2021 (10) TMI 961 - AT - Income Tax

Addition on account of diversion of funds to sister-concern - proof of commercial/business expediency of the transaction between the assessee and its subsidiary company - assessee-company had diverted funds towards sister-concern without charging interest - HELD THAT - There is no advances was made during the year. CIT(A) categorically held from perusal of assessment orders for the earlier years, i.e., assessment years 2011-2012, 2012-2013 and 2013-2014 there has been no addition on account of diversion of fund to sister-concern. Therefore, there cannot be any disallowance in the current assessment year in view of the Hon'ble Karnataka High Court judgment in case of SRIDEV ENTERPRISES 1991 (1) TMI 52 - KARNATAKA HIGH COURT The interest expenditure incurred by the assessee is on loans taken for specific purposes and the same cannot be diverted - there is no nexus between the borrowed funds and the amounts outstanding in the case of the sister-concern, namely, M/s. Tally India (P) Ltd. In such factual situation, there cannot be any addition for the reason that funds have been diverted to the sister-concern interest free. In the case of Embassy Development Corporation 2015 (9) TMI 1055 - KARNATAKA HIGH COURT , the assessee advanced borrowed funds to the sister-concern. The diverted funds was utilized by sister-concern for purchase and development of a property. In this context, the Hon'ble High Court held that funds have been diverted to sister-concern not out of business necessities of the assessee. In the instant case, it is clear that the assessee is having sufficient interest fund for diversion to sister-concern. Therefore, the judgment of CIT Anr. v. M/s. Microlabs Ltd. 2016 (4) TMI 219 - KARNATAKA HIGH COURT , has application to the facts of the instant case. Disallowance of depreciation - A.O. was of the opinion that the home-theatre was not for the purpose of business - CIT-A deleted the addition - HELD THAT -The theatre is admitted used for the business purpose of exhibiting various technologies development in the field of software to the employees and also to the customers. There was a major fire accident in the premises of the assessee and various books of account, documents and invoices were destroyed. These facts were brought to the notice of the A.O. during the course of hearing vide assessee's letter dated 21.12.2016. The proof regarding the fire accident was also furnished by supplying copy of FIR, paper report, etc. All the payments for the purchase of the equipment were made through bank account and the investment is not doubted. Further, we are of the view that there is no violation of Rule 46A(3) of the I.T. Rules, since there is no fresh facts produced before the CIT(A). The stand taken by the assessee before the A.O. was that there was a fire accident, wherein the invoices were destroyed and hence, cannot be produced. The same is the stand taken before the CIT(A) and the same set of evidence are produced. Therefore, there is no violation of provisions of Rule 46A of the I.T. Rules. For the aforesaid reasons, we hold that the CIT(A) is justified in deleting the disallowance of depreciation made by the A.O - Decided against revenue

Summary

Issues involved:
1. Addition of ?1,40,99,637 on account of diversion of funds to sister-concern.
2. Disallowance of depreciation amounting to ?30,28,504.

Issue 1: Addition of ?1,40,99,637
The Department challenged the CIT(A)'s decision to delete the addition of ?1,40,99,637, alleging diversion of funds to a sister-concern without charging interest. The Assessing Officer imposed the addition based on interest disallowance at 14.5%. However, the CIT(A) ruled in favor of the assessee, highlighting that the outstanding balance was not due to fund transfer and there was no nexus between borrowed funds and the sister-concern balance. The CIT(A) emphasized the availability of interest-free funds with the assessee, citing precedents to support the decision. The Tribunal upheld the CIT(A)'s decision, emphasizing the lack of fund diversion during the year and the sufficient interest-free funds with the assessee, distinguishing it from relevant case law.

Issue 2: Disallowance of depreciation of ?30,28,504
The Assessing Officer disallowed depreciation on a home-theatre purchased by the assessee, claiming it was not for business purposes due to a fire accident destroying the original invoices. The CIT(A overturned the disallowance, stating the home-theatre was used for business, and the fire incident was proven. The Tribunal supported the CIT(A)'s decision, noting the business purpose of the theatre, the fire incident, and the absence of fresh facts violating IT Rules. The Tribunal found no grounds to sustain the disallowance, leading to the dismissal of the Revenue's appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues, emphasizing the lack of fund diversion and the business purpose of the home-theatre.