Eldorado Biotech Private Limited, Ahmedabad V. The Deputy Commissioner of Income Tax, Circle-2(1)(1), Ahmedabad

ITA 190/AHD/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2255 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 23-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Assessee Lawyers: B N RAO; DIPEN SUKHADIA
• Keywords: Business income; Proportionate interest
• Section: 14A

Judgement Text

, MH MHMH MH IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD L LL LK KK KOZJH OZJH OZJH OZJH OLHE OLHE OLHE OLHE VGEN VGEN VGEN VGEN] YS[KK ] YS[KK ] YS[KK ] YS[KK LNL; ,O LNL; ,O LNL; ,O LNL; ,O EK/ EK/EK/ EK/KQFERK KQFERK KQFERK KQFERK JKW; JKW;JKW; JKW;] U; ] U;] U; ] U;KF KFKF KF;D ;D;D ;D LNL; LNL; LNL; LNL; DS LE{KA DS LE{KA DS LE{KA DS LE{KA BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SMT MADHUMITA ROY, JUDICIAL MEMBER INCOME TAX APPEAL NO. 190/AHD/2017 ( / ASSESSMENT YEAR : 2012-13) ELDORADO BIOTECH PVT. LTD., 5, JAGNIRMAN SOCIETY, B/H. NAVRANG HIGH SCHOOL, NARANPURA, AHMEDABAD. / VS. DCIT, CIRCLE 2(1)(1), AHMEDABAD 380 014. ./ ./ PAN/GIR NO. : AABCE 1885 F ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI B. N. RAO & DIPEN SUKHADIA, A.R. / RESPONDENT BY : SHRI LALIT P. JAIN, SR. D.R. / DATE OF HEARING 03/10/2018 !'# / DATE OF PRONOUNCEMENT 01/11/2018 $% / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL)-2, AHMEDABAD [CIT(A) IN SHORT] VIDE APPEAL NO.CIT(A)-2 /462/DC. CIR.2(1)(1)/2014-15 DATED 22-11-2016 ARISING IN THE MATTER OF ASSESSMENT ORDER PASSED UNDER S.143(3) OF THE INCOME TAX ACT, 1961(HERE-IN-AFTER REFERRED TO AS 'THE ACT') DATED 24.02.2015 RELEVANT TO ASSESSMENT YEAR (AY) 2012-13. ITA NO.190/AHD/2017 ELDORADO BIOTECH PVT. LTD. VS. DCIT A.Y. 2012-13 - 2 - 2. THE ASSESSEE BEFORE US FILED MODIFIED GROUNDS OF APPEAL AS DETAILED UNDER: 1. THE LD CIT(A) ERRED IN UPHOLDING THE DISALLOWANC E OF RS.80,27,631/- U/S 36(I)(III) OF THE ACT. 2. THE LD CIT(A) ERRED IN HOLDING DISALLOWANCE OF R S.263368/- U/S 14A OF THE ACT. 3. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT HE HAS BEEN INSTRUCTED NOT TO PRESS THE GROUNDS NO.2. THER EFORE WE DISMISS THE SAME AS NOT PRESSED. 4. FIRST GROUND RAISED BY THE ASSESSEE IN THIS APPE AL IS THAT LD CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 80,27,6 31/- U/S 36(I)(III) OF THE ACT ON ACCOUNT OF DIVERSION OF INTEREST BEARING FUND. 5. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IN TH E PRESENT CASE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF DEALING IN GOVT. SECURITIES, SHARES AND MUTUAL FUNDS ETC. THE AO DUR ING THE YEAR OBSERVED THAT THE ASSESSEE HAS GIVEN INTEREST FREE LOANS AND ADVANCES OF RS.19,32,82,201/- TO ITS DIRECTOR NAMELY SHRI AJAY PATEL. ON THE OTHER HAND, THE ASSESSEE HAS INCURRED INTEREST EXPENSES O F RS. 1,55,82,388/- ONLY IN THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE AO WAS OF THE VIEW THAT THE INTEREST BEARING FUND HAS BEEN DIVERT ED TO NON INTEREST BEARING LOANS AND ADVANCES. ACCORDINGLY, THE AO WOR KED OUT THE AMOUNT OF PROPORTIONATE INTEREST OF RS. 80,27,631/- AND DI SALLOWED U/S 36(1)(III) OF THE ACT. THE AMOUNT DISALLOWED WAS ADDED BACK T O THE TOTAL INCOME OF THE ASSESSEE. ITA NO.190/AHD/2017 ELDORADO BIOTECH PVT. LTD. VS. DCIT A.Y. 2012-13 - 3 - 6. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO LD CIT (A) WHO CONFIRMED THE ORDER OF AO BY OBSERVING AS UNDER: 2.3. DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, ASSESSMENT ORDER AND SUBMISSIONS OF THE APPELLANT. THE AO WAS MADE THE DISALLOWANCE OF INTEREST OF RS.80,27,631/- OUT OF T HE INTEREST CLAIM OF RS1,46,10,267/- PAID TO J. M. FINANCIAL PRODUCTS PVT. LTD. U/S.36(1)(III) OF THE ACT. IT HAS BEEN NOTICED THAT THE APPELLANT HAD GIVEN THE INTEREST FREE LOANS AND ADVANCES OF RS. 19,32,52 201/- TO IT S DIRECTOR NAMELY MR. AJAY PATEL WHO WAS A BENEFICIAL SHARE HOLDER HAVING 26% OF SHARE HOLDING OF THE APPELLANT COMPANY. IF HAS BEEN OBSER VED BY THE AO THAT THE APPELLANT COULD NOT EXPLAINED THE BUSINESS PURP OSE OF THE LENDINGS TO THE DIRECTOR AND STATED THAT IT WAS GIVEN FOR TH E PERSONAL PURPOSES OF THE DIRECTOR. THE APPELLANT INSPITE OF THE SPECIFIC REQUISITION DID NOT PROVIDE THE DETAILS TO STATE THAT THOSE LENDINGS TO THE DIRECTOR WERE NOT MADE FOR HIS PERSONAL NEEDS BUT FOR THE PURPOSE OF BUSINESS. 2.4. ON THE OTHER SIDE, IT HAS BEEN NOTICED THAT T HE APPELLANT HAD TAKEN THE INTEREST BEARING LOANS FROM OUTSIDE PARTI ES AND HAD THE FINANCIAL COST OF RS.1,55,82,388/- WHICH INCLUDED T HE INTEREST ON LOAN AMOUNTING TO RS.1,46,10,267/- GIVEN TO J.M. FINANCI AL PRODUCTS LTD. THUS IT HAS BEEN OBSERVED THAT ON THE ONE HAND THE APPELLANT HAS BORROWED THE MONEY FROM J.M. FINANCIAL PRODUCT ON W HICH INTEREST HAS BEEN PAID AND ON THE OTHER SIDE SUCH INTEREST FREE LOANS HAVE BEEN GRANTED TO THE DIRECTOR SHRI AJAY PATEL WITHOUT CHA RGING OF ANY INTEREST. 2.5. THE APPELLANT'S SUBMISSION HAVE BEEN CAREFULL Y CONSIDERED. IT HAS BEEN CLAIMED THAT THE APPELLANT HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT AND THE LOANS AND ADVANCES TO SHR I AJAY PATEL HAVE BEEN GRANTED OUT OF THE SAME. IT HAS GIVEN A SUMMAR IZED DETAILS ABOUT THE INTEREST FREE FUNDS AND UTILIZATION THEREOF AS PER THE ANNEXURE-A TO THE AO'S SUBMISSION BUT THE SAME IS NOT ACCEPTED FO R THE REASON THAT FIRST OF ALL THE APPELLANT OUGHT TO HAVE EXPLAIN TH E REASONS OF TAKING THE LOANS FROM J.M. FINANCIAL PRODUCTS LTD. AND OTHER P ARTIES WHEN IT WAS ALREADY IN POSSESSION OF THE INTEREST FREE FUNDS. A S A PRUDENT BUSINESS MAN IT WOULD NOT TAKE THE INTEREST FREE BORROWINGS, HAD IT IN POSSESSION OF THE SUFFICIENT TUNAS. BECAUSE OF GRANTING THE IN TEREST FREE ADVANCES TO SHRI AJAY PATEL WHICH WERE NOT FOR THE BUSINESS PUR POSE, THERE REMAINED NO LIQUID FUNDS AVAILABLE WITH THE APPELLA NT TO FULFILL THE WORKING CAPITAL REQUIREMENTS AND HENCE, IT HAD TAKE N THE BORROWINGS ITA NO.190/AHD/2017 ELDORADO BIOTECH PVT. LTD. VS. DCIT A.Y. 2012-13 - 4 - FROM THE AFORESAID PARTIES ON WHICH INTEREST HAS BE EN PAID. THE LOANS AND ADVANCES TO SHRI AJAY PATEL HAS BEEN GRATED DUE TO FULFILL HIS PERSONAL REQUIREMENTS AND THE SAME WOULD NOT BE TER MED AS BUSINESS EXIGENCY. THEREFORE IT WAS OUTRIGHT FAVOUR TO THE D IRECTOR BY GRANTING THE LOANS OBVIOUSLY FROM THE INTEREST BEARING BORRO WINGS. THE APPELLANT HAS NOT PROVIDED THE ULTIMATE SOURCE OF THE LENDING S TO THE DIRECTOR IN SUPPORT OF ITS CONTENTION THAT THE SAME HAVE BEEN M ADE OUT OF THE INTEREST FREE FUNDS. THE APPELLANT HAS SUBMITTED TH E FIRST LEVEL SOURCE OF THE LENDINGS AS PER ANNEXURE - A TO THE AO, BUT THE EARLIER LAYERS OF THE FUNDS HAVE NOT BEEN EXPLAINED. IN FACT THE APPELLAN T DID NOT HAVE THE LIQUID FUNDS TO GRANT THE LOANS TO THE DIRECTOR AND THEREFORE IT HAS TAKEN THE INTEREST BEARING BORROWINGS. 2.6. IN VIEW OF THE AFORESAID DISCUSSION, THE INTE REST EXPENSES ON THE BORROWINGS WHICH WERE UTILIZED FOR THE PURPOSE OF L ENDINGS TO SHRI AJAY PATEL CANNOT BE SAID TO BE ON ACCOUNT OF THE BUSINE SS EXIGENCY AND THEREFORE, SUCH INTEREST BURDEN CANNOT BE ALLOWED A S DEDUCTION OUT OF THE BUSINESS INCOME OF THE APPELLANT WHEN THE APPEL LANT HAD PAID THE INTEREST ON THE LENDINGS IN CONSEQUENCE TO THE SAME THE APPELLANT COULD HAVE CHARGED THE INTEREST FROM SHRI AJAY PATEL BUT THE SAME HAS NOT BEEN DONE AY THE APPELLANT. THEREFORE, THE INTEREST DISALLOWANCE MADE BY THE AO. IS FOUND CORRECT ONE JUSTIFIED AND HENCE THE SAME IS CONFIRMED. BEING AGGRIEVED BY THE ORDER OF LD CIT(A) ASSESSEE IS IN APPEAL BEFORE US. 7. THE LD AR BEFORE US FILED A PAPER BOOK RUNNING F ROM PAGES 1-43 AND SUBMITTED THAT THE OWN FUND OF THE ASSESSEE EXC EEDS THE AMOUNT OF LOANS AND ADVANCES. THE ASSESSEE IN SUPPORT OF HIS CLAIM DREW OUR ATTENTION ON THE FINANCIAL STATEMENT PLACED ON PAGE 10 OF THE PAPER BOOK. THE RELEVANT EXTRACT OF THE SAME READS AS UNDER: ITA NO.190/AHD/2017 ELDORADO BIOTECH PVT. LTD. VS. DCIT A.Y. 2012-13 - 5 - SR N. PARTICULARS NOTE NO. 31.MAR.2012 AMOUNT (RS.) 31.MAR.2011 AMOUNT (RS.) 1. 1. EQUITY AND LIABILITIES SHAREHOLDERS FUNDS (A) SHARE CAPITAL (B) RESERVE AND SURPLUS (C) MONEY RECEIVED AGAINST SHARE WARRANTS 2 3 2,41,580,125 2,266,250 239,313,875 - 229,579,235 2,266,250 227,312,985 - 7.1 THE LD AR FURTHER SUBMITTED THAT THE ASSESSEE H AS GIVEN AN INTEREST FREE ADVANCES OF RS. 19.32 CRORES ONLY. THEREFORE I T IS CLEAR THAT THE OWN FUND OF THE ASSESSEE EXCEEDS THE AMOUNT OF INTEREST FREE ADVANCES. IN VIEW OF THE ABOVE, THE LD AR SUBMITTED THAT NO DISA LLOWANCE ON ACCOUNT OF DIVERSION OF INTEREST BEARING FUND CAN BE MADE. 8. ON THE CONTRARY, THE LD DR SUBMITTED THAT THE AS SESSEE HAS INCURRED INTEREST EXPENSES OF RS.1.05 CRORES WHICH WERE CLAI MED IN THE PROFIT AND LOSS ACCOUNT. HAD THE ASSESSEE NOT DIVERTED ITS FUN D BY GIVING ADVANCE TO THE DIRECTOR, IT SHOULD NOT HAVE INCURRED SO MUCH O F THE INTEREST EXPENSES. THE LD. DR VEHEMENTLY SUPPORTED THE ORDERS OF AUTHO RITIES BELOW. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS UNDISPUTED FACT THAT THE OWN FUND OF THE ASSESSEE EXCEEDS THE AMOUNT OF ADVANCES MADE TO THE DIRECTOR S WITHOUT ANY INTEREST AS DISCUSSED ABOVE. THEREFORE, IN OUR CONS IDERED VIEW, THE QUESTION OF MAKING ANY DISALLOWANCE ON ACCOUNT OF D IVERSION OF INTEREST BEARING FUND DOES NOT ARISE. THUS, A PRESUMPTION CA N BE DRAWN THAT THE ASSESSEE HAS GIVEN INTEREST-FREE LOANS AND ADVANCES TO ITS DIRECTOR OUT OF ITS FUND. IN HOLDING SO, WE FIND SUPPORT AND GUIDAN CE FROM THE JUDGMENT ITA NO.190/AHD/2017 ELDORADO BIOTECH PVT. LTD. VS. DCIT A.Y. 2012-13 - 6 - OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 WHEREIN IT WAS HELD AS UND ER:- 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 IN TEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE TH IS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT(A) AND TRIBUNAL SIMILARLY, WE ALSO RELY ON 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 REPRODU CED BELOW:- WHERE ASSESSEE'S CAPITAL, PROFIT RESERVES, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN TAX-FRE E SECURITIES, IT WOULD HAVE TO BE PRESUMED THAT INVESTMENT MADE BY THE ASS ESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AVAILABLE WITH ASSESSEE AND NO DISALLOWANCE WAS WARRANTED U/S 14A. SIMILARLY, WE ALSO FIND SUPPORT FROM THE JUDGMENT O F HONBLE 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 MEE T TAX FREE INVESTMENTS, THEY ARE PRESUMED TO BE MADE FROM INTEREST FREE FUN DS AND NOT LOANED FUNDS AND NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A IN VIEW OF THE ABOVE PROPOSITION, WE HOLD THAT NO D ISALLOWANCE OF INTEREST EXPENSE CLAIMED BY THE ASSESSEE CAN BE MADE ON ACCO UNT OF DIVERSION OF THE FUND. HENCE, WE REVERSE THE ORDER OF THE AUTHOR ITIES BELOW. THE AO IS DIRECTED TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.190/AHD/2017 ELDORADO BIOTECH PVT. LTD. VS. DCIT A.Y. 2012-13 - 7 - 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 01/11/2018 SD/- SD/- E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; OLHE OLHE OLHE OLHE VGEN VGEN VGEN VGEN U;KF;D LNL; YK S[KK LNL; U;KF;D LNL; YK S[KK LNL; U;KF;D LNL; YK S[KK LNL; U;KF;D LNL; YK S[KK LNL; (MADHUMITA ROY) (WASEEM AHMED ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 01/11/2018 PRITI YADAV, SR.PS !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. & '( ) / CONCERNED CIT 4. ) () / THE CIT(A)-2, AHMEDABAD. 5. ,-. //'( , '(# , 12$&$ / DR, ITAT, AHMEDABAD 6. .34 5 / GUARD FILE. % & / BY ORDER, &'#! / //TRUE COPY// (/& )* ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD