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Shri, A. Mohan Alankamony, Accountant Member and Shri Kul Bharat, Judicial Member
May, 25th 2012
           IN THE INCOME TAX APPELLATE TRIBUNAL
              AHMEDABAD BENCH "A" AHMEDABAD

      Before Shri, A. Mohan Alankamony, Accountant Member and
                      Shri Kul Bharat, Judicial Member

                           ITA No.1944/ Ahd/2009
                          Assessment Year:2005-06

          Milton Laminates Ltd.       V/s .   DCIT, Circle-4,
           Chitra Ami                        Ahmedabad
          Apartments, Opp. Old
          RBI, Ashram Road,
          Ahmedabad
          PAN No. AABCM0398K

                 (Appellant)           ..        (Respondent)

           /By Appellant                      Smt. Urvashi Shodhan, AR
           /By Respondent                    Shri Rahul Kumar, SR-DR
          /Date of Hearing                    25-04-2012
          /Date of Pronouncement               24-05-2012


                                 ORDER

PER Kul Bharat, Judicial Member:-

      This appeal of the assessee is directed against the order of Ld.
Commissioner of Income-tax (Appeals)-VIII, Ahmedabad dated 26-02-2009 for
the assessment year 2005-06. The assessee, in this appeal has raised the
following grounds of appeal:-
      "1. That the learned Commissioner of Income-tax (Appeals) has erred in
      confirming the addition of Rs.3,10,812 out of interest expenditure made
      by the learned A.O the said addition is against law, facts and evidence
      on record.

      2. That the learned Commissioner of Income-tax (Appeals) did not
      consider the submissions of the appellant that the interest expenditure
      was wholly business expenditure and no part of thereof should have
      been disallowed.
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                               Page 2

        3. That the learned Commissioner of Income-tax (Appeals) did not
        appreciate the submissions and arguments that the learned A.O having
        not established correlation and direct nexus between the amount given
        to the sister concern and the borrowings made by the company more so
        he did not appreciate the contention of the appellant that the company
        had interest free funds which could have been part of the mount given
        hence whole of the expenditure was not relating to interest bearing
        funds and therefore Rs.3,10,812 disallowed was excessive and no
        reasonable to the fats and circumstances of the case.

        4. The appellant submits that eh interest u/s/. 234B and 234C have
        been wrongly charged and hence the same may kindly be deleted or
        reduced.

        5. In view of above and others that may be urged at the time of hearing
        the appellant requests that
        a. Interest of Rs.3,10,812 disallowed may kindly be deleted;
        b. Interest charged U/s. 234B and 234C may kindly be reduced; and
        c. Such other further relief and reductions be allowed as the facts and
        circumstances of the case so requires."

2.      Brief facts of the case are that assessee-company is engaged in the
business of manufacturing of laminates and plywood sheets, electrical
insulators, plywood etc. The assessee filed its return of income for the year
under consideration declaring total income at Rs.45,55,490/-. Subsequently,
the case was picked up for scrutiny and the assessment proceedings was
completed u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as
`the Act'). The Assessing Officer made disallowance of interest expenditure
claimed u/s. 36(1)(iii) of Rs.22,000/- and Rs.3,10,820/- u/s 36(1)(iii) of the Act.
Thus, total disallowance of interest amounting to Rs.3,10,812/- was made by
the AO. Against this, the assessee filed appeal before Ld. CIT(A). After
considering the submissions of the assessee Ld. CIT(A) partly allowed the
appeal of the assessee.


3.      The assessee feeling aggrieved by this order of Ld. CIT(A) has filed this
appeal before this Tribunal.
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                              Page 3

4.      Ld. Authorized Representative for the assessee, Mrs Urvashi Shodhan
vehemently argued that the order passed by Ld. CIT(A) is erroneous and
contrary to the judicial pronouncements. She submitted that Ld. CIT(A) has
erred in affirming the disallowance under the provisions of Section 36(1)(iii) of
the Act in principle. It is submitted by the Ld. AR that Ld. CIT(A) did not
consider the submission of the assessee that interest expense was wholly
business expenditure and no part thereto be disallowed. It is submitted by the
Ld AR that the assessee was having sufficient interest free reserves. It is
submitted by Ld. AR that Milton Exports Ltd. had an opening credit balance of
Rs.5,14,255/- and after advances given to the said company, there was debit
balance at the end of the year of Rs.28,60,143/-. The AO has computed the
interest @ 12% p.a on the debit amount and disallowed Rs.310,812/- interest
expenditure as claimed by assessee. The AO has not established any direct
nexus between loan and borrowed finance received and amount advanced to
the said company. Ld. AR submitted that assessee has earned cash profit
during the year of Rs.1,04,59,353/- besides having share capital of
Rs.2,27,240/- and free reserves of Rs.1,64,81,890/- at the beginning of the
year i.e. on 01-04-2004. Thus, the total fund free of interest was of
Rs.4,96,87,483/-. It is submitted by Ld. AR that assessee-company has
sufficient interest free funds available for making advances. The order of Ld.
CIT(A) is therefore erroneous. Ld. AR relied upon various decisions in support
of her contention that where no nexus is established between the borrowed
fund and advances, in such circumstances no disallowance of interest can be
made. Ld. AR submitted that if advances are made to third party without
interest from funds other than borrowing. It would not be a case of diverting
borrowings to non-business purpose and so no part of interest on borrowing
should be disallowed. Ld. AR relied upon the decision of Hon'ble Allahabad
High Court in the case of CIT v. Dhampur Sugar Mills Ltd. (No.2) (2005) 274
ITR 370 (All). It is submitted that in the case of CIT v. Prem Heavy
Engineering Works P. Ltd. (2006) 285 ITR 554 (All) it has been held that
where sufficient funds are available with the assessee in the form of interest
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                           Page 4

free advance from customer's share capital reserves etc. to make interest free
advance to sister concern and no disallowance can be made in relation to
interest on borrowings by assessee on the ground that interest free advances
were given to sister concern. This would be a case where borrowed money
was not diverted by assessee but funds other than borrowings had been used
in making those advances. Ld. AR submitted that there was no occasion to
make addition since the assessee was having sufficient interest free funds
and the advances have been made out of this interest free fund but not from
the borrowed funds. It is also submitted by the Ld. AR that the Assessing
Officer has grossly failed to establish nexus between the advance and
borrowed funds. Therefore, the Ld. CIT(A) grossly erred in confirming the
addition made by AO. Ld. AR also relied upon the judgment of Hon'ble
jurisdictional High Court in tax appeal No.820 of 2007 in the case of CIT vs.
Raghuvir Synthetics Ltd. dated 05-12-2011 in support her contention that
where no borrowed funds are utilized for giving advances to sister concern, no
disallowances can be made of the interest expenditure claimed by assessee.


5.      On the contrary, Ld. SR-DR Shri Rahul Kumar supported the orders of
authorities below and he submitted that there is no error in the orders of
authorities below as assessee has neither submitted that the funds were
advanced for commercial expediency nor demonstrated that such advances
were for business purpose. It is submitted by Ld. DR that even in the case
where mixed funds are utilized for giving advances to the sister concern, the
assessee has to establish the commercial expediency in respect of such
advances to the sister concern. In support of this contention Ld. SR-DR
placed reliance on the judgment of Hon'ble Apex Court in the case of S.A
Builders Ltd. v. CIT (2007) 288 ITR 1 (SC), the judgment of Hon'ble Delhi High
Court in the case of Punjab Stainless Steel Inds. V. CIT & Anr.(2010) 324 ITR
396 (Del), he also relied upon the judgment of Hon'ble Kerala High Court in
the case of CIT v. V.I. Baby & Co. (2002) 123 Taxman 894 (Ker) and the order
of Hon'ble co-ordinate Bench in ITA No.243/Ahd/2011 & 3512/Aahd/2010
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                              Page 5

A.Y. 2007-08 in the case of Inamulhaq S Iraki & Abdulhaq S IRaki v. ACIT
order dated 31-01-2012.


6.      We have heard the rival submissions, perused the materials available
on record and the judgments cited by the parties. The contention of Ld. AR is
that the assessee has sufficient interest free funds and the advances were
given from such funds, therefore no disallowance of interest expenditure
claimed on borrowed funds can be made. On the other hand, Ld.SR-DR
contended that even in the case where mixed funds are utilized, the assessee
has to establish commercial expediency and demonstrate that such advances
were essentially for the business purposes. On the other hand, the contention
of Ld. AR for the assessee is that the Assessing Officer has failed to establish
any nexus between the borrowed funds and the funds utilized for giving
advances to sister concern. These two rival submission needs to be examined
in the light of judicial pronouncements as relied by the respective parties. The
Hon'ble Apex Court in the case of S.A. Builders Ltd. (supra) has clarified that it
was not the opinion of the Hon'ble Supreme Court that in every case interest
on borrowed loan has to be allowed if the assessee advances it to a sister
concern. It all depends on the facts and circumstances of the respective case.
For instance, if the creditors of the sister concern utilizes the amount
advanced to it in every case interest on borrowed loan has to be allowed if the
assessee advances it to a sister-concern. It all depends on the facts and
circumstances of the respective case. For instance, if the directors of the
sister-concern utilize the amount advanced to it by the assessee for their
personal benefit, obviously if cannot be said that such money was advanced
as a measure of commercial expediency. However, money can be said to be
advanced to a sister-concern for commercial expediency in many other
circumstances (which need not be enumerated here). However, where it is
obvious that a holding company has a deep interest in its subsidiary, and
hence if the holding company advances borrowed money to a subsidiary and
the same is used by the subsidiary for some business purposes, the assessee
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                                     Page 6

would, in our opinion, ordinarily been entitled to deduction of interest on its
borrowed loans. In S.A. Builders (supra) the facts narrated that during in para-
5 to 8 are being reproduced as under:-
        "5. During the course of the proceeding for the relevant assessment year(s),
        the AO under the IT Act observed that the assessee had transferred a huge
        amount of Rs.82 lakhs to its subsidiary company M/s. SAB Credits Ltd. out of
        the cash credit account of the assessee in which there was a huge debit
        balance. He, therefore, held that since the assessee had diverted its borrowed
        funds to a sister-concern without charging any interest, proportionate interest
        relating to the said amount out of the total interest paid to the bank deserved
        to be disallowed. Accordingly, he disallowed a sum of Rs.5,66,729/-.

        6. The assessee preferred an appeal to the Commissioner of Income-tax
        (Appeals) Chandigarh [for short hereinafter referred to as the CIT(A)}, who
        vide his order dt. 15th April, 1993 partially accepted the claim of the assessee.
        According to the CIT(A), out of the total amount of Rs.82 lacs advanced by
        the assessee in the relevant assessment year to M/s. SAB Credit Ltd., only a
        sum of Rs.18 lacs had a clear nexus with the borrowed funds, as the balance
        amount had been paid out of the receipts from other parties to whom no
        interest had been paid. Accordingly, the CIT(A) directed the AO to calculate
        disallowance of interest only relating to the sum of Rs.18 lacs, and the
        disallowance was reduced accordingly.

        7.Both the assessee as well as the Revenue filed appeals before the Income-
        tax Appellate Tribunal (hereinafter referred to as the `Tribunal'). The Tribunal
        by its order dt. 20th June, 2002 allowed the appeal for the Revenue, and held
        that the entire amount of Rs.82 lacs had been advanced by the assessee by
        utilizing the overdraft account, and hence it was of the view that disallowance
        made by the AO was justified. Accordingly, the appeal filed by the Revenue
        was allowed and the appeal filed by the assessee was dismissed.

        8. Against the order of the Tribunal, the assessee filed appeals in the High
        Court which were dismissed by the impugned judgment."





7.      The Hon'ble Delhi High Court in the case of Punjab Stainless Steel
Inds. (supra) has held in para-11 & 12 of its judgment as under:-
        "11. In view of the provisions contained in s. 36(1)(iii) of IT Act, the interest
        paid by the assessee in respect of capital borrowed for the purpose of
        business or profession is to be allowed as a deduction. Hence, the question to
        be considered in a case such as the one before us is as to whether the
        interest-free advance was made by the assessee for commercial expediency
        or not. If the advances were not made by the assessee for a business
        purpose of the assessee firm, interest paid by the assessee on that part of the
        borrowed capital which is commensurate with the amount of the interest-free
        advances extended by it cannot be said to have been paid for the purpose of
        its business.
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                                     Page 7

        12. The commercial expediency, in our view, would include such purpose as
        is expected by the assessee to advance its business interest and may include
        measures taken for preservation, protection or advancement of its business
        interests. The business interest of the assessee has to be distinguished from
        the personal interest of its directors or partners, as the case may be. In other
        words, there has to be a nexus between the advancing of funds and business
        interest of the assessee firm. The appropriate test in such a case would be as
        to whether a reasonable person stepping into the shoes of the
        directors/partners of the assessee firm and working solely in the interest of the
        assessee firm/company, would have extended such interest-free advances.
        Some business objective should be sought to have been achieved by
        extending such interest-free advance when the assessee firm/company itself
        is borrowing funds for running its business. It may not be relevant as to
        whether the advances have been extended out of the borrowed funds or out
        of mixed funds which included borrowed funds. The test to be applied in such
        cases is not the source of the funds but the purpose for which the advances
        were extended."


Further, Hon'ble Delhi High Court in the case of Punjab Stainless Steel Inds.
(supra) in para-14 of its judgment observed as under:-
        "14. The learned counsel for the appellant has also referred to CIT & Anr. Vs.
        Tin Box Co. (2003) 182 ICTR (Del) 171 : (2003) 260 ITR 637 (Del). We find
        that in the case of Tin Box Co. (supra) the capital of the firm and interest-free
        unsecured loans available with the appellant far exceeded the amount
        advanced to the sister concern in all the years under appeal. The question as
        to whether the loans to the sister concern were extended for commercial
        expediency or not was neither raised nor examined in that case. Considering
        the decision of the Supreme Court in S.A. Builders (supra), what is relevant in
        such a case is as to whether the loan was extended for any commercial
        expediency or not and, therefore, it would be immaterial whether the
        assessee firm had interest-free funds available to it or not."


8.       The      Hon'ble       co-ordinate   Bench   of    this   Tribunal    in      ITA
No.243/Ahd/2011 & ITA No.3512/Ahd/2010 order dated 31-01-2012 has
observed in para-11 as under:-
        "11. We find that as per this judgment of Hon'ble Delhi High Court, where
        mixed funds are used for the purpose of giving interest free advances, the
        only relevant test is as to whether such interest free advances are due to
        commercial expediency or not. In the present case also, the funds are mixed
        funds and the assessee could not establish any commercial expediency and
        hence, in our considered opinion, this issue is squarely coverd against the
        assessee by this judgment of Hon'ble Delhi High Court and respectfully
        following the same, this issue is decided against the assessee."
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                                     Page 8

From the judgment of Hon'ble Delhi High Court in the case of Punjab
Stainless Steel Inds. (supra) as followed by the Hon'ble co-ordinate Bench in
ITA No.243/Ahd/2011 & ITA No.3512/Ahd/2010 (supra) it can be gathered
that where mixed funds are used for the purpose of giving interest free
advances, the test of commercial expediency is required to be applied.
However, the Ho'ble jurisdictional High Court in tax appeal No.829 of 2007 in
the case of CIT v. Raghuvir Synthetics Ltd. held as under:-
        "As can be noted from the order of the Tribunal,, the Assessing Officer
        disallowed the interest solely on the ground that the as had given interest free
        loans to the associate concerns, viz., R.R. Family Trust and Sagar Textile
        Mills and this disallowance, in appeal the CIT(Appeals) deleted by holding that
        the amount advanced to both R.R. Family Trust and Sagar Textiles Mills were
        not given during the year under consideration, but the same was given in the
        earlier years. CIT(Appeals) had also taken note of the fact that there was
        sufficient funds available with the assessee-respondent on which there was
        no interest liability that had been incurred. In such circumstances, relying on
        the case of Torrent Financiers Ltd. (supra), it found that the disallowance was
        not justifiable.

        The Tribunal on noting these details, in terms held that there was nothing
        contrary that could be brought on record by the Department. The assessee's
        equity share capital Rs3.85 crores and reserve and surplus of Rs.5.52 crores
        also were noted by the Tribunal. It found that the interest free fund available
        with the assessee was far greater than the loan advanced to the sister
        concerns and as a corollary to that, it concluded that the borrowed money was
        not utilized for the purpose of advance to the sister concerns, as had been
        noted by the Assessing Officer. What had weighed with the Tribunal is the fact
        that the entire interest free funds included owner's own capital and
        accumulated profits and other interest free credits and loans and if the total
        interest free advances including the debit balance of the partners did not
        exceeded the total interest free funds available with the assessee, interest
        was not disallowable merely on account of the utilization of the funds for non-
        business purposes.

        Thus, as can be seen the Tribunal actually relied on the findings given in case
        of Torrent Financiers Ltd. (supra) and furthermore there was nothing contrary
        that could be brought on record by the Department for it to hold otherwise.
        Factually, it funds huge funds were available without any interest liability with
        the assessee and that there was no evidence to hold that the borrowed
        money was utilized for the purpose of advance to the sister concern. All these
        aspects cumulatively led the Tribunal to hold that the disallowance made only
        on the ground that advances were given out of the borrowed funds, holding
        the assessee ineligible for allowance of interest by the Assessing Officer of
        the sum of Rs.11.66 lacs was not sustainable. The Tribunal has correctly
        approached the issue which has been proposed in the present Tax Appeal.
        When there was no evidence brought on record by the Department for the
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                                Page 9




        Tribunal to hold otherwise than what has been concluded by way of any
        material, we hold that the issue is appropriately concluded in favour of the
        assessee and against the Revenue."



9.      Admittedly in the case in hand, the assessee has both borrowed and
interest free funds. It is transpired from the balance-sheet of the assessee-
company as on 31-03-2005 that it had sufficient interest free funds. It is not
disputed that the assessee-company had sufficient interest free fund could be
used towards loan and advances to sister concern. The Revenue has not
demonstrated as to how the interest bearing funds have been used towards
loan/advances to the sister concern. In the absence of such finding, we do not
agree with the contention of the Ld. DR that in respect of loan and advances
test of commercial expediency would apply despite the fact such advances
are made out of interest free funds of the assessee. In view of the fact that
Hon'ble jurisdictional High Court in the case of Raghuvir Synthetics Ltd.
(supra) has appreciated the view that the entire interest free funds including
the assessee's own capital and accumulated profits and other interest free
credits and loans and if the total interest free advances including the debit
balance of partners did not exceed the total free funds available with the
assessee, interest was not disallowable merely on amount of utilization of the
funds for non-business purpose. In the present case also there is nothing on
record to suggest that the loan and advances exceeded the interest free fund
available with assessee or such advances were given out of interest bearing
borrowed fund. Respectfully, following the ratio in the case of Raghuvir
Synthetics Ltd. (supra) in Tax Appeal No. 829 of 2007 (supra), we hereby
allow the ground of assessee's appeal and direct the Assessing Officer to
delete the disallowance of Rs.3,10,812/- made on account of interest
expenditure.
ITA No.1944/Ahd/2009       A.Y. 2005-06
Milton Laminates Ltd. v. DCIT, Cir-4 A'bd                                         Page 10



10.     Next ground has taken by assessee is consequential in nature,
therefore does not require any adjudication.


11.     In the result, assessee's appeal is partly allowed.
  Order pronounced in Open Court on the date mentioned
 hereinabove at caption page.

       Sd/-                                                   Sd/-
(A.Mohan Alankamony)                                       (Kul Bharat)
 (Accountant Member)                                    (Judicial Member)
Ahmedabad,

*Dkp
-          24/05/2012           
     / Copy of Order Forwarded to:-
1.  / Appellant
2.  / Respondent
3.    / Concerned CIT
4.  -  / CIT (A)
5.  ,   ,  / DR, ITAT, Ahmedabad
6. [  / Guard file.
                                                                              By order/  ,
                                                     /True Copy/
                                                                              / 
                                                                      ,
                                                                                   


           Strengthen preparation & delivery of orders in the ITAT
1) date of taking dictation                                    17/05
2) direct dictation by Member straight on                      No
computer/laptop/dragon dictate
3) date of typing & draft order place before Member            18/05, 18/05
4) date of correction                                          21/05
5) date of further correction                                  21/05, 23/05
6) date of initial sign by Members                             23/05
7) order uploaded on                                           24/05
8) original dictation pad-part has been enclosed in the file Yes
9) final order and 2nd copy send to Bench Clerk on             24/05



 
 
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