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TMI Blog2016 (2) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual workers but the actual position at the time of finalization of books of accounts as well as upto the completion of Tax Audit u/s 44AB of the Act was that the payment was made to individual workers was a payment on behalf of labour contractor to whom assessee has been paying the labour contract charges in preceding years and, therefore, the submission of the assessee that the payment to individual workers is covered u/s 192 of the Act cannot be accepted - Decided against assessee Disallowance of interest expenditure - Held that:- CIT(A) has duly accepted the submissions of the assessee and has, therefore, reduced the addition of disallowance of interest expenditure by restricting it to 3.5% being average interest cost of total fund given as interest free funds. We are, therefore, of the view that as a total fund of the assessee comprising of own capital, interest free unsecured loans as well as interest bearing funds are all moving through a common bank account and the application of this fund is for business as well as at sometimes interest free loan & advance use and ld. CIT(A) has rightly applied 3.5% rate of interest on the average balance of interest free loans and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case in confirming the making of disallowance u/s 40(A)(ia) of ₹ 6,93,236/- in income. The disallowance be cancelled. 3. The ld. Assessing Officer has erred in law and on the facts and circumstances of the case in making disallowance of ₹ 13,18,277/- in interest, and the ld. CIT(A) has erred on the facts and circumstances of the case in confirming the same except for a partial relief in quantum. The disallowance be cancelled entirely. 4. Based on the facts and circumstances of the case, there is no scope for initiating penalty u/s 271(1)(c) and same should be dropped. Your appellant reserves the right to add, alter, modify, amend or delete, any of the above ground(s) either before or during the appeal proceedings. 5. Ground No.1 is of general nature, hence needs no adjudication. 6. The Ground No.2 wherein ld. CIT(A) has confirmed the addition made by Assessing Officer by way of disallowance u/s 40(a)(ia) of the Act at ₹ 6,93,235/-. 7. The ld. AR submitted that the accounts of the assessee company are submitted under Tax Audit u/s 44AB of the Act and in Annexure-11 of the Tax Audit Report for the year under appeal, the Tax Auditor has reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessee company on behalf of a labour contractor. From examining of the records, we find that assessee has been regularly deducting TDS in the preceding years on the payments made to M/s Surgi Pharm Industries on the payments made for the supply of labourers/workers. During the year under appeal the assessee had a dispute with the labour contractor due to which payment was not made directly to the account of labour contractor. However, assessee made the payment to the individual workers. This is an accepted fact by the assessee that individual workers to whom payment has been made by the assessee are not on the payroll of the employees meaning thereby that the workers were not employees of the company. These individual workers were working for the assessee company on behalf of labour contractor M/s Surgi Pharm Industries. Going through the Tax Audit report we find that assessee has not claimed the payment to labour contractor as salary payment and the Tax Auditor has certified that the payments made to individual workers were actually the payment on behalf of the labour contractor M/s Surgi Pharm Industries and such payment was duly covered within the ambit of the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient own funds. The amount outstanding against associate company is in the nature of advance since appellant has not recovered the same. If this was business advance, the same could have been recovered or adjusted by now but the fact that it remain outstanding for many years clearly shows that this is interest free advances given out of overall business fund which included borrowed funds also. Since appellant did not maintain separate bank accounts for borrowed funds and their utilization, the every part of the fund of the appellant has cost. Since appellant is not able to establish that borrowed funds were not at all used for advancing to sister concerns, the disallowance of part of interest is justified in view of the facts mentioned by the assessing officer. However, I agree with the appellant that disallowance of interest cannot be at the rate of borrowing but it has to be on the average cost of fund for the company. Appellant submitted that average cost of fund is 3.5% at which disallowance of interest can be made if at all disallowance is to be confirmed. Assessing Officer is directed to restrict the disallowance of interest to the average cost of total funds during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven out of huge non interest borne funds of the assessee company and the avg. interest servicing cost of funds for the company is hardly 3.5% worked out by considering the average cost of interest, with own capital and unsecured loans not having borne interest cost, the interest to banks on working capital loans at appc.12%). Accordingly, if at all there is disallowance the same (without prejudice) will not exceed ₹ 3.92 lacs. 14. The ld. DR relied on the orders of authorities below. 15. We have heard the rival contentions and perused the material on record. The issue before us is to examine as to what should be the quantum of interest disallowance arising on account of diversion of interest bearing funds to interest free advances. We find from the record that during the assessment proceedings Assessing Officer has made addition of Rs..13,18,277/- by calculating interest @ 12% on average balance of interest free advances. On appeal before ld. CIT(A), Assessee has submitted that the major amount of disallowance is on interest free loans and advances given to M/s Medtek Asia Ltd. ₹ 12,93,040/- out of total disallowance of ₹ 13,18,277/-, there has been regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the actual rate at which the funds diverted were borrowed (12%). On the facts and in the circumstances of the case and in law, the ld. CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above, since the assessee has failed to disclose his true income. The appellant prays that the order of ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. The appellant craves leave or alter any ground or add a new ground which may be necessary. 20. We have heard the rival contentions and perused the material on record. After considering the rival submissions and going through the facts of the case, we find that this appeal was presented on 02/03/2012. On 10.12.2015 the CBDT has issued Instructions bearing No. 21/2015 prohibiting its subordinate authorities from filing of the appeal to the Tribunal against the order of the CIT(A) where the tax effect by virtue of the relief given by the CIT(A) is less than ₹ 10 lakhs. The instructions have been made applicable with retrospective effect, meaning thereby, these instructions are applicable on pending appeals also. The tax effect on deletion of total addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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