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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
Per Asha Vijayaraghavan, Judicial Member
This appeal by the Revenue is directed against the order dated 16.03.2015 of the CIT(Appeals)-III, Bangalore relating to assessment year 2011-12.
The assessee company is engaged in the business of financial services. It filed return of income for the AY 2010-11 declaring a total income of Rs.4,12,01,740. The Assessing Officer passed an assessment order u/s. 143(3) of the Income-tax Act, 1961 [“the Act”] determining the taxable income at Rs.19,87,60,915 by making the following additions:-
a) Interest on loan Rs.4,53,40,320 b) Disallowance u/s. 14A r.w. Rule 8D Rs.1,54,63,081 c) Bad debts disallowed Rs.4,52,73,321
Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the CIT(Appeals).
In the submissions before the CIT(Appeals), the assessee relied on the decision of the Hon’ble Delhi High Court in the case of CIT v. Tin Box Co. (260 ITR 637) and CIT v. Hotel Savera (239 ITR 795, 796).
The brief facts are that the AO noted that a loan of Rs.2,26,07,88,659 has been taken from various concerns, out of which Rs.68,35,95,390 has been diverted for other than business purpose. The AO stated that Rs.31,55,47,240 has been invested in mutual funds and Rs.36,80,48,150 has been deposited in various FDs in banks. According to the AO, the assessee has debited Rs.32,02,98,420 as interest on various loans. Considering the diversion of loans for non-business purposes, interest of Rs.9,68,22,773 has been disallowed by the AO and added back to the returned income.
The CIT(Appeals) observed that though the AO stated that the amount has been diverted for non-business purposes, but the reasons for arriving at such a conclusion have not been elaborated. The CIT(A) further observed that the assessee is carrying on the business of micro finance and is an NBFC which is licenced by the RBI and the amounts borrowed from various banks and the NCDs are specifically required to be utilized only .for the purpose of micro lending. Before the CIT(A), the assessee furnished a copy of certain specific terms and conditions to demonstrate that the term loan sanctioned are not to be used for any purpose other than the sanctioned purpose. The CIT(A) held that the AO’s finding of diversion of these loans for non-business purposes is not based on any verifiable factual basis as no specific violation of the terms of loan sanction has been pointed out. The CIT(A) observed that the finding of the AO that fixed deposits were made for non-business purposes is without any factual basis as the amount of Rs.21.80 lakhs was placed as security/collateral with the lenders for the purpose of borrowing and letter from OBC has been filed in this regard. The CIT(A) observed that it was pointed out by the assessee that the fixed deposits to this extent are not in the nature of any discretionary investment but have been made to adhere to the conditions of the sanction of the loans by the banks and the various institutions. Further an amount of Rs.7 Crores was placed in short term deposits towards the end of the financial year.
The CIT(Appeals) stated that the investments, fixed deposits and mutual funds have only resulted in earning of interest of Rs.2,66,17,276 and the AO has not pointed out that interest expenditure of Rs.9.68 crores has been incurred on earning this amount which is against the principles of commercial prudence. He further pointed out that the assessee has sated that it had sufficient reserve and capital which were far in excess of mutual fund investments of Rs.31,55,47,240 and the AO has not specifically pointed out that any interest bearing funds have been utilised for the purpose of earning the dividend from mutual funds.
The CIT(Appeals) held as follows:-
“5.6 After examining the facts, it would emerge that interest income earned from the FD’s has been offered as income from other sources. It is an established proposition that expenditure incurred in earning such income from other sources is an admissible expenditure. AO has not given any findings that the funds have been diverted for non business purposes or interest free loans or personal advances. The deposits have earned interest income which has been offered to tax. The AO’s proposition that proportionate interest attributable to the deposits is to be disallowed is not tenable or supported by the facts of the case. 5.7 As pointed out by the AR of the appellant the investment, FDs and Mutual fund have only resulted in interest of Rs.2,66,17,276/-. Therefore no case has been made out that interest expenditure of Rs.9,68,22,773/- which is primafacie disproportionate has been incurred on earning this amount. It is also to be mentioned that while at para 4.2 of the assessment order it has been stated that proportionate interest expenditure of Rs.9,68,22,773/- in the computation of total income only an amount of Rs.4,53,40,320/- has been disallowed and added back. This amount therefore stands deleted. As regards the investment in mutual fund disallowance if any is required to be made u/s. 14A, as the specific provisions in relation to exempt income is required to be invoked.”
Aggrieved, the department is in appeal before us and raised ground No.2 which is as under:-
“2. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to not make any disallowance of interest on loans without appreciating the fact that the assessee company diverted the loans taken from various concerns/bank/financial institutions on interest payable basis for investment in mutual funds and FDs which is not the business purpose of assessee, as held by the AO.”
The ld. counsel for the assessee took us through cash flow statement for the year ended 31.3.2011 at page 54 of the assessee’s PB and pointed out that the assessee was have a closing balance of cash of Rs.390,813,736 which was sufficient to make investments in mutual fund. He also pointed out to page 70 of the PB where under specific terms & conditions with respect to loan sanctioned by Oriental Bank of Commerce, it has been stated as follows:-
“15. Our bank finance should be necessarily utilized only for financing self-help groups/micro finance clients for income generation activities and an undertaking to that effect to be submitted to the bank.” 11. Further, attention was drawn to page 67 of the PB wherein amendment to the sanction terms & conditions is mentioned as follows:-
“2. Terms Deposit of 5% of Loan disbursed as cash collateral instead of 10%.”
The ld. counsel for the assessee relied upon the decision of the Hon’ble Madras High Court in the case of Hotel Savera (supra) wherein has been held as follows;-
“The Gujarat High Court held that where the material on record showed that the assessee had a common fund it cannot be predicated that the money lent came only out of borrowed funds. The learned author, Sampath Iyengar in his book Sampath Iyengar’s Law of Income-ax,9th edition, at page 2349, observed as under: “For the same reason a presumption appears to be permissible that where the assessee has his own capital as also the borrowed funds, the former rather than latter to have been utilised for the non-business or personal expenses.”
The ld. DR relied on the order of the Assessing Officer.
We have heard both the parties. In the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), it has been held as follows:-
“16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.' s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.”
Respectfully following the ration of the above decision, ground No.2 of the department is dismissed.
The second issue is with respect to disallowance of bad debts of Rs.4,52,73,321.
The facts are that the AO in the assessment order has stated that the assessee has only submitted a list of bad debts and not provided any evidence that it is allowable. According to the AO, the conditions of sub- section (2) of section 36 have not been fulfilled. He therefore disallowed the same.
On appeal before the CIT(Appeals), the assessee submitted that the AO failed to consider the fact of small amounts of individual loans ranging from Rs.10 to Rs.48,203, number of branches involved (over 200), the maximum ceiling of Rs.50,00 and the number (8249) of loans involved in the write off rendering negotiation, arbitration, statutory limitation, bankruptcy, liquidation and such other criteria laid down by the AO were commercially impractical to follow. The assessee reiterated that it has not created a provision for doubtful debts, but has actually written off the entire amount of Rs.4,52,73,321 by credit to the relevant advances account thus reducing the assets correspondingly. The assessee relied on the decisions of Vijaya Bank v. CIT, 323 ITR 166 (SC) and CIT v. Girish Bhagawatprasad, 256 ITR 772,773 (Guj).
The CIT(Appeals) relying on the Hon’ble jurisdictional High Court decision in the case of CIT v. Krone Communication Ltd., 333 ITR 497 (Karn) allowed the assessee’s appeal on this issue.
Aggrieved the department is in appeal and has raised ground No.3 as follows:-
“3. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to not make any disallowance of bad debts without appreciating the fact that the requirements of section 36(2) are to be fulfilled by the assessee even in the case where a sum is written off the books of accounts as irrecoverable debt and the AO has to verify whether the debts has actually been written off from the books of account of the assessee.”
The ld. DR relied upon the order of the Assessing Officer, while the ld. counsel for the assessee reiterated the submissions made before the CIT(Appeals).
We have heard both the parties. The Hon’ble High Court of Karnataka in the case of Krone Communication Ltd., 333 ITR 497 (Karn) decided the issue in favour of the assessee, following the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd., 323 ITR 397 (SC) wherein it was held that after 1.4.1989, it was not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Respectfully following the decision of the Hon’ble jurisdictional High Court in the case of Krone Communication Ltd. (supra), we dismiss ground No.3 raised by the department.
In the result, the appeal by the Revenue is dismissed.
Pronounced in the open court on this 6th day of November, 2015.