Karp Impex Ltd , Mumbai vs Assessee

/Assessee by : Shri B.V.Jhaveri /Revenue by : Shri Asghar Zain VP

Date of Hearing : 27th November, 2014 Date of Pronouncement 21st January, 2015

ORDER

PER R.C.SHARMA (A.M):

This is an appeal filed by the assessee against the order of CIT(A),

dated 31-3-2010 for the Assessment Year 2006-07, in the matter of order

passed u/s.143(3) of the I.T. Act.

2. Rival contentions have been heard and record perused. Facts in

brief are that the assessee is engaged in the business of trading,

processing and exporting cut and polished diamonds, filed its return of

income for A.Y.2006-07 on 30-11-2006 declaring total income of Rs.17.27

crores. On scrutinizing the said return the AO disallowed Rs.1,05,00,150/-

u/s. 14A of the Act and disallowed interest u/s.36(l)(iii) of the Act of

Rs.9,45,028/-. The CIT(A) partly allowed the appeal of the assessee 2 ITA No.4500/10

company and reduced the disallowance u/s.14A of the Act to

Rs.45,35,572/-. The CIT(A) confirmed the disallowance of interest of

Rs.9,45,028/- u/s.36(1)(iii) of the Act. Against the order of CIT(A),

assessee is in appeal before us.

3. In the written submission filed by the ld. AR, he requested for

withdrawal of grounds No.1 to 3 in respect of partial disallowance u/s.14A

of the Act. Accordingly, grounds No.1 to 3 are dismissed as not pressed.

4. With regard to disallowance u/s.36(1)(iii), we found that the

assessee company had booked the office premises in Bharat Diamond

Bourse at Bandra Kurla Complex, Bandra (East), Mumbai in the year

1996 and accordingly paid instalments as demanded from time to time by

Bharat Diamond Bourse. The assessee company had paid the aggregate

sum of Rs.2,40,75,000/- till 31-3-2005. The assessee company paid

further sum of Rs.14,65,000/- during the year ended 31-3-2006. The AO

invoked section 36( 1 )(iii) of the Act and observed that the assessee

company has used the borrowed funds in purchasing the office premises

which are not put to use in the year ended 31-3-2006 and therefore, a

portion of interest paid by it cannot be allowed as a revenue expenditure

but it is to be capitalised till the office premises are put to use. Accordingly

the Assessing Officer computed disallowance u/s.36(l)(iii) of the Act at

Rs.9,45,028/-.

5. It was contended by ld. AR that assessee was having sufficient

interest free funds, capital and reserves to meet out the above

expenditure, therefore, the AO was not justified in disallowing interest

expenditure.

3 ITA No.4500/10

6. From the record, we found that as per Balance Sheet of the

assessee company as on 31-3-2006 which shows that it has own funds of

Rs.217.63 crores and further interest free funds of Rs.15.50 crores. Out of

the aforesaid own funds investment in the office premises is Rs.2.55

crores i.e., 1.18% of the own funds. We also found that during the year

ended 31-3-2006 the assessee company has earned profit after interest,

depreciation and tax of Rs.22.25 crores which was available for making

investment of Rs.14,65,000/- in the office premises.

7. Relying on the decision of the Bombay High Court in the ca e of IT

vs. Reliance Utilities & Powers Ltd. (313 ITR 340), wherein it was held

that if there were 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 funds generated or available with the company, if

the interest-free funds were sufficient to meet the investments.

8. In the present case the investment in office premises is only 1.18%

of the own funds of the assessee company in the year under

consideration and therefore the presumption would arise that the

assessee company has invested its own funds in purchasing the office

premises and not used the borrowed funds and therefore, no portion of

interest paid on borrowings can be disallowed invoking section 36(1)(iii) of

the Act.

9. In view of the above, we do not find any justification in the

disallowance made u/s.36(1)(iii).

10. In the result, appeal of the assessee is allowed in part

Order pronounced in the open court on this 21/01/2015.

4 ITA No.4500/10

21/01/2015

Sd/- Sd/-

( ) ( ) (SANJAY GARG) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 21/01/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai

6. Guard file. //True Copy// / BY ORDER,

(Asstt. Registrar) / ITAT, Mumbai