TMI Blog2022 (3) TMI 1242X X X X Extracts X X X X X X X X Extracts X X X X ..... the file of the AO to decide the same afresh after verifying overall financial position of the assessee-company in order to ascertain whether the investment in capital work-in-progress was made by the assessee-company out of its own interest free funds or interest-bearing borrowed funds. AO is accordingly directed to decide this issue afresh after such verification and after giving the assessee proper and sufficient opportunity of being hear. Disallowance on account of proportionate interest attributable to the borrowed funds allegedly utilized by the assessee for giving interest free advances to its subsidiary company - HELD THAT:- The case of the assessee as made out before the authorities below and specifically before the Tribunal is that sufficient interest free funds in the form of share capital, reserve surplus and internal accruals were available at the relevant time to give interest free advance to the subsidiary company and there being the case of mixed funds maintained by the assessee-company, this issue is required to be considered having regard to the overall financial position of the assessee-company and not by applying the direct nexus theory. Following our con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-progress was not an allowable deduction as per the proviso to Section 36(1)(iii) of the Act, the assessee was called upon by the Assessing Officer to explain as to why the proportionate interest attributable to the capital borrowed for capital work-in-progress should not be disallowed being capital expenditure. In reply, the following explanation was offered by the assessee in writing: - At the outset, the Assessee would like to submit that it has not obtained any fresh loan/ borrowing during the year under reference. The same can be corroborated with the financial statements of the Assessee (available on your goodselfs records). Regarding the term loans availed in earlier years it is submitted that the assets financed by said term loans have been put to use before FY 2022- 13 (relevant to AY 2013-14). Thus, for the financial year under reference no interest was required to be capitalized as per proviso to section 36(1)(iii) of the Act since the assets acquired had already been put to use. The Assessee had availed certain short-term borrowings during the year under reference which were used to meet the working capital requirements of the Assessee and were not used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be capitalized till the asset is put to use. During the course of the appellant proceedings, it was noticed that the investment was made out of cash credit account bearing cost of interest. However, the Ld AR has claimed in his written submission that negative balance in cash credit account has been reduced from ₹ 12,34,85,362/- as on 01.04.2012 to ₹ 7,31,13,430/- as on 31.03.2013. On perusal of the balance sheet, I find that liability under this head as on 31.03.2013 is ₹ 14,13,95,794/- (Note 7 to Balance Sheet). Presuming that there was reduction in the cash credit liability, yet, the fact remains that the borrowed funds have been utilized in investing in the capital work-in-progress. Since, there was direct nexus between the borrowed funds and the investment in capital work-in-progress, the decisions relied upon by the Ld. AR become distinguishable on facts. In view of the Proviso to section 36(1)(iii), interest expenditure deserves to be capitalized with the cost of the capital asset and accordingly, disallowance made by the AO on this account is confirmed. Thus, appellant fails on this account. 7. We have heard the arguments of both the sides on this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next issue involved in Ground No.3 relates to the disallowance of ₹ 35,70,587/- made by the Assessing Officer on account of proportionate interest attributable to the borrowed funds allegedly utilized by the assessee for giving interest free advances to its subsidiary company. 9. In the Profit and Loss account filed along with the return of income, a sum of ₹ 3,05,28,877/- was debited by the assessee on account of interest expenses. As noticed by the Assessing Officer from the perusal of assessee s balance-sheet, the interest free advance of ₹ 4,34,34,1459/- was given by the assessee to one of its subsidiary company M/s. Diamines Speciality Chemicals Private Limited. In this regard, it was explained by the assessee before the Assessing Officer that the interest free advance to its sister concern was made out of its internal accruals and since the same was made to 100% subsidiary company, no interest had been charged. This explanation of the assessee was not found acceptable by the Assessing Officer. According to him, the assessee did not furnish any evidence to establish that the amount in question was advanced by it to the subsidiary company out of its int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted a reply stating that the utilization of cash credit has been reduced from ₹ 12,34,85,362 as on 01.04.2012 to ₹ 7,31,13,430/-. However, on perusal of the balance sheet (Note No.7), I find that utilization of cash credit facility as on 31.03,2013 is ₹ 14,13,95,794/-. Presuming that there was reduction in the utilization of cash credit facility, yet there was utilization of borrowed funds for advancing interest free funds to the sister concern. Since, there was direct nexus between the interest free advances given to the subsidiary company and borrowed funds, the decisions relied upon by the Ld. AR are distinguishable on facts. In the case of Munjal Sales Corporation 298 ITR 298 (SC) strongly relied upon by the Ld. AR, disallowance of interest was deleted since, the advances to the sister concern were given out of own funds of the firm. Infact, the ratio laid down in the following cases support the cases of revenue:- a) CIT vs Harrisons Malayalam Ltd. (2012) 25 taxmann.com 546 (Ker): After referring to the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities Power Ltd. (2009) 313 ITR 340/178 taxrnann.com 135 (Born), it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer for deciding the same afresh after verifying the overall financial position of the assessee-company in order to ascertain as to whether the interest free advance was given by the assessee-company out of interest free funds available at the relevant time or from the interest-bearing borrowed funds. The Assessing Officer is accordingly directed to decide this issue afresh on such verification after giving the assessee proper and sufficient opportunity of being heard. Ground No.3 of assessee s appeal is thus treated as allowed for statistical purposes. 12. Now we take up the appeal of the assessee for Assessment Year 2014- 15 being ITA No.2275/Ahd/2018 which involves a solitary issue relating to the disallowance of ₹ 90,85,891/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of proportionate interest attributable to the interest-bearing borrowed funds allegedly utilized by the assessee-company for giving interest free advance to its subsidiary company. 13. As the solitary issue involved in this appeal of the assessee for Assessment Year 2014-15 as well as the material facts relevant thereto are similar to the issue involved in Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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