FIRST OVERSEAS CAPITAL LTD,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX(1)(2), MUMBAI

This appeal by the assessee is directed against order dated 12/06/2019 passed by the Ld. Commissioner of Income Tax (Appeals)-2, Mumbai [in short the Ld. CIT(A)] for assessment year 2015-16, raising following grounds: “

Before us, the Ld. Counsel of assessee has filed a paper book containing pages 1 to 55 .

In support of ground No. 1, the Ld. Counsel of the assessee referred to para 4.6 of the order of Assessing Officer and para 4 of the order of Ld. CIT(A) and submitted that the assessee was having sufficient interest free funds for advancing loans to the parties under reference and therefore, lower authorities are not justified in disallowing interest out of the interest expenditure claimed by the assessee. The Ld. Counsel of the assessee relied on the order of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. reported in 313 ITR 340.

On the other hand, the Ld. Departmental Representative relied on the order of the lower authorities and submitted that as on the date of advancing loan, there were no sufficient funds available with assessee and loans have 3 Assessment Year: 2015-16 been advanced out of borrowed funds, thus, the Ld. CIT(A) is justified in upholding the disallowance.

We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Assessing Officer observed that assessee has taken interest-bearing loan from M/s Cheerful Commercial Private Limited amounting to ₹ 1.5 Crores and paid interest of ₹ 23,33,835/- during the year under consideration. The Assessing Officer further observed that assessee has advanced a sum of ₹ 1,34,00,056/- for non-business purposes without charging any interest. The Assessing Officer in the impugned assessment order has noted that on the day of receiving first tranche of interest-bearing loan (Rs. 50,00,000/- + Rs. 25,00,000/-) from M/s Cheerful Commercial Private Limited i.e. 7/4/2014, the assessee had opening balance of ₹ 7,572.71 only and out of loan received of ₹ 50 lakhs, ₹ 45 lakh was utilised for repayment of loan to M/s Stanford Securities. The Assessing Officer further observed that on the date of receipt of second trench of interest-bearing loan from M/s Cheerful Commercial Private Limited i.e. 3/7/2014, the opening balance available in the bank account was of ₹ 15,965.98 only and after receipt of interest-bearing loan of Rs 75.00 lakhs, the assessee advanced money to M/s One world Retail Business for nonbusiness purposes without charging any interest and advanced money to M/s KK Securities for purchase of shares. Thus, according to the Assessing Officer interest-bearing loan had been advanced for non business purposes and therefore, he disallowed the proportionate interest amounting to ₹ 20,84,901/-. The Ld. CIT(A) upheld the 4 Assessment Year: 2015-16 disallowance in respect of three parties and allowed relief in respect of one party observing as under: “5.1.1 The AO has observed that the appellant has paid interest of Rs. 23,33,835/- on the loan of Rs. 1,50,00,000/- from M/s Cheerful Commercial Pvt. Ltd. (CCPL) but the same was utilized for giving interest free advances or for non business purpose to various concerns/parties. The AO has therefore disallowed interest expenditure of Rs. 20,84,901/out of the above interest expenses. The reasons for disallowance made in respect of various parties and the submission of the appellant in that regard is considered as under: i. M/s One World Retail - The. AO has observed that an amount of Rs. 70,00,056/was given to the said party on 09.04.2014 of Rs. 20,00,056/and on 08.07.2014 of Rs. 50,00,000/out of the loan received from M/s CCPL & the appellant did not furnish any evidence to support its claim that the advance was given for business purpose. In this regard, the appellant has submitted that the management of M/s One World Retail Division, which is engaged in the business of readymade garments was known to the Directors of the Company and the amount was advanced in good faith. I find that the appellant is in the - business of merchant banking and has main source of income from professional fees. The appellant has not been able to show the business expediency of advancing Rs. 70,00,056/out of interest bearing funds to One World Retail which is into an altogether different line of business. So it cannot be said that the interest expenditure incurred on borrowing ’ made by the appellant to the extent of Rs. 70,00,056/was allowable u/s 36(1)(iii) of the act. Thus, the disallowance of interest expense made by the AO u/s 36(1)(iii) in respect of the said amount of Rs. 70,00,056 is upheld. ii. K K Securities Ltd.- The AO has observed that an amount of Rs. 15,00, 000/was paid to the said party on 07.07.2014 out of the interest é bearing loan from M/s CCPL which was for the purpose of 5 Assessment Year: 2015-16 purchase of Shares. The AO has disallowed interest in respect of the said amount considering that trading in share was not the business of assessee and the investment in shares have been shown as non current investment. The appellant has submitted that the said amount of Rs. 15 lakhs was paid as advance to acquire shares worth Rs. 12,00,837/- on which company had earned profit of Rs. 196,547/-. Since, the appellant had not involved in the business of trading and the shares are held as investment, the interest expenditure with reference to the borrowing utilized for the purchase of shares by advancing an amount of Rs. 15 lakhs cannot said to be an allowable expense for computing the business income of the appellant. Accordingly, the disallowance with respect to amount is upheld. iii. M/s Stanford Securities Pvt. Ltd.- The AO has observed that an amount of Rs. 45 lakhs was utilized to repay the old interest free outstanding loan from the said party which is a fellow subsidiary company. The business connection of appellant with said subsidiary was not established and the amount of Rs 45 lakhs utilized for payments to the said party out of interest bearing funds borrowed from M/s CCPL was considered to be for non business purpose. The appellant has submitted that it is a current account with subsidiary of the subsidiary company. From the ledger account it would be observed that the company received 71,97,680/including opening balance of Rs. 25,66,000/and paid 49,95,680/ -, leaving closing credit balance of Rs 22,00,000/at the year end. The average debit outstanding was Rs 2,62,961 /-. I find that the appellant is having current account transaction with related party but the appellant has not explained the business expediency of utilizing interest bearing fund for such transaction. Therefore, the disallowance of interest with respect to above said amount is upheld.

Before us, the Ld. Counsel of the assessee has relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance utilities and Power Ltd. (supra). He referred to submission before the Ld. CIT(A), wherein it was submitted that at the beginning of the year, the share capital net of loss was of ₹ 5,57,35,102/- and the assessee had interest free loan of ₹ 1,22,45,000/-, therefore the assessee had ₹ 6,79,80,102/- available. Thus, company had not utilized interest-bearing loans either for the advancing loans or investment. The Hon’ble High Court (supra) has held that if there are funds available both interest free and draft and /or loans taken, then a presumption would arise that investment would be out of interest free funds generated of available with the company, if the interest-free funds were sufficient to meet the investments. Thus, the issue of invoking presumption arise when there is no clear nexus of loans taken and money advanced, but we find that in the instant case the Assessing Officer has established a clear nexus of loans taken 7 Assessment Year: 2015-16 and money advanced out of the said loans. The relevant chart of nexus of loans and money advanced reproduced by the Assessing Officer, is extracted for ready reference as under:

It is evident from the above chart that as on 07/04/2015 funds of ₹ 7 572.711 were only available with assessee and money has been given to M/s Stanford securities (Rs. 45,00,000/-) and M/s One World Retail Division (Rs. 20,00,056/-), out of the money borrowed ( Rs, 75,00,000/-) from M/s Cheerful Commercial Private Limited. Similarly, on 03/07/2014 funds of ₹ 15, 965.98 were only available with assessee and money has been transferred to M/s KK securities (Rs.15,00,000/-) and M/s One World Retail Division (Rs. 50,00,000/-) out of the money borrowed of ₹ 75,00,000/- from M/s Cheerful Commercial Private Limited. Thus, nexus of money advanced and money borrowed is clearly established. In such circumstances, the ratio of the Hon’ble High Court in the case of Reliance utilities and Power Ltd (supra) cannot be invoked. In the case of Punjab Stainless Steel Industries Vs. CIT & ANR for AY 9 Assessment Year: 2015-16 2001-02 in of 2008, the Hon’ble Delhi High Court observed as under:- “The learned counsel for the appellant has referred to the decision of the Supreme Court in Munjal Sales Corporation vs. CIT & Anr. (2008) 215 CTR (SC) 105 : (2008) 3 DTR (SC) 217 : (2008) 298 ITR 298 (SC). In that case it was held by the Tribunal that the assessee hail given interest-free loan in the asst. AY 1992-93, out of its own funds ax not from interest bearing loan taken by the firm from the third party and, consequently the assessee was entitled to claim deduction under s. 36(1)(iii) of the Act. It was observed by the Supreme Court that the Tribunal had held that the loans were given for business purposes. It was further observed that similarly for the asst. yr. 1993-94, the Tribunal had taken the view that the loans given to the sister concern of the assessee were for business purposes. The loans given by the assessee in August/September, 1991 to its sister concern were wiped out in the asst. yr. 1997-98. The Court was of the view that once the Tribunal had found that the loans were advanced for business purposes and the interest paid by the assessee did not exceed 18 per cent per annum, the assessee was entitled to deduction under s. 36(1)(iii) r/w s. 40(b)(iv) of the Act. As regards a small interest free loan of Rs. 5 lakhs extended by the assessee during the asst. yr. 1995-96, the Court was of the view that since the opening balance as on ist April, 1994 was Rs. 1.91 crores wnereas ican given to the sister Concern was a small amount of Rs. 5 lakhs, profits earned by the assessee during the relevant year were sufficient to cover the loan of Rs. 5 lakhs. The assessee before the Supreme Court succeeded on the peculiar facts of the case. However, in the present case, there is absolutely no finding recorded by the Tribunal that the interest-free advances were made by the assessee to M/s Kesho Ram Industries for its business purposes. There is no such finding by the Tribunal even with respect to the advances extended in the previous years. It is not the case of the appellant before us that it had so much surplus cash 10 Assessment Year: 2015-16 available with it at the time of extending these advances that the same could have been extended by it out of those surplus funds available to it. In fact, the payments made to M/s Kesho Ram Industries from CC 40 account indicate to the contrary and show that advances made during the financial year relevant to the asst. yr. 2001-02, were extended out of borrowed funds and not out of any credit balance available with the assessee firrn at that time. Therefore, this judgment is of no help to the appellant.”

In the instant case before us also there was no sufficient interest free funds on date of advancing loans and money has been advanced out of interest bearing loans funds. Thus, ratio of above decision is squarely apply over the facts of the instant case.

Before us, the Ld. Counsel has refrained from arguing on the issue of purpose of giving loan for business or not and therefore we are not commenting on the said aspect which has been dealt by the Ld. CIT(A) in the impugned order. In view of the above, we uphold the finding of the Ld. CIT(A) on the issue in dispute and dismiss the ground of the appeal of the assessee. 11. The ground No. 2 of the appeal relates to disallowance of travelling expenses of ₹ 12, 38, zero 36/-. The Assessing Officer observed that travelling expenses have been claimed for travel of directors of the company and President (operations) of the company for overseas travels including London, Nairobi, Johansburg, Paris, Abhdhabi etc. The assessee failed to substantiate business purpose of the travels except producing few copy of emails, which also could not indicate travels for the purpose of the business. Accordingly, the Ld. Assessing Officer disallowed the expenses incurred on travelling. Before Ld.

Before us, the Ld. Counsel of the assessee relied on the submission before the lower authorities. He also relied on the decision of the Hon’ble Gujrat High Court in the case of Sayaji Iron and Engg. Co Vs CIT reported in 253 ITR 749 (Guj). On the other hand, the Ld. DR relied on the order of the lower authorities.

We have heard rival submission of the parties and perused the relevant material on record. As far as claim of expenses under section 37 of the Act is concerned, the primary onus is on the assessee to substantiate with the documentary evidences whether the expense was incurred wholly and exclusively for the purpose of the business. In the instant case, as observed by the lower authorities, the assessee has failed to substantiate that those travels were carried out for the purpose of the business of the assessee. In the case of Sayaji Iron and Engg. Co. (supra), the issue in dispute was whether the vehicles used by the Directors of the company were used personally by them and if so whether said expenditure on vehicles will be allowable. The Hon’ble High Court held that the limited company is an inanimate person and their cannot be any personal about such entity, but in the instant case disallowance has been made in absence of documentary evidence to support the business purpose of the expenses. During hearing of the case, the Ld. Counsel was asked, whether the assessee in position to produce such evidence, however he expressed inability in this regard. In such circumstances, in our opinion, the Ld. CIT(A) is justified in upholding the disallowance. Accordingly, the ground No. 2 of the appeal of the assessee is dismissed.