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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 ..... ons mentioned in the impugned order. Accordingly, the appeal of the assessee deserves to fail being devoid of merits. - ITA No. 720/Del./2015 & 2114/Del./2014 - - - Dated:- 1-2-2018 - Shri Bhavnesh Saini, Judicial Member and Shri L.P. Sahu, Accountant Member Assessee by Sh. K. Sampath, Advocate Revenue by Sh. Arun Kumar Yadav, Sr. DR Ms. Rakhi Vimal, Sr. DR ORDER Per L.P. Sahu, A.M.: These two appeals have been filed by the assessee against separate orders of the ld. CIT(A)-VI, New Delhi dated 28.11.2014 for A.Y. 2009-10 and of CIT(A)-XVI, New Delhi dated 20.12.2013 for the assessment year 2010-11 on the following grounds : Grounds raised in A.Y. 2009-10 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 disallowance of ₹ 27,82,986/- made out of interest expenses; 2. On facts and in the circumstances of the case and in law, the CIT(A) erred In confirming the above disallowance on the ground that Section 40A was applicable; 2.2 Without prejudice to the above grounds, even the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2010-11. 3. The brief facts of the case are that the assessee filed return of income on 19.09.2009 declaring loss of ₹ 52,08,358/-. The case was selected for scrutiny and statutory notices were issued. During the year under consideration, the assessee company was engaged in the business of investment and financing and derives income from interest on loans, interest on bank FDs and dividend on long-term investments. The Assessing Officer noticed that in respect of interest received on loans and interest paid on loans, the receipt of interest earned on lending was at 7% per annum whereas the interest paid on borrowings was between 9 to 11.5% per annum. It was noticed that the assessee had made payment of interest to M/s. Everplus Securities and Fin. Ltd. to the tune of ₹ 4,15,042/- @ 9% per annum, Jindal Shaw Ltd. to the tune of ₹ 52,70,615/- (Rs.40,87,581 @ 11.5% + 11,83,033 @ 10%) and to Hexa Securities and Fin. Co. Ltd. to the tune of ₹ 18,81,797/- @ 11.5%. The Assessing Officer further noticed that the assessee had advanced money at the lower rate of interest, i.e., 7% to M/s. Jagran Agents Pvt. Ltd. and further the assessee had also given loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has received interest @7% P.A. on loans given to M/s Jagaran Agents Pvt. Ltd. whereas it had paid interest @9% and @ 10-11.5% on loans taken from group companies M/s Everplus Securities Fin. Ltd., M/s Jindal Saw ltd. and M/s Hexa Securities Fin ltd. AO observed that the shareholders funds of the assessee were not enough so as to give loans/advances out of it. The investments are more than the shareholders funds. AO was of the view that the shareholders funds were first utilised for the investments and the remaining funds if any are given as loans and advances with primary aim to earn some income on the same. Since the shareholders funds were exhausted in making investments, therefore, the assessee had given the loans and advances out of the borrowed funds. Therefore, AO rejected the assessee's contention that the loans were given out of its own funds. Since, the assessee is engaged in the business of investing and financing, its main purpose is to earn interest. Therefore, lending money at a rate lower and borrowing at a higher rate goes against the very spirit of its business. In view of the above, the interest paid by the assessee to group companies viz. M/s Everpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of ₹ 2.23 crores. When the assessee is paying such a huge interest on the loans taken then it is beyond any logic as to why it should not charge interest on the advance/loan given to the said party. The assessee did not have enough shareholders funds and the loans/advances were given out of the funds borrowed a rate of interest ranging from 9% to 11.5 %. Interest payments on the funds borrowed and not charging any interest on the funds lent out of such borrowed funds does not make any sense. Therefore, interest income on the said interest free loan/advance is calculated @11.5% which comes to ₹ 9.53,2667- and the same is added by the AO to the income of the assessee. 4.2.2 As discussed in ground no. 2 of appeal, interest free own funds in the form of share capital and reserve surplus were exhausted in making the investments and loans and advances were made out of borrowed funds in the form of secured and un-secured loans. There is no dispute that assessee has incurred expenditure under the head interest of ₹ 2.23 crores on borrowed funds. There is also no dispute that the interest free advance is given to M/s Bir Plantation Pvt. Ltd. which is a grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 2.23 crores. Therefore, A.O. is directed to disallow the above sum out of the interest expenditure claimed instead of making the addition as notional interest income. Therefore, the disallowance by way of addition of ₹ 9,53,266/- is sustained. Aggrieved by the impugned order, the assessee is in appeal before us. 5. The ld. AR of the assessee, reiterating the submissions made before the authorities below, also filed a written synopsis before us, stating therein as under : 3.4 Before the Tribunal it is submitted that the Revenue Authorities erred in disallowing interest paid on genuine loans borrowed by the assessee. The authorities below failed to appreciate that the assessee was a NBFC though that fact has been noticed at page 3 of the assessment order and so the assessee had the discretion to lend/borrow on terms and conditions found suitable by it. The transactions were between associated enterprises belonging to the Jindal Group of companies. It is submitted that borrowing and lending between the associated enterprises has always been done by way of business compulsions and commercial necessities. 3.5 The rule for assessment of interest in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of S.A. Builders Limited would be paramount and unassailable. 3.7 The Assessing Officer has also failed to notice the implications of the chart drawn by him on page 2 of the assessment order. Though there is a marginal increase in the share capital yet loan funds during the year have decreased by ₹ 10 crores approximately and the investment has increased by ₹ 7 crores. That itself is best proof of the absence of any pilferage. The loan funds are inclusive of interest free loan of over ₹ 17 crores carried over from earlier year which was obtained from Jindal Steel Power Limited. Even if the arguments regarding the Associated Enterprise and the need of disallowability of interest in consequence thereof are not to be accepted then the Assessing Officer should atleast have given credit for interest free borrowing to the extent of ₹ 17 crores for lending to M/s Hexa Securities Finance Co. Limited and M/s Jindal Saw Limited a total amount of ₹ 11 crores (Paper Book page 20). This he had failed to do and consequently committed an error of the judgement. 3.8 The Ld. CIT(A) in passing the appellate order has relied upon the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the id. CIT(A) that the assessee had, in fact, received amounts by way of interests which was not reflected in the books of accounts. The AO has not rejected the books of accounts and has accepted most of the figures appearing therein. Respectfully following the ratio of the judgments as above mentioned, in the absence of any specific provision under which the so called notional interest on advances could be brought to tax, we do not see as to how the impugned order passed by the id. CIT(A) can be sustained. Accordingly, we set aside the order of the id. CIT(A) and direct the AO to delete the entire addition of ₹ 1,04,55,324/-made on account of notional interest on the advances/loans given by the assessee. Thus, the appeal of the assessee is allowed and the Revenue's appeal stands dismissed. 3.12 In this background the ground raised by the assessee under Ground No.2 must be directed to be allowed in toto. 4.1 Ground No. 3 is in respect of an addition made to the returned income in a sum of ₹ 9,53,266/- on account of interest not earned. The relevant facts are that the assessee had given interest free loans to Bir Plantations (P) Ltd. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional interest Income. Therefore, the d/sa//owance by way of addition of ₹ 9,53,266/- is sustained. The appeal fails in this ground . 4.3 It is submitted that the authorities below are wrong in conjuring interest in a sum of ₹ 9.53 Lakhs and adding it to the income where there was nothing such earned. The fact of the matter is that no such amount was either provided for or ever received from Bir Plantations Pvt. Ltd. The said company is a group company and going-ons between this company and the assessee are privileged transactions. The assessee company has the prerogative to decide on the aspect of charging interest. It cannot be forced to charge interest by any outsider. Unless there was a subsisting privity contract between the assessee and the borrower no interest could have been imputed by the Assessing Officer and brought to law. 4.4 Controversies of this sort created by the Revenue are legion. Similar issue came up for consideration before the Guwahati High Court in the case of Highways Construction Co. Pvt. Ltd. vs. CIT [1993] 199 ITR 702. The Hon'ble High Court was pleased to point out that where there was no privity for contract for charging int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, can be allowed to the assessee only when the assessee shows and establishes the business expediency under which the money was advanced by the assessee at lower rate of interest, i.e., 7% or free of interest as done in the instant case. For want of business expediency established by assessee, the ld. Authorities below cannot be said to be unjustified in disallowing the excess interest expenditure claimed by the assessee. The explanation of the assessee that the interest free advances given to Bir Plantation Pvt. Ltd., was out of own funds, stands properly rebutted by the ld. Authorities below by giving the details of availability of funds with the assessee and its utilization by the assessee, including own funds, interest free funds interest bearing funds available with assessee and, funds utilized in investments and the funds advanced by assessee. The ld. Authorities below, on the basis of record, have pointed out that the assessee had total own funds at ₹ 38.01 crores and also loan funds at ₹ 35.53 crores, out of which ₹ 17.88 crores was interest free loan taken by the assessee. Therefore, the total non-interest bearing funds available with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are also inclined to observe here that, it hardly matters whether such loans were advanced in earlier years or during the year under consideration. In order to examine the claim of assessee in the above fact situations, we deem it appropriate to reproduce the following observations of Hon ble Apex Court in SA Builder s case recorded in para 32 of the order, which read as under : 32. 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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