M/S GENERAL AERODYNAMICS P. LTD., MUMBAI V. ITO - 2(1)(2), MUMBAI

ITA 252/MUM/2021

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 0389 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: SMC
• Assessment Year: 2016-2017
• Appeal Filed On: 08-03-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SMITA NAIR
• Keywords: Opportunity of being heard; Period of limitation; Proportionate interest; Cost of acquisition; Commercial expediency; Time period of passing order; Revenue expenditure; Set aside
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “SMC” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI SANDEEP SINGH KARHAIL (JUDICIAL MEMBER) ITA No. 252/MUM/2021 Assessment Year: 2016-17 M/s General Aerodynamics Pvt. Ltd., Ali Chambers, Tamarind Lane, Fort, Mumbai-400023. Vs. Income Tax Officer-2(1)(2), Room No. 543, Aayakar Bhavan, M.K. Road, Churchgate-400021. PAN No. AABCG 4629 H Appellant Respondent Assessee by : Mr. Hitesh Jain, AR Revenue by : Mrs. Smita Nair, DR Date of Hearing : 21/06/2022 Date of pronouncement : 05/07/2022 ORDER PER OM PRAKASH KANT, AM This appeal by the assessee is directed against order dated 04/02/2020 passed by the Ld. Commissioner of Income- tax(Appeals)-4, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2016-17, raising following grounds: 1. The Learned Commissioner of Income Tax (Appeals) ("Ld. CIT (A)") has erred in confirming the disallowance of interest expense of Rs 25,38,825/ the borrowed funds have been utilized for non the appellant. On the basis of the circumstances and facts of the case, this addition ought to be deleted. 2. Without prejudice to ground no 1, the Ld. CIT (A) erred in confirming th instead of interest expenditure pertaining to borrowed funds used for non business purpose) On the basis of the circumstances and facts of the case, addition, if 3. Without prejudice to ground 1 and 2 above, the Ld. CIT(A) has erred in confirming action of the 'AO in not allowing capitalization of interest disallowed u/s 36(1)(iii) along with the value of investments. On the of the case, interest disallowed, ought to be allowed to be capitalized. 2. At the outset, we may like to mention that out delay of 339 days in filing the appeal. As form prescribed for filing the appeal, the order of the Ld. CIT(A) was served upon the assessee on 04/02/2020 and therefore appeal before the ITAT was due within 60 days i.e. 5/03/2020, whereas the appeal has been filed on 09/03/2021. We f M/s General Aerodynamics Pvt. of Rs 25,38,825/- u/s 36(1) iii) of the Act, on the assum the borrowed funds have been utilized for non-business purpose of the appellant. On the basis of the circumstances and facts of the case, this addition ought to be deleted. Without prejudice to ground no 1, the Ld. CIT (A) erred in confirming the disallowance u/s 36(1) (iii) at instead of ₹9,74,983/- being proportionate disallowance of interest expenditure pertaining to borrowed funds used for non business purpose) On the basis of the circumstances and facts of the case, addition, if any, ought to be restricted to ₹9,74,983/ Without prejudice to ground 1 and 2 above, the Ld. CIT(A) has erred in confirming action of the 'AO in not allowing capitalization of interest disallowed u/s 36(1)(iii) along with the value of investments. On the basis of the circumstances and facts of the case, interest disallowed, ought to be allowed to be capitalized. the outset, we may like to mention that Registry out delay of 339 days in filing the appeal. As per Form form prescribed for filing the appeal, the order of the Ld. CIT(A) was served upon the assessee on 04/02/2020 and therefore appeal before the ITAT was due within 60 days i.e. 5/03/2020, whereas the appeal has been filed on 09/03/2021. We find that in view of the M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 2 u/s 36(1) iii) of the Act, on the assumption that business purpose of the appellant. On the basis of the circumstances and facts of the Without prejudice to ground no 1, the Ld. CIT (A) erred in e disallowance u/s 36(1) (iii) at ₹25,38,825/- being proportionate disallowance of interest expenditure pertaining to borrowed funds used for non- business purpose) On the basis of the circumstances and facts of ₹9,74,983/- Without prejudice to ground 1 and 2 above, the Ld. CIT(A) has erred in confirming action of the 'AO in not allowing capitalization of interest disallowed u/s 36(1)(iii) along with the basis of the circumstances and facts of the case, interest disallowed, ought to be allowed to be Registry has pointed Form No. 36 i.e. the form prescribed for filing the appeal, the order of the Ld. CIT(A) was served upon the assessee on 04/02/2020 and therefore appeal before the ITAT was due within 60 days i.e. 5/03/2020, whereas the ind that in view of the order dated 10/01/2022 of the Hon’ble Supreme Court in Miscellaneous Application (C) No. 3 of 2020, wherein it is directed that period from 15/03/2020 till 28/02/2022 shall stand excluded for limitation as may be prescribed under any general or special laws in respect of all judicial or by the assessee is wi the appeal is admitted for adjudication. 3. Briefly stated, engaged in the business of providing loans to corporate and bill discounting activity. For the year un filed return of income on 15/10/2016, declaring total income at The Ld. Assessing Officer assessment order dated 14/12/2018, pas of the Income-Tax Act M/s General Aerodynamics Pvt. order dated 10/01/2022 of the Hon’ble Supreme Court in Miscellaneous Application No. 21 of 2022 in suo moto No. 3 of 2020, wherein it is directed that period from 15/03/2020 till 28/02/2022 shall stand excluded for limitation as may be prescribed under any general or special laws in respect of all judicial or quasi judicial proceedings, the appeal filed by the assessee is within extended limitation period. the appeal is admitted for adjudication. facts of the case are that the assessee was engaged in the business of providing loans to corporate and bill discounting activity. For the year under consideration, the assessee ncome on 15/10/2016, declaring total income at Assessing Officer scrutinized the return of income and in the assessment order dated 14/12/2018, passed under section 14 Tax Act, 1961 (in short ‘the Act’), out of the claim of M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 3 order dated 10/01/2022 of the Hon’ble Supreme Court in moto writ petition No. 3 of 2020, wherein it is directed that period from 15/03/2020 till 28/02/2022 shall stand excluded for the purpose of limitation as may be prescribed under any general or special laws in judicial proceedings, the appeal filed thin extended limitation period. Accordingly, facts of the case are that the assessee was engaged in the business of providing loans to corporate and bill der consideration, the assessee ncome on 15/10/2016, declaring total income at Nil. the return of income and in the sed under section 143(3) , out of the claim of the interest expenditure of interest expenditure to of ₹25,38,825/-. The Ld. CIT(A) also upheld the disallowance. Aggrieved, the assessee is an appeal before the grounds as reproduced above. 4. Before us the Ld. counsel containing pages 1 to 49 and upon. 5. The ground No. ₹25,38,825/-, which the investments and not for the purpose of the business. 5.1 The facts qua th engaged in business of giving loans to corporate. The assessee borrowed money and durin interest of ₹55,53,061/ M/s General Aerodynamics Pvt. he interest expenditure of ₹55,53,061/-, he restricted claim of interest expenditure to ₹30,14,226/-and disallowed balance amount . The Ld. CIT(A) also upheld the disallowance. assessee is an appeal before the Tribunal s reproduced above. Ld. counsel of the assessee filed containing pages 1 to 49 and also filed copy of the decisions relied The ground No. 1 of the appeal relates to entire disallowance of , which the Assessing Officer held as related to investments and not for the purpose of the business. The facts qua the issue in dispute are that assessee engaged in business of giving loans to corporate. The assessee and during the year under consideration incurred 61/-. The assessee further given advances out of M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 4 , he restricted claim of and disallowed balance amount . The Ld. CIT(A) also upheld the disallowance. Tribunal, raising the of the assessee filed a paperbook filed copy of the decisions relied of the appeal relates to entire disallowance of held as related to investments and not for the purpose of the business. e issue in dispute are that assessee was engaged in business of giving loans to corporate. The assessee g the year under consideration incurred . The assessee further given advances out of the money borrowed and earned interest income observed that assessee had a opening investment of in debt oriented mutual fund and made a further investment of ₹40,00,000/- during the year under consideration and thus total investment in debt oriented mutual fund as on 31/03/2016 ₹1,70,00,000/-. The corresponding to money invested in debt mutual fund, being for non-business purposes out of the interest incurred, interest of utilized for business purposes proportionate disallowance of interest for fund invested for non interest for business purpose made by the reproduced as under: M/s General Aerodynamics Pvt. the money borrowed and during the year under consideration interest income ₹46,73,102/-. The Assessing Officer observed that assessee had a opening investment of in debt oriented mutual fund and made a further investment of during the year under consideration and thus total investment in debt oriented mutual fund as on 31/03/2016 . The Ld. Assessing Officer held that interest money invested in debt mutual fund, being for business purposes, is not allowable and accordingly out of the interest incurred, interest of ₹30,14,226/ ed for business purposes (i.e. advancing loans) proportionate disallowance of interest amounting to for non-business purposes. The said working of interest for business purpose made by the Assessing Office reproduced as under: M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 5 during the year under consideration Assessing Officer observed that assessee had a opening investment of ₹1,30,00,000/- in debt oriented mutual fund and made a further investment of during the year under consideration and thus made total investment in debt oriented mutual fund as on 31/03/2016 at held that interest money invested in debt mutual fund, being for is not allowable and accordingly, he allowed 30,14,226/- for the fund advancing loans) and made amounting to ₹ 25,38,825/- The said working of Assessing Officer is = amount of fund used for business purpose amount of fund borrowed = (2,80,40,460/5,16,58,492) =₹30,14,226/- 6. The Ld. Assessing Officer non-business purposes. own capital he, also rejected the contention of the assessee that investment in debt mutual funds on the decisions of the Hon’ble Madras High C finding of the Ld. Assessing Officer “In this case, the facts are sufficiently clear to warrant the finding that there has been a diversion. The deduction u/s.36(1)(iii) is an allowable expenditure as long as the amounts borrowed were used for the purpose assessee's business. Further, the capi should not only be invested in assessee's Own business but also that the amounts borrowed continues to remain in the business. It is further seen from the details submitted that assessee has not provided one to one nexus on the funds borrowed utilized. Analysis of balance sheet clearly indicates the assessee kept entire funds available as a common pool of funds and in absence of any separate accounting entries in the books for funds M/s General Aerodynamics Pvt. fund used for business purpose amount of fund borrowed X gross interest debited in profit and loss account ) X 55,53,061 Assessing Officer held that money was business purposes. In absence of link of said investment from also rejected the contention of the assessee that investment in debt mutual funds was out of own capital on the decisions of the Hon’ble Madras High Court Assessing Officer is reproduced as under: In this case, the facts are sufficiently clear to warrant the finding that there has been a diversion. The deduction u/s.36(1)(iii) is an allowable expenditure as long as the amounts borrowed were used for the purpose assessee's business. Further, the capital borrowed should not only be invested in assessee's Own business but also that the amounts borrowed continues to remain in the business. It is further seen from the details submitted that assessee has not provided one to one nexus on the funds borrowed and funds utilized. Analysis of balance sheet clearly indicates the assessee kept entire funds available as a common pool of funds and in absence of any separate accounting entries in the books for funds M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 6 gross interest debited in profit and loss held that money was diverted for In absence of link of said investment from also rejected the contention of the assessee that was out of own capital. He relied ourt. The relevant as under: In this case, the facts are sufficiently clear to warrant the finding that there has been a diversion. The deduction u/s.36(1)(iii) is an allowable expenditure as long as the amounts borrowed were used tal borrowed should not only be invested in assessee's Own business but also that the amounts borrowed continues to remain in the business. It is further seen from the details submitted that assessee has not and funds utilized. Analysis of balance sheet clearly indicates the assessee kept entire funds available as a common pool of funds and in absence of any separate accounting entries in the books for funds borrowed and funds utilized the only conclusion is f utilized from common pool of funds. Hence proportionate interest is required to be disallowed in accordance with section 36(1)(iii). In this regard, reliance is placed on the decision of Court (2011 TIL 687 was held that the assessee is not entitled to claim interest expenditure on the borrowed funds which were diverted to non business objects. Further reliance is placed on Venkateswaran (Mad) 222 ITR 163 K. Somasundaram & Brothers Vs CI When Department established the fact of diversion of borrowed funds for non had sufficient capital and the diversion is out of such funds cannot exist - Disallow 6.1 The Ld. CIT(A) upheld the disallowance observing as under : “4.2 I have carefully gone through the assessment order as well as submission of the appellant. The appellant is engaged in the business of giving loans. The sources of funds available with the appellant as per the balance sheet is share capital of 22.95 lacs a 213.77 lacs. As against this the appellant has a long term borrowings of R5.16 crore. Thus the borrowed fund of the appellant is more than 30 times that of its own funds. In this situation it is incorrect on the part of the appellant to say that investment in mutual fund amounting to R1,70,00,000 has been made by using its own non interest being fund. From the facts of the case it is clear that the appellant has hardly any M/s General Aerodynamics Pvt. borrowed and funds utilized the only conclusion is funds are utilized from common pool of funds. Hence proportionate interest is required to be disallowed in accordance with section 36(1)(iii). In this regard, reliance is placed on the decision of Madras High Court (2011 TIL 687-HC-MAD-IT) CIT Vs R Mohan wh was held that the assessee is not entitled to claim interest expenditure on the borrowed funds which were diverted to non business objects. Further reliance is placed on CIT Vs M.S. Venkateswaran (Mad) 222 ITR 163 K. Somasundaram & Brothers Vs CIT (Mad) 238 ITR 939 where in it was held that When Department established the fact of diversion of borrowed funds for non-business purposes, the presumption that assessee had sufficient capital and the diversion is out of such funds cannot Disallowance justified.” Ld. CIT(A) upheld the disallowance observing as under : I have carefully gone through the assessment order as well as submission of the appellant. The appellant is engaged in the business of giving loans. The sources of funds available with the appellant as per the balance sheet is share capital of 22.95 lacs and reserve and surplus of 213.77 lacs. As against this the appellant has a long term borrowings of R5.16 crore. Thus the borrowed fund of the appellant is more than 30 times that of its own funds. In this situation it is incorrect on the part of ant to say that investment in mutual fund amounting to R1,70,00,000 has been made by using its own non interest being fund. From the facts of the case it is clear that the appellant has hardly any M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 7 borrowed and funds utilized the only conclusion is funds are utilized from common pool of funds. Hence proportionate interest is required to be disallowed in accordance with section 36(1)(iii). Madras High where in it was held that the assessee is not entitled to claim interest expenditure on the borrowed funds which were diverted to non CIT Vs M.S. Venkateswaran (Mad) 222 ITR 163 K. Somasundaram & in it was held that When Department established the fact of diversion of borrowed business purposes, the presumption that assessee had sufficient capital and the diversion is out of such funds cannot Ld. CIT(A) upheld the disallowance observing as under : I have carefully gone through the assessment order as well as submission of the appellant. The appellant is engaged in the business of giving loans. The sources of funds available with the appellant as per the nd reserve and surplus of 213.77 lacs. As against this the appellant has a long term borrowings of R5.16 crore. Thus the borrowed fund of the appellant is more than 30 times that of its own funds. In this situation it is incorrect on the part of ant to say that investment in mutual fund amounting to R1,70,00,000 has been made by using its own non interest being fund. From the facts of the case it is clear that the appellant has hardly any own funds to its credit and it is managing its entire busin well as its investment and asset from borrowed funds only. It has been held by the Hon'ble Supreme Court in the case of S A Builders Ltd. 158 taxman 74 that the allowability of interest on borrowed loan will depend on facts of a particula stated in the assessment order that only proportionate disallowance of interest expenditure is required to be done. It is also seen that in the assessment order the AO has taken an adverse view only on the proportion of interest which he had thought to be relatable to activities such as loans and advances and investment in mutual funds. It is further seen that out of total interest expenditure of disallowed an amount of the appellant is in the business of giving loans and therefore, the activity of loans and advances cannot be described as being not related to the business of the appellant. 4.3 Thus the only issue to be decided now is whether investment i mutual funds amounting to business or as a measure of commercial expediency. The appellant is not an investment company and therefore investing funds from borrowed fund does not make the purposes of business or commercial expediency. Considering the fact that the AO has himself given substantial relief to the appellant by not disallowing the entire amount of interest paid, I see no reason to interfere with the order of are accordingly dismissed and the addition of confirmed.” M/s General Aerodynamics Pvt. own funds to its credit and it is managing its entire business activities as well as its investment and asset from borrowed funds only. It has been held by the Hon'ble Supreme Court in the case of S A Builders Ltd. 158 taxman 74 that the allowability of interest on borrowed loan will depend on facts of a particular case. In this case, the AO himself has stated in the assessment order that only proportionate disallowance of interest expenditure is required to be done. It is also seen that in the assessment order the AO has taken an adverse view only on the n of interest which he had thought to be relatable to activities such as loans and advances and investment in mutual funds. It is further seen that out of total interest expenditure of ₹55,53,061/ disallowed an amount of ₹25,38,825/- However, as mentioned earlier, the appellant is in the business of giving loans and therefore, the activity of loans and advances cannot be described as being not related to the business of the appellant. Thus the only issue to be decided now is whether investment i mutual funds amounting to ₹70 lacs can be said to be for the purposes of business or as a measure of commercial expediency. The appellant is not an investment company and therefore investing ₹1.70 lacs in mutual funds from borrowed fund does not make the case for either the purposes of business or commercial expediency. Considering the fact that the AO has himself given substantial relief to the appellant by not disallowing the entire amount of interest paid, I see no reason to interfere with the order of the AO. The grounds of appeal no. 1,2 and 3 are accordingly dismissed and the addition of ₹25,38,825/ M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 8 ess activities as well as its investment and asset from borrowed funds only. It has been held by the Hon'ble Supreme Court in the case of S A Builders Ltd. 158 taxman 74 that the allowability of interest on borrowed loan will r case. In this case, the AO himself has stated in the assessment order that only proportionate disallowance of interest expenditure is required to be done. It is also seen that in the assessment order the AO has taken an adverse view only on the n of interest which he had thought to be relatable to activities such as loans and advances and investment in mutual funds. It is further ₹55,53,061/- he has ntioned earlier, the appellant is in the business of giving loans and therefore, the activity of loans and advances cannot be described as being not related to the Thus the only issue to be decided now is whether investment in ₹70 lacs can be said to be for the purposes of business or as a measure of commercial expediency. The appellant is not ₹1.70 lacs in mutual case for either the purposes of business or commercial expediency. Considering the fact that the AO has himself given substantial relief to the appellant by not disallowing the entire amount of interest paid, I see no reason to the AO. The grounds of appeal no. 1,2 and 3 ₹25,38,825/- is 7. The assessee before us contended that since the fund of ₹1,28,22,497/- was lying idle in current account as on 31/03/2015 no interest would be earned and therefore the assessee decided to invest the said ideal fund in mutual funds and therefore according to the assessee said investment was for the purpose of the business only. The Ld. counsel to prove that funds have been borrowed for the purpose of the business or profession 7.1 The Ld. counsel Assessing Officer are distinguishable as in those cases borrowed funds were advanced to/utili whereas in the case of the assessee assessee in its own name and has mutual funds, instead of keeping it into current account, which does not give any income. M/s General Aerodynamics Pvt. The assessee before us contended that since the fund of was lying idle in current account as on 31/03/2015 would be earned and therefore the assessee decided to invest the said ideal fund in mutual funds and therefore according to the assessee said investment was for the purpose of the business Ld. counsel further submitted that the assessee only nee to prove that funds have been borrowed for the purpose of the business or profession and not actual deployment. Ld. counsel submitted that decisions relied upon by the are distinguishable as in those cases borrowed funds were advanced to/utilized by the assessee for whereas in the case of the assessee, funds have been retained in its own name and has been temporarily invested into instead of keeping it into current account, which does not give any income. M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 9 The assessee before us contended that since the fund of was lying idle in current account as on 31/03/2015, would be earned and therefore the assessee decided to invest the said ideal fund in mutual funds and therefore according to the assessee said investment was for the purpose of the business further submitted that the assessee only need to prove that funds have been borrowed for the purpose of the submitted that decisions relied upon by the are distinguishable as in those cases borrowed for relative party funds have been retained by the temporarily invested into instead of keeping it into current account, which does 7.2 Without prejudice to the above, has requested for restricting the disallowance to Ld. counsel drawn our attention to position of availability of own fund. The said chart reproduced in is extracted as under : Particulars Share Capital Reserves and Surplus Total Investment in Mutual Fund 7.3 He further submitted that 16 has held that firstly, own funds of the assessee need to be adjusted against investment and can only be liable to disallowance under section 36(1)(iii) of the He submitted that Ld. CIT(A) in assessment year 2015 quantified ₹55,95,152/ on which was held to be liable for disallowance. The submitted that following the finding of the Ld. CIT(A) M/s General Aerodynamics Pvt. Without prejudice to the above, in ground No. has requested for restricting the disallowance to ₹ drawn our attention to position of availability of own fund. The said chart reproduced in para 9 of his written submission is extracted as under : As on 31.03.2015 As on 31.03.2014 2,95,000/- 76,35,020/- Total Investment in Mutual Fund 79,30,020/- submitted that Ld. CIT(A) in assessment year 2015 held that firstly, own funds of the assessee need to be adjusted against investment and excess investment over own funds, can only be liable to disallowance under section 36(1)(iii) of the He submitted that Ld. CIT(A) in assessment year 2015 55,95,152/- out of ₹1,30,00,000/- investment, interest which was held to be liable for disallowance. The following the finding of the Ld. CIT(A) M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 10 ground No. 2 the assessee ₹9,74,983/-. The drawn our attention to position of availability of own of his written submission As on 31.03.2014 2,95,000/- 71,09,848/- 74,04,848/- Ld. CIT(A) in assessment year 2015- held that firstly, own funds of the assessee need to be investment over own funds, can only be liable to disallowance under section 36(1)(iii) of the Act. He submitted that Ld. CIT(A) in assessment year 2015-16 has investment, interest which was held to be liable for disallowance. The Ld. counsel following the finding of the Ld. CIT(A) in assessment year 2015-16, in the case of the assessee disallowance of ₹9,74,983/- could only be made. The relevant submission of the Ld. counsel are reproduced as under: “15. During the year under consideration, the appellant has made an further investment in mutual funds of Rs. 40,00,000/ the A.Y 2015-16 has been increased by Rs. 5,25,172/ 31.03.2015 minus Rs. 74,04,848/ which interest disallowance to be made, ought to be computed as under: a) On Rs. 55,95,152/ 16 plus b) On Rs. 34,74,828/ Rs. 5,25,172/- 16. Based on the above, the amount of proportionate disallowance to be made comes to Rs.9,74,983/ divided by total borrowed funds of Rs. 5,16,58,492 multiplied by interest paid of Rs. 55,53,061/-). 17. In view of above, we request your Honour to restrict the disallowance to Rs. 9,74,983/ as against Rs. 25,38,825 mad 7.4 Further, without prejudice to ground No. counsel further submitted that while allowing the proportionate M/s General Aerodynamics Pvt. 16, in the case of the assessee disallowance of could only be made. The relevant submission of the Ld. are reproduced as under: During the year under consideration, the appellant has made an further investment in mutual funds of Rs. 40,00,000/- and its shareholders funds during 16 has been increased by Rs. 5,25,172/- (i.e. Rs. 79. 31.03.2015 minus Rs. 74,04,848/- as on 31.03.2014) and therefore, the amount on which interest disallowance to be made, ought to be computed as under: a) On Rs. 55,95,152/- as quantified by Hon'ble CIT(A) in order for AY 2015 Rs. 34,74,828/- (being Rs. 40,00,000/- additional investment minus being the increase in internal accruals in A.Y 2015 16. Based on the above, the amount of proportionate disallowance to be made comes to Rs.9,74,983/- (ie investment out of borrowed funds of Rs. 90,69,980/ divided by total borrowed funds of Rs. 5,16,58,492 multiplied by interest paid of 17. In view of above, we request your Honour to restrict the disallowance to Rs. 9,74,983/ as against Rs. 25,38,825 made by the Assessing Officer.” without prejudice to ground No.1 and 2, the further submitted that while allowing the proportionate M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 11 16, in the case of the assessee disallowance of could only be made. The relevant submission of the Ld. During the year under consideration, the appellant has made an further and its shareholders funds during (i.e. Rs. 79.30,020/- as on as on 31.03.2014) and therefore, the amount on which interest disallowance to be made, ought to be computed as under: as quantified by Hon'ble CIT(A) in order for AY 2015- additional investment minus being the increase in internal accruals in A.Y 2015-16) 16. Based on the above, the amount of proportionate disallowance to be made of borrowed funds of Rs. 90,69,980/- divided by total borrowed funds of Rs. 5,16,58,492 multiplied by interest paid of 17. In view of above, we request your Honour to restrict the disallowance to Rs. ” 1 and 2, the Ld. further submitted that while allowing the proportionate interest for fund utili has not considered amount of Healthcare Ltd., which was grouped as doubtful debt and further ignored amount of account. The Ld. counsel statement available on page 14 of the paperbook. The submitted that accordingly the funds utilised for business purpose works out to ₹4,07,23,801/ Assessing Officer for computation of interest allowable to the assessee. The Ld. counsel allowable to the assessee as under: =amount of fund used for business purpose amount of fund borrowed = (4,07,23,801/5,16,58,492) =₹43,77,630/- M/s General Aerodynamics Pvt. interest for fund utilized for business purpose, the Assessing Officer has not considered amount of ₹51,00,000/- advanced to M/s Elder , which was grouped as doubtful debt and further ignored amount of ₹75,83,341/- which was lying in the bank Ld. counsel drawn over attention to audited financial statement available on page 14 of the paperbook. The submitted that accordingly the funds utilised for business purpose ,07,23,801/- instead of ₹2,80,40,460/ for computation of interest allowable to the Ld. counsel submitted revised working of interest allowable to the assessee as under: fund used for business purpose amount of fund borrowed X gross interest debited in profit and loss account ) X 55,53,061 M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 12 Assessing Officer advanced to M/s Elder , which was grouped as doubtful debt and further which was lying in the bank drawn over attention to audited financial statement available on page 14 of the paperbook. The Ld. counsel submitted that accordingly the funds utilised for business purpose 2,80,40,460/- taken by the for computation of interest allowable to the submitted revised working of interest gross interest debited in profit and 7.5 The Ld. counsel disallowance would be restricted to ₹43,77,630/-) 7.6 Without prejudice supporting the ground No. three, the proportionate disallowance allowed to capitalize along with the value of the investment. In support, he relied on the decision of the Hon’ble Madras High Court in the case of Trishul Investment 305 ITR 434 Tribunal Mumbai bench ITA No. 236/Mum/2010 8. The Ld. DR on the other authorities and submitted that assessee has failed to justify as the proportionate interest disallowed is related to the business activity M/s General Aerodynamics Pvt. Ld. counsel accordingly submitted that in that case disallowance would be restricted to ₹11,75,431 /- prejudice to ground one and two of the appeal, supporting the ground No. three, the Ld. counsel disallowance under section 36(1)(iii) should be e along with the value of the investment. In e relied on the decision of the Hon’ble Madras High Court Trishul Investment 305 ITR 434 and decision of the Mumbai bench in the case of DCIT vs. Sh Fritz D Silva in ITA No. 236/Mum/2010. on the other hand relied on finding of lower submitted that assessee has failed to justify as the proportionate interest disallowed is related to the business activity M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 13 accordingly submitted that in that case - (₹55,53,061 – to ground one and two of the appeal, submitted that 1)(iii) should be e along with the value of the investment. In e relied on the decision of the Hon’ble Madras High Court and decision of the Sh Fritz D Silva in finding of lower submitted that assessee has failed to justify as the proportionate interest disallowed is related to the business activity of advancing loan and therefore disallowance has been accordance with law. 9. We have heard relevant material on record. 9.1 As far as ground concerned i.e. the investment business activity because funds being ideal for invested for earning income, the argument of establish that investment in mutual fund is part of the business activity of the assessee. The assessee has cle engaged in advancing loan to corporate and bill discounting profit loss account, the assessee advancing loan only and not the business activity i been invested. The funds have not been invested due to business or M/s General Aerodynamics Pvt. of advancing loan and therefore disallowance has been accordance with law. We have heard rival submission of the parties and perused the relevant material on record. r as ground No. 1 of the appeal of the assessee investment made in debt mutual fund business activity because funds being ideal for invested for earning argument of the Ld. counsel does not in any manner establish that investment in mutual fund is part of the business activity of the assessee. The assessee has clearly admitted that it was advancing loan to corporate and bill discounting the assessee has shown interest income from and this activity of investment in mutual fund is not the business activity irrespective of the fact that ideal fund been invested. The funds have not been invested due to business or M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 14 of advancing loan and therefore disallowance has been made in rival submission of the parties and perused the of the appeal of the assessee is in debt mutual fund was part of business activity because funds being ideal for invested for earning not in any manner establish that investment in mutual fund is part of the business arly admitted that it was advancing loan to corporate and bill discounting. In the interest income from investment in mutual fund is rrespective of the fact that ideal funds have been invested. The funds have not been invested due to business or commercial expediency, and income on ideal funds borrowed money utilized in said investment is disallowed. ground No. 1 of the appeal of the assessee accordingly 9.2 As far as ground No. failed before the lower were deployed in investment which the claim of utilisation of own capital and reserves surplus towards investment in debt mutual fund of accepted. The ground No. accordingly dismissed. 9.3 The alternative plea made in ground however, convincing. While taking calculation of the funds utilised for business purpose consider the claim of the assessee of M/s General Aerodynamics Pvt. commercial expediency, and same have been invested for earning income on ideal funds. Therefore, interest corresponding to borrowed money utilized in said investment is disallowed. of the appeal of the assessee accordingly As far as ground No. 2 of the appeal is concerned, ower authorities to justify as how the own funds were deployed in investment in debt mutual fund and in absence of which the claim of utilisation of own capital and reserves surplus investment in debt mutual fund of ₹1.30 crores The ground No. 2 of the appeal of the assessee accordingly dismissed. The alternative plea made in ground No. 2 of the assessee convincing. While taking calculation of the funds utilised business purpose, the Ld. Assessing Officer was required to consider the claim of the assessee of ₹51 lakh representing under M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 15 invested for earning Therefore, interest corresponding to borrowed money utilized in said investment is disallowed. The of the appeal of the assessee accordingly is dismissed. of the appeal is concerned, the assessee authorities to justify as how the own funds in debt mutual fund and in absence of which the claim of utilisation of own capital and reserves surplus 1.30 crores cannot be of the appeal of the assessee is of the assessee, is convincing. While taking calculation of the funds utilised was required to 51 lakh representing under the doubtful debt and amount of interest allowable was required to be considered after including above two amounts. Accordingly, we a contention of the assessee. We set aside the order of the Ld. CIT(A) on the issue in dispute and restore the matter to the file of the Ld. AO for re-computation of the amount of the interest allowable in terms of section 36(1)(iii) in view of th amount of ₹ 51 lakh representing doubtful debt and representing as amount lying in bank account business purposes. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. In the result, the ground No. 2 of the appeal is partly allowed for statistical purposes. 9.4 The ground no. assessee is seeking disallowed under section 36(1)(iii) M/s General Aerodynamics Pvt. the doubtful debt and ₹75,83,341/- lying in bank account. amount of interest allowable was required to be considered after including above two amounts. Accordingly, we a f the assessee. We set aside the order of the Ld. CIT(A) on the issue in dispute and restore the matter to the file of the Ld. computation of the amount of the interest allowable in terms of section 36(1)(iii) in view of the plea of including the 51 lakh representing doubtful debt and representing as amount lying in bank account for funds utilized for . It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. In the result, the of the appeal is partly allowed for statistical purposes. The ground no. 3 being raised as alternative remedy seeking capitalization of the amount of interest under section 36(1)(iii) of the Act. Here the assessee is M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 16 lying in bank account. The amount of interest allowable was required to be considered after including above two amounts. Accordingly, we accept this f the assessee. We set aside the order of the Ld. CIT(A) on the issue in dispute and restore the matter to the file of the Ld. computation of the amount of the interest allowable in e plea of including the 51 lakh representing doubtful debt and ₹75,83,341/- for funds utilized for . It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. In the result, the of the appeal is partly allowed for statistical purposes. being raised as alternative remedy. The of the amount of interest Here the assessee is claiming that if interest corresponding to investment in mutual funds is not allowed as revenue expenditure, then same should be treated as cost of acquisition of the said mutual fund. We are of the opinion that the issue of claim of the interest amount as cost of acquisition will arise at the time of the sale of the said mutual funds and therefore issue is premature at this stage, adjudicating upon the said issue accordingly dismissed. 10. In the result, the appeal of the assessee is allowed statistical purposes. Order pronounced in the Court on 05 Sd/- (SANDEEP SINGH KARHAIL JUDICIAL MEMBER Mumbai; Dated: 05/07/2022 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 1. The Appellant 2. The Respondent. M/s General Aerodynamics Pvt. claiming that if interest corresponding to investment in mutual funds is not allowed as revenue expenditure, then same should be treated as cost of acquisition of the said mutual fund. We are of the he issue of claim of the interest amount as cost of acquisition will arise at the time of the sale of the said mutual funds and therefore issue is premature at this stage, therefore upon the said issue. The ground No. 3 accordingly dismissed. In the result, the appeal of the assessee is allowed ounced in the Court on 05/07/2022. Sd/- SANDEEP SINGH KARHAIL) (OM PRAKASH KANT JUDICIAL MEMBER ACCOUNTANT Copy of the Order forwarded to : M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 17 claiming that if interest corresponding to investment in mutual funds is not allowed as revenue expenditure, then same should be treated as cost of acquisition of the said mutual fund. We are of the he issue of claim of the interest amount as cost of acquisition will arise at the time of the sale of the said mutual funds therefore, we are not No. 3 of the appeal is In the result, the appeal of the assessee is allowed partly for OM PRAKASH KANT) MEMBER 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// M/s General Aerodynamics Pvt. BY ORDER, (Sr. Private Secretary ITAT, Mumbai M/s General Aerodynamics Pvt. Ltd. ITA No. 252/M/2021 18 Sr. Private Secretary) ITAT, Mumbai