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Judgment
PER C.N. PRASAD, J.M.
This appeal is filed by the assessee against the order of Ld. CIT(A)/NFAC, Delhi dated 02.09.2025 for the A.Y. 2022-23 in sustaining the addition made by the AO on account of deemed notional interest.
The assessee in its appeal has raised following grounds of appeal :-
“1.That on the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs. 10,15,41,040/-made by the Ld. Assessing Officer (AO) on account of deemed interest on an interest-free advance to a group company, M/s UM Power Ltd.
2.That the Ld. CIT(A) has erred in law and on facts by failing to appreciate that the impugned advance was not extended by the appellant but was acquired as a recoverable asset as part of a composite Business Purchase Agreement dated 14.03.2017, and thus, the very basis of alleging a diversion of funds is factually incorrect and legally misconceived.
3.That the Ld. CIT(A) has erred in holding that the appellant failed to establish the commercial expediency of the advance, thereby erroneously substituting his own business judgment for that of the appellant, contrary to the settled principles laid down by the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (288 ITR 1) and other judicial precedents,
4.That the Ld. CIT(A) has erred in placing undue reliance on the judgment in the case of CIT v. Abhishek Industries Ltd. (286 ITR 1), the facts of which are clearly distinguishable from the appellant's case
5.That the Ld. CIT(A) has acted beyond his jurisdiction by re-characterizing the nature of the addition from 'deemed interest income', as determined by the AO, to a 'disallowance of interest expenditure under Section 36(1)(iii) of the Act', thereby making out an entirely new case for the Revenue which is impermissible in law.
6.That the Ld. CIT(A) has erred in ignoring the 'Principle of Consistency' by confirming the addition, despite the fact that the said interest-free advance has been accepted by the Revenue in multiple preceding assessment years for both the appellant and the predecessor company, even in orders passed under Section 143(3) of the Act, without any change in the underlying facts or law.
7.That without prejudice to the above grounds, the Ld. CIT(A) has erred in confirming the application of an arbitrary and excessive interest rate of 16% p.a., without providing any valid basis or comparable instance, and by ignoring the fact that a lower rate was applied by the department in a prior year on the same facts.
8.That under the facts and circumstances of the case, Ld AO has erred in law as much as in fact in levying interest under section 234A, 234B, 234C and 234D of the Act.
9.That under the facts and circumstances of the case, Ld. AO has erred in law as much as in fact in initiating penalty proceedings u/s 270A of the Act.”
The brief facts of the case are that the assessee is engaged in the business of manufacturing and trading of automotive components filed return of income on 12.10.2022 declaring loss of Rs.4,70,90,571/-. The assessment was completed u/s.143(3) r.w.s. 144B of the Act on 18.03.2024 determining the income of the assessee at Rs.5,44,50,469/-. While completing the assessment addition of Rs.10,15,41,040/- was made as deemed interest on advances applying interest rate @16% on the loan to M/s. UM Power Ltd., ignoring the submission of the assessee that the said amount was not given by the assessee as loan instead it was the part of the scheme of acquisition of auto division unit of M/s. Unitech Machines Ltd. on slump sale basis. The assessee contended before the AO that on 14.03.2017 assessee entered into an agreement with M/s. Unitech Machines Ltd. being Business Transfer Agreement whereby the assessee had purchased automotive division unit of M/s. Unitech Machines Ltd. on slump sale basis for a total consideration of Rs.340 crores and a copy of the agreement were also furnished by the assessee. It was contended before the AO that by virtue of this agreement the assessee obtained all assets and liabilities of M/s. Unitech Machines Ltd in respect of automotive division.
It was also contended that the amount of Rs.63,46,31,505/- which was shown against M/s. Unitech Machines Ltd. was part of outstanding liabilities in the name of UM Power Ltd. which was consistently brought forward in the hands of the assessee since the acquisition of auto division unit of M/s. Unitech Machines Ltd. by the assessee company.
It was also contended that the amount of Rs.63,46,31,505/- outstanding in the name of M/s. UM Power Ltd. as on 31.03.2022 consists of two components i.e. one is reflected in short term loans and advances of Rs.37,43,24,934/- and Rs.25,86,03,847/- is forming part of trade receivables. Therefore, it was contended before the AO that no part of the amount of Rs.63,46,31,505/- shown against liabilities of M/s. UM Power Ltd. be considered as interest free loan and advances as it relates to brought forward balance pursuant to the Business Transfer Agreement for the acquisition of automotive division on slump sale basis.
It was also contended that this Business Transfer Agreement which took place for F.Y. 2017-18 and was consistently brought forward the said liabilities even for the A.Y.2022-23 and in none of the years any interest was disallowed with respect to such liabilities which was brought forward. It was also further contended that the Business Transfer Agreement was entered to have strategic control on M/s. UM Power Ld. and thereby property therein can be used for the benefits of the assessee which is into similar business and therefore, it is strategic and the commercial expediency of the transaction. Thus, it was contended that the interest free loan extended by virtue of acquisition of automotive division from M/s UM Power Ltd is part and parcel of the same investment of the assessee to purchase on slump sale basis.
However, not convinced with the submissions of the assessee the AO treated the outstanding amount shown against M/s. UM Power Ltd, as loan advanced by the assessee without any interest and accordingly estimated deemed interest @ 16% and made addition of Rs.10,15,41,040/- to the returned income.
On appeal the Ld. CIT(A) sustained the addition. Against this order the assessee is in appeal before us.
The Ld. Counsel for the assessee further reiterated the submissions made before the lower authorities. The Ld. Counsel for the assessee referring to page 148 of the paper book submitted that in the course of assessment proceedings for the A.Y.2017-18 the AO examined the transaction of slump sale with documentary evidences wherein the assessee has clearly explained that the amount shown against M/s. UM Power Ltd. is part of slump sale transaction and no amount was advanced by the assessee from out of borrowed funds.
The Ld. Counsel for the assessee referring to pages -62,75, 88, ,101 and 116 of the paper book submitted that the amounts reflected against M/s. UM power Ltd which is part of business agreement was only carry forward amount. The Ld. Counsel for the assessee further inviting our attention to balance sheet for the A.Y. 2022-23, schedule 15, where interest and other finance charges was reflected, submitted that the total interest debited during the assessment year under consideration was only Rs.20,48,141/- and therefore, the AO could not have disallowed Rs.10.15,41,040/-as deemed interest. The Ld. Counsel for the assessee further made the following submissions :-
“1.The issue involved in the present appeal relates to addition of Rs. 10,15.41.04 on account of deemed interest accrued to the assessee in respect of amount of 63,46,31.505/- outstanding in the name of M/s UM Power Ltd.
2.The assessment in the present case is framed as per order dated 18-03-2024 passed u/s/143(3) r.w.s 144B of the Income Tax Act, 1961 ("the Act") whereby the total income of the assessee has been assessed at a sum of Rs. 5.44.50.469/- by make an addition of Rs. 10,15,41,040/- and after adjusting the returned loss of R 4,70,90,571/-, The CIT(A) has upheld the addition as per order dated 02-09-2025 passed by National Faceless Appeal Centre (NFAC)
3.The present appeal has been filed to assail the addition made by the AO and sustained by Ld. CIT(A) of a sum of Rs. 10,15,41,040/- being notional interest by treating the amount of Rs. 63,46,31,505/-outstanding in the name of M/s UM Power Ltd. as shown in note no. 16 of audit report of the assessee for FY 2021-22.
4.That the amount of Rs. 63,46,31,505/- relates to M/s Unitech Machines Ltd. and is brought forward from the audited balance sheet of M/s Unitech Machines Ltd. prepared on 28-02-2017 for the purpose of determining assets and liabilities of IM/s Unitech Machines Ltd. in respect of auto division of M/s Unitech Machines Ltd. as the assessee had purchased auto division unit of M/s Unitech Machines Ltd. on 2 slump basis.
5.M/s Unitech Machines Ltd. had two units one being auto unit and other being engineering unit and this fact can be ascertained from the audit report prepared as on 28-02-2017
6.On 06-03-2017 M/s Unitech Machines Ltd, also obtained valuation report of its auto division unit from Mastermind Financial Services Pvt Ltd. and such valuation was determined at Rs. 340,00,00,000/-.
7.That on 14-03-2017 assessee entered into an agreement with M/s Unitech Machines Ltd. being Business Transfer Agreement (BTA) whereby the assessee had purchased the auto division unit of M/s Unitech Machines Ltd. on slump basis for a total consideration of Rs. 340,00,00,000/-, copy of this agreement is enclosed, lo is in pursuance to such agreement the assessee obtained all assets and Habilities.of M/s Unitech Machines Ltd. in respect of its auto division.
8.It is pertinent to note that the aforementioned amount of Rs. 63,46,31,505/- was part of liabilities outstanding in the books of M/s Unitech Machines Ltd. in the name of UM Power Ltd. which is consistently being brought forward in the hands of the assessee company since the acquisition of auto division unit of M/s Umtech Machines Ltd. by the assessee company.
9.That the amount of Rs. 63.46,31,505/- outstanding in the name of M/s UM Power Ltd. as on 31-03-2022 in the balance sheet of the assessee has two components as these were obtained by the assessee from the balance sheet of M/s Unitech Machines Ltd. as on 28-02-2017.
10.The two components are as follows:
a. Rs.37,43,24,934/- being amount shown under the head ‘Short Term Loan and Advances’ and under sub-head ‘Related Parties’ in the name of M/s. UM Power Ltd. The relevant extract is as under :-
b. Second component is a sum of Rs.25,86,03,847/-forms part of amount described under the head ‘Trade Receivable’ and sub-head ‘Trade Receivable More Than Six Month From Due Date’ which is a consolidated sum of Rs.88,20,17,585/-. The relevant extract from audited balance sheet in note no. 16 is as under :-
The bifurcation of aggregate amount of Rs.88,20,17,585/- is as follows :-
12.Thus, no part of the amount of Rs. 63.46 crore cannot be considered as interest free loan and advance by the assessee to its related parties as the aforementioned amounts were brought to the balance sheet of the assessee in pursuance to aforementioned BTA.
13.To demonstrate that amount of Rs. 63,46,31,505/- as being brought forward balance in the name of M/s UM Power is consistent figure from balance sheet of FY 2017-18 and there is no change in such balance as on 31-03-2022. All the balance sheets of the assessee for FY 2017-18; 2018-19; 2019-20: 2020-21 and 2021-22 are made part of the present paperbook to show such consistency.
14.That it is also pertinent to note that the facts regarding BTA were duly examined by the AO during the scrutiny proceedings of the assessee in regard to AY 2017-18 and an assessment order 26-12-2019 was passed u/s 143(3) of the Act, the copy of which is enclosed. Further the quarry raised by the AO with regard to BTA and submission of the assessee in this regard are also enclosed to show that this aspect was examined by the AO. The assessment order passed u/s 143(3) of the Act for AY 2017-18 has attained finality which show that the purchase by the assessee of auto division of M/s Unitech Machines Ltd. has been accepted by the Department and there is no dispute in this regard.
15.It is also pertinent to note that the details regarding inherited assets and liabilities of the auto division of M/s Unitech Machines Ltd. were duly informed to the AO during the course of assessment proceedings of the assessee for AY 2018-19 as per reply dated 06-12-2019. The table submitted in the reply is as under:
On perusal of the Audited Balance sheet as on 28/02/2017 and the valuation of purchase Consideration the assessee had recorded the following assets and liabilities in its books accounts :-
The figures of trade receivables and short term loan and advances are matching.
16.In the aforementioned circumstances, relying upon the documents referred above it is respectful submission of the assessee that the addition of Rs.10,15,41,040/- made by the AO on account of deemed interest and sustained by the NFAC uncalled for and is prayed to be deleted.
On the other hand the Ld. DR supported the orders of the authorities below.
Heard rival submissions and perused the orders of the authorities below. We find considerable merit in the submission of the Ld. Counsel for the assessee that the outstanding amount shown against M/s. UM Power Ltd was not an actual disbursement of loan by the assessee but it is the consequence of Business Transfer Agreement entered into by the assessee for acquisition of automotive division on slump sale basis. We agree with the assessee that the business transfer agreement is nothing but commercial expediency of the transaction. This transaction of slum sale was thoroughly examined by the AO while completing the assessment in the year of entering into the agreement by the assessee i.e. A.Y.2017-18 and in none of the assessment years notional interest was disallowed on such outstanding loan shown/ reflected by the Assessee in the Balance Sheet. Further as the revenue accepted this position consistently for past several assessment years right from A.Y. 2017-18 we see no reason to deviate from this position during the Assessment Year 2022-23.
Therefore, in our opinion no part of the amount of Rs.63.46 crores can be considered as interest free loans and advances by the assessee to its related parties since this is only brought forward balance pursuant to the Business Transfer Agreement entered into by the assessee for purchase of automotive division on slump sale basis.
Even otherwise we observed that the total interest expenditure incurred for the assessment year under consideration is Rs.20,48,191/- only and in which case there cannot be any disallowance of Rs.10.15 crores on notional basis. In this circumstances we direct the AO to delete the addition made towards deemed interest and re-compute the income accordingly.
In the result, appeal of the assessee is allowed.