D.C.I.T.,CIRCLE-3(1), KOLKATA vs. M/S SHIV SHAKTI STEEL PVT. LTD., KOLKATA

This appeal filed by the assessee is against the order of Ld. CIT(A)-17, Kolkata vide Appeal No. 368/CIT(A)-17/Kol/17-18 dated 15.03.2019 against the order of Ld. ITO, Ward-3(2), Kolkata passed u/s. 143(3) of the Income- tax Act, 1961 (hereinafter referred to as the “Act”), dated 30.03.2015.

Revenue has raised the following ground of appeal: 1) “Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 3,18,14,902/- on account of interest on loan made by the A.O. ignoring the fact that the assessee has failed to substantiate the alleged interest expenses as business expenses where the identity, business activities and genuineness of transactions of loan creditor were not established.”

Before the Ld. CIT(A), in addition to what was furnished before the Ld. AO, assessee furnished the following further documents in respect of Gateway Commodities Private Limited-

It was also submitted that assessee has made payment of interest of ₹3,18,14,902/- and of ₹3,71,73,694/- for the year ending on 31.03.2012 and 30.03.2013, respectively, on which the due TDS was done and deposited. Assessee also furnished that it had made short-term loans and advances of ₹8.15 Crores which included amount of ₹6.70 Crores to suppliers for supply of goods and therefore Ld. AO has wrongly alleged that the transaction of loan was entered into to avoid tax liability and that interest bearing loan funds have been utilised towards interest free advance.

Ld. CIT(A) considered the submissions made by the assessee and noted that the total revenue receipts of the assessee for the year are at ₹78,51,05,338/- and there is an inventory of ₹59,38,82,022/-, duly reported in the audited financial statements. Ld. CIT(A) also noted that assessee has used borrowed funds for the purpose of purchase of raw material. Ld. CIT(A) found that the borrowings made by the assessee from Gateway Commodities Private Limited have been used for the purpose of business activities and thus deleted the disallowance in respect of interest expenditure made by the Ld. AO. Aggrieved, revenue is in appeal before the Tribunal.

Before us, Ld. Senior DR placed on record a written submission for his arguments. He submitted that the disallowance of interest expenses made by the Ld. AO rested on the failure by the assessee to Shiv Shakti Steel Pvt. Ltd., AY: 2012-13 prove the identity and financial activity of the lender and thus the genuineness of the loan. It was further stated by him that the premise of the addition made in the hands of the assessee was that the expenditure attributed to an entity which exist and operate only on paper is a bogus expenditure and not whether this expenditure was for the purpose of business of the assessee. Ld. Senior DR thus urged that the assessment order to be restored by setting aside the order of Ld. CIT(A).

Per contra Ld. Counsel for the assessee submitted a one-page synopsis of the case along with paper book containing 56 pages as well as caselaw compilation with five citations. Contentions of the Ld. Counsel are threefold, first being that the lender company has been assessed independently by the Department for the same AY 2012-13 under section 143(3) of the Act vide order dated 30.03.2015. The interest expenditure claimed by the assessee is interest income of the lender company which has been duly accepted in its assessment. If the claim of interest expenditure by the assessee is disallowed, it will lead to taxing the same amount twice. Further, Ld. Counsel submitted that identity of the lender company namely Gateway Commodities Private Limited is established beyond doubt since it has been assessed by the relevant jurisdictional officer of the Department. Thus, the allegations by the Ld. AO as well as by the Ld. Senior DR tainting the lender company as a paper company is baseless. Copy of the assessment order of the lender company is placed on record in the paper book at page 47 to 50.

For the second fold of contentions of the Ld. Counsel relating to proving the genuineness of the transaction, it was submitted that payment of interest has suffered TDS which has been duly reflected in Shiv Shakti Steel Pvt. Ltd., AY: 2012-13 Form 26AS of the lender company for the relevant AY. The same is placed in the paper book at page 53. Further, for the TDS done by the assessee on the interest expenditure, the lender company has been given credit for the same in its assessment by accepting the interest income in its hand. Also, lender company has furnished confirmation letters giving all the details in respect of the loan transaction and the interest payments which also forms part of the paper book at page 54 and 55.

The third fold of contentions of the Ld. Counsel asserts on the fact that for the same given address of the lender company, landline telephone bills, letters served from four prominent banks including by speed post, effectively demonstrates that it exist on the same address. For the production of director/principal officer of the lender company, Ld. AO never issued summon u/s 131 of the Act. In the first appellate proceedings, Ld. CIT(A) had called for a remand report from the Ld. AO for which a copy is placed in the paper book at page 51-52. Ld. Counsel submitted that even during the remand proceedings though specific request was made to issue summons under section 131 of the Act on the lender company, Ld. AO did not choose to do so. He further submitted that Ld. AO has placed reliance on the report of inspector which was collected behind the back of the assessee and was not shared for its rebuttal which is in violation of principles of natural justice.

Ld. Counsel further submitted that inaction at the end of the Department cannot be used to simply negate the evidences submitted by the assessee which are sufficient to discharge the burden at its end. To buttress his contention, he placed reliance on the decision of Hon’ble High Court of Delhi in the case of CIT v. Gangeshwari Metal (P)

We have heard the rival contentions and perused the material on record. Admittedly, it is a fact on record that assessee had obtained unsecured loan from Gateway Commodities Private Limited which has not been doubted in the course of assessment of the assessee as well as of the lender company. In the assessment of both the assessee as well as the lender company, the loan quantum has been accepted and is not in dispute. It is also a fact that the lender company has been assessed by the Department under section 143(3) of the Act, date of order being 30.03.2015 which is the same as that in the present case of the assessee, by accepting the interest income earned by the lender company from the assessee. Even in the remand report, Ld. AO has specifically noted that there is no addition under section 68 of the Act but disallowance of interest expense on the unsecured loan from the said lender company.

We also note that documents furnished like landline telephone bill, letters served on the assessee from four different prominent banks including a speed post, lends credence to the assertion that lender company existed on the given address, more particularly when the lender company has been assessed by the Department and the assessment order also containing the same address. It is also observed from the assessment order of the lender company that against the nature of business, it is noted as ‘trading in securities and iron ores’

On the allegation that assessee did not produce the directors of the lender company, we note that neither Ld. AO nor Ld. CIT(A) made any concerted effort by issuing summons under section 131 the Act for enforcing the personal attendance of the directors of the lender company. Even in the remand proceedings, Ld. AO did not choose to issue summons under section 131 of the Act even though Ld. CIT(A) had given specific instruction in this respect.

We also take note of the observations made by the Ld. CIT(A) that the alleged advance free loan was nothing but advance to trade creditors which was an essential business requirement in expediency to maintain the level of inventory which the assessee was maintaining. He observed that loan taken by the assessee was essential for the business of the assessee and the corresponding interest expense was for business expediency, hence allowable expenditure.

Ld. Senior DR in his written submission stated that the order of Ld. CIT(A) is perverse. In this respect, there is no material on record adduced by the Revenue which could rebut the documents produced by the assessee. In such a scenario, the finding of fact arrived at, based on documentary evidence on record cannot be said to be perverse. Nothing has been pointed out that any of the findings arrived at by the Ld. CIT(A) is on the basis of misleading of evidence or failure to examine any material documents while coming to such conclusions.