ACIT 28 (2), MUMBAI vs. REAL TRADE TECHNOLOGIES, MUMBAI

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CITIA) was correct in deleting the disallowance of proportionate interest paid on borrowed capital amounting to Rs. 2, 12 40,434/- u/s 36(1) (iii) of the Act without appreciating that the assessee has not been able to establish the commercial expediency necessitated advancing of interest free loans while the assessee had paid interest on the borrowed funds? (2). The appellant prays that the order of the Ld.CIT (A) on the above grounds be reversed and that of the Assessing Officer be restored. (3). The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

Brief facts of the case are that the assessee filed its return of income on 28- 09-2013 declaring total income of Rs. 983120/-. The case was selected for scrutiny and notice u/s. 143(2) was issued and served on the assessee. Appellant is a partnership firm engaged in the business of construction and land development.

During the assessment proceeding, AO disallowed proportionate interest on interest free loan given to sister concern in the form of share capital/unsecured loan/advance. Appellant given 93.5 lacs to M/s Gami Properties Pvt. Ltd., M/s Kane Constructions 2.10 cr, Golden Falcon Pacific Ltd. Rs.8 cr. and M/s Om Shakti Enterprises Rs.1.37 cr. AO while relying in the case of S.A. Builder, (2007) 288 ITR 1 (SC) disallowed the interest paid on above mentioned advances given to sister concern interest free.

Aggrieved appellant approached the forum of first appellate authority i.e. ld. CIT (A)-26, Mumbai. During appellate proceeding, the appellant filed following submissions before the first appellate authority which summarized as under:  The Appellant had raised secured loon from M/s India bull Housing Finance Ltd. during financial 2007-08 and from Bombay Mercantile Co-op. Bank during financial year 2009-10 as term specifically to be used for construction of commercial building at Vashi (copies of the sanction letters are enclosed as Annexure - 1). There is outstanding balance of Rs.20, 60, 09,705/- payable to India bull Housing Finance Ltd. and Rs..2,51,86,939/- payable to Bombay Mercantile Co-op. Sank Ltd. as at 31-03- 2013. These loans were term loan in nature and raised for specific purpose of construction and the Appellant was regular in payment as per schedule of repayment.

Ground Nos. 1 and 2 are interrelated, hence disposed of by common finding.

Considering the submissions of the assessee, ld.CIT (A) observed as under: “....addition of Rs.2,12,40,434/- as disallowance of proportionate interest paid on borrowed capital which is utilized for non business purposes. The AO in his order observed that the Assessee has claimed interest of Rs.4,52,15,499/- paid to the unsecured loan providers and not shown any interest income received (except interest of Rs.30,26,301/- received from Mahendra C. Jain) from those persons to whom the loans and advances were given. The balance sheet of the Assessee reveals that the Assesses is having negligible own fund of Rs.5, 58, 87,082/- and is heavily depending upon borrowed funds. On the other hand the Assessee has made investments in shares application of Ken Construction Ltd. of Rs.2,10,00,000/-, M/s Shri Gami Properties Pvt. Ltd of Rs.93,50,000/-, Golden Falcon Pacific Ltd. of Rs. 8,00,75,000/- and M/s Om Shakti Enterprises of Rs.1,37,00,000/-.,The Assessee has not derived any benefit from investment in above companies but has paid substantial interest on loans amounting to Rs.4,52,15,499/-. The AO in his order relied on decision of jurisdictional High Court in the matter of Crescent Organics (P) Ltd (49 Taxmann.com 12B) where it was held that interest on borrowed capital utilized for investment in a foreign company was not in course of assessee’s business and claim for deduction u/s 36(1)(iii) of the I. T. Act has been rejected and S. A Builders (2007) 288 ITR (SC) where it has been held that interest free loans/advances can be allowed to sister concern when commercial expediency require to do so. It is not the business of the assessee to lent money and the assesses has not been able to establish that the commercial expediency necessitated advancing of interest free loans while the assessee has paid interest on the borrowed funds. Hence, the claim of deduction u/s 36(1)(iii) was to be restricted and only the advances given to M/s Top Ten Electronics (sister concern) of Rs.13,00,000/- and a sum of Rs, 11,00,000/- given to M/s Gami Properties P Ltd. (sister concern) were lo be excluded while making the disallowances. The AO disallowed a sum of Rs.2,12,40,434/-/- u/s 36(1)(iii) of the I.T. Act, 1961, 7.1 On going through [he submissions by the Appellant thoroughly, it is clear that the interest is paid on the terms loans which were utilized for construction purposes and there is closing stock in The hands of the Appellant which are valued more that the banks loans outstanding. It is further observed that a sum of Rs.3,35,63,501/- is included in the valuation of closing stock by the Appellant, which means a sum of Rs. 3,35,63,501/- out or Rs. 4,52,15,499/-is not claimed by the appellant u/s. 36(1)(iii) of the I.T. Act. 7 2. Further, the Hon'ble ITAT. "D" Bench, Mumbai vide dated 22.07.2016 in Appellant's own case for A.Y 2010-11 on similar facts, while disposing the appeal against order u/s 263, held that the advances given to M/s Ken Construction Ltd., M/s Gami Properties P. Ltd. and other parties were for commercial expediencies and the order passed by the Ld. Pr. CIT for disallowing the proportionate interest is not sustainable in law. 7.3 While going through the balance sheet and other details filed by the Appellant it is observed that the Appellant is having own capital of Rs 5,58,87,082/- and interest free borrowing and the terms loans on which the interest was paid were raised much before the interest free loans and advances of Rs. 14,32,59,540/- were granted.” The AO has not brought any fact on record which establishes the link between the terms loans on which interest paid were raised and used for giving interest free loans or advances. Out of the interest free loans or advances, major parties are covered and allowed by the Hon’ble ITAT (supra) by holding that the same are given under commercial expediency. Further, the Appellant has already included as sum of Rs. 3,35,63,501/- in closing stock and there is no deduction claimed u/s. 36(1)(iii) of the Act to this extent by the Appellant.

We have heard the rival submissions and considered the order of the AO, findings of the ld. CIT(A), submissions of the appellant before both the stages and particularly the Paper Book filed. The chronology of loans given to sister concerns vis a vis utilization of secured loans and its consequent treatment in the figure of closing stock of the appellant, substantiates the argument of the appellant.

We have carefully gone through the order of the ITAT mentioned (supra) in assessee’s own case vide page no. 37 to 49 of the Paper Book. Para 10, 11 & 12 specifically dealt with the issue under consideration. We do not find any infirmity in the order of the ld. CIT(A) and ITAT’s order mentioned (supra). Hence, ground no.1 & 2 of the appeal taken by Revenue are not sustainable in the given factual position.

In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 7th day of July, 2022.