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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, Shri Jhawar Lal Jain (hereinafter referred to as ‘the assessee’), by filing the present appeal sought to set aside the impugned order dated 01.01.2016 passed by the Commissioner of Income-tax (Appeals)-17, New Delhi qua the assessment year 2012-13 on the grounds inter alia that :- “1. The Learned Commissioner of Income Tax, (Appeals) -17, New Delhi [‘CIT (A)') has erred both in law and on facts in upholding the order of Learned Assistant Commissioner of Income Tax, Circle 51 (1),
New Delhi('ACIT') disallowing interest of Rs.9,66,247/- under Section 36(1)(iii) of the Income Tax Act, 1961 ('Act').
Without prejudice to our other contentions, the Learned CIT(A), has erred both in law and on facts in failing to grant proportionate relief on disallowance of interest of Rs.9,66,247/- under Section 36(1)(iii) of the Act to the extent of availability of own interest free funds with the assessee.
3. Without prejudice to our other contentions, the learned CIT (A) has erred, both in law on facts of the case, in upholding an addition of Rs.37,851/- on account of disallowance of 1/10th of expenses under the head of business promotion, travelling & conveyance, vehicle maintenance, staff welfare and telephone on ad-hoc basis.
The Learned CIT (A) has erred both in law and on facts by not adjudicating on the ground for initiation of penalty proceedings by the Learned AO under section 271 (1)(c) of the Act on the premise that it is consequential in nature even though there was no concealment of income or furnishing of inaccurate particulars by the assessee.” 2. Briefly stated the facts of this case are : pursuant to the notices under section 143 (2) and 142 (1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire issued during the scrutiny proceedings, Shri Praveen Goel, CA/AR put in appearance, filed written submissions along with details and also discussed the case. Assessee is into the business of trading and commission agent of yarn and fabric in the name and style as M/s.
Manoj Yarn Agency. During the year under assessment, assessee has advanced loan to the tune of Rs.3,28,30,957/- and Rs.1,23,48,111/- to M/s. R.J. Fabrics and Shri Manoj Kumar Jain respectively. Assessee was called upon to furnish details as to whether due interest income from such advances has been disclosed in the return of income and the assessee contended that no interest is being received form Shri Manoj Kumar Jain and interest @ 6% per annum has been received from M/s. R.J. Fabrics.
Assessing Officer noticed from the profit & loss account of the assessee for AY 2012-13 that it has claimed expenditure on account of payment of interest on loans amounting to Rs.44,82,727/- @ 12% or more than 12% per annum and as such, interest bearing funds of the assessee were advanced to persons on which notional interest income has accrued to the assessee. AO observed that advances given by the assessee is squarely covered u/s 36(1)(iii) of the Act. Assessee has also not claimed that the interest free advances given to aforesaid persons for commercial expediency. AO also noticed that opening balance in case of Shri Manoj Kumar Jain as on 01.04.2011 is Rs.11,55,000/- (Dr.) and later on throughout the financial year, assessee diverted interest bearing funds to Shri Manoj Kumar Jain and also received some amount as and when required and at the end of the relevant assessment year closing balance was Rs.12,38,111/- (Dr.). As per ledger account, the assessee has not charged any interest on the funds given to Shri Manoj Kumar Jain, so the interest disallowed is calculated @ 12% per annum, amounting to Rs.4,35,376/-.
In case of M/s. R.J. Fabrics, AO noticed that opening balance at Rs.1,58,28,280/- (Dr.) as on 01.04.2011. Assessee diverted interest bearing funds to M/s. R.J. Fabrics and also received same amount as and when required and from ledger, it has come on record that the assessee was charging interest @ 6% per annum only whereas it was borrowing the same @ 12% per annum and thereby disallowed 6% interest which is not charged by the assessee on interest bearing funds and disallowed total interest amounting to Rs.11,04,380/- (Rs.4,35,376/- + Rs.6,69,004/-) and made an addition to the total income of the assessee.
4. Assessee claimed expenses to the tune of Rs.3,78,508/- on account of business promotion, travelling and conveyance, telephone, etc.. Out of which, AO disallowed expenses to the extent of 1/10th and added the same back to the total income of the assessee and thereby made an addition of Rs.37,851/-.
Assessee carried the matter before the ld. CIT (A) who has partly allowed the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by challenging the impugned order passed by the ld. CIT (A) by way of filing the present appeal.
We have heard the ld. Departmental Representative for the revenue to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 2 7. The ld. AR challenging the impugned order contended that the assessee company has transferred certain funds to its subsidiary company without any interest out of the loan taken at interest for business expediency and relied upon the judgments cited as S.A.
Builders vs. CIT (A), Chandigarh [2007] 158 Taxman 74 (SC), CIT vs. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135 (Bombay) and CIT vs. Jugal Kishore Dangayach [2014] 49 taxmann.com 486 (Rajasthan).
However, on the other hand, ld. DR to repel the argument advanced by the ld. AR contended that since there is no nexus between assessee company and one Shri Manoj Kumar Jain, the funds have been diverted for non-business purpose by giving interest free loan to the sister concern and relatives, the disallowance has been rightly made by the AO and relied upon the order passed by the ld. CIT (A).
Undisputed facts in this case are inter alia that assessee company has advanced loans of Rs.3,28,30,957/- and Rs.1,23,48,111/- to M/s. R.J. Fabrics, its sister concern and Shri Manoj Kumar Jain, son of the assessee, respectively; that the aforesaid loans were advanced by the assessee to its sister concern and relative out of the funds taken by it at the interest rate of 18%
per annum; that the assessee company is maintaining two different accounts : one loan account and another one is sale and purchase account purportedly for smooth running of the business. It is also the case of the assessee that the said loans were lent to sister concern to manage the mis-match of the funds.
Now, in the backdrop of the aforesaid undisputed facts and the case laws cited by the ld. AR, the sole question arises for determination in this case is :-
“as to whether the assessee company has diverted borrowed funds taken on interest @ 18% per annum for business expediency and as such is eligible to claim the deduction of interest component under section 36(1)(iii) of the Act.” 11. During the course of argument, the ld. AR only emphasized on the ratio of the judgments cited as S.A. Builders vs. CIT (A), Chandigarh , CIT vs. Reliance Utilities & Power Ltd. and CIT vs. Jugal Kishore Dangayach (supra) that “when the assessee advanced part of the funds borrowed by it from the bank to its sister concern as interest free loan for business expediency, interest has to be allowed u/s 36(1)(iii) of the Act, but failed to brought on record even an iota of material to prove that the said loan was lent to M/s. RJ Fabrics and Shri Manoj Kumar Jain for commercial expediency.” Moreover, assessee has failed to explain the rationale behind maintaining two accounts : one loan account and another sale and purchase account, which has further failed to prove the commercial expediency for diverting the funds taken at the higher rate of interest @ 18% to its subsidiary and relatives.
The contention of the ld. AR for the assessee that AO/CIT (A) have not brought on record that an iota of evidence that funds were diverted for personal use is not tenable because onus to prove the fact that the said funds were used for commercial expediency was on the assessee which he has failed to discharge.
Moreover, perusal of page no.45, which is part of the submission made by the assessee before CIT (A) during appellate proceedings, apparently goes to prove that the assessee has advanced loan of Rs.1,23,48,111/- to Shri Manoj Kumar Jain without charging any interest and lent loan of Rs.3,28,30,957/- to M/s. R.J. Fabrics by charging interest @ 6% out of the funds borrowed by the assessee at the interest of 18%. Had the loan been advance to Shri Manoj Kumar Jain and M/s. R.J. Fabrics for commercial expediency, the assessee would not have charged interest even @ 6% per annum. The assessee has failed to prove any business nexus between the assessee company and Shri Manoj Kumar Jain except the fact that Shri Manoj Kumar Jain is son of the assessee. So, when the assessee has failed to prove commercial expediency for advancing the interest free loan/loan at the nominal rate of interest to its subsidiary and relative, the judgments cited as S.A. Builders vs. CIT (A), Chandigarh, CIT vs. Reliance Utilities & Power Ltd. and CIT vs. Jugal Kishore Dangayach (supra) relied upon by the assessee are not applicable to the facts and circumstances of the case. We are of the considered view that the AO has rightly disallowed the claim of the assessee u/s 36(1)(iii) of the Act, affirmed by the CIT (A). So, grounds no.1 & 2 are determined against the assessee.
GROUND NO.3
During the course of argument, the ld. AR for the assessee has given up this ground and as such, the same is also determined against the assessee.
GROUND NO.4 15. Ground No.4 is also determined against assessee being premature and consequential in nature.
In view of what has been discussed above, finding no illegality or perversity in the impugned order, present appeal filed by the assessee is hereby dismissed. Order pronounced in open court on this 11th day of July, 2016.