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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the order dated 22.10.2012 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2001-02.
This is second round of appeal before us. The assessee has taken the following grounds of appeal: “I: Ground No.1 (a) Under the facts and the circumstances of the case of your Appellant, the Ld. A.O. was not justified in disallowing interest of Rs.32,18,450/= on the ground that the same represented interest on the amounts given by the appellant free of interest to M/s. Jayantiial Khandwala & Sons, a sister concern of the appellant. (b) The Ld. AO. ought to have held that the amounts appearing as debits in the account of M/s. Jayantilal Khandwala & Sons, in the books of the appellant,
represented debits which arose in the course of the business of the appellant. (c) The Ld. AO. failed to establish any connection between the interest bearing loans taken by the appellant and the amounts appearing as debits in the account of M/s. Jayantilal Khandwala & Sons. (d) The Appellant, therefore, prays that the interest addition of Rs. 32,18,450/= is to be deleted. II : GROUND NO.2 (a) The Assessing Officer was not correct in disallowing a sum of Rs. 32,91,269/= out of the finance brokerage and consulting charges paid by the appellant on the ground that the corresponding loans obtained by the appellant were advanced as interest free loans to M/s. Jayantilal Khandwala & Son . (b) The Assessing Officer should have seen that no nexus was established by him between the loans taken on which finance brokerage was paid by the appellant and amounts appearing as debits in the account of M/s. Jayantilal Khandwala & Sons. (c) At any at the disallowance of Rs.32,91,261/- made by the Assessing Officer is arbitrary and excessive.
III: Ground No.3
(a) The Assessing Officer was not correct in holding that the short term capital loss of Rs.9,30,721/- incurred by the appellant should be considered as speculation loss relying on the Explanation to section 73 of the Income Tax Act.
(b) The Assessing Officer failed to notice that the sum of Rs.9,30,721/- represented short term capital loss incurred by the appellant and therefore outside the scope of the Explanation to section 73 of the Income Tax A.O.”
Ground Nos.1 & 2 are inter-related. During the assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) noted that the assessee had given interest bearing borrowed funds to its sister concern M/s. Jayantilal Khandwala & Sons (JK & Sons) as free of interest. The AO, therefore, disallowed the proportionate interest on the interest free funds given to the sister concern and added back the same to the income of the assessee. The AO also noted that the assessee had paid finance, brokerage and consultation charges. On being asked to explain, the assessee explained that M/s. Sheen Metals and Trading Pvt. Ltd. were financial brokers and would lend money on commission. Due to financial difficulties, the assessee approached them to arrange loan/finance for the assessee. The assessee had paid the financial brokerage/commission to M/s. Sheen Metals and Trading Pvt. Ltd. All the payments were made by cheque. The AO, however, did not agree with the contention of the assessee in this respect also.
In appeal before the Ld. CIT(A), the assessee pleaded that the funds were given to the sister concern out of business expediency. The Ld. CIT(A) agreed with the contention of the assessee and deleted the interest disallowance made by the AO. The Ld. CIT(A) also deleted the disallowance of expenditure in relation to brokerage paid holding that the interest bearing loans were utilized for business purposes and hence the commission paid for obtaining the loan was allowable as business expenditure. Being aggrieved by the order of the Ld. CIT(A), the Revenue preferred the appeal before the Tribunal. The Tribunal vide order dated 30.11.10 passed in restored the matter to the file of the AO for denovo adjudication. It was directed by the Tribunal to the AO to consider the plea of the assessee whether the assessee had running business transactions with his sister concern and also to take into considering the decision of the Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (2007) 288 ITR 1 (SC) and further with a direction to the assessee to place the relevant evidences before the AO to prove that in fact the finances were arranged by the assessee for its business purposes and that the assessee had paid commission to M/s. Sheen Metals and Trading Pvt. Ltd. for arranging the said finances.
In the denovo/fresh assessment proceedings, the AO again disallowed the above said interest expenditure and finance/brokerage charges observing as under: “The assessee submission is considered. The ledger account of JK & Sons in the books of assessee is perused. It starts with a debit balance of Rs 22203196/-. There are entries of amounts advanced to and repaid back throughout the year. There is a debit balance of Rs 129083718/- as on 31/3/2001. On 31/3/2001, there is another entry on the credit side of Rs 172574935/-. This is the credit balance of JK & Sons in the books of the assessee on account of share trading done by JK & sons through the assessee. Thus it can be seen that the ledger account of the JK & Sons in the books of the assessee wherein there is a debit balance of Rs 129083718/ is actually contains the transactions of loans given to and repaid from JK & sons. In this ledger the credit balance of the transaction of share trading by JK & sons as the client of the assessee is added. Thus it cannot be said the JK & sons is purely a debtor of the assessee. In fact its share trading account shows a credit balance of Rs 172574935/- and further the assessee has advanced loans to JK & sons. The amount of the credit balance is set off against the amounts advanced to JK and sons and even after that there remains a debit balance of Rs 172574935/- at the year end. Thus the stand taken by the assessee that the account of JK & Sons is purely a share trading account cannot be fully accepted. Coming to the assessee's claim that the loans were advanced out of interest free funds, on careful examination of the balance sheet it is noted that the share capital of the assessee remains at Rs 3 Crores as on 31/3/2001 which is same as that on 31/3/2000. Further the reserves and surplus is Rs 35909729/- which is down from Rs 38508184/- as on 31/3/2000. There is a substantial increase in unsecured loans from Rs Nil in 31/3/2000 to Rs 225335816/- in 31/3/2001. In the case sundry debtors there is an increase from Rs 139852594/- as on 31/3/2000 to Rs 621138722/- as on 31/3/2001. The creditors and other liabilities have also increased from Rs 185653626/- to Rs 386052114/-. Considering the above, it can be clearly seen that the increase in the sundry by Rs 481286128/- is evenly matched by increase in Unsecured loans by Rs 225335816/- and increase in current liabilities by Rs 200398518/-. The assessee has tried to explain that the balance of sundry creditors is its interest free fund and this has been advanced to JK and Sons. This cannot be accepted. The balance of sundry creditor can be adjusted against the other sundry debtors of Rs 621138722/-. It can be said that the amounts payable to sundry creditors have remained payable on account of amounts receivable from the sundry debtors or vice versa. But in the case of JK and sons the assessee has wrongly booked the advances given to JK & sons under the head sundry debtors. The amount given to JK & sons should have been books under the head loans and advances. The loans can be given only from the funds in hand or funds received. It is seen that the assessee has borrowed funds of Rs 104 Crores throughout the year and repaid part of it which has resulted in the net balance of Rs 22533586/-. In the same manner the loans have been advanced to JK and sons throughout the year. It is clear that the loans received by the assessee have been advanced to JK and Sons over and above the credit balance of JK and sons in share trading account. It is a case of interest bearing funds been advanced for non business purposes. In the original assessment order the peak debit balance as on 22/3/2002 was relied upon for making the computation of disallowance of interest. Since the peak debit balance is for the AY 2002-03 it cannot be taken for this year. For-this year-on going through the combined ledger of JK and sons in the books of the assessee, the ledger of JK and sons, peak debit balance is Rs 17,22,59,443/- as on 13/3/2001. This amount is taken
as the peak amount that is advanced out of interest bearing loan and utilized for non business purpose. As per the special audit report, the total loans received by the assessee for the entire year is Rs 104 Crores. The assessee has paid interest of Rs 1,94,31,083/- on the total loans of Rs 104 Crores received. Corresponding interest on 172259443/- works out to Rs 32,18,450/-. This amount is treated as interest paid on interest bearing funds which has been advanced for non business purpose and therefore the said amount is a disallowed and added back to the income of the assessee. Penalty proceedings u/s 271(1) (c) as initiated in the original assessment order stands initiated for filing of inaccurate particulars.
Finance brokerage and Consulting charges The assessee had debited a sum of Rs 19870724/- as finance brokerage and consulting charges paid to different parties. The assessee had not furnished the details of the clients and also the percentage of brokerage paid and amount of loan financed during the original assessment proceedings and also not furnished the same to the special auditors. Since the borrowed funds were held to be not utilized for business the finance brokerage as well as consulting charges are also disallowed as expenditure not allowed for business. The CIT A has held that the AO had not disputed the genuineness of payment made and since the CIT(A) had held that the interest bearing funds were utilized for business purpose the brokerage /commission for arranging the loans was also allowed. As directed by the ITAT, the assessee was asked to produce the details of payment made as finance charges. The major party in this case is M/s Sheen Metals and trading ltd. The assessed has submitted the confirmation from the said party along with the bills and details of payment made. Considering that the assessee has borrowed loans of Rs 104 Crores through the year, the amount Of Rs 1.98 Crores paid as brokerage for financing appears justifiable. However, as held above, the amount of Rs 172259443/ such of loans have been held as not utilized for business purpose. Thus brokerage paid for obtaining these loans would also not be allowed as deduction. The brokerage on such loan comes to Rs 32,91,269/-. This amount is disallowed and added back to the income of the assessee as finance charges on loans not utilized for business purpose. Penalty proceedings u/s 271(1)(c) as initiated in the original assessment order stands initiated for filing of inaccurate particulars.”
Being aggrieved by the above findings of the AO, the assessee preferred appeal before the Ld. CIT(A).
The Ld. CIT(A) upheld the findings of the AO in relation to the interest disallowance observing as under:
“I have considered facts of the case and the submissions of the assessee. On the basis of the account of JK & Sons furnished by the assessee, Assessing Officer has clearly held that all transactions are on account of advance given and loan repaid by JK & Sons furnished by the assessee, Assessing Officer has clearly held that all transactions are on account of advance given and loan repaid by JK & Sons except one transaction on the last day adjustment of Rs.17,25,74,935/- on account of share trading. Therefore, it is clear that the transaction in the account with JK & Sons are on account of advance given and loan repaid and not on account of share transactions. Hence, the proportionate interest is disallowable. In the case of “S.A. Builders, it is held that loan given for business purpose or to a subsidiary cannot be considered for disallowance whereas, loan given to JK & Sons is neither to a subsidiary nor on account of business purpose. Therefore, interest is clearly disallowable. The claim of the assessee of availability of overall fund has also been examined by the Assessing Officer, and it is established that advance given to JK & Sons have come from increase in loan taken by the assessee for which interest has been paid and, therefore, the interest is disallowable. The mistake in calculation of peak has already been rectified by the Assessing officer and, therefore, only a disallowance of Rs.32,18,450/- has been made which is confirmed. In result, the ground of appeal is dismissed.”
He also upheld the disallowance in relation to the brokerage/commission expenditure observing as under: “I have considered the facts of the case and the submissions of the appellant. It has already been held as above against ground No.1 that a part of the borrowed funds were not used for business purposes but diverted for interest free advance to sister concern and, therefore, proportionate interest was disallowed. Accordingly, proportionate expenses relating to interest free advance have been correctly disallowed by the Assessing Officer out of finance brokerage and consulting charges. Therefore, the disallowance is confirmed and the ground of appeal is rejected.”
Being aggrieved by the order of the Ld. CIT(A), the assessee has come in appeal before us.
We have heard the rival contentions and have also gone through the records. We find that right from the beginning, the assessee had taken a stand that the funds were given to the sister concern in the course of business and that the commission was paid for borrowing the funds required for the business purposes of the assessee. The Tribunal in the set aside proceedings has categorically directed the AO to consider the plea of the assessee that the assessee had a running business transactions with his sister concern and also to take into consideration the decision of the Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra). A perusal of the relevant findings of the AO, as reproduced in paras above of this order, reveals that the AO himself has observed after examining the relevant evidences and accounts of the assessee that the assessee had a running account with its sister concern and that it could not be said that the sister concern was purely a debtor of the assessee. He has observed from the ledger account of JK & sons in the books of the assessee that it started with debit balance of Rs.22203196/- . There were entries of advance and repaid back throughout the year. There was a debit balance of Rs.129083718/- as on 31.3.2001 and that there was a credit entry of Rs.17,25,74,935/-. The amount of the credit balance was set off against the amounts advanced to the sister concern and after that there remained debit balance of Rs.17,25,74,935/- at the year end. There were entries in the ledger of the amount advanced to and repaid back throughout the year. The sister concern of the assessee was also engaged in doing share trading on behalf of the assessee. A perusal of the above findings clearly reveals that the assessee had a running business account with its sister concern. The assessee was also interested in the promotion of business of its sister concern. The funds were advanced and repaid back and sometimes there was a credit balance of the sister concern in the accounts of the assessee and sometimes the debit balance. The Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra) has categorically held that what is to be seen as to whether the assessee has advanced loan to its sister concern or a subsidiary as a measure of commercial expediency. The Hon’ble Supreme Court, while referring to section 37 of the Act, has held that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. The Hon’ble Supreme Court has further explained the expression “commercial expediency” as under:
“The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”
The Hon’ble Supreme Court thereafter considering the various aspects of the matter has concluded as under:
“We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
“We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”
A perusal of the above conclusion reveals that though as per the provisions of section 37, it is not necessary that the loan amount should be exclusively used in the business of the assessee. However, the requirement is that it should be used for the purpose of the business which need not necessarily be the business of the assessee itself. What is to be seen is that the transfer of borrowed funds to a sister concern was out of commercial expediency. The Hon’ble Supreme Court t has also made it clear that the order of the Hon’ble Supreme Court should not be interpreted as that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends upon the facts and circumstances of the respective case. The two conditions which are to be fulfilled is that the loan should be advanced out of commercial expediency and secondly the sister concern should use the loan for its business purpose and not for the personal purpose of its directors or partners etc. The Hon’ble Supreme Court thereafter held in the said case that since the sister concern was a subsidiary of the assessee company and the assessee company being the holding company had a deep interest in its subsidiary, hence the loan advanced to subsidiary was out of commercial expediency.
Examining the facts of the case in the light of the law laid down by the Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra) and the contention of the assessee that the borrowed funds were used in the course of business and that the assessee had a running business account with its sister concern, we do not find any justification on the part of lower authorities in disallowing the proportionate interest expenditure. Similarly, no disallowance is called for in respect of the brokerage, commission paid for obtaining the loans which, in our view, were used by the assessee for the purpose of business. Ground nos. 1 & 2 of the assessee are hereby allowed.
Ground No.3 12. The assessee, vide ground No.3 has agitated the action of the lower authorities in treating the loss of short term capital loss of Rs.930721/- as speculation loss as per explanation to section 73 of the Act. The AO on enquiry found that the assessee had included certain purchases which had been booked after sale of the same and similarly certain transactions of purchase and sale were made on the same day. The AO, thereafter, analyzing the nature of transactions held that the loss incurred by the assessee in relation to the said transactions was to be treated as speculation loss. The Ld. A.R. of the assessee has fairly submitted that the assessee has no case on this issue. In view of the above, this ground of appeal of the assessee is hereby dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 30.10.2015.