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Income Tax Appellate Tribunal, DELHI BENCH “SMC”, NEW DELHI
Before: SHRI S.V. MEHROTRA
O R D E R PER S.V. MEHROTRA, A.M :
This is an appeal filed by the assessee against the order dated 25.07.2016 passed by the Commissioner of Income Tax (Appeals), Hisar, u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”), relating to assessment year 2010-11.
Brief facts of the case are that the assessee fled return declaring an income of Rs.9,52,940/-. The Assessing Officer noticed from Profit & Loss Account that assessee had claimed expenses of Rs.4,67,832/- on account of payment of interest on borrowed funds, as per following details :-
Unsecured loans Rs.41,89,706/- Unsecured loans Rs.83,95,459/- Rs.1,25,85,165/- Total interest bearing funds
The Assessing Officer noticed that the assessee had advanced a sum of Rs.1,00,88,796/- to the firm M/s Martin and Brown Bioscience, Baddi, wherein he was one of the partners. He noted that the assessee had not received/charged any interest on the amount of advance to the firm. He also examined the account of debtor and noticed that assessee was having a running account with this concern, wherein, numerous transactions of advancing loans had been carried out. Closing debit balance of the assessee with the firm was at Rs.1,00,88,796/- as on 31.03.2010. He required the assessee to explain as to why interest equivalent to the interest free advances of Rs.1,00,88,796/- to M/s Martin & Brown Bioscience may not be disallowed in view of decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd., (2005) 156 Taxman 257 (P&H). The assessee in its reply stated as under :-
“……..Respectfully it is submitted that we have not charged any interest from M/s Martin & Brown Biosciences because Sh. Vineet Mainin is partner in the firm having 50% share. The unit is setup in Baddi and profit from the unit is exempt u/s 80-I of the Income Tax Act. The assessee earning profit from the unit which was not exempt under Income Tax Act except for the deduction u/s 80-I of the Income Tax Act. Copy of capital a/c in M/s Martin & Brown Biosciences has already been submitted and placed on file……..”
After considering the assessee’s reply, the Assessing Officer concluded that the funds to the extent diverted to the partnership concern free of interest were not required by the assessee for the purposes of its business and no loans to that extent were required to be raised and interest thereon was not allowable. He relied on the decision in the case of CIT vs. Abhishek Industries Ltd. (supra), wherein, it has been held that if in the process of examination of genuineness of deduction of interest, it transpires that the assessee had advanced certain funds to sister concerns or any other persons without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in- spite of pending term loans and working capital loans, on which the assessee is incurring liability to pay tax, there was justification to advance loans to sister concerns for non-business purposes without any interest and, accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. After taking into consideration, securities received from others totaling to Rs.53,14,501/-, the Assessing Officer disallowed the proportionate interest amounting to Rs.2,63,317/-.
Ld. CIT(A) dismissed the assessee’s appeal. Being aggrieved, the assessee is in appeal before the Tribunal and has taken following grounds of appeal :-
“1. The order of the learned CIT (A) confirming the addition is bad in law and against facts.
2. The learned CIT (A) has erred in disallowing interest to the tune of Rs.263317/-.
3. The Learned CIT (A) has erred by not considering the judgment of Honorable Supreme Court and Honorable different High Courts & Tribunals cited by the assessee. Although no addition was called for in view of the judgments of Different Courts, however if the contention of learned CIT(A) is accepted and your Honor also agree with the learned CIT (A) rejecting the contention of the assessee, even then disallowance comes to Rs.94007/- only as per calculation given before the Learned CIT (A). The learned CIT (A) erred in not considering the calculations.
4. The learned C.I.T. (A) has erred in relying on the judgment of Abhishek Industries which has no relevance in the case of assessee as assessee has not made any interest free advances to its sister concern for non business purpose. Rather he has invested funds in a new unit and all the cases relied by him are supporting his stand. The learned C.I.T. (A) has further erred in relying upon judgment of Honorable Supreme Court in the case of Hero Cycles (2015) 63 Taxmann.com 308 (SC). We would further like to submit that in the case of Shenoy & Co. Vs.
CTO (1985) 155 ITR 178, the Honorable Supreme Court has held that the law laid down by it (SC) is binding on all, notwithstanding the fact that it is against the State or a private party; it is binding even on those who were not parties before the court. Also as per Article 141 of the Constitution of India the law declared by the Supreme Court shall be binding on all courts within the territory of India. Moreover, cases decided by the Jurisdictional High Courts are also binding within the State.”
5. Ld. counsel submitted that assessee had invested the amount as capital to earn profit. He pointed out that but for the section 80-I of the Act, the profit would have been taxable in the hands of the assessee and, therefore, the decision in the case of Abhishek Industries (supra) is not applicable. He submitted that assessee had not invested in the capital for earning exempt income. Ld. counsel relied on the decision in the case of S. A. Builders vs. CIT, 288 ITR 1, wherein, it has been held that no interest can be disallowed in respect of advance to sister concern given on account of commercial expediency. Ld. DR submitted that there was no commercial expediency.
I have considered the submissions of both the parties and have perused the record of the case. In the submissions filed before ld. CIT(A), it was specifically stated by assessee that he had started a unit in partnership under the name and style of M/s Martin & Brown Biosciences in Baddi, Himachal Pradesh. The assessee was partner in the firm having 50% share.
The profits of the firm were exempt for a period of 5 years u/s 80-I of the Act. This plea of assessee did not find favour with the ld. CIT(A), who observed in para 5.2 and 5.3 as under :-
“5.2 It is not clear from the submission of the appellant as to how the advances made to M/s Martin & Brown Biosciences is in the interest of the appellant. It is also not clear as to how any investment made by the appellant in a sister concern is going to benefit the appellant. It has also not been clarified as to how interest bearing funds diverted to above concern free of interest is going to benefit the appellant. It has been correctly held by the AO that the funds to extent diverted to the above concern free of interest were not required by the appellant for the purposes of its business and no loans to that extent were required to be raised and interest there on is therefore not allowable. 5.3 It is to be examined, in view of the decision of the honorable Supreme Court as to whether there was reasonable nexus or business exigency for advancing interest free funds out of interest bearing funds. It has been held by the Supreme Court in the case of Hero Cycles pvt. Ltd. V. CIT(2015) 63 taxmann.com 308 (SC), quoting from the case of SA Builders 288 ITR 1, that "the expression 'commercial expediency' is an expression of wide import and includes as much 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.”
From the above observations, it is evident that the claim of assessee has been rejected primarily because assessee failed to establish reasonable nexus of business expediency for advancing interest bearing funds to partnership firm. However, the factual position has not been disputed inasmuch as it is not disputed that the funds were invested in the capital of partnership firm and, therefore, the primary intention of assessee was to earn profits from the firm. The contention of assessee that since the profits from firm were exempt u/s 80-IC, therefore, it cannot be said that the investment was not made for the purposes of earning taxable income from firm is not correct because the main issue to be considered in the present scenario is as to how the receipts from firm would be taxable in the hands of assessee.
Admittedly, the share of the profits derived from firm is exempt u/s 10(2A) in the hands of assessee and, therefore, to this extent proportionate disallowance can be made. However, interest and remuneration from firm would be taxable as business income in the hands of assessee and, therefore, interest paid on borrowed funds in this regard cannot be disallowed. The taxability of income in the hands of firm is not relevant while considering the nature of receipt in the hands of assessee. Therefore, the assessee’s claim that it had not invested the money to earn any exempt income is not correct. The nature of profits in the hands of firm cannot be the decisive factor for considering the nature of profits in the hands of assessee. In view of above discussion, the Assessing Officer is directed to re-compute the disallowance.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on this 28th day of March, 2017.