IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "J", MUMBAI
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND
SHRI SANJAY GARG, JUDICIAL MEMBER
ITA No.1856/M/2011
Assessment Year: 2007-08
M/s. Multicot Textiles Pvt. Ltd. ITO 5(2)(3),
4th Floor, Shalimar House, Mumbai
Vs.
335, Grant Road,
Mumbai 400 007
PAN: AAACH2034G
(Appellant) (Respondent)
Assessee by : Dr. K. Shivaram, A.R.
Revenue by : Shri Jeevanlal Lavidiya, D.R.
Date of Hearing : 26.06.2014
Date of Pronouncement : 26.06.2014
ORDER
Per Sanjay Garg, Judicial Member:
The present appeal has been filed by the assessee against the order of the
Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)]
dated 28.12.10 relevant to assessment year 2007-08.
Through its grounds of appeal, the assessee has agitated the
disallowance of Rs.97,51,956/- made under section 36(1)(iii) of the Income
Tax Act. The assessee has also agitated the finding of the lower authorities to
the effect that alternatively the said interest disallowance of Rs.97,51,956/- was
also attracted under section 43B(e) of the Act, because the interest as claimed
to have been paid by the assessee to the bank was actually neither paid nor was
shown as payable/outstanding in the balance sheet.
2. The brief facts of the case are that the assessee company is engaged in
business of manufacturing of polyester yarn and dealing in cotton yarn and
2 ITA No.1856/M/2011
M/s. Multicot Textiles Pvt. Ltd.
waste. During the year under consideration, the assessee company debited an
amount of Rs.69,76,984/- to its profit and loss account on account of interest
paid on loans taken from banks amounting to Rs.4,47,24,765/-. The assessee
company had also given interest free advances to various persons amounting to
Rs.47,38,005/-. During the course of assessment proceedings, the Assessing
Officer (hereinafter referred to as the AO) asked the assessee to explain as to
why proportionate interest should not be disallowed for giving interest free
advances to other parties. In reply the assessee submitted that it was having
current account with its sister concerns and associate concerns. Whenever it
needed funds, the same was received from the sister concerns and vice versa.
The assessee submitted that neither it had charged any interest from sister
concerns nor it had paid any interest to sister concerns. The assessee further
stated that net advance to sister concerns had come down during the relevant
year and, therefore, no disallowance of interest was called for.
3. The AO, however, rejected the contentions of the
assessee. According to the AO, onus was on the assessee to show
that all the borrowed funds had been used for the purpose of business. In the
case of the assessee, there were no accumulated profits from which assessee
could have advanced interest free funds. The assessee had therefore, utilized
borrowed funds for giving interest free advances. The AO accordingly
disallowed an amount of Rs.7,39,120/- being proportionate interest for
borrowed funds utilized by the assessee for giving interest free advances.
4. Before the ld. CIT(A), the assessee reiterated the same submissions
as made before the A.O. It was submitted that the interest bearing loans taken
for the purpose of business were totally utilized for the purpose of business. It
was submitted that interest free advances were given to sister concerns on
3 ITA No.1856/M/2011
M/s. Multicot Textiles Pvt. Ltd.
account of commercial expediency and no disallowance of interest was called
for.
5. However, the ld. CIT(A) was not satisfied with the explanation given by
the assessee and upheld the disallowance made by the AO observing as under:
"3.4 I have considered the findings of the Assessing Officer and
submissions of appellant. The appellant has relied on the decision
of CIT(A) as well as on the decision of Supreme Court in the case
of M/s. S.A. Builders Limited Vs. CIT 288 ITR 164 wherein it was
held that when the assessee borrowed funds from the bank and
lent some of it to its sister concern (subsidiary) on interest free
loan the tax in such a case is a really whether this was done as a
measure of commercial expediency. In a nutshell, if the advances
given to subsidiary company for business purposes, then no
interest can be disallowed. However, in present case the recipient
companies are not subsidiary company of the appellant and their
interest are different then the appellant company. Some concerns
are proprietary concerns/firms of the assessee group. Therefore,
the aforesaid decision of Supreme Court is not applicable on the
facts of this case. On the other hand, the action of Assessing
Officer is supported by the decision of Madras High Court in the
case of M/s. K. Sondram Brothers Vs. CIT 238 ITR 939, wherein it
was held that business money should always remain in the
business. However, in present case the appellant has paid heavy
interest on loans taken from financial institutions and on the other
hand it has advance of interest free loans to group concern which
is not permissible in the eyes of income tax laws because the same
is against the business principles. Therefore, the Assessing Officer
was fully justified in making disallowance of interest. Otherwise
also the interest payment is disallowable under section 43B of the
Income tax Act. Thus, this ground of appeal is dismissed."
6. Aggrieved with the order of the ld. CIT(A), the assessee has come in
appeal before us.
7. At the outset, the ld. A.R. for the assessee submitted that the identical
issue came for consideration before the Tribunal in the own case of the
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M/s. Multicot Textiles Pvt. Ltd.
assessee in the preceding assessments years i.e. assessment year 2002-03,
2004-05 & 2005-06 and the Tribunal has restored the issue to the file of the
AO. He has produced before us a copy of the order of the Tribunal dated
15.07.11 passed in ITA No.5709/M/09 in the own case of the assessee for
assessment year 2005-06. We find that the Tribunal following the earlier
years' decision in the own case of the assessee for assessment years 2003-04 &
2004-05 has restored the matter back to the file of the AO, observing as under:
5. We have considered the rival arguments made by both the sides,
perused the orders of the Assessing Officer and the CIT(A) and the
paper book filed on behalf of the assessee. We find that in the
preceding assessment years i.e. during A.Ys 2003-04 and 2004-05,
the A.O. had made similar disallowances which were deleted by the
learned CIT(A). On further appeal by the revenue, the Tribunal vide
ITA No.5136/Mum/2007 order dt.25.5.2009 for the A.Ys 2003-04
and 2004-05 restored the issue to the file of A.O. with the following
observation :
" After hearing the rival submissions and perusing the record,
we find that the aspect of commercial expediency as directed
by the Hon'ble Supreme Court in the case of S.A. Builders Ltd.
Vs. CIT cited supra has not been looked into either by the
Assessing Officer or the CIT(A). The ratio laid down by the
Hon'ble Supreme Court in the S.A. Builders Ltd. Vs. CIT (cited
supra) is applicable to the facts of the present case. However,
the matter is set aside to the file of the Assessing Officer to
look into the commercial expediency of advancing interest
bearing funds, as interest free advances, to the parties. The
Assessing Officer shall afford reasonable opportunity of
hearing to the assessee. The ground of appeal raised by
revenue is allowed for statistical purposes."
Keeping in mind the order of the Tribunal in assessee's own case for
the preceding assessment years and in the interest of justice, we
deem it proper to restore the issue back to the Assessing Officer for
fresh adjudication. The Assessing Officer shall decide the issue
afresh and in accordance with law after giving due opportunity of
being heard to the assessee. We hold and direct accordingly. The
ground raised by the assessee is allowed for statistical purposes."
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M/s. Multicot Textiles Pvt. Ltd.
8. The ld. A.R. has further relied upon an authority of the Hon'ble Bombay
High Court in the case of "CIT vs. Upendra T. Kapadia (2013) 256 CTR (Bom)
201" to contend that the alternate finding of the lower authorities that otherwise
disallowance was attracted under section 43(B) of the Act, is also legally not
sustainable as it has been held by the Hon'ble Bombay High Court that the
non-payment of interest amount to a Co-Operative bank would not attract
provision of the section 43(B).
9. Since the issue relating to the interest disallowance has already been
restored by the Tribunal in the own case of the assessee for the preceding
assessment years to the file of the AO as aforementioned, hence for the sake of
consistency, we restore the issue to the AO for fresh adjudication on the same
line as directed by the Tribunal for preceding assessment years. The AO will
also decide the alternative issue relating to the above interest disallowance
under section 43(B) considering the relevant case laws as may be relied
upon/produced by the assessee including the decision of the Hon'ble Bombay
High Court in the case of "CIT vs. Upendra T. Kapadia" (supra). Needless to
say, the AO will give proper opportunity to the assessee to present its case.
10. In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 26.06.2014.
Sd/- Sd/-
(D. Karunakara Rao) (Sanjay Garg)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 26.06.2014.
* Kishore, Sr. P.S.
6 ITA No.1856/M/2011
M/s. Multicot Textiles Pvt. Ltd.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT (A) Concerned, Mumbai
The DR "C" Bench
//True Copy// [
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.
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