I-T - Whether if assessee was having sufficient non-interest bearing funds contributed by shareholders and immediate source of loan to Director was sale proceeds of industrial plot, there can be any nexus between borrowings and advances made to Director - NO: ITAT
By TIOL News Service
NEW DELHI, APR 01, 2016: THE issue is - Whether if assessee was having sufficient non-interest bearing funds contributed by shareholders and immediate source of loan to Director was sale proceeds of industrial plot, there can be any nexus between borrowings and advances made to Director. NO is the answer.
Facts of the case
The assessee company is engaged in the business of manufacturing of plastic, processing machine and its parts. AO noted that the assessee had paid interest to the banks on secured loans borrowed for business purpose but the profit and loss account of the assessee revealed that the assessee had paid a sum of Rs. 41,65.686 to the banks on account of interest @ 15% per annum, whereas assessee had provided its director interest free advances. AO accordingly disallowed Rs.41,65,686 u/s 36(1)(iii), which has been upheld by the CIT(A). AR submitted that the assessee had its own interest free fund and a detailed submission was made in this regard before the authorities below which have been ignored by the authorities below while upholding the disallowance in question. CIT(Appeals) has discussed the submission of the assessee that it had not obtained any loan or credit facilities during the year. The total secured loans outstanding at the beginning of the year i.e. as on 01.04.2010 of Rs.5,09,08,700 has been reduced to Rs.2,75,17,405 as on 31.3.2011. The assessee’s own fund being paid up capital and pre-reserves were Rs.3,65,72,082 as on 01.04.2010 which had been increased to Rs.7,72,68,670 at the end of the year i.e. on 31.3.2011. Reiterating the contents of the same paragraph of the First Appellate Order, AR pointed out further that the immediate source of amount of Rs.1,80,00,000 given to the director Shri R.P. Shukla as loan on 25.8.2010 and 31.8.2010 was the sale proceeds of the investments of the company being industrial plot in greater NOIDA and not the borrowed funds. The assessee company had not acquired any capital assets/fixed assets during the year ending on 31.3.2011 except a mobile phone of Rs.8,250. He contended that the AO without establishing on record any nexus between borrowed funds and specific advance made to its director by the assessee, has made the disallowance in question, upheld by CIT(A).
Having heard the matter, the Tribunal held that,
++ we find that the jurisdictional HC of Delhi in the case of CIT vs. Bharti Tele-venture Ltd. which has now been approved by SC has been pleased to hold as "where the assessee was having sufficient non-interest bearing funds by way of share capital and reserved and there was no nexus between the borrowings of the assessee and advances made by it, no disallowance under sec. 36(1)(iii) was called for". In the present case, the assessee was having sufficient non-interest bearing funds being shareholder fund (Rs.3,65,72,082 as on 01.04.2010 and Rs.7,72,68,670 as on 31.3.2011) and since the immediate source of the loan to the director was sale proceeds of the industrial plot, in our view, there was no nexus between the borrowings of the assessee and advances made to the director out of the interest bearing borrowed funds. It is also undisputed fact that all the borrowings were sanctioned in earlier years and the total secured loan outstanding at the end of the year, has been reduced to Rs.2,75,17,405 as on 31.3.2011 from Rs.5,09,08,700 as on 01.04.2010, during the year, clearly establishes that all the borrowings for which interest/financial charges has been paid, were for the business purpose only. In view of the above material facts and respectfully following the ratios laid down by the jurisdictional High Court of Delhi in the above cited decision in the case of CIT vs. Bharti Tele-venture Ltd., we hold that the authorities below were not justified in making and upholding the disallowance of interest of Rs.41,65,686 invoking the provisions of sec. 36(1)(iii). We thus while setting aside the orders of the authorities below in this regard direct the AO to delete the above disallowance in question. The grounds involving the issue are thus allowed. In result, the appeal is allowed.
(See 2016-TIOL-470-ITAT-DEL)
