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TMI Blog2018 (4) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... culation as made by the AO to arrive at the disallowance was incorrect; 3. On facts and in the circumstances of the case and in law, CIT(AJ erred in confirming the addition of Rs. 9,53,266/- made on account of alleged interest income on the advances given by the appellant; 3.1 On facts and in the circumstances of the case and in law, the CIT(A) erred in holding/confirming the above addition without establishing direct nexus to the effect that interest bearing borrowing were diverted in giving interest free advances; 3.2 On facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the above addition which is contrary to the established principle of taxation that fax cannot be levied on notional income; 3.3. The Ld. CIT(A) erred in confirming the above addition on an altogether different ground not even raised by the Ld. A.O. Grounds raised in A.Y. 2010-11: "1. The orders of lower authorities are bad and wrong in law. 2. On facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) (CIT (A) erred in confirming the additions of Rs. 20,13,878/- made on account of alleged interest income on the advances give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er years. In this respect, the assessee submitted before the Assessing Officer that the said advance has been given out of his own funds. The Assessing Officer was not satisfied with the assessee observing that the assessee had paid interest of Rs. 2.23 crores whereas the assessee has given loans/advances either free of interest or at the lower rate of interest of 7%. He further noticed that the interest has been paid by assessee to its associate enterprises. The Assessing Officer, therefore, concluded that the assessee had reduced and diverted its taxable income by paying higher rate of interest to its related/associated concerned and such excess interest paid cannot be said to have incurred for the purpose of business when the business of the assessee was only to earn income by way of financial activities. In that background, the interest paid by the assessee in excess of 7% was disallowed by the Assessing Officer due to the reason that the excess payment had been made to related and associated concerns which was disallowable u/s. 40A of the Act and that the expenditure incurred could not be stated to be wholly and exclusively incurred for the purpose of business. He accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Rs. 27,82,986/- is disallowed by the AO by invoking the provisions of sec 40A and on the ground that expenditure are not incurred wholly and exclusively for the purpose of business, since it is contrary to the very nature of business of the assessee. 4.1.2 From the balance sheet of the appellant company it is evident that own fund in the form of share capital and reserve & surplus was Rs. 38.01 crores as on 31.03.2009 as against Rs. 37.85 crores as on 31.03.2008. As against the above own fund, the investments have gone up from Rs. 58.40 crores to Rs. 65.50 crores during this period. Borrowed funds in the form of secured loans and un-secured loans was Rs. 45.80 crores as on 31.03.2008 and Rs. 35.53 crores as on 31.03.2009. From the above it is evident that interest free own funds in the form of share capital and reserve & surplus were exhausted in making the investments and loans and advances were given out of borrowed funds in the form of secured and un-secured loans. There is no dispute that the appellant is engaged in the business of investing and financing, main purpose of which is to earn interest. Therefore, lending money at a lower rate and borrowing at a higher rate goe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d give interest free advances if it is incurring huge interest expenses on the borrowed capital and secured loans. It makes no difference that the interest free loan was outstanding and was borrowed in earlier assessment years. If the party (Bir Plantation Pvt. Ltd.) had repaid the loan to the company, certainly proportionate borrowing and interest liability might have been reduced. On identical issue Hon'ble Allahabad High Court in the case of CIT v. Sahu Enterprise Pvt. Ltd. [2013] 31 taxmann.com 270 (All.) held that it is not relevant as to whether the advances have been extended out of the borrowed funds or out of the mixed funds, which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended. In ACIT v. Punjab Stainless Steel Industries (ITAT, Del) 128 ITD 12 assessee claimed that it gave interest free advances from its own funds and then borrowed funds from banks on interest for business purposes. Dismissing the contention of the assessee Hon'ble ITAT Delhi held that such borrowing from banks can be treated as for supplementing cash diverted by assessee without any benefit to it a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w deduction under section 36(])(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits" Once it is established that there was nexus between the expenditure and 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 business or in the position of the board of directions 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 his profits." 3.6 The disallowance has been made by the Assessing Officer by invoking section.40A (sic) of the Act and after observi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.9 The Ld. CIT(A) has omitted to abide by the mandate of the apex court in S.A. Builders Limited in the case of transactions between the group companies. The Ld. CIT(A) failed to realise that in the case of group companies and overall view was required to be taken after giving cumulative effect to the entirety of the transaction vis-a-vis avowed objectives of the assessee. In other words the objection would be subservient to the compulsions of business and other commercial consideration. 3.10 The Ld. CIT(A) read the Balance Sheet erroneously and cryptically. He little realised that good part of the funds could have been diverted to earning the source of income which was not taxable. The assessee had voluntarily sought a massive disallowance in a sum of Rs. 1.59 crores out of Rs. 2.23 crores on Sec. 14A consideration. More explicitly out of a total claim for interest at Rs. 2.23 cores as per the Profit & Loss account a sum of Rs. 1.59 crores was never claimed for deduction on account of sec. 14A impact. 3.11 In identical circumstances in the case of another group company, namely - Manjula Finances Limited - the ITAT Delhi Bench has after abiding by the decision in the case of S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention was rejected by the Assessing Officer. He instead insisted that the loan/advance was given by the assessee out of borrowed funds and not out of its own funds. He then went on to observe that the assessee had paid interest of Rs. 2.23 crores and when such huge interest payments were made on loans taken, then it was illogical that interest free advances should be extended by the assessee. He further stated that the assessee did not have enough shareholders' funds and so the loans and advances were given out of borrowed interest bearing funds in the range of 9% to 11.5% rate of interest. According to him making interest payments on the funds borrowed and not charging interest on the funds lent out of such borrowed funds did not make any sense. In this way reckoning interest rate @ 11.5% the Assessing Officer added to the income a sum of Rs. 9.53 Lakhs. 4.2 The assessee carried this matter in appeal before the CIT(A) who dismissed the plea with the following observations "In view of the above, since the assessee company did not have sufficient own fund and it had borrowed funds from the market @ interest of 9% to 1 1.5% and interest free advances were made to group compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (2015) 233 Taxman 297 (Del), copy of the judgement has been placed on record. 4.5 In this way the imputation of interest by the Revenue Authorities is ex-facie wrong and untenable. The CIT(A) compounded the error by relying upon the cases which were not only irrelevant but also some of which had been over-ruled. 4.6 More recently in the case of another group company viz. Manjula Finances Ltd. the Delhi Bench 'E1, New Delhi has considered an identical issue and vacated the interest as imposed. A copy of that order has already placed on file. 4.7 In view of these circumstances it is pleaded that the addition as proposed by the Assessing Officer and confirmed by the CIT(A) are superfluous, erroneous and unjustified and may please be directed to be vacated. 6. On the other hand, the ld. DR relied on the orders of the lower authorities. He further submitted that the observations of the lower authorities have not been met out by the assessee during the assessment as well as appellate proceedings regarding the business expediency for giving loan at lower rate of interest or free of interest whereas the assessee has paid higher interest. The case laws relied by the assessee are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had lent the money out of interest bearing funds either at lower rate of interest or free of interest, as the assessee utterly failed to establish that the money given at the interest rate of 7% or free of interest, was advanced by him out of the interest bearing funds or interest free funds available with it. Therefore, merely stating that the assessee had mixed funds in its accounts does not go to discharge the burden on the assessee to establish that the loans given by the assessee at lower rate of interest or free of interest were out of interest free funds available with it. No date-wise fund flow statement is available on record nor has the assessee given date-wise details of funds availability, its investment and its lending on interest or interest free. Therefore, in our considered opinion, the ld. Authorities below, in present facts situation, appear to have rightly concluded that the loans advanced by the assessee either at lower rate of interest or free of interest were out of the borrowed funds. 8. In the above factual matrix, now, the question arises whether the authorities below are justified to disallow the interest u/s. 36(1)(iii) read with section 40A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts subsidiary companies either at lower rate of interest or free of interest; that if it is so, how and for what purpose the money advanced by the assessee were utilized by the borrowers; and that what were the business expediencies under which the assessee had advanced the money at lower rate of interest or free of interest. In the present case, as already stated, the aforesaid conditions do not stand established cumulatively to dislodge the disallowance made by the authorities below. The other decisions relied on by the assessee are also found distinguishable on facts. We, accordingly, do not find any justification to interfere with the order of the ld. CIT(A) finding no infirmity therein, which has been reached after following the ratio laid down in various decisions mentioned in the impugned order. Accordingly, the appeal of the assessee deserves to fail being devoid of merits. 9. Since the facts, circumstances and arguments advanced by both the parties in appeal for A.Y. 2010-11 are identical, therefore, our decision reached in appeal for A.Y. 2009-10 shall equally apply to the appeal for A.Y. 2010-11. Accordingly, the appeal for A.Y. 2010-11 also deserves to be dismissed. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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