AI Insights
The case involves an appeal by the Revenue against the order of the CIT(A) which had deleted certain disallowances made by the Assessing Officer (AO) under sections 14A and 36(1)(iii) of the Income Tax Act, 1961, for the Assessment Year 2012-13. The disallowances pertained to interest expenses related to investments yielding exempt income and advances to related parties. The CIT(A) had deleted the disallowances based on the finding that the assessee had sufficient interest-free funds to cover the investments and advances, a position supported by previous years' decisions and the judgment of the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. The Tribunal, after considering the facts and the legal precedents, upheld the CIT(A)'s decision and dismissed the Revenue's appeal.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 133492 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
6 year(s) 8 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
21-03-2023
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
09-01-2023
Assessment Year
2012-2013
Appeal Filed On
10-07-2016
Judgement Text
आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘A’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD ] ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SMT. MADHUMITA ROY, JUDICIAL MEMBER, JUDICIAL MEMBER ITA No.1839/Ahd/2016 Assessment Year :2012-13 DCIT, Cir.2(1)(1) Ahmedabad. Vs. M/s.Infinium Motors P.ltd. 909, 9 th Floor, Shitiratna Panchwati, CG Road Ahmedabad 380 006. 0 अपीलाथ / (Appellant) यथ /(Respondent) Assessee by : None Revenue by : Ms.Anam Benish, Sr.DR स ु नवाई क तार ख/Date of Hearing : 10/01/2023 घोषणा क तार ख /Date of Pronouncement: 22/03/2023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the Revenue against order passed by the ld.Commissioner of Income-Tax(A)-2, Ahmedabad [hereinafter referred to as “ld.CIT(A)”] dated 28.4.2016under section 250(6) of the Income Tax Act, 1961 ("the Act" for short)pertaining to Asst.Year2012-13. 2. None has come present on behalf of the assessee throughout the course of hearing before us, despite notices being served through ld.DR’s office on two occasions. It is clear that the assessee has chosen to remain unrepresented before us. Therefore, it was decided to proceed with adjudicating the present appeal ex parte. ITA No.1839/Ahd/2016 2 3. The effective grounds of appeal raised by the Revenue are as under: 1. The Ld.CIT(A) has erred in law and on facts in deleting disallowance of Rs. 1384018/- u/s 14A, without properly appreciating the facts of the case and the material brought on record. 2. The Ld.CIT(A) has erred in law and on facts in deleting to disallowance of Rs.1,54,69,412/- u/s 36(1)(iii) in respect of Advances to related parties, without properly appreciating the facts of the case and the material brought on record. 3. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 13,10,618/- u/s 36(l)(iii) in respect of interest on capital assets, without properly appreciating the facts of the case and the material brought on record. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 6. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 4. As is evident from the above, there are primarily two issues raised in the present appeal ; • relating to disallowance of expenses pertaining to earning of exempt income as per section 14A of the Act and • disallowance of interest expenses not incurred for business purpose asper section 36(1)(iii) of the Act. Both of which were deleted by the ld.CIT(A). 5. A perusal of the order of the authorities below reveal that the disallowance of expenses under section 14A of the Act related to a) interest expenses amounting to Rs.12,96,174/- computed as per Rule 8D(2)(ii) of the Act by the AO, and b) administrative expenses amounting to Rs.87,844/- computed as per section 8D(2)(iii) by the AO. ITA No.1839/Ahd/2016 3 Thus, in all disallowance of Rs.13,84,018/- was made under section 14A read with Rule 8D by the AO. The said disallowance pertained to investments made by the assessee viz. (i) in shares of GSCSC Ltd. of Rs.50,000/-, and (ii) advance given to partnership firm, M/s.Infi-beam Incorporation Ltd. of Rs.130,47,220/-; income from which, by way of income from partnership firmand dividend income from investments were exempt as per sections 10(2A) and 10(38) of the Act. 6. As regards disallowance of interest expenses under section 36(1)(iii) of the Act ,of Rs.1,54,69,412/- incurred allegedly for non- business purpose, the same pertained to advances made to related parties covered under section 40A(2)(b) of the Act on which no interest was charged by the assessee as under: i) Advances to Prem Call Cabs P.Ltd. of Rs.72,00,000/- ii) Other related concerns shown under the head long term loan advances, which were related parties covered under section 40A(2)(b) of the Act of Rs.14,42,44,816/- The AO worked out average advances so given and applying rate of interest at 12% thereon had worked out the disallowance of interest at Rs.1,54,69,412/- under section 36(1)(iii) of the Act. 7. Further, the disallowance of interest of Rs.13,10,618/- under section 36(1)(iii) of the Act pertained to advances made for capital asset amounting to Rs.1,09,21,815/-. 8. All the disallowances made pertainingto the interest disallowed under section 14A of the Act and interest disallowed under section ITA No.1839/Ahd/2016 4 36(1)(iii) of the Act, as noted above, were deleted by the ld.CIT(A) following his order passed in earlier years, primarily noting that the assessee had sufficient interest free funds for the purpose of making investments/advances, and the presumption therefore, was that the own interest free funds were used for the purpose of making investment/advances calling for no disallowance of interest either under section 14A or under section 36(1)(iii) of the Act. Reliance was placed on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., 313 ITTR 340 (Bom) in this regard. The relevant finding of the ld.CIT(A) while deleting the disallowance of interest under section 14A amou nting to Rs.12,96,174/- at para 3.3-3.5 of the order is as under: 3.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. It has been noticed that the identical issue has also been decided in appellant's own case in A. Y. 2010- 11 by the CIT(A) - VIII, Ahmedabad vide appeal No.CIT(A)- VIII/DCIT/Cir.4/32/2012-13 dated 30/01/2014 granting the partial relief to the appellant. Likewise, in A. Y. 2011-12 also, the identical issue has been decided by this office in Appeal No. CIT(A)-VIII/19/DC. Cir. 4/2014-15 and now CIT(A)-2/90/DC. Cir. 4/2014-15 dated 18/02/2016 giving the partial relief to the appellant. The relevant findings of the decision in A. Y. 2011-12 is reproduced hereunder:- "3.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance of interest and administrative expenditures u/s. 14A r.w. rule 8D amounting to Rs.14,34,248/- which included the interest of Rs. 13,55,415/- under Rule 8D(2)(ii) and administrative and other expenses @ 0.5% at Rs.78,833/- for the reason that the appellant has derived the exempt income and the interest bearing funds have been utilised for the purpose of investment in shares. The AO also observed that the appellant has not produced the status of day to day movement of funds so that segregation of nature of spendings can be ascertained. Thus, it was inferred that the appellant company has invested interest bearing funds for making the investment. Likewise, the office and administrative expenditure are also bound to happen in management of the investment in the shares.” ITA No.1839/Ahd/2016 5 3.4. On the other side, the appellant has submitted that the investments made in the GNFC were at the time of its inception as a precondition to avail term loan facility from GNFC. Further, the investment in shares of Infinity Drive Pvt. Ltd. and Infinium India Limited were since 2002-03. Further, no new investments have been made in the year under consideration. Thus, no interest bearing funds had been diverted for earning the exempt income during the year under consideration. The appellant also relied upon the decision of Id.CIT(A) - VIII, Ahmedabad in appellant's own case in A. Y. 2010-11 in Appeal No.CIT(A)-VIII/DCIT/Cir.4/32/2012-13 dated 30/01/2014, whereby the disallowance made under Rule 8D(2)(ii) was deleted, but the disallowance of the administrative expenditures under Rule 8D(2)(iii) have been confirmed. For ready reference, the decision of the Id. CIT(A) is reproduced as under:- "4.3 Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The appellant has submitted that the investment has been made at the time of inception of the company and on similar basis the disallowance made for AY 2008 - 09 has been deleted by CIT(A) and no further appeal has been made by the Department in ITAT. In the order for assessment year 2009 - 10 was passed ex parte and the disallowance has been upheld. The appellant has filed appeal against the order of CIT(A) before ITAT. I have gone through the facts and the order passed by my predecessor for A Y 2008 - 09. It is noted that the investment in tax-exempt assets has been the same since 2002 - 03. There is a marginal increase of Rs. 5,680/- during the year in the new investment. The appellant has claimed that the investments have -been made out of own funds in earlier years and no interest-bearing funds have been used. My predecessor has deleted the addition on the same ground in A. Y. 2008 - 09. He has held that since the appellant had sufficient interest free funds no disallowance on account of interest can be made under section 14 A. The disallowance on account of administrative expenses has, however, been upheld by him. The facts are identical to that year as the investment is almost unchanged and there is only a marginal increase of a very small amount and, therefore, it would be judicially prudent to follow the decision of my predecessor. Further it is also noted that the appellant has received large interest free funds during the year which would be sufficient to make the small investment of Rs.5680/-. therefore, no disallowance out of interest should be made for investment in tax-exempt assets on account of new investment made during the year. It is no disallowance out of interest shall be made1 under section 14 A for the investment made in tax-exempt assets. Regarding the disallowance out of administrative expenses by applying the third limb of rule 8D it is noted that the disallowance has been upheld in A Y 2008 - 09. The facts and circumstances are accordingly held that similar to this administrative predecessor. year and accordingly the expenses is upheld following the decision of my disallowance out of The ground of appeal is accordingly partly allowed." ITA No.1839/Ahd/2016 6 3.5. Having considered the facts and submission, it is noticed that no new investment in the year under consideration has been made by the appellant. Thus, no interest bearing funds have been utilised by the appellant for the purpose of investment in shares. Further, with regard to the investments made in the F.j Y.2002-03, it has been found that the same were out of its own funds and the AO has not controverted the contention of the appellant. Thus, following the decision of the Id. CIT(A) - VIII, Ahmedabad inj appellant's own case in A. Y. 2010-11 and the fact that the availability of the funds for making the investment in the preceding yeanf much more than the investment and also respectfully following the decisions / judgments of various courts as relied upon by the appellant, the disallowance in respect of interest under Rule 8D(2)(ii) is fdund not correct, and hence the same is deleted. 9. The findings of the ld.CIT(A) deleting the disallowance of interest under section 36(1)(iii) of the Act of Rs.1,54,69,412/- on account of advance made to related parties, at para 4.3-4.6 of the order is as under: 4.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance of interest u/s. 36(l)(iii) in respect of interest free advances granted to the parties on their average balance and such disallowance was worked out at Rs.1,54,69,412/-. The AO observed that in absence of any evidence proving nexus that the surplus funds available with the assessee was utilised for advance for the purpose of interest free advances, the claim of the assessee was not found acceptable. The AO did not accept the contention of the appellant that it had the interest free own funds of Rs.40,50,89,897/- in the form of share capital, reserves and surplus, interest free unsecured loans and interest free advance from customers. The AO observed that it was the general reply which does not depict the real fund movement during the year and availability of interest free funds. 4.4. On the other side, the appellant had submitted that the AO did not took the cognizance of the orders of the Id.CIT(A) deleting the disallowance on the ground that the issue has not attained finality due to pendency of appeals at the instance of the department before the ITAT. Further submitted that the appellant had succeeded in all appeals preferred by the department on this issue either before the Hon'ble ITAT right from A. Y. 20001-02 to A.Y. 2008-09 or before the Hon'ble High Court for A.Y. 2003-04 made at the instance of the department. The appellant also brought on record the findings of the Hon'ble ITAT in the case of appellant for A. Y. 2007-08 and A. Y.2008-09 which have been reproduced in the preceding paras of this order. The appellant also submitted that the majority of the advances were made for the purpose of business and in view of the judgment of Hon'ble Supreme Court in the case of S. A. Builders (Supra) no disallowance could be made. It was also submitted that the total advances made till end of the year were only at rs.15,14,44,816/- while the interest free funds were at Rs.40,50,89,897/-. Thus interest free funds were much higher than the ITA No.1839/Ahd/2016 7 interest free advances. It was also noticed that there was substantial fall in the interest free advances in the year under consideration. In fact these interest free advances were at Rs. 12,70,84,9257- as on 1/4/2011 which increased to Rs. 15.14.44.816/- as on 31/03/2012. Thus, there was increase of Rs.2,43,59,891/- in the interest free advances granted to the parties. It has also been noticed that in fact there were increase in the interest free funds at Rs.11,16,38,985/- in the year under consideration. Thus, the increase of interest free own funds were much higher than the increase in interest free advances during the year under consideration. 4.5. It is worth here to mention that the identical issue has also been examined in the preceding years and the disallowance of interest have been deleted more particularly in A. Y. 2011-12 in appellant's own case in Appeal No. CIT(A)-VIII/19/DC. Cir. 4/2014-15 and now CIT(A)-2/90/DC. Cir. 4/2014-15 dated 18/02/2016. Relevant extract of the decision is reproduced as under:- "2.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance of interest u/s. 36(l)(iii) of the I.T.Act, 1961 on the interest free loans and advances granted to the associated parties by working out the interest at the rate of 12% on the total loans and advances at Rs.5,43,41,363/-. The AO observed that the appellant has not been able to establish that the advances have been made only to the related or associated parties for a definite business purpose and also from interest free funds. It was also submitted that the appellant has paid the interest on the borrowings taken. This issue has also been raised in the preceding years assessment. 2.4. The appellant has submitted that during the year it has made the fresh interest free advances only of Rs.69,37,998/-. In fact, on the majority of the loans, it has charged the interest and interest income of Rs.30,13,333/- has been recorded in the books of accounts. Further, number of interest free tendings were the opening balances only and no new loans to them have been made in the year under consideration. Further, certain loans and advances were granted out of the interest free funds in the form of equity share capital, reserve and surplus, unsecured loans, advances from customers etc. totaling to Rs.29,34,50,912/-. Thus, the interest free funds were much more than the interest free lendings granted in the year under consideration. The details of such lending and availability of interest free funds are noted on Page No. 2 to 4 of the assessment order. Further, the appellant has also made the explanation with regard to the interest free loans and advances granted and has contended that this issue is identically involved in assessment year 2010-11, whereby the disallowance of interest has been deleted. 2.5. Having considered the facts and submission, it is noticed that this issue was identically involved in the preceding years in appellant's own case, and after examining the facts and submission, the Id. CIT(A) in the appellate order No.CIT(A)- ITA No.1839/Ahd/2016 8 VIII/DCIT/Cir.4/32/2012-13 dated 30/01/2014, has deleted the disallowance with the following observations. The relevant findings are reproduced hereunder:- "3.3 Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO noted that the appellant company has given interest free advances in loans to the related companies and other persons. As the appellant had incurred interest expenditure on the borrowed funds the AO disallowed proportionate interest expenditure corresponding to the interest free advances and loans. The appellant has submitted that it had sufficient interest-free funds and therefore no disallowance of interest is called for. After examining all aspects of the issue it is noted that the appellant had interest-free funds of Rs. 13.22 crores during the year which consisted of Share Capital of Rs. 10.1 crore, the reserves and surplus of 48.36 Lacs, interest-free loan from Infinium Automall Private Limited of Rs. 33.87 lakhs and interest-free loan from Vishal Mehta of Rs. 2.22 crores. The interest-free advances that have apparently been given are totalling to Rs. 4.09 crores. The appellant has also given a chart indicating individual advance and the reason as to why the interest disallowance was not called for. After considering all the facts and circumstances it would be appropriate to discuss each advance separately for the sake of clarity and understanding. The discussion is as under: - Name of the party Amount Discussion NSI Advances 3534000 The appellant has submitted that advance has been given to associate concern promoted by the appellant company and therefore it was a business advance. The appellant has explained that it has made a joint- venture with GNFC for doing the business in the software line. The contention of the appellant that this was a business advance is not acceptable as there is no business Link with the party. As discussed in the preceding para that the appellant had sufficient interest free funds. The appellant had received certain additional funds during the year out of share capital infusion and it has also received interest-free loan from Vishal Mehta amounting to Rs. 2.22 crores. In view of these facts it had sufficient interest free funds available ITA No.1839/Ahd/2016 9 with it. Considering The ratio laid down by Honourable Bombay High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340, the presumption would be that the amount has been advanced out of the interest-free funds. The disallowance made by the AO on account of this advance is therefore, directed to be deleted. Aviskar Travels 130665 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. B. Sairam 20000 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Chola Advance 12011 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and ITA No.1839/Ahd/2016 10 no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Devdutta Motors 200000 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Harshadbhai 25151 The appellant has submitted that this amount has been disallowed on account of wrong grouping. Considering the fact that it is on account of wrong grouping and also considering the availability of sufficient interest-free fund with the appellant no disallowance should be made on account of this advance. Lalibhai 11500 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Laxmiben C. Mehta 100000 As discussed in the preceding para that the appellant had sufficient ITA No.1839/Ahd/2016 11 interest free funds. The appellant had received certain additional funds during the year out of share capital infusion and it has also received interest-free loan from Vishal Mehta amounting to Rs. 2.22 crores. In view of these facts it had sufficient interest free funds available with it. Considering The ratio laid down by Honourable Bombay High Court in the case of Reliance Utilities, the presumption would be that the amount has been advanced out of the interest-free funds. The disallowance made by the AO on account of this advance is therefore directed to be deleted. M.M. Thakkar 1695000 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Reliance Gen Ins. Cop. Ltd. 1254979 The appellant has submitted that this was a business advance to the insurance company which is granting insurance on the vehicles sold by the appellant and is pending adjustment. This advance was given in A.Y. 2009- 10. The advance cannot be considered to be an advance without business motive. The appellant is apparently getting the insurance done from the party and it is in the nature of business transaction. Once there is a business expediency no disallowance of interest under section 36 can be made. The disallowance is accordingly directed to be deleted on this issue. ITA No.1839/Ahd/2016 12 Rukmani Travels 100000 The appellant has submitted that it is an advance to travel agency from which vehicles are hired for business purposes like taxies and representing opening balance since A.Y. 2008-09 and was not disputed upto A.Y. 2008- 09. The advance cannot be considered to be an advance without business motive. The appellant is apparently hiring of vehicles from the party and it is in the nature of business transaction. Once there is a business expediency no disallowance of interest under section 36 can be made. The disallowance is accordingly directed to be deleted on this issue. Sanghvi Finance 350000 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Suresh Mohanlal Lakhiani 500000 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. VLM 16289 The appellant has submitted that this ITA No.1839/Ahd/2016 13 Construction advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Infinity Drive P.Ltd. 29671278 The appellant has submitted that this was a business advance and to a sister concern engaged in the same line of business in which appellant is engaged and having business relationship with the appellant. The contention of the appellant that this was a business advance is not acceptable as there is no business Link with the party. However the appellant has submitted a detailed account of all the transactions with the party. The account show that initially the appellant has borrowed from the party and there was a credit balance in the account however at the end of the year that is in the month of February the account was showing a debit balance. The appellant had advanced money to the party. The amount of Rs. 2.96 crores that has been given has been explained by the appellant as out of the interest-free funds. As discussed in the preceding para that the appellant had sufficient interest free funds. The appellant had received certain additional funds during the year out of share capital infusion and it has also received interest-free loan from Vishal Mehta amounting to Rs. 2.22 crores. In view of these facts it had sufficient interest free funds available with it. Considering The ratio laid down by Honourable Bombay High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340, the presumption ITA No.1839/Ahd/2016 14 would be that the amount has been advanced out of the interest-free funds. The disallowance made by the AO on account of this advance is therefore directed to be deleted. Infinium India Ltd – Naroda (30000) The appellant has submitted that this was not an advance but a liability and therefore, need to be considered as interest free fund available with the appellant. The contention of the appellant is factually correct and therefore, the disallowance on this entry cannot be made. Infinium Communications 2034432 The appellant has submitted that this advance represents opening balance both in A.Y. 2009-10 and 2010-11 and not disputed upto A.Y. 2008-09. Addition so made in A.Y. 2008-09 has since been deleted by the Ld. CIT (A) and affirmed by the ITAT. Since the advance was given in earlier year and no disallowance of interest was made in that year considering the availability of funds, no disallowance of interest can be made in the current year as well. The disallowance on this advance is therefore directed to be deleted. Rio Motors 1529873 The appellant has submitted that this was a business advance and to a sister concern engaged in the same line of business in which appellant is engaged and having business relationship with the appellant. The contention of the appellant that this was a business advance is not acceptable as there is no business Link with the party. However the appellant has submitted a detailed account of all the transactions with the party. As discussed in the preceding para that the appellant had sufficient interest free funds. The appellant had received certain additional funds during the year out of share capital infusion and it has also received interest-free loan from Vishal Mehta amounting to Rs. 2.22 crores. In view of these facts it had ITA No.1839/Ahd/2016 15 sufficient interest free funds available with it. Considering the ratio laid down by Honourable Bombay High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340, the presumption would be that the amount has been advanced out of the interest-free funds. The disallowance made by the AO on account of this advance is therefore directed to be deleted. V. M. Associate (187811) The appellant has submitted that this was not an advance but a liability and therefore, need to be considered as interest free fund available with the appellant. The contention of the appellant is factually correct and therefore, the disallowance on this entry cannot be made Vishal A. Mehta 1090937 The appellant has submitted that advance was given against the interest free funds received from him. The contention of the appellant is correct the party has given interest free loan to the appellant and therefore there is no question of charging any interest from the same party. It can at the most the return of loan or it can be adjusted in the same account. If both the entries advance and borrowing are adjusted there would be that borrowings this account. Accordingly no disallowance can be made. Total 40958304 In view of the above discussion the entire disallowance made by the AO on account of interest free advances is directed to be deleted. The ground of appeal is accordingly, allowed." 2.6. Further, during the year under consideration, it has been noticed that even the appellant had much more interest free funds in the year under consideration and there was increase in such interest free funds to the tune of Rs.12,07,15,736/- which is much more than the interest free lendings at Rs.69,37,998/-. Thus, considering the appellant's submission and following the order of the Id. CIT(A) in appellant's own case discussed above and various binding decisions and judgments cited above, the disallowance of interest made by the AO is found not correct and hence the same is deleted. ITA No.1839/Ahd/2016 16 2.7. The ground of appeal is accordingly allowed." 10. Finding of the ld.CIT(A) deleting the disallowance of interest amounting to Rs.13,10,618/-, on account of advances made for capital work-in-progress, at para 5.3- 5.4 of the order is as under: 5.3. Decision: “I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance of interest u/s. 36(1)(iii) of the I. T. Act of Rs. 13,10,618/- in respect of capital advances of Rs.1,09,21,815/- stating that the interest bearing borrowings have been utilised for the purpose of business and the appellant has failed to prove by demonstrating evidences that on the date on which investment to the capital assets were made, the assessee had interest free funds and there was no diversion of interest free funds for acquisition of capital assets. 5.4. On going through the details and submission, it has been claimed that the capital advance of Rs. 16.95 lacs to Shri M.M.Thakkgr and Rs.1.26 lacs to Reliance General Insurance Co. Ltd. have been made in the preceding years and not granted in the year under consideration. Further, the advances to all the parties were made for the purpose of acquisition of the assets of business of the appellant and the same has been granted out of the interest free funds. As submitted by the appellant in respect of the common written submission which is reproduced in the preceding ground i.e. Ground No.3, that interest free funds in the form of share capital, reserves and surplus besides interest free unsecured loans and advances from customers were at Rs.40,50,89,897/- as on 31/03/2012 as against such balances at Rs.29,34,50,912/- as on 31/03/2011 with increase of Rs.11,16,38,985/- were much higher than the capital advances granted by the appellant. Thus, for the reasons discussed for deletion of the disallowance of interest made in Ground No. 3 as above, the disallowance in respect of interest on capital advances in the year under consideration is also deleted. Thus, the ground of appeal is allowed.” 11. We have noted from the above that the ld.CIT(A) deleted the disallowance of interest u/s 14A of the Act noting the fact that own interest free funds of the assessee by way of share capital and Reserves amounted to Rs.40,50,89,897/- which was far in excess of investments made of Rs.2.029 crores and in earlier years identical disallowance was deleted finding sufficiency of own funds for making investment. ITA No.1839/Ahd/2016 17 12. Similarly interest disallowed u/s 36(1)(iii) of the Act of Rs.1,54,69,412/- was deleted noting sufficiency of own funds of Rs.40.50 Crs for the advances of Rs.15.14 Crs. He noted that while the own funds increased during the year by Rs.11.16 Crs , the interest free advances increased during the year by Rs.2.70 Crs. Ld.CIT(A) has followed his order for preceding year, i.e 2011-12 wherein identical disallowance of interest was deleted following Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340, noting sufficiency of own funds for making advances. 13. The disallowance of interest u/s 36(1)(iii) of the Act of Rs.13,10,618/- on account of capital advances was deleted by the Ld.CIT(A) following the same reasoning of availability of sufficient own funds for making the advances. 14. This finding of fact by the Ld.CIT(A) of availability of sufficient own funds for making investments/advances has not been controverted by the Revenue before us. Also, it is settled law that where sufficient own funds are available, presumption is that own funds have been used for the purpose of making the advances/investments, calling for no disallowance of interest whether under section 14A or under section 36(1)(iii) of the Act. The Hon’ble apex court in the case of Commissioner of Income Tax (LTU) vs Reliance Industries Ltd. C.A No. 37 of 2019 & Others dated 23- 03-19 has settled the law in this regard. 15. In view of the above, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance of interest under section 14A amounting to Rs.13,84,018/-; disallowance of interest under ITA No.1839/Ahd/2016 18 section 36(1)(iii) amounting to Rs.1,54,69,412/-and Rs.13,10,618/-. Thus, grounds no.1 to 3 raised by the Revenue are accordingly rejected. 16. In the result, the appeal of the Revenue is dismissed. Order pronounced in the Court on 22 nd March, 2023 at Ahmedabad. Sd/- Sd/- (MADHUMITA ROY) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 22/03/2023
Other Referred Cases
CIT Vs. Reliance Utilities & Power Ltd., 313 ITR 340 (Bom)
Laws Referred To
Income Tax Act, 1961
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