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Facts
The assessee company received unsecured loans of Rs. 2,00,00,000/-, claimed Rs. 9,39,766/- as expenditure under Section 14A, and advanced Rs. 40,00,000/- to a sister concern without charging interest. The Assessing Officer (AO) treated the loans as unexplained cash credit, disallowed the Section 14A expenditure, and disallowed interest on the advance, treating it as not for business purposes.
Held
The Tribunal held that the unsecured loans were unexplained cash credits as the assessee failed to discharge the onus of proving their genuineness, and the large cash deposits in the creditor's account before issuing cheques were not convincing. For Section 14A, it was held that no disallowance can be made when there is no exempt income. Regarding the interest-free advance, it was held that the assessee failed to establish commercial expediency for not charging interest on the funds advanced to sister concerns.
Key Issues
Whether the unsecured loans are unexplained cash credits, whether disallowance under Section 14A is permissible without exempt income, and whether interest-free advances to sister concerns are for business purposes justifying interest deduction.
Sections Cited
68, 14A, 36(1)(iii), 115BBE, 143(3)
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’’ : NEW DELHI
This appeal by the assessee is directed against the order of the Ld. CIT(A)-35, New Delhi dated 12.07.2018 pertaining to Assessment Year 2014-15 on the following grounds:- 1. The CIT(A) has erred on facts and in law in mechanically upholding the action of AO in treating the unsecured loans of Rs. 2,00,00,000/- received from M/s Virat Exports Pvt. Ltd. as unexplained cash credit as per the provisions of Section 68 of the Income Tax Act, 1961 in spite of the aforesaid credit having been specifically and repeatedly confirmed by the cash creditor u/s. 131 of the Income Tax Act with all the supporting documents and has further erred in not dealing with innumerable case laws (including from the Hon’ble Jurisdictional High Court) referred and relied by the appellant.
2. The CIT(A) has erred on facts and in law in mechanically upholding the action of AO in incorrectly invoking the provisions of Section 14A of the Income Tax Act, 1961 and making the addition of Rs. 9,39,766/- in spite of the fact that the appellant had no exempt income and has further erred in ignoring numerous from the Hon’ble Jurisdictional High Court) referred and relied by the appellant.
3. The CIT(A) has erred on facts and in law in upholding the action of AO in incorrectly invoking the provisions of Section 36(1)(iii) of the Income tax Act, 1961 and making the addition of Rs. 2,20,500/- although the appellant had sufficient capital and other non-interest bearing funds.
Brief facts of the case are that assessee filed its return of income originally for the year under consideration on 20.09.2014 declaring loss of Rs. 97,12,795/-. The case of the assessee was selected for scrutiny and assessed u/s. 143(3) vide order dated 28.12.2016 at a loss of Rs. 85,62,629/- by making the additions of Rs. 2,00,00,000/- u/s. 68 of the Act; addition of Rs. 9,39,766/- u/s. 14A of the Act and addition of Rs. 2,20,500/- u/s. 36(1)(iii) of the Act, thus adding total addition of Rs. 2 crores made u/s. 68 of the Act. Aggrieved with the aforesaid action of the AO, assessee preferred the appeal before the Ld. CIT(A), who vide his impugned order dated 12.07.2018 upheld the action of the AO by dismissing the appeal of the assessee. Against the order of the Ld. CIT(A), assessee is in appeal before us.
As far as ground no. 1 is concerned, during the hearing, Ld. AR submitted that Ld. CIT(A) has erred on facts and in law in mechanically upholding the action of AO in treating the unsecured loans of Rs. 2,00,00,000/- received from M/s Virat Exports Pvt. Ltd. as unexplained cash credit as per the provisions of Section 68 of the Income Tax Act, 1961 in spite of the aforesaid credit having been specifically and repeatedly confirmed by the cash creditor u/s. 131 of the Income Tax Act with all the supporting documents and has further erred in not dealing with innumerable case laws including the Hon’ble Jurisdictional High Court. Ld. DR relied upon the orders of the authorities below. 3.1 We have heard both the parties and perused the records. On the instant issue, it is noted that there are huge cash deposits in the bank account of M/s Virat Exports Pvt. Ltd., just before issue of cheque to the assesse company. The reasons given by the Director of M/s Virat Exports regarding the availability of cash which was deposited in the bank account of M/s. Virat Exports just before the cheques of matching amount were issued to M/s. Manglayatan Projects Pvt. Ltd. are not convincing. During the year, no interest was charged by M/s. Virat exports Pvt. Ltd from the assessee company, even though, M/s. Virat exports paid an interest of Rs.41,855,997/- on the funds borrowed by it. The amount of interest foregone by M/s. Virat Exports Pvt. Ltd. on so called unsecured loan is substantial and no prudent business entity will do so. Moreover, the assessee company could not file any explanation to the specific issues regarding the unsatisfactory explanation by Ajay Kumar Jain, Director of M/s. Virat Exports Pvt. Ltd., regarding availability of cash for depositing the same in the bank account just before the cheques were issued to the assessee company. The AO during the assessment proceedings, has correctly concluded that the assessee had failed to discharge its onus regarding establishing the genuineness of transaction regarding Rs.2,00,00,000/- claimed to have been received from M/s. Virat Exports Pvt. Ltd. as unsecured loan on different dates during the year. In the case of the assessee company, the unsecured loan has been taken of Rs.2,00,00,000/- claimed to have been received from M/s. Virat Exports Pvt. Ltd., the amount is a huge amount and it is apparent that in such cases of closely held companies, the transaction has been done between business entities who are controlled by known persons. In such cases, higher onus is required to be placed on such companies to also prove the source of money, in the hands of such persons or business enterprises making payment or receiving funds. If the company fails to discharge the onus, the sum should be treated as income of the company and added to its income. Therefore, it is imperative for the assessee company to provide that the nature and source of any sum credited, as unsecured loan in its books, and the same can be treated as explained, only if the source of funds is also explained by the assessee company. The treatment of the amount Rs.2,00,00,000/- as unexplained cash credit as per the provisions of section 68 of the Act has been done correctly in the assessment order and accordingly, it was correctly treated as income of the assessee company and taxed as per the provisions of section 115BBE of the Income Tax Act, 1961. Accordingly, the action of the Ld. CIT(A) is affirmed and Ground no. 1 is decided against the assesse.
As regards ground No. 2 relating to addition of Rs. 9,39,766/- u/s 14A of the Act is concerned, it is noted that during the year ended March 31, 2014 i.e. the period under consideration, the Assessee had made an investment of Rs 1,82,86,000/- in the equity shares of M/s Akinchan Developers Private Limited, an unlisted private company. Since, no exempt income was earned during the previous year relevant to AY 2014-15, hence, no disallowance was made under section 14A of the Act. However, the AO relied on the CBDT circular no. 05/2014 dated 11.02.2014 wherein the department had clarified that expenditure in relation to exempt income would be disallowed irrespective of the fact whether any exempt income is earned by the assessee. On the basis of the same, the AO invoked the provisions of section 14A read with Rule 8DD of the Act and made a disallowance of Rs 9,39,766/-. While making the said addition, the AO has failed to appreciate the ruling of Delhi High Court in the case of Cheminvest Limited, pronounced on 02.09.2015 (after the department circular) wherein, it has been held that "No disallowance u/s 14A can be made in a year in which no exempt income has been earned or received by the assessee". Hence, in the present case, no exempt income was earned, thus, no addition should have been made u/s 14A of the Act. Accordingly, we delete the addition sustained by the Ld. CIT(A) and decide the ground no. 2 in favour of the assesse.
As regards ground no. 3 relating to addition of Rs. 2,20,500/- for disallowing interest expenses u/s. 36(1)(iii) of the Act is concerned, Ld. AR has submitted that during the FY 2012-13 i.e. the year preceding to the year under consideration, the assesse had given an advance of Rs. 40 lacs to M/s Paryas Infosolutions Pvt. Ltd. As an advance against purchase of some property and the same was duly reflected as such in the books of accounts of the assessee. However, the deal did not materialize and hence the said amount became returnable by M/s Prayas Infosolutions Private Limited to the assesseee. An amount of Rs. 25 lacs was returned during FY 2013-14 and the balance Rs. 15 lacs was returned during FY 2014- 15 i.e. the next year. Since it was a business advance, hence, the question of charging interest does not arise. The argument of AO that the said Rs. 40 lacs cannot be treated as business advance since no documentary proof of the same was furnished lacks merit because even the AO has not brought on record any evidence to substantiate that RS. 40 lacs was indeed a loan. In the case of M/s Akinchan Developers Private Limited, temporary loan was received as well as given to M/s Akinchan Developers Pvt. Ltd. For need of the business on which neither any interest was paid by the Company nor any interest was charged by the company. Had the interest been charged as well as paid by the company, the net interest chargeable by the Company would have been negligible. This fact has been accepted by the AO and the differential interest has been computed to be Rs. 15,500/-, hence, on commercial prudence, the same was not charged by the assesse and addition on this account is not tenable. Ld. DR relied upon the orders of the authorities below. After hearing both the sides, we note that the assesse company has borrowed interest bearing loans on which interest is paid to the extent of Rs. 96,79,675/- but no interest is charged on the funds given to the two group concerns i.e. M/s Parayas Infosolutions Pvt. Ltd. and M/s Akinchan Developers Pvt. Ltd. The assessee company has submitted that the advance of Rs. 40,00,000/- to M/s Parayas Infosolutions Pvt. Ltd. had been given during F.Y. 2012-13 for the purpose of land but the deal did not materialize and an amount of Rs. 25,00,000/- was received back during the year. The appellant has further stated that, during the financial year, a temporary loan was received and given to the M/s Akinchan Developers Pvt. Ltd. and hence, no interest has been charged. The assessee has explained that the loan taken from group concerns has been given to the group concerns for land deal which did not materialize i.e. out of commercial expediency and the group concerns have not used the loans taken for their personal purposes but used the same for the purpose of business. The appellant's main argument is that the borrowed funds have been given to the group concerns out of commercial expediency, hence the interest paid is required to be allowed in view of provisions of section 36(1)(iii) of the I.T. Act. The Ld. AR has submitted that that the overall loan given out to M/s Parayas Infosolutions Pvt. Ltd. has reduced from Rs. 40,00,000/- to Rs. 15,00,000/-i.e. there is reduction of loans by Rs. 25,00,000/-. The Ld. AR has also submitted that the company has sufficient interest free funds in the form of share capital and interest free unsecured loan out of which loans could be given to the associate concern. In the assessment order the AO has observed that the assessee company has given interest free loans/advances to its sister concerns namely M/s.Paryas Infosolutions Pvt. Ltd. And M/s. Akinchan Developers Pvt. Ltd. And has borrowed interest bearing loan on which an amount of Rs. 96,76,675/- was paid during the year. The AO disallowed interest to the extent of Rs.2,20,500/- u/s. 36(1)(iii) of the Income Tax Act, 1961. As regards Ld. AR contention that funds borrowed were also given to the group concerns in earlier years but there had not been any disallowance of interest in the immediately preceding year i.e. A.Y. 2013-14; the contention is not tenable as each assessment year is separate. We note that as per provisions of section 36(1)(iii) of the Act, the interest on loan raised by the appellant for business purpose is available as a business deduction. If the assessee makes a claim to deduction in terms of Section 36 for the purpose of computation of income referred to in section 28, he has to produce materials in support of his claim of entitlement to the deduction. Section 36 (1) ii) relates to the amount of interest paid on capital borrowed for the purpose of his business, profession or vacation. The assessee has to satisfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute. The principle equally applies in case of deductions calmed. Once the assessee claims any such interest as deduction in their books of account the onus is always on the appellant to satisfy the Assessing Officer that whatever loans were raised by the appellant were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpires that the appellant has advanced certain funds to sister concerns charging no interest, there would be a very heavy onus on the assessee to discharge before the Assessing Officer to the effect that in spite of outstanding loans which the assessee is incurring liability to pay interest, there would be sufficient justification to advance the loans to sister concerns for non-business purpose without charging any interest. It is difficult to accept the contention of the appellant that the impugned money has been advanced to the sister concerns for the purpose of its business as the appellant has simply financed its sister concerns. There is no "commercial expediency". Simply by saying that investment has been made for expansion of business or the ultimate company acquired by it is in the same business is not good enough to prove commercial expediency. The appellant has not been able to explain commercial expediency in advancing the money to the two sister concerns without charging any interest and there is no material on record to show that the appellant has derived any business benefit by way of such investment. The expression "Commercial Expediency" is an expression of wide import and includes such expenditure as a prudent business entity incurs for the purpose of business. It is noted by the Hon'ble Supreme Court in S.A. Builders Ltd. Vs CIT (288 ITR 1) by holding that the correct approach to the issue of grant of deduction u/s 36(1)(iii) would be to examine whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. It was held that if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes (which need not necessarily be the business of the assessee itself), the assessee would, ordinarily be entitled to deduction of interest on its borrowed loans. Having laid down the test for determination of the allow ability of deduction u/s 36(1)(vii) the Apex Court set aside the matter to be decided afresh. This decision of the Supreme Court overruled a host of High Court decisions to the contrary which gave a limited interpretations to the scope of the phrase "for the purposes of business or profession" used in section 36(1)(iii). This decision overruled the Bombay High Court decisions in the case of Phaltan Sugar Works Ltd. reported in 208 ITR 989 and 215 ITR 582, and approved the Delhi High Court decision in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377. Subsequent to this decision of the Apex Court, the Dept. filed an SLP against the Delhi High Court's decision in Addl. CIT vs Tulips Star Hotels Ltd. reported in 338 ITR 482 wherein the High Court had held that the interest liability on loans borrowed to acquire the equity capital of a subsidiary company which was in the same line of business was allowable deduction u/s 36(1)(iii). It is further noted that while admitting the SLP of the Department, the Supreme Court vide order dated 30.4.2012 directed that the earlier view of the Court in S.A. Builders Ltd. Vs. CIT should be referred for reconsideration to another Bench of the Court. In view of the these decisions of the Apex Court, it needs to be examined whether the amounts in question that were advanced to sister concerns without any interest were justified by reasons of commercial expediency or not. The assessee has provided justification in very casual and mechanical manner in its written submissions filed during appellate proceedings. In yet another case- CIT v. Walchand & Co. (P.) Ltd.[1967] 65 ITR 381 (SC), it was observed that yardstick will have to be taken from the businessman point of view but the businessman must be a prudent businessman, the tax authorities are still entitled to examine the business expediency. This was the ratio of the Punjab and Haryana High Court decision in CIT v Rockman Cycle Industries Pvt. Ltd. reported in 326 ITR 291 as well as the apex Court decision in SA Builders case (supra). Accordingly, the interest expenditure incurred by the assessee that have been claimed u/s 36(1)(iii), cannot be allowed. Hence, we affirm the action of the Ld. CIT(A) on the issue in dispute and decide the ground no. 3 against the assesse.