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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
Date of Hearing : 29.11.2017. Date of Pronouncement : 01.12.2017. ORDER
Per N.V.Vasudevan, JM
This is an appeal by the Revenue against the order dated.31.12.2014 of C.I.T.(A)-10, Kolkata relating to A.Y.2010-11.
Ground No.1 raised by the revenue reads as follows :- “1. On the facts & circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the disallowance of interest expense to the tune of Rs. 78,000/- out of total disallowance of Rs. 43,24,193/ - u/s 40A(2)(b) of the I. T. Act 1961.”
The assessee is an Individual. The assessee is a proprietor of Proprietorship concern "M/ s Special Steel Stores" which is engaged in the business of "Trading in alloy steel, carbon steel and assorted pieces" having office at 37, N. S. Road, 2nd Floor, Kolkata -700 001 and also at T-22, MIDC BHOSARI, TELCO ROAD, PUNE- 411 026.
The assessee had filed his Return of the Income u/s 139(1) on 12-10-2010 for the Asst. Year 2010 - 2011, showing a Total Income of Rs. 1,30,49,975/- (One Crore Shri Satya Prakash Sharma A.Y.2010-11 2 Thirty Lacs Forty Nine Thousand Nine Hundred and Seventy Five only). The Assessing Officer disallowed a sum of Rs. 43,24,193/- (Rs. Forty Three Lac Twenty Four Thousand One Hundred Ninety Three Only) on account of Interest on the basis of following contention:- ~ That the assessee received interest on deposits at an average rate of 8.16% while paid interest on borrowed loan at an average rate of 13%.
~ That the interest income is not commensurate to the expense made.
~ That the expense made on borrowed fund used for purpose of investment is not a business expense. Further as per the Assessing Officer, the funds have been used in Investment in bank deposits as well as in Housing Cooperatives, shares in banks and purchase of mutual funds. Accordingly, the Assessing Officer was of the view that the expenditure is made with no business expediency.
~ In the opinion of the Assessing Officer more than 50% of the unsecured loan outstanding is taken from a related party, "Satya Prakash Sharma (HUF), which is covered u/ s 40A(2)(b) of the IT Act, 1961 and therefore it is a self imposed liability. According to the Assessing Officer there is a wilful attempt on the part of the assessee to reduce his taxable income by increasing interest expense.
Hence, based on her above contentions the Ld. AO added back mRs.43,24,193/- to the total income of the assesee u/s 36(1)(iii) of the I.T.Act, 19061 (Act.).
Before CIT(A) the assessee contended that the addition made by the AO on account of different between rate of interest paid and interest received was ignoring the “commercial expediency” of the interest expenses incurred. The assessee pointed out that the disallowance was made on Investments & Deposits of Rs.8,22,19,776/-. The break-up of this Investment was as under :- Sl.No. Particulars Amount in (Rs.) 1. Investment in Fixed Deposits 4,96,71,936/- 2. Investment in Recurring Deposits 2,82,74,040/- 3. Investment in Housing Society 41,00,000/- 4. Shares in Banks 1,73,800/- Shri Satya Prakash Sharma A.Y.2010-11 3
TOTAL 8,22,19,776/- The Commercial expediency/necessity of the above Investments was explained by the assessee as follows :- i) Investment in Fixed deposits and Recurring Deposits are mostly made out of recurring savings of assessee’s Proprietary Firm 'Special Steel Stores' to keep the savings secure and intact. As a matter of keeping this balance secure, different Fixed Deposits and Recurring Deposits are created periodically from assessee’s Business savings and are again reinvested at the time of maturity in the most convenient manner. The Investment in fixed deposits was done with a view of earning profits on assessee’s ploughed back profits. ii) Further, Investment in Fixed Deposits and in Shares of Banks is done for the purpose of availing Secured Loans from Banks in the form of overdraft facilities for augmenting working capital requirements of the firm. Since it is considered mandatory to maintain security margin either by Fixed Deposits with Banks or by purchasing a certain shares of the bank for avaiIing various credit facilities. Due to the high volatility of metal market vis a vis requirement of funds for buying materials, the firm tends to maintain Fixed Deposits which can be utilized for pledging at the time availing working capital facilities from scheduled banks. Hence, question of earning higher interest income appears immaterial as the primary objective of the concern is to avail working capital finance from the bank to continue Assessee’s business operations without any hindrances. iii) Further , Investment in Housing Society was made in the nature of Advance with a view of purchasing the Land from Shri Guru Dutta Co Operative Society for expansion of business. Hence the Investment was made for the long-term benefits for the business rather than earning any immediate return.
The Assessee also pointed out that the above Investments were substantially made out of assessee’ own funds and or are incidental to the smooth functioning of the Shri Satya Prakash Sharma A.Y.2010-11 4 business and in accordance of commercial expediency of the business. It was argued that the Assessing Officer is bad in Law as well as in facts because:- i. The Investments are substantially made from Own funds. ii. Where ever borrowed fund is used for Investments, it is made for smooth functioning of the business and in accordance of" commercial expediency of the business. Reliance was also placed on the judgment of Hon'ble Supreme Court Of India in the case of S.A. Builders Limited v. Commissioner of Income-tax (Appeals), Chandigarh on December 14, 2006 wherein in was held that interest free loans given out of borrowed funds on which interest is paid, if it is owing to commercial expediency, no disallowance of interest can be made.
The Assessee further submitted that the Assessing Officer erred in concluding that more than 50% of the unsecured loan outstanding was taken from a related party, Satya Prakash Sharma (HUF), which is covered u/s 40A(2)(b) of the IT Act, 1961 and therefore it is a self imposed liability. It was submitted that the AO wrongly observed that the assessee wilfully attempted to reduce the taxable income by increasing interest expense. The assessee pointed out that the assessee had taken unsecured loan of Rs. 39,00,000/- from Satya Prakash Sharma(HUF) bearing interest @ 12% per annum amounting to Rs. 4,68,000/- in the ordinary course of business. Apart from Satya Prakash Sharma (HUF), similarly the firm has also taken unsecured loans from 9 (nine) other individuals, firms and HUF at the same interest rate during the financial year 2009 - 2010. That means that e firm has borrowed funds at the rate of 12% across the board from all individuals, firms and HUF. So, it is apparently very clear that loan from outside party is equally expensive as that from relative. Moreover, there was idle fund in the hands of Satya Prakash Sharma (HUF). Thus, there was no point of borrowing fund from outside when it can be borrowed from persons covered u/s 40A(2)(b) at the same rate of interest. Mere facts that more than 50% of unsecured loan outstanding is taken from a related party does no ipso facto indicate a self - imposed liability. Thus, there was no attempt of increasing interest expense but an Shri Satya Prakash Sharma A.Y.2010-11 5 attempt was made for proper utilization of funds of related party and reducing the proprietorship firm's outside liability. Moreover, since the interest rate is identical with Nine other parties, there is no excessive payment made by us to persons covered u/s 40A(2)(b). The assessee also pointed out that the Assessing officer has erred in facts by stating that more than 50% of the unsecured loans were borrowed from Satya Prakash Sharma (HUF) only. However, during the year under consideration, the firm had total unsecured loans of Rs. 81,45,725/- bearing interest rate of 12 % per annum. Thus, loan from Satya Prakash Sharma (HUF) was 47.88% (approx.).
Without prejudice to above, the assessee submitted that for the purpose of computation of Average rate of interest, only Unsecured Loan can be considered. This is because Secured Loans consist of the sum borrowed from banks by me in the name of my proprietorship firm Special Steel Stores for specified business purposes and is not allowed to be diverted from business use. Hence the same should not be taken for the purpose of computing Average Rate of Return. Further, since the same can be used only for specified business purposes, these Secured Loans CANNOT be utilized for the purpose of granting Loan or advance or deposit to any third party or for the purpose of Investments due to rigid bank norms as the same can ONLY be used for working capital requirements, i.e. buying materials, paying off trade creditors, etc. Therefore, by no stretch of imagination, the rate of interest on Secured loan CANNOT be compared with the rate of interest on deposits. Further, Unsecured loans were borrowed at the rate of 9% to the extent of Rs. 8,10,00,000/- (Rs. Eight Crore and Ten Lacs only) and at the rate of 12% to the extent of Rs. 84,50,000/- (Rs. Eighty Four Lacs and Fifty Thousand Only) during the financial year 2009 - 2010. Thus, the average rate of interest on Borrowed Funds for the financial year 2009 - 2010 is Rs. 9.28% only.
The CIT(A) accepted the contentions of the assessee. Firstly he held that he deposits in the bank cannot said to be not for the purpose of the business of the assessee. In coming to the aforesaid conclusion the CT(A) accepted the submission of Shri Satya Prakash Sharma A.Y.2010-11 6 the assessee that the deposits in fixed deposits were made for purchasing certain shares of the bank for availing working capital finance from the bank to continue business operations without hindrance. Secondly the CIT(A) also held that the AO failed to consider the availability of own funds of the assessee. Thirdly he held that the assessee’s average rate of interest of availing loan has been arbitrarily and excessively fixed by the AO that the cost of borrowing would be only 6.5%. CIT(A) however sustained addition made by the AO to the extent of Rs.75,000/- by invoking the provision of section 40A(2)(b) of the Act. The following are the relevant observations of CIT(A) : “3.2.6. The ground is allowed subject to some disallowance of interest payment to Satya Prakash Sharma, HUF, which was paid at 12%. I restrict the allowable interest to 10% having regard to borrowing rates from uncoonected parties. Thus 2% of Rs.39,00,000 = Rs.78,000 is disallowed u/s 40A(2)(b) of the I.T.Act. “ We are not aware as to whether the assessee has filed the appeal against this. In this proceedings none appeared on behalf of the assessee and therefore this appeal is being decided on merits ex parte. We make it clear that if the assessee challenges the aforesaid addition of Rs.78,000/- the view which we may take in this appeal should not be considered as decisive in the matter.
We have heard the submissions of the ld. DR, who relied on the order of AO. We have considered the submissions of the ld. DR and the order of AO and are of the view that order of the AO suffers from factual errors. One such error would be that secured loans have been considered as having been diverted by the assessee for non business purposes. Secured loans were taken from the bank for specified business purposes and because of the rigid norm of the bank they cannot be diverted for any other purpose. This aspect has been over looked by the AO. Besides the above the AO has made disallowance on imaginary average rate of interest on borrowings and investments. CIT(A), in our view, rightly considered the action of the AO as not proper. We therefore confirm the order of CIT(A) and dismiss ground no.1 raised by the revenue.
Ground No.2 raised by the revenue reads as follows :- Shri Satya Prakash Sharma A.Y.2010-11 7
“2. On the facts and circumstances of the case and in law, the ld. CIT(A) erred n restricting disallowance to Rs.15,500/- out of total disallowance of Rs.2,34,525/- made u/s 14A rule 8D(2)(iii) of the I.T.Act, 1961.”
The AO made a disallowance of expenses by invoking the provision of section 14A of the Act. In the computation of income, assessee had added back Rs.9857/- as disallowance u/s 14A. The AO called upon the Assessee furnish the computation of the same. The assessee furnished the following :- Investment as on 01/04/2009 Rs.1981481/- Investment as on 31/03/2010 Rs.1961332/- Average Investment Rs.1971407/- 0.5% of Average Investment Rs. 9857/- The AO on perusal of the details was of the view that the assessee had taken only those investments which were in the personal balance sheet. However in the balance sheet of M/s Special Steel Stores also, following dividend yielding investments were there: Name of the scrip Investment as on Investment as on 31.03.2009 31.03.2010 UTI Mutual Fund Rs. 1600000/- Rs. 1600000/- MF- Reliance Natural Rs. 1500000/- Rs. 1500000/- Resource Fund Total Rs. 3100000/- Rs. 3100000/- The AO therefore recalculated disallowance u/s.14A as under: Interest expense in P&L A/c - Rs.l,69,15,562.75/- Average investment- Rs.31 ,00,000/- Asset as on 31.03.2009- Rs. 241751324.78/- Asset as on 31.03.2010- Rs. 237081680.57 Average asset- Rs. 239416502.67/- 8D(ii) Rs.1,69,15,562. 75 x Rs.31 ,00,000 = Rs.219025.18/- Rs. 23,94,16,502.67/- Shri Satya Prakash Sharma A.Y.2010-11 8 8D(iii) 0.5% of Average investment= Rs. 15,500/- Hence total disallowance u/s 14A read with Rule 8D in the books of M/s Special Steel Store was arrived at by the AO at Rs. 2,34,525/- in addition to the disallowance made by the Assessee.
On appeal by the assessee, the CIT(A) restricted the disallowance to Rs.15,500/- under Rule 8D(2)(iii). CIT(A) deleted the disallowance on interest expenses under Rule 8D(2)(ii) of IT Rules on the basis of the finding that assessee had sufficient own funds which were more than the investments in shares which are likely to yield exempt income under Rule 8D(2)(iii) was however confirmed. The following were the relevant observations of CIT(A) :- “The appellant claims that 31 lacs of investment is out of own. fund, which is Rs. 7 .08 Crores [31.03.10], Rs. 7 .29 crores [31.03.09], Rs.6.48 crores [31.03.08] and Rs.5.61 crores [31.03.07] on ends of respective years. Rs.31 lacs is much lower than value of own funds and therefore appellant's claim that Rs.31 lacs was not out of borrowings, may be accepted. Thus, the addition under rule 8D(2)(ii) is deleted. Addition under rule 8D(2)(iii) of Rs.15,500/ - is however confirmed ".
Aggrieved by the order of CIT(A) the revenue has raised ground no.2 before the Tribunal. Here also, we make it clear that the finding will be confined to the grounds of appeal by the revenue. In the submissions made by the assessee before CIT(A) the assessee has taken a stand that there cannot be any disallowance u/s 14A of the Act because the assesee had not earned any tax free income during the previous year. This submission is not being considered in this appeal by the revenue. We make it clear that the conclusion in this appeal are confined to the grounds raised by the revenue on the factual details given by CIT(A) which remained uncontroverted . We are of the view that the disallowance on interest expenses made by CIT(A) was just and proper and calls for no interference. Consequently ground no.2 raised by the revenue is also dismissed. Shri Satya Prakash Sharma A.Y.2010-11 9