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Income Tax Appellate Tribunal, MUMBAI BENCH ‘B’ MUMBAI.
Before: SHRI JOGINDER SINGH & SHRI RAJESH KUMAR
ORDER
Per Rajesh Kumar, Accountant Member
This appeal by the assessee is directed against the order dated 05.06.2012 of Commissioner of Income Tax (Appeals) {(hereinafter referred to as CIT(A)} for A.Y. 2009-10. The only ground raised in the appeal reads as under:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting addition of Rs. 17,35,000/- made u/s 2(22)(e) of the LT. Act. 1961.
On the facts and in the circumstances of the case and in law, the Ld CIT(A) has failed to appreciate that the business of the company a well as the assessee is not primarily money lending as substantial income of the company is from rent.
3. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has failed to appreciate that the assessee did not furnish any evidence in the form of approval of RBI or application for NBFC to prove that the assessee's main business is money lending."
4. "On the facts and in the circumstances of the case and in law. The Ld CIT (A) has failed to appreciate that in the case of CIT Vs Parle Plastics Ltd (Bom), it was held that the business of the assessee was complimentary to the business of the company which does not hold in this case."
5. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting addition of Rs.8,06,719/- on account of interest income.
"On the facts and in the circumstances of the case and in law. The Ld. CIT (A) has failed to appreciate the fact that the assessee was advancing loans at a lower rate of interest and taking loans at a higher rate of interest."
2. Ground no. 1 to 4 are against the deletion of addition by CIT(A) of Rs. 17,35,000/- made by the AO u/s 2(22)(e) of the Act.
The facts in brief are that the assessee was 50% share holder as well as Director of M/s Monika Realtors Pvt. Ltd. The assessee borrowed money from the said company in the earlier years and the amount outstanding as on 31.03.2009 was Rs. 2,41,65,631/-. The assessee had paid interest of Rs. 29,03,360/- to M/s
Assessment year: - 2009-10 Monika Realtors Pvt. Ltd on the said borrowings. The assessee repaid Rs. 40,38,000/- against the outstanding balance and again took a sum of Rs. 17,35,000/- from the said company during the year. The Ld. AO treated the money received of Rs. 17,35,000/- as deemed dividend u/s 2(22)(e) of the Act on the ground that the assessee was holding 50% paid up capital of the company and, therefore, the payment received was deemed dividend within the meaning of section 2(22)(e) of the Act. The total income of the company M/s Monika Realtors Pvt. Ltd. comprised of Rs. 90 lakh as rental income and Rs. 35,30,540/- as interest income on the loans advanced to the various parties. The CIT(A) deleted the addition on the ground that the loan taken by the assessee from M/s Monika Realtors Pvt. Ltd was taken in the ordinary course of business of the company and, therefore, covered by the Explanation provided in clause (ii) of section 2(22)(e) of the Act wherein it is mentioned that the provisions of section 2(22)(e) of the Act does not include any advance or loan made to a shareholder by a company in the ordinary course of its business where lending is a substantial part of the business of the company.
We have considered the rival submissions and arguments of the counsels and carefully perused the relevant material on record. The ld DR argued that the borrowings by the assessee from the company in which he held 50% share capital were covered by the provisions of section 2(22)(e) of the Act and prayed for setting aside the order of CIT(A) and restoring the order of AO. We note that the assessee is holding 50% of the paid up capital and also was Director of the Assessment year: - 2009-10 company. The company was having income from property to the tune of Rs. 90,00,000/- and Rs. 35,30,540/- as income from interest from the money lending division. From the income portion of the company, it is clear that 28% of the gross total income is from money lending business carried on in the ordinary course of business and 43% of the total funds deployed were by way of loan and advances on which interest of Rs. 35,30,540/- was earned meaning thereby that company’s one of the main activities involved money lending business. We also note that this is one of the main object of the company as per the Memorandum and Article of Association which were produced before us during the course of hearing. The assessee paid a sum of Rs. 29,03,360/- as interest on the money borrowed from the company i.e. M/s Monika Realtors Pvt. Ltd. which were outstanding at Rs. 2,41,65,631/-. The ld counsel for the assessee submitted that in the case of Krish Ltd. 119 ITD 49 (Ahd) it has been held that the activity with more than 20% of the fund deployment of the total funds will be substantial business for the purpose of section 2(22)(e). The ld AR also submitted that assessee’s case also got support from the Judgment of Hon’ble Bombay High Court in the case of Parle Plastics Ltd. 332 ITR 63 (Bom.), wherein it has been held that provisions of section 2(22)(e) of the Act are not applicable if the money borrowed by the share holder from the company in the ordinary course of business. The facts of the assessee’s case are squarely covered by the above mentioned decisions as the assessee borrowed money in the ordinary course of business of the company where the money lending was substantial part of the business activity and had paid interest on such borrowings’ We ,therefore,
Assessment year: - 2009-10 respectfully following the above decisions, uphold and sustain the conclusion drawn by the CIT(A) on this issue. Accordingly ground No 1 is dismissed.
Ground no. 5 to 7 relates to deletion of addition of Rs. 8,06,719/- on account of interest .
6. The facts in brief are that the assessee used to raise money from the market at the market rate of interest and used to lend the same as part of his money lending business. The AO on noticing the fact that the assessee was receiving interest at the rate of 12% and paying interest on the money raised from the market ranging between 13% to 15%. The AO asked assessee to explain as to why the excess interest paid should not be disallowed u/s 36(1)(iii). The AO worked out the difference between the rates at which the money was raised and lent at page no. 8 of the assessment order and disallowed a sum of Rs. 8,06,719/- and added the same to the total income of the assesseee.
Aggrieved by the order of AO, the assessee carried the matter in appeal before CIT(A). The CIT(A) deleted the addition of Rs. 8,06,719/- on the ground that the assessee had taken loan from 26 parties out of which interest was paid at the rate of 12% to twenty parties whereas remaining six parties were paid at the rate of 12% to 15% depending upon the urgency of funds , market conditions and Assessment year: - 2009-10 prevalent interest rates in the market. Further that the AO did not make out a case that the assessee deflated its profit by paying higher rate of interest on the money borrowed. AO also failed to prove that the funds were available in the market at the lower rate of interest under the similar facts and circumstances. Thus the CIT(A) deleted the addition by relying upon the Judgment of Hon’ble Orissa High Court in the case of Bansidhar Omkarlal 58 ITR 462 (Orissa).
The Ld. DR submitted that the assessee was borrowing funds from market at the higher rate ranging between 12% to 15% and advanced money at the rate of 12%. He further submitted that he AO has rightly made the addition of Rs. 8,06,719/- u/s 36(1)(iii) of the Act being the differential interest and prayed that the order of CIT(A) may be reversed and that of AO be restored.
The Ld. AR on the other hand submitted that the assessee had raised money from the market on the prevalent rate of interest and several other factors such as availability of funds in the market, urgency of funds required etc. During the year, the appellant raised money from 26 parties out of which from 20 parties money was raised at the rate of 12%, from two parties it was raised at the rate of 13% , from one party(HDFC bank) money was raised at the rate of 13% and in respect of other three parties, the money was raised at the rate of 15% meaning thereby that the assessee paid interest to three parties at the rate of 15%. Since the funds were raised from the market for urgent business needs at a shorter
Assessment year: - 2009-10 notice, the Ld. Counsel further submitted that the AO has no power to downgrade the rate of interest on the ground of reasonableness or excessiveness. The Ld. Counsel further submitted that the case of the assessee is supported by the decision of Hon’ble Orissa High Court in the case of Bansidhar Omkarlal (supra), wherein it has been held that the AO has no power to downgrade the rate of interest on the ground of reasonableness or excessiveness.
We have heard the rival submissions and considered the relevant material on record and find that the assessee has raised money from the market at the differential rate of interest. We note that out of 26 parties only to 3 parties interest was paid at the rate of 15%. We also note that assessee was engaged in the business of money lending in the ordinary course of business and for the purpose of doing its business the assessee had to borrow money from the market at the prevailing market rate of interest which are governed by several factors such as urgency of funds required, availability of funds in the market, notice at which fund are required and creditworthiness of the persons raising the money. The Ld. CIT(A) had given a very detailed observation for arriving at his decision. In the case of Bansidhar Omkarlal (supra), it has been decided that there was no scope for application of the test of the reasonableness to a case of payment of interest and therefore the rate of interest could not be scaled down. Thus in view of the ratio laid down in the above decision by the Honble Orissa High Court , we find no infirmity in the order of CIT(A) and uphold the same on this point.
In the result appeal of the Revenue is dismissed.