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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI V.DURGA RAO & SHRI G. MANJUNATHA
order of the learned CIT(A)-15, Chennai dated 27.02.2019 and pertains to assessment year 2013-14.
The assessee has raised the following grounds of appeal:-
“1. The order of the Commissioner of Income-tax (Appeals) Is contrary to the law, facts and circumstances of the case.
2. The CIT (Appeals) erred in rejecting the several objections raised in the Grounds of the Appeal to the total income determined and the status in which the assessment has been made ( In so far as the addition as business income Is concerned) and dismissing the appeal).
3. The appellant company is one of the authorized dealer of M/s. Hindustan Lever Limited and engaged in marketing of various kinds of products. For storage of such products the appellant company needs a very big go-down / stock yard and for this purposes, the appellant company has executed a Lease Rent Agreement with one Mr.G.Ramesh dated First October 2012. The go-down is situated at Pallavaram Radial Road, Chennai & the size of the same is 22,500 sq feet. For huge level dumping of goods & for business expediency such big size of the stock yard Is required for the company and for this purposes, the appellant company has made a lease rent advance of ` 3,40,00,000/- to the land lord Mr.G.Ramesh and the same is also Incorporated in the above said Lease Rent Agreement and the copies of the same Is also produced before the Ld AO and the CIT(Appeals).
As per the clause 2 of the above lease rent agreement, the monthly lease rent will start from First April 2013 only. Whereas, the learned AO has came to a wrong assumption that as there is no debit towards rental payments in the books of the appellant company and concluded that the advance on lease rent advance is non-business purposes. It is totally against the principles of natural justice and bad in law.
Further for development of the company projects. Mr. G. Ramesh, who Is one of the Director of the company has advanced Rs.3,10,00,000I- to the appellant company and in turn he received some amount as interest income towards his advance amount parked in the company.
The Ld. AO has wrongly assumed that the Interest payment Is made for non business purposes and disallowed the Interest portion to the extent of Rs.15,33,950/- & added back to the total Income.
For that the balance of convenience and merit of this appeal is lying in favour of the appellant.
For these and other grounds that may be adduced at the time of hearing the appellant prays that the Hon’ble ITAT be pleased to allow the appeal and render justice.”
Brief facts of the case are that the assessee company is a distributor for Hindustan Lever Ltd., for various products for which it has taken premises on lease, vide lease rental agreement dated 01.10.2012 from one Mr.G.Ramesh, who is also one of the directors of the assessee company. As per the said lease rental agreement, lease rental shall commence from 01.04.2013. The assessee has also paid lease deposit of ` 3.40 crores . The assessee company had also, received unsecured loan from Shri G.Ramesh, director of the company amounting to `4,84,85,119/-, on which interest of ` 43,82,716/- has been paid. During the course of assessment proceedings, the Assessing Officer was of the opinion that interest paid on loan cannot be allowed as deduction u/s.36(1)(iii) of the Act, because the assessee has diverted interest bearing funds for non-business purpose to advance loan to Shri G.Ramesh. Although, the assessee claims that lease deposit was paid for the purpose of business, but on perusal of financial statement, it was noticed that no lease rental has been debited into profit & loss account. Therefore, he opined that rental security deposit was not for business purposes and accordingly, by taking note of lease deposit and unsecured loan from Mr. G.Ramesh disallowed 70% interest paid to Mr. G.Ramesh which works to `15,33,950/-.
4. Aggrieved by the assessment order, the assessee carried the matter in appeal before learned CIT(A), but could not succeed. The learned CIT(A), for the detailed reasons recorded in his appellate order, confirmed additions made by the Assessing Officer towards interest disallowance on the ground that rental advance given in relation to property to be taken on rent was not given effect till end of the year, even though there was a rental agreement supposedly entered into. He further observed that the circumstances under which two sets of transactions have been entered into have given enough justification to the Assessing Officer to believe that said advance claimed to be for rental purpose is to be treated as funds diverted for non-business purposes and more so, the said arrangement is to claim benefit by way of interest charged to the profit & loss account so as to lower the profit. Aggrieved by the learned CIT(A) order, the assessee is in appeal before us.
5. The learned AR for the assessee submitted that the learned CIT(A) has erred in confirming disallowance of interest on loan taken from Mr. G.Ramesh without appreciating the fact that lease rental deposit paid to Mr. G.Ramesh and loans taken from Mr. G.Ramesh are two separate transactions and both for the purpose of business of the assessee. The learned AR further submitted that the Assessing Officer as well as learned CIT(A) have disregarded rental agreement filed by the assessee to prove its claim that it has taken premises on lease rental by paying lease deposit and as per the said rental agreement, monthly rent commences from 01.04.2013, therefore, question of debiting rental expenses for the impugned assessment year does not arise. Therefore, normal advance given for the purpose of business cannot be considered as diversion of funds so as to disallow interest paid on genuine loan borrowed for the purpose of business of the assessee.
6. The learned DR, on the other hand, strongly supporting the orderof the learned CIT(A) submitted that rental agreement filed by the assessee is an afterthought to circumvent diversion of funds for non-business purposes to one of the directors of the assessee company. Therefore, Assessing Officer as well as the learned CIT(A) have rightly rejected arguments of the assessee that it has paid rental deposit to one of the director for the purpose of business, while disallowing interest expenses u/s.36(1)(iii) of the Act.
7. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The provisions of section 36(1)(iii) of the Act, deals with deduction towards interest paid on loans borrowed for business purposes. As per said section, if interest paid on loans is used for non-business purposes, then said interest cannot be allowed as deduction. Therefore, from a plain reading of section 36(1)(iii) of the Act, it is very clear that all business advances are outside the scope of said provisions. In this case, the Assessing Officer has disallowed interest paid on loans borrowed from one of the director of the company on the ground that company has diverted interest bearing funds in the form of lease rental deposit to the same director for non- business purposes. We have gone through the reasons given by the Assessing Officer to disallow interest paid on loans u/s.36(1)(iii) of the Act and find that there is no merit in the findings of the Assessing Officer, because the assessee has filed rental agreement copy to prove that it has taken premises on rent by paying lease rental deposit to Mr. G.Ramesh on a monthly rental of `75,000/- and such rent shall commence from 01.04.2013. Further, the assessee has also produced necessary evidence to prove that it has started paying rental for the premises from next financial year. In fact, the Assessing Officer has not disputed rental agreement entered into between the assessee and Mr. G.Ramesh, but he has disallowed interest only on the ground that although, rental agreement has been entered into by paying deposit, but no rental payment has been made for the current financial year. We find that reasons given by the Assessing Officer to disbelieve rental agreement between the parties is not on sound footing, because it is for the parties to decide from which date rental payment shall commence. Merely for the reason that there is no rental payment for current financial year, genuine rental agreement and consequent rent advance paid cannot be considered as diversion of funds for non-business purposes so as to disallow interest expenses paid on loan borrowed for the purpose of business. But, the learned CIT(A) without appreciating the facts simply confirmed additions made towards disallowance of interest expenses. Hence, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete additions made towards disallowance of proportionate interest u/s.36(1)((iii) of the Act.