Crown Engineering Co., Baroda vs Assessee

1. This appeal filed by the Assessee is against the order of CIT(A)-II, Baroda dated 01.08.2011 for A.Y. 2007-08.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a partnership firm stated to be engaged in the business of manufacturing of machineries and machine parts. Assessee filed its return of income for A.Y. 2007-08 on 31.10.2007 declaring total income of Rs. 6,66,580/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 21.12.2009 and the total 2 ITA No 2535/AHD/2011 . A.Y. 2007-08 income was determined at Rs. 10,34,230/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 01.08.2011 dismissed the appeal of the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following grounds:-

1.The Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts of the appellant's case disallowance of interest made by the Id. A.O. on the erroneous plea that interest bearing funds are diverted for non business purpose.

The appellant most humbly submits that on the facts and the circumstances of its case and in law no part of the interest paid is disallowable and prays that Hon'ble Tribunal be pleased to hold so now and delete the said addition.

2.The Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts of the appellant's case in enhancing the disallowance of interest made by the Id. A.O. to Rs. 8,12, 434/- on the erroneous plea that there is mistake in disallowance made by the Id. A.O. The appellant most humbly submits that on the facts and the circumstances of its case and in law no part of the interest paid is disallowable and prays that Hon'ble Tribunal be pleased to hold so now and delete the said addition.

3.The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts of the appellant's case in confirming the addition of Rs. 1,196/- being contribution to P.F.& E.S.I U/s. 36(l)(va) of the Act on the erroneous plea that it has been paid late. The appellant most humbly submit that on the facts and circumstances of the case and in law no part of the said amount is disallowable u/s. 36(1) (va) r.w.s. 43B of the Act and prays that Hon'ble Tribunal be pleased to hold so now and delete the impugned addition.

4. Before us, at the outset the ld. A.R. submitted that ground no. 3 with respect to the delayed deposit of employees contribution of P.F and ESIC has to be decided against the Assessee in view of the decision of Hon'ble Gujarat High Court in the case of CIT vs. Gujarat State Road Transport Corporation 3 ITA No 2535/AHD/2011 . A.Y. 2007-08 reported at (2014) 366 ITR 170 (Guj). In view of the aforesaid submission of the Assessee and relying of the aforesaid decision of Hon'ble Gujarat High Court this ground is dismissed.

5. It was submitted that ground no. 1 & 2 are interconnected and therefore can be considered together.

6. During the course of assessment proceedings, A.O noticed that Assessee on one hand was claiming interest expenses of Rs. 13,18,887/- and on the other hand it had given interest free loans out of the borrowed funds. A.O noted that when the Assessee was asked to explain as to why interest not be disallowed to the extent the amount of borrowed funds were advanced interest free, A.O noted that the Assessee had accepted the disallowance of interest of Rs. 3,66,453/- and accordingly A.O disallowed the same. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who after considering the submissions of the Assessee enhanced the disallowance made by A.O by holding as under:-

3.3. I have considered the submissions of the learned Authorized Representative and the order of the Assessing Officer. It is an undisputed fact that funds have been given by the assessee to sister concerns, without charging any interest whereas interest expenses are borne by the assessee. No business expediency for advancing such moneys has been established by the assessee. Now we have to see what interest expenses borne by the assessee and claimed as deduction, can be said to relate to the business needs of the assessee. In this connection, the learned Authorized Representative has proposed that only the net interest outgoing i.e. the difference between interest paid and interest earned, should be taken into account, to work out the disallowances, if any. This proposal of the Authorized Representative is not correct and cannot be accepted. Under the provisions of Income-tax, the assessee has to establish the genuineness and business needs of all expenses and not just the net difference e.g. in a hypothetical case of a trader, if the profit and loss account is as under: -

4 ITA No 2535/AHD/2011 . A.Y. 2007-08

Profit and Loss Account Particulars Amount Particulars Amount

Purchase 90 Sale 100 Expenses 35 Loss 25 Total 125 Total 125

In the above case if the assessee is not able to prove the genuineness or business needs of purchases and expenses and the Assessing Officer finds that purchases of say Rs.20/- and expenses of say Rs.20/- are not related to the business and disallowance needs to be made, then what will be disallowed is full Rs.20/- out of purchases and full Rs.20/- out of expenses and not just a proportion of loss (net outgo) of Rs.25/-. Similar is the case here.

If part of interest expense do not relate to the business of the assessee, disallowance will have to be made from the (gross) interest expenses claimed and not from the net difference between interest expenses and interest income. The disallowance cannot be restricted to this net figure only.

To calculate the quantum of disallowance out of gross interest expenses, the position of funds and assets shown in the Balance Sheet, as given by the learned Authorized Representative during the appellate proceedings is analyzed, as under:-

CROWNENGINEERING CO.

LIABILITIES AMT ASSTS AMT Partners Capital 21.17 Fixed Assets 19.29 A/c Current Assets Secured loans 98.08 Bank FD 92.69 FD with 25.00 others Unsecured Advance to 15.58 Loans(with 168.57 suppliers and interest) Others Cash and 2.29 Bank Balances Current liabilities 226.51 Closing stock 10.29 Interest free 317.12 advances for land Sundry Debtors 32.06 495.04 TOTAL-A 514.33 TOTAL-A 514.33 5 ITA No 2535/AHD/2011 . A.Y. 2007-08 % of interest Free Advance to Total Assets 61.60 % of Business Assets to total Assets 38.40 OPTION-I Total Interest Paid 1318887 Interest paid on interest free advances @ 61.60% 812434

The learned Authorized Representative gave another calculation wherein all interest free funds were considered to be first utilized for extending interest free advances and only the excess was considered as funded from interest bearing funds. The position with such a calculation is as under:-

CROWN ENGINEERING CO.

Balance Sheet as on 31.03.2007 INTEREST BEARING FUNDS Rs. lacs SOURCES AMT APPLICATION AMT Partners Capital A/c 0 Fixed Assets 19.29 Secured Loans 98.08 Current Assets 92.69 Bank FD Unsecured Loans 83.84 FD with others 25.00 (with interest) Advance to 15.59 suppliers Current Liabilities 15.29 Cash and Bank 2.29 Balances Closing Stock 10.29 Sundry Debtors 32.06 177.92 TOTAL-A 197.21 TOTAL-A 197.21

INTEREST FREE FUNDS Rs. lacs SOURCES AMT APPLICATION AMT Partners Capital A/c 21.17 Interest Free 317.12 Unsecured Loans 8.36 Advances (Interest Free) 50.00 Interest Free Loan 161.22 Advances Interest Bearing 76.37 Funds

Total-B 317.12 Total-B 317.12 Total(A+B) 514.33 Total(A+B) 514.33

Interest bearing fund directed to interest free advances is Rs. 76.37 lacs Interest disallowance @ 6.13% being average rate if interest paid= Rs. 4,68,148 It was accepted by the Authorized Representative that the interest -paid by the assessee on unsecured loans and to banks, was approx. 12% during the relevant period. Thus the rate of interest to be applied on Rs.76.37 lakhs would be 12%, which works out 6 ITA No 2535/AHD/2011 . A.Y. 2007-08 to Rs.9,16,440/-. The calculation of the learned Authorized Representative @ 6.13% is not correct and not acceptable.

Thus by the two methods as above, the disallowable interest comes to Rs.8,12,434/- and Rs.9,16,440/- respectively. The less harsh of the two it Rs.8,12,434/- is adopted, also because in real word situation, one-to-one relationships between source of founds and outgoings is difficult to be traced and the first option average out such situations.

Since the Assessing Officer has disallowed only Rs.3,66,453/-, the difference of Rs.4,45,981/- (Rs.8,12,434 - Rs.3,66,453) is to be further disallowed out of interest expenses claimed. Thus it will result in enhancement of income by Rs.4,45,981/- on this ground. Vide order sheet entry dated 27.07.2011, Shri Manish Shah, Authorized Representative was given opportunity of being heard against this proposal for enhancement. The learned Authorized Representative requested to consider the submissions given by him earlier. The submissions have already been considered and not found acceptable, as brought out hereinbefore. The Assessing Officer is therefore directed to further disallow interest expenses of Rs.4,45,981/- leading to enhancement on this ground.

7. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

8. Before us, ld. A.R. reiterated the submissions made before ld.CIT(A) and further relied on the decision of Gujarat High Court in the case of CIT vs. Raghuvir Synthetics Ltd. 356 ITR 222 (Guj). Alternatively Assessee submitted that the disallowance of interest be made of Rs. 1,61,625/- calculation of which was placed at page 10 of the paper book. On the other hand ld. D.R. supported the order of A.O and ld. CIT(A).

9. We have heard the rival submissions and perused the material on record. We find that ld. CIT(A) after considering the submissions of the Assessee has enhanced the disallowance made by the A.O. While enhancing the disallowance he has given a finding that no business expediency for advancing the money has been established by the Assessee. Ld. CIT(A) has also considered the rate of interest at 6.13% as submitted by the Assessee for 7 ITA No 2535/AHD/2011 . A.Y. 2007-08 working out the disallowance as being not correct in view of the fact that Assessee was paying interest @ 12% per annum. We further find that ld. CIT(A) after analyzing the Balance Sheet, submissions of the Assessee, has worked out the disallowance of interest. Before us Assessee has not placed any material on record to controvert the findings of ld. CIT(A). Further the reliance placed by ld. A.R. on the decision of Hon'ble Gujarat High Court is not applicable to the facts of the present case. In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus the ground of Assessee is dismissed.

10. In the result, the appeal of Assessee is dismissed.

Order pronounced in Open Court on 15 - 05 - 2015.

Sd/- Sd/- (KUL BHARAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad