TMI Blog2020 (9) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... erest bearing fund for non-commercial activities - HELD THAT:- We note that the assessee has treated the advances received from the customers as part of the capital which is not correct. It is because the advances received by the assessee from the customers represents the current liability which has to be utilized for the supply of the goods/materials to the concerned parties. As such amount represents the current working capital of the assessee which cannot be used for advancing the interests free advances as discussed above. We hold that the amount of advances received from the customers cannot form part of own fund of the assessee. Therefore, the amount of interest on the borrowed funds diverted to the non-interest bearing advances should be disallowed. Amount of capital including reserve available to the assessee, shall be presumed to have been utilized in advancing such interest free advance. In holding so we draw support from the judgment in case of CIT v. Max India Ltd. [ 2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT] No disallowance of interest expense claimed by the assessee can be made on account of diversion of fund to the extent of own fund available with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Manufacturing of Ferrous and Non-Ferrous Metal. On perusal of the Form 3CD report the AO observed that the assessee has either made late payments or not paid the amount of ESI on behalf of the employee contribution amounting to ₹ 3,01,624/- as prescribed under the relevant Act. The details of the late payments made or not made are as under: Sl. No. Month Employees Contribution to Prov. Fund (Rs.) Due Date of Payment Actual Date of Payment 1 April, 14 42551 21/05/2014 09/06/2014 2 May, 14 35213 21/06/2014 25/06/2014 3 June, 14 33825 21/07/2014 11/08/2014 4 July, 14 34276 21/08/2014 22/10/2014 5 August, 14 34768 21/09/2014 06/11/2014 6 Sept. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yee's contribution. Therefore the sum of employee contribution towards ESI should not be disallowed if the sum is paid before the due date of filing the return of Income as specified under section 139 of the Act. 7. However the Ld. CIT(A) disregarded the contention of the assessee by observing that the assessee did not pay the sum of employee contribution towards ESIC on/before the due date in accordance with the provisions of section 36(1)(va) of the Act. Being aggrieved by the order of the Ld. CIT-A, the assessee is an appeal before us. 8. The Ld. AR for the assessee before us filed a paper running from pages 1 to 98 and agreed that the judgment of Hon'ble Gujarat High Court in the case CIT v/s Gujarat State Road Transport Corporation reported in 366 ITR 170 is squarely applicable in his case wherein it was held that if the payment of employee contribution towards ESI/PF is paid after the due date of the relevant Acts then the sum which has been paid after due date should be disallowed as per the provision of section 36(1)(va) of the Act. 9. However the issue whether the due date is to be considered from the payment of salary or the month for which salary is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) of the Act. 13. On perusal of the balance sheet, the AO observed that the assessee had given the interest free loan to its subsidiaries amounting to ₹ 7,16,59,975/-and on the other hand it has also claimed interest expenditure in its books account for the sum of ₹ 2,10,55,848/- on the funds borrowed by it. The AO also found that there was no information furnished by the assessee suggesting that the funds was given to the subsidiaries either from own funds or from borrowed funds (i.e. interest bearing funds). 13.1 The AO also found that there was no information furnished by the assessee suggesting that the interest free loans were provided for the purpose of the business. Accordingly, the AO in the absence of any submission/clarification, made the proportionate disallowance under section 36(1)(iii) of the Act by observing as under: (B) Amount of expenditure by way of interest debited in the P L A/c. 21055848 Opening Value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces in question were made to its subsidiary company (Pgs.6-7 of Asst. Order). Such advances were made by the assessee out of commercial expediency . It is a settled law that when investments are made in subsidiary company , the same are out of commercial expediency and hence, no disallowance is called for u/s 36(1)(iii) of the Act. Reliance is placed on S.A. Builders v. CIT - 288 ITR 1 (SC) . Substantial interest free funds: In any case, as against average interest free advance of ₹ 5, 48,92,111/-, assessee has average interest free funds of ₹ 8,39, 74,092/- as at 31.03.15 (as is evident from Annexure B ) i.e. almost 1.53 times. In view of the substantial interest free funds, the presumption shall be that the assessee has utilized interest free funds for making underlying the interest free advances and hence, no disallowance is called for in respect of interest on borrowed funds. Reliance is placed on followings: CIT v. Reliance Industries Ltd. 410 ITR 466 (SC); CIT v. Torrent Power Ltd. 363 ITR 474 (Guj.); CIT v. Suzlon Energy Ltd. 354 ITR 630 (Guj.); CIT v. Gujarat Power Corporation Ltd. 352 ITR 583 (Guj.); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Doctor Co. reported in 180 ITR 627 wherein it was held as under : No part of the amounts standing to the credit of various sundry creditors could be available to the assessee for the purpose of advancing loans to its sister concerns for more than one reason. In the first place, just as there were sundry creditors to whom no interest was paid, there would be sundry debtors from whom no interest was received. Secondly, the amounts advanced to its sister concerns, on the assessee's own admission, were at least partly out of borrowed funds. Therefore, the Tribunal was not justified in deleting the disallowance of interest maintained by the AAC. The view taken by the AAC in this regard was correct. 17.2 Thus, we hold that the amount of advances received from the customers cannot form part of own fund of the assessee. Therefore, the amount of interest on the borrowed funds diverted to the non-interest bearing advances should be disallowed. 17.3 However, the amount of capital including reserve available to the assessee, shall be presumed to have been utilized in advancing such interest free advance. In holding so we draw support from the judgment of Hon'ble Punjab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth by the CIT(A) and Tribunal . 17.5 Similarly, we also draw support and guidance from the judgment of the Hon'ble Bombay High Court in the case of CIT v. HDFC Bank Ltd. reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:- Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A. 17.6 Similarly, we also draw support from the judgment of Hon'ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under : If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A . 17.7 Thus we hold that no disallowance of interest expense claimed by the assessee can be made on account of diversion of fund to the extent of own fund available with it as on 31-3-2015. 17.8 At the time of hearing, t ..... 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