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आदेश/Order
PER N.K. SAINI, VICE PRESIDENT This is an appeal by the Assessee against the order dt. 30/01/2019 of Ld. CIT(A), Karnal.
2. Following grounds have been raised in this appeal:
1. Order passed by Ld. ACIT and CIT(A) are illegal, arbitrary and bad in law.
2. On facts and in circumstances of the case Ld. ACIT and CIT(A) were not justified in making the addition of Rs. 1,53,73,790/- in the income of the assessee on account of disallowance of interest under section 36(1)(iii) of the Income Tax Act. 3. On facts and in circumstances of the case ACIT was not justified in charging interest u/s 234B of the I.T. Act. From the aforesaid grounds it is gathered that the only grievance of the assessee relates to the sustenance of addition of Rs. 1,53,73,790/- made by the A.O. by making the disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961(hereinafter referred to as Act).
Facts of the case in brief are that the assesse filed its return of income on 24/11/2014 declaring an income of Rs. 37,83,460/- which was processed under section 143(1) of the Act. Later on, the case was selected for scrutiny. During the course of assessment proceedings the A.O. noticed that the assessee had claimed interest expenditure amounting to Rs. 3,16,88,280/- in the Profit & Loss Account. He further observed that the details submitted by the assessee revealed that it had opening debit balance of Rs. 6,26,00,915/- receivable from M/s Mahabir Agro Industries and that the proprietor of said firm namely Shri Rakesh Khurana was also one of the Director of the assessee company holding 19.64% of the shares and drawing salary of Rs. 7.5 lacs per month. He also observed that the assessee company had made payment in cash and sales to the aforesaid concern during the year under consideration, as a result of which the total debit balance had increased to Rs. 15,01,71,338/- and one point of time i.e on 31/12/2013 the debit balance in the books of the assessee company had increased to Rs. 21,58,37,563/- and the closing debit balance was of Rs. 12,05,566/- as on 31/03/2014. The A.O. observed that on the one hand the assessee had been claiming huge amount on account of interest expenditure and on the other hand the sales had been made to the related party without receiving any payment against the sales made which was clearly a diversion of interest bearing funds to be used by the related party and the burden had been thrown on the assessee in the form of heavy interest expenses.
3.1 The A.O. asked the assessee to explain as to why the proportional interest expenditure should not be disallowed, attributing it to the diversion of interest bearing funds towards M/s Mahabir Agro Industry.
3.2 In response the assessee explained that the interest had not been charged on the debit balance mainly due to the reason that the balance outstanding was on account of goods. It was further submitted that while carrying out the transactions with the related concern no fund had been transferred in the account of M/s Mahabir Agro Industry. It was also stated that there was a credit balance of Rs. 5,82,35,585/- in the account of M/s Paras Chemical which was also related concern of the assessee.
However the A.O. did not find merit in the submission of the assessee for the following reasons:
The assessee has also placed reliance on the ruling in the case of CIT Vs. Sridev Enterprises of Karnataka High Court. However, in this ruling the Hon'ble Court has in principle upheld the charging of interest on debit balance.
2. The assessee also relied upon the ruling of the Apex Court in the case of S.A. Builders Vs. CIT. This ruling deals with the issue of charging of interest on account of interest free loans given tot eh sister concern of the assessee. These are not the facts in the case of the assessee where the debit balance is as per the result of transactions between the related parties and not with the sister concern. However, the assessee has also stated that it has not charged any interest on the credit balance in the account of M/s Paras Chemicals which is the sister concern of the assessee. The assessee reliance on these facts is out of the context and does not in any way justify the stand of the assessee in not charging the interest on the debit balance. In view of the above facts, the interest expense claimed by the assessee is being disallowed at the rate of 12% on the amount of debit balance is disallowed to the extent as computed below in the account of M/s Mahabir Agro Industry in proprietorship concern of one of the Directors of the assessee company.
The A.O. disallowed the interest by applying the rate of 12% on the amount of debit balance in the account of M/s Mahabir Agro Industry, the calculation has been given in the assessment order dt. 13/12/2017 which worked out to Rs. 1,53,73,790/-, the said amount was added to the income of the assessee.
4. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under:
1. "That in making addition of Rs. 1,53,73,790/- Ld. ACIT has misstated and twisted the facts. In para 2 of page 1 he has stated that Sh. Rakesh Khurana Proprietor of M/s Mahabir Agro Industries is drawing a salary of Rs. 7.5 Lacs per month which is absolutely false. The salary of Rs. 7.5 Lacs is not per month but total of salary paid to him during the financial year. He has also mentioned that cash payments have been regularly made by the company till 13.08.2013 which is also not correct. Only petty payments ranging betweenl5000-20000 were made in cash. The total of such petty cash payments made during the financial year comes to Rs. 4,26,000/-. He has ignored the fact that the assessee company has made the sales of Rs. 22,08,50,557/- to M/s Mahabir Agro Industries. He has also ignored the quantum of sale made by the assessee company to M/s Mahabir Agro Industries. The debit balance of Rs. 15,01,71,338/- as on 13.08.2013 includes the opening balance of 6,26,00,915/- and sales of Rs. 8,67,39,923/- made between 1st April to 13th August 2013. Further the debit balance of Rs. 21,58,35,563/- as on 31.12.2013 includes sales of Rs. 22,08,50,557/- made till 31.12.2013. All these circumstances shows that debit balance in the name of above said assessee was on account of sales of goods and no interest bearing funds were transferred by the assessee company. Copy of accounts showing the sales and cash payments are enclosed on pages 1-10.
That Lnd ACIT has charged interest on day to day basis and started charging interest on very first day when the sales were made by the assessee company to M/s Mahabir Agro Industries which is unimaginable because in no trade the payments are supposed to be received on the same day. The assessee company has not charged interest on the amount of debit balance in the account of sister concern because of the reason that the balance outstanding were mainly on account of supply of goods and no interest bearing funds have been transferred in the account of M/s Mahabir Agro Industry. The company has earned the profit on sale of goods and the assesee has not paid any interest to the trade creditors and even the sister concerns when there was a credit balance in their account. No interest has been charged from other trade debtors to whom sales were made because there was no term of charging of interest.
3. That there was opening credit balance of Rs. 5,82,35,585/- in the account of M/s Paras Chemical also a sister concern. The assessee company has neither paid any interest on their credit balance and similarly they have not charged any interest on debit balance.
That in the earlier year also the assessee company is neither paying any interest on the credit balance nor charging any interest on debit balance of the business transaction because there was no term of charging of interest. There was a opening debit balance of Rs. 6,26,00,915/- which was also on account of supply of goods. That Hon'ble High Court of Karnataka in the case of CIT vs. Sridev Enterprises (192 ITR 165 (Kar) have observed as under:- "We are in agreement with the view expressed by the Appellate Tribunal The status of the amount outstanding from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from the finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot subsequently be held by it have become bad prior to that year."
That the Hon'ble Income Tax Appellate Tribunal "A" Bench, Chandigarh in IT A No 231/Chd/2009 M/s Moti Ram Prem Chand Vs. A.O. Ward -1, Kurukshetra have held as under-
Para 3 "We find that the very foundation of impugned disallowance is reliance of the authorities below the Hon'ble jurisdictional High Court's decision in the case of Abhishek Industries Vs. CIT (286 ITR 1) but the said decision is no longer good law in the light of Hon'ble Supreme Court's judgment in the case of S. A Builders Vs CIT (288 ITR 1). We have also noted that the Assessing Officer has simply brushed aside assessee's explanation about commercial justification for the interest free advances by observing that "the reply filed by the assessee is considered but not found convincing". Beyond these vague observations, there is not even a whisper about reasons of rejecting assessee's justification for interest free advances. Such an approach on the part of a quasi judicial authority cannot meet judicial approval. The sole basis of impugned disallowance is that on one hand assessee is paying interest on borrowings, and on the other hand, the assessee is giving interest free advances. This reason, in our considered view, is not sufficient to resort to disallowance of interest. Unless the Assessing Officer is able to demonstrate that the advances are for non commercial purposes or demonstrate fallacies in justification of the interest free advances given by the assessee, there cannot be any occasion to resort to such an exercise and simply brush aside the submissions of the assessee. That the Hon'ble Supreme Court of India in the case of S.A. Builders Vs. CIT 288 ITR page 1 have held and agreed upon with the view taken by the Delhi High Court in the case of CIT Vs. Dalmia Cement 244 ITR 373 that once it is established that there was nexus between the expenditure and the purpose of business, the revenue cannot justify claim to put itself in the arm chair of business man or in the position of Board of Director and assume the role to decide how much is the reasonable expenditure having regarding to circumstances of the case. No business man is compelled to maximize his profit. The Income Tax Authority must put them self in the shoes of the assessee and how a prudent business man would act. The authority must not look at the matter from their own view point but that of prudent business man.
From the above judgment of the Apex Court, it is clear that merely because there was a debit balance in the account of sister concern that too on account of supply of goods, the interest on borrowed funds cannot be disallowed. The assessee company has borrowed the capital from bank for the purpose of their business and interest has been paid on the borrowed amount. Such interest is deductible if the advances are given for commercial expediency. From the observations of the Apex Court, it appears that if the advances given to the subsidiary company are used by that company for the purpose of its business, then the interest on the borrowed funds utilized forgiving such advances should be allowed as deduction u/s 36(1 )(iii).
5. That as regards the claim of interest expenses debited this amount was paid as interest to the bank on the working capital limit, term loan to the bank. The working limit, term loan were used for the purpose of business of the assessee and no interest bearing funds were used for non business purposes. The interest expenses were incurred for the purpose of the business occurring in section 36(1)(iii). The Hon'ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word "commercial expediency" by using this phrase Hon'ble Supreme Court has given a new dimensions and clarified the concepts further. In the judgment Supreme Court has defined commercial expediency as "an expression of wide import and includes such expenditure as a prudent businessman incur for the purpose of business. The expenditure may not have been incurred under any legal obligations, but yet it is allowable as business expenditure, if it was incurred on ground of commercial expediency the money in question. The amount was borrowed by the assessee for the purpose of the business and the assessee has paid interest on borrowed amount and the same was claimed as item of expenditure. In a recent judgment in the case of Hero Cycles (P) Ltd vs Commissioner of Income-tax (Central) Ludhiana [(2015) 63 taxmann.com 308(SC)], the Hon'ble Supreme Court has again authoritatively upheld the primary right of any businessman/ organization to plan and conduct his/its business, thereby effectively negating any attempts on the part of the revenue to step into the shoes of an businessman and sit in judgment on business decisions, particularly with regard to judging the reasonableness of any expenditure and the commercial prudence or correctness of any decision. More specifically rendered in the context of allowability of interest u/s 36(l)(iii) of the Income-tax Act, 1961 (the "Act" ), the observations, interpretation of law and the conclusions drawn therein, if applied objectively, there is no case for making any addition because the expenditure was incurred for the purpose of business of the assessee.
6. That case of the assessee was referred to the TPO for determination of Arm's Length Price (ALP) but no adverse inference was drawn by the TPO, copy of order passed u/s 92CA(3) of the I.T. Act is enclosed on pages 11-12 of paper book. So keeping in view above facts and circumstances of the case it is clear that there is no case for making addition of Rs.1,53,73,790/- in the income of assessee. You are therefore requested to kindly quash the addition because the interest paid is allowable u/s 36(1)(iii) being paid in respect of capital borrowed for the purpose of business and the assessee has paid interest on the borrowed capital."
4.1 Ld. CIT(A) after considering the submissions of the assessee sustained the addition by observing at page 13 of the impugned order as under:
The A.O. has shown how the case laws relied upon by the appellant are not applicable to the instant case. Even at the appellate stage, the assessee has only sought to state that the Director received Rs. 7.5 Lakhs p.a. instead of per month as stated by the A.O. which has non bearing to the facts of the case. The fact of sales made to the said company has not been denied by the A.O. The reasoning that the proprietor of the said concern had a 19.64% of share in the assessee company cannot be denied and the no-charging of interest on the debit balance is a matter of record. In my opinion, the A.O. has rightly disallowed the same by providing a detailed calculation (in terms of day wise retention period) and the I confirm the same.
Now the assessee is in appeal.
Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that the assessee had executed sales to M/s Mahabir Agro Industry which is a related party since the proprietor of M/s Mahabir Agro Industry namely Shri Rakesh Khurana is a shareholder in the assessee company holding 19.64% shares. It was also submitted that the opening receivable from the said party was to the tune of Rs. 6.21 Crores and closing receivable was only to the tune of Rs. 0.12 Crores which fact had been ignored by the A.O. who made the addition under section 36(1)(iii) of the Act by disallowing the interest @ 12% per annum by taking into account the daily outstanding receivable. It was further submitted that the assessee was having interest free funds available to the tune of Rs. 20.81 Crores as per following details:
Sr. No. Particulars Amount (in Rs.)(in Crores) 1. Share Capital 0.82 2. Reserves and Surplus 11.26 3. Long Term Unsecured Loans 1.14
4. Provisions 0.02 5. Trade Payables 7.38 6. Other Current Liabilities 0.19 Total 20.81 6.1 It was contended that the A.O. never doubted the sales of the assessee made to M/s Mahabir Agro Industry and that the receivable from the sister concern were reduced from 6.21 Crores to a meager Rs. 12 Lakhs during the year under consideration, the reference was made to page no. 36 to 44 of the assessee’s compilation which is a copy of the Ledger Account of M/s Mahabir Agro Industry in the books of the assessee company. It was stated that the assessee had made a total sale of Rs. 22,08,50,557/- to M/s Mahabir Agro Industry which was duly disclosed in Form 3CEB forming part of the Audited Report furnished alongwith the Income Tax Return. It was pointed out that the A.O. had referred the case to the Transfer Pricing Officer who vide order dt. 31/12/2014 passed under section 92CA(3) of the Act duly held that the sales to the associate concern were made at an Arm’s Length Price and no adverse inference could be drawn on account of sales made, reference was made to page no. 34 to 35 of the assessee’s paper book. It was further submitted that he copy of the account of M/s Mahabir Agro Industry was revealed that the payment amounting to Rs. 4,26,000/- were only made to the said concern M/s Mahabir Agro Industry and all other transactions debited in the account of that concern were relating to the sales, therefore it could not be said that the interest bearing funds had been diverted towards the sister concern of the assessee company. He requested to delete the addition wrongly sustained by the Ld. CIT(A). The reliance was placed on the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT(A) And Another reported in 288 ITR 1.
In his rival submissions the Ld. Sr. DR reiterated the observations made by the authorities below in their respective orders and strongly supported the impugned order passed by the Ld. CIT(A).
We have considered the submissions of both the parties and perused the material available on the record. In the present case it is noticed that the assessee was making sales to the sister concern M/s Mahabir Agro Industry and the amount of sales were debited to the account of the said concern which is evident from page no. 36 to 43 of the assessee’s paper book. Against those sales, the assessee received his regular receipt from the said concern, therefore, the opening balance outstanding as on 01/04/2013 at Rs. 6,26,00,915/- was reduced to Rs. 12,66,566/- at the end of the year on 31/03/2014 so it cannot be said that the assessee diverted the interest bearing funds to the sister concern, because the debit balance in the account of the sister concern was on account of sales and an amount of Rs. 4,26,000/- only was the amount debited in the said account which was not related to sales, therefore the disallowance made by the A.O. by holding that there was diversion of the interest bearing funds was not justified and the Ld. CIT(A) wrongly upheld the same.
On a similar issue the Hon'ble Apex Court in the case of S.A. Builders Ltd. Vs. CIT(A) And Another (supra) held as under:
In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression “commercial expediency is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.” It has further been held that :
To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.
In the present case also the assessee debited the account of the sister concern on account of sales which were considered to be at Arm’s Length by TPO which is evident from the order dt. 31/03/2017 passed under section 92CA(3) of the Act wherein in para 4, the Ld. TPO held as under:
4. After examination of transfer pricing documentation produced and considering economics analysis contained therein with details and explanation submitted, no adverse inference is drawn in respect of arm’s length price of the specified domestic transaction for the F.Y. 2013-14 pertaining to A.Y. 2014-15.
10.1 We therefore by keeping in view the ratio laid down by the Hon'ble Apex Court in the aforesaid referred to case are of the view that the addition made by the A.O. and sustained by the Ld. CIT(A) was not justified, accordingly the same is deleted.
In the result, appeal of the Assessee is allowed.
(Order pronounced in the open Court on 23/02/2021)