INVOLUTE ENGINEERING PVT. LTD.,NEW DELHI V. DCIT, CIRCLE- 12(2), NEW DELHI

ITA 6885/DEL/2019

AI Insights

Involute Engineering Pvt. Ltd. appealed against the orders of the Commissioner of Income-tax (Appeals)-22, New Delhi, which upheld the disallowance of interest expenditure and repairs and maintenance expenses by the AO. The Tribunal examined the financial transactions and the nature of the expenses incurred by the appellant. It was argued that the interest-free advances to related parties were made from owned funds, not borrowed funds, and that the repairs and maintenance expenses were necessary for the upkeep of a business property, not enhancements of a capital nature. The Tribunal's decision was influenced by precedents and the principle that if owned funds are sufficient to cover interest-free loans, such loans are presumed to be made from owned funds.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 396657 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Other Referred Cases: Commissioner of Income Tax Vs. Modi Rubber Ltd. [2015] 378 ITR 128 (Delhi), Commissioner of Income Tax vs. Bharti Televenture Ltd. [2011] 331 ITR 502 (Delhi)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: OM PRAKASH
• Assessee Lawyers: SANJAY ARORA
• Keywords: Proportionate interest; Commercial expediency
• Section: 143(3)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: C : NEW DELHI BEFORE SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.6885/Del/2019 Assessment Year: 2015-16 Involute Engineering Pvt. Ltd., E-30, Anand Niketan, Basement, New Delhi – 110 001. PAN: AAACS2041N Vs DCIT, Circle-12(2), New Delhi. (Appellant) (Respondent) Assessee by : Shri Sanjay Arora, CA; Ms Pallavi Sharma, CA & Shri Jeetan Nagpal, CA Revenue by : Shri Om Prakash, Sr. DR Date of Hearing : 01.05.2025 Date of Pronouncement : 29.05.2025 ORDER PER ANUBHAV SHARMA, JM: This appeal is preferred by the Assessee against the order dated 31.05.2019 of the Commissioner of Income-tax (Appeals)-22, New Delhi (hereinafter referred to as the Ld. First Appellate Authority or ‘the Ld. FAA’, for short) in Appeal No.208/18-19/CIT(A)-22, New Delhi arising out of the appeal before it against the order dated 27.12.2017, respectively, passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the DCIT, Circle-12(2), New Delhi (hereinafter referred to as the Ld. AO). ITAs No.6885/Del/2019 2 2. Heard and perused the records. The submissions of both sides were to the extent of their respective cases below the ld. Tax authorities. The Ground No. 1 is general in nature while ground no. 4 and 5 are consequential so needs no separate adjudication. 3. Ground No. 2: The ground arises out of the disallowance of interest expenditure. During the impugned year, Rs. 8,39,111 has been advanced by the assessee to Planet Herbs Life Sciences Private Limited [‘PHL’], which is one of Assessee’s related parties, and the other loans were advanced in the previous years. The year end balances of loans and advances to related parties on which interest had not been charged are as under – Advance to Balance as on 31.3.2015 Planet Herb Life Sciences Private Limited 14,14,89,630 Shruti Dhawan 82,31,600 Monal Publishing House Pvt Ltd. 1,87,59,797 4. Ld. AO alleged that such advances have been granted by the Appellant out of its interest-bearing funds. He further alleged that the Appellant has diverted its interest-bearing funds to grant interest free advances. And accordingly, the interest expense of Rs. 1,07,02,066 as claimed by the Appellant was disallowed. The Ld. CIT(A) as well upheld the disallowance by holding as under ; ITAs No.6885/Del/2019 3 “7.1 I have carefully examined the finding of the AO and submission of the Ld. AR. I find that no cogent reasoning has been given by the AO for disallowance of interest expenses amounting to Rs. 1,07,02,066 pertaining to interest paid towards short-term borrowing by the Appellant. I find the finding of the AO sketchy and without any basis. However, I find the issue similar to the issue decided by the undersigned for AY 2013-14 vide order dated 31.05.2019. the undersigned has upheld the decision of the AO for AY 2013-14 where the AO has disallowed the proportionate disallowance of interest in the case of interest free advances made during the year to Planet Herbs Life Science Private Limited, a group concern of the appellant. Following the decision for AY 2013-14, AO is directed to compute the proportionate disallowance of interest on the interest free advances given to Planet Herb Science Pvt. Ltd.” 5. The Appellant submits that during the impugned year, the loan advanced to PHL amounted to Rs. 8,39,111. The said amount has been given out of Appellant’s accumulated profits and free reserves. Also, during the impugned year, the Appellant has taken an interest free loan from its sister concern, Sara Sae Private Limited, of an amount of Rs. 45,00,000. The Appellant has also made profit before tax of Rs. 51,72,082. Considering them both, the Appellant evidently had enough funds to advance Rs. 8,39,111 to PHL. Further, the advances given in earlier years were also out of the owned funds of the Appellant, and there was no necessity for the Appellant to divert any part of its borrowings for the aforesaid purpose. The owned funds comprised of not only share capital and free reserves available with the Appellant, but also the interest free borrowings made by the Appellant during earlier years from its related parties. As would be evident from the following, owned funds of the Appellant were more than the amounts advances to the related parties. ITAs No.6885/Del/2019 4 Share Capital = Rs. 2,25,63,000 Capital Reserve = Rs. 2,54,62,956 Revenue reserve (P&L credit balance) = Rs. 18,86,73,191 Total owned funds = Rs. 23,66,99,147 6. Thus quite apparently the Appellant was having mixed pool of funds comprising own funds and loan funds, and interest free funds have been advanced from owned funds only. In such a situation where the one-to-one nexus between the borrowed funds and the loan advanced was not established by the Ld. AO, the interest free loans had to be held as having come out of the Appellant’s own funds. There is substance in the contention that the Ld. AO. did not make any attempt to establish any linkage between the borrowed funds and the interest free loan advance by the Appellant to PHL, and thus erred in holding that the amount of Rs. 1,07,02,066/- incurred by the Appellant towards interest expenditure has been paid on the borrowings out of which the Appellant has or could possibly have advanced interest-free loan. The Ld. AO has not gone into the nature of borrowings on which interest has been paid. It is a well- settled principle that if an assessee has both owned and borrowed funds; and sufficient owned funds are available to advance interest free loans, the same shall be presumed to have been given out of the owned funds rather than the borrowed funds. Reliance can be placed on the Hon’ble Jurisdictional Delhi High Court decision in the case of Commissioner of Income Tax Vs. Modi Rubber Ltd. [2015] 378 ITR 128 (Delhi), and Commissioner of Income Tax vs. Bharti Televenture Ltd. [2011] 331 ITR 502 (Delhi). ITAs No.6885/Del/2019 5 7. Then where appellant holds 47.06 of the equity in PHL and has substantial stake in the said company. PHL had been making consistent losses in the past. Thus the advance was made for purely “for the purpose of business”. Ld. AO has given no heed to the commercial expediency of trying to sustain a loss making entity where capital was involved. Accordingly, the disallowance of Rs. 1,07,06,066 made by the Ld. AO on account of proportionate interest expenditure deserves to be deleted. The ground is allowed. 8. Ground No. 2; The ground arises out of the disallowance on account of repairs and maintenance. During the impugned year, the Appellant had incurred Rs. 83,73,347 towards repairs and maintenance expenses. In the impugned order, the ld. AO has alleged the same to be of capital nature and disallowed the same. The Ld. CIT(A) also upheld the action of the Ld. AO by holding that nothing has been brought on record by the Appellant to controvert the finding of the Ld. AO. 9. The ld. AR submits that during the impugned year, the expenditure was incurred towards renovation of its Mumbai factory, which was a dilapidated building. The Appellant had to appoint a contractor to do the complete renovation work, which included flooring, electrical repairs, painting work, etc. Ledger account of the repairs and maintenance expenditure as incurred by the ITAs No.6885/Del/2019 6 Appellant during the impugned year is placed before us at pages 72-80/PB. Wer find that the nature of expenses are not such which could have increased its capacity in order to accommodate any larger number of employees than before and neither there was any addition to the floor space in the building, which could be of permanent benefit to the Appellant. In regard to building premises, it is not every advantage of enduring nature acquired by an assessee that makes up a case of expenditure being of capital nature. 10. As a sequel to determination of grounds in favour of the assessee the appeals is allowed. The impugned additions shall stand deleted with consequential effects. Order pronounced in the open court on 29.05.2025. Sd/- Sd/- (S. RIFAUR RAHMAN) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 29th May, 2025. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "