Venus Records & Tapes (P.) Ltd. v. Addl. CIT

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The Tax Publishers2013 TaxPub(DT) 0657 (Mum-Trib) : (2013) 152 TTJ 0001 : (2013) 082 DTR 0035 INCOME TAX ACT, 1961 --Business deduction under section 36(1)(iiii)--Interest on borrowed capital Interest-free advances given to related persons--Out of total borrowed funds interest paid was disallowed by the assessing officer in its entirety. The Commissioner (Appeals) came to finding of fact that out of total sums of Rs. 4.83 crores advanced by assessee to related person, Rs. 1.55 crores pertained to the deposits given to directions and other related persons for office premises. Thus, only a sum of Rs. 3.28 crores could be said to have been utilized by the assessee out of interest bearing borrowed funds for purpose other than business thus, to that extent interest was disallowed by the Commissioner (Appeals) . *Held:* Not rightly so. There was share capital and advances against share capital money was to Rs. 9.26 crores which was far in excess of interest free advances made was for non business purposes, i.e., 3.28 crore, no interest was therefore, to be disallowed at all. Moreover, provision of section 40A(2) also could not be applied. Interest-free advances to associate concerns from year to year. For assessment year 2005-06 these are only to the extent of Rs. 4,82,82,401 and for assessment year 2006-07 these are Rs. 5,17,61,226. Therefore, in any case the disallowance made by the assessing officer could not be to the extent it has been disallowed by the assessing officer for these years. The facts are properly appreciated by Commissioner (Appeals) and he has recorded a finding that what was given by the assessee to its associate concern was a total sum of Rs. 4,82,82,401 for assessment year 2005-06. Out of the said amount, a sum of Rs 1.55 crore pertained to the deposits given to various directors and related parties as advance against office premises which was utilized by the assessee for the purpose of business. Thus, Commissioner (Appeals) has arrived at a finding that only a sum of Rs. 3,27,82,401 can be said to have been utilized by the assessee out of interest-bearing borrowed funds which can be said to be for the purpose of other than business. It is in this manner Commissioner (Appeals) has sustained disallowance only to the extent of interest pertaining to interest-free loans and advances of Rs. 3,27,82,401. Therefore, the issue raised by the Revenue in this regard i.e. regarding deletion made by Commissioner (Appeals) has no merit and department's ground in this respect for both the years deserves to be dismissed and is dismissed. [Para 6] If the facts of the present case are considered in the light of the decision of Hon'ble jurisdictional High Court then for the years under consideration share capital and advance against share application money for both the years will be a sum of Rs. 9,25,64,440 which in any case exceeds much more the interest-free advances made by the assessee which for these years are only a sum of Rs. 4.82 crores and Rs. 5.17 crores. According to the aforementioned decision of Bombay High Court, share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds. Therefore, there is no merit in the disallowance to the extent it has been sustained by Commissioner (Appeals) . The disallowance sustained by Commissioner (Appeals) for both the years is deleted and the assessee's ground in this respect of both the years is allowed. [Para 6.3] So far as it relates to applicability of section 40A(2), it is found that assessing officer has made only a passing reference of section 40A(2). It has not been described as to how section 40A(2) was applicable. Departmental Representative also could not state that how section 40A(2) was applicable to make the impugned disallowance. Therefore, after considering the order passed by authorities below and the arguments of both the parties, disallowance of interest cannot be sustained even on the application of section 40A(2). [Para 6.4] Income Tax Act, 1961, Section 36(1)(iii) Income Tax Act, 1961, Section 40A(2) INCOME TAX ACT, 1961 --Appeal [Tribunal]--Precedent Decision of jurisdictional High court vis-a-vis other High Court--Reference to other High Court's decision could not be made where Jurisdictional High Court's decision was available and subsisting. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0657 (Mum-Trib) : (2013) 152 TTJ 0001 : (2013) 082 DTR 0035

INCOME TAX ACT, 1961

--Business deduction under section 36(1)(iiii)--Interest on borrowed capital Interest-free advances given to related persons--Out of total borrowed funds interest paid was disallowed by the assessing officer in its entirety. The Commissioner (Appeals) came to finding of fact that out of total sums of Rs. 4.83 crores advanced by assessee to related person, Rs. 1.55 crores pertained to the deposits given to directions and other related persons for office premises. Thus, only a sum of Rs. 3.28 crores could be said to have been utilized by the assessee out of interest bearing borrowed funds for purpose other than business thus, to that extent interest was disallowed by the Commissioner (Appeals) . Held: Not rightly so. There was share capital and advances against share capital money was to Rs. 9.26 crores which was far in excess of interest free advances made was for non business purposes, i.e., 3.28 crore, no interest was therefore, to be disallowed at all. Moreover, provision of section 40A(2) also could not be applied.

Interest-free advances to associate concerns from year to year. For assessment year 2005-06 these are only to the extent of Rs. 4,82,82,401 and for assessment year 2006-07 these are Rs. 5,17,61,226. Therefore, in any case the disallowance made by the assessing officer could not be to the extent it has been disallowed by the assessing officer for these years. The facts are properly appreciated by Commissioner (Appeals) and he has recorded a finding that what was given by the assessee to its associate concern was a total sum of Rs. 4,82,82,401 for assessment year 2005-06. Out of the said amount, a sum of Rs 1.55 crore pertained to the deposits given to various directors and related parties as advance against office premises which was utilized by the assessee for the purpose of business. Thus, Commissioner (Appeals) has arrived at a finding that only a sum of Rs. 3,27,82,401 can be said to have been utilized by the assessee out of interest-bearing borrowed funds which can be said to be for the purpose of other than business. It is in this manner Commissioner (Appeals) has sustained disallowance only to the extent of interest pertaining to interest-free loans and advances of Rs. 3,27,82,401. Therefore, the issue raised by the Revenue in this regard i.e. regarding deletion made by Commissioner (Appeals) has no merit and department's ground in this respect for both the years deserves to be dismissed and is dismissed. [Para 6] If the facts of the present case are considered in the light of the decision of Hon'ble jurisdictional High Court then for the years under consideration share capital and advance against share application money for both the years will be a sum of Rs. 9,25,64,440 which in any case exceeds much more the interest-free advances made by the assessee which for these years are only a sum of Rs. 4.82 crores and Rs. 5.17 crores. According to the aforementioned decision of Bombay High Court, share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds. Therefore, there is no merit in the disallowance to the extent it has been sustained by Commissioner (Appeals) . The disallowance sustained by Commissioner (Appeals) for both the years is deleted and the assessee's ground in this respect of both the years is allowed. [Para 6.3] So far as it relates to applicability of section 40A(2), it is found that assessing officer has made only a passing reference of section 40A(2). It has not been described as to how section 40A(2) was applicable. Departmental Representative also could not state that how section 40A(2) was applicable to make the impugned disallowance. Therefore, after considering the order passed by authorities below and the arguments of both the parties, disallowance of interest cannot be sustained even on the application of section 40A(2). [Para 6.4]

Income Tax Act, 1961, Section 36(1)(iii)

Income Tax Act, 1961, Section 40A(2)

INCOME TAX ACT, 1961

--Appeal [Tribunal]--Precedent Decision of jurisdictional High court vis-a-vis other High Court--Reference to other High Court's decision could not be made where Jurisdictional High Court's decision was available and subsisting.