The Delhi Bench of Income Tax Appellate Tribunal (ITAT) while deleting the disallowance held that no question of interest bearing funds diverted by assessee as amount was converted into equity shares, appearing as opening balance.
The AO during the course of assessment proceedings observed that the assessee, M/s. G.S. Pharmbutor P. Ltd. has diverted interest bearing funds for making investment of Rs.28 crores in M/s. Moderate Leasing & Capital Services Limited, a related company.
AO observed that the assessee has also debited an amount of Rs.24,93,81,512/- as interest expenses in its profit & loss account. Facts which were gathered during the assessment proceedings under section 143(3) of the Act for AY 2014-15 suggested that the assessee has diverted interest bearing funds for making investment of Rs.28 crores in the said company. Based on this premise, the assessee’s case was reopened u/s 148 of the Act as per the reasons recorded in the assessment order. Accordingly, the ld. AO worked out the proportionate disallowance of Rs.3,36,00,000/- by working out the notional interest expenses at the rate of 12% on the amount of Rs.28 crores.
The coram of Accountant Member, Anil Chaturvedi and Judicial Member, Amit Shukla held that the assessee has not given any loan or advances during the year. As can be seen from the copy of account of M/s. Moderate Leasing & Capital Services Limited, assessee has been paying advances and loan to the said company from time to time and was also being repaid by the said company. All throughout, there were debit balances right from the assessment year 2006-07. In the FY 2011-12, the assessee has converted its debit balance of Rs.29.13 crores into convertible debentures on 30.04.2011 for a sum of Rs.28 crores. The said debentures were converted into equity shares on 25.03.2014 i.e. for the assessment year 2014-15. This amount was standing as opening balance to which AO has treated that the amount advanced of Rs.28 crores which was converted into convertible debentures from an advance given out of interest bearing funds. First of all, nowhere AO has analyzed as to when assessee had been advancing loan right from AY 2006-07 from out of any interest bearing funds or during the relevant year any further interest bearing funds have been diverted. Converting of debentures on 30.04.2011 out of debit balance with the said party cannot be treated as diversion of funds to the sister concern out of interest bearing funds for the year under consideration. As stated by the assessee, the long term borrowings were reduced to Rs.6.12 crores during the year.
“Thus, we do not find any reason as to why disallowance can be made on such a premise. Without going into the merit, whether interest free funds were available or not, we hold that under these facts and circumstances, no disallowance can be made. Accordingly, the entire disallowance made by the AO is deleted,” the ITAT added.Subscribe Taxscan AdFree to view the Judgment