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Income Tax Appellate Tribunal, “D”, BENCH
Before: SHRI C.N. PRASAD, JM & SHRI M.BALAGANESH, AM Dr. Annie Besant Road
आदेश / O R D E R PER M. BALAGANESH (A.M):
This appeal in A.Y.2011-12 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-17, Mumbai in appeal No.CIT(A)-17/IT-24/14-15 dated 30/06/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 05/03/2014 by the ld. Income Tax Officer – 8(2)(3), Mumbai (hereinafter referred to as ld. AO).
None appeared on behalf of the assessee nor any adjournment petition was filed on behalf of the assessee, though the notice of hearing was served on the assessee. Hence we proceed to dispose off this appeal on hearing the ld DR and based on materials available on record.
M/s. Mega Custodial Services Ltd.,
The first issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of interest u/s 36(1)(iii) of the Act on proportionate basis in the facts and circumstances of the case.
3.1. The brief facts of this issue are that the assessee is a public limited company engaged in the business of providing financial services to various companies and had filed its return of income for the Asst Year 2011-12 on 29.9.2011 declaring total income of Rs 22,97,171/- under normal provisions of the Act and book profits of Rs 50,88,348/- u/s 115JB of the Act. The ld AO observed that in the course of assessment proceedings, the assessee furnished computation of total income, balance sheet, profit and loss account, tax audit report in Form 3CA and 3CD and various other documents , as called for, by him. On perusal of profit and loss account, the ld AO observed that assessee had credited an amount of Rs 12,96,57,884/- on account of interest income and debited an amount of Rs 12,95,71,373/- on account of interest and finance charges as expenditure during the previous year relevant to Asst Year 2011-12. The assessee furnished the details of loans and advances before the ld AO and gave the break up of interest received in the sum of Rs 12,96,57,884/- in the tabular form as under:- Sr. Name of the Opening Loans given Loans repaid Closing Amount of Rate of No Party Balance during the year balance interest interest received 1. M/s. Everest 54,05,000 54,05,000 --- 3,53,836 12% Anggan Pvt. Ltd., 2. Mega 38,37,23,310 1,61,34,25,577 123,14,94,142 76,56,54,745 12,77,86,271 14% Management Services Pvt. Ltd., 3. V.K. 51,11,000 51,11,000 1,23,333 12% Industries Ltd., 4. Varun 16,20,280 1,89,097 18,09,377 1,94,444 12% Retreas Ltd., 5. Shree 1,00,00,000 1,00,00,000 12,00,000 12% Mahaveer Associates & Developmen t & Housing
M/s. Mega Custodial Services Ltd.,
Total 41,68,75,932 251,23,25,674 214,66,26,484 79,64,19,083 12,96,57,884 Average rate of interest works out to 12.40% 3.2. The ld AO observed that the assessee had taken loans during the previous year from various parties and paid interest thereon as under:- Sr. Name of the party Date Total amount Rate ^6f No. taken during the Interest year
08/04/2010 10,00,00,000 14.75% 1 SICOM Limited 31/08/2010 25,00,00,000 SICOM Limited SICOM Limited 25/11/2010 10,00,00,000 13.50% SICOM Limited 08/11/2010 35,00,00,000 13.00% Total amount taken from SICOM Limited, 80,00,00,000 11 .75% 2 Barclays Investment and 22/07/2010 15,00,00,000 Loan (India) Ltd. 3 Bright Brothers Limited 25/03/2011 3,00,00,000 17.50% 4 India Infoline Investment 23/06/2010 15,00,00,000 12.25% Services Limited
5. St. Archana Mittal On various 90,97,27,342/- 16% date
Average rate of interest 13.81% 3.3. The ld AO observed that in addition to the interest payment on loans of Rs 12,95,71,373/-, the assessee company had also paid ‘Brokerage and Commission’ of Rs 6,50,000/-; ‘Processing Fees’ of Rs 10,25,000/- and ‘Legal and Professional Fees’ of Rs 15,00,000/- which form part of cost of acquisition of fund. Accordingly, the ld AO asked the assessee to explain as to why the proportionate disallowance of interest u/s 36(1)(iii) of the Act should not be made and added to the total income of the assessee.
M/s. Mega Custodial Services Ltd., 3.4. The ld AR replied that the average rate of interest on secured loans works out to 12.79% and that of interest paid on unsecured loans works out to 14.71%. Thus the assessee company had paid more interest on unsecured loans by 1.92% in comparison with payment of interest on secured loans. The assessee submitted that it had borrowed secured loans as under:- Sr. No. Name of the Party Total amount Rate of take during the interest year 1. SICOM Limited 80,00,00,000 13.26% 2. Barclays Investment and 15,00,00,000 11.75% Loan (India) Ltd., 3. Bright Brothers Limited 3,00,00,000 17.50% 4. India Infoline Investment 15,00,00,000 12.25% Services Limited Total amount 113,00,00,000 3.5. Against the above secured loans, the assessee company has given loans to parties, as under:-
Sr. No. Name of the Party Total amount Rate of take during the interest year 1. Mrs. Archana Mittal 89,36,00,000 16% 2. Mega Management Services 161,34,25,577 14% Pvt. Ltd., 3. V.K. Industries Ltd., 51,11,000 12% Total Amount 251,26,55,736 3.6. With regard to other expenses such as ‘Brokerage and Commission’ and ‘Professional Fees (Loan processing fees)’ , the assessee submitted that it had to pay brokerage and commission at a certain percentage of loan amount and thay are sanctioning to the assessee and are conditional payments, therefore the company had to incur for getting the said loans. Further the company had to M/s. Mega Custodial Services Ltd., approach the third party for arranging the funds and the third party charges to company on account of loan processing fees / professional charges.
3.7. The ld AO on perusal of the memorandum of association of the company observed that the main objects and incidental objects of the assessee company are as under:- (A) “THE MAIN OBJECTS OF THE COMPABY TO BE PURSUED BY THE COMPANY ON ITS INCORPORATION:
1.
To receive, hold in trust as trustee, agent or nominee of any person or persons, company, corporation, government, state or province or of any municipal or other authority or public body and sell, transfer, exchange, assign, lend, bail, pledge or deal with, manage and turn to account any real and personal property of all kinds and in particular shares,, stocks, debentures, securities, policies, book debts, claims and choses in action, bonds, promissory notes, participation, certificates, lands, building, hereditaments, business concerns.
2. To act as advisors and manager........................ (B) THE OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECTS: 3. To borrow or raise moneys or loans for the purposes of the company by promissory notes, bills of exchanges, hundies and other negotiable or transferable instruments or by mortgage, charges, hypothecation or pledge, or by issue of debentures or debenture-stock convertible into shares of this company, charged upon all or any of the company's property and assets, both present and future, moveable and immovable., including its uncalled capital, upon such terms as the Directors may deem expedient, or to lake money on deposit or otherwise (merely) for the purpose of financing the business of the company subject 10 restrictions and rules in force at that time and to lend money to customers and others having dealings with the company and to execute alt deeds, writings and assurances for any of the aforesaid purposes.”
From the above, the ld AO observed that the assessee is involved in the financial activity of providing finance to various parties. He observed that the assessee had only Rs 41,68,75,932/- of funds of its own and almost the entire funds were borrowed by it on interest either from financial institutions or from other parties and out of that, substantial amounts to the extent of Rs 89,36,00,000/- and Rs 161,34,25,577/- were given to Smt Archana Mittal , M/s Mega Management Services Pvt Ltd respectively. He observed that the assessee
M/s. Mega Custodial Services Ltd., is not registered as a non-banking financial company. Hence the loans advanced by the assessee were at all given as a measure of commercial expediency is to be tested. The ld AO observed that the assessee had advanced loans to its related parties either at the same rate of interest on which borrowings were made or at the rate lower than the borrowings rate. The ld AO arrived at the differential rate of interest at 1.41% and applied the same on the total borrowings and arrived at the disallowance of interest u/s 36(1)(iii) of the Act on a proportionate basis in the following manner:- Sr. No. Name of the Date Amount No. of days on Amount Lender (Rs.) Which interest (Rs.) calculated @1.41% 358 13,82,959 1. Sicom Limited 08.04.2010 10.00 Cr. 31.03.2010 25.00 Cr. 213 20,57,055 2. Sicom Limited 127 10.00 Cr. 4,90,603 3. Sicorn Limited 25.11.2010 144 4. Sicom Limited 08.11.2010 35.00 Cr. 19,46,959 5. Barclays 22.07.2010 15.00 Cr. 253 14,66,014 Investment & Loan (India) Ltd., 6. IIFL 23.06.2010 15.00 Cr. 282 16,34,055 7. Bright Brothers 25.03.2011 03.00 Cr. 07 8,112 Ltd., Total 89,85,757/- 4. The assessee stated before the ld CITA that it had received more interest at a higher rate than the rate of interest on its borrowings which is evident from the following table:- Particulars Rate of Interest AS PER AS PER AO APPELLANT Average interest 14.71% 12.40% received Average interest 12.79% 13.81% paid
M/s. Mega Custodial Services Ltd., Accordingly it pleaded that there is no need to disallow any interest on proportionate basis u/s 36(1)(iii) of the Act in the sum of Rs 89,85,757/-.
The ld CITA arrived at the revised calculation of average rate of interest paid on borrowed monies from various financial institutions as under:- Sr.No. Name of the party Amount of Rate of Loan Taken Interest 1 10,00,00,000 14.75% SICOM Ltd. 25,00,00,000 1 SICOM Ltd. 11.80% SICOM Ltd. 10,00,00,000 13.50% 35,00,00,000 SICOM Ltd. 13,00% 80,00,00,000 Total amount taken 13.50% from 2 15,00,00,000 11.75% Barclays Investment and Loan [India) ltd. 3 Bright Brother Limited 3,00,00,000 17.50% 4 15,00,00,000 12.25% India Infoline Investment Services Limited 5.1. The ld CITA observed that assessee had also advanced monies to the following parties and the revised rate of interest charged after excluding interest charged to Mrs Archana Mittal are as under:- Sr.No. Name of the party Amount of Rate of Loan Taken Interest M/s. Everest Anggan 54,05,000 12% Pvt. Ltd., 1 Mega Management 161,34,25,577 14.00% Services Pvt. Ltd., 2. V.K. Industries Ltd., 51,11,000 12.00% 3. Varun Retreas Ltd., 1,89,097 12.00% 4. Shree Mahaveer 1,00,00,000 12.00% Associates & (op.Bal) Development & Housing Average rate of interest received – 12.40%
M/s. Mega Custodial Services Ltd., 5.2. The ld CITA concluded that since assessee is in the business of financing activities, it had borrowed monies at an average rate of interest at 13.5% and lent to various persons at an average rate of interest at 12.40%. Based on this, he concluded that no prudent businessman would borrow at a higher rate and lend at a lower rate of interest. Accordingly, the ld CITA restricted the disallowance of interest u/s 36(1)(iii) of the Act by applying the differential rate of interest at 1.1% and arrived at the disallowance of Rs 70,16,489/- as under:-
Sr. Name of the Date Amount No. of days Amount 1 Sicom Limited 08.04.2010 10.00 Cr 385 10,78,904 2 Sicom Limited 31.08.2010 25.00 cr 213 16,04,794 3 Sicom Limited 25.11.2010 10.00 cr 127 38,27,39 4 Sicom Limited 08.11.2010 35.00 cr 144 15,18,904 5 Barclays Investment & Loan (India) Ltd., 22.07.2010 15.00 cr 253 11,43,698 6. IIFL 23.06.2010 15.00 Cr. 282 12,74,794 7. Bright Brothers Limited 25.03.2011 03.00 Cr. 07 6328
Aggrieved, the assessee is in appeal before us.
We have heard the ld DR. At the outset, it is not in dispute that the assessee had mixed funds in its kitty i.e own funds as well as borrowed funds. It is not in dispute that the assessee is engaged in financing activities. It is not in dispute that the assessee had indeed lent to various persons including sister concerns wherein interest was duly charged. Once the lending is meant in the ordinary course of financing activities of the assessee company, then charging / non-charging of interest or charging of interest at a lesser rate would not fall in the domain of the revenue. It si for the businessman to decide the same and the revenue cannot step into the shoes of the businessman in this regard. The test of commercial expediency is to be viewed from the point of view of businessman and not from the point of view of the revenue. Reliance in this regard is placed on the decision
M/s. Mega Custodial Services Ltd., of Hon’ble Supreme Court in the case of CIT vs Dhanrajgiri Raja Narasingirji reported in 91 ITR 544 (SC). Once it is proved and accepted that the lending is part of business activities of the assessee company and once there is no finding recorded by the lower authorities that the borrowed funds were diverted for non- business purposes, there cannot be any disallowance of interest u/s 36(1)(iii) of the Act on a proportionate basis. Accordingly, the ground no. 1 raised by the assessee is allowed.
The last issue to be decided in this appeal is with regard to claim of set off of business loss of Rs 16,29,034/- and unabsorbed depreciation of Rs 14,75,566/- against the total income of the assessee. This was disallowed by the ld AO on the ground that the details furnished by the assessee in the return of income under the relevant column differed with the details submitted during the course of assessment proceedings and the assessee failed to reconcile the same. The ld CITA however found certain discrepancies in the claim made by the assessee and accordingly directed the ld AO to verify the amount of losses brought forward / carried forward and compute the correct amount of set off available and grant the same to the assessee as per law. Aggrieved by this direction of the ld CITA, the assessee is in appeal before us.
8.1. We have heard the ld DR. We find that there is nothing wrong in the direction of the ld CITA in asking the ld AO to verify the claim of brought forward business and depreciation losses from earlier years. The assessee cannot be aggrieved by this direction. Hence the order of the ld CITA in our considered opinion, does not call for any interference. Accordingly, the ground no. 2 raised by the assessee is dismissed.
The Ground no. 3 raised by the assessee is general in nature and does not require any specific adjudication.
M/s. Mega Custodial Services Ltd.,
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on this 24/04/2019