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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM]
ORDER Per M.Balaganesh, AM
This appeal by the assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-19, Kolkata [in short the ld CIT(A)] in Appeal No.364/CIT(A)- 19/Kol/2014-15 dated 17.12.2015 against the order passed by the ITO, Ward-9(3), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 02.12.2011 for the Assessment Year 2009-10.
The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the disallowance of interest expenditure of Rs. 10,00,515/- in the facts and circumstances of the case.
2 M/s Rawalwasia & Sons Exim Ltd. A.Yr. 2009-10 3. The brief facts of this issue is that the assessee originally was a firm till 2004 and got converted into a limited company on 29.12.2004. Shri J.P. Agarwal, who was a partner in the erstwhile firm became a major shareholder in the assessee company. Shri J.P. Agarwal had a current account in the erstwhile firm which continued in the assessee company books and admittedly he had overdrawn the amounts from the assessee company. No interest was disallowed in the hands of the assessee company till assessment year 2008-09 on the ground of excessive borrowings made by Shri J.P. Agarwal from the assessee company. The ld. AO observed that the assessee company had debited in its profit and loss account a sum of Rs. 2,58,01,703/- towards interest expenditure against the loan of Rs. 39.16 crores [both secured and unsecured loans]. The ld. AO observed that the assessee had earned interest income of Rs. 1.63 crores against the loans given in the sum of Rs. 14.98 crores. During the year under consideration, the assessee’s main business was wholesale and retailer in essential commodities like edible oil, wheat, flour and sheers. The ld. AO observed that the assessee had advanced the following funds to its Director and to a concern in which such director is interested:
3 M/s Rawalwasia & Sons Exim Ltd. A.Yr. 2009-10 The ld. AO observed that on one hand, the assessee had paid interest on its borrowings, and on the other hand, it had advanced interest free loans and advances to interested parties. Accordingly, he sought to disallow the proportionate interest claimed as deduction by the assessee. The assessee replied that the advances made to Director and to the company in which director was interested were for the purpose of purchase of goods and in order to meet its business commitments and accordingly, no interest was charged from them by the assessee. It was also pleaded that the assessee was having own funds as on 01.04.2008 to the tune of Rs. 96.90 lacs. Accordingly, it was pleaded that the assessee had made advances to interested parties out of own funds. The assessee furnished the following details of interest paid during the assessment year 2009-10 before the ld. AO:
The assessee filed the details of interest received before the ld. AO as under:
6 M/s Rawalwasia & Sons Exim Ltd. A.Yr. 2009-10 The assessee stated that Shri J.P. Agarwal had given two properties belonging to him as collateral security to the company to enable the bank to grant credit facilities to the assessee company. Shri J.P. Agarwal in return was made available by the assessee company with interest free funds up to maximum limit of 1 crore at any given time as consideration for offering his properties as collateral security. Hence, it was pleaded that the sums advanced to Shri J.P. Agarwal by the assessee were part of the business commitment and expediency and hence cannot be treated as amounts diverted for non- business purposes. These submissions made by the assessee were not appreciated by the ld. AO and the ld. AO sought to disallow the proportionate interest worked out at 9% per annum and accordingly arrived at the disallowance figure of Rs. 10,00,515/- and added the same in the assessment. The action of the ld. AO was upheld by the Ld. CIT(A). Aggrieved, the assessee is in appeal before us on the following grounds: 1. On the facts and in the circumstances of the case the Ld. CIT(A) is not justified in confirming the disallowance of a sum of Rs. 10,00,515/- under the head interest expenditure on estimated basis.
We have heard the rival submissions. We find that the ld. AR had placed on record a copy of the Co-ordinate Bench decision of this Tribunal in the case of Shri J,P. Agarwal in dated 12.04.2017 for the assessment year 2010- 11 wherein the addition made in the hands of Shri J.P. Agarwal towards deemed dividend for excessive borrowings by him from the assessee company in the sum of Rs. 21,13,676/-, was deleted by the Tribunal by holding that funds were given to Shri J.P. Agarwal only to facilitate the company’s business and thereby proving business exigency thereon. In that decision, it was held that Shri J.P.Agarwal had permitted his properties mortgaged to the bank for enabling the assessee company to take the benefit of loan and in spite of request of Shri J.P. Agarwal, the assessee company was unable to release the properties from the mortgage. In such a situation, for retaining the benefit of loan availed from the bank, if decision was taken to give advance to Shri J.P. Agarwal, such decision was not to give gratuitous advance to its share holder 6
7 M/s Rawalwasia & Sons Exim Ltd. A.Yr. 2009-10 but to protect the business interest of the assessee company. Accordingly, we hold that the excess borrowings made by Shri J.P. Agarwal from the assessee company was in the normal course of business and to retain the facility of loan availed from the bank, which clearly demonstrates the business nexus of the advances made by the company to Shri J.P. Agarwal. Hence, it cannot be said that the monies advanced to Shri J.P. Agarwal were for non-business purposes. Once the money is borrowed for the purpose of business and interest is paid thereon, the same would be squarely allowable as deduction u/s 36(1)(iii) of the Act. Accordingly, the lending of monies to Shri J.P. Agarwal (Individual) and Shri J.P. Agarwal (Karta of HUF) is for the purpose of business and hence no proportionate disallowance of interest paid on borrowed capital could be made in respect of amounts advanced to these two parties.
4.1.With regard to amounts advanced to Kolkata Concrete Pvt. Ltd. (sister concern of the assessee), we find that the assessee had charged interest on the amounts advanced to them during assessment year 2008-09 and had offered to tax. It was stated that since M/s Kolkata Concrete Pvt. Ltd. was facing financial crunch and was in bad position, the assessee company waived its right to charge interest during assessment year 2009- 10 i.e. the year under appeal and was able to recover a substantial portion of balance outstanding in the sum of Rs. 1,36,30,495/- during the year, thereby leaving a meager balance of Rs. 9,09,183/- as on 31.03.2009. In any case, we find that the assessee is having sufficient funds to make advance to M/s Kolkata Concrete Pvt. Ltd. as is evident from the balance sheet. Hence, there cannot be any disallowance of interest u/s 36(1)(iii) of the Act. Accordingly, ground no. 1 raised by the assessee is allowed.
The last issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in confirming the disallowance u/s 14A of the Act, in the facts and circumstances of the case. 7
The brief facts of this issue is that the assessee earned a dividend income of Rs. 6,001/- and claimed the same as exempt u/s 10(34) of the Act. The assessee stated that no expenditure was incurred for the purpose of earning such dividend income and accordingly, no disallowance u/s 14A of the Act need to be made thereon. The ld. AO resorted to compute the disallowance by applying the provisions of Rule 8D and made disallowance of Rs. 32,717/- under second and third limb of Rule 8D(2) of the Rules. This action of the ld. AO was upheld by the Ld. CIT(A). Aggrieved the assessee is in appeal before us on the following grounds: 2. On the facts and in the circumstances of the case the Ld. CIT(A) is not justified in confirming the disallowances of a sum of Rs. 32,717/- u/s 14A of the Income Tax Act, 1961.
We have heard the rival submissions. We find that the ld. AR pleaded before us that the assessee had paid interest to the SBI in the sum of Rs. 96,85,630/- which is included in the total interest payment of Rs. 2,58,01,703/-. He also stated that the assessee had also received interest income of Rs. 1,64,60,886/- which needs to be netted off with the interest paid. He further argued that the assessee has got own funds to make the investments and hence no disallowance under the second limb of Rule 8D(2) is warranted. We find that the assessee is having sufficient own funds and in any case we are inclined to agree with the argument of the ld. AR that the interest received by the assessee is to be netted off with interest paid and bank interest also deserves to be excluded for the purpose of computing disallowance under the second limb of Rule 8D(2). This is because of the fact that the interest paid to SBI for the loan borrowed has been used only for the purpose of business and the same has been allowed as deduction in the earlier grounds supra. Once the bank interest is reduced from the total interest payment and the resultant figure thereon is netted off with interest received by the assessee on the loan given by the assessee, then there is no positive figure of interest payment. Hence, no disallowance under the second limb of Rule 8D(2) is 9 M/s Rawalwasia & Sons Exim Ltd. A.Yr. 2009-10 warranted. With regard to disallowance under the third limb of Rule 8D(2) in the sum of Rs. 2,515/- the ld. AR fairly agreed for the same. In any case it is already settled that the disallowance under 14A read with Rule 8D cannot exceed the exempt income claimed by the assessee.
7.1. Accordingly, we hold that the disallowance made under the second limb of Rule 8D(2) is hereby directed to be deleted and disallowance under the third limb is sustained. Accordingly, ground no. 2 raised by the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 06.04.2018