Morakhia Copper & Alloys pvt. Ltd., Ahmedabad V. ACIT, Circle-2(1)(2), Ahmedabad

ITA 1810/AHD/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9157 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 04-02-2020
• Assessment Year: 2015-2016
• Appeal Filed On: 20-08-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Proportionate interest; Commercial expediency
• Section: 43B; 139; 14A; 201; 13; 20

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR & SHRI WASEEM AHMED, ACCOUNTANT MEMBER ./ I.T.A. NO. 181 0 /AHD/201 8 ( / ASSESSMENT YEAR : 201 5 - 1 6 ) MORAKHIA COPPER AND ALLOYS PVT. LTD. 12, SECOND FLOOR, MARDIA PLAZA, C.G.ROAD, NAVRANGPURA, AHMEDABAD / VS. ASSISTANT COMMISSIONER OF INCOME - TAX CIRCLE 2 ( 1 )( 2), A HMEDABAD 1ST FLOOR, NAVJEEVAN TRUST BUILDI NG, NR. NAVJEEVAN POST OFFICE, AHMEDABAD - 380014 ./ ./ PAN/GIR NO. : AAACM3439J ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI P. B. PARMAR , A.R. / RESPONDENT BY : SHRI VIDHYUT TRIVEDI , SR . D.R. / DATE OF HEARING 0 4 /0 2 /20 20 /DATE OF PRONOUNCEMENT 11 / 08 /20 20 ORDER PER BENCH : THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 2 , AHMEDABAD (CIT(A) IN SHORT) DATED 15 / 06 /201 8 RELEVANT TO ASSESSMENT YEAR (AY) 20 15 - 16 . ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 2 - 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE DISALLO WANCE OF RS.2,08,324/ - U/S. 36(1 )(VA) R.W.S.2(24)(X) OF THE ACT. 2. ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABOVE, THE MATTER SHOULD BE REMANDED TO THE AO T O VERIFY WHETHER THE SUM WAS DEPOSITED WITHIN 21 DAYS FROM THE END OF THE MONTH OF PAYMENT OF SALARY AS CONTEMPLATED UNDER THE PROVISIONS OF EMPLOYEES PROVIDENT FUNDS & MISCELLANEOUS PROVISIONS ACT, 1952 AND EMPLOYEES STATE INSURANCE ACT, 1948. 3. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE DISALLOWANCE OF ESTIMATED INTEREST EXP ENSES OF RS.25,98,8647 - U/S.36(1 )(III) OF THE ACT. 4. BOTH THE LOWER AUTHORITIES HAVE PASSED THE ORDERS WITHOUT PROPERLY APPRE CIATING THE FACTS AND THEY FURTHER ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THIS ACTION OF THE LOWER AUTH ORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JUSTICE AND THEREFORE DESERVES TO BE QUASHED. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING ACTION OF THE LD. AO IN LEVYING INTEREST U/S.234A/B/C OF THE ACT. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT THE LD. CIT - A ERRED IN CONFIRMING THE DISALLOWANCE FOR THE SUM OF RS. 2,08,324/ - UNDER SECTION 36(1)(VA) R.W.S. 2(24)(X) OF THE ACT. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPA NY AND ENGAGED IN THE BUSINESS 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 AMOUNTI NG TO RS. 3,01,624/ - AS PRESCRIBED UNDER THE RELEVANT ACT. THE DETAILS OF THE LATE PAYMENT S MADE OR NOT MADE ARE AS UNDER: SR. NO. MONTH EMPLOYEES CONTRIBUTION TO PROV. FUND (RS.) DUE DATE OF PAYMENT ACTUAL DATE OF PAYMENT 1 APRIL, 14 425 51 21/05/2014 09/06/2014 2 MAY, 14 35213 21/06/2014 25/06/2014 ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 3 - 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 27691 21/10/2014 06/11/2014 7 OCT., 14 23304 21/11/2014 N IL 8 NOV., 14 18438 21/18/2014 NIL 9 DEC., 14 15461 21/01/2015 NIL 10 JAN. ,15 13143 21/02/2015 NIL 11 FEB., 15 12318 21/03/2015 NIL 12 MAR., 15 10636 21/04/2015 NIL TOTAL 301624 5. THEREFORE, THE AO WAS OF THE VIEW THAT AS PER THE PROVISION OF SECTION 36(1)(VA) IF THE SUM OF EMPLOYEE CONTRIBUTION WAS NOT PAID TO THE RELEVANT FUND ON/BEFORE THE DUE DATE AS PRESCRIBED UNDER THE RELEVANT ACT THEN THE SUM WOULD BE TREATED AS INCOME OF THE ASSESSEE UNDER SECTION 2(24)(X) OF THE INCOM E TAX ACT. 5.1 THE AO FURTHER NOTED THAT THE ASSESSEE ITSELF DISALLOWED THE SUM OF RS. 93,300/ - IN ITS BOOKS OF ACCOUNT BUT FOR THE BALANCE OF RS. 2,08,324/ - (RS. 3,01,624 RS. 93,300) IT GIVES ITS CONSENT TO MAKE DISALLOWANCE IN PURSUANT TO THE PROVISI ON OF SECTION 36(1)(VA) R.W.S. 2(24)(X) OF THE ACT. 5.2 THE AO THEREFORE DISALLOWED THE SUM OF RS. 2,08,324/ - UNDER SECTION 36(1)(VA) AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE UNDER SECTION 2(24 ) (X) OF THE ACT. 6 . AGGRIEVED ASSESSEE PREFERR ED AN APP EAL BEFORE THE LD. CIT(A) . THE ASSESSEE BEFORE THE LD. CIT(A) SUBMITS THAT IT AGREED BEFORE THE AO FOR THE DISALLOWANCE/ ADDITION DUE TO WRONG UNDERSTANDING OF THE PROVISIONS OF LAW. 6.1 THE ASSESSEE FURTHER SUBMITS THAT EVEN THOUGH SUCH SUM OF EMPLOYEE CONTRIBUTION PAID TOWARDS ESIC WAS AFTER DUE DATE AS SPECIFIED UNDER THE ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 4 - RELEVANT ACT BUT IT SHOULD BE NOTED THAT THE PAYMENT WAS MADE BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME. THE ASSESSEE IN SUPPORT OF ITS CONTENTION REFERRED THE PROVISION OF S ECTION 43B OF THE ACT. 6.2 THE ASSESSEE ALSO SUBMITTED THAT THE PROVISIONS OF SECTION 43B DO NOT TALK ABOUT ONLY EMPLOYER S CONTRIBUTION BUT IT ALSO COVERS EMPLOYEE S CONTRIBUTION. THEREFORE THE SUM OF EMPLOYEE CONTRIBUTION TOWARDS ESI SHOULD NOT BE DISAL LOWED 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 TH E LD. CIT(A) DISREGARDED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE DID NOT PAY THE SUM OF EMPLOYEE CONT RIBUTION 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 RU NNING 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 CONSI DERED FROM THE PAYMENT OF SALARY OR THE MONTH FOR WHICH SALARY IS DUE HAS NOT BEEN CONSIDERED BY THE AUTHORITIES BELOW WHILE DISALLOWING THE SUM OF RS. 2,08,324/ - AS EMPLOYEE CONTRIBUTION TOWARDS ESIC BY APPLYING THE PROVISION OF SECTION 36(1)(VA) OF THE A CT. AS SUCH, THE PAYMENT OF THE EMPLOYEE CONTRIBUTION TOWARDS ESIC HAD BEEN MADE KEEPING IN MIND THE DUE DATE TO BE CONSIDERED FROM THE PAYMENT OF SALARY. ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 5 - 10 . ON THE OTHER HAND THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 11 . WE HA VE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE ARISES BEFORE US WHETHER THE PAYMENT OF EMPLOYEE CONTRIBUTION MADE BY THE ASSESSEE TOWARDS ESI ARE WITHIN THE DUE DATE AS SPECIFIED UNDER THE RELEVANT ACT. IN THIS REGA RD, WE NOTE THAT THE ASSESSEE HAS MADE THE PAYMENT OF EMPLOYEES CONTRIBUTION BEYOND THE DUE DATE AS SPECIFIED UNDER THE RELEVANT ACT. THEREFORE THE SAME CANNOT BE ALLOWED AS DEDUCTION. WE ALSO NOTE THAT THE IDENTICAL ISSUE HAS BEEN DECIDED VIDE ORDER DATED 15 TH OCT, 2018 BY THE HON BLE GUJARAT HIGH COURT IN THE CASE OF M/S CHECKMATE FACILITY AND ELECTRONICS SOLUTIONS PVT. LTD. V/S DCIT REPORTED IN TAX APPEAL NO.1256 OF 2018 AGAINST THE ASSESSEE. THE HEAD NOTE READS AS UNDER: DISALLOWANCE U/S 2(24)(X) R.W .S. 36(1)(VA) HELD THAT: - PROVISION REQUIRES AN EMPLOYER BEFORE PAYING THE EMPLOYEE HIS WAGES TO DEDUCT THE EMPLOYEE S CONTRIBUTION ALONG WITH THE EMPLOYER S OWN CONTRIBUTION AS FIXED BY THE GOVERNMENT. IT IS FURTHER REQUIRED THAT HE SHALL WITHIN FIFTEEN D AYS OF THE CLOSE OF EVERY MONTH PAY THE SAME TO THE FUND SUCH CONTRIBUTION AND ADMINISTRATIVE CHARGES. IF NOT SO PAID THEN NO DEDUCTION 36(1)(VA) 11.1 FROM THE ABOVE IT IS VERY CLEAR THAT THE PAYMENT UNDER SECTION 36(1)(VA) WOULD BE ALLOWED IN RESPECT TO THE PAYMENT OF EMPLOYEE CONTRIBUTION TOWARDS ESI IF SUCH PAYMENT IS MADE ON/BEFORE DUE DATE AS SPECIFIED UNDER THE RELEVANT ACT (I.E. 15 DAYS FROM THE MONTH FOR WHICH SALARY IS DUE). THUS THE PAYMENT MADE BY THE ASSESSEE ON ACCOUNT OF EMPLOYEE CONTRIBUTIO N TOWARDS ESI AFTER DUE DATE STANDS DISALLOWED IN VIEW OF THE JUDGMENT IN THE CASE OF M/S CHECKMATE FACILITY AND ELECTRONICS SOLUTIONS PVT. LTD. V/S DCIT (SUPRA). WE UPHOLD THE ORDER OF THE LOWER AUTHORITIES. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 12 . THE SECOND ISSUE RAISED BY THE ASSESSEE IS THAT THE LD. CIT - A ERRED IN CONFIRMING THE DISALLOWANCE MADE UNDER SECTION 36(1)(III) OF THE ACT. ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 6 - 13 . ON PERUSAL OF THE BALANCE SHEET , THE AO OBSERVED THAT THE ASSESSEE HAD GIVEN THE INTEREST FR EE LOAN TO ITS SUBSIDIARIES AMOUNTING TO RS. 7,16,59,975/ - AND ON THE OTHER HAND IT HAS ALSO CLAIMED INTEREST EXPENDITURE IN ITS BOOKS ACCOUNT FOR THE SUM OF RS. 2,10,55,848/ - ON THE FUNDS BORROWED BY IT. THE AO ALSO FOUND THAT THERE WAS NO INFORMATION FUR NISHED 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 CLOSING VALUE (A) AVERAGE BORROWED FUND 440852455 448613112 444732783.5 (C ) AVERAGE OF ADVANCE IN BALANCE SHEET 38124247 71659975 54892111 II (B) X (C) / (A) 2598864 13.2 THE AO THUS DISALLOWED THE PROPORTIONATE INTEREST EXPENSES FOR THE SUM OF RS. 25,98,864/ - UNDER SECTION 36(1)(III) OF THE ACT AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 14 . AGGRIEVED ASSESSEE PREFERRED AN APP EAL BEFORE THE LD. CIT(A) WHO CONFIRMED THE ORDER OF THE AO BY OBSERVING AS UNDER: ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 7 - 4.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT. THE AO HAS MADE DISALLOWANCES U/S. 36 (1)( III) OF RS.25,9 8,864/ - ON THE GROUND THAT APPELLANT HAS PAID INTEREST OF RS.2,10,55,848 / - ON BORROWED FUND BUT NOT CHARGED INTEREST ON ADVANCES OF RS.6,95,64,322 / - TO ITS SUBSIDIARY COMPANY. THE APPELLANT HAS SUBMITTED THAT THE AO HAS MADE THE DISALLOWANCE ON THE PRESUMP TION THAT INTEREST BEARING FUND IS USED FOR MAKING INTEREST FREE ADVANCES BUT THE CASH FLOW STATEMENT INDICATES THA T THERE IS NET CASH FLOW OF RS. 1,85,77,468 / - . I DO NOT AGREE WITH THE SUBMISSION OF THE APPELLANT, AS APPELLANT ON ONE HAND IS PAYING HUGE IN TEREST ON THE BORROWING AND ON THE OTHER HAND IT IS MAKING INTEREST FREE ADVANCE TO SUBSIDIARY COMPANY. THE BANK STATEMENT ALSO REVEALS THAT THE INTEREST FREE ADVANCE HAS BEEN MADE FROM THE LOAN ACCOUNTS ONLY, THEREFORE, THE AO PRESUMPTION IS FOUND TO BE CORRECT. AO WAS THEREFORE, JUSTIFIED TO MAKE THE DISALLOWANCE. THE GROUND OF APPEAL IS ACCORDINGLY DISMISSED . BEING AGGRIEVED BY THE ORDER OF THE LD. CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US. 15 . THE LD. AR BEFORE US SUBMITTED AS UNDER: AO F OUND THAT ASSESSEE HA S INCURRED 'INTEREST EXPENSES' AND HAS ALSO MADE 'INTEREST FREE ADVANCES' O F RS.5,48,92.111 - PG.7, PARA 5.2 OF ASST. ORDER ). HENCE, AO MADE DISALLOWANCE OF RS.25 , 98,864/ - BEING PROPORTIONATE INTEREST EXPENSES AND THE SAME WAS CONFIRME D BY CIT(A) AS WELL. INVESTMENT IN QUESTION HAS BEEN MADE OUT OF COMMERCIAL EXPEDIENCY': AT THE OUTSET, IT IS SUBMITTED THAT THE ADVANCES 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. BUILDE RS VS. CIT - 288 ITR 1 (SC)'. SUBSTANTIAL INTEREST FREE FUNDS: IN ANY CASE, AS AGAINST AVERAGE 'INTEREST FREE ADVANCE' OF RS. 5, 48,92,111/ - , ASSESSEE HAS AVERAGE 'INTEREST FREE FUNDS' OF RS. 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 RESP ECT OF INTEREST ON BORROWED FUNDS. RELIANCE IS PLACED ON FOLLOWINGS: > CIT VS. RELIANCE INDUSTRIES LTD. - 410 ITR 466 (SC); > CIT VS. TORRENT POWER LTD. - 363 ITR 474 (GUJ.); > CIT VS. SUZLON ENERGY LTD. - 354 ITR 630 (GUJ); > CIT VS. GUJARAT POWER CORPORATION LTD. - 352 ITR 58 3 (GUJ); > CIT V S. RELIANCE UTILITIES & POWER LT D. - 313 ITR 340 (BOM); > MUNJAL SALES CORPORATION VS. CI T - 298 ITR 298 (SC); ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 8 - > CIT VS. HITACHI H OME & LIFE SOLUTIONS (I). LTD. (2014) 41 TAXMANN.COM 540 ( GUJ); IN VIEW OF SUBSTANTIAL INTEREST FREE FUNDS, THE IMPUGNED DISALLOWANCE MADE U/S 36( 1 )(III) OF THE ACT IS UNJUSTIFIED. 16 . ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 1 7 . WE HAVE HEARD THE RIVA L CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE DISALLOWANCES OF THE INTEREST EXPENSES MADE BY THE AO ON ACCOUNT OF DIVERSION OF INTEREST BEARING FUND FOR NON - COMMERCIAL ACTIVITI ES. HOWEVER THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE ASSESSEE HAD OWN FUND WHICH EXCEEDS THE AMOUNT OF INTEREST FREE ADVANCES (RS. 7,16,59,975 / - ) PROVIDED TO ITS SUBSIDIARIES. AS PER LD. AR, THE AVERAGE OWN FUND OF THE ASSESSEE IS OF RS. 8,39,7 4,092 / - WHICH IS IN EXCESS OF THE INTEREST FREE ADVANCES. THE AVERAGE FUND OF THE ASSESSEE AS WORKED OUT BY THE LEARNED AR STANDS AS UNDER: PARTICULARS 31.03.15 31.03.14 PG. OF P/B SHARE CAPITAL 6,75,50,000 6,75,50,000 PG.19 RESERVES & SURPLUS ( 5,59,46, 370) (1,19,78,658) PG.19 ADVANCE FROM CUSTOMERS 4,93,25,967 5,14,47,244 PG.30 TOTAL 6,09,29,597 10,70,18,586 AVERAGE INTEREST FREE FUNDS= (6,09,29,597 + 10,70,18,586)/2 = RS.8,39,74,092/ - 17.1 ON PERUSAL OF THE AFORESAID WORKING, WE NOTE THAT THE ASS ESSEE 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 G OODS/ 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. IN HOLDING SO ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 9 - WE DRAW SUPPORT AND GUIDANCE FROM THE JUDGMENT OF HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. 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 L OANS 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 CONCE RNS, 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 , W E 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 H OWEVER, THE AMO UNT 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 AND HARYANA HIGH COURT IN CASE OF CIT VS MAX INDI A LTD. REPORTED IN 80 TAXMANN.COM 98 WHERE IT WAS HELD AS UNDER: - 5. WITH REGARD TO THE FIRST ISSUE QUA DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT, ADMITTEDLY, THE ASSESSEE COMPANY HAD GIVEN INTEREST FREE LOANS AND ADVANCES AMOUNTING TO RS. 2297.83 LACS UPTO THE END OF THE RELEVANT YEAR INCLUDING RS. 704 LACS DURING THE RELEVANT YEAR TO ITS THREE SUBSIDIARY COMPANIES. THE ASSESSING OFFICER DID NOT MAKE ANY DISALLOWANCE IN RESPECT OF EXPENDITURE INCURRED ON BORROWED FUNDS UNDE R SECTION 36(1)(III) OF THE ACT IN RELATION TO INTEREST FREE LOANS AND ADVANCES GIVEN TO THE SAID THREE SUBSIDIARY COMPANIES IN THE EARLIER YEARS. AFTER PERUSING THE CASH FLOW STATEMENT OF THE ASSESSEE COMPANY FOR THE ASSESSMENT YEAR IN QUESTION, THE TRIBU NAL OBSERVED THAT THE ASSESSEE COMPANY HAD RECEIVED SUBSTANTIAL PROCEEDS FROM PREFERENTIAL ISSUE OF SHARES CAPITAL AMOUNTING TO RS. 99999.98 LACS. IT HAD ALSO RECEIVED DIVIDEND INCOME OF RS. 166.13 CRORES FROM VARIOUS INVESTMENTS. AFTER GIVING INTEREST FRE E LOANS OF RS. 7.04 CRORES TO ITS SUBSIDIARY COMPANIES, THE ASSESSEE WAS LEFT WITH SURPLUS INTEREST FREE FUNDS OF RS. 53.86 CRORES WHICH WERE UTILIZED FOR GIVING INTEREST FREE ADVANCES. THUS, THERE WAS NO NEXUS OF INTEREST EXPENDITURE INCURRED DURING THE Y EAR WITH THE AFORESAID LOANS/ADVANCES GIVEN TO THE SUBSIDIARY COMPANIES, WARRANTING DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 10 - ACT. AFTER CONSIDERING THE RELEVANT PROVISIONS AND THE CASE LAW ON THE POINT, THE TRIBUNAL DELETED THE DISALLOWANCE OF INTEREST EXPENDITURE MADE UNDER SECTION 36(1)(III) OF THE ACT LEARNED COUNSEL FOR THE APPELLANT HAS NOT BEEN ABLE TO SHOW THAT THE FINDINGS RECORDED BY THE TRIBUNAL ARE ILLEGAL OR PERVERSE WARRANTING INTERFERENCE BY THIS COURT. 17.4 WE ALSO FIND GUIDANCE AND SUP PORT FROM BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 WHEREIN IT WAS HELD AS UNDER: - THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST - FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST - FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FI NDING OF FACT BOTH 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 VS. 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 . ITA NO. 181 0 /AHD/ 20 1 8 [ MORAKHIA COPPER AND ALLOYS PVT. LTD. VS. AC IT] AY 201 5 - 1 6 - 11 - 17.8 AT THE TIME OF HEARING, THE LEARNED AR HAS NOT BROUGHT ANYTHING ON RECORD SUGGESTING THAT THE IMPUGNED ADVANCES WERE GIVEN TO THE SISTER CONCERN IN THE COURSE OF THE BUSINESS. ACCORDINGLY, WE REJECT THE CONTENTION OF THE LEARNED AR FOR THE ASSESSEE. 17.9 IN VIEW OF THE ABOVE , WE DIRECT THE AUTHORITIES BELOW TO WORK OUT THE AMOUNT OF DISALLOWANCE TOWARDS INTEREST E XPENSES AFTER CONSIDERING/ADJUSTING THE OWN FUND INCLUDING RESERVE AVAILABLE TO THE ASSESSEE AS ON 31 - 3 - 2015. H ENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTY ALLOWED. 1 8 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. - SD - - SD - (WASEEM AHMED) ( MAHAVIR PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER (TRUE COPY) AHMEDABAD: DATED 11 / 08 /2020 S. K. SINHA THIS ORDER PR ONOUNCED IN OPEN COURT 11 / 08 /2020