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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
PER MAHAVIR PRASAD, JUDICIAL MEMBER
1. This appeal filed by the Assessee is directed against the order of the Ld. CIT(A)-1, Ahmedabad dated 30.11.2017 pertaining to A.Y. 2014-15 and following grounds have been taken:
2 . A.Y. 2014-15 1. The Learned Commissioner of Income Tax, (Appeals)-l, Ahmedabad has erred in law and on facts of the case in confirming the disallowance of interest on interest free loans and advances amounting to Rs.52,76,097/- though the advances were given for the purpose of business of the Appellant and the Appellant had sufficient interest free funds for the same.
2. Your Appellant prays to reserve the right to add, alter, amend and/or withdraw any of the above grounds of appeal.
Facts of the case are as emanated from the Assessment Order: 5. Disallowance of Interest on interest free loan and advances:- 5.1 From the details furnished, it is observed that the assessee has claimed interest expenses to the tune of Rs.864.94 lakhs. Further, the assessee has given interest free loans and advance of Rs.9,67,83,921/-. During the course of assessment proceedings the assessee was asked to explain why the corresponding interest on such loans and advances should not be treated as expenses incurred for non business purpose and why the same should not be disallowed u/s 36(l)(iii) of the I.T. Act. In this connection, the assessee has furnish the breakup of loans and advances as under- Short-term loans and advances Rs. 95,19,652/- Advance to staff Rs.7,16,515/- Advance to others Rs. 5,86,63,137/- Balance with statutory authority Rs. 2,78,84,617/-
In respect of short term loans and advances mad to suppliers and advance to others, it was submitted that the advances were made as business advances. However, the assessee could not furnish the evidences that the advances were made for business purpose in respect of following advances- 1. Tirupati textiles Rs. 5,00,000/- 2. Shree Vaibhav Corporation Rs. 5,00,000/- 3. VirenEximPvtLtd Rs. 5,00,000/- 4. Adv. For Bunglow at Navrangpura Rs. 12,02,920/- 5. Adv. For land purchase Mithakhali city SN Rs.25,00,000/- 6. Ashokbhai Bhavanbhai Patel Rs. 17,87,562/- 7. Om Shree Owners Association Rs.9,77,000/- 8. Dinesh Ramgopal Sharma Rs. 50,00,000/- 9. . Nanda Dinesh Sharma Rs. 50,00,000/- 3 . A.Y. 2014-15 10. Ashwinbhai Adv for land Saijpur-Gopalpur Rs. 1,00,00,000/- 11. Pranav S Shah Rs. 25,00,000/- 12. Kohinoor Creations Pvt Ltd Rs. 1,35,00,000/- Total Rs. 4,39,67,482
In respect of persons mentioned above, the assessee company failed to substantiate with supporting evidences that advances were given for business purpose. Further, notice was issued on 22.11.2016 on the above issue. In response to which the assessee has furnish the chart which was also furnish along with reply dated 22.11.2016. 5.2 The submission of the assessee has been perused but the same is not tenable. The assessee in this regard has submitted that the funds have been advanced to them for business purpose. However, on the examination of the ledger account of the said parties, it has been found that the assessee unlike other parties to whom it has extended business advances does not have any business transactions with the said parties. 5.3 Interest on borrowed capital is allowed as a deduction from business only if it satisfies the condition that it is for the purpose of business or profession. Where the money borrowed was diverted for giving interest free loans, the proportionate interest attributable to such loans could be legitimately disallowed by the Assessing Officer. It was so held in S.A. Builders Ltd. v. CIT (2004) 269 ITR 535 (P&H). Further, this view was accepted in CIT v. H.R. Sugar Factory Pvt. Ltd. [1971] 187 ITR 363 (All) in a case, where money was borrowed for purposes of business, but advanced at a concessional rate to its directors, so that the High Court upheld the inference of the Revenue to disallow the amount to the extent of difference in interest rates, though the Revenue was not able to establish the identity of the funds allegedly diverted. The High Court pointed out that no business purpose was served by such lending and that the amounts were substantial and cannot be glossed over and that the fact that the assessee borrows money for its business cannot by itself justify the deduction. The Tribunal's approach in allowing deduction for these reasons was characterized by the High Court as "not only superficial but too naive". 5.4 Where the assessee lends money without interest, there can be no inference of notional income based on reasonable interest, which the assessee might have charged for lending to relatives or sister concerns/others. But then, it is possible in such case, to disallow a proportionate part of interest paid on such borrowed capital, if any, to the extent that the borrowed funds are utilized for interest-free advances. Disallowance is therefore made on the ground that it will not be 4 . A.Y. 2014-15 eligible for deduction as expenditure incurred was not for purposes of business. Further, reliance is placed on the following decisions:-
Patel Filter Ltd. vs. CIT [2003] 264 ITR 21 (Guj.) 2. CIT vs. Vallabh Glass Works Ltd. [1982] 137 ITR 389 (Guj.) 3. CIT vs. H. R. Sugar Factory Pvt. Ltd. [1991] 187 ITR 363 (All.) 4. Indian Saving Products Ltd. vs. CIT [2004] 265 ITR 250 (Raj.) 5. Caldern Pharmaceutical Pvt. Ltd. vs. CIT [2004] 265 ITR 244 (Kal.) 6. CIT vs. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom.) 7. K. Somasundram & Bro. [1999] 238 ITR 939 (Madras) 8. Elmer Havell Electrics vs. CIT [2005] 277 ITR 549 (Del.)
Thus, the contentions of the assessee lacks merit and could not be substantiated. 5.5 In view of the above narrated facts and the judicial pronouncements, the claim of the assessee in respect of interest is not allowed. Since the assessee has been paying interest @ 12% on loans accepted. Therefore, interest expenses in proportion to the funds diverted for non business purpose amounting to Rs. 52,76,097/(12% of Rs. 4,39,67,482/-) is hereby disallowed and added to the total income of the assessee.
Against the disallowance of Rs. 52,76,097/-, assessee preferred first statutory appeal before the ld. CIT(A) who confirmed the action of the assessing officer with following observations:
4.3. I have carefully considered the Assessment Order and the submission of the appellant carefully. The Assessing Officer has made disallowance out of interest of Rs.52,76,0977-. It is pertinent to note that similar disallowance was made by the AO for the first time in A.Y. 2012-13 which was followed in the assessment orders for the subsequent assessment years i.e. A.Ys. 2013-14, 2014-15. The similar disallowance was made by Assessing Officer in A. Y.2012-13 wherein CIT(A)-1 vide order dated 30th August, 2016 in Appeal No. 134/CIT(A)-1 has held as under: 4.3 "I have carefully considered the Assessment Order and submission filed by the Appellant. The Assessing Officer in the assessment order has stated that interest free loans and advances have been given to various parties amounting to Rs. 12,78,83,916/- and other loans and advances 5 . A.Y. 2014-15 are of Rs.2,14,10,507/-. The Assessing Officer has observed that Appellant has advanced loans & advances short term / long term made to various parties in cases of the persons both opening and closing balances are same but there is no transaction made related to the parties (as per table on pages 11-12 of this order) whom the interest amount of Rs.49,79,253/- should have been charged. Interest on borrowed capital is allowed as a deduction from business only if it satisfies the condition that it is for the purpose of business or profession. Where the money borrowed was diverted for giving interest free loans, the proportionate interest attributable to such loans could be legitimately disallowed by the Assessing Officer. It was so held in S.A. Builders Ltd. v. CIT (2004) 269 ITR 535 (P&H). Further, this view was accepted in CIT v/s H.R. Sugar Factory Pvt. Ltd. [1971] 187 ITR 363 (All). Where money was borrowed for purposes of business, but advanced at a concessional rate to its directors, so that the High Court upheld the inference of the Revenue to disallow the amount to the extent of difference in interest rates, though the Revenue was not able to establish the identity of the funds allegedly diverted. In view of the above narrated facts and the judicial pronouncements, the claim of the assesses in respect of interest is not allowed. Since the assesses has been paying interest @ 12% on loans accepted, therefore, interest expenses in proportion to the funds diverted for non business purpose amounting to Rs.49,79,253/-- is hereby disallowed and added to the total income of the assessee. The learned A.R. has submitted written submissions in the matter and has argued that the amounts of advances are given for business purpose only and in support of the same he has furnished copies of account to various persons. He has also furnished a detailed chart showing therein the purpose of advances, which is placed on pages 216 and 217 of the paper book. It is also argued by the A.R. that on advances, which are nature of business, no interest is charged and this is the normal trade practice prevailing in business. Similarly, on advance received from the customer, no interest is payable to the customer on such advance amount. It was, therefore, submitted that the Assessing Officer is not justified in disallowing Rs.49,79,253/- out of interest expenditure. 4.4. I have carefully considered the assessment order and submission filed by appellant. The A.O. in the impugned order has observed that appellant had debited an amount of Rs.49,79,253/- being interest paid on loans obtained secured & unsecured and it is noticed that the assessee 6 . A.Y. 2014-15 has not charged interest from the persons/parties to whom it has given advance. It is observed that interest free loan & advances short term / long term made to various parties in cases of the persons both opening and closing balances are same but there is no transaction made related to the parties (as per table on pages 11-12 of this order) and no interest have been charged. Interest on borrowed capital is allowed as a deduction from business only if it satisfies the condition that it is for the purpose of business or profession. Where the money borrowed was diverted for giving interest free loans, the proportionate interest attributable to such loans could be legitimately disallowed by the Assessing Officer. It was so held in S.A. Builders Ltd. v, CIT (2004) 269 ITR 535 (P&H). Further, this view was accepted in CIT v. H.R. Sugar Factory Pvt. Ltd. [1971] 187 ITR 363 (All) in a case, where money was borrowed for purposes of business, but advanced at a concessional rate to its directors, so that the High Court upheld the inference of the Revenue to disallow the amount to the extent of difference in interest rates, though the Revenue was not able to establish the identity of the funds allegedly diverted. The appellant has failed to prove that the amounts advanced are for business purpose and the money borrowed has been diverted for giving interest free loans to the said persons, and therefore, he disallowed Rs.49,79,253/- out of interest payment. The appellant has not utilized the interest bearing fund for its business purpose but advanced the same as interest free and lower rate of 12%. The expenditure u/s.36(1))(iii) of the Act is allowable if the borrowed fund are utilized for the purpose of business. In view of the above, Rs.49,79,253/-disallowed u/s. 36(1)(iii) of the I. T. Act, treating the same is not incurred wholly and exclusively for the purpose of business. Since the assessee has been paying interest @ 12% on loans accepted, therefore, interest expenses in proportion to the funds diverted for non business purpose amounting to Rs.49,79,253/- disallowed and added to the total income of the assessee is confirmed. The ground of the appellant is dismissed".
After going through the facts of the case, it is seen that there is no change with respect to the facts and position in law during the year under consideration from those existed in the preceding assessment years. Facts as well as position in law remaining the same during the year are identical to the previous year in the case of disallowance of commission expenses, Following the ratio of decision of the 7 . A.Y. 2014-15 earlier year, the disallowance made by the A.O. of Rs.52,76,0977- is confirmed. This ground of appeal is dismissed.
In this case, assessee is in the business of manufacturing of textiles, handlooms & power looms. Assessee has claimed interest expenses to the tune of Rs. 864.94 lakhs. Further, assessee has given interest free loans and advance of Rs. 9,67,83,921/- for business purposes. And advances were given to supplier of the material and were made for business purpose.
And in support of its contention, ld. A.R. stated that it has filed the balance sheet as at March, 31, 2014 wherein all the details were given. And apart from that assessee has also submitted the details of the trade receivables and assessee is having interest free funds i.e. share capital and reserves of Rs. 7214 lakhs and share application money of Rs. 200 lakhs and contended that advances on which interest is not charged is Rs. 43967482/- are less than interest free funds available with the assessee.
In support of its contention, assessee has cited an order of Co-ordinate Bench in assessee’s own case for A.Ys. 2012-13 & 2013-14 in & 1071/Ahd/2017 wherein similar facts and circumstances, relief was granted by the Co-ordinate Bench with following observations:
We have carefully considered the orders of the authorities below. A perusal of the documentary evidences shows that assessee was having interest free funds available with it totaling to Rs. 48.58 crores and the impugned advances were at Rs. 12.78 crores. This shows that the interest free funds available with the assessee were far more in excess of the interest free advances. We further find that long term loan from banks, maturity term loan and unsecured loans taken by the assessee amounting to Rs. 32.80 crores whereas the total project expenses which included fixed assets and capital work in progress amounted to Rs. 64.76 crores. This shows that the term loans taken by the assessee have been utilized in fixed assets and capital work in progress.
8 . A.Y. 2014-15
The Hon’ble High Court of Gujarat in the case of Consumer Marketing (India) (P.) Ltd. 64 taxmann.com 16, on identical facts has held that the term loan on which deduction of interest was sought, had entirely been used for the purpose of purchasing the assets and the assessee has sufficient interest free funds to take care of the advances. Therefore, the disallowance of interest was not justified.
Considering the facts in totality in the light of the decision of the Hon’ble Jurisdictional High Court of Gujarat (supra), we do not find any justification in this disallowance of interest.
We accordingly direct the A.O. to delete the disallowance of Rs. 49,79,253/-. Ground no. 3 is allowed.
In parity with the above said Co-ordinate Bench order, we allow appeal of the assessee.
In the result, appeal filed by the Assessee is allowed.
Order pronounced in Open Court on 10 - 12- 2019