By TIOL News Service

AHMEDABAD, AUG 31, 2018: THE ISSUE IS - Whether sundry creditors amounts to own funds of assessee which can be used for giving interest free advance to others. NO IS THE VERDICT.

Facts of the case

The assessee company, engaged in the business of Coal trading and stevedoring, had filed return for relevant AY. The assessee in the earlier years had given the advance to M/s. Adani Powers Ltd for Rs.16 crores only. This advance was given on an interest basis. The assessee during the relevant year received back the advance and further given this amount of Rs. 16 crores to M/s Midex Overseas Ltd. (MOL) without charging any interest. The assessee during the assessment proceedings claimed that the amount was advanced out of its own funds. Therefore, no interest was charged. However the AO was not convinced and worked out the interest expense of Rs. 61,04,753/- and added to the total income of the assessee. On appeal, CIT(A) deleted the addition made by the AO. Aggrieved Revenue, filed appeal before Tribunal.

Tribunal held that,

++ the assessee was paying interest on the borrowing funds. The own capital of the assessee in its balance sheet as on 31-03-2010 was shown for Rs.2,46,30,404/- only, which was less than advance given to MOL. The Counsel for the assessee claimed that there was an interest-free fund available with the assessee in the form of current liabilities to the tune of Rs. 599.67 crores out of which such advances were made to MOL. It was noted that there can be various kinds of current liabilities such as creditors for the goods, provisions, and expenses, etc. These current liabilities normally arise out of the expenses incurred by the assessee. These expenses can be direct expenses as well as indirect expenses. Normally under the head 'current liability' no liability on account of receipt of cash is shown unless some advance money received from the debtors or similar parties. Therefore these current liabilities arise to the assessee on account of day to day business activities. Therefore, the same cannot be diverted for making the loans and advances. Thus sundry creditors cannot form part of an interest-free fund available with the assessee. The Counsel for the assessee has just relied on the finding of ITAT in the case of Torrent Financiers without bringing facts on record suggesting that there were sundry creditors which have been treated own funds of the assessee. There was no cash flow statement filed by the assessee to prove that the sundry creditors fund was used in advancing the loan to MOL. It was also noted that sundry creditors cannot form part of the own funds of the assessee. In the result, the appeal by the Revenue is allowed.

(See 2018-TIOL-1391-ITAT-AHM)