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TMI Blog2020 (9) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... see is dismissed. Disallowance u/s 36(1)(iii) - interest free loan to its subsidiaries - diversion of interest bearing fund for non-commercial activities - HELD THAT:- We note that the assessee has treated the advances received from the customers as part of the capital which is not correct. It is because the advances received by the assessee from the customers represents the current liability which has to be utilized for the supply of the goods/materials to the concerned parties. As such amount represents the current working capital of the assessee which cannot be used for advancing the interests free advances as discussed above. We hold that the amount of advances received from the customers cannot form part of own fund of the assessee. Therefore, the amount of interest on the borrowed funds diverted to the non-interest bearing advances should be disallowed. Amount of capital including reserve available to the assessee, shall be presumed to have been utilized in advancing such interest free advance. In holding so we draw support from the judgment in case of CIT v. Max India Ltd. [ 2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT] No disallowance of interest expense claimed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of Manufacturing of Ferrous and Non-Ferrous Metal. On perusal of the Form 3CD report the AO observed that the assessee has either made late payments or not paid the amount of ESI on behalf of the employee contribution amounting to ₹ 3,01,624/- as prescribed under the relevant Act. The details of the late payments made or not made are as under: Sl. No. Month Employees Contribution to Prov. Fund (Rs.) Due Date of Payment Actual Date of Payment 1 April, 14 42551 21/05/2014 09/06/2014 2 May, 14 35213 21/06/2014 25/06/2014 3 June, 14 33825 21/07/2014 11/08/2014 4 July, 14 34276 21/08/2014 22/10/2014 5 August, 14 34768 21/09/2014 06/11/2014 6 Sept. 14 27691 21/10/2014 06/11/2014 7 Oct., 14 23304 21/11/2014 Nil 8 Nov., 14 18438 21/18/2014 Nil 9 Dec., 14 15461 21/01/2015 Nil 10 Jan., 15 13143 21/02/2015 Nil 11 Feb., 15 12318 21/03/2015 Nil 12 Mar., 15 10636 21/04/2015 Nil TOTAL 301624 5. Therefore, the AO was of the view that as per the provision of section 36(1)(va) if the sum of employee contribution was not paid to the relevant fund on/before the due date as prescribed under the relevant Act then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is to be considered from the payment of salary or the month for which salary is due has not been considered by the authorities below while disallowing the sum of ₹ 2,08,324/- as employee contribution towards ESIC by applying the provision of section 36(1)(va) of the Act. As such, the payment of the employee contribution towards ESIC had been made keeping in mind the due date to be considered from the payment of salary. 10. On the other hand the Ld. DR vehemently supported the order of the authorities below. 11. We have heard the rival contentions and perused the materials available on record. The issue arises before us whether the payment of employee contribution made by the assessee towards ESI are within the due date as specified under the relevant Act. In this regard, we note that the assessee has made the payment of employees contribution beyond the due date as specified under the relevant Act. Therefore the same cannot be allowed as deduction. We also note that the identical issue has been decided vide order dated 15th Oct, 2018 by the Hon'ble Gujarat High Court in the case of M/s Checkmate Facility and Electronics Solutions Pvt. Ltd. v. DCIT reported in Tax Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X (C)/(A) 259886 4 13.2 The AO thus disallowed the proportionate interest expenses for the sum of ₹ 25,98,864/- under section 36(1)(iii) of the Act and added the same to the total income of the assessee. 14. Aggrieved assessee preferred an appeal before the Ld. CIT(A) who confirmed the order of the AO by observing as under: "4.3 I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has made disallowances u/s. 36(1)(iii) of ₹ 25,98,864/- on the ground that appellant has paid interest of ₹ 2,10,55,848/- on borrowed fund but not charged interest on advances of ₹ 6,95,64,322/- to its subsidiary company. The appellant has submitted that the AO has made the disallowance on the presumption that interest bearing fund is used for making interest free advances but the cash flow statement indicates that there Is net cash flow of ₹ 1,85,77,468/-. I do not agree with the submission of the appellant, as appellant on one hand is paying huge interest on the borrowing and on the other hand it is making interest free advance to subsidiary company. The bank statement also reveals that the interest free adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed disallowance made u/s 36(1)(ii) of the Act is unjustified." 16. On the other hand, the Ld. DR vehemently supported the order of the authorities below. 17. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the instant case relates to the disallowances of the interest expenses made by the AO on account of diversion of interest bearing fund for non-commercial activities. However the learned counsel for the assessee argued that the assessee had own fund which exceeds the amount of interest free advances (₹ 7,16,59,975/-) provided to its subsidiaries. As per ld. AR, the average own fund of the assessee is of ₹ 8,39,74,092/- which is in excess of the interest free advances. The average fund of the assessee as worked out by the learned AR stands as under: Particulars 31.03.15 31. 03.14 Pg. of P/B Share capital 6,75,50,000 6,75,50,000 Pg.19 Reserves & Surplus (5,59,46,370) (1,19,78,658) Pg.19 Advance from customers 4,93,25,967 5,14,47,244 Pg.30 Total 6,09,29,597 10,70,18,586 Average interest free funds= (6,09,29,597 + 10,70,18,586)/2 = ₹ 8,39,74,092/- 17.1 On perusal of the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to interest free loans and advances given to the said three subsidiary companies in the earlier years. After perusing the cash flow statement of the assessee company for the assessment year in question, the Tribunal observed that the assessee company had received substantial proceeds from preferential issue of shares capital amounting to ₹ 99999.98 lacs. It had also received dividend income of ₹ 166.13 crores from various investments. After giving interest free loans of ₹ 7.04 crores to its subsidiary companies, the assessee was left with surplus interest free funds of ₹ 53.86 crores which were utilized for giving interest free advances. Thus, there was no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance under section 36(1)(iii) of the Act. After considering the relevant provisions and the case law on the point, the Tribunal deleted the disallowance of interest expenditure made under section 36(1)(iii) of the Act Learned counsel for the appellant has not been able to show that the findings recorded by the Tribunal are illegal or perverse warranting i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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