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Income Tax Appellate Tribunal, DELHI BENCHES “SMC-1”: DELHI
Before: SHRI BHAVNESH SAINI
This appeal by assessee has been directed against the order of Ld. CIT(Appeals)-9, New Delhi dated 09.08.2019 for AY 2016-17, challenging the addition of Rs. 23,77,833/- made by AO u/s 37(1) of the IT Act by disallowing interest provided on loan and that the Ld. CIT(A) has exceeded his jurisdiction even in giving directions u/s 150 of the IT Act. 2. I have heard Ld. Representatives of both the parties and perused the material on record.
2 ITA.No 8224/Del./2019
Briefly the facts of the case are that the assessee company filed return of income declaring zero income. The case was selected for scrutiny assessment on many reasons including, whether deduction claimed on account of interest expenses is admissible? The AO asked for the details from the assessee with regard to unsecured loans, expenses etc. which were provided by the assessee. The AO noticed that during the year under consideration the assessee company was engaged in Real Estate business (i.e. sale and purchase of property/under construction property), property developers, investment business, civil construction and real estate agent business investment. During the year under consideration, assessee company has shown interest expenses of Rs. 1,75,267/- and Rs. 22,02,566/- paid to M/s Rajnigandha Management Private Limited and M/s Ranisati Management Private Limited respectively on the respective outstanding unsecured loans of Rs. 1.57 lakhs and Rs. 2.50 crore for AY 2016-17 under appeal. The assessee was asked to file complete details of the outstanding loans along with documentary evidences of loan agreement/sanction of loan along with past business history and any other relevant evidence to prove genuineness of the interest expenses shown to have been paid to these entities in assessment year under appeal. The assessee submitted ledger account of both these loaners along with their addresses. The assessee company
3 ITA.No 8224/Del./2019 explained that it has availed loans on the mutual understanding of interest rate prevailing in the market with some personal relation with the Director of the company and it has utilized part of the borrowed funds for investment in shares of M/s Om Shubham Housing and Construction Company Pvt. Ltd., a subsidiary company of M/s Pivotal Infrastructure Pvt. Ltd. with whom the assessee company has done the regular and continuous business activity during the year. However, no documentary evidence was filed with regard to sanction of the loan or showing terms and condition of the loan. The AO noticed from the detail submitted on record that assessee had received Rs. 25 lakhs on 24.06.2013 from M/s Rajnigandha Management Pvt. Ltd. and thereafter, credited the interest amounts annually till 02.12.2015, however, no actual bank payment has been made on the loan. Similarly, it was also noticed that the assessee company received different amounts, amounting to total Rs. 2.50 crores from M/s Ranisati Management Pvt. Ltd. since 17.10.2012 and thereafter, credited the interest amounts annually till 29.03.2016, however, no actual bank payment is made by it on the outstanding loan during this period. The assessee filed ITR and acknowledgment of the loaner from where AO noticed that both these companies are assessed to tax and have shown income. The AO in order to verify the genuineness and creditworthiness of the unsecured loan and transactions taken
4 ITA.No 8224/Del./2019 by the assessee company from these two entities issued notice u/s 133(6) of the Act but no reply has been received. The AO further noted that in assessment year under appeal no unsecured loan was received by the assessee from these two parties to whom the interest has been paid. The assessee further explained that loan amount received from these two parties have been utilized for investment in shares of M/s Om Shubham Housing and Construction Company Pvt. Ltd. however, no documentary evidences were filed. The AO issued show cause notice as to why the interest expenses of Rs. 23,77,833/- be not disallowed u/s 37(1) of the IT Act.
The assessee submitted the detailed reply which is reproduced in the assessment order in which the assessee reiterated the same facts that assessee produced all the ledger account of both the parties along with their ITR and that assessee received loans in earlier year in which interest is also paid in earlier year. The assessee made investment of the borrowed funds in shares of M/s Om Shubham Housing and Construction Company Pvt. Ltd. which is a subsidiary company of M/s Pivotal Infrastructure Pvt. Ltd. with whom assessee has a business activity. The investments made by assessee for business purpose have provided more business to the assessee and financial status of the assessee have enhanced. It was submitted that assessee is following mercantile system of accounting, therefore, even if actual
5 ITA.No 8224/Del./2019 interest is paid or not is not relevant. The assessee also requested that in case both the parties have not responded to the notices u/s 133(6) of the IT Act, summons u/s 131 of the Act may be issued against these two parties for their production and assessee may be given opportunity to cross- examine the directions to these companies.
The AO, however, did not accept the contention of the assessee because the parties did not make any compliance to the notice u/s 133(6) and further it was noted that utilization of the funds borrowed from these two parties is secondary issue because the assessee shall have to prove the genuineness of the unsecured loans. The AO also noted that assessee did not prove the terms of the loan through documentary evidence because only verbal agreement was claimed for loan and payment of the interest. The AO also noted that both the above companies are assessed to tax and the record also shows that the assessee company though have filed return of income for earlier year but it is not assessed in scrutiny u/s 143(3) of the IT Act for preceding financial years 2012-13 & 2013-14, therefore, assessee failed to establish genuine transaction of receiving loans, therefore, AO applying provisions of section 37(1) of the IT Act disallowed the interest payment of Rs. 23,77,833/-.
The assessee challenged the addition before Ld. CIT(A). The assessee reiterated the same submissions before Ld.
6 ITA.No 8224/Del./2019 CIT(A). It was also explained that assessee has received loans for business purposes which were utilized for business purpose. The article clause of the assessee company also shows that it may lend the advance money out of own surplus fund to any other person upon such terms and condition as the company may think fit. As per the article clause of the company, the lender company is authorized to lend any advance money without any security and own terms and condition deemed fit to utilize its surplus fund. Assessee also explained that loans were received through banking channel and are not related to assessment year under appeal. The Ld. CIT(A), however, did not accept the contention of the assessee because assessee failed to establish the identity, creditworthiness and genuineness of the transaction with regard to these loans and, accordingly, dismissed the appeal of the assessee. Ld. CIT(A) also directed the AO u/s 150 of the Act to take necessary remedial action for obtaining the loans from the above two parties.
Ld. Counsel for assessee reiterated the submissions made before authorities below. He has submitted that admittedly the loans were taken in earlier years and assessee has also paid interest in earlier year which have not been disallowed by the authorities below. Loans were taken through banking channel in earlier years. He has referred to ledger account, loan account and confirmations filed by both
7 ITA.No 8224/Del./2019 the parties for taking and giving loan in earlier years. Both the loaner companies are assessed to tax and admittedly loan is used for business purposes, therefore, provisions of section 36(1)(iii) clearly apply in case of the assessee. He has submitted that assessee is following mercantile system of accounting and since interest is paid in assessment year under appeal also for business purposes, therefore, AO should not have applied provisions of section 37(1) of the IT Act which is a general section. He has submitted that in view of the above, since no appeal of assessee was pending before Ld. CIT(A) for preceding assessment years in which loan was taken, there was no need for the Ld. CIT(A) to issue any direction to the AO for taking any remedial action in the matter. In support of the contention, he has relied upon the order of ITAT ‘Indore Bench’ in the group cases of ACIT Vs. Mukesh Sharma etc. IT(SS)A No. 88/Indore/2013 dated 04.06.2019 in which it was held that the Ld. CIT(A) has exceeded jurisdiction in giving direction to the AO to reopen the assessment for other years i.e. 2010-11 which is not within the powers of the Ld. CIT(A) as he was dealing with the appeals for AY 2009-10 only, therefore, there was no need to issue any direction in the matter.
On the other hand, Ld. DR relied upon the orders of the authorities below and submitted that addresses of the loaner were not correct and they have not replied to the notice u/s 8 ITA.No 8224/Del./2019 133(6) of the IT Act. No actual interest has been paid, therefore, authorities below were justified in disallowing the interest claimed by assessee.
I have considered the rival submission and perused the material on record. It is not in dispute that assessee has taken loan from both the above loaner company in preceding financial years 2012-13 and 2013-14. The assessee also paid interest in preceding assessment years which have not been disputed by the authorities below. The assessee on the outstanding unsecured loans coming up from the preceding assessment year has also paid interest on the same outstanding loans in assessment year under appeal i.e. AY 2016-17. The AO did not accept explanation of the assessee because in earlier years no scrutiny assessments have been made u/s 143(3) of the IT Act. But it is a fact that impugned loan amounts were taken in earlier years on which interest is also paid in earlier years. The assessee is following mercantile system of accounting. Therefore, whether assessee actually paid interest to the loaner company or not is not relevant. Such a treatment is permissible under mercantile system of accounting regularly followed by assessee. Therefore, there is no question to consider genuineness of the loan outstanding in assessment year under appeal coming up from the earlier years in assessment year under appeal. The Hon’ble
9 ITA.No 8224/Del./2019 Karnataka High Court in the case of CIT vs. Sri Dev Enterprises 192 ITR 165 considered the following question: - “Whether, on the facts and in the circumstances of the case, the Income tax Appellate Tribunal is right in law in holding that since no additions have been made in earlier years, the opening debit balance cannot be considered during the current year and that the enquiry has to be limited to the increase in the current year only?” The findings of the Hon’ble High Court are as under: - “We are in agreement with the view expressed by the Appellate Tribunal. The status of the amount outstanding from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee’s claims for deduction were allowed in respect of the sums advanced during those years ; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years’ assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so 10 ITA.No 8224/Del./2019 that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot subsequently be held by it to have become bad prior to that year. Sri K.R. Prasad, Ld. Counsel for the assessee, referred to a decision of this court in Bit Tul (P) Ltd. Vs. CIT (ITRC 141 of 1977 dated 29.07.1980) wherein it was held that there should be material to justify the conclusion that any borrowed money by the assessee in a year to which interest had been paid had been diverted for non business purpose. For the purpose of this reference, it is unnecessary to apply the said principle. Accordingly, we answer the question referred to us in the affirmative and against the Revenue. Answered accordingly.”
The above facts when considered in the light of the judgment in the case of Sri Dev Enterprises (supra) it is clear that assessee received loan in earlier years on which interest is also paid which have not been disputed by the Income tax authorities, therefore, Income tax authorities cannot depart from the fact that assessee received loan in earlier years and as such, on outstanding loan amount, no disallowance of interest could be made. The Income tax authorities shall have to follow rule of consistency and definiteness of approach in dealing with the matter. When loans have not been disputed as loan genuine in earlier year, same could not be considered as bad loan in assessment year under appeal in which the 11 ITA.No 8224/Del./2019 loan was merely coming up as outstanding from the previous years. It is also not disputed that the borrowed funds have been used by the assessee for making investment in shares of M/s Om Shubham Housing and Construction Company Pvt. Ltd. for business purposes. Section 36(1)(iii) of the IT Act provides for the deduction, when the amount of interest is paid in respect of capital borrowed for the purpose of business or profession. In the present case, assessee company borrowed funds from these two companies in earlier years and invested in shares of other company for business purposes, therefore, provisions of section 36(1)(iii) are satisfied in the present case. The authorities below have however, applied general provisions of section 37(1) of the IT Act for the purpose of making disallowance as against specific provision provided for deduction of interest u/s 36(1)(iii) of the IT Act, therefore, the entire approach of the authorities below is wholly unjustified for the purpose of disallowing the interest on irrelevant consideration. The assessee is not required to prove genuineness of the outstanding balance of the loans coming up from the earlier years. Therefore, there was no justification for the authorities below to disallow the interest. It may also be noted here that even if the authorities below on wrong premise proceeded to examine genuineness of the outstanding loans coming up from the earlier years, the AO shall have to issue summon u/s 131 of the IT Act as requested by the 12 ITA.No 8224/Del./2019 assessee company for the purpose of examining the truth in the matter but the AO did not issue summon u/s 131 of the IT Act for summoning of the Directors of the loaner company, therefore, no fault could be found with the explanation of the assessee. In view of the above discussion, and particularly when outstanding loan was coming up from the earlier year, there was no justification for the authorities below to disallow interest in assessment year under appeal considering loans as non-genuine.
In view of the above, I set aside the orders of the authorities below and delete the entire addition of Rs. 23,77,833/-. I also set aside the order of the Ld. CIT(A) in giving direction to the AO u/s 150 of the IT Act for taking remedial action in earlier years.
In view of the above, the appeal of assessee is allowed. Order pronounced in the open Court on 14.01.2021.