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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: HON’BLE MANISH BORAD, ACCOUNTANT
PER MANISH BORAD, A.M
The above captioned appeals filed at the instance of the
assessee for Assessment Year 2014-15 and 2013-14 are directed
against the orders of Ld. Commissioner of Income Tax(Appeals)-I (in
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
short ‘Ld. CIT], Indore dated 24.9.2019 & 13.11.2019 which are
arising out of the order u/s 143(3) of the Income Tax Act 1961(In
short the ‘Act’) dated 27.12.2016 16.02.2016 framed by ITO-1(3),
Indore.
Assessee has raised following grounds of appeal:-
Assessment Year 2013-14
That the Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance made by the Assessing Officer at Rs.9,22,643/- on account of interest expense.
2.That the Learned Commissioner of Income Tax (Appeals) failed to appreciate the submission made by the appellant.
That the disallowance made is not based on the facts of the case and needs to be deleted.
That, the appellant, carves leave to add alter and/or delete any of the grounds of appeal. Assessment Year 2014-15
That the Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance made by the Assessing Officer at Rs.1120776/- on account of interest expense.
2.That the Learned Commissioner of Income Tax (Appeals) failed to appreciate the submission made by the appellant. 2
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
That the disallowance made is not based on the facts of the case and needs to be deleted.
That, the appellant, carves leave to add alter and/or delete any of the grounds of appeal.
As accepted by both the parties since the facts involved and issues raised in these appeals are common and pertaining to same assessee these appeals were heard together and are being disposed off by this common order for the sake of convenience and brevity.
On perusal of the grounds we find that the common grievance is against the finding of Ld. CIT(A) confirming the disallowance of interests expenses made by the Ld. A.O alleging that the assessee has charged interest at lower rate but paying interest on higher rate.
Brief facts of the case as culled out from the records are that the assessee is an individual engaged in money lending
business. Assessee takes loans from banks and other parties on
interest and also gives loans and advances and mostly charge
interest. The rate of interest are varying both while paying and 3
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
receiving the interest. Ld. A.O while examining the records of the
assessee during the course of assessment proceedings selected for
scrutiny after serving notice u/s 143(2) of the Act, observed that
assessee is paying interest of loan @12% to 15% per annum but has
charged interest @6% on the loan advanced to Mr. P.S. Kalani and
has not charged any interest on the loan advanced to B.N. Kalani
HUF and Saurabh Kalani. On observing so and after considering
the submissions of the assessee Ld. A.O was of the view that
interest expenditure of Rs.9,22,643/- and interest of
Rs.11,20,776/- deserves to be disallowed for Assessment Years
2013-14 and 2014-15 respectively. This issue was challenged before
Ld. CIT(A) but assessee failed to succeed as Ld. CIT(A) confirmed
the action of Ld. A.O observing that the assessee has failed to
corroborate as to how the loan has been given on lower rate of
interest while at the same time debiting in Profit & Loss Account
with interest expenditure paying higher rate of interest.
Now the assessee in appeal before the Tribunal.
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
Ld. Counsel for the assessee vehemently argued referring to
the following written submission and also relied on various
decisions mentioned in the written submission which are
reproduced below:-
With reference to the above it is submitted that the assessment order for assessment years 2013-14 & 2014-15 was passed on 16.02.2016 and 27.12.2016 respectively. That the assessee is carrying on the business of Money landing. That no prudent business person would run a business to incur a loss is the prime question to be considered.
That the AO disallowed expenses relating to interest payments on the ground that where as the assessee had received loans @ 12% to 16% but had charged less interest from P.S. Kalani i.e. @6% only and therefore the difference is disallowed. That the assessee had paid higher rate of interest on the overdraft taken from the bank was ignored.
That the AO has pointedly mentioned on page 2 of the assessment order that interest @ 18% to be received form Kalani Industries and @ 12% from M/s Padma Homes Pvt. Ltd. That the AO calculated the disallowance considering the rate of interest paid to bank @ 16% intend of 12% in most of the cases.
That as stated above the assessee was carrying on the business of money lending for the past may years. Too substantiate the above claim a copy of the assessment order for assessment year 2006-07 is enclosed for ready perusal. That the complete chart in respect of the amount of interest paid is enclosed. Copy of assessment order with details for assessment year 2012-13 is also enclosed. With this synopsis, a perusal 5
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
of the same will show that rate of interest paid is between 12% to 15% and around 16% on overdraft from bank. That therefore the AO should not have calculated the disallowance considering the amount of interest paid to the bank. Secondly the point to be considered is that interest @18% was charged from the amount advanced to Kalani Industries. It therefore is beyond doubt that the assessee was prudently carrying on her business. That the learned AO ignored the fact that the amount advance to P.S. Kalani should have been considered as a related concern out of commercial expediency which is allowable under the income tax return and any expenses claimed in respect of such advance can be claimed as an expenditure.
Attention is drawn to the order of the Hon’ ble Jaipur bench in the case of Kailash Chand Soni Vs. ACIT Circle-O5 (order enclosed at page 66 to 84 of the paper book) where in it has been held: (Para 21)
"In the present case also the assessee had provided to the assessing officer with the bank statements in which it is clearly visible that the /4 funds raised from the unsecured loan taken from various parties is utilized for ITA No. 960/JP/2019 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur lending money to various parties. It means that the interest paid on unsecured loans is expended wholly and exclusively for earning the interest income from loans and advances.
However the A.O. had not considered section 57(iii) of the income tax act and term commercial expediency together and had contended that the expenditure is not related wholly and exclusively for earning income of Rs. 4,21,667/- only because the assessee has advanced loan to one party at nil rate of interest out of commercial expediency .. In actual such loans and advances which are provided at low or nil rate of interest out
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
of commercial expediency does not affect the nature of transaction."
We further drawn your honours attention to the following decisions:
(i) Commissioner of Income-tax Vs. Shriram Investments (2020) 422 ITR 528 (Madras High Court) wherein it has been held that :-
Held, that the Tribunal rightly held that when the cash system of accounting was adopted by the assessee, an investment company, whose business was only to borrow and lend or invest, that could not be said to be not in the business interest or commercially expedient for the purpose of business and the concept of matching principles which had been applied by the assessing authority and the Commissioner (Appeals) in the present case, was not really applicable. It is not for the Revenue authorities to substitute their own wisdom or notion about the rate of interest agreed to between the parties, including group companies and as such, the finding of fact about commercial expediency or absence thereof is a finding of fact, out of which no substantial question of law can be said to arise, requiring consideration under section 260a of the Act. Moreover, since in the case of the assessee itself, the court had decided on similar facts earlier and dismissed the Revenue's appeal, there was no reason to take a different view of the matter for the assessment year 2013-14.
We may submit here the question before the High Court was that when the assessee had not advanced interest bearing fund without charging any interest. The Hon'ble High Court referred to the following cases:
(i) Commissioner of Income tax vs. Lokhandwala Construction Inds. Ltd (Bombay High Court) 260 ITR 579 7
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
"Where an assessee claims deduction of interest paid on capital borrowed, all that the assessee has to show is that the capital which was borrowed was used for business purpose in the relevant year of account and it does not mater whether the capital was borrowed in order to acquire a revenue asset or a capital asset."
(ii) S. A. Builders Ltd. Vs. Commissioner of Income tax (Appeals) and Another (Supreme Court of India)
"Interest on borrowed capital - Interest on money borrowed from bank and lent to sister concern without charging interest - when allowable - test same as that for allowance of business expenditure, viz., "for the purpose of the business" - allowable if made as a measure of commercial expediency - Income tax Act, 1961, ss36(1)(iii),37.
Words and phrases - "for the purpose of business" "commercial expediency", meaning of.
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 businessman incures for the purpose of business. The expenditure may not have been incurred under any legal obligation, buy yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of the business". "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
The expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits".
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. 8. Per contra Ld. Departmental Representative vehemently
argued supporting the orders of both the lower authorities.
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
We have heard rival contentions and perused the records
placed before us and carefully gone through the submissions made
by the Ld. Counsel for the assessee as well as finding of both the
lower authorities. The instant appeal pertains to Assessment Years
2013-14 and 2014-15. Though various grounds are raised but the
sole grievance is commonly raised against the disallowance of
interest expenditure of Rs. 9,22,643/- and Rs.11,20,776/- for
Assessment Years 2013-14 and 2014-15 respectively.
We observe that the assessee is into money lending business
and holds registration certificate for running this business given by
the local authority. Books of accounts are regularly maintained
and audited u/s 44AB of the Act. Assessee is regularly accepting
both secured and unsecured loans on interest and giving loans and
advances for earning income. Details for party wise interest
received and interest paid have been filed before us. For
Assessment Year 2013-14, we find that the assessee has charged
the interest in the range of 6% to 18% more specifically interest
@18% per annum has been charged from Kalani Industries Pvt Ltd,
6% per annum has been charged from P.S. Kalani. In the details of
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
interest paid we observe that on the unsecured loans the rate of
interest paid is ranging from 9% to 15%. Interest ranging from 12%
to 15% has been paid to the bank. Revenue has not doubted the
genuineness of all other interest expenses and interest receipts
during the year except those disputed. No adversity have been
found in the books of accounts regularly maintained by the
assessee. Assessee also enjoys over draft facility from Bank of
Baroda and also on 31.3.2014 the outstanding balance of over draft
of Bank of Baroda was Rs.2,02,07,718/-.
The above stated facts clearly demonstrates that assessee is
regularly carrying out the business of money lending and for
business and commercial expediency rate of interest paid and
received varies from case to case. The assessee is very much
independent to carry out its business activity in the best of her
interest. Charging of interest at high rate and low rate depends on
various circumstances. If the funds are idle and due to pre
commitments the interest on unsecured loans are to be paid
consistently then even if interest rate is low and if the person finds
that the investment is safe, one can very well go for receiving lower
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
interest rate. It is a well known fact that in banking industries also
per annum rates of interest on Fixed Deposit normally range
between 5% to 7% whereas for the cash credit loans and other
business loans the banks are charging much higher interest. There
cannot be a straight jacket formula that if unsecured loan is taken
@12% per annum one will have to charge interest more than 12%
on loan given. The same may or may not happen. It is up to the
businessmen to take a wise decision at the given point of time and
the risk involved in giving loan on interest. In finance business, one
is concerned to earn profits but major concern is of receiving the
principle amount back as and when due to be received.
In the instant case the transactions of taking money on loan
and giving them as advance or loan for interest is being carried out
regularly round the year. It shows that interest paid on secured
and unsecured loan is wholly and exclusively for the business
purpose of earning income from loans and advances.
The allowability of interest paid on borrowed capital where
interest bearing funds have been advanced interest free to the sister
concern was deliberated upon by the Hon’ble Supreme Court in S.A.
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
Builders (supra) 288 ITR 1 (SC). The ratio laid down by the Hon’ble
Supreme Court is 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 businessman incures 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.”
Examining the instant case and on the facts of above
judgment we are of the view that firstly there is a clear nexus of
interest paid against the income received during the year, the
transactions carried out by the assessee are for the commercial
expediency and for this purpose the rate of interest paid and
received by the assessee are varying from case to case which is duly
evident from the records placed before us and the audited financial
statements. Under given facts and circumstances of the case the
action of Ld. A.O was not justified in taking up few out of many
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019
advances given by the assessee to arbitrarily levy interest rate on
loan given at an agreed rate of interest which may be lower than the
interest rate charged from other persons or no interest is charged
for commercial expediency purposes. We thus set aside the finding
of Ld. CIA(A) and delete the disallowance of interest at
Rs.9,22,643/- and Rs.11,20,776/- made for Assessment Years
2013-14 & 2014-15 respectively. The common issue raised before
us is decided in favour of the assessee. Effective grounds raised in
these two appeals are allowed.
In the result both the appeals of the assessee are allowed.
The order pronounced as per Rule 34 of ITAT Rules, 1963 on 30.04.2021.
Sd/- Sd/-
(MADHUMITA ROY) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER
�दनांक /Dated : 30th April, 2021 /Dev Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file. By Order, Asstt.Registrar, I.T.A.T., Indore
Smt.Padma Kalani ITA No. 87/Ind/2020 & 956/Ind/2019