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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI JASON P.BOAZ
This appeal is by the assessee against the order of the CIT(A)-II, Bangalore, dated 16/07/2014 for the assessment year 2011-12. The only grievance of the assessee in this appeal is against the confirmation of the disallowance of the difference in interest paid by the assessee on account of a loan taken from M/s.West Palm Development Pvt. Ltd., [‘WPD’ for short] at the M/s.YSN Properties & Investments. Page 2 of 6 rate of 13.5% as against the receipt of interest from M/s.Ram Kumar Mills Pvt. Ltd.,[ ‘RKM’ for short] at the rate of 12.%.
Brief facts of the case are that the assessee, a firm, filed its return of income for the assessment year 2011-12 on 26/09/2011 declaring a total income of Rs.1,28,38,760/-. During the assessment proceedings u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' in short] the Assessing Officer (AO) observed that the assessee is in the business of trading in shares and commodities and that the assessee has not done any business for the two financial years but has been merely claiming expenditure. The AO further observed that the assessee had offered interest income from fixed deposits to the tune of Rs.1,02,815/- and interest received from RKM to the tune of Rs.27,60,000/- under the head ‘income from other sources’ against which the assessee has claimed interest paid of Rs.3,59,647/- and Rs.31,03,987/- respectively as paid to WPD and thus has claimed a loss of Rs.6,00,729/-. The assessee was asked to explain as to why interest paid is in excess of interest earned. In response to the same, the assessee explained that during the financial year 2008-09, the assessee had taken a loan of Rs.2,56,65,000/- from WPD and interest on this loan has been orally agreed at the rate of 13.5% for the financial year 2010-11 and that the assessee had advanced out of the above amount, a sum of Rs.2.3 crores as loan to its related party i.e. RKM and the balance of Rs.26,65,000/- was kept in fixed deposit. It was M/s.YSN Properties & Investments. Page 3 of 6 submitted that the loan to RKM at the rate of 12% by taking into consideration the business requirements of RKM was advanced and therefore the interest received at the rate of 12% was income and interest paid at the rate of 13.5% was expenditure which has resulted in a loss under the head ‘income from other sources’. It was submitted that interest earned has been incurred by the assessee wholly and exclusively for earning interest income and the interest paid is allowable u/s 56 of the Act. The AO, however, was not convinced with the assessee’s contention and considering the fact that both WPD and RKM are related to the assessee-firm, the AO held that there is no written agreement while taking the loan or disbursing the same to the related party and there is no clear-cut mention about the purpose of loan and the rate of interest thereon. The AO, therefore, held that the loan from WPD cannot be said to wholly for advancing to the related parties and that the transaction and can be treated as colourable device to reduce tax incidence in the hands of the assessee. He, therefore, disallowed the claim of loss of Rs.6,00,729/- and brought it to tax.
Aggrieved, assessee preferred an appeal before the CIT(A) who confirmed the same and the assessee is in second appeal before us.
The learned counsel for the assessee, while supporting the submissions made by the assessee before the authorities
M/s.YSN Properties & Investments. Page 4 of 6 below, submitted that the AO has not doubted the payment of interest to WPD or receipt of interest from RKM and therefore the disallowance of interest paid by the assessee in excess of 12% is not permissible under any provision of the Act. He submitted that the fact that the assessee has taken loan and immediately advanced the same to RKM clearly proves that the purpose of taking the loan was to advance the loan to its related party and therefore the income earned has to be set off against the interest paid by the assessee. He submitted that even if it is to be presumed that the disallowance u/s 40(a)(ia) of the Act, is to be made by the AO since the transactions are with related parties, the AO has failed to bring out as to how interest paid by the assessee is in excess of the market rate of interest. Therefore, he prayed that the disallowance be set aside.
The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that the assessee has not rebutted the findings of the authorities below that both WPD and RKM are related parties of the assessee and that it was also clear that the assessee itself has paid interest of 13.5% and therefore there was no prudence in immediately advancing the same amount to another related party at a lower rate of interest. Therefore, according to him, the addition has to be confirmed.
M/s.YSN Properties & Investments. Page 5 of 6 5. Having regard to the rival contentions and the material on record, we find that the assessee has not rebutted the findings of the lower authorities that both WPD and RKM are related to the assessee-firm or that there is no written agreement for the loan taken or advanced by the assessee, the purpose of the loan or the rate of interest on the loan. As rightly pointed out by the CIT(A) at para.5.3 of her order, the assessee has not explained as to whether it is getting any materials from its sister concern for its own business requirements in order to justify the loan because RKM is in the textile manufacture business. The assessee has also not explained the necessity to borrow loan at a higher rate of interest i.e. at 13.5% from WPD to give it at a lower rate of interest to another sister concern RKM. We are of the opinion that the initial burden of proving the necessity of obtaining of loan at a higher rate of interest and receiving of interest only at the rate of 12% from another sister concern has not been discharged by the assessee. In view of the same, we do not see any reason to interfere with the order of the CIT(A).
In the result, the assessee’s appeal is dismissed.