There is no question of interest-bearing funds misappropriated by the assessee because the amount has been converted into equity shares, appearing as the opening balance: the ITAT removes the refusal

The Delhi Bench of Income Tax Appeal Tribunal (ITAT), while removing the dismissal, held that no matter of interest-bearing funds misappropriated by the assessed as amount was converted into shares, appearing as opening balance .

The AO during the appraisal process observed that the appraisee, M/s. GS Pharmbutor P.Ltd. embezzled interest-bearing funds to invest Rs 28 crore in M/s. Moderate Leasing & Capital Services Limited, a related company.

AO observed that the assessee also debited an amount of Rs.24,93,81,512/- as interest expense in his profit and loss account. Facts which were gathered during the valuation proceedings under Section 143(3) of the Act for AY 2014-15 suggest that the valuator misappropriated interest bearing funds to invest Rs 28 crore in said company. Based on this premise, the assessee’s file was reopened under section 148 of the Act, in accordance with the reasons recorded in the assessment order. Accordingly, the ld. AO calculated the proportionate withholding of Rs.3,36,00,000/- by calculating the notional interest charge at the rate of 12% on the amount of Rs.28 crores.

The coram of Accountant member, Anil Chaturvedi and Judicial member, Amit Shukla maintained that the assessee did not make any loans or advances during the year. As can be seen on the copy of the report from M/s. Moderate Leasing & Capital Services Limited, the assessee has made advances and a loan to said company from time to time and has also been reimbursed by said company. Throughout, there have been debit balances as early as the 2006-07 tax year. During the 2011-12 financial year, the assessee converted its debit balance of Rs 29.13 crore into convertible debentures on April 30, 2011 for an amount of Rs 28 crore. Said bonds were converted into shares on 25.03.2014, ie for tax year 2014-15. This amount constituted the opening balance at which AO processed the advanced amount of Rs 28 crore which was converted into convertible debentures from an advance made on interest bearing funds. First, nowhere did AO analyze when the assessee advanced the lending right from AY 2006-07 from interest-bearing funds or in the relevant year, of other interest-bearing funds were misappropriated. The conversion of bonds as of 30.04.2011 into a debit balance with said party cannot be considered as a diversion of funds to the sister company from interest-bearing funds for the year in question. As noted by the assessor, long-term borrowings were reduced to Rs.6.12 crores during the year.

“Thus, we find no reason why a disallowance can be made on such a premise. Without going into the substance, whether interest-free funds were available or not, we believe that under these facts and circumstances, no denial can be made. Accordingly, the entire denial made by the OA is removed,” ITAT added.

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