TaxTMI 
TaxTMI 
2020 (9) TMI 756
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....Act, 1952 and Employees State Insurance Act, 1948. 3. The learned CIT(A) has erred both in law and on the facts of the case in confirming the disallowance of estimated interest expenses of Rs. 25,98,8647-u/s.36(1)( ii) of the Act. 4. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 5. The learned CIT(A) has erred in law and on the facts of the case in confirming action of the ld. AO in levying interest u/s.234A/B/C of the Act." 3. The first issue raised by the assessee is that the Ld. CIT-A erred in confirming the disallowance for the sum of Rs. 2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Act. 4. The facts in brief are that the assessee is a Private Limited Company and engaged in the business of Manufacturing of Ferrous and Non-Ferrous Metal. On perusal of t....
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....43B of the Act. 6.2 The assessee also submitted that the provisions of section 43B do not talk about only employer's contribution but it also covers employee's contribution. Therefore the sum of employee contribution towards ESI should not be disallowed if the sum is paid before the due date of filing the return of Income as specified under section 139 of the Act. 7. However the Ld. CIT(A) disregarded the contention of the assessee by observing that the assessee did not pay the sum of employee contribution towards ESIC on/before the due date in accordance with the provisions of section 36(1)(va) of the Act. Being aggrieved by the order of the Ld. CIT-A, the assessee is an appeal before us. 8. The Ld. AR for the assessee before us filed a paper running from pages 1 to 98 and agreed that the judgment of Hon'ble Gujarat High Court in the case CIT v/s Gujarat State Road Transport Corporation reported in 366 ITR 170 is squarely applicable in his case wherein it was held that if the payment of employee contribution towards ESI/PF is paid after the due date of the relevant Acts then the sum which has been paid after due date should be disallowed as per the provisio....
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....l of the assessee is dismissed. 12. The second issue raised by the assessee is that the Ld. CIT-A erred in confirming the disallowance made under section 36(1)(iii) of the Act. 13. On perusal of the balance sheet, the AO observed that the assessee had given the interest free loan to its subsidiaries amounting to Rs. 7,16,59,975/-and on the other hand it has also claimed interest expenditure in its books account for the sum of Rs. 2,10,55,848/- on the funds borrowed by it. The AO also found that there was no information furnished by the assessee suggesting that the funds was given to the subsidiaries either from own funds or from borrowed funds (i.e. interest bearing funds). 13.1 The AO also found that there was no information furnished by the assessee suggesting that the interest free loans were provided for the purpose of the business. Accordingly, the AO in the absence of any submission/clarification, made the proportionate disallowance under section 36(1)(iii) of the Act by observing as under: (B) Amount of expenditure by way of interest debited in the P & L A/c. 21055848 ....
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....aw that when investments are made in "subsidiary company", the same are out of "commercial expediency" and hence, no disallowance is called for u/s 36(1)(iii) of the Act. Reliance is placed on "S.A. Builders v. CIT - 288 ITR 1 (SC)". Substantial interest free funds: ♦ In any case, as against average "interest free advance" of Rs. 5, 48,92,111/-, assessee has average "interest free funds" of Rs. 8,39, 74,092/- as at 31.03.15 (as is evident from Annexure "B") i.e. almost 1.53 times. ♦ In view of the substantial interest free funds, the presumption shall be that the assessee has utilized "interest free funds" for making underlying the "interest free advances" and hence, no disallowance is called for in respect of interest on borrowed funds. Reliance is placed on followings: * CIT v. Reliance Industries Ltd. 410 ITR 466 (SC); * CIT v. Torrent Power Ltd. 363 ITR 474 (Guj.); * CIT v. Suzlon Energy Ltd. 354 ITR 630 (Guj.); * CIT v. Gujarat Power Corporation Ltd. 352 ITR 583 (Guj.); * CIT v. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom.); * Munjal Sales Corporation v. CIT 298 ITR 298 (SC); ....
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.... was received. Secondly, the amounts advanced to its sister concerns, on the assessee's own admission, were at least partly out of borrowed funds. Therefore, the Tribunal was not justified in deleting the disallowance of interest maintained by the AAC. The view taken by the AAC in this regard was correct." 17.2 Thus, we hold that the amount of advances received from the customers cannot form part of own fund of the assessee. Therefore, the amount of interest on the borrowed funds diverted to the non-interest bearing advances should be disallowed. 17.3 However, the amount of capital including reserve available to the assessee, shall be presumed to have been utilized in advancing such interest free advance. In holding so we draw support from the judgment of Hon'ble Punjab and Haryana High court in case of CIT v. Max India Ltd. reported in 80 Taxmann.com 98 where it was held as under:- 5. With regard to the first issue qua disallowance of interest expenditure under section 36(1)(iii) of the Act, admittedly, the assessee company had given interest free loans and advances amounting to Rs. 2297.83 lacs upto the end of the relevant year including Rs. 704 lacs during....