Poona Constructtion Machinery & Products Pvt.Ltd, Pune V. Deputy Commissioner of Income tax, Pune

ITA 493/PUN/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 5459 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-10-2020
• Assessment Year: 2012-2013
• Appeal Filed On: 28-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: IS DIRECTED AGAINS T PASSED

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE VIRTUAL COURT BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA NO. 493/PUN/2017 / ASSESSMENT YEAR : 2012-13 POONA CONSTRUCTION MACHINERY AND PRODUCTS PVT. LTD., UNIVERSAL HOUSE, NEAR OLD JAKAT NAKA, WARJE, KOTHRUD, PUNE 411 029 PAN : AADCP2679L VS. DCIT, CIRCLE-4, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-2, PUNE ON 04-11-2016 IN RELATION TO THE ASSESSMENT YEAR 2012-13. 2. THE ONLY ISSUE RAISED IN THIS APPEAL THROUGH VARIOUS GR OUNDS IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF INTEREST U/S.36(1 )(III) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) AMOUNTING TO RS.1,29,22,224/-. ASSESSEE BY NONE REVENUE BY SHRI S.P. WALIMBE DATE OF HEARING 06-10-2020 DATE OF PRONOUNCEMENT 07-10-2020 ITA NO.493/PUN/2017 POONA CONSTRUCTION MACHINERY AND PRODUCTS PVT. LTD., 2 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E HAS BEEN ENGAGED IN MANUFACTURING AND FABRICATION OF CONSTRUCTION MACHINERY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSING OFFICER (AO) OBSERVED THAT THE ASSESSEE PAID INTE REST ON BANK BORROWINGS TO THE TUNE OF RS.2,38,71,029/-. IT WAS FURTHER NOTICED THAT THE ASSESSEE HAD ALSO ADVANCED INTEREST FREE LOA NS TO ITS DIRECTORS/THEIR RELATIVES AND SISTER CONCERNS TO THE TUNE OF RS.8,07,63,900/-. ON BEING CALLED UPON TO EXPLAIN AS TO W HY DISALLOWANCE OF INTEREST BE NOT MADE TOWARDS THE ADVANCING O F INTEREST FREE LOANS WITHOUT BUSINESS PURPOSE, THE ASSESSEE S UBMITTED THAT IT HAD SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL AND HEN CE, NO DISALLOWANCE OF INTEREST WAS CALLED FOR. NOT CONVINCED, THE A O APPLIED INTEREST RATE OF 16% ON THE AMOUNT OF INTEREST FREE LO ANS AND WORKED OUT DISALLOWANCE AT RS.1,29,22,224/-. THE LD. CIT(A) AFFIRMED THE VIEW OF THE AO. 4. WE HAVE HEARD THE LD. DR THROUGH THE VIRTUAL COURT AND G ONE THROUGH THE RELEVANT MATERIAL ON RECORD. THERE IS NO APPE ARANCE FROM THE SIDE OF THE ASSESSEE DESPITE SEVERAL NOTICES. I N FACT, THE APPEAL WAS FIRST FIXED FOR HEARING ON 16-05-2009 WHEN TH E ASSESSEE DID NOT APPEAR. THE MATTER WAS ADJOURNED FOR 15-07-2009 . AGAIN, ITA NO.493/PUN/2017 POONA CONSTRUCTION MACHINERY AND PRODUCTS PVT. LTD., 3 THE ASSESSEE NEITHER APPEARED NOR PUT UP ANY ADJOURNMEN T APPLICATION. THE CASE WAS ADJOURNED FROM TIME TO TIME, NAM ELY, 09-09-2019, 04-11-2019, 26-02-2020, 07-08-2020, 08- 09-2020 AND FINALLY FOR 06-10-2020. THE ASSESSEE HAS CHOSEN TO REMAIN ABSENT DESPITE SO MANY NOTICES. WE ARE, THEREFORE, PROCE EDING TO DISPOSE OFF THE APPEAL EX PARTE QUA THE ASSESSEE ON MERITS. 5. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE ADVANCED NON - BUSINESS INTEREST FREE LOANS TO ITS DIRECTORS, THEIR RELATIVES AND SISTER CONCERNS AMOUNTING TO RS.8,07,63,900/- WITHOUT INTEREST. I T IS ALSO NOT DISPUTED THAT THE ASSESSEE BORROWED FUNDS ON WHICH INTE REST OF RS.2.38 CRORE ODD WAS PAID. THE ASSESSEE MADE OUT A CASE BEFORE THE AO AND THE LD. CIT(A) THAT ITS SHARE CAPITAL AND RESERVES AND SURPLUS STOOD AT RS.5,71,49,014/- AND TO THAT EXTENT NO DISALLOWANCE OF INTEREST SHOULD BE MADE, WHICH CONTENTION CAM E TO BE JETTISONED. 6. THE HON'BLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) , HAS HELD THAT WHERE AN ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OW N WHICH WERE GENERATED IN THE COURSE OF RELEVANT FINANCIAL YEAR, AP ART FROM SUBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHE D ITA NO.493/PUN/2017 POONA CONSTRUCTION MACHINERY AND PRODUCTS PVT. LTD., 4 THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASS ESSEE OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO PART OF INTER EST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTME NTS WERE MADE OUT OF INTEREST BEARING FUNDS. IN REACHING THIS CONCLUSION, THE HONBLE HIGH COURT RELIED ON THE JUDGMENT OF TH E HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. VS. CIT (1997) 224 ITR 627 (SC). SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE DEHI HIGH COURT IN CIT VS. TIN BOX COMPANY (2003) 260 ITR 637 (DEL), HOLDING THAT WHEN THE CAPITAL AND INTEREST FREE UNSECURED LOAN WITH THE ASSESSEE FAR EXC EEDED THE INTEREST FREE LOAN ADVANCED TO THE SISTER CONCERN, DISALLOWA NCE OF PART OF INTEREST OUT OF TOTAL INTEREST PAID BY THE ASSESSEE TO THE BANK WAS NOT JUSTIFIED. MORE RECENTLY, THE HONBLE SUPREME COURT IN CIT(LTU) VS. RELIANCE INDUSTRIES LTD. (2019) 410 ITR 466 ( SC) HAS REITERATED THE SAME VIEW. 7. AS THE ASSESSEES CAPITAL ALONG WITH RESERVES AND SU RPLUS STOOD AT RS.5.71 CRORE AS AGAINST INTEREST FREE LOANS AMOU NTING TO RS.8.07 CRORE, WE HOLD THAT NO DISALLOWANCE OF INTEREST COU LD HAVE BEEN MADE TO THE EXTENT OF AVAILABILITY OF INTEREST FREE FUNDS. WE, THEREFORE, ACCEPT THE AVAILABILITY OF INTEREST FREE FUNDS FOR DIVERSION TOWARDS DIRECTORS, THEIR RELATIVES AND SISTER CONCERN TO THE EX TENT OF ITA NO.493/PUN/2017 POONA CONSTRUCTION MACHINERY AND PRODUCTS PVT. LTD., 5 RS.5,71,49,014/- AND HOLD THAT THE REMAINING AMOUNT OF LOA N OF RS.2,36,14,886/- WAS ADVANCED INTEREST FREE OUT OF INTER EST BEARING FUNDS. THE AO IS DIRECTED TO WORK OUT THE AMOUNT OF PROPO RTIONATE DISALLOWANCE OF INTEREST BY CONSIDERING THE RATE OF INTEREST AT WHICH THE ASSESSEE PAID INTEREST ON SUCH AMOUNT OF RS.2.36 CR ORE AND ODD. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING BY THE AO IN SUCH FRESH PROCEEDINGS . 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH OCTOBER, 2020. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 07 TH OCTOBER, 2020 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-2, PUNE 4. 5. THE PR.CIT-2, PUNE , , / DR A, ITAT, PUNE 6. / GUARD FILE / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE ITA NO.493/PUN/2017 POONA CONSTRUCTION MACHINERY AND PRODUCTS PVT. LTD., 6 DATE 1. DRAFT DICTATED ON 06-10-2020 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 07-10-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *