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Income Tax Appellate Tribunal, “A” BENCH : CHENNAI
Before: Hon’ble Shri NRS Ganesan, JM & Hon’ble Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-13, Chennai [in short the ld CIT(A)] in Appeal No.29/CIT(A)- 13/2013-14 dated 05.06.2017 against the order passed by the ACIT, Circle-I, Vellore [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 31.03.2016 for the Assessment Year 2013-14.
The first issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of interest of Rs 1,23,22,323/- paid on its borrowings in the facts and circumstances of the case.
Indira Industries A.Yr. 2013-14 3. The brief facts of this issue is that the assessee is a registered partnership firm engaged in the business of fabricationof industrial equipments and one of the business carried on by the assessee was a 100% Export Oriented Unit. The assessee filed its return of income for the Asst Year 2013-14 on 30.9.2013 determining total income of Rs 2,41,78,590/-. The assessee firm consists of three partners viz (i) Shri K Ponnuswamy ; (ii) Shri P Manikandan and (iii) Smt P Vijayarani. During the course of assessment proceedings, the ld AO observed that the following are the balances in the partners capital and current account as per the consolidated balance sheet of the assessee :-
- (-) Rs 29,29,27,860/- (1st partner) Shri K Ponnuswamy - Rs 22,65,95,806/- ( Son of 1st partner) Shri P Manikandan - Rs 14,86,103/- (Wife of 1st partner) Smt P Vijayarani ------------------------------- (-) Rs 6,48,45,951/- From the above, the ld AO observed that one of the partners Shri K Ponnuswamy had overdrawn from the assessee firm beyond the balance available in his capital and current account. There is no provision for payment of interest on capital and current account of the partners. Hence the overdrawings made by one of the partner Shri K Ponnuswamy was without any interest. Whereas, the assessee firm had obtained a bank loan and the balance of such loan (overdraft facility) as on 31.3.2013 was Rs 13,39,40,609/- on which the assessee had paid total finance charges of Rs 1,23,22,323/-. Accordingly, the ld AO show caused the assessee firm as to why the finance charges debited in the sum of Rs 1,23,22,323/- be not disallowed on the ground that the borrowed funds have been utilized for non-business purposes and diverted for purposes which did not bear any interest to the assessee firm.
3.1. In response to this, the assessee replied as under:-
Indira Industries A.Yr. 2013-14 a) The credit balances lying in the partners capital and current account of other two partners viz Shri P Manikandan had been allowed to be drawn by the other partner i.e Shri K Ponnuswamy. The assessee firm is not paying any interest on the credit balances of partners capital and current account. Similarly, the assessee had not charged any interest from the partner who had overdrawn beyond his capital and current account. b) The assessee had taken overdraft facility from State Bank of India, Walajapet Branch to meet its short term cash flow deficits which has been utilized only for meeting the trade liabilities of the firm. Hence the borrowings were utilized only for the purpose of business and not diverted for non-business purposes. c) The assessee stated that it had placed fixed deposits with the same bank branch which has been offered as security for the overdraft facility extended by the State Bank of India and that on such fixed deposit, it had earned interest income of Rs 19,94,148/-. Accordingly, it pleaded that eventhough the assessee firm had paid interest on overdraft to the tune of Rs 89,46,763/-, the same should be considered only on net basis to the tune of Rs 69,52,615/- as the placing of fixed deposits and earning interest income thereon was linked with the borrowings and payment of interest thereon , thereby proving the clear business nexus. Hence it has to be construed that the assessee had paid only net interest of Rs 69,52,615/- ( 89,46,763 – 19,94,148) on its overdraft facility. d) The assessee had received an interest free advance of Rs 3,99,51,000/- from a group company (in which the partners are shareholders) M/s KGP Solar Projects Private Limited, which has to be considered as own funds available with the assessee firm for allowing one of the partner to overdraw from the firm. e) The outstanding overdraft facility as on 1.4.2012 was Rs 14,84,32,219/- and the closing balance as on 31.3.2013 was Rs 13,39,40,610/- . From the analysis of current account of Shri K Ponnuswamy, it reveals that he has not withdrawn any amount from the assessee firm during the year under appeal. Infact the debit 3
Indira Industries A.Yr. 2013-14 balance had decreased by Rs 13,02,64,904/- ( 42,31,92,764 – 29,29,27,860). This shows that the overdraft facility was utilized only for business purposes and not for partners drawings.
The ld AO however did not heed to the aforesaid contentions of the assessee and concluded that the assessee had paid finance charges of Rs 1,23,22,323/- on one hand on its borrowings and on the other hand had allowed one of its partners to make overdrawings from the firm without carrying any interest, and that the borrowed funds had been diverted for non-business purposes and accordingly he disallowed the entire finance charges of Rs 1,23,22,323/- in the assessment.
This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds :- 1. The Commissioner of Income Tax(Appeals) erred both in law and on the facts of the case in disallowing a sum of Rs. 1,23,22,323/- being finance charges (interest and other bank charges) on the ground that one of the partner (Mr. K. Ponnuswamy) had overdrawn in his Capital Account.
2. The Commissioner of Income Tax (Appeals) erred in not considering the fact that the interest portion of the total finance charges is only Rs. 95,76,048/- and balance of Rs.27,46,275/- represents Bank Charges (for providing performance guarantees and letters of credit for the Appellant’s business) and such bank charges should not be considered for calculation of disallowance of interest as the bank charges have no link to the drawings by the partner.
3. The Commissioner of Income Tax (Appeals) erred in not considering the fact that the overdraft facility from the Bank (for which interest was paid and disallowed by the Assessing Officer) was not utilized for payment to partners but, only to meet its trade payments.
4. The Commissioner of Income Tax(Appeals) erred in not considering the fact that the debit balance in the capital account of Mr. K. Ponnuswamy during the current assessment year actually shows a decrease of Rs. 13,02,64,905/- which amply shows that the loans taken by the Appellant has not been withdrawn by the partner during the year. 4
Indira Industries A.Yr. 2013-14
5. The Commissioner of Income Tax (Appeals) erred in not considering the fact that the Bank Overdraft during the current year has also reduced as compared to the beginning of the year which also proves the fact that during the current year there has been no drawings by the partner/s from the interest bearing loan funds of the Appellant.
6. The Commissioner of Income Tax(Appeals) erred in not considering the fact that the Assessing Officer had failed to discharge the onus of proving that the overdraft account was utilized for non-business purposes.
7. Notwithstanding the above, the Appellant submits that the Commissioner of Income Tax(Appeals) erred in not considering the following: a. since all the partners of the Appellant are closely related to each other (as father, mother and son), the net cumulative debit balance should alone be considered for excess drawings by the partners. b. no interest in paid to any partner and therefore individual debit balance of partners should not be considered. c. the interest-free advances received by the Appellant from a Group Company (Viz. M/s KGP Solar Projects Private Limited), should also be considered for calculating the debit balances of the partners. d. the Appellant had earned an interest of Rs. 19,94,148/- on deposits made with the same bank and only net interest paid Rs. 69,52,615/- should be considered for disallowance of interest on account of excess drawings of the partner.
The Appellant, in light of the above, prays that additions confirmed by the Commissioner of Income Tax (Appeals) amounting to Rs. 1,23,22,323/- be deleted.
We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of Consolidated Balance Sheet, Consolidated Profit and Loss Accoutns and Consolidated Partners’ Current Account (enclosed in pages 1 to 3 of paper book). At the outset, we find that the assessee had debited total finance charges in the sum of Rs 1,23,22,323/- in its profit and loss account. The break up of the same is as under:-
Bank Interest 89,46,763 5
Indira Industries A.Yr. 2013-14 Interest paid to Others 6,29,285 --------------- 95,76,048 Charges paid which are not in the nature of interest paid Bank charges 3,56,324 Bank Guarantee charges 15,13,700 Letter of Credit charges 2,54,971 Processing charges 6,00,000 Valuation charges 21,280 --------------- 27,46,275 ------------------ Total Finance Charges 1,23,22,323 ------------------ 6.1. We find that the assessee had placed fixed deposits with State Bank of India with the same bank branch in which it had availed overdraft facility and that the said fixed deposits had been offered as security for availing overdraft facility. Hence the business nexus between the fixed deposit and availing of credit facility is proved beyond doubt. Accordingly, the interest income earned on fixed deposits of Rs 19,94,148/- had to be reduced from the total interest paid to banks by the assessee in view of inter connection between the same. Hence the sum of Rs 19,94,148/- need to be reduced from the total interest paid by the assessee in the sum of Rs 95,76,048/- and only the net interest is to be considered towards borrowings which would be Rs 75,81,900/-.
6.2. We find from the perusal of the consolidated balance sheet, the assessee had borrowed interest free advance of Rs 3,99,51,000/- from its group concern M/s KGP Solar Projects Private Limited, which has to be construed as own funds available with the assessee as per the ratio laid down by the Hon’ble Madras High Court in the case of Hotel Savera reported in 239 ITR 795 (Mad) and by the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd reported in 313 ITR 340 (Bom).
Indira Industries A.Yr. 2013-14 6.3. We hold that the bank charges, bank guarantee charges, LC charges and valuation charges paid in the sum of Rs 21,46,275/- has got nothing to do with the amounts overdrawn by one of the partners. These charges are to be incurred in the ordinary course of its business and are payable irrespective of the fact whether any partner had overdrawn from the firm or not and hence the same cannot be linked with the overdrawing made by one of the partner Shri K Ponnuswamy from the assessee firm. We further hold that the said charges would not take the character of interest payments eventhough the same had been grouped / included in the accounts of the assessee under the head ‘finance charges’. Hence the said charges would automatically be outside the ambit of disallowance of interest u/s 36(1)(iii) of the Act. However, with regard to processing charges of Rs 6,00,000/- , the same would be directly linked with the overdraft facility availed by the assessee firm and hence would become the cost incurred on the borrowings of the assessee. Accordingly the same would also have to be considered for the purpose of making disallowance u/s 36(1)(iii) of the Act.
6.4. We find that the outstanding overdraft facility as on 1.4.2012 was Rs 14,84,32,219/- and the closing balance as on 31.3.2013 was Rs 13,39,40,610/-. The average loan balance thereon would be Rs 14,11,86,414/-. The total cost incurred by the assessee which are linked with the borrowings are as under:-
Interest paid to Banks and Others 95,76,048 Processing charges for loan 6,00,000 ----------------- 1,01,76,048 Less: Interest income on fixed deposits 19,94,148 ---------------- Net Interest and Processing charges on loan 81,81,900 ----------------
Indira Industries A.Yr. 2013-14 The average interest rate works out to 5.80% ( 81,81,900 / 14,11,86,414 *100). This average interest rate of 5.80% is to be applied on the amounts effectively overdrawn by one of the partner Shri K Ponnuswamy out of borrowed funds of the assessee firm.
6.5. The borrowed funds utilized for overdrawing by the partners are worked out as under:-
Shri K Ponnuswamy Capital & Current A/c Bal (-) 29,21,69,693 Shri P Manikandan Capital & Current A/c Bal 22,70,95,806 Smt P Vijayarani Capital & Current A/c Bal 20,21,953 Interest free advance from KGP Solar Projects Private Ltd 3,99,51,000 ---------------------- Net Overdrawings from the firm (-) 2,31,00,934 ---------------------- 6.6. Hence the total interest to be disallowed by the ld AO is worked at Rs 13,39,854/- (2,31,00,934 * 5.80%) . We direct the ld AO accordingly. Hence the grounds raised by the assessee are partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 08.02.2018