Case Law Details
Brief Facts
1. Assessee has filed its return of income on 22-11-2006 and 05-10-2007 declaring a loss at Rs. 21,98,810/-and Rs. 96,91,459/- in Assessment Year 2006-07 and 2007-08 respectively. The case of the assessee was selected for scrutiny assessment and notices u/s. 143(2) of the income tax act were issued on 09-10-2007 and 18-09-2008 which were duly served upon the assessee in Assessment Year 2006-07 and 2007-08 respectively.
2. Assessee had taken a loan to the tune of Rs. 39.11 crore in Assessment Year 2006-07 and has paid interest at Rs. 44,65,790/- on such loans and in Assessment Year 2007-08 assessee has paid interest amount of Rs 46,76,972/-. In Assessment Year 2007-08 the opening balance of the unsecured loan was Rs. 39.41 crore which was enhanced to Rs. 73,11,37,602/-
3. AO has disallowance interest paid for both the year by holding that (A) Assessment Year 2006-07 assessee has diverted interest bearing funds to the sister concern without charging interest and without any purpose of the business. In other words, the interest bearing funds were used for non-business purposes; therefore, the interest expenses are not admissible to the assessee. (B) Assessment Year 2007-08 The opening balance of the unsecured loan was Rs. 39.41 crore which was enhanced to Rs. 73,11,37,602/-. Thus, there was an increase in the unsecured loan amounts, simultaneously the amounts in advances given to sister concern without charging interest have also been increased from Rs. 23,75,00,209/- to Rs. 1,55,77,78,397/-
4. Therefore, AO has disallowances of interest expenses amounting to Rs. 44,65,790/- and Rs. 46,76,672/- in Assessment Year 2006-07 and 2007-08 respectively for the reason state above.
Question Raised:
Aggrieved by the order of AO and Ld. CIT(A) the Assessee filed appeal before Tribunal raising the following question of
“Whether CIT(A) has erred in confirming the disallowance of interest paid Rs 44,65,790/- and Rs. 46,76,672/- in Assessment Year 2006-07 and 2007-08 respectively”
Contention of Assessee
1. The learned counsel for the assessee has raised two fold submissions. In his first fold of submission, he contended that assessee has sufficient interest free funds available which were used for the purpose of giving interest free advances, therefore, ld. Assessing Officer ought to have not disallowed any amount out of the interest expenses claimed on the borrowed funds. In other words, the interest bearing funds were used for the purpose of business and not used for gaining interest free advances to the sister concern.
2. In his second fold of submission, he contended that if accounts are being examined minutely then it will reveal that these advances were given for the purpose of business. The commercial expediency to give these advances is involved in these transactions and, therefore, no disallowance ought to have been made.
Contention of Revenue
1. Assessee failed to establish the availability of interest free funds; therefore, Assessing Officer has rightly disallowed the claim of the asesssee.
2. He further contended that as far as plea of commercial expediency is conserved, the assessee failed to bring any evidence exhibiting that under commercial expediency, it has to pay advances to the sister concern.
Observation/decision of Hon’ble Tribunal
1. The ld. Assessing Officer has observed that the funds referred by the assessee were not available with it, because, it has invested above referred funds in shares of Rs. 100.28 cores and created fixed asset of Rs. 7.10 cores. He further observed that from the perusal of schedule (b) of balance sheet, it reveals that assessee has increased its reserve and surplus by an amount of Rs. 24 crores in the form of re-evaluation of reserve account, meaning thereby no cash-in-flow was available. learned counsel for the assessee, if this amount of Rs. 24 crore created by way of revaluation of reserve account is taken out then a balance roughly Rs. 66(907968256-24=667968256) crore will be available to the assessee. The second objection of the Assessing Officer is that assessee had made investment in the shares of Rs. 100.2 core. He drew our attention towards balance sheet and pointed out that investment as on 31st March, 2005 stood at Rs. 82.89 crore. It increased to Rs. 100.2 crore, meaning thereby there is an increase of Rs. 18 cores in the investment in shares. If these two amounts are debited from the total reserve i.e. Rs. 18 + 24 from Rs. 90 cores of reserve and surplus then roughly Rs. 48 crores of rupees were available with the assessee which take care interest free advances of Rs. 23.59 crores. To this calculation, Ld. Departmental Representative was unable to controvert. Ld. Assessing Officer failed to appreciate the funds available with the assessee in right perspective.
2. Apart from this one aspect, it has been brought to our notice that assessee has running account with the sister concern. It has a debit balance at Rs. 30.60 crore as on 31st March, 2005 in the account of Adani Agro Pvt. Ltd and it has not paid any interest on this debit balance. Taking into consideration these facts, we are of the view that assesse has demonstrated on the record that it has sufficient interest free funds which can take care of the interest free advances.
3. As far as Assessment Year 2007-08 is concerned, assessee has liquidated its investment of Rs. 100 crore, therefore, a sum of Rs. 100 crore was available with the assessee. The realization of the investment at Rs. 100 crore accounted in the accounts. Similarly, it has reserve and surplus of Rs. 165 crore. If Rs. 24 crore taken out from this which was added on account of revaluation in the last year, then, the sum at Rs. 141 crore will be available to the assessee. If the investment realized by the assessee out of liquidation of Rs. 100 crore in the shares is added with interest free funds at Rs. 141 crore, then, assessee has the funds of Rs. 241 crore. It has given interest free advances of Rs. 153.52 crore only. It has demonstrated that it has more interest free fund than the one given to the sister concern.
4. There is no dispute on facts between both the Assessment Years. Therefore, considering the discussion in Assessment Year 2006-07, no disallowance is sustainable in this year also. These grounds of appeals are allowed and disallowance at Rs. 44,65,790/- as well as Rs. 6,76,672/- in Assessment Year 2006-07 and 2007-08 are deleted .
Analysed by CA Rahul Sureka
