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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’, NEW DELHI
Before: SHRI N. K. BILLAIYA & SH. K. N. CHARY
ORDER PER: N. K. BILLAIYA, AM
This appeal by the Revenue is preferred against the order of the Commissioner of Income Tax [Appeals]-11, New Delhi dated 02.06.2015 for Assessment Year 2011- 12.
The solitary grievance of the assessee is that the CIT(A) erred in upholding disallowance of Rs.20,14,327/- out of an aggregate disallowance of Rs.54,22,147/- u/s 36 (1) (iii) of the Act.
During the course of the scrutiny assessment proceedings the Assessing Officer noticed that the assessee had taken secured loans of Rs.9.90 crores and Rs.16.17 lacs on which it has paid interest amounting to Rs.54.22 lacs. The Assessing Officer further found that the assessee has given interest free amounts to related parties as under :-
(i) Suresh Goel : Rs. 7,42,30,474/- (ii) M/s Suresh Goel & Sons, HUF : Rs. 3,98,61,150/-
The Assessing Officer was of the opinion that the assessee has diverted interest bearing funds to its relatives on which no interest has been charged. The assessee was asked to explain why proportionate interest should not be disallowed.
In its reply the assessee explained that the amount given to Suresh Goel was for purchase of plot and the amount given to Suresh Goel & Sons HUF was for construction of building on the plot situated in Gurgaon for being used as office of the assessee. The assessee claimed that since the advances have been given for business purposes no disallowance on account of interest should be made.
The explanation of the assessee did not find favour with the Assessing Officer who proceeded by disallowing of Rs.56,33,640/- and in doing so the officer drew support from the similar disallowance made in A. Y. 2010-11.
7. The assessee carried the matter before the CIT(A) and once again claimed that the advances were made for business purposes and therefore, no disallowance of interest as to be made. After considering the facts and the submissions the CIT(A) held as under :-
“I have carefully considered the facts of the case and the observation of the Assessing Officer and submissions made by the appellant. I am of the opinion that the claim of the appellant that the funds have been advanced to the partners for the purchase of property which was to be utilized for the business purposes, cannot be accepted as partnership property is in the name of the partners. Mere fact that property is to be utilized by the firm cannot be a ground to suggest that the interest paid on borrowed funds for the purchase of the property in the name of the partners is to be allowed as deduction. However, I am in agreement with the claim of the appellant that since interest of Rs. 43,21,601/- has already been recovered from Suresh Goel and Sons HUF in respect of the debit balance made available to Suresh Goel & Son s HUF, the said del it balance should be excluded for computing the withdrawals to compute the diversion of borrowed funds and further, credits have to be allowed of the investment made by the other remaining partners of Rs. 3,46,22,122/- and if that principle is adopted then net diversion of funds would be computed at Rs. 3,96,08,352/- and on that oasis, the disallowance of interest would be recomputed at Rs.20,14,327/-, as would be evident from charthereunder:
Sr. Particulars Amount (Rs.) No. I Total allegedly funds diverted for non business purpose at the close of year (A) (i) Suresh Goel & Sons 3,98,61,150/- (HUF) (ii) 7,29,33,673/- 11,27,94,823 Suresh Goel II Less : Debit Balance of Suresh 3,98,61,150/-
Goel & Sons (HUF) for which interest recovered of Rs.43,21,601/-(B) III Balance = (C ) = (A-B) 7,29,33,673/- IV Less : Credit balance in the account of the partners (D) i) Gautam Goel 1,55,13,506/- ii) Anuradha Goel 1,91,08,616/- 3,46,22,122/- V Net Debit Balance 3,96,08,352/- (E)= (C-D) VI Total borrowing (F) 10,66,07,621/- VII % age (G) = E/FX100 37.15% VIII Net interest claimed 54,22,147/- (H) IX Amount to be 20,14,327/- disallowed out of net interest claimed (I)=HXG X Relief to be allowed 34,07,820/- (J)= (H-I)
Accordingly, out of the total interest of Rs.54,22,147/-, deduction of Rs.34,07,820/- is allowed and balance Rs.20,14,327/- is sustained. As a result of the above discussion, out of the total disallowance of Rs.56,33,640/- (Rs.54,22,147/- + Rs. 2,11,492/-), interest of Rs.36,19,132/- (Rs.34,07,820/- + Rs. 2,11,492/-) is allowed and balance Rs.20,14,327/- is sustained.”
At the very outset the counsel for the assessee pointed out that similar disallowance made in A. Y. 2010-11 have been deleted by the Tribunal. Per contra, the DR strongly supported the findings of the Assessing Officer. It is the say of the DR that in A. Y. 2010-11 the commercial expediency of the interest free advances was not examined by the Assessing Officer, therefore, the decision in A. Y. 2010-11 is not binding for the year under consideration.
We have carefully considered the orders of the authorities below. There is no dispute that while making the addition the Assessing Officer has relied upon the findings given in A. Y. 2010-11. We find force in the contention of the Ld. Counsel. A similar disallowance was made in A. y. 2010-11 and the Tribunal in held as under :-
6.2 “I find that the lower authorities have failed to appreciate that the only condition for claiming deduction under section 36(1)(iii) of the Act is "commercial expediency" of the expenditure incurred and once the said condition is fulfilled no further factor can be brought in to deny the legitimate claim of deduction. In this behalf, I draw support from the judgment of the Hon’ble Apex Court in the case of S.A. Builders Ltd. vs. CIT reported in 288 ITR 1 wherein it has been held as under:
"We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency, However, money can be said to be advanced to a sister concern for commercial expediency in many either circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans" [Emphasis supplied]
6.3 I further draw support from the judgment of the Hon’ble High Court of Madras in the case of CIT vs. Century Flour Mills Ltd reported in 334 ITR 377 wherein the Hon'ble Apex Court judgment in the case of SA Builders vs. CIT (Supra) has been followed. The Hon’ble High Court of Madras while following the Hon’ble Apex Court judgment as aforesaid, has held that where assessee having borrowed money, utilized it as advance to its managing director for purchase of land for business purpose, interest paid on said borrowing was to be allowed as deduction. The finding of the Hon’ble High Court was as under:-
"10. The Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR I, has considered the question of payment of interest on the borrowed money. In that case, the borrowed money was lent to the sister concern without charging interest and it was held that the Revenue must look into the transaction whether the transfer of funds to the sister concern was from the point of view of commercial expediency and whether the amount was advanced for earning profits. Considering the principles in the above judgment, it is clear that in the present case, the amount was given to the managing director and other persons only for the purchase of the land and also for business purposes and there is no transaction of loan involved in this case. In these circumstances, I do not find any error or illegality in the order of the Tribunal so as to warrant interference. It is a question of fact. It is not a perverse order. The order passed by the Tribunal is based on valid materials and evidence. Accordingly, the question raised is answered in favour of the assessee and against the Revenue. The appeal is devoid of merit and the same is dismissed."
6.4 I further draw support from the ITAT Chandigarh decision in the case of Dhanna Mal Chatter Sain vs ITO reported in 18 TTJ 552, wherein, the Tribunal has held that it is the onus of Revenue to establish the interest bearing funds have been utilized for non - business purposes and without discharging the onus, no addition/ disallowance can be made under section 36(1 )(iii) of the Act and in the case of the appellant firm also, the said onus has not been discharged by the learned AO and CIT (A) both and as such, no disallowance can be made under section 36(1) (iii) of the Act".
Keeping in view of the facts and circumstances of the present case as explained above and by respectfully following the precedents of the Hon’ble Supreme Court of India, Hon’ble High Court of Madras and the ITAT, Chandigarh, as aforesaid, I am of the considered view that the advances have been made to M/s Suresh Goel & Son (HUF) for the purpose of the business and on account of commercial expediency, and it has not been established by the learned Assessing Officer that advances are for non - business purposes and as such, disallowance made by the learned Assessing Officer is unsustainable in law. Therefore, I delete the addition in dispute amounting to Rs. 10,54,790/- made by the AO and upheld by the Ld. CIT(A).”
Respectfully following the findings of the coordinate bench (supra) we direct the Assessing Officer to delete the addition of Rs.20,14,327/-. The appeal filed by the assessee is allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 26.09.2018.