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TMI Blog2013 (9) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... r any disallowance of interest in relation to such investment. Only in case it is found that the assessee does not have non-interest bearing funds of its own, disallowance out of interest claimed has to be worked out and made accordingly. We accordingly set aside the impugned order of the CIT(A) on this issue and restore the matter to the file of the Assessing Officer. The Assessing Officer shall re-decide the issue in the light of our above observations and in accordance with law, after giving due opportunity of being heard to the assessee - Decided in favour of Revenue. - ITA No.1661/Hyd/2008, ITA No. 814/Hyd/2010, ITA No. 900/Hyd/2010, ITA No. 508/Hyd/2011 - - - Dated:- 4-9-2013 - Shri Chandra Poojari And Smt. Asha Vijayaraghavan,JJ. For the Petitioner : Shri V. Siva Kumar (A.R.) For the Respondent : Shri Y. V. S. T. Sai (D.R.) ORDER Per Smt. Asha Vijayaraghavan, J.M. 1. This appeal filed by the assessee against the Order of the CIT(A)-V, Hyderabad dated 29.08.2008 for the A.Y. 2004-05. 2. ITA.No.1661/Hyd/2008 - A.Y. 2004-2005 :- The brief facts of the case are that the assessee company is engaged in the business of manufacture of plain and laminated parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilized either as inter-corporate deposits on which interest was earned or for working capital needs of the company. It was further submitted that all the, borrowed funds were utilized by the company in its business operations and investments were made by liquidating earlier investments or out of earnings during the year. However, the Assessing Officer did not accept such submissions of the appellant. He noted that as per the bank statement furnished by the appellant, at the time of making investment in GVK Infrastructure Holdings P. Ltd., there was a debit balance of Rs.83,82,362. He further noted that while making investment in shares of Trinity Advisors Pvt. Ltd., there was debit balance of Rs.1,96,19,931/- in the bank account, and while making investment in GVK Power Ltd. there was a debit balance of Rs.2,10,04,982. He thus observed that while issuing cheques for investments in the shares of the above companies, the appellant was not having credit balance in its bank account. He further observed that the appellant's own funds and loan funds were mixed up. He further noted that the appellant was already having loan funds on which it was paying interest. Since borrowed funds wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest out of the inter-corporate deposits made by it. (Pages 27 of paper book.)" 7. However, the learned CIT(A) confirmed the order of the Assessing Officer. The learned CIT(A) pointed out that the assessee had issued cheques from IOB and ICICI Bank Accounts for investment in GVK Power Limited and concluded that the assessee utilised borrowed funds for investment. CIT(A) directed that the interest should be reckoned from the date of investment to the end of the accounting year in respect of each investment and accordingly worked out interest disallowance at Rs.64,82,223/-. 8. Before us, learned Counsel for the assessee submitted that its capital stood at Rs.8,79,27,570/- as at 31-03-2003 and as on 31-03-2004. Also reserves have increased from Rs.42,67,16,480/- as on 31-03-2003 to Rs.43,08,13,184/- as at 31-03-2004. The assessee also submitted that it had been earning profits for the previous 20 years and has been paying dividends regularly to share holders. The company as and when it had surplus funds was making investments either in shares or in share application money of various companies which ranged between Rs.20 to 30 crores over last many years. The company has no ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year and interest burden decreased during the year. 10. Learned Counsel relied on the decision of the ITAT 'B' Bench, Hyderabad in the case of M/s. Veljan Hydrair Ltd. in ITA.No.623/Hyd/2010 dated 14.12.2011. 11. Learned D.R. pointed out that the CIT(A) has observed as under : "10.1. . . . . .It was noticed that out of the short term loans raised from Bank of Nova Scotia, on some instances deposits have been made in IOB Cash Credit Account, before issuance of cheques from the latter for the purpose of investing in shares of the above companies. 10.2. . . . . . .As seen from the copy of bank statement of Indian Overseas Bank furnished before me, after issuance of cheque for Rs. 5 crores on 11.09.2003 for investing in GVK Infrastructure Holdings P. Ltd., it resulted in a debit balance of Rs.83,82,362 in that account. Thus, it shows that a loan amount of Rs.83,82,362 has been utilized for investing in shares of GVK Infrastructure Holdings P. Ltd. Similarly, after issuance of cheque for an amount of Rs. 5 crores on 17.09.2003 for investing in Trinity Advisors P. Ltd. it has resulted in debit balance of Rs.1,96,19,931. Thus, it shows that for making such investment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the investments are in shares of other companies and in share application money of its own group of companies. The A.O stated that it is obvious that there is no necessity of continuing borrowals thereby incurring interest whereas there are surplus funds with the company. However since the investments are much more than the borrowed funds, he called upon the assessee to state why interest of Rs.1,11,64,992/- incurred on loans should not be disallowed. 15. The assessee replied stating that there is an overall reduction of Rs. 12,39,44,052/- in the investments on account of realisation of investments. The assessee also stated that during the year further investments of Rs. 13,71,45,000/- in GVK Cements Ltd., and Rs.4,80,45,000/- in GVK Petrochemicals Pvt. Ltd., were also met out of realisation of certain investments made earlier. It was also submitted that the company has strategically invested in GVK Petrochemicals Pvt. Ltd., as they are supplying one of the main raw materials required in production of the company's finished products viz., PPB and MFPB which was .acquired by the company as a part of the scheme of amalgamation and arrangement. The assessee submitted that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h proportionate income from different sources could not be applied and disallowance was directed to be deleted. 20. The CIT(A) also noticed the decision of the Calcutta High Court in the case of CIT vs Britannia Industries Ltd., 280 ITR 525 CAL wherein it was held that since the assessee company had regular course of business with a firm and advances were made for obtaining supply of raw materials, it could be said that advances were made for purposes of business and disallowance of interest could not be made. 21. The CI.T(A) also noticed the decision 'in the case of M.S.P Raja vs CIT 105 ITR 295 (MAD) which decision relates to the claim made by a partner of a firm towards interest paid to the firm on borrowals used for acquisition of agricultural lands. 22. The CIT(A) also referred to the decision in the case of Indian Metals and Ferro Alloys Ltd., vs CIT 193 ITR 344 (ORI.) wherein it was held that the assessee has to place material on record in support of its claim. 23. However, the CIT(A) held, following the decision of the CI.T(A) in the assessee's case for A.Y. 20004-05, that the A.O should ascertain the number of months for which interest is paid on new loans taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions and perused the material available on record. The point arising for consideration admittedly, relates to disallowance out of interest expenditure on the ground of diversion of funds. On careful consideration of the matter, in the light of the rival contentions, we are of the view that this issue should be remitted back to the file of the Assessing Officer with a direction to verify whether the investments made by the assessee is out of its own funds or from the borrowed funds. In case the investments are found to have been made from out of non-interest bearing own funds, there is no justification for any disallowance of interest in relation to such investment. Only in case it is found that the assessee does not have non-interest bearing funds of its own, disallowance out of interest claimed has to be worked out and made accordingly. We accordingly set aside the impugned order of the CIT(A) on this issue and restore the matter to the file of the Assessing Officer. The Assessing Officer shall re-decide the issue in the light of our above observations and in accordance with law, after giving due opportunity of being heard to the assessee. Hence, the appeal of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the context of assessee's appeal in para 26 above, there is no need for separate adjudication of the Revenue's ground in this appeal since the matter stands restored to the file of the Assessing Officer for fresh examination in the light of directions of this Tribunal hereinabove. Accordingly, Revenue's ground on this aspect is also treated as allowed for statistical purposes. 31. In the result, ITA. No. 900/Hyd/2010 of the Revenue is also treated as allowed for statistical purposes. 32. ITA.No.508/Hyd/2011 - A.Y. 2006-2007 : The facts of the case are in the quantum appeal, the CIT(A) directed that interest on borrowed funds has to be disallowed only to the extent that it is attributable to interest free investments in sister concerns. Thereafter, the Assessing Officer passed a consequential order dated 11.6.2010 to give effect to the decision of the CIT(A). In the consequential order, the Assessing Officer adopted the rate of interest to be applied at 18%. The assessee filed appeal before the CIT(A) objecting to the adoption of rate of interest at 8% because rate of interest charged by the lender during the previous year relevant to assessment year 2006-2007 was much lower ..... X X X X Extracts X X X X X X X X Extracts X X X X
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