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Income Tax Appellate Tribunal, BENCH “A”, KOLKATA
Before: Shri Mahavir Singh, JM & Shri M.Balaganesh, AM]
Per Shri M.Balaganesh, AM
This appeal of the assessee arises out of the order of the Learned CIT(A)- XXXII, Kolkata in Appeal No.43/XXXII/11-12/R&T/Cir-8/Kol for the Asst Year 2007-08 passed against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
The only issue to be decided in this appeal is as to whether, the learned AO is justified in disallowing the interest of Rs.1,02,06,034/- paid on loans taken by the assessee in the facts and circumstances of the case. 4. The brief facts of this issue are that the assessee is a Non-Banking Finance Company (NBFC) duly registered with Reserve Bank of India (RBI) and inter-alia engaged in the business of granting loans and advances. During the course of the said lending business, the assessee had granted loans to various parties during the year to the tune of Rs.110,57,48,000/-. The total loans taken by the assessee was Rs.57,64,86,000/- on which the assessee has paid interest of Rs.1,02,06,034/-. The assessee had earned interest income of Rs.57,14,661/- out of the amounts lent to several parties. This interest income was derived out of lending made in the earlier years and during the year under appeal. The assessee stated that since it is a non- banking finance company, the prudential norms prescribed by the Reserve Bank of Fairluck Commercial Company Ltd. A.Y.2007-08 India for revenue recognition have to be strictly followed, according to which, once a borrower defaults in making payment of certain instalments, the concerned borrower account should have to be classified as non performing asset (NPA). It was further explained that once an account gets classified as NPA, the interest income on such loan can be recognized by the lending company (the assessee herein) only on receipt basis and not on accrual basis. This is the mandate prescribed by the prudential norms of the Reserve Bank Of India which is mandatorily to be followed by all non banking finance companies and banks. The ld. AO without appreciating the aforesaid factual position observed that the assessee on one hand had given certain interest free advances to certain parties which were listed in the assessment order, and on the other hand, it made borrowings and made interest payments thereon. Accordingly he held that the borrowed funds were diverted for advancing interest free funds to certain parties and held that the interest payment of Rs.1,02,06,034/- is not eligible for deduction from the total income.
On first appeal the ld. CIT(A) upheld the action taken by the ld. AO. Aggrieved, the assessee is in appeal before us on the following grounds :- “
1. The Commissioner of Income Tax erred in upholding the action of the Assessing Officer in disallowing the appellant's claim of interest expenditure on the facts and in the circumstances of the case.
2. The Commissioner of Income Tax erred in upholding the action of the Assessing Officer in disallowing the appellant's claim of interest expenditure on the ground that interest-free advances were made by the appellant out of the borrowed funds on the facts and in the circumstances of the case.
3. The Commissioner of Income Tax erred in not allowing the netting-off of interest income earned with the interest expenditure incurred by the appellant in the business of granting of loans and advances on the facts and in the circumstances of the case.
4. The Commissioner of Income Tax erred in not allowing any deduction for interest expenditure against the interest income earned by the appellant on the facts and in the circumstances of the case.”
We have heard the rival submissions and perused the materials available on record. We find that the assessee being a non-banking finance company had indeed advanced loans to several parties and had indeed derived interest income of Rs.57,14,661/- out of lending made in the earlier years and out of lending made during the year. We find lot of force in the arguments of the ld. Counsel of the assessee that the assessee being a non-banking finance company, has to mandatorily comply with Fairluck Commercial Company Ltd. A.Y.2007-08 the prudential norms prescribed by the Reserve Bank of India on revenue recognition, wherein, once an account gets classified as non-performing asset due to default in payments of instalments, interest income on such account could be recognized only on receipt basis and not on accrual basis. We find that the assessee had not given interest free advances to any of the parties at the time of granting of the loan. It is only because of the fact that non payment of the prescribed number of instalments, the assessee was forced as per law to stop recognition of interest income on accrual basis. We find that the borrowings made by the assessee had been utilized for advancing funds to various parties. Hence it could be safely concluded that the borrowings were made by the assessee for the purpose of its lending business. Once it is established that the borrowings were made for the purpose of lending business, interest payments thereon shall be automatically eligible for deduction u/s 36(1)(iii) of the Act. Hence we find force in the arguments of the learned AR in this regard. The ld. DR vehemently supported the orders of the lower authorities. We also find that this aspect of the issue have been duly conceded by the Hon’ble Jurisdictional High Court in the case of Caldern Pharmaceuticals Ltd. Vs CIT reported in 265 ITR 244 (Cal) wherein, it was held:- “INTEREST ON BORROWED CAPITAL – CONDITION PRECEDENT FOR DEDUCITON-CAPITAL SHOULD HAVE BEEN BORROWED FOR PURPOSES OF BUSINESS – NOT NECESSARY THAT STEPS SHOULD BE TAKEN TO REALISE CREDITS – INCOME-TAX ACT, 1961, s.36(1)(iii). The language of section 36(1)(iii) of the Income-tax Act, 1961, is very clear. An assessee would be entitled to deduction of interest paid on capital borrowings for the purpose of its business. Section 36(1)(iii) does not contemplate a situation where an assessee is required to take positive steps for realizing its outstanding dues in order to be eligible for the claim for the deduction of interest under the provision. The assessee had claimed deduction of interest on borrowed capital for the assessment years 1993-94 and 1994-95. The Assessing Officer disallowed the claim on the ground that the assessee had wilfully and deliberately chosen not to collect its outstanding dues from the sister concern in order to accommodate the sister concern and had, on the other hand, borrowed capital from the market and paid interest thereon. This was confirmed by the Commissioner (Appeals) and the Tribunal. On further appeal to the High Court : Held, that no case had been made out before any of the forums below that the capital borrowing had not been utilized by the assessee for its business. The assessee was entitled to the deduction on the interest paid on its capital borrowings for the assessment years 1993-94 and 1994-95.”
Fairluck Commercial Company Ltd. A.Y.2007-08 6.1. In the instant case we find that the assessee had indeed granted loans to several parties charging interest at the contract rates. It is not the case of the revenue that assessee had not taken any steps for realization of the said dues subsequent to the period from which the said loan account has been classified as non performing asset. Hence it is very clearly established that the borrowings were made for the purpose of lending business and once that is proved the interest payment made thereon shall become automatically eligible for deduction. Respectfully following the aforesaid decision of the Hon’ble Calcutta High Court and in view of the aforesaid facts and findings we have no hesitation in directing the ld. AO to allow the claim of interest payment of the sum of Rs.1,02,06,034/-. Accordingly ground nos. 1 and 2 of the assessee are allowed.
In view of our decision given in respect of ground nos. 1 and 2, the alternative arguments taken by the ld.AR that the ld.AO ought to have allowed the claim of interest payment at least to the extent of interest received in the sum of Rs.57,14,661/- which was raised in ground no.3 becomes infructuous.
In the result the appeal of the assessee is allowed. Order pronounced in the court on 06.05.2016.