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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLEDr. Annie Besant Road Shri Navneet Chaudhary Shri Ram Krishna Kedia
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited v. DCIT – Circle-10(2)(2) 301, Level-3, Ceejay House Room No. 209, 2nd Floor Shiv Sagar Estate, F-Block Aayakar Bhavan, M.K. Road Dr. Annie Besant Road Mumbai - 400020 Worli, Mumbai – 400018 PAN: AAACM3508J (Appellant) (Respondent) Assessee by : Shri Navneet Chaudhary Department by : Shri Ram Krishna Kedia
Date of Hearing : 31.05.2022 Date of Pronouncement : 28.06.2022
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals)-17, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 13.11.2017 for the A.Y. 2013-14.
2 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited 2. Brief facts of the case relating to the Ground No. 1 are assessee electronically filed its return of income for A.Y 2013-14 on 30.09.2013 declaring loss of ₹.3,47,66,085. The return of income was processed under section 143(1) of the Act. The case was selected for scrutiny under CASS and notice u/s. 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee. In response AR of the assessee attended and submitted the information as called for.
The assessee company is engaged in the business of providing financial services. The assessee has submitted that during the year under consideration, no such services were provided by it. However, the assessee has taken secured loans from various financial institutions which were given as unsecured loans to various parties. The difference between interest earned and interest paid was claimed as business loss. During the assessment proceedings Assessing Officer observed that assessee has taken secured loans form the following parties: -
Loan taken Sr. Interest Rate of Name of the Party during the No. paid (Rs-) Interest year (Rs.) 1 SICOM Limited 45,00,00,000 5,11,65,412 16.00% Barclays Investment and Loan 2 15,00,00,000 2,07,74,999 13.85% (India) Ltd. - Opening Balance Bright Brothers Ltd. - Opening 3 3,00,00,000 22,91,919 16,00% Balance
3 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited Loan taken Sr. Interest Rate of Name of the Party during the No. paid (Rs-) Interest year (Rs.) India Infoline Investment 4 15,00,00,000 2,67,23,624 18.00% Services Ltd. Opening Balance Total 78,00,00,000 10,09,55,954
Assessing Officer further observed that assessee has given unsecured loans to the following parties: - Loan taken Sr. interest Rate of Name of the Party during the NO. paid (Rs.) Interest year (Rs.) 1. Mega Management Services Pvt. 52,78,85,492 6,82,92,321 12% Ltd. Shree Mahavir Associates & De 2 viand & Housing Limited - 1,00,00,000 12,00,000 12% Opening Balance Total 53,78,85,492 6,94,92,321
Assessing Officer observed from the financial statements as under: - 4.3 It can be noted from the above tabular data that the assessee has taken secured loans from various financial institutions at an average rate of interest of 15.97% while the average rate of interest on unsecured loans given comes to 12.00%. As such, there is a difference of 3.97% in the rate of interest for interest paid on secured loans and the rate of interest charged on unsecured loans given. In this regard, vide order sheet noting dated 14.10.2015, the assessee was asked to explain why proportionate interest disallowance should not be made. A show cause notice dated 21.10.2015 was also issued to the assessee giving one more opportunity to the assessee to show cause as to why proportionate disallowance of the interest u/s.36(1)(iii) should not be made in view of the fact that the assessee had taken unsecured loans from various concerns @13.85% to 18% and the same were forwarded to mainly to its sister concern M/s. Mega Management Services Pvt. Ltd. @12%. Relevant extract of the questionnaire is reproduced as hereunder:
4 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited "Vide order sheet entry dated, Shri Kausal Shukla, your authorised representative was asked to explain as to why proportionate disallowance of the interest u/s 36(1)(iii) should not he made in your case in view of the fact that you have taken unsecured loans from various concerns @ 13.85% to 18% and the same are forwarded to different parties @12%. You are hereby given one opportunity to establish the allowability of the claim.”
Assessee filed detailed submissions. However, after considering the detailed submissions of the assessee, Assessing Officer rejected the submissions of the assessee and proceeded to make the proportionate interest disallowance to the extent of ₹.2,55,82,026/- and determined the proportioned disallowance as under:
No. of days on Loan taken which Sr. Amount Name of the Party during the interest No. (Rs.) year (Rs.) worked out @3.97% 1 SICOM Limited. 15,00,00,000 363 59,22,370 15,00,00,000 2.16 35,24,054 15,00,00,000 186 30,34,602 2 Barclay’s Investment and Loan (India) 15,00,00,000 365 59,55,000 Ltd. - Opening Balance 3 Bright Brothers Ltd. Opening Balance 3,00,00,000 365 11,91,000 4 India Infoline Investment Services Ltd., - 15,00,00,000 365 59,55,000 Opening Balance Total 2,55,82,026
Assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee filed detailed submissions for the purpose of clarity it is reproduced below: -
5 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited "Disallowance under section 36(1)(ii) of Rs 2.55.82.026/ 1. We reiterate what is mentioned in our Appeal. 2. It is submitted before your goodself that the learned assessing officer has erred in making disallowance of proportionate interest on secured loan from non-banking financial companies ("NBFC's), since as per learned assessing officer, the rate o interest charged by these NBFC's are higher as against the rate of interest at which appellant has received the interest on unsecured loans given. In this regard, for the Sr Opening Closing Rate at Loan Taken Loan Repaid , Name of the Balance as Balance as Which During the During the Interest Paid N Lender on on Interest Year Year o 01/04/2012 31/03/2013 Paid 1 SICOM Limited 50,00,00,000/ 45,00,00,000/ 65,00,00,000/ 30,00,00,000/- 5,11,65,412/- 16,00% 2 Barclays 15,00,00,000/- NIL NIL 15,00,00.000/- 2,07,74,999/- 13.85% investment and Loan Limited 3 India Infoline 15,00,00,000/ NIL NIL 15.00.00.000/- 2,67,23,624/- 18.00% Finance Limited 4 Bright Brothers 3,00,00,000/- NIL 3,00,00,000^ NIL 22.91.919/- 16.00% Total Amount 83I00,00I000/ 45,00,00,000/- 68, 00,00,000/- 60,00,00,000/- 10,09,55,954/
Upon perusal of the aforesaid table, your goodself would notice that the company has not taken any fresh loan from the said NBFC's for the year under appeal in fact the to appearing as taken in the year is merely the renewal of old loans Further your goodself would appreciate that the loan from said NBFC's has reduced from Rs 83.00 crores Rs 60.00 crores for the year under appeal 4. Similarly, the rate at which the interest has been charged/ paid to said NBFC's a marginally increased compare to previous years, which were as per the terms of the renewed sanction letter of the said NBFC's For more clarity on the subject matter the kind perusal of your honour, we enclose herewith the copy of ledger account of said loan parties as appearing in the books of the company alongwith copy of their o sanction letter as under:- (i). Ledger Account of Sicom Limited vide page number 5 (ii). Ledger Account of Barclays Investments & Loans (india) Limdied vide page number 6 (iii). Ledger Account of India Infoline Finance Limited vide page number 7
6 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited (iv). Ledger Account of Bright Brother Limited vide page number 8 (v). Sanction Letter of Sicom Limited vide page number 9 to 26 (vi). Sanction Letter of Barclays Investments & Loans (India) Limited vide page number 27 to 29 (vii). Sanction India Infoline Finance Limited vide page number 30 to 31 (viii). Sanction Letter of Bright Brothers Limited vide page number 32 to 33 5. It is further submitted before your goodself that the interest received by the appellant company on loans given are relatively at lower rate against the interest paid on loan availed, it may be pertinent to note that loan given to Ms. Maga Management Service Private Limited and Shree Mahavir Associates & Devland Housing Private Limited are form of brought forward from previous years/pertaining to previous years, moreover t quantum of loan given to said two entities are quite high, as such, the rate of interest which interest charged to them are predetermined ie determined at the inception of a loan (copy of ledger account of aforesaid two parties as appearing in the books of company enclosed herewith vide page numbers 34 to 36).”
After considering the submissions of the assessee, Ld.CIT(A) reduced the disallowance to the extent of ₹.70,16,489/- by observing as under: - “Having considered the above and principle of business prudence and commercial expediency, I hereby restrict the disallowance of interest u/s. 36(1)(i) of the Act @ 1.1% i.e. borrowing at an average rate of 13.5% and lending at an average rate of 12.40% and the same is calculated as under: - No. of Sr. Name of the Amount days on Amount Date No. lender (Rs) which (Rs) interest
7 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited calculated ® 1.41%
1 Sicom Limited 08.04,2010 10.00 cr 385 10,78,904 2 Sicom Limited 31.08.2010 25.00 cr 213 16,04,794 3 Sicom Limited 25,11.2010 10.00 cr 127 38,27,39 4 Sicom Limited 08.11.2010 35.00 cr 144 15,18,904 Barclays Investment & 5 22.07.2010 15.00 cr 253 11,43,698 Loan (India) Ltd. 6 HFL 23.06.2010 15.00cr 282 12,74,794 Bright Brothers 7 25.03.2011 03.00cr 07 6328 limited Total 70,16,489 The AO is directed to restrict the disallowance of interest u/s 36(1)(iii) of the Act at Rs. 70,16,489. Reliance is placed on the judgment of the Hon'ble High Court of Gujarat CIT, Ahmedabad-l Vs Cornerstone Exports (P) Ltd. held that- Where action of assessee company to make advances to group companies at a lower rate of interest than interest rate at which assessee company borrowed such funds was not shown to be in any manner actuated by business expediency, disallowance of differential interest was justified. This ground of appeal is partly allowed.”
Aggrieved assessee is in appeal before us. At the time of hearing Ld. AR brought to our notice that the issue under consideration is covered in favour of the assessee in assessee’s own case in A.Y. 2011-12. Copy of the same is placed on record, the relevant order is ITA.No. 6270/Mum/2017 dated 24.04.2019.
On the other hand, Ld. DR relied on the order of the lower authorities.
8 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited 11. Considered the rival submissions and material placed on record, we observe that similar issue is already adjudicated by the Coordinate Bench in assessee’s own case for the A.Y. 2011-12, for the sake of clarity it is reproduced below: - “7. We have heard the ld DR. At the outset, it is not in dispute that the assessee had mixed funds in its kitty i.e own funds as well as borrowed funds. It is not in dispute that the assessee is engaged in financing activities. It is not in dispute that the assessee had indeed lent to various persons including sister concerns wherein interest was duly charged. Once the lending is meant in the ordinary course of financing activities of the assessee company, then charging / non-charging of interest or charging of interest at a lesser rate would not fall in the domain of the revenue. It si for the businessman to decide the same and the revenue cannot step into the shoes of the businessman in this regard. The test of commercial expediency is to be viewed from the point of view of businessman and not from the point of view of the revenue. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of CIT vs Dhanrajgiri Raja Narasingirji reported in 91 ITR 544 (SC). Once it is proved and accepted that the lending is part of business activities of the assessee company and once there is no finding recorded by the lower authorities that the borrowed funds were diverted for nonbusiness purposes, there cannot be any disallowance of interest u/s 36(1)(iii) of the Act on a proportionate basis. Accordingly, the ground no. 1 raised by the assessee is allowed.”
Respectfully following the above said decision, we allow the ground No.1 raised by the assessee.
With regard to Ground No.2, brief facts relating to the ground are, during assessment proceedings Assessing Officer observed that assessee has debited an amount of ₹.40,23,051/- on account of legal and professional fees. He observed that assessee has paid an amount of
9 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited ₹.15,00,000/- lacs to M/s. India Infoline Finance Limited and ₹.25,00,000/- to M/s. Subhuti Estates Pvt. Ltd. In order to verify the same, show cause notice dated 21.10.2015 was issued to the assessee and in response assessee submitted as under: - “3. Legal and professional expenses paid to M/s India Infoline Finance Limited to Rs.25,00,000/- and M/s. Subhuti Enterprises Pvt. Ltd. amounting to Rs. 15.00.000/- have been claimed by you as business expenses paid in lieu of arrangement of loans from various financial institutions. Since, the activity of securing loans at a higher rate and then forwarding the same at a lower rate to various parties does not have any business rationale. The commission paid for the said transactions, which have in fact been arranged mainly for the benefit of your sister concern namely, M/s Mega Management Service Private Limited as the major loans have been forwarded at discounted rate to the said concern may not be justified as a genuine business expense. In view of the same, you are requested to explain as to why these expenses aggregating to Rs 40,00,000/- should not be disallowed and added back to your total income."
Further, vide letter dated 30.11.2015 assessee submitted as under:- "It is to submit before your goodself that these expenses incurred for arranging secured loans are very incidental in relation to company's nature of business. It may be pertinent to note that for getting the funds arranged company has to approach to third party for arranging the funds to it, since, and in the finance market it is practically not possible for company to obtain the loan directly by approaching the lender without involving experts. Since these parties are having sufficient expertise in arranging the loans, as per the terms and requirement of the company, as such, company does not have any option, but to hire their services / to appoint them for getting the funds arranged to it. It is to further submit before your goodself that, at the time of appointing the third party for arranging the loan to company, the company has to enter into an agreement with these parties for arranging the loan to it and as per the terms of the agreement, company has to pay certain percentage of loan amount as per the loan sanction letter and these are conditional payments which company has to incur for getting the said loans. Without incurring
10 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited the said expenses, it is not possible to arrange / take the loan. As such, the legal and professional expenses incurred are genuine and relevant as per the nature of business of the company. In other words, based on company nature of business, it proves that these expenses are as per commercial prudency of the company based on company's business of financial services. Based on the above submission, it becomes very clear that the expenses incurred by the company of Rs.40.23,051/- on account of legal and professional fees as per the commercial prudency of the company keeping in view that company nature of business consists of financial service provider, genuine and relevant expenses. Hence, the said expense is an allowable expense." 5.3 The submissions put forth by the assessee have been considered. As discussed earlier, the secured loans have been taken by the assessee to forward them at a discounted rate to its sister concern i.c. M/s. Mega Management Services Pvt. Ltd. (MMSPL). The same do not have any business prudence or a substantial reason. Since the loans have been used for the benefit of the sister concern of the assessee i.e. MMSPL and the assessee has only acted as a conduit, the expenses so incurred by the assessee on arranging loans cannot be said to be incurred for the purpose of the business of the assessee. The same is substantiated by the
After considering detailed submissions Assessing Officer observed that assessee has received secured loans from M/s. India Infoline Finance Limited and were forwarded the same at a discounted rate to its sister concerns. According to him the same does not have any business prudence or substantial reason. The loans were used for the benefit of the sister concerns and the assessee has only acted as a conduit, the expenses so incurred by the assessee on arranging loans cannot be said to be incurred for the purpose of business. In view of the above observation he disallowed the same.
11 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited 16. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and made similar submissions which were submitted before the Assessing Officer. After considering the submissions of the assessee, Ld.CIT(A) dismissed the ground raised by the assessee with the following observations: - “I have considered the facts of the case and appellant's submission. The disallowance made by the AO is on a specific issue le claim of arranging secured loan at a higher rate and advancing the same at a lower rate to sinter concerns. I have also gone through the statement of fact filed along with the appeal. Here also the same general and vague justification has been given along with a claim that copy of ledger account and invoices raised by the parties towards such legal and professional fees have been filed before the AO However, no such copy of ledger account or copy of invoices have been filed during the appellate proceeding. The following important facts emerges, related to this claim. I. No evidence of whatsoever nature may be, have been filed for actual rendition of services. II. No copy of bills/invoices has been filed to justify the claim. III. No copy of agreement of such legal and professional fee have been filed. The nature of services stated to have been rendered (without evidence) are mentioned in a very general and vague terms. IV. No copy of resolution passed by the Board of Directors of the company for such payment has been filed. V. No evidence of rates for such legal and professional charges have been paid, has been filed. In other words, no basis for payment in round figure has been submitted. VI. No evidence of request made to alleged parties for rendering of services in arranging loans have been filed. VII. No evidence has been brought on record by the appellant company to show that secured loan was procured due to active involvement of the alleged parties.
12 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited VIII. No evidence has been filed to show that the alleged parties have made efforts in procurement of secured loan by the company. IX. No confirmation from the NBFC'S, which has extended loan to the appellant company, has been filed. X. Above all, nature of such payments are within the purview of tax deduction at source. No evidence has been filed, showing that such were subjected to tax deduction at source. Thus, there is nothing before me to establish or indicate that the services has actually been rendered by the alleged company for which such huge amount that too in round figure been claimed. Thus, I do not find justification to deviate from the finding of the Assessing Officer. The disallowance of Rs 40,00,000/- made by the AO is therefore confirmed grounds appeal this on this issue is dismissed.”
Aggrieved with the above order, assessee is in appeal before us and at the time of hearing Ld. AR submitted that assessee has incurred the legal and professional fees to secure the various loans from the parties. He brought to our Page No. 41 of the Paper Book which is sanction letter from M/s. India Infoline Finance Limited. He submitted that the payment of ₹.15 lacs is towards processing of the above said loan. Therefore, the processing charges are allowable expenditure. Further, he submitted that similarly professional fees were paid to M/s. Subhuti Estates Pvt. Ltd., estate enterprises Pvt. Ltd., for arranging the loans only. Therefore, this expenditure is also allowable expenditure.
13 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited 18. On the other hand, Ld.DR submitted that assessee has taken loan of ₹.73 crores and the same was diverted to its subsidiaries to the extent of ₹.58 Crores. He submitted that the loans were exclusively arranged for the purpose of lending to sister concerns, therefore, these expenditures are relating to the above said loan. Therefore, these are not expenditure incurred for the purpose of the business of the assessee, therefore this should not be allowed as business expenditure.
Considered the rival submissions and material placed on record, we observe from the submissions of the Ld. AR that assessee has incurred ₹.15 lacs towards the processing charges paid to M/s.India Infoline Finance Limited and assessee has brought on record a copy of the sanction letter to support its submissions. After considering the sanction letter, we are of the view that it is fact on record that assessee has received secured loans and we already adjudicated that the assessee has diverted the funds to its sister concerns and it is held that the lending of the loan is part of the assessee’s business. Similarly, the expenditure incurred by the assessee towards processing fees is also allowable expenditure. Therefore, this is allowable expenditure. Accordingly, we
14 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited direct the Assessing Officer to allow the claim of ₹.15 lacs paid to M/s. India Infoline Finance Limited.
With regard to payment of ₹.25 lacs to M/s. Subhuti Estates Pvt. Ltd., assessee has submitted that copy of legal fees and professions paid and it was submitted that this is incurred for the purpose of arranging the loans. Before us no other document were submitted in support of genuineness of claim of the above expenditure, except the submission that these are incurred for the purpose of arranging loans. In the absence of any other supporting documents, we are not inclined to allow this expenditure. Accordingly, ground raised by the assessee is partly allowed.
In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 28th June, 2022.
Sd/- Sd/- (ABY T. VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 28.06.2022 Giridhar, Sr.PS
15 ITA NO. 633/MUM/2018 (A.Y. 2013-14) M/s. Mega Custodial Services Limited Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.
//True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum