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Income Tax Appellate Tribunal, ‘ B’ BENCH : CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
In this appeal filed by the assessee, which is directed against an order dated 30.01.2017 of ld. Commissioner of Income Tax (Appeals)- 2, Chennai, it is aggrieved on a disallowance of Rs.1,65,81,384/- made u/s.36(1)(iii) of the Income Tax Act, 1961 (in short ‘’the Act’’).
ITA No.995/CHNY/2017. :- 2 -:
Facts apropos are that assessee engaged in the business of financing and investments had filed its return of income for the impugned assessment year declaring loss of Rs.84,55,310/-. Main business of the assessee was providing financial support to concerns in an industrial group called Shriram group. Ld. Assessing Officer noted that assessee had advanced a sum of Rs.926,59,85,044/- to 102 persons. As per the ld. Assessing Officer, assessee was selective in receiving interest. Ld. Assessing Officer noted that assessee owed a sum of Rs.1058,41,56,014/- to the group companies, from which advances were given. Ld. Assessing Officer found from the Profit and Loss account that assessee had received interest of �10,09,62,087/- whereas it had paid interest of �11,75,43,471/-. As per the ld. Assessing Officer, there was no business prudence on the part of the assessee to receive lesser interest while paying higher interest, when all the transactions were with related parties. Ld. Assessing Officer also noted that partner’s current accounts reflected a huge debit balance of Rs.27,56,67,897/-, on which no interest was charged.
Relying on Section 40A2(b) of the Income Tax Act, 1961 (in short ‘’the Act’’) ld. Assessing Officer held that expenditure which involved related parties had to be restricted to the market value. According to him, concept of matching principle had to be allowed on the interest received and paid. Difference between interest received and interest
ITA No.995/CHNY/2017. :- 3 -: paid working out to Rs.1,65,81,384/- was disallowed u/s.36(1) (iii) of the Act. Assessment was completed accordingly.
Aggrieved, assessee moved in appeal before ld. Commissioner of Income Tax (Appeals). Relying on the judgment of Hon’ble Apex Court in the case of S.A. Builders Ltd vs, CIT, 288 ITR 1, assessee submitted that advances given to various persons were all in the business interest of the assessee. As per the assessee, it was following cash system and therefore there was no question of applying any matching principle. Assessee also stated that advances given by it, to the executives of Shriram group of concerns and members of Shriram Ownership Trust were all interest bearing.
Contention of the assessee was that it had interest receipt of Rs.13,34,06,510/- during the previous year relevant to assessment year 2009-2010. According to it, due to the cash system of accounting followed, for some years interest receipt could be lower than the interest payment and in some other years it could be vice- versa. Relying on the decision of Co-ordinate Bench in its own case for assessment year 2009-2010 (ITA No.1690/Mds/2013, dated 27.11.2013) assessee stated that commercial expediency of its investments was upheld by this Tribunal. Assessee also pointed out
ITA No.995/CHNY/2017. :- 4 -: that the persons to whom it had advanced money had repaid substantial sums.
However, ld. Commissioner of Income Tax (Appeals) was not appreciative of the above contentions of the assessee. According to him, assessee had received interest from M/s. Shriram Transport Company Limited. Further, as per the ld. Commissioner of Income Tax (Appeals), partners current account exhibited huge debit balances.
According to the ld. Commissioner of Income Tax (Appeals) if huge amounts were not given to the partners then assessee could have reduced its interest burden substantially. Ld. Commissioner of Income Tax (Appeals) also noted that the judgment of Hon’ble Apex Court in the case of SA Builders Ltd (supra) was overruled by a larger Bench of Apex Court in the case of Addl. CIT vs. M/s. Tulip Star Hotels Ltd (SL to Appeal (Civil)… /2012 (CC 7138-7140/2010) dated 30.04.2012).
Crux of the finding of the ld.CIT(A) as it appears at paras 5.5 and 5.6 of his order is reproduced hereunder:-
‘’The contention of the Appellant is carefully considered. During the FY 2008-09, the assessee has collected interest from the Group Executives and also the principal amount due from them as on 31/03/2009. During the FYs 2009-10 to 2012-13, the Appellant has been lending sums to 44 executives in all amounting to Rs.11,91,72,798/- as ITA No.995/CHNY/2017. :- 5 -: on 31/03/2013. Apart from the same, a sum of Rs.10,11,96,799/- is due from the promoters being the advances provided to them. While the total sum advanced by the Appellant free of interest to its executives and promoters stands at Rs.22 crores approximately, interest only to the extent of Rs.5,97,253/- has been collected and admitted as income. The Appellant had failed to note that the transactions are between related enterprises and it is correct on the part of the Assessing Officer to invoke the concept of matching principle because the disallowance is not governed only by the provisions of 5.36(1)(iii) but is also covered by the provisions of Sec, 40A(2)(b) of the Act.
5.6. Further, as per the indenture of partnership made at Chennai on 01/04/2006, of the Appellant Firm, loans and advances or over-withdrawal from the firm by the partners would result in collection of simple interest @ 12%. For easier comprehension, the relevant Clause no.11 of the partnership deed is captured and provided below.
10.As and when required the firm can obtain loans and or advances from the partners and such loans and or advances which shall be in addition to and over and above thc capital shall carry simple interest not exceeding 12% per annum or such other rate of interest as may be agreed upon from time to time.
Any partner of the firm can withdraw money from the firm subject however to an agreement between all the partners and such drawings are to be adjusted against profits and or capital or loans and shall carry simple interest not exceeding @ . 12% per annum or such ITA No.995/CHNY/2017. :- 6 -:
other rate of interest as may be agreed upon from time to time.
Sd/- 6. Sd/- 2. Sd/- 7. Sd/- 3. Sd/- 8. Sd/- 4. Sd/- 9. Sd/-` 5. Sd/- 10. Sd/-
Shri. R. Thiagarajan , Shri. T. Jayaraman and Shri AVS Raja are the first, third and fifth partners of the firm who have taken a loan of ₹10,11,96,799/-. Further, the balance sheet as on 31.03.2013 exhibits a over-drawal by the partners of the firm to the extent of ₹27,56,67,897/-. As per the terms of the relevant clause in the partnership deed, it is clearly stated that the payment of interest by the partners is compulsory since the preceding Clause No.10 requires the firm to pay interest @ 12% to the credit balance in the capital account of the partners. Undoubtedly, the method of accounting does not impact the receipt or payment of interest by and to the partners respectively. The Appellant ought to provide interest @ 12% on the loans and over-withdrawals by its partners and when these transactions are also related party transactions, the disallowance of interest on such interest free diversions undertaken by the Assessing Officer is found to be in order and therefore the grounds of appeal of the Appellant are dismissed’’.
He thus upheld the order of the ld. Assessing Officer.
Now before us, the ld. Authorised Representative strongly 5. assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that assessee was following cash basis of accounting.
According to him, this was clearly mentioned in the return of income
ITA No.995/CHNY/2017. :- 7 -: filed. Ld. Authorised Representative submitted that assessee had received substantial interest from loans and advances given by it. As
per the ld. Authorised Representative, investment and loans given by the assessee were only for business purpose. Contention of the ld. Authorised Representative was that disparity in interest receipts and interest payments arose on account of the cash basis system followed and not because of any undercharging of interest. Reliance was placed on a letter dated 27.01.2017 filed before ld. Commissioner of Income Tax (Appeals), wherein loans given to various parties and interest received from them were listed. According to him, lower authorities fell in error in disallowing a part of the interest expenses based on matching principle, which was not applicable when cash basis of accounting was followed.
Per contra, ld. Departmental Representative submitted that 6.
ld. Commissioner of Income Tax (Appeals) had clearly brought out the lower amount of interest received from persons to whom assessee had advanced money. According to him, lower authorities were justified in making a disallowance of interest to the extent of excess over receipts.
We have considered the rival contentions and perused the 7. orders of the authorities below. Assessee had debited in its profit and ITA No.995/CHNY/2017. :- 8 -: loss account, only the actual interest paid and credited only the actual interest received, since it was following the cash system of accounting. In our opinion in a cash basis of accounting system, there is no question of applying any matching principle. Interest is credited as income at point of receipt and debited as expenses at the point of payment. According to the disparity in the period for which interest is received and paid, there could be difference. That apart, copy of the partners current account placed at paper book page 10, shows that debit balances in partners current account arose more on account of losses suffered in the earlier years, than due to any drawings by the partners. It might be true that it had received interest only from four individuals to which it had advanced amounts during the relevant previous year. This does not mean that assessee had not received interest from other parties in other years. During the previous assessment year 2009-2010, it had received interest of �13,34,06,510/- from persons to whom it had advanced loans. Hence in our opinion, it is obvious that disparity between interest received and interest payment arose not on account of any selective charging of interest, but on account of cash basis system followed by the assessee. There is nothing in the statute which stopped the assessee from following the cash system of accounting. In assessee’s own case for assessment year 2009-2010 on Revenue appeal (ITA
ITA No.995/CHNY/2017. :- 9 -:
No.1690/Mds/2013, dated 27.11.2013), this Tribunal had held as under:-
‘’6. The Commissioner of Income Tax (Appeals) held that the assessee is an investment company made investments in group concerns as part of its business of the assessee i.e. advancing loans to group concerns. The Commissioner of Income Tax (Appeals) also gave a finding that monies are borrowed from group concerns only and these monies are utilized by the investee concerns for their trade purposes. Since the investments in shares of group concerns amounting to �4,38,00.000/- are within the course of trading activities and out of commercial expediency and the decision of the Hon’ble Hon'ble Supreme Court in the case of S.A.Builders (288 ITR 1) is applicable to the assessee. The Commissioner of Income Tax (Appeals) also held that �76,58,00,000/- invested in sister concerns as share application money is not capable of yielding any income nor any right to a benefit is vested in, therefore provisions of Section 14A are not attracted in view of the decision of the Co-ordinate Bench of this Tribunal in the cases of MSA Security Services and NMS Consultancy P. Ltd (supra). The Department could not rebut any of the findings of the Commissioner of Income Tax (Appeals). Therefore, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under Section 14A of the Act. The grounds raised by the Revenue are rejected’’.
Thus assessee has been considered as an investment company and making investments was part of its business. Hon’ble Jurisdictional High Court also in the case of CIT vs. Shriram Investments (Firm), (2015) 54 taxmann.com 15 also held that deduction u/s.36(1) (iii) of the Act had to be allowed in respect of interest paid, if capital was borrowed for the purpose of business or profession. As already mentioned by us, there is no finding by any of the lower authorities
ITA No.995/CHNY/2017. :- 10 -: that disparity between interest receipts and payments arose on account of charging of lower rate of interest on loans advanced when compared to interest paid on loans received. In the circumstances, we are of the opinion that ld. Assessing Officer was not justified in making a disallowance for the difference between interest received and interest paid by the assessee. Disallowance of �1,65,81,384/- stands deleted.
In the result, the appeal of the assessee is allowed. 8.