M/S.Kerala Cars P.Ltd, Cochin vs Assessee

1 ITA No.370 & 371/Coch/2014

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN

Before Shri N.R.S. Ganesan (JM) and Shri Chandra Poojari (AM)

I.T.A No.370 & 371/Coch/2014 (Assessment years 2009 & 2010)

M/s Kerala Cars (P) Ltd vs Jt.CIT(OSD) Edapally PO, Ellikkat Building cir.1(2), Kochi 682 018 Kochi-682 024 PAN : AABCK4746M (Appellant) (Respondent)

Appellant by : Shri V.G. Kesava Shenoy Respondent by : Shri K.K. John

Date of hearing : 30-12-2014 Date of pronouncement : 09-01-2015

ORDER

Per N.R.S. Ganesan (JM)

Both the appeals of the assessee are directed against the respective

orders of CIT(A)-II, Kochi dated 28-03-2014 for the assessment years

2009-10 & 2010-11.

2. Shri V.G. Kesava Shenoy, the ld.representative for the assessee

submitted that the assessing officer disallowed interest on the borrowed

loan on the ground that the borrowed funds were used for earning exempt

income. According to the ld.rperesentative, the assessee had sufficient 2 ITA No.370 & 371/Coch/2014

own funds for making the investment in the equity shares of other

companies. Therefore, according to the ld.representative, the

disallowance made by the assessing officer is not justified. According to

the ld.rperesentative, investment was made in the sister concerns;

therefore the disallowance made by the assessing officer needs to be

deleted. The assessee has filed fund flow statements for the financial

years 2002-03 to 2009-10.

3. On the contrary, Shri K.K. John, the ld.DR submitted that the

assessee borrowed funds and made investment. If the assessee has

sufficient own funds, there is no necessity for the assessee to borrow loan

from the financial institutions. Therefore, according to the

ld.rperesentative, the assessee has diverted the borrowed funds for non

business purpose of making investment in the equity shares of the so-

called sister concerns. According to the ld.representative, if the investment

is made in the equity shares of companies, the income earned from such

equity shares is exempt, therefore, the expenditure incurred by the

assessee for earning the exempt income has to be disallowed. The ld.DR

has placed his reliance on the judgment of the Kerala High Court in CIT vs

Popular Vehicles & Services Ltd (2010) 325 ITR 523; CIT vs V.I. Baby

(2002) 254 ITR 248 and in CIT vs State Bank of Travancore (2011) 16

Taxman.com 289.

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ITA No.370 & 371/Coch/2014

4. We have considered the rival submissions on either side and also

perused the material available on record. The assessee now claims that

sufficient own funds were available for making investment in the so-called

sister concerns. The assessee has filed fund flow statementss for the

financial years 2002-03 to 2009-10. The assessee has also filed copies of

the auditor's report, cash flow statement and the balance-sheet. As per

the fund flow statements filed by the assessee for the financial years 2008-

09 relevant to assessment year 2009-10, the assessee claims that own

funds were available to the extent of Rs.9,47,68,625. Similarly for the

financial year 2009-10 relevant to assessment year 2010-11, the assessee

claims that it had own funds to the extent of Rs.14,00,96,522. The

availability of own funds was not verified by the lower authorities.

Therefore, the genuineness of the claim of availability of own funds has to

be examined by the assessing officer after verifying the books of account.

The Apex Court in the case of Munjal Sales Corporation vs CIT 298 ITR

298 (SC) examined an identical issue and found that if the assessee has

own sufficient funds and current year's profit, then to that extent it cannot

be considered that borrowed funds are diverted. However, before applying

the principles laid down by the Apex Court in the case of Munjal Sales

Corporation (supra), the availability of own funds needs to be ascertained

factually only after verifying the books of account and other materials.

Since this issue was not considered by the lower authorities, this Tribunal 4 ITA No.370 & 371/Coch/2014

is of the considered opinion that the matter needs to be re-examined.

Accordingly, the orders of the lower authorities are set aside and the issue

of disallowance of interest on borrowed funds is remitted to the file of the

assessing officer. The assessing officer shall reconsider the issue after

verifying the books of account and other materials available on record with

regard to availability of own funds with the assessee for making investment

and thereafter decide the issue in the light of the judgment of the Apex

Court in the case of Munjal Sales Corporation (supra) after giving

opportunity of hearing to the assessee.

5. For the assessment year 2010-11, the assessee has taken one

more ground with regard to payment made to Registrar of Companies in

connection with the increase of capital by making public issue. During the

course of hearing of the appeal, the ld.representative for the assessee

submitted that he did not want to press this ground of appeal. Te

ld.representative for the assessee has made an endorsement on the

appeal folder to that effect. Accordingly, the ground raised with regard to

payment to Registrar of Company in connection with share issue expenses

is dismissed as withdrawn.

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ITA No.370 & 371/Coch/2014

6. In the result, the appeal of the assessee in ITA No.370/Coch/2014 is

allowed for statistical purpose and the appeal of the assessee in ITA

No.371/Coch/2014 is partly allowed for statistical purpose.

Order pronounced in the open court on this 09th January, 2015.

Sd/- sd/- (Chandra Poojari) (N.R.S. Ganesan) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cochin, Dt : 09th January, 2015 pk/- copy to:

1. M/s Kerala Cars Pvt Ltd, 508A, Ellikkatt Building, Edappally PO, Kochi

2. The JCIT (OSD), Cir.1(2), I.S. Press Rod, Kochi 682 018

3. The Commissioner of Income-tax, Kochi

4. The Commissioner of Income-tax(A)-II, Kochi

5. The DR (True copy) By order

Asstt. Registrar, Income-tax Appellate Tribunal, Cochin Bench