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Income Tax Appellate Tribunal, DELHI BENCH : SMC : NEW DELHI
Before: SHRI R.K. PANDA
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER Assessment Year: 2016-17 Mukesh Kumar, Vs. ITO, 44, New Grain Market, Ward-1, Bhattu, Fatehabad. Fatehabad, Haryana. PAN: ATQPK8439E (Appellant) (Respondent) Assessee by : Shri Gautam Jain, Advocate Revenue by : Shri R.K. Gupta, Sr. DR Date of Hearing : 25.08.2021 Date of Pronouncement : 22.09.2021 ORDER This appeal filed by the assessee is directed against the order dated 30.04.2019 of the CIT(A), Hisar, relating to the assessment year 2016-17.
Facts of the case, in brief, are that the assessee filed his return of income on 17th October, 2016 declaring taxable income of Rs.3,12,270/-. During the course of assessment proceedings, the AO noted that the assessee deals in wholesale trading of oil seed, cotton, guar and commission agent, etc. From the Profit & Loss Account filed by the assessee, he noted that the assessee has received
Rs.26,78,036/-. Further, the assessee has claimed deduction of Rs.22,89,134/- on account of interest apart from other routine expenses. He further noted that the assessee has paid interest of Rs.19,91,170/- to M/s Samjhai Nath Industries, Bhattu, and Rs.2,92,764/- to Saraswati Ginning Pressing & Oil Mills, Bhattu, which are sister concerns of the assessee. From the perusal of the ledger account of the concerned parties, he noted that the assessee has effected purchase/sales during the year from those parties. He noted that the assessee has not charged interest from debtors at Rs.96,20,818/-. He, therefore, asked the assessee to explain as to why the interest has been paid to creditors whereas no interest was charged from the debtors. It was explained by the assessee that the assessee sells auction goods to M/s Samjhai Nath Industries and Saraswati Ginning Pressing & Oil Mills and trading goods has been purchased from these parties. Interest has been paid to them at prevailing market rate as Vyapar Mandal Association. Interest has also been paid to the above parties against their credit balance and TDS has been duly deducted and TDS return filed. So far as the non-receipt of interest from debtors is concerned, it was submitted that the main business of the firm is that of commission agent. The assessee has made payments to the farmers/Jamindars within time and no interest is charged from them and in lieu of that they received commission from the farmers amounting to Rs.26.78 lakhs which is duly credited in the Profit & Loss Account under the head ‘Dami.’ It was submitted that there is no practice of charging interest from farmers in the business carried on by the assesseee i.e., commission agent and in lieu of that they charge commission @ 2.5% of the goods sold.
However, the AO was not satisfied with the arguments advanced by the assessee and disallowed the interest expense of Rs.22,89,134/- to the total income of the assessee.
3.1 In appeal, the ld.CIT(A) sustained the addition made by the AO by observing as under:-
“5.1 I have given careful consideration to the facts of the case, submissions of the appellant and the contentions of the AO. From the submissions, it is apparent that the appellant has mainly paid interest to two parties Samjhai Nath Induestries BTU Rs. 19,91,170 & Saraswati Ginning Pressing & Oil Mills Rs.2,92,764. It is noted that the appellant has made purchase of goods and sale of agricultural produce to these parties. The appellant further submitted that the interest was paid to the purchase where credit balance remained at the end of the year after setting both credit and debit balance. It is apparent that both these parties (Samjhai Nath Industries BTU & Saraswati Ginning Pressing & Oil Mills ] are sister concern of the appellant. The whole of arrangement of making payment of interest seems to be for the sake of diversion of income. Since the appellant is both purchasing sales selling goods to the sister concern it seems to be apparently by design that the credit balance at the end of the year remaining so as to make payment for the same. Further it is seen that the rate of interest paid is much higher then the usual rate paid in normal trade practice. The submissions of the appellant that the interest is paid at the rate decided by Vyapar Mandal Association is not supported by any documents or letter from the Vyapar Mandal Association. Considering the entirety of the case the disallowance made by the AO is confirmed. The grounds of appeal are dismissed.”
4. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee strongly challenged the order of the CIT(A) in confirming the addition made by the AO. Referring to the assessment order and order of the CIT(A), he submitted that the trading transactions has not been disputed and has been accepted as genuine. He submitted that the assessee has received interest and also paid interest @ 15%. For the above proposition, the ld. counsel drew the attention of the Bench to the following details:-
He submitted that the observation of the AO that the assessee has not charged interest from business debtors is factually incorrect since the assessee has received interest and also has paid interest on debit and credit balance with above parties at the same rate i.e., @ 15% per annum. He submitted that it is the settled proposition of law that the burden is on the AO to satisfy conditions u/s 40A(2)(b) of the Act and until and unless the Revenue establishes the same, the disallowance made is untenable. For the above proposition, the ld. counsel relied on the decisions of the Hon’ble Delhi High Court in the case of CIT vs. United Hotels Ltd., 177 Taxman 417 and Hive Communication (P) Ltd. vs. CIT, 201 Taxman 99. He also relied on the following decisions:- 4
High Court of Bombay i) 310 ITR 306 (Mum) CIT vs. Indo Saudi Travel (P) Ltd. ii) 336 ITR 209 (Bom) CIT vs. Y.S. Dempo & Co. (P) Ltd.
High Court of Karnataka i) 293 ITR 451 (Kar) DCIT vs. Mircotex Separators Ltd. ITAT Delhi Bench i) dated 7.12.2012 Raj Surendra and Associates vs. ACIT ii) 10 SOT 525 (Del) ACIT vs. Doon Valley Motors iii) ITA No. 4034/D/2007 (Del) dated 5.2.2008 DCIT vs. M/s Amitdeep Motors iv) 51 SOT 426 (Del) Aradhana Beverages & Foods Co. (P) Ltd. vs. DCIT v) 52 SOT 112 (Del) DCIT vs. Raj Laxmi Stone Crusher vi) 83 ITR(T)415 dated 30.6.2020 Ikea Trading (India)(P) Ltd. vs. DCIT Mumbai Bench i) ITA No. 3110, 3111 & 3112/Mum/2018 dated 26.07.2019 Motilal Laxmichand Sanghavi vs. ACIT Jodhpur Bench i) 146 ITD 473 (Jodhpur-Trib.) ITO vs. Axon Global (P) Ltd. Indore Bench i) ITA No. 590/Ind/2009 dated 8.2.2011 S. Balkishan Jagannath Goyal HUF) vs. Dy. CIT Allahabad Bench i) ITA No. 249 & 261/ALLD/2018 dated 27.11.2020 Rajesh Bajaj vs. DCIT
Referring to the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. vs. CIT, reported in 288 ITR 1 and the decision of the Hon’ble Supreme Court in the cased of Hero Cycles (P) Ltd. vs. CIT, 379 ITR 347, he submitted that once trading transactions were genuine and accepted as such, then, such expenditure is in accordance with the law. He accordingly submitted that the disallowance made by the AO and sustained by the CIT(A) should be deleted.
The ld. DR, on the other hand, relied on the orders of the AO and the CIT(A).
I have considered the rival arguments made by both the sides and perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, disallowed an amount of Rs.22,89,134/- on the ground that the assessee could not explain the reasons for payment of interest to the business creditors that too sister concerns whereas it is not charging any interest from the debtors. I find, the ld.CIT(A) upheld the action of the AO, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the ld. counsel that since trading transactions are genuine and accepted as such, then, disallowance of expenditure is not in accordance with law. It is also his submission that the assessee has received interest and has also paid interest @ 15% to the sister concerns and only the net interest has been debited to the Profit & Loss Account. 6
I find some force in the above argument of the ld. counsel for the assessee. From the various details furnished by the assessee in the paper book, it is noted that the assessee has paid interest as well as received interest from both the sister concerns, namely, M/s Samjhai Nath Industries and Saraswati Ginning Pressing & Oil Mills. Further, the transactions with the parties have not been doubted and these are business transactions. The AO has also not brought anything on record to the effect that the assessee has violated the provisions of section 40A(2)(b) of the Act. I find, the Hon’ble Supreme Court in the case of SA Builders (supra) has held that once the assessee establishes that there was a nexus between expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the Board of Directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. The relevant observation of the Hon’ble Supreme Court reads as under:- “It is to be noted that in the present case the question that has been raised by the Revenue is not one relating to the expenditure being not for the purposes of the business. It is an question of the appropriate amount which would have been paid as commission. In fact the Assessing Officer himself has allowed to the extent of Rs.4,35,854 holding, inter alia, "the payment of Rs. 1.75 per M.T. to Cement Distributors Limited is very much on the excessive side". This in our view was impermissible within the framework of section 37 of the Act. The jurisdiction of the Revenue is confined to "deciding the reality of the expenditure", namely, whether the amount claimed as deduction was factually expended or laid down and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having 7
regard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by the CDL has not been refuted by the Revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the Revenue.”
I find, the Hon’ble Supreme Court in the case of Hero Cycles (P) Ltd. (supra) has observed as under:-
In so far as loans to the sister concern/subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of ‘S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another' [2007 (288) ITR 1 (SC)]. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner:— 26. 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.
No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 (SC)], if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(l)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency.
Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act.
In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.
It has been repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971 82 ITR 166 (SC)], etc." In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.' [2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of 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. It further held that no businessman can be compelled to maximize his profit and that 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. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s Hero Fibres Limited to meet the working capital for meeting any cash loses.”
Since the assessee has made purchase and sale transactions with the two sister concerns, namely, M/s Samjhai Nath Industries and Saraswati Ginning Pressing & Oil Mills the details of which are at para No.5 of this order and has also charged interest from them on outstanding balances and paid interest to them on the outstanding balances, therefore, in the light of the decisions of the Hon’ble Supreme Court in the case of SA Builders Ltd. (supra) and Hero Cycle (supra), I am of the considered opinion that no interest can be disallowed. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the penalty.