ITA No. 4327/Del/2012
Asstt.Year: 2009-10
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C' NEW DELHI
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
AND
SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER
ITA No.4327/Del/2012
ASSTT.YEAR: 2009-10
ACIT, vs Hal Offshore Ltd.,
Circle 12(1), 25, Bazar Lane,
New Delhi. Bengali Market,
New Delhi.
(PAN: AAACH3144B)
(Appellant) (Respondent)
Appellant by: Shri T. Vasanthan, Sr. DR
Respondent by: Shri Piyush Kaushik, Adv.
ORDER
PER C.M. GARG, JUDICIAL MEMBER
This appeal of the revenue has been directed against the order of the
CIT(A)-XIII, New Delhi dated 24.05.2012 in Appeal No. 201/11-12 for AY
2008-09.
2. The sole ground raised by the revenue reads as under:-
"1. Whether ld. CIT(A) was correct on facts and
circumstances of the case and in law in deleting the
disallowance of Rs.23,75,256/- made by the AO on account of
interest payment u/s 36(1)(iii)."
3. Briefly stated the facts giving rise to this appeal are that the assessee
company is engaged in the business of off shore operations and also engaged in
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Asstt.Year: 2009-10
running on contract for charter hire of multi-support vessel with ONGCL,
painting of ONGC platform and a running contract for operation and
maintenance of water maker on ONGCL Platforms. During the assessment
proceedings, the AO disallowed interest payment of Rs. 23,75,256/- u/s
36(1)(iii) of the Income Tax Act, 1961 (for short the Act) by observing that the
average interest cost debited in the Profit and loss account on interest free
advances and loans will not be allowed as deduction u/s 36(1)(iii) of the Act.
The aggrieved assessee preferred an appeal before the CIT(A) which was
allowed by passing the impugned order. Now, the aggrieved revenue is before
this Tribunal with the sole ground as reproduced hereinabvove.
4. We have heard arguments of both the sides and carefully perused the
relevant material placed on record inter alia paper book of the assessee spread
over 34 pages, assessee's written submissions and decision of ITAT `G' Bench
Mumbai in the case of M/s Aplab Limited vs ACIT in ITA No.
3313/Mum/2010 for AY 2006-07 dated 23.12.2011 and another decision of
ITAT Mumbai "D" Bench in the case of ACIT vs M/s Reliance
Communications Infrastructure Ltd. 2009-TIOL-313-ITAT-MUM.
5. Ld. DR submitted that the CIT(A) was not correct on the facts and
circumstances of the case and in law deleting the impugned disallowance made
by the AO on account of interest payment u/s 36(1)(iii) of the Act. Ld. DR
pointed out that the AO noticed that the assessee has made investment of
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Asstt.Year: 2009-10
Rs.4,18,79,945 and has borrowed money in the shape of secured and unsecured
loans and has paid interest of Rs.13,07,08,614. Ld. DR further pointed out that
on the one hand, there were interest bearing loans and on the other hand, the
assessee has given interest free advances and the assessee failed to establish
nexus between the surplus funds of the company and interest free advances,
therefore, the AO rightly made disallowance u/s 36(1)(iii) of the Act. Ld. DR
requested that the impugned order may be set aside by restoring that of the AO.
6. Replying to the above, ld. Counsel of the assessee has drawn our attention
towards operative para no. 2 and 3 at page 12 of the impugned order and
submitted that the assessee has got equity share capital of more Rs. 10 crore and
reserve and surplus of more than Rs. 51 crore which clearly show that there was
huge capital available with the assessee, therefore, investments made by the
assessee amounting to Rs.44,596,370 have no nexus with the interest bearing
loans of the assessee. Ld. Counsel of the assessee vehemently contended that
the assessee, by way of statement of accounts, balance sheet and profit and loss
account submitted before the authorities below, successfully established that no
interest bearing funds were utilized for making investment in the shares of
various companies and the investment in such shares was carried forward from
the last years, therefore, the CIT(A) rightly held that the disallowance of interest
made by the AO on the allegation of diversion of interest bearing funds was not
justified and baseless. Ld. Counsel supported the impugned order.
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Asstt.Year: 2009-10
7. On careful consideration of above submissions from operative part of the
impugned order, we note that the CIT(A) granted relief for the assessee with
following observations and conclusion:-
"It is claimed by the appellant that interest of Rs.
1,93,54,438/- has been paid on cash credit loans and Rs.
8,75,50,782/- has been paid on the term loan raised for
purchase of vessel which has been given to ONGC on hire
basis, therefore, the interest was on account of purchase of
vessel. The interest payment shown at S.No. 3 is pertaining to
the Car loans. The interest of Rs. 27,29,276/- pertains to the
buyers credit loan and interest of Rs. 11,01,513/- pertains to
delay in payment of service tax. The balance amount of Rs.
1,99,12,685/- is bank charges paid on account of guarantee
commission to various banks. The above analysis shows that
no interest bearing funds were utilized for making investments
in the companies listed in the table given above.
It is also seen that appellant has got equity share capital
of Rs. 10,03,12,000/- and reserve & Surplus of
Rs.51,04,71,127/- which shows that there is huge capital base
available with the appellant. The appellant has claimed that
investments in the shares of various companies was made out
of the shares capital and reserve and surplus available with
the appellant. It is claimed by the appellant that the loans were
raised for specific purposes and same have been utilized for
the stated purposes and no amount of such loans has been
diverted for investment purposes. It is also observed that the
Assessing Officer has not established any nexus between the
interest bearing funds taken by the appellant and investments
made in the shares of various companies. In the absence of
such nexus it cannot be held that investment was made out of
interest bearing funds and the natural presumption would be
that such investments were made out of share capital and
reserve & surplus. It is also claimed by the appellant that the
assessment for A. Y. 2008-09 was passed u/s 143(3) of the IT
Act and investments in shares and securities was more than
the investments during the year, however, no disallowance of
interest on account of these investments was made by the
Assessing Officer in A.Y. 2008-09.
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Asstt.Year: 2009-10
In view of the facts discussed above, it is established
that no interest bearing funds were utilized for making
investments in shares of various companies listed above and
the investment in such shares was carried forward from the
last year. Hence, the disallowance of interest made by the
Assessing Officer for diversion of interest bearing funds was
not justified. Therefore, the same is deleted."
8. On careful perusal of the assessment order, we note that the AO in para
4.12 observed that the average interest cost debited in the profit and loss
account of interest free advances and loans will not be allowed as deduction u/s
36(1)(iii) of the Act and the AO picked up amount of investment of
Rs.4,18,79,945 for calculating the amount of disallowance which was actually
investment as shown in the table at page 10 and 11 of the impugned order. In
view of above uncontroverted details of investment of the assessee, it is vivid
that the amount of Rs.4.18 crore as picked up by the AO was actually amount of
investment at the end of the financial year under consideration. The assessee
has also given details of Rs. 13,07,08,614 which includes bank interest and bank
charges. These fact and figures have also not been controverted by the AO.
From the balance sheet, it is also clear that the assessee has got equity share
capital of more than Rs.10 crore and reserve and surplus of more than Rs.51
crore and, in this situation, the natural presumption would be that such
investments were made out of share capital and reserve and surplus in absence
of any nexus between interest bearing funds taken by the assessee and
investment made in the shares of various companies. Under above noted facts
and circumstances, we are inclined to hold that the AO made disallowance on
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Asstt.Year: 2009-10
wrong premise which was rightly deleted by the CIT(A) by properly analysing
the facts and figures submitted by the assessee and we have no reason to
interfere with the impugned order in this regard and we uphold the same.
9. On this issue, we respectfully follow the decision of coordinate bench of
ITAT Mumbai `G' Bench in the case of M/s Aplab Limited vs ACIT (supra)
wherein it was held as under:-
"13. The Hon'ble jurisdictional High Court in the case of
CIT vs. Reliance Utilities & Power Ltd. [(2009) 313 ITR 340
(Bom)] considered almost similar facts. In that case the AO
recorded a finding that a sum of Rs.213 crores was invested by
the assessee out of their own funds and Rs.1.74 crores out of
borrowed funds. Accordingly, disallowance of interest was made
to the tune of Rs.2.40 crores. It was argued on behalf of the
assessee that no part of interest bearing funds had gone into
investment in those two companies in respect of which the AO
made disallowance of interest. It was also argued that income
from operations of the company was Rs.418.04 crores and the
assessee had also raised capital of Rs.7.90 crores, apart from
receiving interest free deposit of Rs.10.03 crores. It was,
therefore, submitted before the first appellate authority that the
balance-sheet of the assessee adequately depicted that there were
enough interest free funds at its disposal for making investment.
The ld. CIT(A) got convinced with the assessee's submissions and
deleted the addition. Before the Tribunal, it was contended on
behalf of the Revenue that the shareholders' funds were utilized
for the purchase of its assets and hence the assessee was left with
no reserve or own funds for making investment in the sister
concern. Thus, it was argued that the borrowed funds had been
utilized for the purpose of making investment in the sister
concern and the disallowance of interest was rightly called for.
The Tribunal, on appreciation of facts, recorded a finding that
the assessee had sufficient funds of its owns for making
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Asstt.Year: 2009-10
investment without using the interest bearing funds. Accordingly,
the order of CIT(A) was upheld. When the matter came up before
the Hon'ble jurisdictional High Court, it was contended by the
Department that the shareholders' funds stood utilized in the
purchase of fixed assets and hence could not be construed as
available for investment in sister concern. Repelling this
contention, the Hon'ble High Court observed that : "In our
opinion, the very basis on which the Revenue had sought to
contend or argue their case that the shareholders' fund to the
tune of over Rs.172 crores was utilized for the purpose of fixed
assets in terms of the balance-sheet as on March 31, 1999, is
fallacious." In upholding the order of the Tribunal, the Hon'ble
High Court held that : "If there be interest free funds available to
an assessee sufficient to meet its investment and at the same time
the assessee had raised a loan, it can be presumed that the
investments were from the interest free funds available".
Thereafter, the judgment of the Hon'ble Supreme Court in the
case of East India Pharmaceutical Works Ltd. Vs. CIT [(1997)
224 ITR 627 (SC)] and also the judgment of the Hon'ble Calcutta
High Court in Woolcombers of India Ltd. Vs. CIT [(1981) 134
ITR 219 (Cal)] were considered. It was finally concluded that :
"The principle, therefore, would be that if there are funds
available both interest free and overdraft and/or loans taken,
then a presumption would arise that the investments would be out
of interest free funds generated or available with the company, if
the interest free funds were sufficient to meet the investment".
Consequently the interest was held to be deductible in full.
14. From the above judgment, it is manifest that there can be no
presumption that the shareholders' fund of a company is utilized
for the purchase of fixed assets. If the assessee has interest free
funds as well as interest bearing funds at its disposal, then the
presumption would be that investments were made from interest
fee funds at the disposal of the assessee. The facts of the instant
case abundantly show that the shareholders fund is much more
than the amount advanced by the assessee without any interest to
its sister concerns. Respectfully following the precedent, we hold
that the ld. CIT(A) was not justified in sustaining addition under
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Asstt.Year: 2009-10
the present circumstances. We, therefore, order for the deletion
of addition. Ground no.5 is allowed."
10. In the present case also, the assessee has interest free funds as well as
interest bearing funds at its disposal, then the presumption would be that
investments were made from interest free funds which were at the disposal of
the assessee. Hence, the present case is squarely covered in favour of the
assessee by the aforesaid order of ITAT, Mumbai. Accordingly, sole ground of
the revenue is dismissed.
11. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 01/05/2015.
Sd/- Sd/-
(R.S. SYAL) (CHANDRAMOHAN GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
DT. 1st May, 2015
`GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. CIT(A)
4. C.I.T. 5. DR
By Order
Asstt. Registrar
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