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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Chandra Poojari, AM & Shri George George K, JM
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 15.03.2019. The relevant assessment year is 2012-2013.
The brief facts of the case are as follow: The assessee is a company engaged in the business of printing and publishing of newspaper and allied publications. For the assessment year 2012-2013, the return of income was filed on 28.09.2012 declaring loss of Rs.2,25,85,635. The assessment was completed u/s 143(3) of the I.T.Act vide order dated 31.03.2015 determining loss of Rs.1,79,70,640. In the assessment completed, the Assessing Officer disallowed interest on borrowings amounting to Rs.20,90,000 u/s 36(1)(iii) and Rs.25,25,000 u/s 40(a)(ia) of the I.T.Act.
. 2 M/s.Mangalam Publications India (P) Ltd.
3. Aggrieved by the order of assessment, the assessee filed an appeal before the first appellate authority. The CIT(A) dismissed the appeal of the assessee vide impugned order dated 15.03.2019.
4. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal, raising following grounds:-
“1. The order of the Commissioner of Income Tax (Appeals) is against law.
2. Commissioner of Income tax (Appeals) erred in disallowing interest on borrowings amounting to Rs.20,90,000 as incurred towards non business purposes. The Commissioner of Income Tax (Appeals) failed to appreciate the fact that the appellant had not granted any advances to sister concerns, but was forced to repay towards the bank liability of sister concerns as they were in financial difficulties. The repayment towards bank loans taken by sister concern was made out of commercial expediency and to protect the trade name of the group and hence allowable as expenditure.
The Commissioner of Income tax (Appeals) failed to note that the appellant had interest free funds in the form of trade payable which was more than the advances to sister concerns and hence there was no diversion of interest bearing funds warranting a disallowance.
The Commissioner of Income Tax (Appeals) went wrong in disallowing interest paid to banks amounting to Rs.25,25,000 for non-deduction of tax at source. The Commissioner of Income Tax (Appeals) failed to appreciate the fact that though the loans were granted in the names of directors, the funds were immediately transferred to the assessee company and the interest and repayments were also made by the company directly into the loan account with the bank. It was only for the purpose of convenience and documentation that loans were granted in the names of directors and there is no interest payment to the directors and consequently the provisions of TDS was not applicable.”
. 3 M/s.Mangalam Publications India (P) Ltd. 5. The learned AR did not raise any contention with regard to ground No.3 above. The assessee has filed a paper book enclosing the details of advances made to sister concern, copies of audited accounts of the assessee as on 31.03.2012 and audited accounts of various sister concerns etc.
We shall adjudicate the issues raised as under:
Disallowance of interest paid amounting to Rs.20,90,000 on account of diversion of funds to sister-concern.
The only contention raised before us is that the advances were made to sister-concern out of commercial expediency and hence no disallowances can be made for the interest expenditure. The Assessing Officer had rejected the claim of the assessee by observing as under:-
“Now, the question of “commercial expediency”. The test of commercial expediency is not whether the property of sister concerns will be attached, thereby damaging the goodwill of the group. Instead, the test of commercial expediency is the extent to which business interest of the assessee concern is furthered by the said advance. That is, whether the assessee’s business is benefitted by the advancement of loans? Financial constraints of the sister concerns and damage to goodwill cannot be accepted as deciding factors of business expediency. In that case, almost every advance to a sister concern will fall within its ambit.”
6.1 The view taken by the Assessing Officer was affirmed by the CIT(A). The relevant observation of the CIT(A) reads as follow:-
“4.2.3. In the light of the decision of Hon'ble ITAT, as above, it is evident that advancement of loans by the Appellant to save the sister concerns being declared as NPA by the Bank or to save the properties mortgaged by the Appellant to the bank as a guarantee would not amount to advancement for "commercial expediency" unless the Appellant proves that . 4 M/s.Mangalam Publications India (P) Ltd. failure of the business of sister concern has an impact on the business of the Appellant. The learned AR has not produced any evidence to prove that failure of the sister concerns has impact on the Appellant. It cannot be held that the interest free loans advanced by the Appellant to the sister concerns has an element of "commercial expediency" in it and consequently, the interest expense to the extent of diversion of funds to sister concerns cannot be allowed as deduction under section 36(1 )(iii) of the Act. Therefore, it is held that there is no merit in the ground raised by the Appellant on the issue of "commercial expediency" and hence, the ground raised on this issue is dismissed.”
6.2 The contentions raised before the Tribunal by the assessee read as follows:-
“The advance to sister concern was out of commercial expediency. The assets of the company and guarantee of the directors for common for all the concerns including sister concerns. The advances were on account of transfer by the bank to clear the loan outstanding of the sister concern. The AO as well as CIT(A) failed to appreciate that the failure of the sister concerns to pay the bank dues would have affected the goodwill of the whole group and thus the commercial expediency was clearly established. The disallowance of Rs.20,90,000 under section 36(1 )(iii) is not correct. Moreover , the assessment for the earlier years were completed under section 143(3), of which two years was done by the same AO accepting the appellant's argument of commercial expediency and the disallowance under section 36(1 )(iii) was not made. It is submitted that the assessing officer should be consistent in their approach on a particular issue and hence the disallowance was not correct.”
6.3 The learned Departmental Representative strongly supported the orders of the Income Tax Authorities.
6.4 We have heard the rival submissions and perused the material on record. As rightly pointed out by the Assessing Officer, the test of `commercial expediency’ is to be examined from the aspect of how the business interest of the assessee company is furthered by diverting interest free advance to the sister concerns. In other words, the question that is to be . 5 M/s.Mangalam Publications India (P) Ltd. posed was how the assessee’s business is benefitted by the advancement of interest free loans to the sister-concerns. The financial constraints of the sister-concerns and damage to goodwill cannot be accepted as deciding factors of commercial expediency unless the assessee proves that failure of business of sister-concerns has an impact on the business / goodwill of the assessee. The assessee in this case has not been able to prove with necessary evidence that the failure of the business of the sister concern has an impact on the assessee. The assessee has not been able to prove that there is commercial expediency in diverting interest free funds to the sister- concerns when assessee was paying huge interest on its borrowings. Therefore, the interest expenditure to the extent of funds diverted to sister concerns has been rightly disallowed by the A.O. Therefore, Ground No.2 raised is rejected.
Disallowance of Rs.25,25,000 u/s 40(a)(ia) of the I.T.Act.
The Assessing Officer disallowed interest of Rs.25,25,000 by invoking the provisions of section 40(a)(ia) of the I.T.Act. It was noticed by the Assessing Officer that the assessee had taken loan from its Directors amounting to Rs.2.03 crore and interest on such loans was Rs.25.25 lakh. On the interest paid amounting to Rs.25.25 lakh, no tax was deducted at source u/s 194A of the I.T.Act, hence, by invoking the provisions of section 40(a)(ia) of the I.T.Act, the A.O. disallowed the interest claimed as a deduction.
7.1 On further appeal, it was contended before the CIT(A) that the Directors had taken loan from bank and in turn advanced
. 6 M/s.Mangalam Publications India (P) Ltd. the amounts to the assessee-company and the assessee company had paid interest to the banks directly. Therefore, it was submitted that for the interest paid directly to the banks by the assessee-company, there is no necessity to deduct tax at source, in view of the provisions of section 194A(3)(iii) of the I.T.Act. The contention raised by the assessee was rejected by the CIT(A). The relevant finding of the CIT(A) reads as follow:-
“4.3.2 During the appeal proceedings, the learned AR has relied on the grounds raised. The learned AR has not disputed the facts discussed in the assessment order. It is not the case of the Appellant that provisions of section 194A of the Act are not applicable to interest paid by the Appellant to its Directors. The fact that the Appellant had paid interest directly to Bank would not alter the liability of the Appellant under the TDS provisions. Hence, the disallowance of Rs.25,25,000 under section 40(a)(ia) of the Act is upheld and the ground raised on this issue is dismissed.”
7.2 Aggrieved by the order of the CIT(A) in making disallowance of interest paid amounting to Rs.25.25 lakh u/s 40(a)(ia) of the I.T.Act, the assessee has raised this issue before the Tribunal. In the brief written submission, the assessee has contended as follows:-
“The Commissioner of Income tax(Appeals) went wrong in disallowing interest paid to banks amounting to Rs.25,25,000 for non-deduction of tax at source. The Commissioner of Income tax (Appeals) failed to appreciate the fact that the though the loans were granted in the names of directors, the funds were immediately transferred to the assessee company and the interest and repayments were also made by the company directly into the loan account with the bank. Banks were not able to extend further loans in the name of the company due to various restrictions and hence the loans were granted in the names of the directors. The loan account were reflected in the books of the company and the repayments were also made directly from the bank account of the company. We are submitting the ledger copy of loan account of one of the director, the loan statement from HDFC and the repayment from the appellant's bank account which would
. 7 M/s.Mangalam Publications India (P) Ltd. show that there was no interest payment to director but the same directly paid to the bank. Even for argument sake it is considered that interest was paid to the director and he has in turn paid to the bank, it is only reimbursement of the expenditure and hence TDS is not attracted.”
7.3 The learned Departmental Representative was duly heard.
7.4 We have heard the rival submissions and perused the material on record. Admittedly, the loans were advanced by the Directors of the assessee-company. As per the assessee- company’s audited balance sheet, the loans in question are standing against the Directors (and not in the name of the banks). Once it is admitted that the loans are from Directors, the interest on such loans have to be paid to the Directors. Therefore, undoubtedly, tax ought to have been deducted at source on such interest payment by the assessee-company under the provisions of section 194A of the I.T.Act. In the instant case, since there is no deduction of tax at source u/s 194A of the I.T.Act, the Assessing Officer has correctly invoked the provisions of section 40(a)(ia) of the I.T.Act and disallowed interest payment. Therefore, ground No.4 is rejected.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced on this 02nd day of December, 2019.