, `'
INCOME TAX APPELLATE TRIBUNAL,MUMBAI E BENCH
. ., , ,
Before S/Sh. A.D. Jain,Judicial Member & Rajendra,Accountant Member
/.ITA No.3884/Mum/2014, /Assessment Year-2003-04
M/s. Sanjay Trade Corporation Jt. CIT(OSD)13(3)
407, Adamji Building Mumbai.
413, Narsh Natha Street Vs
Masjid(W)Mumbai400 009.
PAN: AAAFS 4078 E
( /Appellant) ( / Respondent)
/Assessee by: Sh.S.C. Tiwari & Ms. Rutuja N. Pawar (AR)
/ Revenue by : Shri Chandra Vijay-DR
/ Date of Hearing : 22 072015
/ Date of Pronouncement : 31 082015
,1961 254(1)
Order u/s.254(1)of the Inco me-tax Act,1961(Act)
PER RAJENDRA, AM
Challenging the order dated 03.02.2014 of the CIT(A)24,Mumbai,the assessee has raised
following grounds of appeal:
1. The learned Commissioner of Income Tax, (Appeals)-24,Mumbai erred in confirming the
disallowance of interest of Rs.86,80,1951-regarding non charging of interest on the loans
advanced to sister concern.
1.1 The learned CIT(A) failed to appreciate the advances made to the sister concern where
whose recovery was doubtful and as such, your appellant has not charged any interest on the
loans given to them.
1.2 Your appellant further submits that the CIT (A) ought to have considered the explanation
given by your appellant regarding non charging of the interest and as accepted the contention
that the recovery of the principle amount was in doldrums, ultimately the recovery could be
made only of principle amount and not the interest amount.
1.3 Your appellant, therefore, submits that the interest added by the learned A.O. be deleted.
2. Your appellant craves leave to add, alter, amend, withdraw or substitute all or any of the
grounds of appeal as the circumstances of the appeal may require.
Brief Facts
Assesseefirm,engaged in the business of dealing in dial caliper,Gear Tooth,micrometer,filed its
return of income on 25.11.2003,declaring income of Rs.()89.53 lakhs.Assessing Officer (AO)
finalised the assessment on u/s.143(3)of the Act on 28.02.2006,determining the income of the
assessee at Rs.35,40,500/.
2.During the original assessment proceedings,the AO found that the assessee had debited a sum
of Rs. 86,83,951/under the head Interest in the P&L a/c for the year under the appeal.As per the
AO,the assessee had failed to prove the nexus of the above loans and advances with the interest
free loans taken/funds.He computed the interest chargeable @ 12% on the above loans and
held that the same was disallowable from the interest expenditure. Accordingly,the disallowance
was restricted to the extent of the interest debited, since the interest chargeable computed by the
AO exceeded the interest expenditure.He disallowed interest of Rs. 86,80,915/ vide order dated
ITA 3884/M/14 ,AY.0304,STC
28.02.2006.Aggrieved by this order, assessee had preferred an appeal before the First Appellate
Authority(FAA),who,vide his order dated 10.07.2006 dismissed the assessee's appeal.The
assessee challenged the order before the Tribunal.On 15.07.2011,while deciding the appeal
no.5727/Mum/2006,the Tribunal held as under:
5. We have heard.the rival submissions. The learned counsel for the assessee submitted before us
that funds were given to the sister concern purely out of commercial expediency. It was also
submitted by him that the assessee had sufficient interest free funds; and therefore, it cannot be
said that borrowed funds were utilized for giving interest free loans. In this regard, learned
counsel for the assessee relied on the decision of Hon'ble Bombay High Court in the case of
Reliance Power Utility, 312 ITR. With regard to commercial expediency of the loan, learned
counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of S.A.
Builders Ltd. Vs. CIT, 288 ITR 1. In this regard, learned counsel for the assessee has filed before
us copy of balance sheet and profit and loss account and wanted to substantiate availability of
interest free funds and also demonstrate commercial expediency in giving interest free loans to
sister concern.We are of the view that these issues were not raised by the assessee either before
the Assessing Officer or before learned CIT(A).It is not clear as to what is the nature of business
that sister concerns of the assessee were engaged in.Even availability of surplus funds for giving
interest free loan has not been examined. With a view to give the assessee an opportunity to prove
his case, we set aside the order of learned CIT(A) and remand the issue to the Assessing Officer
for fresh consideration. The Assessing Officer will consider if the interest free loan is given out of
commercial expediency and also verify if the there were enough interest free surplus funds. The
assessee will establish both the aforesaid aspects and the Assessing Officer will examine the claim
of the assessee in accordance with law.
The AO directed the assessee to submit details proving commercial expediency and availability
of interest free surplus funds.In response to the notice the assessee filed its reply on 28.12.
2011.After considering the same the AO held that there was no business expediency in advanc
ing loans to World Wide Commodities Pvt.Ltd.,(WWPL)Priya Blue Ind.Pvt.Ltd.(PBIPL),Sanjay
Sales Corporation(SSC),that the assessee had claimed that the above loanees had suffered major
reverses and one of the partners had decided support one of the above loanees,that the reasons
for not charging interest on the advances paid to the said parties was difference between the
partners.He further observed that the assessee had not furnished any details to establish the fact
that the above loans were advanced out of interest free surplus funds.In the circumstance no
relief was allowed on the disallowance on interest attributable to the loans given to the said three
loanees by the AO.
With regard to the loan of Rs. 63,09,174/ advanced to Sanjay P. Mehta(SPM),the assessee,vide
his letter dated 23.12.2011,claimed that he was an ex partner,that he was a partner in the firm till
7thFebruary,that there was no provision for either paying interest on capital account or charging
interest on debit balance of the partners.He directed the assessee to furnish the copy of the capital
account of SPM and a copy of the partnership deed.It filed filed a copy of the capital accounts
of the partners as on 31.03.2003,vide its letter dated 23.12.201.He found that SPM's capital
account was squared up as on 31.03.2003.The AO held that sum of Rs. 63,09,174/ was standing
to debit of SPM in the books of the assessee as on 31.03.2009,that it represented the retired
partner's capital account,that it was a loan account.He further observed that even if it was
accepted that the said balance represented his capital account the assessee's contention that there
was no provision for either paying interest on capital account or charging interest on debit
balance of the partners was not correct in view of class VII of the deed of Partnership dated 07.
02.2003.He reproduced the clause that read as under:
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The partner shall be entitled to a simple interest @ 12% per annum or at such other rate as may
be laid down in section 40(b) of the I. T. Act 1961 from time to time. The interest shall be
credited to the capital or current account of the partner as the case may be at the end of the year
or period. The interest payable to partners shall be a charge to the profits of the firm, the
partners may be mutual consent agree to increase or reduce the above said rate or interest.
As per the AO,when the partnership deed provided for payment of interest on the balance
standing to the credit of the partners, corollary that interest should be charged on the balance
standing to the debit of the partners would hold good.Therefore,he held that the interest free
advance to the ex partner were not acceptable.
Before the AO the assessee had furnished a copy of the ITAT,Mumbai Bench Cs order dated
16.03.2009(ITA/No.5236 and 5237/Mum/2007 for A.Y. 200405)in the cases of Chimanlal U
Shah and Sadguna C.Shah(Late) in support its claim.As per the AO,the facts of the said cases
were different from that of the instant case,that in that the issue involved was disallowance u/s
40A(b) and the interest not charged on the assessees who were under BIFR.Passing the order
u/s.254r.w.s.143(3)of the Act,the AO held that no relief could be allowed to the assessee on the
disallowance of interest of Rs.86,80,915/.
3.Aggrieved by the order of the AO,the assessee again preferred an appeal before the FAA.
Before him it was argued that the amounts were advanced to sister concerns who were sick,that
the advances given were in dispute,that sister concerns were dissolved,that question of charging
interest did not arise,that WCPL was having profitable business and subsequently it sunk into
losses,that Umesh Mehta,partner of the assesseefirm was also a director of WCPL,that he was
the moving force behind the company,that he had to support the company to save his
reputation,that had he not supported WCPL it would have adversely affected the activities of the
firm..The assessee also submitted copies of the financial statements of its own and also of
WWCPL to explain the issue.
After considering the submissions of the assessee,he held that the AO,during the set aside
assessment proceedings,gave the assessee ample opportunities to explain/produce details and
documents in support of the claim made by it,that in response to AO's opportunity the assessee
submitted in a broad manner the circumstances under which the interest could not/did not collect
from the parties to whom the assessee advanced loans,that the reply of the assessee had been
produced by the AO in the assessment order,that perusal of the reply submitted by it during the
setaside proceedings revealed that interest was not be collected with regard to the amounts
advanced to its associate/sister concerns as they were in not in sound financial conditions.He
further held that that the fact of safeguarding the reputation of the partner by advancing loan to
WCPL was not established,that it was not clear as to how advancing of loan was beneficial to the
assesseefirm,that advancing interest free loans to WCPL was not beneficial to the business of
the assessee,that the transaction lacked commercial expediency.Coming to amount of loan
advanced to Priya Blue Industries(P) Ltd.(PBIPL)the FAA observed that the assessee argued that
one of the partners of the assessee firm,Sanjay Mehta,was also one of the directors of PBIPL,that
he was having differences with another partner,namely Umesh Mehta,that with much difficulty
the principal amount could be collected,that the assessee had contended that had the assessee
firm insisted for interest it would have adversely affected the functioning of the firm,that the
reason/ explanation furnished by the assessee did not hold water,that the assessee's partners'
dispute could not be a reason for noncharging of interest,that it would not automatically become
a reasonable cause for lending amounts free of interest.About Sanjay Sales Corporation (SSC),it
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was stated that Umesh Mehta,partner of assessee'sfirm was also a partner in SSC,that due to
some commercial disputes the amount could not be recovered.As per the FAA,the reason given
by the assessee for not charging interest would not fall under the head commercial expediency.
With regard to debit balance of Sanjay Mehta,the FAA held that the AO had analysed the issue
properly and had held that the assessee ought to have collected interest on the debit balance of
capital when partnership deed prescribed payment of interest on the credit balance of Capital
A/c.Finally,he held that the assessee did not bring out any information or details/evidence to
prove that there was commercial expediency involved in giving the loan, that the Tribunal had
also directed the assessee to establish both the aforesaid aspects before the AO,that it failed to
establish either of the above before AO,that it had not discharged the onus cast upon it by the
Tribunal even before him.The FAA upheld the order of the AO.
4.During the course of hearing before us,Authorided Representative(AR)argued that the
assessee had advanced loans in earlier years,that it had not charged interest for those years
also,that it was interested in recovering the principal and not interest, that the loans were
advanced to save the prestige and good will of the partners who were also the directors of the
companies or the partners of the firms,that there was dispute among the partners,that the advance
to the sister concern had to be treated as business loss, that surplus find was available with the
assessee,that the partners' account had balance of Rs.3.13 crores, that partner's capital had to be
adjusted first.He relied upon the case of Reliance Utility (313 ITR 340) and Sridev
Enterprises(192 ITR165)of the Hon'ble Karnataka High Court.The Departmental Representative
(DR) argued that the assessee had not explained as to how the reputation of the assessee firm was
at stake in case if the sister concerns failed, that it was also not clear as to how the assessee was
benefited by not charging interest from them,that commercial expediency was not proved by the
assessee, that the FAA had given up working of fund flow, that the assessee had not proved the
onus cast upon it by the Tribunal on both the counts.
5. We have perused the material before us.We find that basic issues to be decided are as to
whether assessee had advanced the amounts in question to its associate concerns namely
WECL,PBIPL,SSC and SM free of interest out of commercial expediency, (ii) and, whether
there were enough interest free surplus funds to advance the amounts,that the AO and the FAA,
in the second round of litigation,deliberated upon both the aspects as directed by the Tribunal
and held that claim made by the assessee had to be rejected.Before proceedings further we would
like to mention certain principles governing the allowing/disallowing interest expenditure
claimed by an assessee and same can be narrated as under:
i.Section 36(1)(iii) of the Act provides for deduction of interest on loans raised for business
purposes.Once an assessee claims deduction under the head interest paid in the books of account,
the onus will be on him to satisfy the AO that whatever loans were raised by the assessee were
used for business purposes.If in the process of examination of the genuineness of such a
deduction,it transpires that the assessee had advanced certain funds to sister concerns or any
other person like relatives, directors without any interest, there would be a heavy onus on the
assessee to discharge before the AO to the effect that in spite of the pending term loans and
working capital loans on which the assessee is incurring liability to pay interest, there was
justification to advance loans to sister concerns for nonbusiness purposes.
ii.Business expediency is a term used by business house to showcause that the transaction was
required to be done in pure commercial purpose. It means by doing such transaction there will be
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profit to an assessee.It also means that if such transaction is not done, there will be losses to the
firm either financial or otherwise.
iii.When amounts are advanced free of interest to an entity by an assessee,it should result in
promoting business interest to that assessee,but if the amount is advanced to save other entities in
the name of saving reputation it partakes character of charity rather than becoming a sound
decision of a prudent businessman.
iv.The reasons that the sister concerns had become sick,or were dissolved or existence of the
dispute could not establish or prove the aspect of commercial expediency. It may be the case of
the assessee that the amounts lent to the associate concerns were turned out to be bad
subsequently,does not entail it not to follow provisions of law.
v.The business expediency would include such purpose as is expected by the assessee to advance
its business interest and may include measures taken for preservation, protection or advancement
of its business interests.The business interest of the assessee has to be distinguished from the
personal interest of its directors or partners, as the case may be. In other words, there has to be a
nexus between the advancing of funds and business interest of the assessee. The appropriate test
in such a case would be as to whether a reasonable person stepping into the shoes of the
directors/partners of the assessee and working solely in the interest of the assessee, would have
extended such interestfree advances. Some business objective should be sought to have been
achieved by extending such interestfree advance when the assessee itself is borrowing funds for
running its business. It may not be 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.
vi.Equity and law are strangers to each other and on that count the provisions of law cannot be
applied.The courts have also dealt with the argument of the assessee that the expenditure whether
to incur or not it is upto the assessee to decide and it cannot be forced by the Revenue to dictate
terms.It has been held that the assessee is absolutely free to decide its financial affairs to suit its
business needs,but, the Revenue also had the responsibility to see that there is no revenue
leakage, wrong or excess claim made by the assessee, that is precisely the purpose and intention
of the legislature.Once the said principle is accepted then it has be held that if the assessee
advances loans bearing interest to others without charging interest the AO is not unjustified in
disallowing the same in absence of commercial expediency.
vii.A sum of money expended not of necessity and with a view to a direct and immediate benefit
to the trade, but voluntarily and on the grounds of business expediency and in order indirectly to
facilitate the carrying on of the business, may yet be expended wholly and exclusively for the
purposes of the trade.In Malayalam Plantations Ltd.(53 ITR 140), the Supreme Court held that
business expediency may not require that all the expenses be incurred for earning immediate
profits.The Supreme Court also held that such business expediency may also require that the
expenses be incurred to save business from coercive process and unlawful expropriation so that
the business may remain on sound footing and may earn better profits in future. An expenditure
to which one cannot apply an empirical or subjective standard is to be judged from the point of
view of a businessman. It applies to interest expenditure also.
5.a.Now,we would like to consider the facts of the case in light of the above principles.As far as
business expediency is concerned,we find that the assessee has not proved as to how its business
was benefited directly or indirectly by advancing interest free loans to sister concerns and other
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related parties.In our opinion,the onus of proving justification was on the assessee and it did not
discharge the same.Saving the reputation of sister concern cannot be termed business
expendiency.We are of the opinion that every business entity has unrestricted right to manage its
own affairs in the manner it deems fit.But,it cannot claim expenditure that are not incurred
wholly and exclusively for carrying out its business of profession.If the assessee had not made a
claim of interest expenditure in the P &L account on the borrowings that were advanced as
interest free loans to the related persons and WCPL,there would not have been any problem.On
the one hand the assessee acts as a benevolent savior to an entity that was difficult situation and
on the other it wants that the Sovereign should also shoulder its benevolence by allowing an
expenditure that has no business connection.Good deeds have to be appreciated, but not at the
cost of the exchequer.In other words,State should not be made party to those items of
expenditure that are unrelated with business of an assessee.In the case before us,the assessee has
done the same thing.It wants to shift the burden of its generosity in form of claiming an
untenable claim.In our opinion there was no commercial expediency in the transactions entered
in to by the assessee i.e. non charging of interest from WCPL,PBIPL and others was necessitated
by any business consideration.In other words, the assessee had failed to establish existence of
commercial expediency. The FAA has given a categorical finding of fact that there was no direct
nexus between the borrowings of the funds and diversion thereof for nonbusiness purposes.He
had dealt with each and every of the four parties to whom loans were advanced and had given a
categorical finding of fact that the transactions in question were not guided by commercial
expediency.In our opinion,his order does not suffer from any legal or factual infirmity as far as
first direction of the Tribunal in concerned.
Now we would take up the second direction of the Tribunal.Availability of funds has been
discussed by the FAA.In our opinion,availability of funds from partners' account has be seen in
light of the principle laid down by the Hon'ble Apex Court in the case of Reliance Utility
(supra).For the limited purpose of calculation,we are remitting back the matter to the file of the
AO.He would consider the argument taken by the assessee before us about availability of funds
in partners' account before making proportionate disallowance,in any.
As a result,appeal filed by the assessee stands partly allowed.
.
Order pronounced in the open court on 31st August,2015.
31st ,2015
Sd/- Sd/-
(. . /A.D. Jain) ( / RAJENDRA)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
/Mumbai, /Date: 31.08.2015
...Jv.Sr.PS.
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ITA 3884/M/14 ,AY.0304,STC
/Copy of the Order forwarded to :
1.Appellant / 2. Respondent /
3.The concerned CIT(A)/ , 4.The concerned CIT /
5.DR E Bench, ITAT, Mumbai / , ,.. .
6.Guard File/
//True Copy//
/ BY ORDER,
/ Dy./Asst. Registrar
, /ITAT, Mumbai.
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