2020 (9) TMI 326 - AT - Income Tax

Tribunal rules in favor of assessee on interest disallowance and employees' contributions

The tribunal allowed the appeal, ruling in favor of the assessee on both issues. It held that there was no basis for disallowance of interest on borrowed ... Disallowance of interest paid on borrowed capital @ 12% - Addition on an estimated basis in respect of amount alleged to be diverted as interest free advances to sister concern - HELD THAT:- As on 01/04/2012, the assessee had sufficient interest free own funds in its kitty in order to make interest free advances to its group concerns. We also find that the own funds available with the assessee are much more than the interest free advances given to the group concerns. Hence, it can be safely presumed that interest free advances given to the group concerns were only out of own funds of the assessee and not out of borrowed funds. See case of Reliance Utilities Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] and in HDFC Ltd. reported in [2014 (8) TMI 119 - BOMBAY HIGH COURT]. Respectfully following the ratio decidendi of the same decision, we hold that there cannot be any disallowance of interest on borrowed capital in the facts and circumstances of the case. Delayed Employees contribution to PF and ESI - contribution remitted beyond the due date prescribed under the respective statutes but, the same had been remitted before the due date of filing of return u/s 139(1) - HELD THAT:- Respectfully following the said decision in the case of VBC Industries [2015 (6) TMI 1 - ITAT HYDERABAD] we hold that there cannot be any addition towards employees contribution to PF & ESI when the said contributions were duly remitted before the due date of filing of return of income u/s 139(1) of the Act. The grounds raised in this regard are allowed. Issues:1. Disallowance of interest paid on borrowed capital on an estimated basis for interest-free advances to sister concerns.2. Employees' contribution to PF and ESI remitted beyond due date but before the due date of filing return under section 139(1) of the Act.Issue 1 - Disallowance of Interest on Borrowed Capital:The appeal questioned the confirmation of disallowance of interest paid on borrowed capital at 12% on an estimated basis for interest-free advances to sister concerns. The Assessing Officer (AO) observed interest-free advances given by the assessee to sister concerns while paying interest on borrowings. The AO proposed a disallowance based on the diversion of borrowed funds for non-business purposes. The CIT(A) directed disallowance at 12% on the interest-free advances, which the tribunal upheld. However, the tribunal found that the interest-free advances were made from the assessee's own funds and not borrowed funds, supported by the availability of sufficient interest-free own funds. Citing relevant case laws, the tribunal held that there was no basis for disallowance of interest on borrowed capital, thus allowing the appeal.Issue 2 - Employees' Contribution to PF and ESI:The appeal also addressed employees' contribution to PF and ESI remitted after the due date but before the due date of filing return under section 139(1) of the Act. The tribunal referred to a previous decision involving a similar issue and various High Court decisions. The tribunal analyzed conflicting views on whether such delayed payments are allowable deductions under section 43B. Following the decision of the High Court in favor of the assessee, the tribunal held that employees' contributions remitted before the due date of filing return are allowable as deductions under section 43B. Consequently, the tribunal directed the deletion of the disallowance made on account of employees' contribution to PF and ESI, allowing the appeal on this issue as well.In conclusion, the tribunal allowed the appeal of the assessee, ruling in favor of the assessee on both issues raised in the appeal. The judgment emphasized the distinction between interest-free advances made from own funds versus borrowed funds and clarified the treatment of delayed remittances of employees' contributions to PF and ESI under section 43B.