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Income Tax Appellate Tribunal, KOLKATA BENCH ‘D’, KOLKATA
Before: Shri Aby. T. Varkey, J.M. & Dr.A.L.Saini, A.M.)
The captioned appeal filed by the Revenue and cross objection filed by the assessee, pertaining to assessment year 2011-12, are directed against the order passed by the Commissioner of Income-tax (Appeals)- 6, Kolkata in Appeal No. 90/CIT(A)-6/Kol/2014-15, dated 20-01-2017, which in turn arise out of an order passed by the Assessing Officer u/s. 143(3) of the Income-Tax Act, 1961 (in short, ‘the Act’), dated 29-03-2014.
CO No. 51/Kol/2017 Dilip Chand Kankaria
The grievances raised by the Revenue are as follows:- i). On the facts and circumstances of this case the ld. CIT(A) has erred in allowing the interest on loan as not being established to have been used wholly and exclusively for the purpose of the business. ii) On the facts and circumstances of this case, the assessee failed to establish the rendering of services by the brokers and so ld. CIT(A) ought to have confirmed the disallowance of Rs.16,57,607/- for brokerage on loan.
The grievances raised by the assessee in cross objections, are as follows:-
1. 1. For that on the facts and circumstances of the case, the ld. CIT(A) was not justified in confirming the disallowance to the extent of Rs. 54,61, 737/- out of the total disallowance of Rs. 1,40,86,389/- made by the AO under the head Interest expenditure.
2. For that on the facts and circumstances of the case, the ld. CIT(A) was not justified in confirming the disallowance to the extent of Rs. 10,49,713/- relating to brokerage paid against funds borrowed by the assessee.
Ground no.1 raised by the Revenue in the appeal and ground no.1 raised by the assessee in his cross objection relate to the disallowance to the extent of Rs. 54,61,737/- confirmed by the ld CIT(A), out of the total disallowance of Rs.1,40,86,389/- made by the assessing officer under the head Interest expenditure.
The facts of the issue which can be stated quite shortly are as follows: During the assessment proceedings the assessing officer noted that assessee has debited interest on loan to the Profit and Loss Account to the tune of Rs. 1,88,78,103/- and on the other hand the assessee received interest on account of loan given of Rs.30,51,214/-. The AO also noted that the assessee debited to its profit and loss account to the tune of Rs.27,07,320/- on account of brokerage and commission paid. The assessee was asked to explain the excess of interest on loan taken over the interest on loan given by the assessee. CO No. 51/Kol/2017 Dilip Chand Kankaria In response, the assessee submitted that the assessee borrowed funds in earlier years, which continued in current assessment year except repayment of loan to some parties out of fresh loan received from other parties. However, the AO has rejected the contention of assessee and made addition on account of excess interest of loan taken over the interest on loan given by the assessee to the tune of Rs. 1,58,26,889/- ( Rs.1,88,78,103 - Rs.30,51,214) and added the same to the total income of assessee. The said disallowance was later reduced to Rs.1,40,86,389/- by passing an order u/s.154 of the Act.
Aggrieved by the stand of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A), who partly allowed the appeal of the assessee. Aggrieved by the order of ld CIT(A), both, the Revenue and Assessee are before us, by filing respective grounds raised in the appeal of revenue and cross objection of assessee.
The ld. DR for the Revenue did not have much to say, but nevertheless he relied on the order of the assessing officer.
On the other hand, Learned counsel for the assessee begins by pointing out that in the relevant year, the assessee debited net interest of Rs.1.58 crores (Rs.1.88 cr. - Rs.0.30 cr.). At the time of making the assessment, the Ld. A.O. disallowed the entire interest expenditure. Subsequently, the disallowance was reduced by the A.O. by a sum of Rs.17,40,500/- vide a rectification order u/s. 154 (at page no. 33 of the paper book), since the said amount was suo moto added back by the assessee in his computation of income. The ld counsel pointed out that in the preceding assessment year 2010-11, a similar type of disallowance was made by the A.O. which was deleted by the Ld. CIT(A)
CO No. 51/Kol/2017 Dilip Chand Kankaria and subsequently Hon'ble Tribunal confirmed the order of the Ld. CIT(A) (Copy of the Hon'ble Tribunal order-pb no.25). Therefore, the issue of disallowance of interest expenditure is fully covered in favour of the assessee by the order of the Hon'ble Tribunal in his own case, vide A. Y. 2010-11, order dated 31.01.2018. The ld counsel further submitted that the Ld. CIT(A) rightly observed that the Sundry Debtors represent the debts due from various persons which have arisen in the ordinary course of the business of the assessee. However, the Ld. CIT(A) was not justified in not allowing interest on borrowings made to the sister concerns since the same is contrary to the order of Hon'ble Tribunal. In this regard, the observations of the Hon'ble Tribunal is reproduced hereunder - “6.Having heard the rival submissions and perused the materials available on record, we note that assessee has admittedly paid a sum of Rs.3,66,38,397/- to various sister concerns who were the owners of the property and the contractor utilized for construction, while the assessee had the occupiers right. In lieu of the occupiers right and the loans given to the sister concern, he has received a sum of Rs.75 lakhs during the year. As the amount received by the assessee of Rs.75 lakhs for the year, in lieu of the loans given and occupiers right in property, is much more than the interest payable on borrowing of Rs.3,66,38,397/-, diverted to sister concerns for purchase of property, therefore, ld CIT(A) has rightly held that no disallowance on account of interest diverted for non business purposes was warranted. Therefore, we are of the view that advances for occupancy is for the purpose of business and business expediency. For this, we rely on the judgment of Hon'ble Supreme Court of S A Builders, 288 ITR 01 (SC) wherein it was held: "The assessee borrowed the fund from the bank and lent some of it to its sister- concern (a subsidiary) on interest-free loan. The test in such a case is really whether this was done as a measure of commercial expediency. The decisions relating to s. 37 will also be applicable to s.36(1)(iii) because in s. 37 also the expression used is 'for the purpose of business". It has been consistently held in decisions relating to s. 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The High Court as well as the Tribunal and other IT authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest-free loans as given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 6.1 We also note that other utilization of the borrowing, was utilized to compensate for the sundry debtors of the proprietary concern, M/s. Devyank Arts. The assessee repeated the explanation which he had stated before the Assessing Officer, that since he was a film exhibitor he sells the picture right to various companies, which was taken as income of the year in which it was sold. However, a part of CO No. 51/Kol/2017 Dilip Chand Kankaria the payment remains outstanding, it appears as sundry debtors for which the borrowings had to be made. So, the borrowings were for the purpose of his film business. As per the assessee's explanation, since the borrowings were related to his business as film exhibitor, no disallowance could be made for interest paid related borrowings. Based on the above facts and circumstances, we are of the view that borrowings made by the assessee were related to his business. Hence, we confirm the order passed by the ld. CIT(A)."
The ld Counsel submitted that the Ld. CIT(A) while passing order deviated from his predecessor's earlier order, which was affirmed by the Hon'ble ITAT. Hon'ble ITAT in its order has accepted the business expediency of advancing of interest free loans to the sister concerns. The Ld. CIT(A) tried to distinguish the earlier order on the ground that in the preceding year income was offered on account of compensation receivable from the sister concerns to whom funds were advanced whereas no such income accrued in the instant year. In this regard, it is humbly submitted that business expediency does not mean that every year income has to be accrued/received and allowance of expenditure including interest expenditure is not dependent on the income earned or the amount of income earned. Therefore, the interest expenditure sustained by the CIT(A) to the tune of Rs 54,61,737/- may please be deleted.
Without prejudice to the above, the counsel submitted alternative plea that CIT(A) had observed that the advances for occupancy to sister concerns have gone up from Rs.3,69,41,747/- to 5,08,81,411/- though the assessee had asked them to refund the advances in the preceding year. In the circumstances, direction may be given to the A.O to disallow only that portion of interest, which is attributable to the figure of advances to sister concerns that has gone up during the year from the closing figure appearing in the books in the preceding year, that is, as on 31.03.2010.
CO No. 51/Kol/2017 Dilip Chand Kankaria
We have given a careful consideration to the rival submissions and perused the material available on record. We note that the assessee had advanced funds to various sister concerns who were owners of property where the assessee had occupancy right. The said sister concerns, according to the assessee, had agreed to provide a portion of the new building to be developed by them on the said occupied property at a low rate. The assessee borrowed funds on interest and advanced funds to the sister concerns without charging any interest. As the construction of the building was delayed, the sister concerns were asked to refund the advance together with compensation. The sister concerns agreed to refund the advance with compensation of Rs. 75 lakhs. The compensation of Rs. 75 lalchs was treated as income by the assessee in A.Y. 2010-11. In light of the income of Rs. 75 Lakhs being more than the interest payable on the borrowings used to make the advances to the sister concerns, the Ld. CIT(A) held that no disallowance on account of interest diverted for non-business purposes was warranted. Subsequently, the coordinate Bench of this Tribunal, in assessee`s own case, vide A.Y. 2010-11, order dated 31.01.2018, confirmed the order of ld CIT(A) based on the facts narrated above.
12.However, we note that, during the assessment year under consideration, that is, A.Y. 2011-12, the facts are different as compared to A.Y. 2010-11. During the assessment year under appeal, that is A.Y. 2011-12, the said advances for occupancy have gone up from Rs. 3,69,41,747/ - to Rs. 5,08,81,411/ -. If No advance has been refunded and no compensation for not constructing the building has been received as promised by the sister concerns (as claimed by the assessee in relation to A.Y. 2010- 11) during the assessment year 2011-12 which is under appeal. The assessee has simply relied upon the order of the Ld. CIT(A) for the A.Y. 2010-11 during the CO No. 51/Kol/2017 Dilip Chand Kankaria assessment proceedings and appellate proceedings. The AO has stated in the assessment order that the assessee could not adduce any specific evidence or details regarding any specific property for which the advances might have been given to sister concerns. Besides, the assessee have not explained before the lower authorities the reasons why and how said advances for occupancy have gone up from Rs. 3,69,41,747/ - to Rs. 5,08,81,411/ -. Hence, it was clear that the advances were not made for the purpose of business. The assessee has not produced any specific details of the property or the purpose for which advances to sister concerns were made. Moreover, unlike in the immediately preceding financial year relevant to AY 2010-11, no compensation has been received from or debited to the accounts of the sister concerns. No advance has been refunded. Rather it is contradicting the explanation given in the proceedings for A.Y. 2010-11, that is, the assessee had asked the sister concerns to refund the advances in A.Y. 2010-11, whereas the assessee has advanced more funds to the sister concerns in A.Y. 2011-12. The details and nature of more funds advanced in A.Y.2011-12 have not been submitted by the assessee. Thus, there is no evidence of the borrowings being advanced to the sister concerns for business purpose, as rightly held by ld CIT(A). In this regard, it needs to be mentioned that we are differing from the decision of the coordinate Bench in assessee`s own case in for A.Y. 2010-11 (supra) cited by the ld Counsel for the assessee in para 8 of this order, as the facts of the assessee are different in the A. Y. 2011-12, under consideration. We note that in the A.Y 2010- 11, as in that year there was clear evidence of income of Rs.75 Lakhs being offered on account of compensation receivable from the sister concerns to whom funds were advanced. To that extent, the facts for the instant assessment year are different. The average of the opening and closing balances of the advances comes to Rs.4,39,11,579/-, which includes the above mentioned compensation of CO No. 51/Kol/2017 Dilip Chand Kankaria Rs.75,00,000/- receivable from the sister concerns debited to their accounts in the previous year relevant to A.Y 2010-11. It is, therefore, clear that borrowing equivalent to advances worth Rs.3,64,11,579/- ( ie. Rs.4,39,11,579/- - Rs.75,00,000/- ) have not been made for the purpose of business and interest on the same is not admissible as a deduction. The ld CIT(A) by taking the estimated interest rate of 15% computed the disallowance to the tune of Rs. of Rs.54,61,737/- and balance disallowance of Rs.86,24,652/- ( i.e. Rs.1,40,86,389/- - Rs. 54,61,737/-) was deleted.
We note that ld Counsel for the assessee raised before us an alternative plea stating that since the CIT(A) had observed that the advances for occupancy to sister concerns have gone up from Rs.3,69,41,747/- to 5,08,81,411/- though the assessee had asked them to refund the advances in the preceding year. In these circumstances, the direction may be given to the A.O to disallow only that portion of interest, which is attributable to the figure of advances to sister concerns that has gone up during the year from the closing figure appearing in the books in the preceding year, that is, as on 31.03.2010. Consideration, the principle of natural justice and fair play, we agree with the submission of ld counsel, therefore, we direct the assessing officer to examine the portion of interest, which is attributable to the figure of advances to sister concerns and adjudicate the issue as per the provisions of law. Therefore, ground No. 1 raised by the Revenue and ground No. 1 raised by the assessee in cross objection are allowed for statistical purposes.
Ground No. 2 raised by the Revenue and cross objection No.2 raised by the assessee relate to brokerage paid against funds borrowed by the assessee to the tune of Rs. 16,57,607/- .
CO No. 51/Kol/2017 Dilip Chand Kankaria
The brief facts qua the issue are that during the assessment proceedings, the AO noted that in regard to Commission payment of Rs.27,07,320/- in this assessment year, the observation and its counter explanation whatever may be is similar as it was prevailed in the last assessment year 2010-11. The AO noted that in the F.Y.2008-09 relevant to assessment year 2009-10 there was no payment of commission for loan and on further examination of 'Loan Confirmation' for the year ended 31/03/2010 as well as on 31.03.2011 it was noticed that almost same lenders appear in the assessment year 2009-10, 2010-11 and in 2011-12. All on a sudden the role of broker came to ply from the assessment year 2010-11. The assessee began to debit commission & brokerage due to those loans (already existed) from the assessment year 2010-11 for the simple reason that it is the practice that whenever someone wants to procure loan from market he has to contact a broker for arranging such loan and that broker used to take certain percent of brokerage from the said loan debtor after arranging such loan. The AO noted that it is quite normal phenomenon that when any broker arranges any loan for someone else his brokerage come into play at the very beginning of the said loan transaction. But reason for debiting such brokerage as offerred by the assessee is applicable in the case of new loans only. In the present case of the assessee almost all the loan creditors are old loan creditors, they are well known to the assessee also. So here the question of any brokerage & commission does not arise. Therefore, the AO noted that the idea for introducing brokerage in old loans came in mind of the assessee from assessment year 2010-11 onwards for obvious reason for minimizing his profit by debiting fictitious expenses in the form of brokerage and hence AO made addition of Rs.27,07,320/-
On appeal by assessee, the ld. CIT(A) deleted the addition partly. Aggrieved by the order of ld CIT(A), both, the revenue as well as the assessee are before us by CO No. 51/Kol/2017 Dilip Chand Kankaria raising their respective grounds. The ld. DR for the revenue did not have much to say, but nevertheless relied on the order of the assessing officer.
On the other hand, the ld. Counsel for the assessee has submitted that the Ld. CIT(A) was not justified in not giving full relief in connection with brokerage charges. In the alternative, it was submitted that the disallowance of brokerage be confirmed in the same proportion as the disallowance of interest expenditure, if any as per the decision in the preceding ground.
18.We have given a careful consideration to the rival submissions and perused the material available on record. We note that we have held in para 13 of this order that borrowings worth Rs. 3,64,11,579/ - had not been made for the purpose of business and we allowed the ground for statistical purposes, for disallowance of interest of Rs. 54,61,737/ - ( subject to confirmation of AO) out of total claim of Rs. 1,40,86,839/ -. Hence, brokerage relatable to such borrowings also is not admissible as deduction, having been incurred not for the purpose of business. We consider it reasonable to disallow brokerage in the same proportion in which part of the interest has been disallowed but subject to examination by the AO. Hence, disallowance of brokerage of Rs. 10,49,713/- (i.e. Rs. 27,07,320 X 54,61,737/1,40,86,389) is confirmed subject to examination by the AO the portion of interest, which is attributable to the figure of advances to sister concerns.
We note that ld Counsel for the assessee made an alternative plea before us stating that the disallowance of brokerage be confirmed in the same proportion as the disallowance of interest expenditure, if any as per the decision in the preceding ground, vide para 13 of this order, relating to disallowance of interest. Therefore, we
CO No. 51/Kol/2017 Dilip Chand Kankaria make it clear that we had directed the assessing officer (in para 13 of our order) to examine the portion of interest, which is attributable to the figure of advances to sister concerns and adjudicate the issue as per the provisions of law, therefore, the said disallowance of the brokerage Rs. 10,49,713 is subject to change of the outcome of the portion of interest, which is attributable to the figure of advances to sister concerns. Hence, we allow ground no.2 raised by the Revenue and cross objection no.2 raised by the assessee for statistical purposes.
In the result, the appeal of Revenue and cross objections of the assessee are allowed for statistical purposes. Order Pronounced in the Open Court on 25-07-2018 Sd/- Sd/- (A. T. Varkey) (A. L. Saini) Judicial Member Accountant Member Dated: 25-07-2018 **PRADIP (Sr.PS) Pronounced on 25.07.2018 Sd/- Satbeer Singh Godara (Judicial Member)
Copy of the order forwarded to: Department: The DCIT, Circle-22, Kolkata 54/1 Rafi Ahmed kidwai Road, 4th 1. Floor, Kolkata-16. 2 Assessee: Shri Dilip Chand Kankaria 87 Lenin Sarani, Kolkata-13. 3. The CIT- 4. The CIT(A)- 5. DR, Kolkata Benches, Kolkata