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2015 (6) TMI 966 - ITAT KOLKATA

2015 (6) TMI 966 - ITAT KOLKATA - [2015] 43 ITR (Trib) 735 (ITAT [Kolk]) - Disallowance of interest calculated on advances given to sister concern - CIT(A) deleted the addition - Held that:- The assessee has total capital and reserves available at ₹ 140 crores along with the total income assessed by the Assessing Officer for the assessment years 2006-07 and 2007-08 at ₹ 26.86 crores and ₹ 43.47 crores respectively, the assessee has availability of funds interest-free more than .....

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h (Judicial Member).-These two appeals by the Revenue are arising out of orders of the Commissioner of Income-tax (Appeals)-VI, Kolkata in Appeal No. R-27/CIT(A)-VI/2010-11/Cir-6/Kol dated January 2, 2012. Assessments were framed by the Deputy Commissioner of Income-tax, Circle-6, Kolkata under section 143(3)/115WE(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for the assessment years 2006-07 and 2007-08 vide his orders of December 16, 2008 and December 31, 2009 .....

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nd circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in law in deleting the disallowance of interest of ₹ 86,87,054 being the interest calculated and taxed on advances given to Neora Hydro Ltd." 3. The brief facts relating to this issue are that NHL is a concern where the assessee held 50 per cent. shares from the beginning and by March 31, 2005, balance 50 per cent. shares were also transferred to the associated concerns of the assessee. NHL ultimately .....

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pages 36 and 37. During the year ended on March 31, 2006, total advances of ₹ 7.69 (net) crores were given and during the year ended on March 31, 2007 ₹ 1.38 crores were further given. The total capital and reserves of the assessee was at ₹ 140 crores. This fact is also mentioned by the Income-tax Appellate Tribunal in its order in para-3 (page 2 of the paper book). The total income assessed by the Assessing Officer for the assessment years 2006-07 and 2007-08 are as under : A .....

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n commer cial expediency. The assessee relied on a judgment of the Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) III. The assessee has contended that the amount was advanced to Neora from cash credit account where its profits are also deposited. IV. I reject the contention of the assessee on the following grounds: (a) Neora is an independent company till March 31, 2006. The assessee owned only 50 per cent. shares. (b) The assessee had paid the advances o .....

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that the amount was borrowed and used from its own business. (e) Admittedly the amount was borrowed and interest was paid. The amount utilised for giving interest-free to another legal entity, i.e., Neora. It is quite immaterial that the assessee had deposited the profits in the cash credit account but depositing the profits there was debit balance in the cash credit account. The judgment of the Supreme Court refers to the commercial expediency. The commercial expediency cannot over ride the spe .....

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td. [2006] 280 ITR 525 (Cal) and in the case of J. K. Indus tries Ltd. v. CIT [1999] 238 ITR 820 (Cal) has held that the assessee may give interest-free advances to its sister concern wherever the expenditure was made from the mixed account and the assessee had sufficient funds of its own to advance money out of that to the sister concern. In the present case the assessee had 50 per cent. shares in the sister concern which amalgamated with the group company later on. There was a business interes .....

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te the disallowance of interest on account of interest-free loans given to Neora Hydro Ltd. The addition of ₹ 86,87,054 is hereby deleted." 6. Aggrieved, the Revenue filed the second appeal before the Tribunal. 7. The learned senior Departmental representative Sh. K. L. Kanak argued that the Commissioner of Income-tax (Appeals) while deciding the appeal had taken into cognizance the fact that the assessee has total capital and reserve of ₹ 140 crores and according to the Commiss .....

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com and noted that the balance-sheet of the company does not in any way indicate that it is sitting on a cash balance of ₹ 140 crores for finance to its sister concern. Even the cash flow statements for these two years indicate that the assessee is left with negative cash flow. According to him, the primary burden of establishing that on the date when each interest-free loans is given by the assessee, there was sufficient non-interest bearing/own funds available with the assessee to advanc .....

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rectors of the assessee-company. The four companies, as mentioned in the assessment order and three individuals are closely connected with the assessee. Thus the entire share capital of NHL was held by the assessee and its close associates. There was an agreement dated March 12, 1999 (at pages 101 to 124 of the paper book) between NHL and the assessee for sharing the energy produced. Under the said agreement, bulk of the energy produced was to be supplied to the assessee. There was an agreement .....

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the completion and commissioning of the project." 9. According to the assessee all these factors conclusively prove that the "commercial expediency" as far as the assessee is concerned existed to give interest-free advance to NHL. The assessee relied on the judgment of the Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) and the judgment of the Calcutta High Court in the case of CIT v. Britannia Industries Ltd. [2006] 280 ITR 525 (Cal). 10. .....

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to the associated concerns of the assessee by March 31, 2005. The assessee filed a scheme of amalgamation and as per the direction of the hon'ble Calcutta High Court, NHL ultimately amalgamated with the assessee with effect from August 1, 2007. We further find that the assessee had sufficient funds of its own to advance the loan to the sister concern as is evident from the facts of the case discussed above. The assessee also had loans and advances taken on interest at the time when the mone .....

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y NHL electric project. Therefore, there was commercial interest of the assessee in Neora Hydro Electric Ltd., for advance in the money. The assessee had 50 per cent. shares in NHL while balance 50 per cent. was also transferred to the associated concerns of the assessee by March 31, 2005. We find that the assessee has relied on the case of CIT v. Britannia Industries Ltd. [2006] 280 ITR 525 (Cal). The hon'ble Calcutta High Court has held in this case as follows (pages 527 and 534) : "1 .....

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al that the recipient of interest-free loan was not a firm of relatives ; the advance was made for the purpose of business within the meaning of section 36(1)(iii) ; that there was regular course of business between the assessee and the firm ; and that the advances were made to MCAP in the regular course of business ; such advances were made in the course of busi ness for commercial expedience and for the purpose of business ; the findings arrived at by the learned Tribunal were not perverse ; t .....

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such we find no merit in this appeal. We answer the question in the affirmative in respect of the respective assessment years involved in this appeal. 24. In the result, the appeal fails and is accordingly hereby dismissed." 11. We further find that the assessee also relied on the judgment of the jurisdictional High Court in the case of J. K. Industries Ltd. v. CIT [1999] 238 ITR 820 (Cal), wherein it is observed as under (this case appears to be to [2011] 61 DTR (Cal) 153 ) : "(f) Th .....

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r ended on March 31,1996, the appellant advanced a further sum aggregating to ₹ 7.30 crores to its subsid iaries and during the previous year ended on March 31, 1996, the appellant's cash profit after providing for taxation and dividend amounted to ₹ 30.37 crores and the said interest-free loans of ₹ 7.30 crores were given out of the said internal accruals of the appellant. The Assessing Officer, however, by order dated March 26, 1999 disallowed the interest expenditure of .....

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s were deposited in the cash credit accounts to cover the amount of the interest-free loans . . . In the case before us, we find that the opening balance of such interest-free loans to the subsidiaries for the previous year ending on March 31, 1996 amounted to ₹ 1 crore. During the previous year ended on March 31, 1996, the appellant advanced a further sum aggregating to ₹ 7.30 crores to its subsidiaries and during the previous year ended on March 31, 1996, the appellant's cash p .....

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ect the Assessing Officer not to deduct any amount from expenditure on the ground that interest-free loan was given to its sister concerns from the borrowed fund when the profit was far in excess and entire deposits were made in the said account and at the same time disal lowance of foreign travel expenditure of the spouse of the appellant's managing director who accompanied her husband on business visits amounting to ₹ 7,44,549 is also set aside. The appeal is, thus, allowed by answer .....

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