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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Assessee by Shri S.C. Tiwari Revenue by : Shri Rakesh Ranjan सुनवाई क� तार�ख /Date of Hearing : 10-12-2015 घोषणा क� तार�ख /Date of Pronouncement : 03-03-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
These are two appeals by the assessee firm directed against two separate orders of the learned Commissioner of Income Tax (Appeals)-24, Mumbai (‘CIT(A)’ for short) dated 5-10-2011, for the assessment year 2008- 09 and order dated 15-05-2012 for the assessment year 2009-10. The identical issue is involved in both these appeals and both these appeals are disposed of by this common order for the sake of convenience and brevity. We would first take the appeal in 2008-09 as the lead appeal and our decision in ITA no.
2 ITA 8271/Mum/2011 & ITA 4969/Mum/2012 8271/Mum/2011 for the assessment year 2008-09 shall apply mutatis mutandis to the appeal in for the assessment year 2009-10.
The ground raised by the assessee firm in the memo of appeal filed with the Tribunal in reads as under:-
“1. The learned CIT(A) erred in confirming the disallowance of RS.10,85,012/- on Account of Interest. 2. Your appellant further submits that your appellant had given loan to sister concern which is sick unit and the recovery of the principal amount is doubtful and an as such your appellant has not charged any Interest on the loan advanced to sister concern being sick unit. 3. Your appellant therefore submits that the addition of RS.10,85,012/- on account of Interest be deleted.”
The brief facts of the case are that the assessee firm is dealer in Dial Caliper, Gear Tooth Micrometer etc. It was observed by the learned assessing officer (Hereinafter called “the A.O.”) during the course of assessment proceedings u/s 143(3) read with Section 143(2) of Income Tax Act,1961(Hereinafter called “the Act”) that an interest free advance of Rs. 4,86,96,890/- has been given by the assessee firm to its sister concern, World Wide Commodities Pvt. Ltd. while the Partner’s capital of the assessee firm is Rs.3,47,32,991/- which is not sufficient for advancing interest free loan to the afore-stated sister concern, hence, it was observed by the AO that the said advance has been made by the assessee firm from the borrowed capital on which interest has been paid. An amount of Rs. 10,85,011/- has been claimed as interest expense on the borrowed capital in the profit and loss account. The assessee firm was asked during the course of assessment proceedings to explain why proportionate disallowance should not be made on 3 ITA 8271/Mum/2011 & ITA 4969/Mum/2012 the same as the borrowed capital has been diverted for non business purpose. In reply, the assessee firm explained that the loans have been forwarded to the sister concern and the interest has not been charged because the said concern is a sick company. The assessee firm submitted that the loan was forwarded for commercial expediency out of the current account, ING Vysya Bank Ltd. and not from the overdraft. The assessee firm relied on the judgment of Hon'ble Bombay High Court in the case of CIT v. Bombay Samachar Ltd., 74 ITR 723(Bom. HC) and submitted that the interest should be allowed as all the conditions have been met as per section 36(1)(iii) of the Act. The A.O. rejected the contentions of the assessee firm holding that assessee firm has not shown any unsecured loan or over draft facility from the ING Vysya Bank in the details filed. The capital of the assessee firm is not sufficient to forward interest free loan to the sister concern and the loan has been forwarded from the borrowed funds. The AO held that no business expediency could be established from the details filed by the assessee firm. The sister concern of the assessee firm is not doing any business for the last nine years. The assessee firm’s total sources of funds including partner’s capital , secured loans or unsecured loans of the assessee firm comes to Rs. 4,56,44,600/- while the assessee firm has advanced loan of Rs. 4.86,96,890/. The assessee firm was specifically asked to explain the purpose for which all the secured and unsecured loans have been taken and when the same have been utilized but the assessee firm could not establish any nexus between the interest free loans advanced and received. In view of the above, since the assessee firm could not establish any business expediency in forwarding interest free loans to the sister concern, and further, because the capital borrowed on interest has been diverted for non business purpose, proportionate disallowance on the interest expenses claimed by the assessee firm is warranted. The A.O. held that since the conditions laid down in Section 36(1)(iii) of the Act are not satisfied, hence, proportionate
4 ITA 8271/Mum/2011 & ITA 4969/Mum/2012 disallowance is hereby being made @ 12%. The disallowance works out to Rs.16,75,668/-. Since assessee firm has debited only an amount of Rs.10,85,012/-, therefore, the disallowance was limited to Rs.10,85,012/- by the AO vide assessment order dated 28.12.2010 passed u/s 143(3) of the Act.
4.Aggrieved by the assessment order dated 28.12.2010 passed u/s 143(3) of the Act by the AO , the assessee firm preferred an appeal before the CIT(A).
Before the CIT(A), the assessee firm reiterated the submission as was made before the A.O. However, the CIT(A) rejected the contentions raised before him and held that the issue in assessee firm’s own case for the assessment year 2007-08 was adjudicated by his predecessor and decided against the assessee firm. Admittedly, the assessee firm has advanced interest free funds to its sister concern while at the same time it had secured and unsecured loans on which it was paying interest and claiming it as a deduction. The CIT(A) held that the interest free funds were advanced to sister concern of the assessee firm and not a subsidiary. The assessee firm has not been able to show that the said funds were advanced out of commercial expediency or that such funds were not advanced out of interest bearing loans taken by the assessee firm. The CIT(A) relied on the decision of the Hon'ble Supreme Court in the case of S. A. Builders reported in 288 ITR 1(SC) and held that the action of the AO of disallowing the interest is held to be justified. The assessee firm has also made a without prejudice submission wherein it has been contended that the opening capital account of the partner was Rs. 3,75,03,204/- and the assessee firm had given interest free loans of Rs. 4,86,96,890/- to the sister concern, hence, the maximum interest that could be disallowed would be the difference on loan and the partner's capital . The CIT(A) held that AO has worked out the disallowance exactly in the way the assessee firm has submitted . The interest @12% worked out to Rs.16,75,668/- which was restricted to the actual claim of the expenditure of 5 ITA 8271/Mum/2011 & ITA 4969/Mum/2012 interest of Rs.10,85,012/- vide CIT(A) appeals orders dated 05-10-2011 whereby the appeal of the assessee firm was dismissed.
Aggrieved by the orders of the CIT(A) dated 05-10-2011, the assessee firm is in appeal before the Tribunal.
The ld. Counsel for the assessee firm contended that the assessee firm has advanced loan to the sister concern M/s World Wide Commodities Pvt. Ltd. which has been advanced in the earlier years . The said loan amount is advanced from time to time and also received back from time to time from the said sister concern. The ld. Counsel for the assessee firm submitted that interest paid by the assessee firm on the borrowed funds has been disallowed by the Revenue which was confirmed by the CIT(A). The ld. Counsel for the assessee firm submitted that the loan was advanced to the afore-stated sister concern based upon the commercial expediency and interest was charged in the financial year 2000-01 which was later on reversed in the financial year 2003-04 as the said sister concern has become sick and is not in a position to pay the interest. The ld. Counsel for the assessee firm submitted that even the amount which has been lent by the assessee firm has become doubtful and based upon the commercial expediency, no interest is charged from the said sister concern as the principal itself is doubtful. The assessee firm relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Shivsagar Estates (AOP), (1993) 204 ITR 0001(Bom. HC) and also the CIT v. Bombay Samachar Ltd., [1969] 74 ITR 0723(Bom.HC). The ld. Counsel submitted that no amount of borrowed funds were advanced to the sister concern. The ld. Counsel drew our attention to the balance sheet of the assessee firm whereby the assessee firm’s partner capital account as on 31st March, 2008 shows as Rs. 34,732,991.11 and the amount which has been advanced to sister concern stood at Rs. 4,86,96,890.00. The ld. Counsel for the assessee firm also drew our attention to the bifurcation and details of the 6 ITA 8271/Mum/2011 & ITA 4969/Mum/2012 interest expenditure incurred by the assessee firm and submitted that assessee firm has paid interest on car loans and other interest which has no connection with the amount advanced by the assessee firm to the afore-stated sister concern.
The ld. D.R. submitted that the CIT(A) in the preceding assessment year 2007-08 also rejected the contentions of the assessee firm and authorities below has rightly disallowed the claim of the interest expenses with respect to the borrowed capital as assessee firm has advanced interest free loan to the sister concern, which is not a subsidiary company. The ld. DR relied upon the decision of the Hon’ble Supreme Court in the case of S. A. Builders reported in 288 ITR 1(SC), and contended that there is no commercial expediency in granting the afore-stated loans to sister concern.
We have considered the rival contention and also perused the material on record including case laws relied upon. We have observed that the assessee firm has advanced an amount of Rs. 4,86,96,890/- to its sister concern World Wide Commodities Pvt. Ltd. free of interest. There is a loan account with the said sister concern whereby loan payments have been made from time to time by the assessee firm to the said sister concern and the loan so granted were also received back partly from the said sister concern from time to time. We have observed that apart from these to and fro movement of funds between the assessee firm and the said sister concern, there is no business transaction entered by the assessee firm per-se with the said sister concern except movement of funds which is observed by us from the loan account of the assessee firm with the said sister concern from 01-04-2000 to 31-03-2009 placed in the paper book filed with the Tribunal at page 1-15. No business commercial expediency has been shown by the assessee firm for grant of the said amount of loan. The assessee firm has charged interest from sister concern on the loans to sister concern in the financial year 2000-01
7 ITA 8271/Mum/2011 & ITA 4969/Mum/2012 only which was also reversed in financial year 2003-04 but still the assessee firm continued to grant further loans to the said sister concern. The assessee firm has given interest free advance of Rs. 4,86,96,890/- whereas the assessee’s firm capital is 3,47,32,991/-. No interest has been charged by the assessee firm from the said sister concern. The assessee firm has not been able to show that the loan amount has been advanced by the assessee firm from the partner’s capital account. The case laws relied upon by the assessee firm are clearly distinguishable as in the instant case, the assessee firm is not able to demonstrate that the said loans were granted for business of the assessee firm due to commercial expediency. However, the assessee firm has brought on record that the total interest amount paid by the assessee firm is Rs. 10,85,011/- which include the interest paid for car loan for which there is a specific and dedicated borrowings for buying a car. The assessee firm has taken a plea that the sister concern has become a sick company , however, no such evidence/cogent material to this effect has been brought on record. In our considered view and in the interest of justice, the matter needs to be set aside to the file of A.O. for re-determination of the issue de-novo after considering the cogent material/evidences of the assessee firm to be brought on record by the AO to prove its contentions that the interest free funds have been advanced by the assessee firm to the sister concern of the assessee firm and to that extent the assessee firm will be entitled for relief. Further, the A.O. shall also consider the plea of the assessee firm that the interest have been paid on specific and dedicated borrowings such as for acquiring car etc. on which in our considered view, no disallowance of interest paid on dedicated and specific borrowings is warranted. Needless to say that the AO shall give proper and adequate opportunity of being heard in accordance with principles of natural justice in accordance with law. We order accordingly. for the assessment year 2009-10
8 ITA 8271/Mum/2011 & ITA 4969/Mum/2012
Since identical issue is involved in this appeal also, our decision in 2008-09 shall apply mutatis mutandis to the appeal in for the assessment year 2009-10.
In the result, the appeals filed by the assessee firm in ITA N0. 8271/Mum/2011 for the assessment year 2008-09 and for the assessment year 2009-10 are allowed for statistical purposes.
Order pronounced in the open court on 3rd March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 03-03-2016 को क� गई ।