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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL
This appeal by assessee is directed against the order of Ld. CIT (A)-13, Mumbai dated 23.08.2019 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2014-15. The assessee has raised the following grounds of appeal:-
M/s Mitra Trading & Exports Pvt. Ltd The ground or grounds of appeal are without prejudice to one another.
1(a) On the facts and circumstances of the case and in law, the ld. CIT (A) erred in confirming the addition of Rs. 1, 58, 18,053/- made by the AO to the income of the Appellant by way of disallowing interest u/s. 36(1) (iii) being difference of interest paid and received by the Appellant on trade advances received and inter-corporate deposit given to unrelated parties.
(b) The ld. CIT (A) failed to appreciate that the differential rate of interest paid was due to breach of contract for non-fulfilment of commitments and the same has no relation or comparison with interest received on inter-corporate deposit.
(c) In reaching to the conclusion and confirming such addition the ld. CIT (A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
The Appellant craves leave to add, alter, amend or delete any or all of the above grounds of appeal.
2. The brief facts of the case are that assessee company filed its return of income on 30.09.2014 at a figure of Rs. 3,26,33,890/-. Case of the assessee was selected for scrutiny and a notice u/s. 143(2) was issued vide dated: 28.08.2015. Assessee Company is engaged in the business of export of white sugar. During the assessment proceedings, AO observed that assessee had received interest @ 11.50% and paid the interest @ 13.50% p.a. On account of this interest rate variation, there was a gap of Rs. 1, 58, 18,053/-, hence the same is disallowed and added back to the income of the assessee. Assessee being aggrieved with this action of AO, preferred an appeal before the Ld. CIT (A)-13, Mumbai, who in turn confirmed the action of the AO in his appeal order passed u/s. 250 of the Act.
M/s Mitra Trading & Exports Pvt. Ltd 3. Assessee being further aggrieved preferred this present appeal before us. We have gone through the order of AO, order of the Ld. CIT (A) and submissions of the assessee. It is observed that during the year under consideration assessee received an advance of Rs. 90.80 Crores from its customer M/s. Vantmuri Trading and Investments Ltd. somewhere in F.Y. 2012-13 or even before (Because Ledger provided to us starts with closing bal. as on 31.03.2012). Ultimately, this account was settled with a journal entry on 22.11.2017, wherein M/s. Ravindra Energy Ltd. took over this liability for the pending amount as on that day, i.e., Rs. 37 Crores. Accordingly, company credited the account of M/s. Ravindra Energy Ltd. and correspondingly debited the account of M/s. Vantmuri Trading and Investments Ltd. Here it is pertinent to mention that assessee company is a subsidiary of M/s. Ravindra Energy Ltd. and M/s. Murkumbi Investments Pvt. Ltd. (To whom assessee provided un-secured loan @ 11.50%) is a shareholder of M/s. Ravindra Energy Ltd.
It is also observed that money taken as advance from M/s. Vantmuri Trading and Investments Ltd. for supply of goods in period 2011-12 or may be even before, finally settled with return of money (partially) and 37 Crores as journal entry and that is too in F.Y. 2017-18. For almost six years amount was retained by assessee and parked with a company who in turn is a shareholder of its holding company @ 11.50%. We have gone through the ledger account of M/s. Murkumbi Investments Pvt. Ltd. also and found that account of this company also started simultaneously with that of M/s. Vantmuri Trading and Investments Ltd. with an opening balance of Rs. 68.60 Crores. Thereafter account during the F.Y.s 2012-13 to 2016-17 reached to the height of 117 Crores. Ultimately, this account was settled through partially through waive-off of Rs. 61.80 Crores and rest of the M/s Mitra Trading & Exports Pvt. Ltd amount through receiving the payments. These are not the normal transactions where the version of assessee on commercial expediency or non-fulfilment of commercial commitment etc. can stand on its feet.
In this whole transaction so many things look to be murky, as assessee taking a huge amount as business advance, then not fulfilling business commitment for almost six years rather parking those funds in a closely related company. Ultimately, account of closely related company written off as that closely related company failed to return the money and interest thereon. In these transactions, assessee is totally failed to explain the purpose of taking advance and then parking the same with closely related company. How, it improves its profitability and what type of business acumen was there at the end of assessee.
How to run its business is a prerogative of concerned assessee. It may have loss and profit both. But, actions of the assessee must look genuine and transparent. No doubt authorities had no jurisdiction to determine a particular rate of interest, but the transactions of the assessee must not be colourable device to fulfil other purposes other than purposes of business enterprise under consideration. Assessee is totally failed to demonstrate the genuineness of its transaction along with the condition wholly and exclusively for the purposes of the Act.
In this connection we may refer to section 36(1) (iii) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the Income-tax under section 28 of the Act. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court
M/s Mitra Trading & Exports Pvt. Ltd held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of the Courts.
Where the assessee borrows money carrying interest cost and lends the same to sister concern without interest, the interest paid/payable on borrowing cannot be disallowed, if the lending is on the grounds of commercial expediency When a holding company advances money to its subsidiary company which incurs losses, such advance is meant to protect its deep interest in the subsidiary, hence, the interest on amount borrowed is eligible for deduction, though it was advanced interest-free to the subsidiary company. The expression 'commercial expediency' was explained in plethora of cases by various judicial forums including Hon’ble Apex Court. The expression 'commercial expediency' is an expression of wide import and it would include such expenditure a prudent businessman would incur for the purpose of business. It may not be a legal obligation but it is allowable if it is incurred on grounds of commercial expediency. Here in this case assessee is not able to make out a case of commercial expediency and also genuineness of the transaction entered into by the assessee.
In C.R. Auluck & Sons (P.) Ltd. v. CIT [2014] 360 ITR 193/227 Taxman 264 (Mag.)/49 taxmann.com 21 (Punj. & Har.) the assessee borrowed money and gave the same to sister concern which was incurring huge losses and its borrowing was declared as non-performing asset by the bank. The assessee was guarantor to the subsidiary company along with two other guarantors, being the group concerns. The interest-free loan was viewed by the Assessing Officer as a measure to reduce
M/s Mitra Trading & Exports Pvt. Ltd its income by claiming interest on borrowing @ 12% per annum and the sister concern to have the income there from. The tribunal held that there was no commercial expediency in giving interest-free loan to the allied concern and the interest attributable to interest-free advances was not allowable under section 36(1)(iii). The High Court confirmed the order of the tribunal. The facts of the matter under consideration are almost similar to the case cited (supra).
In view of facts of the case observed in preceding paragraphs and law applicable on the matter, we are not in favour of grounds taken by the assessee. Order of Ld. CIT (A) is confirmed and grounds taken by assessee are dismissed.
In the result, appeal of the assessee is dismissed.