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Income Tax Appellate Tribunal, HYDERABAD BENCH ‘A, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ‘A', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA Nos. 476 and 484/Hyd/2018 Assessment Years: 2013-14 & 2014-15 Compagnie Indo vs. Dy. Commissioner of Franchise De Commerce Income-tax, Circle – 1(2), Pvt. Ltd., Secunderabad. Hyd. PAN – AAACC 8364L Appellant Respondent Assessee by: Shri Brijesh Mathur Revenue by: Shri K.Mohan Reddy Date of hearing: 16/01/2019 Date of pronouncement: 13/03/2019 O R D E R PER S. RIFAUR RAHMAN, AM:
Both these appeals filed by the assessee are directed against the orders of CIT(A) – 1, Hyderabad, both dated, 07/11/2017 for AYs 2013-14 and 2014-15. As identical issues are involved in both these appeals, the same were clubbed and heard together and therefore, a common order is passed for the sake of convenience.
ITA No. 476/Hyd/18 for AY 2013-154
Brief facts of the case are that the Assessee company, engaged in the business of trading in chemicals and fertilizers, e filed its return of income for the AY 2013-14 on 30/11/2013 admitting a total income of Rs. 8,21,52,980/- under normal provisions and book profits of Rs. 6,89,91,360/- under the provisions of section 115JB of the Income-tax Act, 1961 (in
2 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , short ‘the Act’). The AO completed the assessment u/s 143(3) on 11/3/2016 determining total income of the assessee at Rs. 8,74,79,404/-, by making the following additions: 1. Disallowance of Rs. 11,51,015/- out of foreign travel 2. Disallowance of proportionate interest on interest free Advances u/s 36(1)(iii) of Rs. 41,75,409/-. 3. When the assessee preferred before the CIT(A), the CIT(A) confirmed the additions made by the AO.
Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal: 1. Whether the Order of the learned Commissioner of Income Tax (Appeals-1), Hyderabad (CIT-A), in confirming the action of the AD of disallowing Rs.11,51,015/- out of foreign traveI expenses, being the expense incurred on Travel for attending the marriage of the daughter of Managing Director of one of the suppliers and towards gift for her marriage, as not directly related to the business activity of the company, is bad in law and on the facts of the case. 2. Whether the learned Commissioner of Income Tax (Appeal-1), Hyderabad has erred in ignoring the application dated 07/11/2017 filed with her for acceptance of additional evidence under Rule 46A and for seeking a remand report from the AD. 3. a. Whether the learned CIT(A) has erred in confirming the action of the AO in disallowing Rs. 4l,75,409/-, out of total interest on buyer's credit and hedging costs of Rs.39,94,70,241/- lRsAO,35,44,529 (-) RsAO,74,288 - other than operating income] as attributable to borrowings used to advance interest free loans to sister concerns, u/s 36(1)(iii) of the Act. b. Whether in doing so, she has erred in confirming the action of the AO in concluding that the assessee has given advances (Net of borrowings) of Rs.5,66,23,416/- to its related parties, free of interest, for non-business purposes out of interest bearing borrowings. c. Whether in doing so, she has erred in ignoring the fact that not only the entire borrowings of Rs.541,72,81,996/- outstanding as on 31/03/2013, but also some other funds available with it, were kept in
3 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , interest earning deposit accounts which amounted to Rs.547,82,33,S39/-as on 31/03/2013. d. Whether in doing so, she has erred in concluding, when the entire short term borrowings of Rs.S41,72,81,996/- as on 31/03/2013 were kept in short term deposits of Rs.547,82,33,S39/- as on that date and when the transaction of borrowings from the Banks and keeping them in short term deposits with Banks resulted in net interest income of Rs.4,19,54,006/-, that interest bearing funds have been used for giving non-interest bearing funds to its Associated Enterprises. e. Whether in doing so, she has erred in concluding that if the appellant company had funds at their disposal, there would have been no need for requirements of loans completely disregarding the facts of the case as brought before her. f. Whether in doing so, she has erred in mixing up the figures of Net Interest earned of RSA,19,54,006/- [Rs44,54,98,S35/- being gross interest earned (_) Rs.40,35,44,529/- being interest on borrowings and net hedging Gain/Loss] from the Bank with the amount of Rs.7,02,17,155/- given as interest free loans to sister concerns and in concluding that there is a shortfall in the source of funds to fund such loans.
g. Whether in doing so, she has erred in not accepting the plea of the appellant that Interest free loans received, Reserve & Surplus and the amount of share capital with the company were sufficient to fund Interest Free loans to sister concerns. h. Whether in doing so, she has erred in ignoring the plea of the appellant that disallowance u/s 36(1)(iii) was permissible for interest costs incurred and that no disallowance should have been made from hedging cost of Rs.27,89,75,522/- included in Rs. 40,35,44,529/- adopted by the AO. i. Whether in doing so, she has erred in concluding that the appellant had not brought out the business reasons for giving interest free loans to sister concerns. 4. That the order of the learned CIT(A) is bad in law and on the facts of the case.
4 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , 5. The Appellant craves leave to add, amend or alter the Grounds of Appeal, before or at the time of hearing.”
Ground Nos. 5 & 6 are general in nature and ground No. 2 was not pressed by the ld. AR at the time of hearing, therefore, the same is dismissed as not pressed.
As regards ground No. 1 regarding addition of Rs. 11,51,015/- out of foreign travel expenses, during the assessment proceedings, the Assessing Officer noticed that the assessee company has debited an of Rs.11,51,015/- on account of travel for marriage of Managing Director’s daughter of one of the supplier. Since this expenditure was not related to the business, AO asked the assessee to show cause as to why this claim should not be disallowed u/s 37(1) of the Act. In response, the assessee vide its reply dated 29/02/2016 submitted that the dollar card of 20,000 was used on the occasion of marriage of daughter of MD of one of the supplier. The assessee submitted that this amount was towards the travel expenses incurred for attending this occasion and towards gift for her marriage. Rejecting the submissions of the assessee, the AO disallowed the said amount of Rs. 11,51,015/- by holding that the expenditure was not directly related to the business activity of the assessee.
Assessee preferred an appeal before the CIT(A) and reiterated the submissions as made before the AO.
The CIT(A) confirmed the addition made by the AO by observing that the expenses incurred by the assessee was towards attending the marriage occasion which is of personal in nature and hence, not related to business of the assessee.
5 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , 9. Before us, ld. AR submitted that the attending of Marriage in the family of the supplier and the occasion in which the director would meet the other suppliers and other businessmen. This will promote the interest of the business and it is meant to spend for the purpose of business only.
Ld. DR opposed the submissions of the ld. AR.
Considered the rival submissions and perused the material on record. The director has attended the marriage of the daughter of the supplier. The extension of courtesy on the occasion like this will increase the supplier relationship and may benefit the business in the future. It is difficult to establish whether the whole expenditure is exclusively for the purpose of business. Therefore, we direct the AO to disallow 50% of the expenditure as personal expenditure. Accordingly, ground raised by the assessee is partly allowed.
As regards ground No. 3 (a to i) regarding disallowance of proportionate interest on free advances u/s 36(1)(iii) of Rs. 41,75,409/-, during the course of assessment proceedings, the AO noted that the assessee had given interest free advances of Rs. 7,02,17,155/- to its sister concerns. However, the assessee also took interest bearing loan of Rs. 381,15,76,206/-, on which it has paid an interest of Rs.14,45,78,832/- during the year under consideration. The Assessing officer asked the assessee to show cause as to why the proportionate interest should not be disallowed on these interest free advances in the light of decisions of higher courts in CIT Vs. Abhishek Industries Ltd., (P&H HC) Vs. Baby & Co. (Kerala HC). Since the assessee failed to give any convincing explanation, the AO computed the disallowance of proportionate interest at Rs. 41,75,409/-, as under:
6 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , Amount of interest free advances Given to sister concerns Rs. 7,02,17,155/- Amount of loan taken from Sister concerns Rs. 1,35,93,738/- A) Net advances given interest free Rs. 5,66,23,416/- B) Interest Bearing loans Rs. 5,41,72,81,996/- C) Interest paid on the loans Rs. 39,94,70,241/- (Total interest as per 26AS – interest offered to tax) Interest disallowed A/B X C = 41,75,406/-
Before the CIT(A), the assessee, inter-alia, submitted that no part of the borrowings of Rs. 541,72,81,996/- were used to give interest free advances to sister concerns, since all the funds, other than long term fund, were kept in short term deposits which resulted in (Net) interest income of Rs. 4,19,54,006/-. Further, it was submitted that the gross interest income earned at Rs. 44,54,98,535/- was more than the borrowing costs taken at Rs. 39,94,70,241/-.
13.1 It was further submitted that out of the total interest earned on fixed deposits, after deducting the cost of hedging buyer's credit repayment and interest payable on buyers credit, the net income is shown under interest income. In view of the above, the assessee submitted that disallowance u/s.36(1)(iii) was not warranted.
After considering the submissions of the assessee, the CIT(A) confirmed the addition made by AO by observing as under: “6.3 The submissions of the appellant have been carefully considered. The only contention of the appellant is that the company had funds at the disposal to give interest free loans to sister concerns. It is pertinent to mention that the appellant has taken loans, details given below:
7 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , Secured Loans : Rs. 13,24,116/- Unsecured Loans : Rs. 15,60,000/- Short Term Borrowings : Rs.543,08,75,734/- If the appellant company had funds at their disposal, they would have been no need for requirement loans. Secondly, the contention of the appellant is that it has received interest from buyers credits and to tune of Rs. 40,35,441529/- leaving interest income of Rs. 4,19,54,006/- which is from current maturities in bank and Rs. 7,02,17,155/- has been free loans to sister concerns. Even if the of the is accepted there is a shortfall in the source of funds. Thirdly, appellant has given a theoretical calculation regarding using reserve and surplus and share capital account to fund interest free loans to sister concerns. The appellant has not submitted how these funds were given to or taken from. Appellant did not submit details from whom these interest free loans were taken and given. No bank account or confirmation of recipients of funds were submitted. Also, it is not clear as to whether these interest free loans were returned or not. The appellant has not been able to show the nexus between the using of funds i.e., reserve and share capital to give out interest free loans for sister concerns. Lastly, appellant has not brought out the business reasons for giving interest free loans to sister concerns. In absence of any reason, it is to be taken as "Personal". The Hon'ble ITAT in the appellant's case for the AY 201213 for the same issue was remitted back to the Assessing Officer for verification. In light of the above, the appellant has not been able to prove its contention, the nexus between the available funds and the interest free loans to sister concerns has not been brought out, before me. The only issue raised by the appellant is that the funds received as Interest has been the source of loans. However, this contention was also not brought out by the appellant' with evidence. In this background, I find the stand of the Assessing Officer is justified. The addition on this issue is upheld.”
Considered the rival submissions and perused the material on record. We find that similar issue came up for consideration before the coordinate bench of this Tribunal in
8 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. ,
assessee’s own case for AY 2012-13 in ITA No. 561/Hyd/2017 vide order dated 15/11/2017 wherein the coordinate bench held as under: “9. Considered the rival submissions and perused material facts on record. No doubt, the submissions of the ld. AR of the assessee is factually correct and assessee has separate treasury department, which mandates collection from receivables and payment to its creditors by having facilities with the Bank. The total interest cost to the assessee as noted by AO is Rs. 14,45,78,832/-. However, in the financial statement, assessee has declared interest income of Rs. 1,81,16,931/- and claimed financial charges, which includes borrowing cost to the extent of Rs. 4,70,99,117/-. Assessee has declared net interest income in the financial statement after setting off of the interest expenditure. Since the assessee has agreed for the proportionate disallowance of interest, AO has not gone into the verification of the whole transaction. For the sake of clarity and justice, we find it appropriate to remit this issue back to the file of the AO with a direction to verify the treasury transactions vis-à-vis with other borrowings in the business and verify/decide the issue afresh only on the income and expenditure of treasury transactions and cost of borrowings. In case, AO finds that all the interest cost relate to only the treasury transactions, then, AO cannot disallow any proportionate interest. However, at the same time, if there is any interest cost to the business, AO is justified in disallowing proportionate interest cost. Needless to say, proper opportunity of being heard to the assessee may be provided in the matter.” As the issue in this AY is materially identical to that of AY 2012-13, following the decision therein, we remit this issue to the file of AO to decide the same following the direction in AY 2012-13. This ground is allowed for statistical purposes.
ITA No. 484/Hyd/2018 for AY 2014-15
In this appeal, the assessee has raised 5 grounds of appeal, out of which ground No.1 was not pressed and ground Nos. 4 & 5 are general in nature.
Ground No.2 ( a to m) is similar to ground No.3 (a to i) in ITA No. 476/Hyd/2018, which is regarding disallowance of proportionate interest on free advances u/s 36(1)(iii) of Rs.
9 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , 66,12,33,079/-. Following the conclusions drawn in ITA No. 476/Hyd/2018 (supra), we remit this issue to the file of AO to decide the same following the direction in AY 2012-13. This ground is allowed for statistical purposes.
As regards ground No. 3 (1 to e) regarding addition of Rs. 14,25,354/- as long term capital gains on sale of rights in BPTP Flat in Faridabad and Haryana, during the assessment proceedings, the Assessing Officer noticed that the assessee has sold a Flat bearing No. PB-12A-SF, BPTP, Faridabad comprising of 876 sft built-up area, through an unregistered agreement of sale on 03.12.2013, for a sale consideration of Rs.16,95,507/-. The assessee has claimed capital loss of RS.3,83,169/- after deducting indexed cost of acquisition of Rs.20,78,676/- from the sale consideration. As per the Sub Registrar, Faridabad the Fair Market Value as per the government records as on 03.12.2016 was Rs. 4,000/- per sft. As per the SRO value, the Fair Market Value of the flat sold works out to Rs.35,04,000/-(876 X 4000). The Assessing Officer asked the assessee as to why the FMV as per SRO records should not be adopted for computing capital gains. In response, the assessee submitted that the flat was sold before the completion of the project and therefore, the sale consideration was less. However, the assessee did not submit any documentary evidence like agreement of sale entered into with the builder to know the terms & conditions of the purchase and also the status of the flat at the time of the sale. Furthermore, nowhere in the sale agreement, any details with reference to the stage of completion of the flat, etc, were mentioned. Hence, in the absence of evidence, the AO invoked the provisions of section 50C of the IT Act and made an addition of Rs. 14,25,354/-.
10 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. , 19. When the assessee preferred the appeal before the CIT(A), ld. CIT(A) upheld the addition made by observing that in absence of sale deed and the name of the party to whom and how it was sold, etc., and also rejected the alternative submission of the assessee regarding the cost of sale.
Before us, ld. AR brought additional evidence to support the claim made before the AO and submitted that the registered document will clarify the stand of the assessee.
Ld. DR, on the other hand submitted that assessee sold the unfinished flat and section 50C is very much applicable.
Considered the rival submissions and perused the material on record. Before us, the assessee has submitted the copy of buyer agreement for flat E40-06-SF, and the copies of receipt of payment schedule. These documents were not submitted before the tax authorities and these were not verified by any authorities. Therefore, we remit these documents to the file of AO to verify and quantify the capital gains as per law after providing reasonable opportunity of being heard to the assessee. Accordingly, this ground is allowed for statistical purposes.
In the result, appeal in ITA No. 476/Hyd/2018 is partly allowed and appeal in ITA No. 484/Hyd/2018 is allowed for statistical purposes.
Pronounced in the open court on 13th March, 2019.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 13th March, 2019.
11 I.T.A. Nos. 476 & 484/Hyd/18 Comp agn ie In do F ra nch ise De C ommerc e Pvt . Lt d. ,
kv Copy forwarded to: 1. Compagnie Indo Franchise De Commerce Pvt. Ltd., 66, Rashtrapathi Road, Secunderabad – 500 003. 2. DCIT, Circle – 1(2), B-Block, 7th Floor, IT Towers, Hyderabad. 3. CIT(A) - 1, Hyderabad 4. Pr. CIT – 1, Hyderabad 5. The DR, ITAT, Hyderabad 6. Guard File