EXPRESS AIRTRONICS P.LTD,MUMBAI vs. ITO 2(1)(3), MUMBAI

O R D E R

PER RAMIT KOCHAR, Accountant Member:

3. The brief facts of the case are that the assessee is engaged in the business of trading of telecommunication related equipments. It was observed by the AO during the course of assessment proceedings u/s. 143(3) r.w.s. 143(2) of the Act, that the assessee has advanced ICD/loan to M/s. Manphool Export Ltd. ( hereinafter called “MEL"), 29A, Ballygunge Circular Road, Kolkata-700019 carrying interest @ 6% per annum , which showed the opening balance of Rs. 6 crores, which was squared off on 05.01.2011. The total interest received by the assessee from MEL for the year was Rs. 25,39,726/-. The AO observed that the assessee has obtained new secured loan of Rs. 45.75 crores from Syndicate Bank carrying interest @ 8.5% per annum. The assessee was asked by the AO to explain as to why the differential interest between higher rate of interest paid on secured loans from Syndicate Bank @8.5% per annum and the lower rate of interest received on Loan from MEL @ 6% per annum , be not disallowed keeping in view provisions of Section 36(1)(iii) of the 1961 Act. The assessee during the course of assessment proceedings explained before the AO that similar disallowance on account of differential interest @ 1% were made for AY 2009-10 also which stood deleted by learned CIT(A) in full , vide appellate order dated 11.10.2012. It was further claimed that the assessee obtained new secured loan of Rs. 45.75 crores from Syndicate Bank carrying interest @8.5% per annum for business purposes . It was submitted that these loan proceeds were utilised by the assesse for retiring assessee’s liability towards advance received from customers. It was also claimed that interest bearing funds have been employed in business which are deployed and utilised by assessee for its trading business activities and consequently interest expenses are to be fully allowed u/s 36(1)(iii) of the 1961 Act. It was claimed that these ICD/loan were provided by assessee on short term basis and hence consequently interest charged on such deposits are little lower than interest paid by the assessee. The AO rejected the contentions of the assessee and held that this loan/ICD of Rs. 6 crore was not given for short term but was given in FY 2008-09 which was continuing in this year also and finally squared on 05.01.2011. It was also observed by the AO that this loan of Rs. 6 crores was unsecured and hence it should have been given at higher rate of interest than the rate of interest applicable for secured loans/prevailing PLR. This led AO to disallow interest to the extent of 2.5% on Rs. 6 crores, which led to additions to the tune of Rs. 10,58,220/- by way of disallowance u/s. 36(1)(iii) of the 1961 Act on account of short recovery, vide assessment order dated 14.03.2014 passed by the AO u/s 143(3) of the 1961 Act.

4. Aggrieved by an assessment framed by the AO u/s 143(3) of the 1961 Act vide assessment order dated 14.03.2014, , the assessee filed first appeal with learned CIT(A) who was pleased to dismiss the appeal of the assessee , vide appellate order dated 02.12.2015 passed by learned CIT(A). The assessee submitted before the learned CIT(A) that an amount of Rs. 6 crores was given to MEL out of ICD on AY 2008- 09. It was also submitted that secured loans obtained from Syndicate Bank carrying interest @8.5% per annum were not utilised for advancing loan and hence interest rate of 8.5% per annum on loan to MEL cannot be applied as against actual interest charged on loan to MEL @6% per annum . It was also submitted that for AY 2009-10, the AO disallowed 1% of interest u/s 36(1)(iii) of the 1961 Act on the grounds that interest received from MEL is 6% p.a. while the assessee paid interest @7% on borrowed funds from GTL.It was claimed that learned CIT(A) while adjudicating appeal for AY 2009-10 was pleased to delete the addition as was made by the AO towards differential interest vide appellate order dated 11.10.2012 bearing no. CIT(A)- 4/IT-72/AC(OSD).2(1)/2011-12, by holding as under: “Ground No. 2 “ On the facts and in the circumstances of the case and in law the Ld. A.O was not justified in disallowing interest expenses of Rs. 6,00,000/- incurred by the appellant during the year.”

6. The facts of the case are that assessee has given Rs. 6 crore to M/s. Manphool Exports Ltd. @ 6%, whereas, it had paid interest on the borrowed funds to GTL Ltd., @7%, therefore, A.O disallowed Rs. 6 lakhs out of the 4 interest paid, which has been disputed by the assessee and the submissions of the assessee are as follows: “The assessing officer has disallowed Rs. 6,00,000/- out of interest expenses and for this purpose the assessing officer has compared the rate of interest at which the loan is given by the company and the rate at which interest bearing funds were obtained by the company. It is submitted that the entire exercise carried out by the assessing officer is unwarranted for the reasons stated below- a. The loan which generated interest income which has been considered for the purpose of disallowance was given in the last year. b. There is no quid pro quo between the funds on which interest was paid by the company and the loan which was given by the company. c. It is to be clarified that, the company pays interest at 7% on advances received with a moratorium period of one month. Thus effective rate of interest paid by the company on advances received is not 7% but is around 6.4%. Therefore, the Assessing Officer has erred in considering interest rate of 7% the purpose of disallowance. d The non interest bearing funds available with the company in the form of own funds, non interest bearing advances received and creditors outstanding are more than the loan amount which is considered by the assessing officer for disallowing portion of interest expenses. Your Honor's attention is invited to the Jurisdictional High Court's judgment in the case of CIT Vs. Reliance Utilities and Power Ltd wherein Honourable High court has held that "if there be interest free funds available to an assesses sufficient to meet its investments and at the same time the assessee had raised loan, it can be presumed that the investments were from interest free funds available. e. It is to be placed on record that the company has earned total interest income of Rs. 2.05 Crores vis-a-vis total interest expenses of 1.52 Crores. The above fact has been conveniently overlooked by the Assessing Officer. Singling out a particular loan transaction is unjustified. The reasons for lower interest rates were placed on record and ignoring the same without any valid reasons is unwarranted. In the circumstances, your Honor is requested to delete the disallowance of interest expenditure.' 7. I have considered the facts of the case and submissions of the assessee. A.O. has not established any relation between the borrowed funds and the advance given by the assessee and, therefore, apparently the decision of Hon'ble Bombay High Court in the case .of Reliance Utilities and Powers Ltd., relied by the assessee applies to the case of the assessee and no disallowance can be made. As clarified by the assessee, the advance given to Manphool Exports was for a short period of three months only, whereas, the terms for the advance taken are different. The amounts given and taken as loan are also substantially different. The difference in rate of interest is also that of 1% only and the parties to whom loan has been given or taken are not related and, therefore, the difference of 1% is considered as normal in the circumstances of the case. Hence, the addition is deleted and the ground of appeal is allowed.”

4.2 The assessee made following written submissions before the learned CIT(A) during appellate proceedings for the impugned assessment year :

The Appellant submits that the said ICD were not given out of secured loan from Syndicate Bank, but were given to Manphool in the A Y 2008-09 out of the ICD of Rs, 6 crores refunded by Arena Textile & Industries Ltd.( please refer Paper Book Pg, No. 63). The Appellant further submits that in the FY 2007-08, it had borrowed funds of Rs. 4,20,665/-only. Therefore, there is no question of borrowed funds of Syndicate Bank having being utilised for ICD of Rs. 6 crores. (Please refer Balance-sheet of FY 2007-08 at Paper Book Pg, No. 79). In this regards; the Appellant would like to place its reliance on the decision of Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd [2009] 178 Taxman 135. (Refer Paper Book Pg. No.8-11). Now, the Appellant would like to draw Your Honour's attention to the fact that the new secured loan from Syndicate Bunk was obtained by the Appellant during the captioned year on September 27, 2010 at the rate of 8.5% p.a. which was utilized to pay the business advances to the suppliers in the normal course of business (Please refer Paper Book Pg, No.53). Your Honour will appreciate that there was no nexus between the said ICD given and the new secured loan taken from Syndicate Bank during the year. Therefore, the alleged disallowance or interest at the rate of 2.5% on the amount of ICD was unjustified and unwarranted and as such liable to be deleted. The Appellant would like to draw Your Honour's attention to the fact that the similar disallowance was made at the rate of 1% on account of short recovery of interest on unsecured loan from Manphool on the same amount in assessee's own case in the A.Y. 2009-10 and the said disallowance was deleted by the Hon'ble CIT(A) - 4, Mumbai and held (in Para 7} that- I have considered the facts of the case and submissions of the assesses. AO has not established any relation between the borrowed funds and the advance given by the assesses and, therefore, apparently the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Powers Ltd,, relied by the assesses applies to the case of the assesses and no disallowance can be made. As clarified by the assesses, the advance given to Manphool Exports was for a short period of three months only, whereas, the terms for the advance taken are different The amounts given and taken as loan are also substantially different. The difference in rate of interest is also that of 1% only and the parties to whom loan has been given or taken are that of 1% only and the parties to whom loan has been given or taken are not related and. therefore, the difference of 1% is considered as normal in the circumstances of the case. Hence, the addition is deleted and the ground of appeal is allowed," The Appellant prays that following the order of the CIT (A) for the A.Y. 2009-10 in the Appellant's own case, the said disallowance of interest be deleted in as much during the captioned assessment year the A.O. has failed to establish the nexus between the borrowed funds and the amount so utilised by way of ICDs given. Further, the party to whom ICD given are not related parties and as such the question of disallowance did not arise, In this regards, reliance may be placed on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Vijay Solvex Lid. [2015] 59 taxmann.com 294, wherein it was held that where the AO failed to show the nexus between the borrowed funds and the advances given and where the assessee company has sufficient own funds, interest disallowance could not be made, (Refer Paper Book Pg. No. 39-40). The Appellant would like to further rely on the decision of Hon'ble Delhi High Court, in the case of CIT v. Dalmia Cement (p.) Ltd. [2002] 254 ITR 377. wherein it was held that once it is established that there was nexus between the expenditure and the purpose of the business, Revenue cannot justifiably claim to put itself In the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case Further reliance may be placed on the decision of Hon’ble Allahabad High Court in the case of CIT v. Motor Sales Ltd [2008] 304 ITR 123, wherein it was held that it was finding of fact as found in the case that respondent-assessee had capital/ reserve/ surplus of Rs. 6.10 crores on which no interest was being paid and therefore interest free advances made by it are covered and ultimately held that there is no question of any disallowance of notional interest on loan taken by it. It was further held that the Tribunal had also recorded a finding that the assesses had not diverted any borrowed fund on which interest was paid for non-commercial purposes and therefore, there is no question of disallowance of interest out of the interest paid by the assesses The Appellant further relies on the decision of Hon’ble Bombay High Court in the case of CIT v. S.D. investment & Trading Co. {2008] 306 ITR 31 wherein it was observed that a businessman cannot be expected to and does not make profit out of each and every transaction entered into by him. In light of the foregoing facts and legal position of the case, the Appellant prays that the said disallowance of interest expenditure of Rs. 25,39,726/- be deleted."

4.3 The learned CIT(A) after considering submissions of the assessee confirmed the addition for the impugned assessment year AY 2011-12, vide appellate order dated 02.12.2015, by holding as under:- “9. I have considered the issue under appeal, carefully. I find that loan has been procured @8.5% from the Syndicate Bank, hence, there is no valid reason to charge interest @6% from the related concern. It is true that loan was given in A.Y.2008-09 out of ICD, nevertheless, there is no valid reason not to charge market rate of interest on such advances. The Appellant has not demonstrated with evidences as to how such advances has benefited the business of the Appellant in addition to the interest income, therefore, there is no reason for not charging rate of interest prevailing in the market. Therefore, I find substance in the reasoning of the Assessing Officer that interest has been paid @8.5% whereas it has been charged only @6%, without any visible reason, therefore, the findings of the Assessing Officer is sustained and corresponding "Interest Expenditure" disallowed by the Assessing Officer to the extent of Rs.10,58,220/- is approved.”

On the facts and in the circumstances of the case and in law the Ld. A.O was not justified in disallowing interest expenses of Rs. 6,00,000/- incurred by the appellant during the year.

6. The facts of the case are that assessee has given Rs. 6 crore to M/s. Manphool Exports Ltd. @ 6%, whereas, it had paid interest on the borrowed funds to GTL Ltd., @7%, therefore, A.O disallowed Rs. 6 lakhs out of the interest paid, which has been disputed by the assessee and the submissions of the assessee are as follows: “The assessing officer has disallowed Rs. 6,00,000/- out of interest expenses and for this purpose the assessing officer has compared the rate of interest at which the loan is given by the company and the rate at which interest bearing funds were obtained by the company. It is submitted that the entire exercise carried out by the assessing officer is unwarranted for the reasons stated below- a. The loan which generated interest income which has been considered for the purpose of disallowance was given in the last year. b. There is no quid pro quo between the funds on which interest was paid by the company and the loan which was given by the company. c. It is to be clarified that, the company pays interest at 7% on advances received with a moratorium period of one month. Thus effective rate of interest paid by the company on advances received is not 7% but is around 6.4%. Therefore, the Assessing Officer has erred in considering interest rate of 7% the purpose of disallowance. d The non interest bearing funds available with the company in the form of own funds, non interest bearing advances received and creditors outstanding are more than the loan amount which is considered by the assessing officer for disallowing portion of interest expenses. Your Honor's attention is invited to the Jurisdictional High Court's judgment in the case of CIT Vs. Reliance Utilities and Power Ltd wherein Honourable High court has held that "if there be interest free funds available to an assesses sufficient to meet its investments and at the same time the assessee had raised loan, it can be presumed that the investments were from interest free funds available. e. It is to be placed on record that the company has earned total interest income of Rs. 2.05 Crores vis-a-vis total interest expenses of 1.52 Crores. The above fact has been conveniently overlooked by the Assessing Officer. Singling out a particular loan transaction is unjustified. The reasons for lower interest rates were placed on record and ignoring the same without any valid reasons is unwarranted. In the circumstances, your Honor is requested to delete the disallowance of interest expenditure.' 7. I have considered the facts of the case and submissions of the assessee. A.O. has not established any relation between the borrowed funds and the advance given by the assessee and, therefore, apparently the decision of Hon'ble Bombay High Court in the case .of Reliance Utilities and Powers Ltd., relied by the assessee applies to the case of the assessee and no disallowance can be made. As clarified by the assessee, the advance given to Manphool Exports was for a short period of three months only, whereas, the terms for the advance taken are different. The amounts given and taken as loan are also substantially different. The difference in rate of interest is also that of 1% only and the parties to whom loan has been given or taken are not related and, therefore, the difference of 1% is considered as normal in the circumstances of the case. Hence, the addition is deleted and the ground of appeal is allowed.” Thus, the learned CIT(A) while adjudicating appeal for AY 2009-10 deleted the disallowance as the AO could not show nexus between borrowed funds and the amount lent by the assessee to MEL. The learned DR could not show that the Revenue filed an appeal against the decision of learned CIT(A) granting relief to the assessee for AY 2009-10. The assessee has squared off loan to MEL on 05.01.2011. The total interest received from MEL for the impugned assessment year was Rs. 25,39,726/-. The assessee has obtained new secured loan of Rs. 45.75 crores from Syndicate Bank carrying interest @ 8.5% per annum, during the year under consideration. The assessee had claimed that new secured loan of Rs. 45.75 crores from Syndicate Bank carrying interest rate @8.5% per annum was utilised by the assesse for retiring assessee’s liability towards advance received from customers. It was also claimed by the assesseee that the aforesaid interest bearing funds have been employed in business which are deployed and utilised by assessee for its trading business activities and consequently interest expenses are to be fully allowed u/s 36(1)(iii) of the 1961 Act. The Revenue is not able to rebut this contention of the assessee as to user of loan raised from Syndicate Bank for purposes other than business of the assessee. The loan to MEL was not given during the year under consideration but rather it was given in FY 2008-09 and for AY 2009-10, and the additions so made towards lower rate of 6% interest per annum charged from MEL as against ICD from GTL taken by the assessee @ interest of 7% per annum stood deleted by learned CIT(A) wherein while granting relief to the assessee the learned CIT(A) observed that the AO could not prove nexus of interest bearing borrowed funds with the loans granted. The learned DR could not show that the Revenue has filed an appeal against the appellate order passed by learned CIT(A) for the AY 2009- 10 granting relief to the assessee. The loans raised by the assessee as of 31.03.2008 were merely Rs. 4.20 lacs as is appearing from the audited Balance Sheet as at 31.03.2008 filed before the Bench(page 79/pb). We have observed on the perusal of the audited financial statements for the year ended 31.03.2011 that the assessee has stated in its Directors Report that the assessee has taken secured loan from Syndicate Bank of Rs. 45.75 crores bearing interest rate of 8.5% per annum to execute order received from Company to Purchase Telecom Tower(page 3/pb). The assessee claimed before the authorities below that this secured loan of Rs. 45.75 crores obtained from Syndicate Bank on interest rate of 8.5% was deployed and utilised by the assessee to repay trade advances and to undertake business activities. The Revenue could not co-relate and prove nexus of interest bearing borrowings with the loan of Rs. 6 crores advanced to MEL. In any case, these loans/ICD of Rs. 6 crores were advanced in the financial year 2008-09 and not in the year under consideration. The learned CIT(A) has already held in favour of the assessee while adjudicating appeal for AY 2009-10. The learned DR could not bring on record any material to contend that Revenue had challenged the decision of learned CIT(A) for AY 2009-10 and an appeal was filed with tribunal for AY 2009-10 by Revenue. We have also observed from the audited financial statements for the year ended 31.03.2011 placed by the assessee in paper book filed before the tribunal that there were advances of Rs. 85.53 crores received against orders from customers as at 31.03.2010 while the same were Rs. 16.83 crores as at 31.03.2011 from the perusal of audited financial statements for the year ended 31.03.2011(pb/page 16). The loan advanced to MEL was also received back by assessee on 05.01.2011. It is also observed that the assessee also received ICD from Chennai Network Infrastructure Limited to the tune of Rs. 60 crores during FY 2009-10 and 2010-11 , which carried interest rate of 7% per annum(page 54-62/pb). The said ICD also stood paid back in FY 2010-11 as is emerging from ledger extract of said Chennai Network Infrastructure Limited placed in paper book filed before the tribunal(pb/page 62). The loan/ICD to MEL was given in FY 2008-09 and contractual rate of interest was 6% per annum. Merely because rate of interest was lower, there is no justification of making additions unless malafide or intent to defraud revenue is brought on record. The Revenue cannot sit in the armchair of the businessmen to decide manner in which business is to be conducted unless it is brought on record that the affairs of business are so organised by taxpayer with an objective to perpetrate fraud on revenue. Nothing is brought on record by the AO to justify additions in the instant case and even nexus of borrowings made by the assessee by way of secured loan from Syndicate Bank on interest rate of 8.5% per annum to the loan/ICD granted to MEL is not proved. Revenue has failed to bring on record any cogent material to prove nexus of interest bearing borrowed funds and ICD/loan granted by the assessee to MEL and in absence thereof theory of mixed funds being used for granting of Loan/ICD to MEL will come into play. The business entity is like a flowing river wherein dynamics changes with passage of time. The debts are repaid, fresh debts are raised or even substituted by equities/debts and vice versa with passage of time. Similarly fresh equities are raised and reduction of capital also takes place from time to time. Some of the entities which were established even 100 years back are still operating in India and have seen churning of debts and/or equities as well vice versa several time with passage of time. Whether interest free funds were utilised or not for making investments or granting loan are all finding of facts which requires investigation into the facts and affairs of the entities. This requires seeing the fund utilisation during the year under consideration of entity which could be tied up funds or could be a mixed used funds . This exercise is to be done every year as facts situation may change from year to year. In the case of tied up funds wherein interest bearing borrowings are raised for specific purposes as to its end use, there is no difficulty in such type of interest bearing borrowings as the funds can be used only for specific purposes unless diversion of funds for un-authorised purposes is brought on record. In case of mixed use funds wherein the tax-payer has with it both interest bearing funds as well interest free funds which are both not tied up funds for specific end use , then in that case if the interest free funds available with the taxpayer are higher than the loans/investments made, presumption will apply that the taxpayer has utilised interest free funds available with it for granting loans or making investments . This is purely a finding of fact which need to be investigated on year to year basis by unfolding facts from the financial records of the tax-payer. The decision of Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd. (2019) 410 ITR 466(SC) will be applicable, wherein it was held as under : 7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. Thus as could be seen from aforesaid judgment of Hon’ble Supreme Court , it is purely a question of fact. The decision of Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Limited (2009) 313 ITR 340(Bom.) is relevant. The working of availability of interest bearing funds as well as interest free funds which are mixed use funds being not tied up funds is not available on record in the instant case before us. Under these circumstances based on facts as are emerging from records , we are restoring the matter back to the file of the AO for ascertaining the availability of interest free funds available with the assessee and whether the same are sufficient to cover loans/investments made by the assessee and we are directing the assessee to produce before the AO details of interest bearing as well interest free funds available with it during the impugned assessment year along with the complete details of interest expenses paid/payable on these interest bearing funds, which shall be then verified by the AO from records in context of loans granted and investments made to come to conclusion whether interest free funds 14