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Dy.Commissioner of Income Tax, Circle 6(1),New Delhi. Vs. Milk Food Ltd., 5th Floor, Bhandari House, 91, Nehru Place, New Delhi-110019
January, 28th 2015
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





                                                                             1
ITA No.1690/Del/2013
Asstt. Year: 2005-06


        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.


                                                                               2
ITA No.1690/Del/2013
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

                                                                                3
ITA No.1690/Del/2013
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

                                                                                 4
ITA No.1690/Del/2013
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".


                                                                             5
ITA No.1690/Del/2013
Asstt. Year: 2005-06


        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.



                                                                               6
ITA No.1690/Del/2013
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




                                                                       7

 
 
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