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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ NEW DELHI
Before: SHRI H.S. SIDHU & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal filed by the assessee against the order of ld. CIT(A)-IV, New Delhi dated 28.02.2014 for the assessment year 2000-01 on the following grounds :
“I. That under the facts and circumstances of the case, the Learned Income Tax Officer and the Learned CIT (APPEALS) have erred both in facts and in law in making disallowance of Rs.48,82,192 , being 2/3rd of interest expenditure claimed of Rs.73,23,288. The expenditure being a bona fide business expenditure incurred wholly and exclusively for the purposes of business is fully allowable u/s 36(1 ){iii) of the Income Tax Act, 1961.
II. THAT under the facts and circumstances of the case, the disallowance of Rs.48,82,192 out of total interest expenditure of Rs.73,23,288, being disallowance made on a notional basis merely on the plea that the assessee has advanced loan at a rate of interest lower than the rate of interest paid by him, is incorrect and stands to be deleted.
III. THAT under the facts and circumstances of the case, the Learned Income Tax Officer and the Learned, CIT (APPEALS) have not done full justice to the order of Hon'ble ITAT, Delhi Bench G dated 29.06.2007, wherein the matter had been restored back to the file of the Assessing Officer to determine the allowability of the expenditure in accordance with the directions of the Hon'ble ITAT.”
From the above grounds, it emerges out that the only issue involved in this appeal relates to disallowance of interest expenses of Rs.48,82,192/- being 2/3rd of interest expenditure claimed by the assessee of Rs.73,23,288/-.
The brief facts of the case are that the assessee company is engaged in the business of giving loans and advances, undertaking financial services and also trading in shares. The assessee filed its return of income on 20.11.2000 declaring the income of Rs.1,81,106/- u/s. 117JA of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). The return was processed u/s. 143(1) and was subsequently selected for scrutiny. Notice u/s. 143(2) was issued and served upon the assessee along with the questionnaire. Replies were submitted by the ld. AR of the assessee. The books of accounts were called for and the same were produced by the assessee. The Assessing Officer completed the scrutiny proceedings and made certain additions.
This is second round of appeal before the Tribunal on the impugned issue of interest expenses disallowed u/s. 36(1)(iii) of the Act as challenged in the above grounds of appeal raised before us. The assessee company had raised loans from M/s. Silver Line Technologies Ltd. in earlier years and showed the same as opening balance of Rs.2.15 crores as on 01.04.1999. He further raised loan of Rs.5.00 crores on 03.05.1999 at the interest rate of 15% and paid interest of Rs.73,23,288/-. The interest paid was claimed in the profit and loss account. The loan so raised from M/s. Silver Line Technologies Ltd., a sum of Rs.6.25 crores was given an ICD to M/s. Merlin Resources Pvt. Ltd. at the rate of 6% whereas the assessee has raised the same loan @ 15% and paid interest amounting to Rs.73,23,288/- on it. In this regard a letter was issued to the assessee on 30.12.2002 for seeking explanation for doing so, which reads as under :
“You have taken the unsecured loan from M/s. Silverline Technologies Ltd. and are paying interest @ 15% whereas you have advanced ICD deposits given to M/s. Merlin Resources (P) Ltd. to the tune of Rs.22.25 crores @ 7% on opening balance and 6% ICD given during the year. Please explain why the interest should not be restricted to 5% instead of 15% taken from M/s. Silverline Technologies Ltd. and given to M/s. Merlin Resources Pvt. Ltd.”.
In this regard the assessee replied vide letter dated 24.02.2003 as under:
“The interest paid by us is to Silverline Technologies only. This principal amount of average outstanding during the year is approx 30 Million. The rate of interest was 15% which was purely short term in nature. Interest received by us was from Merlin Resources Pvt. Ltd. @ 7% which was on Rs.22.25 crores approx outstanding. Therefore, the two figures are not inherently comparable.”
The Assessing Officer was not satisfied with the above submission of the assessee and added 2/3rd of the interest paid amounting to Rs.48,82,192/-. The matter travelled upto the stage of ITAT wherein, the ITAT restored the issue to the Assessing Officer with the following directions :
“7. During the course of scrutiny assessment, the Assessing Officer has disallowed interest expenditure of Rs.48.82 lacs being 2/3rd of the total interest expenses of Rs.73.23 lacs claimed by the assessee. The disallowance was made by the Assessing Officer on the plea that loan was taken by the assessee at higher rate of interest, whereas the advances were taken at a lower rate of interest. By the impugned order the Ld. CIT(A) confirmed the action of the Assessing Officer by observing that prudent businessman would not like to run into losses and make such investment which prima facie are not profitable. We have considered the rival contentions and found from the record that assessee has claimed huge interest expenditure on the loan allegedly taken for the purpose of business, at the very same time, the same loan was advanced for shorter period at a lower rate of interest. There is no dispute to the fact that businessman is the best judge in the matter of his business affairs, but in case of any loss or expenses, he is required to demonstrate that same was incurred in the course of business and for the purpose of business. In the interest of justice, this ground is also restored back to the file of Assessing Officer and the assessee is directed to demonstrate that amount of loan taken and interest paid thereon was for the purpose of business. If the Assessing Officer finds that interest payment was as per provisions of section 36(1)(iii), no disallowance is to be made merely on the plea that assessee has advanced loan at a rate of interest lower than the rate of interest paid by him. We direct accordingly.”
In the light of above directions of ITAT, the Assessing Officer issued notice u/s. 143(2) dated 07.12.2007 along with questionnaire requiring the assessee to furnish the complete details in respect of loan taken and interest paid and also furnish documentary evidences to prove that the said loan was taken and interest was paid thereon for the purpose of business. The Assessing Officer passed the order u/s. 254/143(3) of the Act. The relevant para is as under :
“The notice u/s 143(2) however remained un-responded. As such another notice u/s 143(2) dated 23.07.2008, was issued fixing the case for 05.08.2008. This notice too remained un-responded. Subsequently, another notice u/s 143(2) of 08.08.2008 was issued to the assessee fixing the case for 18.08.2008, which was subsequently adjourned for 21.08.2008 and further adjourned to 26.08.2008. On 26.08.2008, a letter dated 20.08.2008 was filed on behalf of the AR of the assessee company who filed his Power of Attorney and sought a copy of the questionnaire which had already been sent along with the notice u/s 143(2) dated 23.07.2008. However, no details were filed by the assessee company as such vide a notice u/s 142(1) dated 01.10.2008, it was asked to file its written submissions along with the necessary evidence in support of its contention in the light of the directions given by the Hon'ble ITAT in order dated 29.06.2007. This notice too remained un-complied with. Finally, another notice u/s 142(1) dated 22.10.2008, fixing the case was issued for 31.10.2008, which too remained un-complied with.
I am therefore, constrained to believe that the assessee has no evidence to prove contrary to the findings given by the A.O. in his order u/s 143(3) dated 28.02.2003, which were duly confirmed by the CIT(A), after due deliberations.”
Aggrieved by the order of the Assessing Officer, the assessee appealed before the ld. CIT(A) and filed written submissions before him. The ld.CIT(A) remanded the matter to the AO and after considering the remand report and rejoinder thereof, dismissed the appeal of the assessee. Aggrieved by the order of ld. CIT(A), the assessee is in appeal before the Tribunal.
The ld. AR of the assessee submitted a written synopsis before us, making the following submissions :
“The Ld CIT in the order u/s 254, whereby interest proportionate to the differential rate of interest has been disallowed, has not done full justice to the order of the Hon'ble ITAT , Delhi Bench "G" dated 29.06.2006, which categorically held that "If the Assessing Officer finds that interest payment was as per provisions of section 36(1)(iii), no disallowance is to be made merely on plea that assessee has advanced loan at a rate of interest lower than the rate of interest paid by him." The Ld CIT (Appeals) -IV has in the appellate order has rejected the appeal of the assessee and simply disallowed the differential interest without giving any reasons or findings to counter that submissions of the Appellant justifying it's claim u/s 36(1)(iii) and the commercial expediency vide submission dated September 25, 2012 ( pg 36- 45 of paper book) and detailed reply dated 07.02.2014 ( pg 20-22 of paper book) also furnished by the appellant in regard to the reply furnished by the Assessing Officer in response to the Remand Report, reiterating its position and explaining the allowably of the expenditure u/s 36(i)(iii). The acceptance of 1/3rd of the interest expenditure on the loan as an allowable business expense is in itself acceptance of the fact that the said interest relates to capital borrowed for the purposes of the business of the assessee company and is acceptance of the nexus between the expenditure and the business of the appellant, and is thus an allowable expenditure u/s 36(1)(iii). The said nexus having being accepted in allowing 1/3rd of the interest expenditure, the disallowance of 2/3rd of the interest on the same loan is completely unwarranted in view of the specific directions of the Hon'ble ITAT that no disallowance is to be made merely on plea that assessee has advanced loan at a rate of interest lower than the rate of interest paid by him. The nexus having been accepted, the revenue cannot put itself in the arm chair of the businessman to decide how much reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximise his profit and revenue authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act.”
Reliance is placed on the judgment of the Hon'ble Supreme Court in Hero Cycles (P.) Ltd. vs. Commissioner of Income-tax (Central), Ludhiana [2015] 63 taxmann.com 308.
The ld. DR relied on the order of the lower authorities. It was submitted that the assessee did not comply with the directions of the Hon’ble ITAT despite several opportunities given by AO and could not establish the business expediency eve. The case law relied by assessee is quite distinguishable.
We have heard the rival submissions and have perused the entire materials available on record. A perusal of assessment order passed in compliance to directions of Tribunal, reveals that the assessee has failed to comply with the express directions of Tribunal. The question for adjudication has been whether deduction of the interest expenditure amounting to Rs. 73.23 Lakhs claimed by assessee was justified or not in terms of section 36(1)(iii) of the Act and in the attending facts and circumstances of the case. In fact, the assessee was to justify the business expediency under which he had to pay interest on the borrowed funds at the rate more than the interest received on the same funds advanced by the assessee. Several opportunities were given by the Assessing Officer by issuing notices u/s. 143(2) along with questionnaire in terms of Tribunal’s directions but the assessee did not bother to comply with the notices issued to him. One of the submissions of the assessee has been that the loan was advanced at lower rate to Merlin Resources Pvt. Ltd. for a long period whereas the loan raised from Silverline Technologies Pvt. Ltd. was repaid in a short period. However, the assessee could not submit any evidence or any loan agreement before us in support of such contention nor could he lay any evidence to justify any business prospects by borrowing the funds at higher rate of interest and lending the said borrowed funds at lower rate of interest, particularly when the assessee was engaged in the business of financial services. There are also no previous or subsequent instances on record to prove such business practice of the assessee. We, therefore, find that the assessee failed to prove the business expediency, under which he chose to suffer loss in the business by paying much more interest on borrowed funds and by earning lesser interest on advancing the said borrowed funds. We, therefore, find no justification to discard the conclusions of the authorities below regarding admissibility of inordinate interest expenditure claimed by assessee on borrowed funds. The decision in the case of Hero Cycles (P) Ltd. (supra) is not applicable to the present case for the reason in the reported case the business expediency stood proved, as the borrowed funds were utilized for giving interest free loans to the assessee’s subsidiary company in that case and also the loans were given to the directors of the company out of surplus funds. Such situation does not arise in the instant case. We, therefore, find no justification to interfere with the orders of the authorities below on this issue. Accordingly, the appeal of the assessee has no merits and deserves to fail.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 27.10.2016.