2015 (2) TMI 165 - AT - Income Tax

Disallowance on account of interest paid to M/s Fab India Overseas Private Limited - Holding subsidiary companies - assessee is subsidiary of FabIndia Overseas Pvt. Ltd. FOPL - CIT(A) confirmed disallowance - Held that - Admittedly the assessee company received loan of ₹ 2,52,89,149 from FOPL and at the same time FOPL was a debtor of ₹ 5,26,61,151 as per balance sheet of the assessee submitted before the AO. Although the assessee company has explained that the unsecured loan was necessary for the smooth operation of the assessee company which was also taken on lower rate of interest, but when the amount of sales is more than double of unsecured loan, then the transaction of unsecured loan and transaction of sale with the same company may be seen by the intention of the parties but ultimate purchaser of the product of the company is a debtor to the extent of ₹ 5.26 crore as against the loan amount of ₹ 5.52 crore, then interest on such loan cannot be allowed. We are in agreement with the conclusion of the CIT(A) that even after adjusting the loan amount against the sundry debtor, the assessee company is still to receive ₹ 2,73,72,010 from FOPL, therefore, interest on such loan cannot be allowed and expenditure claimed by the assessee company on interest is not allowable. If interest so paid is allowed, then it would be indirect benefit given by the assessee company to the FOPL and the same amounts to diversion of income of the assessee company which is not permissible. In view of above and on the basis of foregoing discussion, we uphold the action of the AO and we are unable to see any ambiguity, perversity or any other valid reason to interfere with the findings of the CIT(A) on the impugned addition on this point. - Decided against assessee. Disallowance of rent paid to M/s Fabindia Overseas Pvt. Ltd. - CIT(A) deleted disallowance - Held that - AO made disallowance of 2/3 amount of rent by holding that the assessee do not have documentary evidence to prove that the premises was even hired on rent from the owner of the buildings or from its own group company M/s Fabindia Overseas Pvt. Ltd. The CIT(A) granted relief by observing and noticing certain facts revealed from certain documents. At the same time we also note that theses documents require proper examination and verification at the end of the AO to evaluate the issue as to whether the assessee incurred expenditure on rent wholly and exclusively for the purpose of its business . Hence we deem it just and proper to restore the matter to the file of the AO with this direction that the AO shall adjudicate the issue afresh by affording due opportunity of hearing for the assessee. -Decided in fvaour of revenue for statistical purposes. Disallowance of professional charges - CIT(A) deleted disallowance - Held that - The AO is obviously empowered to examine and verify the claim of the assessee but without bringing out any adverse material, it would he held that the claim of the assessee was not incurred or professional charges to AMFPL were not paid wholly and exclusively for the purpose of business of the assessee. We are unable to see any infirmity, perversity or any other valid reason to interfere with the impugned order which granted relief for the assessee on the issue. On the basis of foregoing discussion, we reach to a conclusion that the AO made disallowance of professional charges without any basis which was rightly deleted by the CIT(A) on justified and cogent reasons and we uphold the impugned order on this issue. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest payment to group companies.
2. Disallowance of rent payment.
3. Disallowance of professional charges.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Payment to Group Companies:
The assessee contested the disallowance of Rs. 6,57,669/- made by the AO for interest paid to Fab India Overseas Pvt. Ltd. (FOPL). The AO disallowed the interest, arguing that the assessee could have asked FOPL to clear its dues instead of taking loans. The CIT(A) upheld the AO's decision, noting that the assessee was paying interest on loans from FOPL while FOPL was a debtor for a larger amount. The CIT(A) concluded that the interest payment was not for business purposes but an indirect benefit to FOPL, amounting to income diversion. The Tribunal agreed with the CIT(A), dismissing the assessee's appeal on this point.

2. Disallowance of Rent Payment:
The revenue challenged the deletion of Rs. 1,25,70,364/- out of the rent paid to FOPL. The AO disallowed 2/3rd of the rent, arguing that the assessee did not require such a large space and lacked proper documentation. The CIT(A) found that the assessee needed the space for storing inventory and running its office, and had registered with relevant authorities at the said address. The CIT(A) deleted the disallowance, concluding that the rent was incurred wholly and exclusively for business purposes. However, the Tribunal noted that the documents required proper examination and verification by the AO and restored the matter to the AO for fresh adjudication, allowing the revenue's ground for statistical purposes.

3. Disallowance of Professional Charges:
The revenue also contested the deletion of Rs. 22,43,080/- paid as professional charges to Artisan Micro Finance Pvt. Ltd. (AMFPL). The AO disallowed the charges, questioning the actual requirement and practical work done by AMFPL. The CIT(A) found that AMFPL provided essential services to the assessee and other companies, and the charges were incurred wholly and exclusively for business purposes. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not provided any justified reason to disallow the expenses, and dismissed the revenue's ground on this issue.

Conclusion:
The Tribunal dismissed the assessee's appeal regarding the disallowance of interest payment and the revenue's appeal regarding professional charges. However, it allowed the revenue's appeal regarding rent payment for statistical purposes, directing the AO to re-examine the documents and adjudicate the issue afresh.