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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
सुनवाई क� तार�ख /Date of Hearing : 18-2-2016 घोषणा क� तार�ख /Date of Pronouncement : 11-05-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee company, being 04-03-2013 passed by learned Commissioner of Income Tax (Appeals)- 37, Mumbai (hereinafter called “the CIT(A)” ), for the assessment year 2008-09, the appellate proceedings before the CIT(A) arising from the assessment order dated 8-12- 2010 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961(Hereinafter called “the Act”).
ITA 2526/Mum/2013 2
The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) reads as under:-
“1. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeal) erred in confirming the disallowance of interest expenses of Rs. 22,23,298/-.”
The brief facts of the case are that the assessee company is engaged in the business of trading of computer hardware and software on wholesale basis.
During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the Act, the A.O. observed that the assessee company’s profit margin has come down , due to the huge interest paid against advances to one of its principal client M/s GTL Limited. The assessee company had paid interest @ 7% on the advances after allowing for a grace period . However, the duration of the grace period was not specified by the assessee company before the AO during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act. As per the AO after going through the working of interest calculations, the assessee company has charged interest even for a day . The opening balance as at the beginning of the relevant previous year outstanding to be payable by the assessee company to GTL Limited was Rs. 14,52,85,920/- and closing balance as at the end of relevant previous year was Rs. 14,61,75,000/-. The AO observed that the interest is normally payable in trade after a grace period of one month. The A.O. allowed 7% interest on the average of opening and closing outstanding balances and the excess interest of Rs. 22,23,298/- was disallowed by the AO terming it as an excessive and not incurred for business purposes, vide assessment order dated 08-12-2010 passed u/s 143(3) of the Act.
ITA 2526/Mum/2013 3 5.Aggrieved by the assessment order dated 08-12-2010 passed by the A.O. u/s 143(3) of the Act, the assessee company preferred an appeal before the first appellate authority i.e. CIT(A).
Before the CIT(A), the assessee company submitted that the assessee company has taken advances from customers for the goods sold to the customers as per prudent business practices keeping in view the nature of product and risk of obsolescence. There was an un-appropriated advance of Rs. 27,86,92,809/- which was outstanding to be payable as on 31st March, 2008 i.e. the end of the relevant previous year. The party-wise details are as under:-
GTL Limited Rs. 14,61,75,000/- Commune Equipments Pvt. Ltd. Rs. 2,00,00,000/- Global Management Services and Projects Pvt. Ltd. Rs. 10,29,08,755/- GTL Ltd. (interest payable) Rs. 96,09,054/- =============== Rs. 27,86,92,809/- =============== It was submitted that the assessee company has paid interest to GTL Limited @ 7% on the advances received if such advance remained un-appropriated for more than one month from the date of receipt of advance which comes to the effective rate of interest at 6.42% per annum. It was submitted that these advances were fully utilized for business activities of the assessee company. It was also pointed out that unutilized advances have been partly utilized by the assessee company for placing short term inter-corporate deposits on which interest income of Rs. 1,28,09,783/- was earned by the assessee company during the previous year, and on an average, the assessee company has earned interest @ 7.15% on inter-corporate deposits given by the assessee company. The assessee company submitted that the taxable profit of the ITA 2526/Mum/2013 4 assessee company has gone up as compared to the immediately preceding year. There has been substantial increase in the interest earning by the assessee company during the relevant previous year which has neutralized the impact of interest outgoings. There was a grace period of one month which has been allowed by M/s GTL Ltd to the assessee company and thereafter the interest @7% is payable to GTL Ltd vide GTL Limited letter dated 2-11-2010, a copy of which was enclosed before the CIT(A). It was submitted by the assessee company before the CIT(A) that M/s GTL Ltd. is not a related party as defined in section 40A(2)(b) of the Act. It has not been brought on record by the A.O. that the assessee company has utilized the funds for non-business purpose. The AO has not considered that the assessee company has earned interest on inter-corporate deposits placed by it. The assessee company submitted that interest is paid to GTL Limited as per the terms of agreement/contract. The assessee company submitted that the opening balance as at the beginning of the relevant previous year and closing balance as at the end of the relevant previous year of the advance received from GTL Limited is almost the same which is merely a coincidence and no adverse inference can be drawn against the assessee company for the same . The audited statements of accounts were produced by the assessee company before the CIT(A) to prove the contention that the funds have been utilized and deployed for the purpose of business and for placing inter-corporate deposits. The assessee company submitted that it has non-interest bearing funds to the tune of Rs. 25.41 crores while interest bearing funds are available to the tune of Rs. 14.62 crores and the assessee company has deployed interest earning inter-corporate deposits of Rs. 25.80 crores and interest free advances to suppliers of Rs. 14.23 crores. Thus , it was submitted that the assessee company has with it the sufficient non-interest bearing funds for granting interest free advances to the suppliers.
ITA 2526/Mum/2013 5 The CIT(A) after careful consideration of the rival submissions and examination of the records held that the assessee company has to prove that the interest bearing funds were utilized for the purpose of business especially when the A.O. held that the interest bearing funds were used by the assessee company for non-business purposes. The expenditure can only be allowed if it is incurred wholly and exclusively for the purpose of business as per the mandate of Section 37 of the Act. Mere payment by itself would not entitle the tax-payer to the deduction of a particular expenditure unless the same is proved to be paid for commercial considerations. It was observed by the CIT(A) that all expenditure incurred by the tax-payer though voluntary which is ultimately designed to further the objects and purposes of the tax-payer can be treated as business expenditure so long as the connection between the expenditure and the object is real and not remote and illusory. The CIT(A) held that the assessee company has not been able to support its contention to suggest any real connection between the expenditure and the object and in the instant case, the connection appears to be remote and illusory and hence the disallowance was justified. The assessee company has failed to prove the genuineness of the claim made. The burden and onus of proving the claim that interest bearing funds were utilized for business purposes was on the assessee company and not on the Revenue. The CIT(A) relied upon various case laws and also held that the Revenue authorities are entitled to look into surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities .The CIT(A) find no infirmity in the order of the A.O. in making the disallowance of interest expenditure of Rs.22,23,298/- , as the assessee company failed to discharge its onus despite the fact that the AO has not followed scientific method of checking the nexus between the interest bearing funds with the non interest bearing advances . The CIT(A) accordingly upheld the order of A.O. vide orders dated 04-03-2013.
ITA 2526/Mum/2013 6
Aggrieved by the orders dated 04-03-2013 of the CIT(A), the assessee company filed second appeal before the Tribunal.
It is contended by the ld. Counsel for the assessee company that interest of Rs. 22,23,298/- has been disallowed by the A.O. which is confirmed by the CIT(A). The ld. counsel submitted that interest @ 7% has been provided with respect to the advance received from GTL Limited which is as per the agreement / contract with the GTL Limited , the interest being provided in the books of accounts after providing grace period of one month. The ld. Counsel for the assessee drew our attention to paper book page No. 43 to 44A filed with the Tribunal, whereby the interest @ 7% payable by the assessee company to GTL Limited is agreed upon. The ld. Counsel also drew our attention to page 45 of the paper book whereby detailed computation of working of interest payable by the assessee company to GTL Limited is disclosed , which also provided for credit for grace period interest. He also drew our attention to the TDS certificate issued by the assessee company whereby tax was deducted at source on the total interest of Rs.1,24,24,430/- payable by the assessee company to GTL Limited which is placed in paper book page 46. He also drew our attention to the ledger account extract of various suppliers to whom the interest free advances have been paid which are placed at paper book page 51-62. He also drew our attention to the submission made before the authorities below which is also placed on record to contend that this interest expenditure is an allowable expenditure which should be allowed. He also drew our attention to the assessment orders for the assessment year 2009-10, 2010-11 and 2011-12 which are placed in paper book pages No. 76-96 filed with the Tribunal , whereby no disallowance has been made by the Revenue on account of interest payable to GTL Limited, the assessment orders for assessment year 2009-10 and 2010- 11 both dated 15-03-2013 were passed by the AO u/s 143(3) read with Section 153C of the Act , while the assessment orders dated 15-03-2013 for ITA 2526/Mum/2013 7 assessment year 2011-12 was passed by the AO u/s 143(3) of the Act . Thus, he submitted that on the principles of consistency, the interest expenditure should be allowed. The ld. Counsel for the assessee also submitted that the assessee has sufficient interest free funds, which are reflected in the audited balance sheet, which is placed in the paper book at page 3-16, to make these interest free advances of Rs.14.22 crores to suppliers. The assessee company’s counsel submitted that the assessee company has share capital and reserves of Rs 1.27 crores, non-interest bearing advances from customers of Rs. 12.29 crores and amount payable to creditors(interest-free) of Rs.11.85 crores as at 31-03-2008, which is sufficient enough to make interest free advances to suppliers of Rs.14.22 crores as at 31-03-2008. The ld. counsel also submitted that the said advances to suppliers had been made keeping in view the commercial expediency. The ld. Counsel submitted that Rs.25.79 crores as at 31-03-2008 is placed as inter-corporate deposits on which interest of Rs.1.28 crores is earned and the detailed working are placed in paper book page 40-41. The ld. Counsel relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. (2009), 313 ITR 356(Bom. HC) , the decision of Hon’ble Supreme Court in the case of Hero Cycles (P) Ltd. v. CIT (2016), 379 ITR 347(SC) and the decision of Hon’ble Supreme Court in the case of CIT v. Excel Industries Ltd. (2013) 358 ITR 295(SC). The ld counsel for the assessee company submitted that there is a presumption that the assessee company has utilized its interest free funds available with it for the advancing interest free advances to suppliers. The assessee company also contended that the revenue cannot sit in the arm chair of the businessmen to decide how much is a reasonable expenditure as it is contended that the advances to suppliers have been made keeping in view the commercial expediency. The ld counsel also submitted that consistency should be maintained as the said expenses were duly allowed in assessment year 2009-10, 2010-11 and 2011-12 in the scrutiny assessments made by the Revenue as set out above and the disallowance of ITA 2526/Mum/2013 8 Rs.22,23,298/- towards interest expenditure payable to GTL Limited should be deleted.
The ld. D.R., on the other hand, relied upon the orders of authorities below and submitted that the advances have been received from customer GTL Limited for which interest has been paid. He submitted that the authorities below have rightly disallowed the interest expenditure of Rs.22,23,298/- as the same was excessive and not incurred wholly and exclusively for the purposes of the business. The interest free advances to suppliers of Rs.14.22 crores have been given and no justification was provided for giving interest free advances to suppliers. The funds are moving to and fro in the accounts of supplier as per ledger accounts submitted by the assessee company.
The ld counsel for the assessee submitted in rejoinder that that after search on Global Telecom Limited group and other associates entities, the assessment has been framed in the case of the assessee company for the assessment year 2009-10 and 2010-11 u/s 143(3) read with Section 153C of the Act vide separate orders both dated 15-03-2013 and for assessment year 2011-12 assessment has been framed u/s 143(3) of the Act vide separate orders dated 15-03-2013 , whereby no additions have been made for the interest expenditure disallowance in all the above three years , while the additions have been made towards disallowance of interest expenditure of Rs.22,23,298/- payable to GTL Limited being excessive and not wholly and exclusively for the purposes of business for the instant assessment year 2008-09 both vide impugned assessment orders dated 08-12-2010 passed u/s 143(3) of the Act and also assessment orders dated 15-03-2013 passed u/s 143(3) read with Section 153C of the Act.
ITA 2526/Mum/2013 9
We have considered the rival submissions and also perused the material placed on record including the case laws relied upon by the parties. We have observed that the assessee company has received advances of Rs.27.86 crores outstanding as at 31-03-2008 from the customers including GTL Limited. The assessee company has provided interest @ 7% as per the contract obligations payable to GTL Limited on advances received from it , which as per contractual obligations come to Rs.1.24 crores . The ledger account of said GTL Limited is provided by the assessee company and the said interest is provided based on the amount outstanding to be payable by the assessee company to GTL Ltd. after providing for grace period of 30 days. The AO while allowing the interest expenditure payable to GTL Limited by the assessee company has considered the average of opening balance outstanding to be payable as on the beginning of the previous year and the closing balance outstanding for payment as at the end of the previous year and applied the rate of interest of 7% on the average outstanding amount payable by assessee company to M/s GTL Ltd of Rs. 14,57,30,460/- to allow deduction of interest expenditure and termed the balance of the amount of interest expenditure payable by the GTL Ltd to the assessee company as per contractual obligation as excessive and not incurred for the purposes of business . In our considered view, the said methodology of computing interest expenditure allowable under the Act at the rate of 7% of average outstanding balance on the opening and closing balance outstanding to be payable to GTL Ltd by the assessee company and disallowing the balance interest payable by the assessee company to GTL Limited as per contractual obligations itself is fallacious as no finding of fact is arrived at by the AO that the funds so received by the assessee company from time to time as advance from GTL Limited on which interest is payable as per contractual obligations has been diverted for non- business purposes or are utilized for any other purposes other than business purposes. The assessee company has on the other hand brought on record evidences that own funds/interest free funds to the tune of Rs. 25.41 crores ITA 2526/Mum/2013 10 are available with it which is reflected in the audited balance sheet, that the assessee company has deployed inter-corporate deposit to the tune of Rs. 25.79 crores on which interest income of Rs.1.28 crores has been earned which is duly offered for taxation in the return of income filed by the assessee company with the Revenue and the assessee company has advanced interest free funds to the tune of Rs. 14.22 crores to the suppliers and the ledger extracts and audited balance sheets to this effect are duly placed in the paper book. The advances to the suppliers of Rs.14.22 crores have been stated by the assessee company to be made for purposes of business keeping in view the commercial expediency and it is not brought on record by the Revenue that these interest free advances to suppliers are not made for the business purposes except making a bald statement that the interest is not incurred for the purposes of business and the interest is excessive. In any case , the assessee company has demonstrated that there are sufficient interest free funds available with the assessee company of Rs. 25.41 crores as per audited Balance Sheet filed in the paper book which is sufficient enough to cover the interest free advances to suppliers to the tune of Rs.14.22 crores and presumption shall apply unless rebutted that the interest free funds available with the assessee company are utilized for advancing interest free advances to suppliers, keeping in view the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited(supra) and HDFC Bank Limited v. CIT (2016) 67 taxmann.com 42(Bom.). Thus, keeping in view the overall factual matrix and peculiar circumstances of the case, In our considered view no addition/disallowance of interest expenditure of Rs.22,23,298/- is warranted in this case. The appeal filed by the assessee company is , therefore, allowed and the additions so made by the AO and confirmed by the CIT(A) of Rs.22,23,298/- by disallowing interest expenditure paid/payable to GTL Limited is ordered to be deleted. We order accordingly.
ITA 2526/Mum/2013 11
In the result, the appeal filed by the assessee company in ITA N0. 2526/Mum/2013 for the assessment year 2008-09 is allowed.
Order pronounced in the open court on 11th May , 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 11-05-2016 को क� गई ।