel of the assessee submitted that similar disallowance has been dealt with by the AO in assessee s own case for the assessment year 2003-04 wherein the AO has disallowed the interest of 40% on estimate basis and in Appeal Ld. CIT(A) has entirely deleted the addition on this account. And subsequently, the Department was in app .....

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submitted that the Assessing Officer has disallowed the Interest & Finance Charges of ₹ 17551634/- on the ground that on the one hand, the assessee company has paid interest on the loans taken by it and on the other hand, the assessee company has given interest free advances on which no interest has been charged. The Assessing Officer has held that since the assessee is not maintaining seperate accounts of its funds invested in business and those given for non-business purpose, disall .....

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d on advances given relating to real estate business, it will not make than for non-business purposes so as to disallow the interest. Moreover, under any eventuality the interest free funds available with the company are much more than the interest free advances as per the balance sheet of company, the financial position is as follows:- Non-interest bearing funds available with the company i.e. owned funds :- Particulars As on 31.03.2002 Share Capital 123083123 Reserve & Surplus 59042225 Tot .....

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y has reduced from ₹ 47.79 cores to ₹ 36.79 cores i.e. by ₹ 11 cores. The cash and bank balances have reduced from ₹ 1.29 cores to ₹ 0.40 cores i.e. by ₹ 0.89 cores. And that the funds of ₹ 11.89 cores released from the current assets became available as assessee own interest free funds as submitted by them. So according to the ld AR, the loan and advances given by the assessee were in usual course of business the same were for business purposes. Therefo .....

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in its business interest, did not opt for disposal of stock and arranged funds from bank. The decision of not disposing off the stock was considered prudent as at that time the assessee company was not getting the desired price and also. it would have resulted into the end of earning of rental income on stock. It may be seen that during the year the assessee company has earned rental income of ₹ 1,17,84,686/- which has been offered as business income and also assessed as such and in the su .....

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ith the assessee for exceeded the amount advanced by it as interest free loans arid therefore disallowance of interest was to be deleted. 9. According to the ld counsel in the case of Commissioner of Income Tax vs Reliance Utilities & Power Ltd. (2009) 178 Taxman 135 (Born) disallowance of interest was made by the Assessing officer on the ground that the assessee has utilized the borrowed funds for making investments. The contention of the assessee was that it had sufficient interest free fu .....

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y, if the interest free funds were sufficient to meet the investments. 10. The counsel stated that in the case of Commissioner of Income Tax vs Tin Box Co (2004) 135 Taxman 145 (Del) disallowance of interest was made on the ground that the assessee has diverted the interest bearing funds for giving interest free advances to sister concerns. The disallowance made was confirmed by CIT(A). The matter went to tribunal which allowed the claim of the assessee. The department went into appeal before Hi .....

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sproved by the learned departmental representative also." 11. In the case of CIT vs Hotel Savera (J 997) 239 ITR 795, the assessee, a partnership firm has advanced loan of Rs.l0,34,656/- to a sister concern. The firm has borrowed funds on which interest was paid In addition to borrowed funds, the assessee firm has credit balance of ₹ 10,95,010/- in Capital Account of Partners. The Assessing Officer made the disallowance of interest on the ground that since on the one hand, it had borr .....

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nds available with assessee i.e. ₹ 10,95,010/- (being credit balance in capital and current account of partners) were more than interest free advance of ₹ 10,34, 656/- given to sister concern, no disallowance of interest was warranted The Hon'ble Madras High Court upheld the view of Tribunal. 12. Ld counsel further pointed out that the Learned author, Sampath Iyenger in his book Sampath Iyengar's Law of Income Tax, 9th edition, at Page No. 2349 observed as under :- "For .....

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estion of disallowance of any part of the interest. 14. Ld counsel submitted that in the case of Herald Advertising Agency vs ITO (1991) 39 TTJ (Del) 34, it was held that where there was no material to show that there was any nexus between the advances made by the assessee to a party without charging any interest and the borrowed funds of the assessee on which interest was payable no disallowance could be made on that account. 15. In view of the above, Ld. Counsel of the assessee submitted that .....

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the submission of the assessee that the ITAT C Bench, New Delhi in assessee s own case for the assessment year 2003-04 vide ITA No. 4211/Del/2010 vide order dated 13.7.2012 in Revenue s appeal, has decided the issue of disallowance of ₹ 81,65,658/- on account of interest payee in favor of the assessee and against the Revenue. 18. A perusal of the balance sheet of company, reveals the financial position of the assessee company is as follows:- Non-interest bearing funds available with the co .....

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