M/S. RL EXPORTS INTERNATIONAL,NEW DELHI vs. DCIT, NEW DELHI

The present appeal is filed by the assessee against the order of the ld. CIT(A)-XXXI, vide order dated 11/12/2012 for AY 2008-09 on the following grounds of appeal: “That the order dated 11.12.2012 passed u/s 250 of the IT Act, 1961 by the ld. CIT(Appeals)-XXXI, New Delhi is against law and facts on the file in as much as he was not justified in upholding the action of the Assessing Officer in making addition of Rs. 3,25,338/- for disallowance of excess of interest paid over interest received on Unsecured Loans taken and advances given by the Appellant Firm.”

Aggrieved by the order of the ld. AO the assessee filed an appeal before the ld. CIT(A).

Before the ld. CIT(A) the assessee contended that from the financial positions of the assessee, it is very clear that the substantial funds were available with the assessee by way of partner’s capital to the tune of Rs. 3.02 crores on which no interest was paid/payable and to which no covenants were attached. The assessee, therefore, contended that it was unjustified by the ld. AO to conclude that unsecured loans on which interest have been paid at a higher rate had been diverted to give loans and advances at a low rate of interest. The ld. CIT(A), however, did not agree with the arguments of the assessee and held that since no nexus has been established between the unsecured loans and advances made by the assessee the AO was correct in making disallowance to an extent of Rs. 3,25,338/- being the difference in interest.

Aggrieved by the order of the ld. CIT(A) the assessee is before us.

We have perused the order of the authorities below of the paper book filed before us. The financial position of the assessee as per the balance sheet dated 31/03/2008 is summarized herein below: Liabilities Sch. Amount Assets Sch. Amount Capital A/c A 30,283,158.81 Fixed Assets E 2,466,014.92 Secured Loans B 968,100.00 Current Assets F 43,371,947.84 Loans & Advances Unsecured Loans C 14,875,272.00 Export Division 4,422,052.93 Current Liabilities D 3,809,448.88 And Provisions Deferred tax liability 324,036.00 Notes to Accounts G Total ------------------------- Total ----------------------- 50,260,015.69 50,260,015.69 6.1. A review of financial position of the assessee firm as at 31.03.2008 summarized above would reveal that in addition of borrowed funds (both secured and unsecured, it also had substantial owned funds by way of Partner’s capital to the tune of more than Rs. 3.02 crores on which no interest was paid/payable and to which no covenants were attached. Accordingly it would not be correct to conclude that unsecured loans on which interest had been paid at a higher rate had been diverted to give loans and advances at a lower rate of interest rate.”

The ld. AR submitted that the act of receiving loans and giving advances are two entirely independent and unrelated transactions with no interconnection whatsoever of any form or nature between them. The ld. AR submitted that the rate of interest and other terms, conditions and covenants are negotiated and determined by an entirely different set of parameters and circumstances. Ld. AR further submitted that merely because interest on unsecured loan bears a higher rate and that on loans granted bears a lower rate cannot lead to the disallowance of the differential, more so in the absence of any direct and immediate nexus between the two transactions. He submitted that in view of the above arguments no disallowance of the interest differential is called for.

The ld. AR has placed his reliance on the judgment of the Hon’ble Supreme Court in the case of Hero Cycles Pvt. Ltd. Vs. CIT in Civil Appeal no. 514 of 2008 vide order dated 15.11.2015.

We observed from the arguments as well as the submissions of the ld. AR that the AO has added the difference in the interest paid by the assessee on the loans taken and interest received by the assessee on the advances given. The assessee has advanced loan at a lesser rate viz-a-viz the rate at which the interest has been paid on the loans taken. Further it is clear from the balance sheet for the financial year that assessee is having a capital of 3.07 crores. The assumption made by the AO that the low advances given by the assessee at a lesser rate is from the loans taken by the assessee at a higher rate. Further even if the AO had to make addition it should have been the difference in the rate of interest rather than the difference in the interest paid and interest received by the assessee on the respective loans and advances. The Hon’ble Supreme Court in the case of Hero Cycles (supra) has dealt with the expression “commercial expediency”. As defined in the case of S.A. Builders vs. CIT reported in 2007 (288 ITR 1) (SC) in the following manner: “26. The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.

It has been repeatedly held by this court that the expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits” vide CIT vs. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC)], CIT vs. Birla Cotton Spinning & Weaving Mills Ltd. [1971 82 ITR 166 (SC)], etc.”

Further the Hon’ble Supreme Court in the case of Hero Cycles (supra) has observed as under: “In the process, the Court also agreed that the view taken by the Delhi High Court in CIT vs. Dalmia Cement (B.) Ltd. [2002 (254) ITR 377], wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.”

In the present case, we observe that no nexus has been proved by the authorities below between the interest bearing funds and interest and the advances made by the assessee at lower rate of interest which has been made in the ordinary course of business.