The Chennai bench of Income Tax Appellate Tribunal (ITAT) observed that issuance of cheque to associate concerns from OCC account cannot be construed as diversion of working capital loan Fund.
The assessee Mr. T.S. Kumarasamy, Prop: M/s Christy Fried Gram Industry (in short CFI) is engaged in the business of production and supply of weaning food/nutrient supplements to government schemes in Tamil Nadu.
The assessee filed the returns and the case was selected for scrutiny. Due to the complexities of the accounts, a special auditor was appointed under section 142(2A) of the Income Tax Act, 1961.
Both the assessee and the revenue has submitted 19 cross appeals against the order of the Commissioner of Income Tax (Appeals)[CIT(A)].
The fact with regard to impugned dispute is that during the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed interest expenditure in respect of working capital loan borrowed from banks and financial institutions.
The Assessing Officer further noticed that the assessee has diverted the working capital loan funds for non-business purposes by advancing interest free loans to various group/associated concerns.
It was submitted that the Assessing Officer, after analyzing the bank accounts of the appellant worked out diversion of funds for non business purpose for assessment years 2016-17 to 2019-20 and called upon the assessee to explain as to why interest paid on loans cannot be disallowed under Section 36(1)(iii) of the Income Tax Act.
In response, the assessee submitted that working capital loans borrowed from banks has been utlilised for the purpose of business alone and no part of loans funds has been diverted for non-business purposes. Therefore, submitted that the question of disallowance of interest expenditure under Section 36(1)(iii) does not arise.
The Assessing Officer, however was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the assessee has borrowed working capital loan of Rs. 150 crores and diverted interest bearing funds of Rs. 79.15 crores to various group companies without charging any interest.
Before the CIT(A), the assessee contended that no part of working capital loan has been diverted for non-business purpose as alleged by the Assessing Officer, because bank has given working capital loan in the form of OCC limit which is fully covered by stock and book debts for all assessment years.
The assessee further contended that its own fund in the form of capital and reserves is more than the amount of loans and advances given to various group companies. Since, loans and advances given to group concerns are out of own funds, no disallowance can be made for interest expenditure under Section 36(1)(iii) of the Act.
The CIT(A) observed that the AO completely erred in making additions toward disallowance of interest expenses under Section 36(1)(iii) of the Act without appreciating fact that OCC limits sanctioned by the banks is against security of stock and debtors and the assessee is having investments in stock and debtor at each year end more than the amount of loan given by the banks.
The CIT(A) further observed that the assessee is having own funds of Rs. 246.25 crores for assessment year 2016-17 which is more than the amount of the alleged diversion of funds of Rs. 79.16 crores to group companies. Therefore, came to the conclusion that the question of disallowance of interest expenditure does not arise.
The tribunal observed that on analysing the availability of interest free funds with the appellant, it is noticed that the appellant has sufficient own capital and non-interest bearing unsecured loans for financing his investments and loans & advances (including the amount of Rs.79.15 crores shown in the assessment orders) as seen from the examination of the balance sheet relevant to the four assessment years.
Alos, the bench relied on the Supreme Court in the case of CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC) held that where the own funds and non-interest bearing funds are adequate to cover the investments, it needs to presumed that such investments have been made from own funds and non-interest bearing funds only.
The bench of V. Durga Rao (Judicial Member) and Manjunatha G. (Technical Member) observed that the ground of appeal filed by the revenue is devoid of merits and thus, inclined to uphold the findings of the CIT(A).
Also, directed the Assessing Officer to delete additions made towards disallowance of proportionate interest expenditure under Section 36(1)(iii) of the Income Tax Act for assessment year 2016-17 to 2019-20.
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