ITA No.1690/Del/2013
Asstt. Year: 2005-06
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES `E' NEW DELHI
BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
AND
SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER
ITA NO. 1690/DEL/2013
ASSTT. YEAR: 2005-06
Dy.Commissioner of Income Tax, vs Milk Food Ltd.,
Circle 6(1), 5th Floor, Bhandari House,
New Delhi. 91, Nehru Place,
New Delhi-110019
(PAN: AAACM5913B)
(Appellant) (Respondent)
Appellant by: Shri R.S. Singhvi, CA
Respondent by: Shri P.Dam Kanunjna, Sr. DR
O R D E R
PER CHANDRAMOHAN GARG, J.M.
This appeal has been preferred by the revenue against the order of the
CIT(A)-IX, New Delhi dated 9.01.2013 in Appeal No. 102/2007-08 for AY
2005-06.
2. Ground no. 4, 5 and 6 are general in nature which need no adjudication.
Remaining ground no. 1, 2 and 3 read as under:-
"1. Whether in the facts and circumstances of the case,
the Ld. CIT(A) erred in deleting the disallowance of interest
expenses amounting to Rs,28,21,698/- by holding that the
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assessee was having adequate interest free funds at its
disposal?
2. Whether the facts and circumstances of the case and in
law, the learned CIT (A) erred in deleting the disallowance of
interest expenses amounting to Rs.28,21,698/-by relying upon
the judgment of Hon'ble Delhi High Court in Bharti
Televentures 331 ITR 502 even the assessee failed to prove its
commercial expendiency and CIT (A) also held that there was
no commercial expediency?
3. Whether the facts and circumstances of the case and in law,
the learned CIT (A) erred in not considering the decision in
the case of CIT vs. Abhishek Industries Ltd. 286 ITR 1 in
which the Hon'ble Punjab and Haryana High Court has held
that the onus of establishing the nexus between the interest
free funds and advances is on the assessee and receipts from
all sources go in common kitty?"
3. Briefly stated the facts giving rise to this appeal are that the return of
income for AY 2005-06 was filed on 31.10.2005 declaring nil income and the
same was processed u/s 143(1) of the Income Tax Act, 1961. Subsequently, the
case was selected for scrutiny and a statutory notice u/s 143(2) was issued and
duly served on the assessee. The assessment was completed u/s 143(3) of the
Act vide assessment order dated 26.12.2007 at a loss of Rs.1,43,62,014 by
making disallowances pertaining to dividend income, interest, disallowances u/s
40A(3) of the Act, total amounting to Rs.28,96,322. The aggrieved assessee
preferred an appeal before the CIT(A) which was partly allowed on the issue of
disallowing of interest paid on borrowed capital amounting to Rs.28,34,723/-.
Now, the aggrieved revenue is before this Tribunal on the grounds as
reproduced hereinabove.
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Asstt. Year: 2005-06
4. Apropos all grounds of the revenue, we have heard arguments of both the
sides and carefully perused the relevant material placed on record before us.
Ld. DR submitted that the CIT(A) has erred in deleting the disallowance of
interest expenses amounting to Rs,28,21,698/- by holding that the assessee was
having adequate interest free funds at its disposal. Ld. DR further contended
that the learned CIT (A) erred in deleting the disallowance of interest expenses
amounting to Rs.28,21,698/- by relying upon the judgment of Hon'ble Delhi
High Court in Bharti Televentures 331 ITR 502, even the assessee failed to
prove its commercial expendiency and CIT (A) also held that there was no
commercial expediency for making payment of huge interest expenses. Ld. DR
further contended that the learned CIT (A) did not consider the decision in the
case of CIT vs. Abhishek Industries Ltd. 286 ITR 1 in which the Hon'ble Punjab
and Haryana High Court has held that the onus of establishing the nexus
between the interest free funds and advances is on the assessee and receipts
from all sources go in common kitty. Ld. DR finally contended that the
impugned order may be set aside by restoring that of the AO on this issue.
5. Ld. AR drawing our attention towards para no. 3.4 to 3.7 of the impugned
order submitted that the CIT(A) was not justified in directing the AO to
calculate and disallow interest u/s 37(1)(iii) of the Act mentioned therein on the
sums that were advanced out of borrowed funds and were enumerated at sl. No.
6 to 10 of Table mentioned in para 3.3 of the impugned order. Ld. AR also
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Asstt. Year: 2005-06
placed reliance on the decision of Hon'ble Supreme Court of India in the case
of CIT vs S.A. Builders Ltd. 288 ITR 1 (SC) and submitted that interest on
borrowed capital and land to sister concern without charging interest is
allowable as business expenditure if it was lent to sister concern as a measure of
commercial expediency.
6. On careful consideration of above submissions and perusal of the ratio of
the citation relied by both the parties, from bare reading of the assessment order
dated 26.12.2007, we note that the AO made disallowance of Rs.28,34,723
following the decision of Hon'ble Jurisdictional High Court of Delhi in the case
of Elmer Havell Electrics (2005) 277 ITR 549 (Delhi) and decision of Hon'ble
Delhi High Court in the case of Motor General Finance Ltd. 272 ITR 550(Del)
wherein it was held that if assessee has taken loans with interest and had
advanced funds by diversion or otherwise to its sister concern free of interest,
then deduction of interest paid on borrowed capital is to be disallowed. We
further note that in the case of CIT vs S.A. Builders Ltd. (supra) as relied by ld.
AR, in the subsequent decision Hon'ble Jurisdictional High Court of Delhi has
held that in order to decide whether interest on funds borrowed by the assessee
to give interest free loan to a sister concern should be allowed as deduction u/s
36(1)(iii) of the Act, one has to inquire whether the loan was given by the
assessee as a measure of commercial expediency. Their lordships further held
that the expression "commercial expediency" is one of wide import and
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Asstt. Year: 2005-06
includes such expenditure as prudent businessman incurred for the purpose of
business. It was also held that even if the expenditure may not have been
incurred under any legal obligation but yet it is allowable as business
expenditure if it was incurred on the grounds of commercial expediency.
7. Turning to the factual matrix of the present case, we observe that the
CIT(A) went on to discuss in para 3.3 the loans advanced to M/s Triplefast
Investment Pvt. Ltd. and after detailed deliberations, the CIT(A) directed the
AO to calculate and disallow interest u/s 36(1)(iii) of the Act at the rate
mentioned on the sums which were advanced out of borrowed funds. The
relevant operative part of the impugned order reads as under:-
"3.4 On going through the Bank statement of the two
accounts, HDFC account and State Bank of Patiala account,
from where funds have been diverted to the subsidiary concern
it is seen that some funds have been diverted out of the
borrowed funds. This has been tabulated above. On these
borrowed funds the appellant is paying interest. These funds
were borrowed from State Bank of Patiala for the purpose
stated in the loan document "For shoring up the net working
capital and repayment of existing short term loan of HDFC
Bank". These funds have been diverted, from credit balances
in the State Bank of Patiala account, funds have been diverted
for non business purposes to its subsidiary company and are
not really used for the stated purpose.
3.5 The appellant's contention that the advances were for
the subsidiary company to put up a business plant has not been
substantiated by any documents. Without such supporting
evidence a bald statement carries no weight. The appellant has
not made out a case that the sums were advanced for
"commercial expediency".
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3.6 All the judgments quoted by the appellant and the AO have
repeatedly stated that the issue of disallowance u/s 36(1)(iii) is
one that has to be determined on the facts of each case. As
discussed above it is seen that the appellant has diverted
borrowed funds and advanced it to its subsidiary at serial nos.
6 to 10 of the table given above.
3.7 AO is directed to calculate and disallow interest u/s
36(1)(iii), at the rate mentioned, on the sums that are
advanced out of borrowed funds and are enumerated at serial
no. 6 to 10 above."
8. We also observe that the AO has not disputed the fact that the assessee
company made interest free advance to M/s Triplefast Investment Pvt. Ltd. (its
subsidiary company) for the purpose of putting up the business plant and as
such these advances were made for the purpose of business so as to develop and
promote the assessee's own business. In this situation, from the table given in
para 3.3 of the impugned order, we observe that the assessee advanced loans to
its subsidiary company i.e. M/s Triplefast Investment Pvt. Ltd. out of own funds
and a part of loan was given from borrowed funds for which the CIT(A) has
directed the AO to disallow the claim of the assessee towards interest
expenditure. We are unable to see any ambiguity or infirmity in the impugned
order and we uphold the same as the CIT(A) has rightly understood and
followed the decisions of Hon'ble Supreme Court of India in the case of CIT vs
S.A. Builders Ltd. (supra) and Hon'ble Delhi High Court in Bharti Televentures
(supra). Accordingly, ground no. 1, 2 and 3 of the revenue being devoid of
merits are dismissed.
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Asstt. Year: 2005-06
9. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 27.01.2015.
Sd/- Sd/-
(G.D. AGRAWAL) (CHANDRAMOHAN GARG)
VICE PRESIDENT JUDICIAL MEMBER
DT. 27th January, 2015
`GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. C.I.T.(A)
4. C.I.T. 5. DR
By Order
Asstt. Registrar
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