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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’ NEW DELHI
Before: SHRI G. S. PANNU & MS SUCHITRA KAMBLE
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against order dated 21/2/2018 passed by CIT(A)-4, New Delhi for assessment year 2013-14.
The grounds of appeal are as under:-
(a) “That the learned CIT(A) has erred in sustaining the addition of Rs. 2,13,37,665/- made by the learned Assessing Officer on account of disallowance of interest expense under section 36(l)(iii) of the Act on the alleged contention that the loan borrowed from the bank is being used for the benefit of the group concerns and as such cannot be said to be utilized wholly and exclusively the purpose of business of the appellant without giving credence to the fact that the advances given by the appellant were for the purposes of its business.
That the learned CIT(A) has misinterpreted the provisions of (b) Section 36(1 )(iii) of the Act inasmuch as the said section does not provide for disallowance of any part amount of interest being the difference between interest paid and interest received.”
The assessee company is engaged in the business of trading of barley scrap. The assessee filed its return of income on 1/10/2013 declaring los at Rs. 1,68,82,236/-. The Assessing Officer made disallowance of interest expenses u/s 36(i)(iii) due to diversion of funds amounting to Rs.2,13,37,665/-.
Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT (A) dismissed the appeal of the assessee.
The Ld. AR submitted that the assessee is engaged in the business of trading barley scrap and during the relevant Assessment Year the assessee made purchases amounting to Rs. 1,71,56,941/- and sales amounting to Rs.2,54,62,361/-from this activity only. During the relevant Assessment Year the assessee had borrowed money from ING Vysva Bank and Independent Investment Company, which was lend to group companies. The details of interest paid and interest earned is given below:-
(a) interest expenses amounting to Rs.5,20,46,877/- on borrowing from ING Vysva Bank and Independent Investment Company; (b) Interest income amounting to Rs. 3,07,09,213/- out of which Rs.2,80,19,223/- was received on loan given to M/s PMV Nutrient Products Pvt. Ltd. and The Malt Company (India) Ltd. The remaining interest of Rs. 26,89,919/- was received on fixed deposits. During the assessment proceedings the assessee had furnished its reply dated 29/12/2015 stating therein that it had taken loan from ING Vysva Bank and Independent Investment Company at 14% and had given loan to its sister concerns i.e. The Malt Company @ 12% and PMV Nutrients @ 14%. The Ld. AR pointed out the letter issued by ING Vysva Bank relating to the loan details. The Ld. AR explained the reason in respect of the difference between the interest paid and interest received. The Ld. AR further submitted that outstanding balance of the loan given by the assessee to The Malt Company as on 1/4/2012 was Rs. 25,60,12,563/-. During the relevant Assessment Year, The Malt Company returned the loan of Rs. 10,14,66,800/-. Since the loan was returned before the time, the interest component for the actual due date of payment of loan became lower. Had the loan not been returned, the interest earning would be higher. The Ld. AR submitted that assessee cannot be penalized for accepting the repayment of loan. If this loan was not repaid then the interest earned would have been Rs. 1,21,76,016/-. The amount invested in fixed deposits was carrying an interest rate of 6%. The differential interest on Rs. 6,50,50,000/- was also one of the reasons for difference between interest paid as interest received. Another reasons for difference in interest paid and interest received is the time difference i.e. the date on which loan was received by the assessee from ING Vysva Bank and the date on which loan was given by the assessee to The Malt Company. The Ld. AR relied upon the various decisions wherein it has been held that the interest on borrowed capital could not be disallowed u/s 36(1)(iii)of the Act where the borrowed funds have been invested in the shares of the Company for the commercial interest of the assessee. The ld. AR submitted that the Assessing Officer did not consider the reply filed by the assessee. The Ld. AR relied upon the sanction letter from ING Vysva Bank dated 9/5/2014 wherein the purpose of taking loan was that the assessee could lend the same to its group Companies for meeting their Capital expenditure and working capital requirement and the loan was actually utilized for this purpose only. Thus, the assessee has utilized the loan for the purpose of business and also on account of commercial expediency. The Ld. AR relied upon the decision of Hon'ble Supreme Court in case of S A Builders Ltd. VS. CIT (2007) 158 Taxman 74. In this case, the assessee had given interest free advances to its sister concern out of interest bearing funds. The Assessing Officer disallowed the interest paid on borrowed funds u/s 36(1)(iii) of the Act which was upheld by the Tribunal and the Hon'ble High Court. The appeal to the Hon'ble Supreme Court, the Apex Court held that neither the Hon'ble High Court nor Tribunal had examined as to whether the loan was given by the assessee to its sister concern was on account of commercial expediency or not and accordingly the Hon'ble Supreme Court remitted back the said case to the Tribunal for fresh adjudication in accordance with the law after considering the fact that whether the said loan was given by way of commercial expediency or not. The Ld. AR further submitted that in earlier Assessment Years the Revenue Authorities has accepted assessee’s stand in respect of these loans. This is the only year where the Revenue has taken a different stand. Therefore, Ld. AR relied upon the principle of consistency.
The Ld. DR submitted that the loan was not for the commercial purpose but just for lending money to the other Companies which was not the business of the assessee Company. The Ld. DR relied upon the assessment order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the loan/advance given by the assessee to the Malt Company which is a subsidiary Company of the assessee, in which the assessee was holding 60% shares as on 31/3/2013. The said loan was given by the assessee to The Malt Company and the said sister concern utilized the same to meet out its capital expenditure and working capital requirements. The loan given by the assessee to PMV Nutrients was carrying the same interest rate as that of the borrowed funds 14% and there was no difference in the interest paid and interest received. From the perusal of the sanction letter issued by ING Vysva Bank, it clearly reveals the intention of the assessee that the said amount is lent to the Group Companies for meeting their capital expenditure and working capital requirements. The revenue at no point of time disputed that the loan amount was diverted from its original purpose. The ratio laid down by the Hon'ble Supreme Court in case of S.A Builders is apt in the present case as the assessee has utilized the amount for its commercial expediency and, therefore, Section 36(1)(iii) will not attract. Therefore, the Assessing Officer was not right in making addition thereto as well as the CIT(A) has not taken cognizance of the actual commercial expediency and evidences shown by the assessee before him while confirming the addition. Besides this the Revenue has also accepted this component of interest expenses in earlier years. So, the principle of consistency is applicable in the present case as well. Therefore, the appeal of the assessee is allowed.
In result, the appeal of the assessee is allowed.