IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A. No.100/Bang/2014 (Assessment Year : 2010-11) M/s. Kems Auto Components Vs. Dy. Commissioner of Inocme Ltd., Tax, No.110, Railway Parallel Road, Circle 11(5), Bangalore. Kumarapark West, Seshadripuram, Bangalore-560 020 PAN AAACK 6751B Appellant Respondent. Appellant By : Shri Narendra Sharma, Advoacate. Respondent By : Shri Nambi Rajaa Pillai, JCIT (D.R) Date of Hearing : 18.8.2016. Date of Pronouncement : 16. 09.2016. O R D E R Per Shri Vijay Pal Rao, J.M. : This appeal by assessee is directed against order dt.25.10.2013 of Commissioner of Income Tax (Appeals)-I, Bangalore for Assessment Year 2010-11. 2 ITA No.100/Bang/2014 2. only issue arises for our consideration and adjudication is whether in facts and circumstances of case CIT (Appeals) has erred in confirming disallowance of interest on account of loan/advances of Rs.1,58,54,874 to its three Directors. In scrutiny assessment, Assessing Officer noticed from details filed by assessee that assessee claimed interest of Rs.2,82,57,064 on loans aggregating to Rs.21,72,89,376. Assessing Officer further noticed that assessee has given advances amounting to Rs.1,58,64,874 to its three Directors as under : S.No. Name of Director Advance Given (Rs.) 1. Deepak Gandhi 5,86,000 2. S.K. Gandhi 92,72,000 3. Manish Gandhi 60,06,874 Total : 1,58,64,874 Accordingly, Assessing Officer has worked out proportionate interest of Rs.20,62,434 and disallowed same on ground that it is not laid out for purpose of business of assessee. assessee challenged action of Assessing Officer before CIT (Appeals) and explained that assessee's own fund is sufficient for advancing loan to Directors. assessee has given details that its own interest free fund is more than Rs.10 Crores and 3 ITA No.100/Bang/2014 therefore no interest can be disallowed for advancing of loan amounting to Rs.1,58,64,874 to Directors. CIT (Appeals) did not accept contention of assessee. 3. Before us, ld. AR of assessee has reiterated contention that assessee's own fund is sufficient to advance amount in question to Directors. He has referred Balance Sheet and submitted that assessee's own fund is Rs.10.35 Crores whereas advances given to Directors are at Rs.81.58 Crores. Therefore assessee's own interest free fund is more than sufficient to advance amount to Directors. In support of his contention, he has relied upon judgment of Hon'ble Bombay High Court in case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) as well as decision of co-ordinate bench of this Tribunal dt.29.4.2016 in case of KBD Sugars & Distilleries Ltd. Vs. ACIT in ITA No.1062 & 1073/Bang/2014 and submitted that even if assessee's own fund as well as borrowed fund are pooled together presumption can be raised that assessee's own fund is utilized for purpose of giving interest free advances to Directors. 4. On other hand, ld. DR has relied upon orders of authorities below and submitted that assessee has failed to show direct nexus 4 ITA No.100/Bang/2014 between advances given to Directors and assessee's own fund. He has further contended that when assessee's own fund is already utilized for acquisition of assets then it cannot be presumed that own fund is available for giving loan to Directors. 5. We have considered rival submissions as well as relevant material on record. assessee has claimed that assessee's own fund comprising share capital, share application money, reserves and surplus comes to Rs.10.35 Crores as under : Sl.No. Particulars Amounts (Rs.) 1. Share Capital 66,80,000. 2. Share Application Money 8,00,000 3. Reserves & Sruplus 9,60,32,194 Total : 10,35,12,194. This factual position has not been disputed by authorities below that assessee's own fund is Rs.10.35 Crores. identical issue was fell for consideration of Hon'ble Bombay High Court in case of CIT Vs. Reliance Utilities & Power Ltd. (supra) wherein revenue has filed appeal against order of Tribunal and raised contention as recorded in para 6 of judgment. After considering contention of revenue that own fund 5 ITA No.100/Bang/2014 has been utilized for purpose of fixed assets Hon'ble High Court has held in paras 8 to 10 as under : 8. We have heard learned counsel for both parties. In our opinion very basis on which Revenue had sought to contend or argue their case that shareholders funds to tune of over Rs. 172 crores was utilised for purpose of fixed assets in terms of balance sheet as on 31st March, 1999, is fallacious. Firstly, we are not concerned with balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, learned counsel has been unable to point out to us from balance sheet that balance sheet as on 31st March, 1999 showed that shareholders funds were utilised for purpose of fixed assets. To our mind P&L a/c and balance sheet would not show whether shareholders funds have been utilised for investments. argument has to be rejected on this count also. 9. Apart from that we have noted earlier that both in order of CIT(A) as also Tribunal, clear finding is recorded that assessee had interest- free funds of its own which had been generated in course of year commencing from 1st April, 1999. Apart from that in terms of balance sheet there was further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, finding of fact recorded by CIT(A) and Tribunal as to availability of interest-free funds really cannot be faulted. 10. If there be interest-free funds available to assessee sufficient to meet its investments and at same time assessee had raised loan it can be presumed that investments were from interest-free funds available. In our opinion Supreme Court in East India Pharmaceutical Works Ltd. (supra) had occasion to consider decision of Calcutta High Court in Woolcombers of India Ltd. (supra) where similar issue had arisen. Before Supreme Court it was argued that it should have been presumed that in essence and true character taxes were paid out of profits of relevant year and not out of overdraft account for running of business and in these circumstances appellant was entitled to claim deductions. Supreme Court noted that argument had considerable force, but considering fact that contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber s case (supra) Calcutta High Court had come to conclusion that profits were sufficient to meet advance tax liability and profits were deposited in overdraft account of assessee and in such case it should be presumed that taxes were paid out of profits of year and not out of overdraft account for running of business. It noted that to raise presumption, there was sufficient material and assessee had urged contention before High Court. principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then presumption would arise that investments would be out of 6 ITA No.100/Bang/2014 interest-free fund generated or available with company, if interest-free funds were sufficient to meet investments. In this case this presumption is established considering finding of fact both by CIT(A) and ITAT. Thus contention raised by revenue that own fund has been utilized for purpose of fixed assets was not accepted by Hon'ble High Court and it was held that if there are funds available both interest free and loan then presumption would arise that investment would be out of interest free fund generated or available with company if interest free fund was sufficient to meet investment. We are of view that judgment of Hon'ble Bombay High Court in case of CIT Vs. Reliance Utilities & Power Ltd. (supra) is applicable in facts of present case. Accordingly, following judgment of Hon'ble Bombay High Court (supra), addition made by Assessing Officer in question is deleted. 6. In result, appeal of assessee is allowed. Order pronounced in open court on 16.09.2016. Sd/- Sd/- (A.K. GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp M/s. Kems Auto Components Ltd. v. Dy. Commissioner of Income-tax, Circle 11(5), Bangalore