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2016 (6) TMI 168 - ITAT MUMBAI

2016 (6) TMI 168 - ITAT MUMBAI - TMI - Disallowance of interest expenses - Held that:- Methodology of computing interest expenditure allowable under the Act at the rate of 7% of average outstanding balance on the opening and closing balance outstanding to be payable to GTL Ltd by the assessee company and disallowing the balance interest payable by the assessee company to GTL Limited as per contractual obligations itself is fallacious as no finding of fact is arrived at by the AO that the funds s .....

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pany has deployed inter-corporate deposit to the tune of ₹ 25.79 crores on which interest income of ₹ 1.28 crores has been earned which is duly offered for taxation in the return of income filed by the assessee company with the Revenue and the assessee company has advanced interest free funds to the tune of ₹ 14.22 crores to the suppliers and the ledger extracts and audited balance sheets to this effect are duly placed in the paper book. The advances to the suppliers of ₹ .....

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ith the assessee company of ₹ 25.41 crores as per audited Balance Sheet filed in the paper book which is sufficient enough to cover the interest free advances to suppliers to the tune of ₹ 14.22 crores and presumption shall apply unless rebutted that the interest free funds available with the assessee company are utilized for advancing interest free advances to suppliers - Decided in favour of assessee. - I.T.A. No. 2526/Mum/2013 - Dated:- 11-5-2016 - Shri Saktijit Dey, Judicial Memb .....

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sessment order dated 8-12- 2010 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961(Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) reads as under:- 1. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeal) erred in confirming the disallowance .....

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the advances after allowing for a grace period . However, the duration of the grace period was not specified by the assessee company before the AO during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act. As per the AO after going through the working of interest calculations, the assessee company has charged interest even for a day . The opening balance as at the beginning of the relevant previous year outstanding to be payable by the assessee company to GTL Li .....

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3) of the Act. 5. Aggrieved by the assessment order dated 08-12-2010 passed by the A.O. u/s 143(3) of the Act, the assessee company preferred an appeal before the first appellate authority i.e. CIT(A). 6. Before the CIT(A), the assessee company submitted that the assessee company has taken advances from customers for the goods sold to the customers as per prudent business practices keeping in view the nature of product and risk of obsolescence. There was an un-appropriated advance of ₹ 27, .....

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ance remained un-appropriated for more than one month from the date of receipt of advance which comes to the effective rate of interest at 6.42% per annum. It was submitted that these advances were fully utilized for business activities of the assessee company. It was also pointed out that unutilized advances have been partly utilized by the assessee company for placing short term inter-corporate deposits on which interest income of ₹ 1,28,09,783/- was earned by the assessee company during .....

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ch has been allowed by M/s GTL Ltd to the assessee company and thereafter the interest @7% is payable to GTL Ltd vide GTL Limited letter dated 2-11-2010, a copy of which was enclosed before the CIT(A). It was submitted by the assessee company before the CIT(A) that M/s GTL Ltd. is not a related party as defined in section 40A(2)(b) of the Act. It has not been brought on record by the A.O. that the assessee company has utilized the funds for non-business purpose. The AO has not considered that th .....

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ssessee company for the same . The audited statements of accounts were produced by the assessee company before the CIT(A) to prove the contention that the funds have been utilized and deployed for the purpose of business and for placing inter-corporate deposits. The assessee company submitted that it has non-interest bearing funds to the tune of ₹ 25.41 crores while interest bearing funds are available to the tune of ₹ 14.62 crores and the assessee company has deployed interest earni .....

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hen the A.O. held that the interest bearing funds were used by the assessee company for non-business purposes. The expenditure can only be allowed if it is incurred wholly and exclusively for the purpose of business as per the mandate of Section 37 of the Act. Mere payment by itself would not entitle the tax-payer to the deduction of a particular expenditure unless the same is proved to be paid for commercial considerations. It was observed by the CIT(A) that all expenditure incurred by the tax- .....

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ce was justified. The assessee company has failed to prove the genuineness of the claim made. The burden and onus of proving the claim that interest bearing funds were utilized for business purposes was on the assessee company and not on the Revenue. The CIT(A) relied upon various case laws and also held that the Revenue authorities are entitled to look into surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities .The CIT( .....

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second appeal before the Tribunal. 8. It is contended by the ld. Counsel for the assessee company that interest of ₹ 22,23,298/- has been disallowed by the A.O. which is confirmed by the CIT(A). The ld. counsel submitted that interest @ 7% has been provided with respect to the advance received from GTL Limited which is as per the agreement / contract with the GTL Limited , the interest being provided in the books of accounts after providing grace period of one month. The ld. Counsel for t .....

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whereby tax was deducted at source on the total interest of ₹ 1,24,24,430/- payable by the assessee company to GTL Limited which is placed in paper book page 46. He also drew our attention to the ledger account extract of various suppliers to whom the interest free advances have been paid which are placed at paper book page 51-62. He also drew our attention to the submission made before the authorities below which is also placed on record to contend that this interest expenditure is an all .....

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ers dated 15-03-2013 for assessment year 2011-12 was passed by the AO u/s 143(3) of the Act . Thus, he submitted that on the principles of consistency, the interest expenditure should be allowed. The ld. Counsel for the assessee also submitted that the assessee has sufficient interest free funds, which are reflected in the audited balance sheet, which is placed in the paper book at page 3-16, to make these interest free advances of ₹ 14.22 crores to suppliers. The assessee company s counse .....

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sel submitted that ₹ 25.79 crores as at 31-03-2008 is placed as inter-corporate deposits on which interest of ₹ 1.28 crores is earned and the detailed working are placed in paper book page 40-41. The ld. Counsel relied upon the decision of Hon ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. (2009), 313 ITR 356(Bom. HC) , the decision of Hon ble Supreme Court in the case of Hero Cycles (P) Ltd. v. CIT (2016), 379 ITR 347(SC) and the decision of Hon ble .....

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en made keeping in view the commercial expediency. The ld counsel also submitted that consistency should be maintained as the said expenses were duly allowed in assessment year 2009-10, 2010-11 and 2011-12 in the scrutiny assessments made by the Revenue as set out above and the disallowance of ₹ 22,23,298/- towards interest expenditure payable to GTL Limited should be deleted. 9. The ld. D.R., on the other hand, relied upon the orders of authorities below and submitted that the advances ha .....

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f supplier as per ledger accounts submitted by the assessee company. 10. The ld counsel for the assessee submitted in rejoinder that that after search on Global Telecom Limited group and other associates entities, the assessment has been framed in the case of the assessee company for the assessment year 2009-10 and 2010-11 u/s 143(3) read with Section 153C of the Act vide separate orders both dated 15-03-2013 and for assessment year 2011-12 assessment has been framed u/s 143(3) of the Act vide s .....

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15-03-2013 passed u/s 143(3) read with Section 153C of the Act. 11. We have considered the rival submissions and also perused the material placed on record including the case laws relied upon by the parties. We have observed that the assessee company has received advances of ₹ 27.86 crores outstanding as at 31-03-2008 from the customers including GTL Limited. The assessee company has provided interest @ 7% as per the contract obligations payable to GTL Limited on advances received from it .....

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revious year and the closing balance outstanding for payment as at the end of the previous year and applied the rate of interest of 7% on the average outstanding amount payable by assessee company to M/s GTL Ltd of ₹ 14,57,30,460/- to allow deduction of interest expenditure and termed the balance of the amount of interest expenditure payable by the GTL Ltd to the assessee company as per contractual obligation as excessive and not incurred for the purposes of business . In our considered vi .....

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imited on which interest is payable as per contractual obligations has been diverted for nonbusiness purposes or are utilized for any other purposes other than business purposes. The assessee company has on the other hand brought on record evidences that own funds/interest free funds to the tune of ₹ 25.41 crores are available with it which is reflected in the audited balance sheet, that the assessee company has deployed inter-corporate deposit to the tune of ₹ 25.79 crores on which .....

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