TaxTMI 
TaxTMI 
2023 (5) TMI 1278
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....assessment proceedings, the AO noted that the assessee has given advances of Rs. 24,13,56,764 to its sister concern, M/s. Naveen Hotels Ltd. for purchase of land and the average interest at Rs. 2,14,35,676 has been paid on the OD facility by the assessee. The advance for land was made from the OD a/c/Current a/c/CC a/c. The AO observed that the advance paid to Naveen Hotels Ltd. (sister concern) was capital in nature, because the loan advanced to Naveen Hotels was for purchase of land and it was not put to use during the impugned assessment year. Therefore the interest expenditure should be capitalized instead of claiming it as revenue expenditure. Accordingly the same was added to the income of the assessee. 4. The CIT(Appeals) upheld the order of the AO in the second round of set aside proceedings before him also. Aggrieved, the assessee is in appeal before the Tribunal. 5. The ld. AR reiterated the submissions made before the lower authorities and filed written synopsis which is as under:- "GROUND - 3 : DISALLOWANCE OF INTEREST UNDER FIRST PROVISO TO SECTION 36(1)(iii) "3. The learned CIT(A) has erred by holding that the learned Assessing Officer has righ....
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....en allowed only if the asset (land) would have been put to use for the purpose of business. He disallowed the interest holding that the interest pertaining to this capital expenditure cannot be claimed as revenue expenditure and adopted the 10 percent as rate of interest and accordingly disallowed the proportionate interest amounting to Rs. 2,41,35,676. The learned Assessing Officer has added back such interest income to the total income of the Appellant. 8. The learned CIT(A) has confirmed the addition of interest holding that the proviso to section 36(1)(iii) are applicable to the Appellant. The Appellant most humbly submits that the advance has been given to the sister concern. The said advance will be receivable by the Appellant and such amount will not be capitalized in the books of account of the Appellant. The advance is not a capital expenditure in the books of the Appellant attracting the proviso to section 36(1)(iii) of the Act in the instant case. Thus, the proviso to section 36(1)(iii) is not applicable to the facts of the case. 9. In view of the above, the Appellant prays before Your Honors to hold that the proviso to section 36(1)(iii) is not applica....
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.... "4. The learned CIT(A) has erred by not holding that the Appellant had advanced the free funds on the facts and circumstances of the case." 14. The Appellant has made the payment to sister concern out of the interest free cash available with the Appellant. The Appellant most humbly states that the finding of the learned Assessing Officer that the payments has resulted in over drawals and negative balance increased from time to time leading to charging of OD/CC interest by the bank is factually incorrect. The Appellant has utilized the interest free funds available in making the advance to Naveen Hotels Ltd. 15. In case, the Appellant has utilized the overdraft and cash credit facility in making the land advance to Naveen Hotels, the cash outflow from financing activity should have been higher by such amount over and above the cash generated from operating activity. The Appellant has generated cash of Rs. 43,04,92,050.88 from the operating activities and cash outflow from financing activities amounted to Rs. 38,75,13,394.03 during the year under consideration. Your Honors reference is drawn to page number 145 of the paper book for the cash flow statement. Fur....
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....pported the assessment order and learned AR of the assessee supported the ITA No. 1531/B/2012 order of CIT (A). He also submitted that as per the revised Balance Sheet on page 17 of the paper book, the own interest free funds are to the extent of Rs. 151.44 Crores on 31.03.2009 and Rs. 179.63 Crores on 31.03.2008. Then he drawn our attention to page 11 of the assessment order and pointed out that as per the A.O., the interest free advances to sister concern a on 31.03.2009 is only Rs. 128.89 Crores and on 31.03.2008 only Rs. 136.12 Crores. He submitted that own interest free funds on both these dates i.e. 31.03.2009 and 31.03.2008 is in excess of interest free advances and therefore, no disallowance of interest is justified. He placed reliance on the tribunal order rendered in the case of M/s. Kems Auto Components Ltd. vs. DCIT in ITA No. 100/B/2014 dated 16.09.2016 (Copy Filed) and pointed out that in that case, the tribunal followed the Judgment of Hon'ble Bombay High Court rendered in the case of CIT vs. Reliance Utilities & Power Ltd., 313 ITR 540. 13. We have considered the rival submissions. In view of the facts noted above as per which, own interest free funds o....
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....ce on the judgement of Hon'ble Bomaby High Court in the case of CIT V/s. Reliance Utilities & Power Ltd [20091 178 Taxman 135 (Bombay) at para 10 has held that if there are funds available, both, interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with company. The copy of the order has been provided at Page No. 01 to 05 of the legal paper book for Your Honors ready reference. Kindly refer para 8 to 10 of the case law for the relevant portion of the observation of the Hon'ble High Court. The relevant portion of the judgment has been reproduced below for Your Honours ease of reference: "The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT." 22. In view of the above, the Appellant prays be....
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....ower authorities have rightly observed that the advances were given from the OD/CC/Current A/cs. He further submitted that the land purchased by Naveen Hotels Ltd. was not put to use during the impugned assessment year, therefore it should be capitalized. He also submitted that the case laws relied on the by the ld. AR are distinguishable on the present facts of the case. 8. After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, we note that the assessee had advanced loans of Rs. 24,13,56,764 to Naveen Hotels Ltd. which is a sister concern for the business purpose for purchase of land and interest has been paid by the assessee on the loan account. The AO proportionately disallowed the interest by holding that the interest should be capitalized as per proviso to section 36(1)(iii) because the assets were not put to use during the impugned assessment year. On going through the ledger account of Naveen Hotels in the books of the assessee company, it is noticed that the interest free funds have been given on various dates on piece-meal basis and the amount has also been received back from the sister concern on different dates, b....