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04-10-2019, Mecords India, Section 36(1)(iii), 147, Tribunal Mumbai
This appeal in ITA No.1013/Mum/2016 for A.Y.2010-11 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-22, Mumbai in appeal No.CIT(A)22/IT/345/2014-15 dated 11/01/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 07/03/2014 by the ld. Income Tax Officer-10(2)4, Mumbai (hereinafter referred to as ld. AO).
2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in confirming the disallowance of interest u/s 36(1)(iii) of theAct on a proportionate basis in the facts and circumstances of the case.
3. The brief facts of this issue are that the assessee company is engaged in the business of manufacturing and trading of industrial fabrics, dipped nylons chafer fabrics and other fabrics. The ld AO observed that assessee had shown secured loan of Rs 13,43,00,000/- , working capital loan from banks at Rs 16,82,59,808/- and unsecured loans at Rs 5,28,28,541/- as on 31.3.2010 as against the opening balances of Rs 13,38,70,416/- , Rs 15,84,22,076/- and Rs 5,20,46,296/- as on 1.4.2009 respectively. The assessee had debited total finance cost in its profit and loss account amounting to Rs 4,91,91,557/- which includes interest paid to banks at Rs 3,66,24,468/- and interest paid to others at Rs 1,25,67,089/-. The ld AO on verification of schedule of loans and advances given by the assessee , observed that the assessee had shown other advances at rS 5,79,37,770/- as on 31.3.2010 as against Rs 8,19,38,063/- as on 1.4.2009. A cordingly, he came to the prima facie conclusion that the interest bearing funds were diverted by the assessee for non business purposes by giving interest free loans / advances to the following parties and resorted to make proportionate disallowance of interest :-
3.1. The ld AO worked out the disallowance of interest by adopting a notional rate of 12% per annum on the higher of either the opening balance or the closing balance in respect of the aforesaid parties and arrived at the interest disallowance figure of Rs 95,10,449/-.
3.2. The assessee in response to show cause notice replied as under:-
a. Mehta Growell Holdings Ltd.
This is an advance towards purchase of property at Maval Taluka, Dist, Pune having survey no. 124/B. Copy of Memorandum of Understanding between Mehta Growell Holdings Ltd. & Mecords India Ltd. is enclosed for your reference.
b. Neeta Nitin Mehta
This is an advance payment towards purchase of flat. During the year Company has paid Additional Advance of Rs. 15,52,273/-
c. Mamta Ajit Mehta
This is an advance towards purchase of Shares. However she expired and accordingly the process of purchase was delayed and hence referred to as advance.
d. Atul Desai - Rs,3,78.300/-
It is an advance against salary.
e. Mecords Leasing & Finance - Rs. 1,96,737/-
This is a Business advance.
Kindly appreciate that all the advances are for business purposes and as such question of disallowance of interest does not arise at all. Further, we state that during the F.Y. 2009-10 and 2010-11 the Company has received interest - free funds particulars of which are of which are as follows:
Without prejudice, we state that in view of the above interest free funds available with the company, no disallowance can be made in hands of the company.
3.3. The assessee further replied that in connection with the advance given to M/s Mehta Growell Holding Ltd, the same was towards purchase of property at Maval Taluka District, Pune, having Survey No. 124/B, in support of which, a copy of Memorandum of Understanding between Mehta Growell Holding Ltd and assessee was furnished. It was submitted that the completion of the development was delayed abnormally by Mehta Growell Holding Ltd. The ld AO extracted the relevant portions of the said MOU in page 4 of his order. The ld AO rejected the contentions of the assessee that during the year the assessee had sufficient interest free funds at its disposal for making these interest free advances. The ld AO specifically pointed out that the share application money stated to be
received during the year by the assessee was actually received in the sum of Rs 17,40,76,032/- during the financial year 2010-11. Hence assessee could not have used the said sum for making interest free advances to the aforesaid parties. The ld AO also observed that the advances given to Mehta Growell Holding Ltd towards purchase of immovable assets are capital in nature and held that the proportionate interest paid on borrowed funds should have been capitalized by the assessee to the cost of investment in immovable asset and not to be claimed as deduction. He observed that further opening and closing balance of Mehta Growell Holding Ltd and Mamta Mehta reflects reduced balance which clearly shows running account for giving and taking of interest free loans. This
fact also shows that the assessee had no intention to purchase the property / shares as the assessee has received advance from these parties. He also placed reliance on the amendment brought in section 36(1)(iii) of the Act with effect from 1.4.2004 wherein the interest paid in respect of capital borrowed for acquisition of an asset for extension of business will not be allowed as deduction till the asset is first put to use. With these observations, the ld AO made proportionate disallowance of interest in the sum of Rs 95,10,449/- by holding that borrowed funds were diverted for non-business purposes.
4. The ld CITA upheld the action of the ld AO by observing as under:-