M/S GENERAL AERODYNAMICS P. LTD. MUMBAI vs ITO - 2(1)(2) MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “SMC” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI SANDEEP SINGH KARHAIL (JUDICIAL MEMBER) ITA No.

252/MUM/2021 Assessment Year: 2016-17 M/s General Aerodynamics Pvt.

Ltd., Ali Chambers, Tamarind Lane, Fort, Mumbai-400023.

Vs.

Income Tax Officer-2(1)(2), Room No.

543, Aayakar Bhavan, M.K.

Road, Churchgate-400021.

PAN No.

AABCG 4629 H Appellant Respondent Assessee by : Mr.

Hitesh Jain, AR Revenue by : Mrs.

Smita Nair, DR Date of Hearing : 21/06/2022 Date of pronouncement : 05/07/2022 ORDER PER OM PRAKASH KANT, AM This appeal by the assessee is directed against order dated 04/02/2020 passed by the Ld.

Commissioner of Income- tax(Appeals)-4, Mumbai [in short ‘the Ld.

CIT(A)’] for assessment year 2016-17, raising following grounds: 1.

The Learned Commissioner of Income Tax (Appeals) ("Ld.

CIT (A)") has erred in confirming the disallowance of interest expense of Rs 25 the bor the app case, th 2.

Withou confirm instead interest busines the cas 3.

Withou erred capitali value o of the capitali 2.

At the outset, w out delay of 339 days form prescribed for f served upon the as before the ITAT was appeal has been filed M/s Gener 5,38,825/- u/s 36(1) iii) of the Act, on the a rrowed funds have been utilized for non-bus pellant.

On the basis of the circumstances his addition ought to be deleted. ut prejudice to ground no 1, the Ld.

CI ming the disallowance u/s 36(1) (iii) a d of ₹9,74,983/- being proportionate d t expenditure pertaining to borrowed fund ss purpose) On the basis of the circumstan e, addition, if any, ought to be restricted to ₹ ut prejudice to ground 1 and 2 above, the in confirming action of the 'AO in ization of interest disallowed u/s 36(1)(iii) of investments.

On the basis of the circumst case, interest disallowed, ought to be ized. we may like to mention that Regis s in filing the appeal.

As per For filing the appeal, the order of the sessee on 04/02/2020 and th due within 60 days i.e. days i.e.

5/03/20 d on 09/03/2021.

We find that ral Aerodynamics Pvt.

Ltd.

ITA No.

252/M/2021 2 assumption that siness purpose of and facts of the IT (A) erred in at ₹25,38,825/- disallowance of ds used for non- nces and facts of ₹9,74,983/- e Ld.

CIT(A) has not allowing ) along with the tances and facts allowed to be stry has pointed m No.

36 i.e. the e Ld.

CIT(A) was herefore appeal 020, whereas the t in view of the order dated 10/01 Miscellaneous Applic (C) No.

3 of 2020 15/03/2020 till 28/0 limitation as may be respect of all judicial by the assessee is w the appeal is admitte 3.

Briefly stated, engaged in the busi discounting activity. filed return of income The Ld.

Assessing Off assessment order da of the Income-Tax Ac M/s Gener 1/2022 of the Hon’ble Supr cation No.

21 of 2022 in suo mo 0, wherein it is directed tha 02/2022 shall stand excluded fo prescribed under any general o l or quasi judicial proceedings, within extended limitation perio d for adjudication. facts of the case are that the ness of providing loans to cor For the year under consideratio e on 15/10/2016, declaring tota ficer scrutinized the return of in ated 14/12/2018, passed under ct, 1961 (in short ‘the Act’), out ral Aerodynamics Pvt.

252/M/2021 3 reme Court in oto writ petition at period from r the purpose of r special laws in the appeal filed od.

Accordingly, e assessee was rporate and bill on, the assessee al income at Nil. ncome and in the r section 143(3) t of the claim of the interest expend interest expenditure of ₹25,38,825/-.

Th Aggrieved, the assess grounds as reproduce 4.

Before us the L containing pages 1 to upon.

5.

The ground No. ₹25,38,825/-, which investments and not 5.1 The facts qua engaged in business borrowed money and interest of ₹55,53,06 M/s Gener iture of ₹55,53,061/-, he rest to ₹30,14,226/-and disallowed he Ld.

CIT(A) also upheld th see is an appeal before the Tribu ed above.

Ld. above.

Ld. counsel of the assessee file o 49 and also filed copy of the 1 of the appeal relates to entire h the Assessing Officer held for the purpose of the business. the issue in dispute are tha s of giving loans to corporate d during the year under conside 1/-.

The assessee further given ral Aerodynamics Pvt.

252/M/2021 4 tricted claim of balance amount e disallowance. unal, raising the ed a paperbook decisions relied disallowance of as related to t assessee was e.

The assessee eration incurred advances out of the money borrowe earned interest in observed that assess in debt oriented mu ₹40,00,000/- during total investment in d ₹1,70,00,000/-.

The corresponding to mo non-business purpos out of the interest in utilized for business proportionate disallo for fund invested for interest for busines reproduced as under M/s Gener ed and during the year unde come ₹46,73,102/-.

The As ee had a opening investment of utual fund and made a further the year under consideration debt oriented mutual fund as on e Ld.

Assessing Officer held oney invested in debt mutual es, is not allowable and accordin ncurred, interest of ₹30,14,226 s purposes (i.e. advancing loa owance of interest amounting t r non-business purposes.

The s s purpose made by the Asse : ral Aerodynamics Pvt.

252/M/2021 5 r consideration sessing Officer f ₹1,30,00,000/- r investment of and thus made n 31/03/2016 at d that interest fund, being for ngly, he allowed 6/- for the fund ans) and made to ₹ 25,38,825/- said working of ssing Officer is = amount of fund used for b amount of fund bo = (2,80,40,460/5,16,58,492) =₹30,14,226/- 6.

The Ld.

Assessi non-business purpos own capital he, also investment in debt m on the decisions of finding of the Ld.

Asse “In this case, t that there has allowable expe for the purpos should not on that the amou is further seen provided one utilized. utilized.

Analy kept entire fu absence of any M/s Gener business purpose orrowed X gross interest debit account ) X 55,53,061 ing Officer held that money w ses.

In absence of link of said in o rejected the contention of th mutual funds was out of own ca the Hon’ble Madras High Cour essing Officer is reproduced as u the facts are sufficiently clear to warrant th s been a diversion.

The deduction u/s.36(1) enditure as long as the amounts borrowed w se assessee's business.

Further, the capital b ly be invested in assessee's Own business nts borrowed continues to remain in the bu n from the details submitted that assessee to one nexus on the funds borrowed an ysis of balance sheet clearly indicates the unds available as a common pool of fund y separate accounting entries in the books f ral Aerodynamics Pvt.

252/M/2021 6 ted in profit and loss was diverted for nvestment from he assessee that apital.

He relied rt.

The relevant under: he finding (iii) is an were used borrowed but also usiness.

It e has not nd funds assessee ds and in for funds borrowed and utilized from c is required to b In this regard, Court (2011 was held tha expenditure on business objec Venkateswara Brothers Vs C When Departm funds for non had sufficient c exist - Disallow 6.1 The Ld.

CIT(A) u “4.2 I have submission of giving loans.

T balance sheet 213.77 lacs.

As R5.16 crore.

T times that of it the appellant R1,70,00,000 h From the facts M/s Gener d funds utilized the only conclusion is fu common pool of funds.

Hence proportionate be disallowed in accordance with section 36 , reliance is placed on the decision of Madr TIL 687-HC-MAD-IT) CIT Vs R Mohan wh at the assessee is not entitled to claim n the borrowed funds which were diverte cts.

Further reliance is placed on CIT an (Mad) 222 ITR 163 K.

ITR 163 K.

Somasund CIT (Mad) 238 ITR 939 where in it was h ment established the fact of diversion of b -business purposes, the presumption that capital and the diversion is out of such fund wance justified.” upheld the disallowance observi carefully gone through the assessment or the appellant.

The appellant is engaged in The sources of funds available with the appel is share capital of 22.95 lacs and reserve s against this the appellant has a long term Thus the borrowed fund of the appellant is ts own funds.

In this situation it is incorrect to say that investment in mutual fund has been made by using its own non intere s of the case it is clear that the appellant h ral Aerodynamics Pvt.

252/M/2021 7 funds are e interest 6(1)(iii). ras High here in it interest ed to non Vs M.S. daram & held that borrowed assessee ds cannot ing as under : rder as well as the business of llant as per the and surplus of m borrowings of s more than 30 t on the part of amounting to est being fund. has hardly any own funds to it well as its inve held by the Ho taxman 74 th depend on fac stated in the a interest expen assessment or proportion of i such as loans a seen that out disallowed an the appellant i of loans and a business of the 4.3 Thus th mutual funds a business or as an investment funds from b purposes of b that the AO ha disallowing th interfere with are according confirmed.” M/s Gener ts credit and it is managing its entire busine estment and asset from borrowed funds on on'ble Supreme Court in the case of S A Bu hat the allowability of interest on borro cts of a particular case.

In this case, the A assessment order that only proportionate d diture is required to be done.

It is also se rder the AO has taken an adverse view interest which he had thought to be relatab and advances and investment in mutual fun t of total interest expenditure of ₹55,53 amount of ₹25,38,825/- However, as men is in the business of giving loans and therefo advances cannot be described described as being not e appellant. he only issue to be decided now is whether amounting to ₹70 lacs can be said to be for t a measure of commercial expediency.

The a t company and therefore investing ₹1.70 l orrowed fund does not make the case f usiness or commercial expediency.

Consid as himself given substantial relief to the ap he entire amount of interest paid, I see the order of the AO.

The grounds of appea gly dismissed and the addition of ₹2 ral Aerodynamics Pvt.

252/M/2021 8 ess activities as nly.

It has been uilders Ltd.

158 wed loan will AO himself has disallowance of een that in the w only on the ble to activities ds.

It is further 3,061/- he has ntioned earlier, ore, the activity t related to the r investment in the purposes of appellant is not lacs in mutual for either the dering the fact ppellant by not no reason to al no.

1,2 and 3 25,38,825/- is 7.

The assessee b ₹1,28,22,497/- was ly no interest would be invest the said ideal f the assessee said inv only.

The Ld. counsel to prove that funds business or professio 7.1 The Ld. counse Assessing Officer are funds were advanced whereas in the case o assessee in its own mutual funds, instead not give any income.

M/s Gener before us contended that sin ying idle in current account as o e earned and therefore the asse fund in mutual funds and therefo vestment was for the purpose l further submitted that the ass have been borrowed for the on and not actual deployment. l submitted that decisions reli e distinguishable as in those c d to/utilized by the assessee fo of the assessee, funds have been name and has been temporaril d of keeping it into current acco ral Aerodynamics Pvt.

252/M/2021 9 ce the fund of on 31/03/2015, essee decided to ore according to of the business essee only need purpose of the ed upon by the cases borrowed or relative party n retained by the ly invested into ount, which does 7.2 Without prejud has requested for re Ld. counsel drawn o fund. wn o fund.

The said chart r is extracted as under Particulars Share Capital Reserves and Surplus Total Investment in Mutua 7.3 He further subm 16 has held that fir adjusted against inve can only be liable to d He submitted that quantified ₹55,95,15 on which was held t submitted that follow M/s Gener ice to the above, in ground No estricting the disallowance to ₹ our attention to position of ava reproduced in para 9 of his wri : As on 31.03.2015 As 2,95,000/- 76,35,020/- al Fund 79,30,020/- mitted that Ld.

CIT(A) in assessm rstly, own funds of the assess estment and excess investment o disallowance under section 36(1 Ld.

CIT(A) in assessment yea 2/- out of ₹1,30,00,000/- inve to be liable for disallowance.

T wing the finding of the Ld.

CIT(A ral Aerodynamics Pvt.

252/M/2021 10 .

2 the assessee ₹9,74,983/-.

The ailability of own tten submission s on 31.03.2014 2,95,000/- 71,09,848/- 74,04,848/- ment year 2015- see need to be over own funds, 1)(iii) of the Act. ar 2015-16 has stment, interest The Ld. counsel A) in assessment year 2015-16, in ₹9,74,983/- could on counsel are reproduc “15.

During the ye investment in mutual the A.Y 2015-16 has 31.03.2015 minus Rs. which interest disallow a) On Rs.

55,95 16 plus b) On Rs.

34,7 Rs.

5,25,172/- 16.

Based on the abo comes to Rs.9,74,983/ divided by total borro Rs.

55,53,061/-).

17.

In view of above, 9,74,983/ as against R 7.4 Further, withou counsel further subm M/s Gener the case of the assessee d nly be made.

The relevant subm ced as under: ar under consideration, the appellant has l funds of Rs.

40,00,000/- and its sharehold been increased by Rs.

5,25,172/- (i.e.

Rs.

7 74,04,848/- as on 31.03.2014) and therefor wance to be made, ought to be computed as 5,152/- as quantified by Hon'ble CIT(A) in o 74,828/- (being Rs.

40,00,000/- additional i being the increase in internal accruals in A. ove, the amount of proportionate disallow /- (ie investment out of borrowed funds o owed funds of Rs. nds of Rs.

5,16,58,492 multiplied by we request your Honour to restrict the di Rs.

25,38,825 made by the Assessing Officer. ut prejudice to ground No.1 mitted that while allowing the ral Aerodynamics Pvt.

252/M/2021 11 disallowance of ission of the Ld. made an further ders funds during 79.30,020/- as on re, the amount on s under: order for AY 2015- investment minus Y 2015-16) wance to be made of Rs.

90,69,980/- by interest paid of isallowance to Rs. ” and 2, the Ld. e proportionate interest for fund utili has not considered a Healthcare Ltd., whi ignored amount of account.

The Ld. cou statement available o submitted that accor works out to ₹4,07,2 Assessing Officer fo assessee.

The Ld. co allowable to the asses =amount of fund used for amount of fund b = (4,07,23,801/5,16,58,492) =₹43,77,630/- M/s Gener ized for business purpose, the A amount of ₹51,00,000/- advanc ch was grouped as doubtful d ₹75,83,341/- which was lyin unsel drawn over attention to a on page 14 of the paperbook.

T rdingly the funds utilised for bu 3,801/- instead of ₹2,80,40,460 or computation of interest al ounsel submitted revised work ssee as under: r business purpose borrowed X gross interest loss account ) X 55,53,061 ral Aerodynamics Pvt.

252/M/2021 12 Assessing Officer ed to M/s Elder ebt and further ng in the bank audited financial The Ld. counsel usiness purpose 0/- taken by the lowable to the king of interest t debited in profit and 7.5 The Ld. couns disallowance would ₹43,77,630/-) 7.6 Without prejud supporting the grou proportionate disall allowed to capitalize support, he relied on in the case of Trishu Tribunal Mumbai ben ITA No.

236/Mum/2 8.

DR on authorities and subm proportionate interes M/s Gener sel accordingly submitted tha be restricted to ₹11,75,431 /- dice to ground one and two und No. three, the Ld. e, the Ld. counsel lowance under section 36(1) e along with the value of the n the decision of the Hon’ble Ma ul Investment 305 ITR 434 and nch in the case of DCIT vs.

Sh F 2010. n the other hand relied on fi mitted that assessee has failed t st disallowed is related to the b ral Aerodynamics Pvt.

252/M/2021 13 at in that case - (₹55,53,061 – of the appeal, submitted that (iii) should be investment.

In dras High Court d decision of the Fritz D Silva in nding of lower to justify as the business activity of advancing loan a accordance with law.

9.

We have heard relevant material on r 9.1 As far as grou concerned i.e. the inv business activity bec income, the argumen establish that invest activity of the assesse engaged in advancing profit loss account, t advancing loan only a not the business activ been invested.

The fu M/s Gener nd therefore disallowance has rival submission of the parties a record. und No.

1 of the appeal of t vestment made in debt mutual f ause funds being ideal for inves nt of the Ld. counsel does not tment in mutual fund is part ee.

The assessee has clearly adm g loan to corporate and bill dis the assessee has shown intere and this activity of investment in vity irrespective of the fact that i unds have not been invested du ral Aerodynamics Pvt.

252/M/2021 14 s been made in and perused the the assessee is fund was part of sted for earning in any manner of the business mitted that it was counting.

In the est income from n mutual fund is ideal funds have e to business or commercial expedien income on ideal f borrowed money ut ground No.

1 of the ap 9.2 As far as ground failed before the low were deployed in inv which the claim of u towards investment accepted.

The groun accordingly dismisse 9.3 The alternative however, convincing for business purpos consider the claim o M/s Gener ncy, and same have been inves funds.

Therefore, interest cor tilized in said investment is d ppeal of the assessee accordingl d No. ingl d No.

2 of the appeal is concern wer authorities to justify as how vestment in debt mutual fund an utilisation of own capital and r in debt mutual fund of ₹1.30 c nd No.

2 of the appeal of t d. plea made in ground No.

2 of .

While taking calculation of th se, the Ld.

Assessing Officer w f the assessee of ₹51 lakh repr ral Aerodynamics Pvt.

252/M/2021 15 sted for earning rresponding to disallowed.

The ly is dismissed. ed, the assessee w the own funds nd in absence of reserves surplus rores cannot be the assessee is the assessee, is he funds utilised was required to resenting under the doubtful debt a amount of interest a including above tw contention of the ass on the issue in dispu AO for re-computati terms of section 36 amount of ₹ 51 lakh representing as amou business purposes.

It be afforded adequate ground No.

2 of the ap 9.4 The ground no assessee is seeking disallowed under sec M/s Gener and ₹75,83,341/- lying in ban allowable was required to be c wo amounts.

Accordingly, w sessee.

We set aside the order o ute and restore the matter to th on of the amount of the intere 6(1)(iii) in view of the plea o h representing doubtful debt an unt lying in bank account for fu t is needless to mention that th e opportunity of being heard.

In ppeal is partly allowed for statis o.

3 being raised as alternativ g capitalization of the amou ction 36(1)(iii) of the Act.

Here ral Aerodynamics Pvt.

252/M/2021 16 nk account.

The considered after we accept this of the Ld.

CIT(A) he file of the Ld. est allowable in of including the nd ₹75,83,341/- unds utilized for he assessee shall n the result, the stical purposes. ve remedy.

The unt of interest e the assessee is claiming that if inte funds is not allowed treated as cost of acq opinion that the issu acquisition will arise and therefore issue is adjudicating upon th accordingly dismisse 10.

In the result, th statistical purposes. purposes.

Order pronounce Sd/- (SANDEEP SINGH KA JUDICIAL MEM Mumbai; Dated: 05/07/2022 Rahul Sharma, Sr.

P.S.

Copy of the Order forward 1.

The Appellant 2.

The Respondent.

M/s Gener erest corresponding to investm as revenue expenditure, then quisition of the said mutual fund ue of claim of the interest am at the time of the sale of the sa s premature at this stage, there he said issue.

The ground No.

3 d. he appeal of the assessee is allo ed in the Court on 05/07/2022.

Sd/- ARHAIL) (OM PRAKASH BER ACCOUNTANT ded to : ral Aerodynamics Pvt.

252/M/2021 17 ment in mutual same should be d.

We are of the mount as cost of aid mutual funds fore, we are not of the appeal is owed partly for H KANT) MEMBER 3.

The CIT(A)- 4.

CIT 5.

DR, ITAT, Mumbai 6.

Guard file. //True Copy// M/s Gener BY ORDER, (Sr.

Private Se ITAT, Mum ral Aerodynamics Pvt.

252/M/2021 18 ecretary) mbai