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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) – III, Chennai, dated 08.01.2014 and pertains to assessment year 2006-07.
The first issue arises for consideration is with regard to disallowance of `17,10,926/- being the interest on borrowed funds.
Shri B.S. Purshotham, the Ld. representative for the assessee, submitted that the assessee had advanced a sum of `1 Crore to M/s Vasavi Hotels & Properties Pvt. Ltd. The assessee has also suffered a chit loss of `2,59,882/-. The assessee explained before the Assessing Officer that the net worth of the assessee-company was `193.61 lakhs and the share capital of the assessee-company was `1.16 lakhs. The reserve and surplus of the assessee-company was to the extent of `33.61 lakhs.
Therefore, according to the Ld. representative, the net worth of the company was more than the money advanced to M/s Vasavi Hotels & Properties Pvt. Ltd. Since the assessee-company had sufficient funds in the form of capital, share application money, reserve and surplus, the loan advanced to sister concern was not out of borrowed funds. The Ld. representative further submitted that the loan of `1 Crore to M/s Vasavi Hotels & Properties Pvt. Ltd. was, in fact, advanced in the earlier assessment year. Therefore, there was no nexus between money borrowed during the year under consideration and the loan advanced to M/s Vasavi Hotels & Properties Pvt. Ltd. in the earlier assessment year. According to the Ld. representative, it is not the case of the Revenue that the money advanced to M/s Vasavi Hotels & Properties Pvt. Ltd. was out of the borrowed funds. In view of the above, according to the Ld. representative, the CIT(Appeals) is not justified in confirming the addition made by the Assessing Officer.
Shri B.S. Purshotham, the Ld. representative for the assessee, further submitted that the Assessing Officer has also disallowed chit loss to the extent of `2,59,882/-. According to the Ld. representative, the chit loss was incurred during the course of assessee’s business, therefore, there was no justification in disallowing the chit loss claimed by the assessee. Referring to the CBDT circular in Instruction No.1175 dated 16.05.1978 and 25.03.1992, the Ld. representative submitted that chit loss has to be considered as business loss. According to the Ld. representative, this circular of CBDT is binding on the Assessing Officer. Both the authorities below had no occasion to consider the circular of the CBDT.
On the contrary, Shri K.N. Dhandapani, the Ld. Departmental Representative, submitted that the assessee claimed that it had sufficient money in the form of capital, reserve and surplus, etc.
Placing reliance on the judgement of Madras High Court in K.
Somasundaram & Bros. v. CIT (1999) 238 ITR 939, the Ld. D.R. pointed out that if the assessee borrowed funds for the purpose of business or profession, the interest on such borrowed funds can be allowed under Section 36(1)(iii) of the Income-tax Act, 1961 (in short "the Act"). The object of Section 36(1)(iii) of the Act is not to enable the assessee to make a large borrowing and create a liability for payment of interest thereon not only in the year in which the borrowing was made, but the subsequent years as well, keep the loan outstanding and thereafter divert the amount borrowed by taking it out of the business. According to the Ld. D.R., if the assessee had sufficient funds, then there may not be necessity to borrow loan for the purpose of business. In view of the judgement of Madras High Court in K. Somasundaram & Bros. (supra), by advancing the available funds to other companies, the assessee cannot go on borrowing funds for the purpose of business.
According to the Ld. D.R., the payment of interest on the amount borrowed, which is not used for the purpose of business, cannot be construed as business expenditure. Section 36(1)(iii) of the Act, according to the Ld. D.R., cannot be construed as enabling the assessee to burden the business with interest even while taking the amount initially borrowed for the business, but subsequently taken out of the business by diverting it as interest-free loan to relatives of the partners.
We have considered the rival submissions on either side and perused the relevant material available on record. From the order of the Assessing Officer it appears that the assessee has advanced funds to various persons without charging interest. However, the assessee claims payment of interest in the Profit & Loss account.
The assessee clarified before the Assessing Officer that the net worth of the assessee-company was `193.61 lakhs, which includes share capital of `1,60,00,000/- and reserves and surplus of `33.61 lakhs. The assessee clarified that the amount advanced to various persons does not exceed the net worth of the assessee-company. It is not known whether the net worth of the company was in the form of liquid cash or in the form of capital asset. It is not known from the orders of the lower authorities the extent of liquid cash available with the assessee on the date of loan advanced. The assessee claims that a sum of `1 Crore was advanced to M/s Vasavi Hotels and Properties Pvt. Ltd. The assessee further claims that the advance made to the sister concern was not out of the borrowed funds. It is not known how M/s Vasavi Hotels and Properties Pvt. Ltd. is a sister concern of the assessee. The shareholding pattern of the assessee-company and M/s Vasavi Hotels and Properties Pvt. Ltd. is not available on record. Therefore, this Tribunal is unable to appreciate the contention of the assessee that the advance was made to sister concern. In the absence of any material available on record with regard to availability of liquid cash on the date of payment of advance to M/s Vasavi Hotels and Properties Pvt. Ltd. and the shareholding pattern of the assessee- company and M/s Vasavi Hotels and Properties Pvt. Ltd., this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. In other words, the Assessing Officer has to reconsider the available liquid cash on the date of payment of advance made to M/s Vasavi Hotels and Properties Pvt. Ltd. and also consider the shareholding pattern of the assessee-company and M/s Vasavi Hotels and Properties Pvt. Ltd. and thereafter decide the issue in accordance with law.
Accordingly, the orders of the lower authorities are set aside and the issue of disallowance of interest to the extent of `17,10,926/- is remitted back to the file of the Assessing Officer. The Assessing Officer shall reconsider the issue afresh on the basis of the material that may be filed by the assessee before him.
The next issue arises for consideration is with regard to disallowance of chit loss.
The main contention of the assessee before the Tribunal is that the CBDT circular was not considered by both the authorities below. Since the main issue of disallowance of interest on borrowed funds was remitted back to the file of Assessing Officer, this Tribunal is of the considered opinion that the disallowance of chit loss also needs to be reconsidered by the Assessing Officer in the light of the circular issued by the CBDT. Accordingly, the orders of the authorities below are set aside. In respect of the issue regarding chit loss also, the matter is remitted back to the file of the Assessing Officer. The Assessing Officer shall reconsider the material that may be filed by the assessee, in accordance with law, after giving reasonable opportunity to the assessee.
In the result, the appeal of the assessee is allowed for statistical purpose.
Order pronounced on 9th June, 2016 at Chennai.