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Income Tax Appellate Tribunal, ‘’SMC’’ BENCH, AHMEDABAD
Before: SHRI KUL BHARAT & SHRI WASEEM AHMED
आदेश/O R D E R PER BENCH:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-10, Ahmedabad dated 23/01/2017 (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dt.04/03/2015 relevant to the Assessment Year 2012-2013.
The assessee has raised the following grounds of appeal.
1.1 The order passed u/s.250 on 23.01.2017 for A.Y.2012-13 by CIT(A)-10, Abad upholding the disallowance of interest of Rs. 1,66,765/- and Rs.2,66,880/- made by AO is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned disallowances.
2.1 The Ld.CIT(A) has grievously erred in law and on facts in confirming the disallowance of interest expenses of Rs.1,66,765/-. The Id. CIT(A) has erred in holding that the appellant should have repaid the interest bearing funds of 18% when he was having surplus money so that the disallowance made by AO was justified. 2.2 That in the facts and circumstances of the case as well as in law, the Ld.CIT(A) ought not to have upheld the disallowance of interest expenses of Rs.1,66,765/-. 3.1 The Ld.ClT(A) has grievously erred in law and on facts in confirming the disallowance of interest expenses of Rs. 2,66,880/-.
4.1 The Id. CIT(A) has failed to appreciate that when the borrowings with interest @18% from M/s. Dev Staya Corporation were made in earlier year and there was already interest free funds available to the appellant, the impugned disallowance of interest was wholly unjustified.
It is, therefore, prayed that the disallowance upheld by the CIT(A) may kindly be deleted.
The 1st issue raised by the assessee in ground No. 1 and 2 is that the learned CIT (A) erred in confirming the addition of ₹1,66,765.00 on account of excess interest paid by it.
The facts in brief are that the assessee in the present case is an individual and engaged in the business of trading in precious stones, gold, gold jewellery, silver etc and construction of building. The assessee in the year under consideration has incurred interest expenses of ₹10,00,586.00 at the rate of 18% on the money borrowed from M/s Dev Satya Corporation.
2.1 The assessee at the same time has earned interest income of Rs. 4,48,480.00 at the rate of 15% on the money advanced to the party namely Smt Geetaben D Soni.
2.2 As per the AO, the assessee should have repaid the amount of the borrowed fund rather than advancing the money to the party at a lower rate of interest. On a question by the AO as to why the assessee has advanced money at the lower rate of interest than the rate of interest paid by it?
2.3 There was no reply from the side of the assessee. Therefore the AO worked out the excess amount of interest over and above 15% on the money borrowed from M/s Dev Satya Corporation for ₹1,66,765.00 and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learner CIT (A).
The assessee before the learned CIT (A) submitted that he had taken loan from M/s Dev Satya Corporation in the earlier years at the rate of interest 18% fixed per annum and without furnishing any guarantee. Moreover, there was no time period for the re-payment of such loan to the party.
3.1 The assessee also admitted the fact that the prevailing rate of interest on the money borrowed from the bank is 15% but on furnishing of the security whereas the impugned loan was unsecured.
3.2 There is no dispute that the impugned loan was taken for the purpose of the business and this fact was not disputed by the AO.
In view of the above, the assessee claimed that the impugned loan has been taken for the purpose of the business and therefore there cannot be any disallowance on account of interest payment to the party.
However, the learned CIT (A) during the proceedings observed that the assessee could have returned the loan to M/s Dev Satya Corporation instead of advancing the same to the party at the rate of lower interest. The assessee has not demonstrated by producing any evidence that the payment of loan to M/s Dev Satya Corporation was not possible. Therefore, the learned CIT (A) confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 116 and submitted that the loan was advanced to Smt Geetaben D Soni at the lower rate of interest than the interest cost incurred by him on account of commercial expediency. The learned AR claimed that the assessee has made sales to Smt Geetaben D Soni for ₹8.50 crores approximately out of the total sales of ₹42.14 crores.
In view of the above, the learned AR claimed that there cannot be any disallowance on account of charging lower rate of interest from the party as the same was extended to her for his business/commercial expediency.
On the other hand the learner DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the instant case relates whether the excess interest paid by the assessee over and above 15% rate of interest (actual rate 18%) on the money borrowed by it is allowable deduction under section 36(1)(iii) of the Act in a situation where the assessee has advanced money to the party on interest at the rate of 15% only.
7.1 Regarding the argument of the land AR that the money was advanced at lower rate of interest to Smt Geetaben D Soni on account of commercial/business expediency, we note that no such plea was taken by the assessee before the authorities below. Moreover, the learned AR before us has not filed any documentary evidence in support of his contention. Therefore we do not want to place our reliance on the same.
7.2 However, on perusal of the order of the assessment order we note that the AO has accepted the interest expenses at the rate of 18% by observing as detailed under: “The assessee has made payment of interest at the rate of 18% is not objectable”.
7.3 The above finding of the AO evidences that the loan was obtained at the rate of 18% for the purpose of the business. Accordingly in our considered view the same cannot be disturbed even if it is on the higher side than the prevailing market rate. It is because it is the decision of the assessee to obtain/accept the loan at particular rate of interest. The assessee understands the best his business affairs. Therefore, the AO in our considered view cannot occupy the arm chair of the assessee as well as direct to him to conduct his business in a particular manner.
7.4 Furthermore, it appears that the revenue was aggrieved by the action of the assessee of charging interest at the lower rate than the rate at which he (assesses) was paying on the money borrowed by him. In such a situation, the AO to our mind should have calculated the amount of interest on the amount advanced at the same rate at which the assessee is paying the interest. But the authorities below have not done so. As such, we note that the AO was dissatisfied with the rate of interest charged by the assessee on the money advanced to the party but the AO without disturbing the same, has calculated the excess amount paid to the party on the money borrowed by him which is contrary to the observations of the authorities below.
7.5 It is also pertinent to note that the impugned loan was borrowed by the assessee in the earlier assessment year/s and the rate of interest on such loan was accepted by the Revenue in the earlier year/s. Therefore, in our considered view the same cannot be disturbed in the year under consideration.
In view of the above and after considering the facts in detail as discussed above, we are of the view that there cannot be any addition to the income of the assessee merely on the ground that the assessee has charged interest from the party on the money advanced by him lower than the rate of interest paid by him on the money borrowed. Accordingly we reverse the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
The 2nd issue raised by the assessee is that the learned CIT (A) erred in confirming the addition made by the AO for ₹2,66,880.00 on account of interest expenses.
The assessee in the year under consideration has advanced money to the parties without charging any interest from them. The details of such parties and the amount advanced to them stand as under: i. Blue Gold export private Ltd 20,00,000.00 ii. Parul H. Oza 7,60,900.00 8.1 The AO was of the view that the assessee has diverted interest-bearing loans for non-commercial purposes. Accordingly, the AO worked out the amount of interest attributable to such advances for ₹2,66,880 and disallowed by adding the same to the total income of the assessee.
9. Aggrieved assessee preferred appeal to the learned CIT (A) who also confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
10. The learned AR before us submitted that advance of ₹20 lakhs to M/s Blue Gold Exports Pvt. Ltd. was given for the purchase of the goods. Thus there cannot be any addition for not charging the interest on such advance.
10.1 The learned AR further submitted that such advance was given in the immediate preceding assessment year dated 30-03-2011 and the same was received back in the year under consideration i.e. 6th September 2011. There was no addition of interest income or the disallowance of interest expenses in the immediate preceding assessment year. The learned AR in support of his contention drew our attention on the balance sheet of the assessee as on 31st March 2011 which is placed on pages 73 to 76 of the paper book. The learned AR to buttress his view also relied on the proposition laid down by the Hon’ble Karnataka High Court in the case of Sridev Enterprise reported in 192 ITR 165.
10.2 The learned AR further contended that there was sufficient own fund available with the assessee as on 31 March 2012 amounting to Rs. 23,36,904.00.00. Therefore there cannot be any addition on account of not charging interest on the advanced made to the so-called parties.
On the other hand, the learner DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The assessee has given advances to two parties without charging any interest thereon. Therefore the AO was of the view that the assessee has diverted interest-bearing fund for non-business activities. Accordingly, the AO disallowed the interest expenses attributable to such advances.
12.1 The learned AR before us has made 3 fold contentions stating that there cannot be any disallowance of interest expenses. The 1st fold of contention is that the advance to M/s Blue Gold Exports Pvt. Ltd. was given for the purchase of the goods in connection with the business. Therefore, the transaction/advance is for the business purposes and accordingly no disallowance is warranted. However, we note that the learned AR before us has not produced any documentary evidence suggesting that the impugned advance represents the business transactions. Thus in the absence of any documentary evidence, we reject the contention of the ld. AR for the assessee.
12.2 The 2nd fold of contention is that there cannot be any addition on account of interest expenses by virtue of the principles laid down in the case of Sridev enterprise by the judgment of Hon’ble Karnataka High Court. Admittedly, the advance to M/s Blue Gold Exports Pvt. Ltd. was given in the immediate preceding assessment year as evident from the balance sheet available on record. Furthermore, the plea of the ld. AR that there was no disallowance of interest expenses in the immediate preceding was not controverted by the learned DR for the Revenue. Therefore, we can assume that there was no disallowance made by the Revenue on account of such advance given to the party in the immediate preceding year. Accordingly, the principles as laid down by the Hon’ble High Court as discussed above can be applied to the case on hand. The relevant extract of the judgment of Hon’ble Karnataka High Court in the case of Sridev Enterprise (supra) stands as under:
“In the instant case the status of the amount standing as outstanding due from N on the first day of the accounting year was the amount that stood outstanding on the last day of the previous accounting year; therefore, its nature and status could not 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 deductions 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 was 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 would 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 ‘was necessary in the matter of recognising 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 to have become bad prior to that year. The Tribunal was, therefore, justified in holding that since no additions had been made in earlier years, the opening debit balance could not be considered during the current year and the enquiry had to be limited to the increase in the current year only.”
12.3 We also make it clear that the advanced was made by the assessee to the impugned party on 30 March 2011 i.e. just 2 days before the end of the relevant financial year. But in our considered view, the revenue could have made the addition for the interest for the proportionate amount. But the Revenue has not done so. Therefore, we are of the view that the principles laid down by the Hon’ble Karnataka High Court as discussed above are applicable to the case on hand.
12.4 Coming to the advances made by the assessee to Parul H. Oza for Rs. 7,60,900.00, in this regard we note that there is sufficient own fund available with the assessee for making such amount of advance. Therefore it can be presumed that such advance was made by the assessee out of his own fund. Accordingly there cannot be any disallowance on account of diversion of interest-bearing fund for non-commercial purposes. In this regard we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Raghuvir synthetics Ltd reported in 354 ITR 222 wherein it was held as under:
We may refer to the judgment of the apex court at this stage given in case of S. A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) where the question was whether interest on funds borrowed by the assessee to give an interest-free loan to sister concern should be allowed as deduction and the apex court ruled thus (pages 7 and 8) : "We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and, hence, we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. . . . In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. . . The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.. . . We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi), that once it is established that there was nexus between the expenditure and the 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 its profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits."
Accordingly, the question is answered in favour of the assessee by the apex court. In this tax appeal it is to be specified here that considering the material on record and keeping in view substantial interest-free funds and business expediency that the Commissioner of Income-tax (Appeals) and the Tribunal held the issue in favour of the assessee. 11. There is absolutely no perversity in such findings. On the contrary, they are conforming to the well laid down guiding principle on the subject. In the premise, the question of law needs to be answered in favour of assessee and against the Revenue. The tax appeal is dismissed accordingly and stands disposed of.”
In view of the above we hold that there cannot be any disallowance of the interest expenses on account of the diversion of fund. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 01/10/2019 at Ahmedabad.