Interest on borrowed capital is not disallowable if interest free Loan given to sister concern is out of the interest free fund

Overview:

If the assessee has huge interest free funds including the profit earned by it during the year, which is sufficient to cover the advancement of loan, then no interest could be disallowed under section 36(i)(iii).

AO made addition on account of pro ratainterest on loan under section 36(i) (iii). Assessee contended that as it had given the interest free advance to its sister concern from the interest free funds available out of the capital of partners and the entire loan was used for the purpose of business, no disallowance could be made.

It was held thay in view of decision of Supreme Court in the case of Munjal Sales Corporation v. CIT (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC), if the assessee has huge interest free funds including the profit earned by it during the year, which is sufficient to cover the advancement of loan, then no interest should be disallowed. Therefore, AO was not justified in making disallowance of pro rata interest on loan under section 36(i)(iii).

Decision: In assessee’s favour.

Relied: Munjal Sales Corporation v. CIT (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC).

Referred: CIT v. Abhishek Industries Limited. (2006) 286 ITR 1 (P&H-HC) : 2006 TaxPub(DT) 1778 (P&H-HC), K.T.M India v. ACIT Panipat Range, Panipat  [ITA Nos. 5619, 2529/DEL/2011, ITA No. 1981/Del/2012 & ITA No. 3165/Del/2011, dt. 14-9-2018].

IN THE ITAT, DELHI BENCH

N.K. SAINI, A.M. & SUCH ITR A KAMBLE, J.M.

K.T.M. India v. Dy. CIT

ITA No. 57/Del/2012

15 October, 2018

Appellant by: Rakesh Gupta, Sh. Somil Agarwal, Advocates

Respondent by: Naina Soin Kapil, Sr. Departmental Representative

ORDER

Such ITR A Kamble, J.M.

This appeal is filed by the assessee against the Order, dt. 31-10-2011 passed by Commissioner (Appeals)-Karnal, for assessment year 2008-09.

2. The grounds of appeal are as under :–

“1. That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in disallowing the deduction of Rs. 7,05,311 under section 80IB in respect of purported export incentives even though assessee was supporting manufacturer.

2. That in any case and in any view of the matter, action of learned Commissioner (Appeals) in confirming the action of learned assessing officer in passing the impugned order and disallowing the claim under section 801B in respect of purported export incentives is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case. Learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in making disallowance of Rs. 65,250 on account of pro-rate interest on loan under section 36(i)(iii) of the Income Tax Act., 1961.
4. That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in making addition of Rs. 20,89,100 on account of short term capital gain arising on sale of land.
5. That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in framing the impugned assessment in violation of principles of natural justice and by recording incorrect facts and findings and without providing adequate opportunity of hearing.”
6. The assessee is a partnership concern and derives income as a supporting manufacturer, from manufacturing and export of handloom products. The assessee firm received capital towards DEPB/Duty Draw Back amounting to Rs. 60,47,967 in respect of export realization. The assessee claimed deduction under section 80IB for Rs. 7,05,311 at 25% on the profit of Rs. 28,21,245. The assessing officer held that DEPB/Duty Draw Back claims amounting to Rs. 7,05,311 in respect of export realization were not profits derived from industrial undertaking and reduced the claim of deduction under section 80IB from Rs. 7,05,311 to Rs. NIL. The assessing officer further made addition of Rs. 65,250 on account of pro rata interest on loan under section 36(i) (iii) of the Act. The assessing officer also made addition amounting to Rs. 20, 89,100 on account of short term capital gain arises on sale of land.
7. Being aggrieved by the assessment order, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) dismissed the appeal of the assessee.
8. The learned Authorised Representative submitted that as relates to Ground No. 1 & 2, the same is decided against the assessee in assessee’s own case for assessment year 2007-08 being ITA Nos. 5619, 2529/Del/2011, ITA No. 1981/Del/2012, ITA No. 3165/Del/2011 vide Order, dt. 14-9-2018. As regards, Ground No. 3, the learned Authorised Representative submitted that the assessee, during the assessment submitted the details regarding advances for furniture and fixture, advance petrified and loans and advances to sister concerns. Thus, the learned Authorised Representative submitted that all these amounts were interest free advances and, therefore, the assessing officer was incorrect in making disallowance of Rs. 65,250 on account of pro rata interest on loan under section 36(i) (iii) of the Act. As regards Ground No. 4, the learned Authorised Representative submitted that the assessee sold its business as slump sale to SPJ Textiles (P) Ltd. on 2-7-2007 for the consideration of Rs. 3,89,84,198.86. The balance sheet of the assessee as on 2-7-2007 containing land measuring 2 acre, 2 karnal, 15 marlas as asset which was duly reflected in Schedule of fixed assets of the balance sheet. The assessing officer as well as the Commissioner (Appeals) has not verified these details. Therefore, the learned Authorised Representative requested that the issue may be restored back to the file of the assessing officer for verification and proper adjudication. The learned Authorised Representative submitted that Ground No. 5 and 6 are general in nature, hence, not pressed.
9. The learned Departmental Representative relied upon the Assessment Order and the order of the Commissioner (Appeals).
10. We have heard both the parties and perused the material available on record. As regards, Ground No. 1 & 2, the Tribunal decided the issue against the assessee. The Tribunal for assessment year 2007-08 held as under :–

“4. After hearing both the parties, we find that it is not in dispute that the assessee has given interest free advance to its sister concern. The assessee’s case has been that it has given the advance from the interest free funds available out of capital of the partners and the entire loan was used for the purpose of business. The assessing officer following the judgment of Hon’ble P & H High Court in the case of CIT v. Abhishek(supra) held that on such an interest free advance proportionate interest has to be disallowed. Now the said judgment of Hon’ble P & H High Court in CIT v. Abhishek (supra) has been overruled by the Hon’ble Supreme Court in the case of CIT v. Munjal Sales Corporation, wherein the Hon’ble Supreme Court held that if assessee has huge interest free funds including the profit earned by the assessee during the year which is sufficient to cover the advancement of loan, then no interest should be disallowed. The assessee has demonstrated that the huge amount of money was lying in the capital of the partners and the profit earned during the relevant assessment year itself was approximately Rs. 1.19 crores. Therefore, such an availability of funds interest free is sufficient to cover up a small interest free loan of Rs. 16 lacs given to sister concern. Accordingly, the disallowance of Rs. 1,14,777 is deleted. In the result appeal of the assessee is allowed.”

Since, the issue is identical in present assessment year as well, the same is covered in assessee’s own case against the assessee. Therefore, Ground No. 1 & 2 are dismissed.

8. As regards Ground No. 3, the assessing officer as well as the Commissioner (Appeals) has not looked into the aspect of the additions for the business purpose relating to furniture and fixtures and commercial expediencies. The assessing officer also ignored the loans and advances given to the sister concern. Therefore, this needs to be verified and therefore, we remand back this issue to the file of the assessing officer to adjudicate upon it as per the evidence produced before the assessing officer by the assessee. Needless to say, the assessee be given opportunity of hearing by following principals of natural justice. Hence, Ground No. 3 is partly allowed for statistical purpose.
9. As regards Ground No. 4, both the assessing officer as well as the Commissioner (Appeals) has not taken the cognizance of the evidence produced before the assessing officer more particularly that of balance sheet and its profit. Therefore, this issue also needs to be remanded back to the file of the assessing officer. Needless to say, the assessee be given opportunity of hearing by following principals of natural justice. Ground No. 4 is partly allowed for statistical purpose.
10. As regards Ground No. 5 & 6, the same are general in nature and not pressed by the learned Authorised Representative, hence dismissed.
11. In result, the appeal of the assessee is partly allowed for statistical purpose.