ACIT, 3(1), Indore v. M/s. Kehems Engineering Private Ltd
[Citation -2016-LL-0105-11]

Citation 2016-LL-0105-11
Appellant Name ACIT, 3(1), Indore
Respondent Name M/s. Kehems Engineering Private Ltd.
Court ITAT-Indore
Relevant Act Income-tax
Date of Order 05/01/2016
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags corroborative evidence • interest-bearing funds • interest free advance • ad hoc disallowance • interest free fund • interest free loan • license agreement • security deposit • sister concern • share capital • interest paid • cash credit
Bot Summary: CIT(A) erred in deleting the addition of Rs. 39,91,541/- on account of disallowance of Finance Interest Charges without considering that if the assessee had interest-free funds which was advanced as interest- free deposit to its sister concern and then the assessee borrows interest-bearing funds to meet its business needs; it only means that the diverted fund has been supplemented by the interest-bearing funds. Erred in deleting the addition of Rs. 2,00,000/- on account of the assessee s failure to produce corroborative evidence and to establish that the expenses were identical to business, without appreciating that the assessee was duly bound to produce/establish the same, which it has failed despite consuming adequate opportunities. The assessee has further informed vide its reply dated 28th March that the assessee company had given a deposit of Rs 610 lacs in 1995 to M/s Kehems Consultants Private Limited in pursuance of License Agreement to acquire technology and the relevant technical know-how. The AO found that the assessee had also made deposit of Rs. 4,85,00,000/- to its sister concern M/s. Kehems Consultants Private Limited and no interest on this amount has been charged and the assessee was asked as to why the interest paid by the assessee should not be disallowed keeping in view that the assessee has made interest free advance to its sister concern by way of security deposit against business right. The submission of the assessee was considered but the same was not acceptable as the company have both types of fund i.e. interest free as well interest bearing during the year under consideration. AO has failed to follow the direct decision of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Limited, 313 ITR 340, wherein it is held that where the assessee possessed sufficient interest free funds of its own which were generated in the course of the relevant financial year, part from substantial shareholders funds, presumption sands established that the investment in sister concerns were made by the assessee out of interest-free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. AO has erred in law in placing reliance on the decision of Delhi ITAT reported as the assessee claimed that it gave interest-free advances from its own funds and then borrowed funds from banks can be treated as for supplementing cash diverted by assessee without any benefit to it - claim for deduction of interest an borrowing disallowed by AO and confirmed by the ITAT. It is well settle principle that in the event of two conflicting decision of High Court, the decision which is in favor of the assessee should be followed CIT Vs. Vegetable 10 ACIT,3(1), Indore.


IN INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI D.T. GARASIA, JUDICIAL MEMBER AND SHRI B.C.MEENA, ACCOUNTANT MEMBER I.T.A.No. 602/Ind/2014 A.Y. : 2010-11 ACIT, M/s.Kehems Engineering Private Ltd., 3(1), Vs. Indore. Indore. Appellant Respondent PAN NO.AABCK3441M Appellants by : Shri R.R.Meena, DR Respondent by : Shri Manoj Phadnis, CA Date of Hearing : 04.11.2015. Date of : .12.2015 Pronouncement ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 2 I.T.A.No. 602/Ind/2014 A..Y.2010-11 ORDER PER D. T. GARASIA, J.M. This appeal by Revenue is directed against order of CIT(A)-I, Indore, for assessment year 2010-11. 2. grounds raised by Revenue in this appeal are as under :- On facts and in circumstances of case ld. CIT(A) (i) erred in deleting addition of Rs. 39,91,541/- on account of disallowance of Finance & Interest Charges without considering that if assessee had interest-free funds which was advanced as interest- free deposit to its sister concern and then assessee borrows interest-bearing funds to meet its business needs; it only means that diverted fund has been supplemented by interest-bearing funds. (ii) erred in deleting aforesaid addition without appreciating fact that assessee company was 2 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 3 I.T.A.No. 602/Ind/2014 A..Y.2010-11 incorporated in October, 1994, raised share capital & other funds and more than 98% of fund so raised was given to sister-concern in March,1995, itself. No prudent business entity would strip itself off entire fund it has. Clearly, advancing of deposit to sister-concern had no business exigency; and on this ground along, addition was required to be upheld. (iii) erred in deleting aforesaid addition without appreciating that no break-up of interest fee funds and interest-bearing funds was provided by assessee; hence, it is incorrect to say on part of ld. CIT(A) that said advance to sister- concern (given in 1995) still represents interest-free funds (in F.Y. 2009-10). (iv) Erred in deleting aforesaid addition ignoring facts narrated in assessment order and further ignoring case of ACIT vs. Punjab Stainless Steel Industries, 128 ITR 12, which is squarely applicable 3 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 4 I.T.A.No. 602/Ind/2014 A..Y.2010-11 in assessee s case. (v) Erred in deleting addition of Rs. 2,00,000/- on account of assessee s failure to produce corroborative evidence and to establish that expenses were identical to business, without appreciating that assessee was duly bound to produce/establish same, which it has failed despite consuming adequate opportunities. 3. Ground no. 1 relates to addition of Rs 39,91,541/- on account of disallowance u/s 36(1)(iii) of Income-tax Act, 1961. 4. brief facts of case are that assessee filed return of income for assessment year 2010-11 through E- filing vide acknowledgement number 157622771220910 declaring total income of Rs 28,31,680/-. During assessment proceedings, ld. AO has made certain additions against which assessee is in appeal. assessee company had given deposit of Rs 610 lacs in 1995 to M/s Kehems 4 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 5 I.T.A.No. 602/Ind/2014 A..Y.2010-11 Consultants Private Limited in pursuance of License Agreement to acquire technology and relevant technical know-how. copy of agreement and related details were filed before AO. by assessee vide reply dated 25th March 2013. assessee has further informed vide its reply dated 28th March that assessee company had given deposit of Rs 610 lacs in 1995 to M/s Kehems Consultants Private Limited in pursuance of License Agreement to acquire technology and relevant technical know-how. copy of agreement and related details were also filed with reply dated 25th March 2013. deposit was given in year 1995 out of share capital and other interest free funds available with company in 1995. said deposit has now reduced to Rs 485 lacs during year under assessment. During year, company has paid interest and bank charges amounting to Rs 39,91,541/-. This amount is incurred on aggregate loans of Rs 2,09,01,707/-. Out of this, Rs 1,91,96,921/- is cash credit loans against stocks and sundry debtors and remaining Rs 17,04,785/- is towards finance for 5 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 6 I.T.A.No. 602/Ind/2014 A..Y.2010-11 vehicles. These loans have been acquired much later to Financial Year 1995 when company had given security deposits. Thus interest paid is towards loans borrowed for purpose of business of company. deposit of Rs 485 lacs outstanding as at 31st March 2010 is not financed from borrowed money but is from share capital raised by company in year 1995. On basis of clear facts as mentioned above, interest paid by company cannot be considered as being in any way attributable towards interest free deposit given by company. aggregate of share capital and free reserves of company are as under:- Particulars 31.03.2 010 31.03.2009 Share Capital 5,49,76,300.00 5,49,76,300.00 Reserves and Surplus 2,34,36,064.00 2,16,35,207.00 Total 7,84,12,364.00 7,66,11,507.00 Interest Free Deposit 4,85,00,000.00 4,85,00,000.00 That from foregoing it will be evident that interest free funds available with company are far in excess of interest free loan given by company. This is without 6 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 7 I.T.A.No. 602/Ind/2014 A..Y.2010-11 prejudice to contention that as deposit is given in year 1995, this comparison itself is not warranted. 5. During course of assessment proceedings, AO observed from Schedule-8 of Balance Sheet relating to Loans, Advances and Deposits, assessee company has shown advances at Rs. 5,09,61,406.31 narrating as deposit with Government Department and Others . assessee was asked to submit details of these advances and amount of interest recovered. In response assessee submitted list of advances/deposits. AO found that assessee had also made deposit of Rs. 4,85,00,000/- to its sister concern M/s. Kehems Consultants Private Limited and no interest on this amount has been charged and assessee was asked as to why interest paid by assessee should not be disallowed keeping in view that assessee has made interest free advance to its sister concern by way of security deposit against business right. In reply assessee submitted its reply dated 28.03.2013 that it have sufficient interest free fund for making advances to its sister concern and advances made in 7 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 8 I.T.A.No. 602/Ind/2014 A..Y.2010-11 year 1995. submission of assessee was considered but same was not acceptable as company have both types of fund i.e. interest free as well interest bearing during year under consideration. He further mentioned that assessee company was incorporated in October,1994 and assessee company had given advances in March,1995, as such at that time company could have only its share capital as interest free funds. He further observed that paid up share capital of company even at end of year under consideration was Rs. 5,49,76,300/-. He further observed that amount of paid up capital of company at end of year in March, 1995 i.e. at time of making interest free advances to its sister concern must have less than amount as stated in balance of year. As such assessee s claim that it have interest free fund on date of making advance to its sister concern is totally wrong. AO further relied on Hon ble ITAT, Delhi, in case of ACIT vs. Punjab Stainless Steel Industries reported in 128 ITR 12. In this case, assessee claimed that it gave interest free advances from it s own funds 8 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 9 I.T.A.No. 602/Ind/2014 A..Y.2010-11 and then borrowed funds from banks can be treated as for supplementing cash diverted by assessee without any benefit to it-claim for deduction of interest on borrowing disallowed by AO and confirmed by ITAT. AO disallowed finance and interest charges charged in profit and loss account at Rs. 39,91,541/- and added to income of assessee. 6. matter carried to ld. CIT(A) and ld. CIT(A) deleted addition. 7. Ld. DR relied upon order of AO. 8. ld. Authorized Representative for assessee has contended that ld. AO has failed to take proper note of balance sheet of company for period ending 31st March 1996, being first accounting year of company, which very clearly shows following position:- Particulars 31.03.1996 Share Capital 4,50,03,000 Reserve and Surplus 35,36,189 Unsecured Loans from 1,34,36,221 Promoters Total 6,19,75,410 Interest free Deposits 6,10,00,000 9 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 10 I.T.A.No. 602/Ind/2014 A..Y.2010-11 ld. AO has failed to follow direct decision of Hon'ble Bombay High Court in case of CIT vs. Reliance Utilities and Power Limited, (2009) 313 ITR 340, wherein it is held that where assessee possessed sufficient interest free funds of its own which were generated in course of relevant financial year, part from substantial shareholders funds, presumption sands established that investment in sister concerns were made by assessee out of interest-free funds and therefore no part of interest on borrowings can be disallowed on basis that investments were made out of interest bearing funds. ld. AO has erred in law in placing reliance on decision of Delhi ITAT reported as assessee claimed that it gave interest-free advances from its own funds and then borrowed funds from banks can be treated as for supplementing cash diverted by assessee without any benefit to it - claim for deduction of interest borrowing disallowed by AO and confirmed by ITAT. It is well settle principle that in event of two conflicting decision of High Court, decision which is in favor of assessee should be followed CIT Vs. Vegetable 10 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 11 I.T.A.No. 602/Ind/2014 A..Y.2010-11 Products Ltd.[1973] 88 ITR 192 SC. In present case Id. AO has followed decision of ITAT in contrast to decision of High Court. decision rendered in case of ACIT vs. Punjab Stainless Steel Industries reported in 128 ITR 12 is based on facts completely different form instant case and is therefore not applicable in assessee s case. addition made by Id. AO is not sustainable on facts and in law and therefore addition made be deleted. 9. We have heard rival contentions of both parties. Looking to facts and circumstances of case, we find that assessee was having sufficient interest free funds to extend advance of Rs. 6.10 crores to its sister concern in assessment year 1996-97. Ld. DR could not point out anything contrary to finding of ld. CIT(A). We uphold action of ld. CIT(A). Ground no. 1 of Revenue is dismissed. Ground no. 2 : 10. Ground no. 2 relates to addition of Rs. 2,00,000/- made on account of disallowance of certain expenses. 11 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 12 I.T.A.No. 602/Ind/2014 A..Y.2010-11 11. AO made further lump sum disallowance of Rs. 2,00,000/- in expenses claimed by assessee on ground that certain expenses were not properly vouched and open to verification. He further mentioned in order that for availing claim of any expenditure u/s 37, onus was on assessee to establish that expenditure was exclusively incurred for purpose of business activity. Mere production of vouchers and invoices are not sufficient to explain reasonableness and genuineness of such expenditure. It was obligatory on part of assessee to furnish other corroborative evidences alongwith vouchers relevant to expenditure. assessee could not explain all expenses that are debited to profit and loss account conclusively with support of corroborative evidences and he made lump sum disallowance of Rs. 2,00,000/-. 12. matter carried to ld. CIT(A) and ld. CIT(A) has deleted disallowance made by Assessing Officer observing as under :- 6. Ground no. 2 is against lump sum disallowance 12 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 13 I.T.A.No. 602/Ind/2014 A..Y.2010-11 of Rs. 2 lakh from certain expenses which are not properly vouched. This is ad hoc disallowance, where AO has not even identified as to which expenses is questionable and unvouched. Out of all expenses debited in profit and loss account, he has made ad hoc disallowance of Rs. 2 lakh. Such ad hoc disallowances without identification of expense which is not properly vouched and without finding any defect in any vouchers is not at all justified when appellant is company whose books of account are duly audited. Ground no.2 of appeal is also allowed. 13. Ld. DR relied upon order of AO. 14. ld. Authorized Representative contended that additions were made on ad-hoc basis. Id. AO has not pointed out any specific defects. Id. AO has also not considered that accounts are duly audited and that there are no qualification in accounts. ld. Authorized Representative relied on order of ld. CIT(A). 15. We have heard rival contentions of both parties. 13 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 14 I.T.A.No. 602/Ind/2014 A..Y.2010-11 Ld. DR could not point out anything contrary to finding of ld. CIT(A). We uphold action of ld. CIT(A). Ground no.2 of Revenue also fails. 16. In result, appeal of Department is dismissed. This order has been pronounced in open court on 5th January, 2016. Sd/- Sd/- (B. C. MEENA) ( D.T.GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 5th January, 2016. CPU* 9.10 14 ACIT,3(1), Indore. vs. M/s. Kehems Engineering Private Limited, Indore. 15 I.T.A.No. 602/Ind/2014 A..Y.2010-11 15 ACIT, 3(1), Indore v. M/s. Kehems Engineering Private Ltd
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