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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY & SHRI DUVVURU RL REDDY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
This appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-18, Chennai dated 17.05.2017 in for the assessment year 2013-14 passed U/s.250(6) r.w.s. 143(3) of the Act respectively.
The assessee has raised two grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in confirming the order of the Ld.AO who had disallowed interest expenses of Rs.71,37,500/- U/s.36(1)(iii) of the Act being the interest attributable towards fund diverted to sister company.
The brief facts of the case are that the assessee is a private limited company engaged in the business as authorized distributor for Nokia India Pvt. Ltd and HCL System Ltd in respect of Nokia mobile phones and Nokia mobile accessories in the State of Tamilnadu, Pondicherry and Bengaluru, filed its return of income for the assessment year 2013-14 on 19.09.2013 admitting total income of Rs.3,54,03,590/-. The case selected for scrutiny under CASS and finally assessment order was passed U/s.143(3) of the Act on 17.03.2016 wherein the Ld. Assessing Officer disallowed interest expense Rs. Rs.71,37,500/- U/s.36(1)(iii) of the Act because the assessee had diverted its interest bearing funds to its sister concerns without recovering interest on such advances. The contention of the assessee was that the sister concern of the assessee had placed its land as collateral security with Citibank for enabling the assessee to obtaining working capital limits of Rs.16 crores for the group. The assessee had further explained that the amount was advanced to its sister concerns out of commercial exigency and relied in the decision of the Hon’ble Apex Court in the case S.A. Builders Limited vs. CIT reported in 288 ITR 1 and Hero Cycles Pvt. Ltd. vs. CIT reported in 379 ITR 347. It was further explained that the assessee and its sister concern fall under the same tax rate and therefore there was no loss of revenue to the Department. However the Ld.AO disallowed the interest expense of Rs.71,37,500/- which is 12.5% of Rs.5.71 crore interest free loan advanced to the assessee’s concern M/s. Rocky Agencies. On appeal the Ld.CIT(A) confirmed the order of the Ld.AO by giving a clear finding in his order that interest bearing funds have been diverted to the sister concerns of the assessee without charging interest.
At the outset the Ld.AR reiterated the submissions made before the Ld.Revenue Authorities and further pleaded that one more opportunity may be provided to the assessee in order to explain before the Ld.AO the commercial exigency existing between the assessee company and its sister company and the applicability of the ratio laid down by the Hon’ble Apex court in the case S.A. Builders Limited vs. CIT reported in 288 ITR 1 and Hero Cycles Pvt. Ltd. vs. CIT reported in 379 ITR 347, in the case of the assessee. The Ld.DR strongly opposed to the submission of the Ld.AR and pleaded for confirming the orders of the Ld.Revenue Authorities.
We have heard the rival submissions and carefully perused the materials on record. Before us the Ld.AR has made the following submissions:
“I. It is submitted that the Appellant has regular business transactions and a running account with its sister concern - Rocky Agencies, one of its distributor. Further the Assessee had given a rental advance of Rs.5 Crores to Rocky Agencies and pays a monthly rent of Rs.75,000/- for the use of the building and land belonging to Rocky Agencies since April 2011 much prior to the sanctioning of the limits by Citi Bank on 13/02/2012 (Page 5 of PB). Thus there is no nexus between the borrowal and alleged diversion of funds - CIT Vs Hotel Savera 239 ITR 795 (Mad).
II. Although the assessee hypothecated its stock and book debts, personal guarantee of the Directors to Citi Bank for the working capital limits sanctioned to the Assessee was primarily based on security of immovable property after it was duly valued by a valuer (Page 70 of PB).
III. The land and Godown owned by Rocky Agencies was given to Citi Bank as collateral security for getting working capital limits of Rs.16,00,00,000/- and loan of Rs.11,00,00,000/-; without which security the assessee would not have been in a position to get the credit limits. As a result of the above arrangement, the Assessee had gained overall cost reduction to the tune of 2%.
IV. The sanction letter from Citi Bank for overdraft facility dated 13/02/2012 was produced before the AO. AO treats an amount of Rs.5,71,00,000/- was given to Rocky Agencies out of the borrowed loan; which is factually incorrect as Rs.5 Crores was given in April 2011 itself. The Balance sum is in respect of a running account.
V. The transaction is out of commercial expediency and the funds had been utilized for the purpose of the assessee's business and that of Rocky Agencies, also engaged in the same line of activity as the Assessee. The amount was advanced to it to meet its business requirements.
VI. Reliance in this regard is based on the decision of the Hon'ble Apex Court in the case of S.A.Builders Limited Vs. CIT 2007 (288) ITR 1 (SC) and Hero Cycles (P) Ltd Vs CIT 379 ITR 347 (SC). In view of the above decisions, the interest on borrowed funds advanced to the sister concern - Rocky Agencies, used for business purposes ought to be allowed as deduction.
VII. It is further submitted that there is no unjust enrichment since the Appellant and its sister concern fall under the same tax rates and there is no loss of revenue to the Department. Hence, the disallowance of Rs.71,37,500/- in the case of the Assessee is unwarranted and may be allowed.
VII. In any event the AO himself has arrived at the funds diverted at Rs. 4.7 Crores in page 5 but took a higher figure of Rs. 5,71,52,141 in page 6 interest at 12.5 % p.a had been charged, which may be reduced to 8% p.a based on the F.D interest paid by the banks during that period.”
5.1 The Ld.AR had further argued before us that there is no revenue loss to the Department because both the appellant company and its sister company fall under the same tax rate. It was further submitted that the entire borrowings was utilized for the purpose of group companies wherein the activities are all inter- related. Further from the Orders of the Ld.Revenue Authorities it is evident that the aspects with respect to the activities of the group companies are not brought out in order to examine the commercial exigency existing between the assessee company and its sister company. Though prima-facie we find some strength in the orders of the Ld.Revenue Authorities the entire issue is required to be looked into keeping in view of the decision rendered by the Hon’ble Apex Court cited by the Ld.AR supra along with the complete facts of the case. Therefore in the interest of justice, we remit back the matter to the file of Ld.AO for de-nova consideration thereby granting one more opportunity to the assessee to present its case before the Revenue.
In the result the appeal of the assessee is allowed for statistical purposes.
Order pronounced on the 5th February, 2018 at Chennai.