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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