Snj Synthetics Private Limited,, ... vs Assessee

For Assessee : Mr. A.V. Sadasiva & M.V. Anil Kumar For Revenue : Mr. R. Clement Ramesh Kumar

Date of Hearing : 25.05.2015 Date of Pronouncement : 03.06.2015

ORDER

PER P.M. JAGTAP, A.M.

This appeal filed by the assessee is directed against the order of the Ld. CIT(A)-IV, Hyderabad dated 14.12.2014 whereby he confirmed the disallowance of Rs.35,76,487 made by the A.O. out of interest expenditure claimed by the assessee.

2. The assessee in the present case is a company which is engaged in the business of manufacturing of Synthetic Packaging Products. The return of income for the year under consideration was filed by it declaring total income of Rs.28,93,665 before claiming set off of unabsorbed depreciation and book profit of Rs.2,65,44,146 under the provisions of section 115JB. During the course of assessment 2 ITA.No.810/Hyd/2014 SNJ Synthetics P. Ltd., Hyderabad

proceedings, the A.O. noticed that the assessee company has advanced a total amount of Rs.4,34,56,706 to six parties without charging any interest. He also noticed that a substantial expenditure of Rs.3,65,70,944 was claimed by the assessee on account of interest paid. He therefore required the assessee to establish whether the advances paid free of interest were for the purpose of its business. He also required the assessee to show cause as to why the proportionate interest attributable to the interest free advance should not be disallowed if the same are found to be not given for the purpose of business. Since the explanation offered by the assessee in this regard was not found satisfactory by the A.O., he worked out the interest attributable to the interest free advances given by the assessee at Rs.35,76,487 and made disallowance out of interest expenditure to that extent in the assessment completed under section 143(3) vide order dated 26.01.2013.

3. Against the order passed by the A.O. under section 143(3), an appeal was preferred by the assessee before the Ld. CIT(A) disputing the disallowance made by the A.O. out of interest expenditure. During the course of appellate proceedings before the Ld. CIT(A), it was submitted by the assessee company that the advances in question were given to the six parties for the purpose of its business and therefore, the disallowance made by the A.O. on account of interest attributable to the said advances was not sustainable. It was also pointed out by the assessee company before the Ld. CIT(A) that sufficient own funds as well as interest free unsecured loans were available with it at the relevant time to give the interest free advances. Relying on the decision of Hon'ble 3 ITA.No.810/Hyd/2014 SNJ Synthetics P. Ltd., Hyderabad

Supreme Court in the case of S.A. Builders vs. CIT 288 ITR 1, it was contended on behalf of the assessee company that the disallowance made by the A.O. out of interest paid was not justified on this count also. The Ld. CIT(A) did not find merit in the stand taken by the assessee on this issue. According to him, the assessee could not satisfactorily explain the business purpose or expediency of giving the advances in question free of interest to the six parties. He also held that the mere fact that assessee company had surplus own funds was not sufficient for it to give interest free advance to others. Accordingly, the disallowance made by the A.O. out of interest was confirmed by the Ld. CIT(A). Aggrieved by the order of the Ld. CIT(A), the assessee has preferred this appeal before the Tribunal.

4. The Ld. Counsel for the assessee invited our attention to the relevant balance sheet of the assessee company placed at page No.34 of the paper book as well as the relevant schedules forming part of the balance sheet as placed at page Nos. 37 and 38 of the paper book. He pointed out that own funds in the form of share capital of Rs.5.75 crores and reserve and surplus of Rs.6.06 crores were available to the assessee company along with interest free unsecured loans of Rs.9.01 crores. He contended that since these funds were sufficient to give the interest free advances in question to the relevant six parties, there was no question of making disallowance out of interest expenditure claimed by the assessee. He also brought to our notice that interest expenditure claimed by the assessee was in respect of secured loans of Rs.44.44 crores availed by the assessee. He submitted that out of the said secured loans, a sum of Rs.15.12 crores 4 ITA.No.810/Hyd/2014 SNJ Synthetics P. Ltd., Hyderabad

represented cash credit facility and the same fully secured by hypothecations of the stocks and book dates was utilized for that purpose only. He submitted that similarly the term loan of Rs.29.14 crores taken by hypothecation of plant and machinery was utilized for acquiring the relevant fixed assets. He contended that the interest bearing loans were thus fully utilized by the assessee company for the purpose of its business and there was no justification to make disallowance out of interest expenditure incurred by the assessee.

5. The learned D.R. on the other hand, relied on the authorities below in support of the Revenue's case that the disallowance made by the A.O. out of interest was rightly confirmed by the Ld. CIT(A).

6. We have considered the rival contentions and also perused the relevant material on record. As is evident from the relevant balance sheet of the assessee company placed at page No.34 of the paper book and the relevant schedules forming part of the said balance sheet as placed at page Nos. 37 and 38 of the paper book, the assessee company at the relevant time had own funds of Rs.11.81 crores in the form of share capital and reserves and surplus as well as interest free unsecured loans of Rs.9.01 crores which were sufficient to give the interest free advance of Rs.4.39 crores to the relevant six parties. As further demonstrated by the Ld. Counsel for the assessee from the balance sheet and relevant schedule of the assessee company, entire interest bearing secured loans availed by the assessee company for the specific business purpose were utlised for that purpose which clearly shows that there was no diversion of interest bearing borrowed funds by the assessee company to give interest free advances to the 5 ITA.No.810/Hyd/2014 SNJ Synthetics P. Ltd., Hyderabad

relevant six parties. The relevant facts and figures as borne out from the record thus clearly show that there was no diversion of interest bearing borrowed funds by the assessee company for any non-business purpose and the interest free advances in question having been given by it to the relevant six parties out of its own funds and interest free funds available at the relevant time, we are of the view that the disallowance made by the A.O. out of interest and confirmed by the Ld. CIT(A) is not sustainable. We therefore direct the A.O. to delete the same and allow the appeal of the assessee.

7. In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 03.06.2015.

Sd/- Sd/- (SAKTIJIT DEY) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 03rd June, 2015.

VBP/-

Copy to

1. SNJ Synthetics P. Ltd., Hyderabad

C/o. M. Anandam & Co., Chartered Accountants, 7-A, Surya Towers, S.D. Road, Secunderabad-3.

2. The DCIT, Circle 3(2), Hyderabad.

3. Commissioner of Income Tax (Appeals)-IV, Hyderabad.

4. Commissioner of Income Tax-III, Hyderabad.

5. D.R. I.T.A.T. "B" Bench, Hyderabad.

6. Guard File