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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI SHAMIM YAHYA
This appeal by the assessee is directed against the order of learned CIT(A)-54, Mumbai dated 12.04.2018 and pertains to assessment year 2013-14.
The grounds of appeal read as under :-
“1. That on facts and circumstances of the case and in law the ld. C.I.T (Appeals) has erred in confirming the disallowance of proportionate interest claim of Rs.21,32,703/-.”
2 Nilesh Jabarmal Jain ITA No. 4376/Mum/2018 3. The brief facts of the case are that the assessee is engaged in the business of imports and trading in stainless steel and ferrous metal. The assessee has debited interest expenditure to the tune of Rs.63,01,585/- in the Profit & Loss Account. The assessee had taken unsecured loan of Rs.11,27,49,538/- and the interest expenditure is on account of these loans. The Assessing Officer observed in the assessment order that assessee had given interest free loan/advances to M/s. Sun Impex to the tune of Rs.3,78,10,000/- and M/s. Domet Trading Pvt. Ltd. to the tune of Rs.1,49,70,315/-. No interest has been received from these two parties. The Assessing Officer proposed to disallow the proportionate interest on these interest-free advances given by the assessee. The assessee replied that the advances given to these two parties were given for business purpose and purchases were made from these parties in the immediate next year, therefore, no disallowance of interest is warranted. The Assessing Officer further observed in the assessment order that not a single purchase transaction was made with these two parties during the year. Therefore, the stand of the assessee that the advances were given for purchases cannot be accepted. The Assessing Officer discounted the theory of the assessee that the interest-free advances were given from the interest-free fund of the assessee as the capital of the assessee was a mere Rs. 85 lacs whereas the interest-free advances given are more than Rs. 5 crores. The interest-free loan received from M/s. Jay Bhagwati Impex Pvt. Ltd. of Rs.1 crore was received at the end of the year on 23.01.2013 and, therefore, it could not have been the source of the interest-free advance throughout the year to the aforementioned two parties. The Assessing Officer has taken the average of the loan given to both the parties which worked out to Rs.2,63,90,158/-. After giving credit to the average capital of the assessee which was Rs.86,17,633/-, the Assessing Officer
3 Nilesh Jabarmal Jain ITA No. 4376/Mum/2018 worked out proportionate interest @ 12% per annum on Rs.1,77,72,525/- (2,63,90,158 – 86,17,633). The proportionate disallowance worked out at Rs.21,32,703/- which was disallowed by the Assessing Officer.
Upon assessee’s appeal, learned CIT(A) upheld the Assessing Officer’s action by holding as under :-
“5.3 The submissions of the ld. Counsel have been carefully considered. The ld. Counsel for the appellant strongly contended that the interest-free loans have been given only out of commercial expediency for business reasons and the disallowance of the interest is not warranted. The ld. Counsel relied upon the judgment of Hon'ble Apex Court in the case of S.A. Builders vs. CIT (2007) [158 Taxman 74] and Hero Cycles (P) Ltd. vs CIT (2015) [63 Taxman.com 308] wherein it was held that the interest-free advance given by the assessee company to its subsidiary company/sister concerns due to business or commercial expediency, no disallowance u/s.36(1)(iii) can be made. In the instant case, the loan/advance were not given to sister concerns and subsidiary companies. No business expediency as claimed by the assessee has been proved by the assessee. The advances were given throughout the FY. 2012-13 relevant to AY 2013-14, not a single transaction of purchase took place in the entire year. The assessee has not given any reason as to why so many advances were given throughout the year when there is no single transaction of purchase. The onus is entirely on the assessee to prove the commercial expediency aspect. Further, the assessee claimed to have interest-free fund from which the advances were given. As could be seen from the assessment order, the assessee had an average capital balance of Rs.86,17,633/-. He could not have possibly advanced loan of over Rs. 5 crores from this amount. Further, the interest-free advance of Rs. 1 crore received from M/s. Jai Bhagwati Impex Pvt. Ltd. was only received towards the fag end of the year, i.e. 21.03.2013. Therefore, this could not have been the source of the interest-free advance given. The other two small loans of Rs. 10 lacs from Amrita Agarwal and Rs. 1,75,000/- from Manjula M. Angara were short term loans received and paid during the year. Therefore, these cannot be taken as sources of interest-free advance given. In the absence of any positive evidence of commercial expediency in giving these loans furnished by
4 Nilesh Jabarmal Jain ITA No. 4376/Mum/2018 the assessee, the Ld. AO has rightly made proportionate disallowance of the interest on the interest-free advance given by the assessee. In fact, the Ld. AO has been very fair as he had given credit to average capital balance and has also taken average value of the interest-free loan/advances given while working out the proportionate interest disallowance. The addition made by the Ld. AO is confirmed.”
Against the above order, assessee is in appeal before the ITAT.
I have heard both the counsel and perused the records. Upon careful consideration, I find that the learned CIT(A) has rejected the assessee’s reliance upon decisions from Hon'ble Court allowing interest for loans advanced on account of commercial expediency on the ground that assessee has given advances to the concerned party and no purchase has been done from the same party during the year. In this regard, I note that the contention of the counsel of the assessee is that those advances were made to secure supplies and that purchases were in fact given effect in the next year. I find that the limb of argument has not been rebutted by the revenue authorities. The learned CIT(A) also mentions that he is rejecting the commercial expediency plank because no purchases has been done from the said party during the year. The order of learned CIT(A) is conspicuously silent regarding the assessee’s submission that this was to secure supplies and purchases were in fact made during the next year. Hence, in my considered opinion, interest of justice will be served if the matter is remitted to the file of the Assessing Officer.
The Assessing Officer is directed to consider the issue afresh after examining the subsequent purchases made by the assessee. In light of the same, he shall consider the issue of commercial expediency raised by the
5 Nilesh Jabarmal Jain ITA No. 4376/Mum/2018 assessee that the said advance was meant to secure future supplies in accordance with the case law from Hon'ble Apex Court referred before the learned CIT(A). Needless to add, the assessee should be granted adequate opportunity of being heard.
In the result, appeal filed by the assessee stands allowed for statistical purposes.
Order pronounced in the open court on 5th December, 2019.
Sd/- (SHAMIM YAHYA) ACCOUNTANT MEMBER Mumbai, Date : 5th December, 2019 *SSL* Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “SMC” Bench, Mumbai 6) Guard file By Order
Dy./Asstt. Registrar I.T.A.T, Mumbai