PER BENCH : The above 7 appeals filed by the assessee are directed against the consolidated order dated 23-06-2011 of the CIT(A) relating to Assessment Years 2002-03 to 2008-09 respectively. Since common grounds have been taken by the assessee in all these appeals, therefore, these were heard together and are being disposed of by this common order. ITA No. 1001/PN/2011 (A.Y. 2002-03) :

2. In Ground of appeal No.1 the assessee has challenged the order of the CIT(A) in confirming the disallowance to the extent of Rs.52,820/- u/s.36(1)(iii) made by the Assessing Officer on account of interest on borrowed funds.

3. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing of P.S.C poles, RCC pipes and other allied products. A search u/s.132 of the Income Tax Act was conducted on 21-02- 2008 at the business and residential premises of different members/concerns of the Yog group of Aurangabad. In response to notice u/s.153A the assessee company, which belongs to this group filed its return of income on 17-11-2009 declaring loss of Rs.7,40,122/-. During the course of assessment proceedings the Assessing Officer noted from the various details furnished that the assessee has diverted interest bearing funds to various companies without charging any interest from them. He noted from the balance sheet that the assessee has made investment of Rs.58,66,000/- with various group concerns and also given loans and advances to the tune of Rs.2,39,087/- to various group concerns without charging any interest. The Assessing Officer therefore asked the assessee to explain as to why proportionate disallowance should not be made. The assessee in its reply submitted that none of the investment out of Rs.58,66,000/- has been made during the current year. The investment in the earlier year was made out of routine business funds. It was further submitted that the investment in YCP-IPL, Shyamlal Presstressed Pvt. Ltd. and Yog Seeds Pvt. Ltd. was done with an anticipation of the dividend/other income. Further, the company has not paid any interest on unsecured loan, therefore, the provisions of section 36(1)(iii) shall not apply.

4. However, the Assessing Officer was not satisfied with the explanation given by the assessee for the following reasons as mentioned at Para 7.2 of the assessment order : (i) The company has not established the business purpose to the persons to whom the loans and advances are given in its reply. (ii) The company has not the reserve and surplus during the year for giving the loans and advances. The reserve and surplus shown in the balance sheet is nothing but the state capital incentive received. (iii) As per the profit & loss account, the company has paid interest to bank on CC account at Rs.1,78,680/- and interest to others Rs.2,062/-. (iv) The interest on unsecured loan is being given on the earlier year balances of unsecured loan also. (v) The allowability of interest on the borrowed capital is based on the utilization of such capital for wholly and exclusively for the business of the concern. In the instant case, the company has made the investment in shares and loans & advances as shown above as on 31/03/2002 in which there is no involvement of any business income. Since the assessee has paid interest on borrowed funds @12%, therefore, the Assessing Officer calculated interest @12% on the investment and loans and advances of Rs.61,05,087/- and determined the disallowable interest at Rs.1,80,742/-.

5. Before the CIT(A) the assessee submitted that the investments and advances were mostly made in the preceding years out of routine business funds and investments were made in the shares of sister concerns with an anticipation of dividend income. It was further submitted that the Assessing Officer has not established nexus of borrowed funds with the investment in shares and loans and advances to sister concerns. It was submitted that the provisions of section 36(1)(iii) are not applicable in respect of investments in shares of sister concerns in anticipation of income there from. The decision of Honble Supreme Court in the case of S.A. Builders Vs. CIT reported in 158 Taxmann 74 and the decision of Honble Madras High Court in the case of CIT Vs. South India Corporation (Agencies) reported in 293 ITR 237 were also cited. The assessee further filed a chart showing the capital and free reserves, State capital incentive and Interest free loans etc. to substantiate that interest free amount was available from which investments were made in shares and loans and advances granted.

6. However, the learned CIT(A) was not satisfied with the explanation given by the assessee and upheld the disallowance made by the Assessing Officer. While doing so, he held that the submission of the assessee that investment in shares of sister concerns were made in anticipation of earning dividend income cannot be regarded as business activity carried out by the assessee. From the various details filed by the assessee he noted that the assessee has borrowed funds for the purpose of its business and incurred interest expenditure.

6.1 So far as the reliance of decision in the case of S.A. Builders (Supra) is concerned he noted that in the said decision the Honble Apex Court has held that interest on borrowed funds cannot be disallowed if the assessee has advanced interest free loans to sister concerns as a measure of commercial expediency. However, in the instant case, it was not established that the amount was advanced to sister concerns for business purpose as a measure of commercial expediency and it has not been pointed out the manner of utilisation of the money advanced by the sister concerns. So far as the decision of Honble Madras High Court in the case of CIT Vs. South India Corporation (Agencies) Ltd. (Supra) is concerned he noted that the interest on money advanced to sister concerns was not disallowed in the earlier years. Further, there was sufficient funds available for advancing the sums to sister concerns. From the chart furnished by the assessee he noted that the assessee has incorrectly considered the state capital incentive as interest free funds available since the said fund is to be recorded as utilised for acquisition of capital asset since the said incentive was received for the said purpose. He accordingly upheld the action of the Assessing Officer.

6.2 Aggrieved with such order of the CIT(A) the assessee is in appeal before us.

7. The learned counsel for the assessee reiterated the same submissions as made before the Assessing Officer and the CIT(A). He submitted that the Assessing Officer has not established the nexus of interest bearing funds being diverted for investment in shares and loans and advances to group concerns. Referring to the decision of Honble Bombay High Court in the case of CIT Vs. Shrishti Securities Pvt. Ltd. he submitted that for the purpose of deduction of interest u/s.36(1)(iii) object of the loan is irrelevant. Interest payable on borrowed fund which were utilised is allowable as deduction u/s.36(1)(iii). He submitted that no disallowance has been made during A.Y. 2006-07, therefore, no disallowance is called for during this year also. In his alternate contention, he submitted that the state capital subsidy received by the assessee should be considered as interest free funds available for making the interest free advance.

8. The learned Departmental Representative on the other hand heavily relied on the order of the Assessing Officer and the CIT(A). He submitted that since the assessee has diverted the interest bearing funds to sister concerns in shape of investment and loans and advances without charging any interest, therefore, the Assessing Officer was justified in disallowing proportionate interest u/s. 36(1)(iii) of the Act. So far as the decision relied on by the learned counsel for the assessee in the case of Shrishti Securities Pvt. Ltd.(Supra) he submitted that the assessee in that case was engaged in the business of purchasing, selling, investing and dealing in shares, stocks, debentures, bonds, units of company etc. Therefore, primarily the company was engaged in the business of share trading. However, in the instant case, the business of the assessee company is different from that of share trading, therefore, the said decision has no application. As regards the decision of Honble Madras High Court cited supra is concerned, he submitted that the facts in that case are also distinguishable and not applicable to the facts of the present case. As regards the submission of the learned counsel for the assessee that state capital investment should be available to the assessee for making the interest free advance/investment, he submitted that under the said scheme the assessee has to keep the money for purchase of capital assets and he cannot divert the funds for interest free advances. He accordingly submitted that the disallowance made by the Assessing Officer and confirmed by the CIT(A) being justified should be upheld.

9. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We find the Assessing Officer disallowed proportionate interest u/s. 36(1)(iii) for diverting interest bearing funds to sister concerns without charging any interest which has been upheld by the learned CIT(A). Since the assessee has not established that the amount invested in sister concerns and amounts given as loans and advances to sister concerns without charging any interest is for commercial expediency, therefore, proportionate disallowance of interest is justified and the decision of Honble Supreme Court in the case of S.A. Builders (Supra) has no application to the facts of the present case. So far as the various other decisions relied on by the learned counsel for the assessee, we find the ratio of those decisions are not applicable to the facts of the present case and are distinguishable.

9.1 However, we find some force in the submission of the learned counsel for the assessee that the state capital investment subsidy received by the assessee which is interest free should be available to the assessee for making the advances. From the submissions made before the Assessing Officer we find the assessee has received the state capital incentive of Rs.4,52,690/- for the year 1996-97, Rs.51,925/- for the year 1999-2000, and balance amount of subsidy Rs.2,01,325/- received in the year 2001-02. The subsidy was sanctioned by WMDC, Pune on 08-11-1995 and the subsidy has been credited to capital reserve and surplus account after receipt of the amounts. However, it remains to be verified as to whether the assessee has received the incentives after investing in the purchase of the machineries etc. and whether the amount so credited to capital reserve and surplus can be utilised freely. If the amount can be utilised by the assessee freely, then the amount standing to the credit of the capital reserve should be considered as available to the assessee for making the interest free investment. We therefore deem it proper to restore the issue to the file of the Assessing Officer with a direction to verify the scheme of granting subsidy and if the assessee is eligible to freely utilise the same, then recompute the disallowance after considering the same as interest free funds available for giving loans and advances to sister concerns free of interest. The Assessing Officer while re-computing such disallowance shall give due opportunity of being heard to the assessee and decide the issue as per law. We hold & direct accordingly. The ground raised by the assessee is accordingly allowed for statistical purpose.

10. The second ground by the assessee relates to the order of the CIT(A) in confirming the addition u/s.2(22)(e) on account of deemed dividend to the extent of Rs.20,59,491/-.

11. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted from the balance sheet that the assessee company has received loans and advances of Rs.17 lakhs from Yog Cement Products and Industries Pvt. Ltd. (Now known as Yog Industries Ltd.). The Assessing Officer noted that the provisions of section 2(22)(e) are applicable to the assessee and therefore addition u/s. 2(22)(e) is required on account of deemed dividend. When the Assessing Officer confronted the same to the assessee there was no response. The Assessing Officer therefore made addition of Rs.17 lakhs as deemed dividend u/s. 2(22)(e) of the Income Tax Act.

12. Before the CIT(A) the assessee strongly objected to the addition made by the Assessing Officer. It was submitted that while making the addition the Assessing Officer has not considered the accumulation of profits accurately and not adopted the correct working of available accumulation of profit. It was accordingly submitted that the addition should be revised. It was submitted that for arriving at accumulated profit of the lending company depreciation as per Income Tax Act has to be considered and not depreciation as per Companies Act. For this proposition, the decision of the Honble Bombay High Court in the case of Navnitlal C. Jhaveri Vs. CIT reported in 80 ITR 582 and the decision of the Delhi Tribunal in the case of Chadha and Co. Vs. DCIT reported in 133 TTJ 490 were relied upon. The assessee also filed working of profit as per Companies Act and profit as per Income Tax Act after considering depreciation as per Income Tax Act for the purpose of calculating deemed dividend.

13. Based on the submissions filed by the assessee the learned CIT(A) called for a remand report from the Assessing Officer. After considering the remand report and the submission of the assessee the learned CIT(A) held that for arriving at accumulated profit of the lending companies, depreciation as per Income Tax Act as argued by the assessee cannot be accepted. He distinguished the decision of the jurisdictional High Court in the case of Navnitlal Jhaveri (Supra) on the ground that the lending company was Malegaon Electricity Company Pvt. Ltd. and the said company has arrived at profit by considering the depreciation as per Electricity Supply Act which is at lower rate and not at commercial rate. On these facts the Honble Bombay High Court has held while deciding appeal for A.Y. 1956-57 that the depreciation as allowable under Income Act 1922 is to be considered as the accumulated profit for the purpose of arriving at deemed dividend from such commercial profit. In the present case, the depreciation has been claimed by the lending company in its books of account as per provisions of Companies Act and not as per provisions of Electricity Supply Act. The depreciation as provided in the Companies Act is on commercial basis after considering the period of wear and tear of the respective assets. Therefore, the profit arrived at by the lending company after considering depreciation as per Companies Act is commercial profit. Further, the provisions in respect of deemed dividend was brought on statute since instead of paying dividend as per the provisions of Companies Act to the shareholders the amounts were paid to the substantial shareholders by way of loans and advances, He, however, accepted the contention of the assessee that deemed dividend considered in the years under appeal are to be reduced while considering accumulated profit available for arriving at deemed dividend. He accordingly gave partial relief to the assessee.

13.1 Aggrieved with such order of the CIT(A) the assessee is in appeal before us.

14. The learned counsel for the assessee reiterated the same submissions as made before the Assessing Officer and the CIT(A). He submitted that the issue now is narrowed down and limited to the allowability of depreciation as per Income Tax purpose for the purpose of computing the accumulated profit. Referring to the decision of Honble Bombay High Court in the case of CIT Vs. Jamnadas Khimji Kothari reported in 92 ITR 105 he submitted that the Honble High Court in the said decision has held that for ascertaining accumulated profits, adjustments such as depreciation allowable under the Income Tax Act would have to be deducted.

14.1 The learned Departmental Representative on the other hand heavily relied on the order of the CIT(A).

15. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute in the impugned ground is regarding the computation of the accumulated profit. According to the assessee such accumulated profit has to be determined after calculating the depreciation under the Income Tax Act. In other words, the difference between the depreciation as per Income Tax Act and depreciation as per Companies Act has to be reduced from the profit available for distribution of dividend as per books of accounts.

16. We find the Honble Bombay High Court in the case of CIT Vs. Jamnadas Khimji Kothari while deciding an identical issue has held that accumulated profit as used in section 2(6A)(e) does not mean such profit as disclosed by the companys balance sheet but such disclosed profits subject to adjustments as required by the Income Tax Act. The relevant observations of the Honble Court is as under :

8.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The further submission of the assessee was that the left over balance of Rs.3,55,000 and odd also did not represent the true accumulated profits. The submission was that in the balance sheet the depreciation shown was not in accordance with the depreciation allowed by the assessment orders made in the previous years. The contention was that in arriving at the true figure of the accumulated profits from the reserve fund the depreciation as previously allowed by the previous assessment orders must be first deducted. The amounts of allowed depreciation would be capital loss. In the balance sheet as prepared by the company for its own purposes, the depreciation was calculated at much lesser rates than allowed under the Income tax Act and that had resulted in the excessive figure of reserve fund mentioned in the balance sheet. This contention was not accepted by the Income tax Tribunal. The observation of the Tribunal was as follows : " The company is normally the best judge of what it should deduct for depreciation. If it did not think it necessary to provide more for depreciation it cannot ask for adjustments now at this stage. There appears to be no room on the language of the provision to make the adjustment required by the assessee. " Now this finding of the Income tax Tribunal is contrary to the findings and observations of this court in Navnitlal C. Jhaveri v. Commissioner of Income tax and Commissioner of Income tax v. P. K. Badiani.

9. In the above first case the assessee had admitted that in the accounts maintained by the company having regard to certain provisions of the Electricity Supply Act the depreciation was calculated and stated at much lower rate than allowed to it under the Income tax Act with the result that in the balance sheets of the company the general reserve fund was shown at a larger figure than the income resulted having regard to the rate of depreciation granted under the Income tax Act and in the previous assessment orders. The submission was that as regards the question that had arisen under section 12(1B) read with section 2(6A)(e) the true amount of the accumulated profits was liable to be ascertained on the footing of the depreciation calculated at the rates permitted under the Income tax Act and accordingly granted in the previous assessment orders. The submissions of the assessee were accepted by this court. The finding of the court was that for the purpose of calculating the profits within the meaning of the phrase " accumulated profits " under section 2(6A)(e), an allowance for depreciation should be made by way of a deduction at the rates provided for by the Income tax Act itself. The contrary contention made to the effect that the accumulated profits were liable to be ascertained on the basis of the depreciation calculated in the balance sheets of the assessee company was rejected by the court. The observation of the court in that connection at page 587 was as follows : " Unless such depreciation is set apart, the gross profits will contain an element within them which is really of a capital nature .... In short a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. "

10. In the case of P. K. Badiani, the finding of the court was :" ....when arriving at the profits for that period the amount of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first as otherwise the initial capital would, to that extent, incorrectly and falsely be converted into and treated as profits. "

11. We are bound to follow the findings made by this court in the above two decisions as regards the true meaning and construction of the phrase " accumulated profits " in section 2(6A)(e). We are, therefore, bound to hold that the Income tax Tribunal in this case was entirely wrong in rejecting the contention made by the assessee that from the figure of reserve fund mentioned in the balance sheet the true amount of depreciation allowed in accordance with the rates prescribed under the Income tax Act and accordingly by the assessment orders previously made was liable to be deducted. There is no dispute in this case that if the depreciation thus granted in accordance with the income tax rates was deducted from the figure of reserve fund arrived at after deducting the above sum of Rs. 1,35,330 there would be left nothing by way of reserve fund. Under the circumstances the true position in the present case was that in respect of the loans of Rs. 2,55,135 advanced by the company to the assessee which could be considered as dividend under section 2(6A)(e) there was no accumulated profits with the company and the same could, therefore, not be considered dividend and income of the assessee.

17. Respectfully following the decision of the jurisdiction High court cited supra we find merit in the submission of the learned counsel for the assessee that difference in the depreciation as per the Income Tax Act and depreciation as per Companies Act should be reduced from profit available for distribution as dividend as per books of accounts. We, therefore, restore the issue to the file of the Assessing Officer with a direction to verify the difference and make suitable adjustment while calculating the deemed dividend u/s.2(22)(e). We hold and direct accordingly. This ground by the assessee is accordingly allowed for statistical purposes.

18. In Ground of appeal No.3 the assessee has challenged the order of the CIT(A) in confirming the addition of Rs.2,57,089/- on account of excess consumption of steel.

19. After hearing both the sides, we find the Assessing Officer made addition of Rs.2,57,089/- on account of excess consumption of steel since the consumption of steel during the impugned assessment year was very high as compared to other assessment years and the assessee company was unable to satisfactorily explain such discrepancy.

20. In appeal the learned CIT(A) upheld the action of the Assessing Officer by holding as under :

20. I have carefully considered the facts of the case, assessment order of the Assessing Officer and submission of the appellant. On perusal of the same, the contentions raised by the Assessing Officer are found to be reasonable and correct and hence accepted. The contention of the appellant that as the steel of bad quality has been supplied by the supplier, the consumption of steel for manufacturing of P.S.C. pipes has substantially increased is not supported by any evidence. The appellant has not brought on record any evidence such as the unused raw material/pipes on account of bad quality of steel in stock, sale of the said stock as scrap, correspondence with the supplier or action taken against the supplier for supplying bad quality steel etc. The addition made by the Assessing Officer on account of excess steel consumption amounting to Rs.2,57,089/- is, therefore, confirmed. Ground No. 4 for A.Y. 2002-03 stands dismissed

.

20.1 Aggrieved with such order of the CIT(A) the assessee is in appeal before us.

21. The learned counsel for the assessee strongly challenged the addition made by the Assessing Officer and upheld by the CIT(A). In his alternate contention he submitted that if the addition is sustained then telescoping benefit should be granted to the assessee on account of excess stock found during A.Y. 2008-09.

22. The learned Departmental Representative on the other hand heavily relied on the order of the CIT(A).

22.1 After hearing both the sides, we find merit in the alternate contention of the learned counsel for the assessee that if the addition is sustained in A.Y. 2002-03 then telescoping benefit should be given out of the addition on account of excess stock during A.Y. 2008-09. We, therefore, uphold the addition made by the Assessing Officer for the impugned assessment year and direct that benefit should be given to the assessee on account of excess stock found during A.Y 2008-09. Ground raised by the assessee is accordingly dismissed. ITA Nos. 1002/PN/2011 to 1006/PN/2011 (A.Y. 2003-04 to 2007-08) :

23. The first issue in ITA No.1002/PN/2011, 1003/PN/2011, 1005/PN/2011 and 1006/PN/2011 relates to the order of the CIT(A) in confirming the disallowance made by the Assessing Officer u/s.36(1)(iii) of the Act which are as under : Assessment year Amount 2003-04 5,19,932 2004-05 4,09,052/- 2006-07 1,839/- 2007-08 3,66,681/-

24. After hearing both the sides, we find the above ground is identical to Grounds of appeal No.1 in ITA No.1001/PN/2011. We have already decided the issue and the matter has been restored to the file of the Assessing Officer with certain directions to re-compute the disallowance if any u/s.36(1)(iii) after considering the availability of state capital investment subsidy to him for giving interest free advances/investments. Accordingly, we restore this issue to the file of the Assessing Officer to re-compute the deduction in the light of the directions given therein. The above grounds by the assessee are accordingly allowed for statistical purposes.

25. The remaining grounds in the above appeals and the only ground in ITA No.1004/PN/2011 relate to the order of the CIT(A) in sustaining the addition u/s.2(22)(e) on account of deemed dividend. 26 After hearing both the sides we find the above grounds are identical to the Ground of appeal No.2 in ITA No.1001/PN/2011. We have already decided the issue and the ground has been restored to the file of the Assessing Officer with certain directions. Following the same ratio, these grounds are also restored to the file of the Assessing Officer to re-compute the deemed dividend as per directions given therein. The above grounds are accordingly allowed for statistical purposes. ITA No.1007/PN/2011 (A.Y. 2008-09) :

27. The only effective ground raised by the assessee reads as under : The learned CIT(A) has further erred on facts and in law in confirming the addition of Rs.2,88,375/- on account of Excess stock.

28. After hearing both the sides we find the addition of Rs.2,88,375/- made by the Assessing Officer on account of excess stock has been confirmed by the learned CIT(A). While deciding the ground of appeal No.3 in ITA No.1001/PN/2011 we have accepted the alternate contention of the learned counsel for the assessee that telescoping benefit should be given to the assessee in case addition is sustained on account of excess consumption in A.Y. 2002-03. We therefore direct the Assessing Officer to give the benefit of excess consumption of steel from the excess stock found during A.Y. 2008-09. The balance amount of Rs.31,286/- (i.e. Rs.2,88,375 Rs.2,57,089/-) is accordingly directed to the sustained. Ground raised by the assessee is partly allowed.

29. In the result all the ITA Nos. 1001/PN/2011 to ITA No. 1006/PN/2011 are partly allowed for statistical purposes and ITA No.1007/PN/2011 is partly allowed. Pronounced in the Open Court on this the 19 th day of March, 2013. Sd/- Sd/- ( SHAILENDRA KUMAR YADAV ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER satish Pune, dated the 19 th March 2013. Copy of the order is forwarded to:

1. The Assessee

2. The Department

3. The CIT(A)-Aurangabad

4. The CIT-Aurangabad

5. The DR A Bench, Pune.

6. Guard File By Order // True Copy // Senior Private Secretary, Income Tax Appellate Tribunal, Pune.