A.C.I.T. CIRCLE - 2(3)(1), MUMBAI vs. TRUST CAPITAL SERVICES (INDIA) PVT. LTD., MUMBAI

1. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in partially deleting the disallowance made u/s 36(1)(iii) of the Act without appreciating the fact that the assessee being a Non-Banking Financial Company paid higher rate of interest to its lenders than the rate of interest received on loans extended by it."

Brief facts of the case are that the assessee is a company engaged in the business of investment in securities. The assessee filed its return of income for Assessment Year 2014-15 on 30.11.2014 declaring total income of Rs. 10,40,99,210/-. The return of income was selected for scrutiny and the assessment was completed on 29.12.2016 under section 143(3) of the Act. The Assessing Officer while passing the assessment order made the addition of Rs.62,71,660/- under section 36(1)(iii), addition of Rs.64.24,201/- on account of market to market loss and disallowance of Rs. 15,88,675/- under section 14A. On appeal before the ld. CIT(A), the assessee was allowed partial relief on the addition under section 36(1)(iii), however, remaining other additions/disallowance was deleted. Thus, aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before us.

We have heard the submissions of the ld. DR for the revenue and the ld AR for the assessee and perused the material available on record. We have also deliberated on various case laws relied by the lower authorities and the ld. representatives of the parties. Ground No.1 relates to sustain Mum 2018-M/s Trust Capital Services (India) Pvt. Ltd. the partial the disallowance of interest expenses under section 36(1)(iii).

On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that assessee had given advance to M/s India Infoline Finance Ltd. and charged interest @ 12%. The assessee also received a loan from M/s India Infoline Finance Ltd. and paid interest @ 16%. The assessee received interest of Rs. 24.57 lakhs and paid interest of Rs. 18.63 lakhs to said party India Infoline Finance Limited. The Assessing Officer accordingly disallowed excess interest @ 4% of Rs. 4,64,753/-, which decision of AO was reversed by learned CIT(A) as the said party is NBFC and not a related party . The decision of the assessee to pay this differential interest were held to be governed by commercial expediency. The ld. AR of the assessee further submits that the assessee had borrowed fund at a short notice and for a short period of time i.e. at the time of settlement. Immediately after payment is made for settlement and money is recovered from the client, the loan was re-paid that is why the assessee paid interest at higher rate i.e @ 16% which was a short term loan. The assessee gave loan to M/s India Infoline Finance Ltd. as Inter Corporate Deposit (ICD) for a longer period. Accordingly, the interest rate of such ICD given was at a lower rate of interest. M/s India Infoline Finance Ltd. is not a related entity with the assessee. Further, being corporate entity, the tax rate applicable to M/s India Infoline Finance Ltd. and assessee are same. The difference in interest paid was only on account of immediate demand, supply need 5 Mum 2018-M/s Trust Capital Services (India) Pvt. Ltd. and business expediency. For disallowance in respect of remaining other parties of Rs. 58,05,907/-, the ld. AR of the assessee submits that assessee has taken short term borrowings in order to meet its commitment at the time of settlement. Therefore, the assessee is required to borrow the funds from whatever sources available at whatever competitive rate of interest the loan is available in market. Most of the parties who provided loan are corporate assessee. The interest paid to unrelated party are 13% to 14% & 8% to related party. The assessee charged interest @ 12% from unrelated parties and @ 8% from related parties. In most of the cases, the assessee has generally paid and received interest @ 8% from related parties, except Sankhya Financial Services P.

We have considered the submission of both the parties and gone through the order of authorities below. We have also deliberated on various case 6 Mum 2018-M/s Trust Capital Services (India) Pvt. Ltd. laws relied by lower authorities and ld. Representative of the parties.

So far as disallowance of interest to related parties are concerned, the ld. CIT(A) observed that the interest paid to only related party is higher, whereas the interest received from all of them is at 8% only. The ld. CIT(A) further observed that the assessee has to demonstrate the business expediency and need while dealing with related parties for payment of interest at higher rate and or charging less rate of interest. As simple and self serving statement is not sufficient. The ld CIT(A) observed that the Assessing Officer has prepared a complete chart of interest rate chart and paid in a tabular format in para 6.1 of his order.

We have noted that the ld. CIT(A) passed the order after properly appreciating the fact and directed to recompute the interest disallowance. We have observed that the said party M/s India Infoline Finance Limited is an unrelated party. It is explained by the assessee before the authorities below that the assessee is in the business of trading in interest futures and borrowing are made at shorter notice for a shorter period to meet immediate fund requirements at the time of settlement and once money is recovered from clients, the loans and advances are repaid. It was explained that the loan borrowed from India Infoline Finance Limited @16% was a short term loan while loan granted to India Infoline Finance Limited was an Inter Corporate Deposit for a longer period and 9 ITA No. 709 Mum 2018-M/s Trust Capital Services (India) Pvt. Ltd. hence lower rate of interest @12% was charged. This is a plausible view offered by the assessee governed by principles of commercial expediency and the onus which lay on assessee stood discharged . Now it was for Revenue to have rebutted the same with cogent evidences that the said decision was not governed by principles of commercial expediency . Merely because while dealing with a party who is an NBFC, the borrowing rates are higher than lending rate , inferences cannot be drawn against the tax-payer in a straight jacket manner. The terms and conditions of borrowing/lending in totality as well surrounding circumstances governing such business decision ought to have been evaluated by AO to rebut the contentions of the assessee. The AO failed to do so and further the AO cannot sit in the arm chair of businessmen and decide about commercial expediency of business decision taken by tax-payer. With respect to other disallowance of interest rate differential made by the AO which were deleted by learned CIT(A) , we have observed from the chart of borrowings and lending as reproduced by learned CIT(A) in para 6.1 that the assessee has borrowed from related parties at 8% and loans were also granted to related parties at 8% . The major borrowings were from Trust Investment Advisor Private Limited , a related party wherein interest @ 8% was payable amounting to Rs. 3.00 crores. So far as allegation of lending at lower rate of interest to JM Financial Services Limited @0.5% is concerned , it is explained by 10 Mum 2018-M/s Trust Capital Services (India) Pvt. Ltd. assessee that the assessee has paid Rs. 22.69 lacs to JM Financial Services Private Limited towards processing charges / brokerage for arranging loan from M/s JM Financial Products Limited . If the processing charges/brokerage for arranging loans are paid, we fail to understand how the same can be considered for computing disallowance based on interest rate differential. So far as disallowance confirmed by learned CIT(A) with respect to interest rate differential to a related party namely Sankhya Financial Services Private Limited , the assessee has accepted the same and no appeal/CO is filed by the assessee. The chargeability of interest on loans granted by a taxpayer vis-a-vis interest payable on borrowings are commercial decisions taken by a tax-payer based on commercial expediency. There are several factors which govern these decisions such as period of loan, terms of loan, immediate pressing business needs , securities offered etc for borrowing/lending. The Revenue cannot sit in the arm chair of businessmen and start scrutinizing these decisions without analyzing the several complex reasons which govern decision making process undertaken by a businessman unless it is shown that malafide is writ large with a view to defraud Revenue. In our view the ld CIT(A) has take a reasonable view, which we affirm. No contrary fact or law is brought to our notice to take any other view.

Ground no.2 relates to disallowance of market to market loss. The ld. DR for the revenue supported the order of Assessing Officer. The ld. DR further submits that Assessing Officer while going through the Profit & Loss Account noted that assessee has incurred notional loss of Rs. 64,24,201/-. The loss being notional in nature which is only contingent and was disallowed as per provision of section 37.

On the other hand, the ld. AR of the assessee submits that this ground of appeal

Ground no.3 relates to disallowance under section 14A. The ld. DR for the revenue supported the order of ld. Assessing Officer.

On the other hand, the ld. AR of the assessee submits that during the relevant Financial Year, the assessee has not earned any exempt income; therefore, no disallowance under section 14A is warranted. In support of his submission, the ld. AR of the assessee relied upon the decision of jurisdictional High Court in PCIT vs. Balarpur Industries Ltd. (ITA No. 51/2015 dated 13.10.2016). 14. We have considered the submission of both the parties and have perused the order of lower authorities. We have also deliberated on various case law relied by respective parties. The Assessing Officer noted that the assessee has made investment of Rs. 7.36 Crore out of total non-current investment of Rs. 39.16 Crore in unlisted equities and mutual fund. The Assessing Officer while relying upon the decision of Special Bench in Mumbai Tribunal in M/s Daga Capital Management Pvt. Ltd. invoked the provision of section 14A r.w.r. 8D and worked out the disallowance of Rs. 15,88,675/-. Before the ld. CIT(A), the assessee contended that the assessee has not earned any dividend income during the relevant financial year, therefore, there was no question of disallowance under section 14A. The ld. CIT(A) deleted the entire disallowance by following the decision of Hon’ble Delhi High Court in Cheminvest Ltd. vs. CIT 9378 ITR 33). 14 Mum 2018-M/s Trust Capital Services (India) Pvt. Ltd.

We have further noted that the jurisdictional High Court PCIT vs. Balarpur Industries Ltd. (supra) by following the decision of Hon’ble Delhi High Court in held that the provision of section 14A would not apply, if no exempt income was received or receivable during the relevant previous year. Considering the above factual and legal discussion we do not find any illegality or infirmity in the order passed by ld. CIT(A), which we affirm. In the result the ground No.3 of the appeal is also dismissed.

In the result, appeal of the revenue is dismissed.