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Income Tax Appellate Tribunal, BANGALORE BENCHES “ B ” BENCH: BANGALORE
Before: SHRI B.R. BASKARAN & SHRI PAVAN KUMAR GADALE
PER SHRI PAVAN KUMAR GADALE, JM :
The assessee has filed an appeal against the order of learned Commissioner of Income Tax (Appeals)-7, Bangalore under Section 143(3) and 250 of the Income Tax Act, 1961.
The assessee has raised the following grounds of appeal :
3. At the time of hearing, the learned Authorised Representative has argued only on the Ground No.5 regarding disallowance of Rs.74,67,450 applying the provisions of Section 36(1)(iii) of the Act and other grounds are treated as not pressed and dismissed.
The brief facts of the case are that the assessee is a NBFC and engaged in the business of providing loans to micro, small and medium enterprises in rural and Return of Income on 29.11.2014 with total income of Rs.1,43,31,140. Subsequently, the case was selected for scrutiny and Notices under Section 143(2) and 142(1) were issued. In response, the learned Authorised Representative of the assessee appeared from time to time and produced the Books of accounts and details. The Assessing Officer considered the submissions of the assessee and found that in F.Y. 2013-14, the assessee has advanced interest free loan of Rs.5,08,10,000 to M/s. Vistar Employee Welfare Trust and called for explanations and to show cause why the proportionate interest paid should not be disallowed on borrowed funds as interest free loans were provided to the Trust. The assessee has submitted the details on 9.12.2016 explaining that the Vistar Employee Welfare Trust was Registered on 7.6.2012 with intention to provide employees an opportunity to participate in the growth and prosperity of the company through issue of options which would entitle such employees to apply for shares of the company and further the main object of the Trust is to solely and exclusively administer, manage and operate the Employee Stock Option Scheme Plan in consultation with Compensation Committee of the Company. The assessee further submitted that loan was provided for the purchase of shares by the Trust under ESOP Scheme and ESOP compensation committee. As per the Agreement dt.15.6.2012, an amount of Rs.5,08,10,000 was granted as loan to the Trust to acquire 14,47,711 shares of Vistar Financial Services Pvt. Ltd. The Authorised Representative also explained that for the purchase of shares loan was given to the Trust for out of equity funds and not out of Debt funds. Whereas in the month of August, 2012, the assessee company received Rs.40 Crores as equity capital from investors and while the said money was provided to trust for acquisition of shares and further details of amounts received from investors as capital contribution and the share application and were filed along with explanation by the assessee. The Assessing Officer on examination of the assessee’s submissions also dealt on the provisions under Section 36(1)(iii) of the Act and is of the opinion that the advances provided by the assessee company to the Welfare Trust are not for the purpose of business. Further the assessee company filed details on 9.11.2016 and same was referred at para 4.5 in assessment order. The Assessing Officer found that the main business activity of the assessee company is in lending of loans and earning income out of lending activity and for this purpose, the assessee company raises loan from banks and other financial institutions which are bearing interest. The Assessing Officer also dealt on the judicial decisions where borrowing should be for the purpose of business and after considering the judicial decisions referred in pages 6 & 7 of the order. The Assessing Officer is of the opinion that the assessee company has provided interest free loan to the Trust and not for the purpose of business. Hence interest expenses has to be proportionately disallowed and made addition of Rs.73,67,450 and assessed total income of Rs.2,16,98,590 and passed under Section 143(3) of the Act on 20.12.2016. Aggrieved by the order, the assessee filed an appeal with the CIT(Appeals) whereas the CIT(Appeals) considering the grounds of appeal
, findings of the Assessing Officer, assessee's submissions concurred with the action of the Assessing Officer and confirmed the addition and dismissed the assessee's appeal. Aggrieved by the order, the assessee filed an appeal before the Tribunal.
5. The learned Authorised Representative submitted that the CIT(Appeals) has erred in confirming the addition of proportionate disallowance of interest irrespective of the fact that interest free advances were provided to the Trust for the purpose of welfare of the employees to purchase the shares as per the provisions of Companies Act. The learned Authorised Representative further emphasized that the amount advanced is in the nature of loan to the Trust out of the interest free funds available to the assessee company where certain investors have contributed to substantive share capital of the company. The learned Authorised Representative substantiated his arguments explaining that the loan was provided to trust is wholly and exclusively for the purpose of business and there is no violation of provisions of law. The learned Authorised Representative filed paper book to substantiate the claim with supporting the evidences and judicial decisions and referred to the details of Employee Stock Option Plan Scheme (ESOP) and explained that the expenses on ESOP are allowed by the revenue to the assessee and prayed for allowing the assessee's appeal. Contra the learned Departmental Representative supported the orders of the lower authorities and submitted that the advances were provided to the sister concern with an intention to divert the funds and relied on the findings of the CIT(Appeals) order and prayed for the dismissal of the appeal.
6. We heard the rival contentions and perused the material on record. The learned Authorised Representative’s submissions and arguments are in respect of disallowance on proportionate interest under provisions of 36(1)(iii) of the Act. The learned Authorised Representative relied on the judicial decisions and explained that the assessee has provided the advance to the Vistaar Employees Welfare Fund Trust with sole purpose of acquisition of shares by the Trust and further allotment of shares to the employees under ESOP. The learned Authorised Representative also emphasized that the notional interest could not be brought to tax as loans have been advanced to the Trust for the purpose of business. The learned Authorised Representative relied and demonstrated the clauses of the Trust Deed where the beneficiaries are employees of the assessee company and whereas the Trust was formed to allot shares under the ESOP for the benefit of assessee company employees. The said loan was provided for the betterment of welfare of employees which is purely and exclusively for the purpose of business.
The assessee company has formed the Trust for the purpose of operating ESOPs for the employee which is recognized by the CBDT vide Notification No.323/2001 (F.No.142/48/2001-TPL) Dt.11.10.2001. Further the ESOP taxed in the hands of employees under Section 17(2)(vi) of the Act and expenses incurred in relation to ESOPs are allowable as deduction from business income. The learned Authorised Representative highlighted the provisions of Company Act to substantiate that there is no violation of any provisions under the Companies Act. The learned Authorised Representative further submitted that ESOP expenses for the Assessment Year 2013-14 and 2014-15 claimed in the Books of Accounts of the assessee are allowed, whereas the Assessing Officer is of the opinion that the amount advanced to the Trust is not in the ordinary course of business. The learned Authorised Representative substantiated his arguments relying on the financial statements where the surplus fund amounts are available to the assessee company and utilized for the purpose of lending to the Employees Welfare Trust. Further ld. AR relied on the plethora of judicial decisions and the financial statements to substantiate that Borrowed funds were not utilized for the purpose of lending to the Welfare Trust. The ld. AR referred to the Balance Sheet as on 31.03.2014 where shareholders funds disclosed are Rs.590,195,044 and the amount advanced to the Welfare Trust is only Rs.5,08,10,000 and supported his submissions relying on the Hon'ble Supreme Court decision (2019) 401 ITR 466
(SC) CIT Vs. Reliance Industries Ltd. We found that the submissions of the learned Authorised Representative are realistic duly supported with the judicial decisions on the issue of interest free funds, we rely on the decision of Reliance Industries Ltd. (supra) where the Hon'ble Apex Court held as under (Head Note) :
Similarly in the case of SKS Micro Finance Limited Vs. DCIT 145 ITD 111 (Hyd.-Trib.) where the Tribunal has observed at para 28 as under :
“ 28. We have heard rival submissions of the parties and perused the material on record. It is the contention of the assessee that the interest free loans were advanced due to commercial expediency and for the purpose of business. It is the further contention of the assessee that no borrowed fund was utilised for advancing loan to the MD or the employee’s welfare trust. From the assessment order or the order of the CIT (A), we do not find any clear cut finding whether the assessee has utilised borrowed funds for giving loan to the MD or employees welfare trust. In case of SSPDL Ltd. Vs. DCIT (24 ITR (Trib) 290 co-ordinate bench of this Tribunal held that unless interest payment is directly related to the diverted funds, it cannot be said that interest incurred by the assessee was for non business purpose. Since this fact has not been properly verified, we remit this issue to the file of the Assessing Officer who shall decide the same after a reasonable opportunity of being heard to the assessee.”
In the case of ACIT Vs. Murugappa Management Services Ltd. 148 ITD 319 (Chennai-Trib.), the observations at para 5 as under :
We have heard the submissions made by the representatives of both the sides and have perused the orders of the authorities below as well as the judgment/order relied upon by the ld. Counsel for the assessee. It is an un- disputed fact that the borrowings have been made by the assessee for advancing the amount to the Trust formed by the assessee for acquiring shares of the group companies to be allotted under ESOP Scheme. The assessee has claimed interest as expenditure u/s. 37(1) of the Act. The provisions of section 77 of the Companies Act, 1956 put restrictions on the companies to purchase its own shares or grant loans for the purchase of its own shares or its holding companies. Thus, for administering the ESOP Scheme, the assessee has formed a Trust for holding the shares of the assessee-company and other group companies which will be transferred to the employees as and when the employees excise their option to acquire shares under ESOP Scheme. One of the objections raised by the Revenue is that the Trust is not exclusively handing the shares of the assessee-company and is not only dealing with the employees of the assessee-company, the Trust is holding shares of group companies as well. The ld. Counsel for the assessee has categorically stated that the assessee- company has been incorporated with the purpose of providing management services to the group companies as well as holding of shares. The Trust has been floated by the assessee-company to achieve its objectives. The benefits accruing to employees by allotment of shares under the scheme is in the form of perquisite. The difference between the market value at which the shares are acquired by the Trust and the value at which the employees were allotted shares is assessable as perquisite in the hands of the employees. As has been rightly pointed out by the CIT(Appeals) when the company provides the benefit or amenity to its employees through intermediary institution, it is not necessary to that such intermediary institute should operate solely for the similar company. What is important is that the value of benefit has been conferred to the employees irrespective of the manner in which or through whom they obtain the benefit as long as the source of the benefit is the employer of the benefit get taxed in the hands of the employees. We agree with the observations of the CIT(Appeals).”
Also in the case of DCIT Vs. SKS Microfinance Ltd.in the Tribunal has observed considering the issue at paras5 & 6 are as under : “ 5. We have heard the arguments of both the parties and also perused the material on record. The ld Counsel for the assessee has submitted that a similar issue involved in assessee’s own case for A.Y 2008-09 was restored by the Tribunal to the file of the AO vide its order dated 21.06.2013 passed in ITA No.1789/Hyd/2011 with the following directions given in paragraph No.28: “28. We have heard rival submissions of the parties and perused the material on record. It is the contention of the assessee that the interest free loans were advanced due to commercial expediency and for the purpose of business. It is the further contention of the assessee that no borrowed fund was utilized for advancing loan to the MD or the employee’s welfare trust. From the assessment order or the order of the CIT (A), we do not MD or employees welfare trust. In case of SSPDL Ltd. Vs. DCIT (24 ITR (Trib) 290 co- ordinate bench of this Tribunal held that unless interest payment is directly related to the diverted funds, it cannot be said that interest incurred by the assessee was for non business purpose. Since this fact has not been properly verified, we remit this issue to the file of the Assessing Officer who shall decide the same after a reasonable opportunity of being heard to the assessee.
As further submitted by the ld Counsel for the assessee, the AO has already examined this issue as per the directions of the Tribunal and decided the same in favour of the assessee after recording the following findings in Para No.4.3 of the order dated 31.7.2014 passed u/s 143(3) r.w.s. 254 of the Act: “4.3 For the disallowance of interest on loan given to the Managing Director and to the employees welfare trust, details regarding loan given to the Managing Director and to Employees Welfare Trust the assessee submitted that the loans were granted out of internal accruals of the company and no interest bearing loans were utilized for giving advance to the Managing Director and to the Employees Welfare Trust and also submitted relevant details such as Reserves and Surplus of the Company. In support, the assessee company submitted the cash flow of the above term loans and utilization certificate required to be submitted to lending banks which are duly certified by the CA to the effect that the term loans raised were utilized for the purpose of its portfolio lending business”.
Further in the case of CIT Vs. V I Baby & Co. 254 ITR 248 (Ker) at para 4 read as under :
“ 4. We, are inclined to accept the argument raised by counsel for the Revenue, because the advances to the partners, their relatives and the sister concerns are not for business purposes and the assessee has not derived any benefit out of the same. Admittedly, no interest was charged on these advances. The Tribunal appears to have placed reliance on the fact that the partners and their relatives have utilised the amounts for business purposes, such as construction of a shop building, etc. So long as the assessee-firm is not the beneficiary of such investments the nature of investment of the utilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest-free advance. The claim of the assessee’s counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee’s case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest-free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as the assessee is not the beneficiary of the investments made by the partners, their relatives and the sister concerns, and so long as the advances are interest-free,
AO is perfectly justified in disallowing the interest in proportion to the advances made. There is no dispute with regard to working out of the proportionate disallowance of interest. The decision relied on by the Tribunal and referred to above does not appear to be applicable to the facts of this case, because that was an individual-assessee advancing interest-free loan to a firm engaged in a related business as the assessee and in which he is also a partner along with his wife and minor children. Whatever benefit accrued to that firm will also be treated as income of the assessee assessable in his individual capacity. Therefore, such an advance also should be taken as for business purposes of the assessee, and we do not see how that decision will apply to the facts of this case. We are of the view that the Tribunal went wrong in relying on the said decision and allowing the appeals.”
We, after considering the facts and circumstances of the case, and legal position and judicial decisions on the availability of surplus funds are of the opinion that the assessee has granted interest free advance to its Welfare Trust not out of the Borrowed funds as envisaged by the learned Authorised Representative duly supported by the financial statements and the Hon'ble Apex Court decisions. The assessee has to prove that the advances are not out of Borrowed funds and the onus lies on the assessee to satisfy that non-interest bearing funds have been provided to the Welfare Trust. Accordingly, we are of the opinion that the assessee company as per the Balance Sheet has Reserves and Surplus of Rs.30,01,46,634 and whereas the amount advanced is Rs.5,08,10,000 to Welfare Trust out of surplus funds. We are of the substantive opinion that the addition made by the Assessing Officer cannot be sustained on applying the above said judicial decisions and provisions of Section 36(1)(iii) of the Act. Hence we set aside the order of CIT
(Appeals) and direct the Assessing Officer to delete the addition and allow the ground of appeal of the assessee.
7. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 22nd July, 2019.