ASSIT. COMMISSIONER OF INCOME TAX - 16(3), MUMBAI vs. SHEETAL MANUFACTURING CO., MUMBAI

The present appeal has been preferred by the Revenue against the order dated 24.08.2011 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09.

The Revenue has taken following grounds of appeal:

The brief facts of the case are that during the year under consideration, the partners of the assessee firm borrowed funds from various banks by mortgaging their personal residential properties. The borrowed funds were in turn given to the assessee firm and were utilized for meeting the working capital requirements of the assessee firm by transferring the loans amounts either on the same day or next day of obtaining the loans by the partners to the bank account of the firm. In the similar manner loans were obtained and transferred to the assessee firm by the partners, by pledging their personal LIC policies, which were also utilized for meeting the working capital requirement of the assessee firm. The interest paid to the banks was at Rs.14,71,363/- and to the LIC was at Rs.5174731- in this regard. That apart, financial expenses in the form of documentation and processing charges and other related expenses were incurred to the tune of Rs.20,82,504/- for raising these loans from the banks. The Assessing Officer (hereinafter referred to as the AO) in his assessment order noted that the loans taken by the partners from various banks and the LIC were given in turn to the assessee firm as loans by the partners. The AO also observed that the MOU entered into in this regard between the firm and the partners established that the loans were given by the partners to the firm and that the loans so advanced would carry same rate of interest which the lending partners would have to pay to the bank and further that these loans were to be credited to the partners loan account. The AO also noted that the 3 M/s. Sheetal manufacturing Co. assessee had been crediting the loan account of the partners for the payments made by them towards interest paid to the banks. Considering all these facts, the AO came to the conclusion that the loans were obtained by the partners in their individual status and the said loans were advanced to the assessee firm, resulting in two independent transactions. Therefore, the AO held that the loans advanced by the partners to the assessee firm and the interest paid thereon were hit by the provisions of section 40(b)(iv) of the Act and accordingly restricted the interest paid by the assessee firm at 12% p.a., resulting in the disallowance of Rs.1471363/-. Similarly, the AO also held that the interest paid towards LIC loan amounting to Rs.5,17,473/- was also hit by the provisions of section 40(b)(iv). The AO also held that the financial expenses incurred by the partners by way of documentation and processing charges for raising the funds from the banks was not allowable expenditure in the hands of the assessee firm. Being aggrieved by the above additions made by the AO, the assessee preferred appeal before the CIT(A).

The Ld. CIT(A) considering the facts and circumstances of the case observed that the MOU was entered between the assessee firm and its partners for raising the loan by mortgaging the personal properties of the partners for the purpose of business requirements of the firm. Since the assessee firm was in need of funds and has already reached its limits to borrow in the name of the firm, the MOU was signed to get the loans in the name of partners and thereafter the loan amount was transferred to the bank account of the assessee firm immediately and was utilized by the assessee for the purpose of its business. The installments of principle and the interest thereof were paid by the firm directly to the respective banks/LIC. The interest paid was not claimed as expenditure in the hands of the partners. Thus the intention of the assessee firm was to take loans for the purpose of its working capital requirement with the help of the personal properties of the partners and the partners were merely used as conduits to obtain the funds. Hence the firm as per the MOU had to bear the interest and other expenditure incurred for obtaining the loan which 4 M/s. Sheetal manufacturing Co. were allowable expenses in the hands of the assessee firm in full and that the provisions of section 40(b)(iv) were not attracted in this case. He therefore observed that in the case of the assessee the substance of the transaction and the conduct of the assessee firm and its partners apparently reveal that it was only one transaction i.e. obtaining of loan from various financial institutions, banks, LIC by using the partners as a go between. The interest payments were directly made by the assessee firm to the respective institutions and not by the partners. The loans were transferred to the bank account of the assessee firm immediately on obtaining the same by the partners and they were reflective to be the liabilities of the assessee firm in the audited accounts. The Ld. CIT(A) therefore concluded that the interest paid by the assessee firm on the loans obtained by the partners from banks/LIC and given to the assessee firm did not attract the provisions of section 40(b)(iv) of the Act. He also concluded that the financial expenses incurred in raising the above loans constitute deductable expenditure in the hands of assessee firm. He accordingly deleted the additions made by the AO in this respect.

After hearing the Ld. Representatives of the parties and going through the records, we do not find any infirmity in the well reasoned order of the Ld. CIT(A) and the same is accordingly upheld.

In the result, the appeal of the Revenue is hereby dismissed.