IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : SMC : NEW DELHI
(Through Virtual Hearing)

BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER

ITA No.6822/Del/2019
Assessment Year: 2016-17

AKT Investments Pvt. Ltd., Vs. ITO,
57, Lajpat Nagar-3,
South Delhi, Ward 1(1),
New Delhi.
New Delhi.

PAN: AAACL3085E

(Appellant) (Respondent)

Assessee by : Shri Pulkit Saini, CA
Revenue by : Shri R.K. Gupta, Sr. DR

Date of Hearing : 31.08.2021
14.10.2021
Date of Pronouncement :

ORDER

This appeal filed by the assessee is directed against the order dated 11th
June, 2019 of the CIT(A)-1, New Delhi, relating to Assessment Year 2016-17.

2. Although a number of grounds have been raised by the assessee, however,
these all relate to the order of the CIT(A) in confirming the addition of Rs.30
lakhs made by the AO u/s 36(1)(iii) of the IT act.

3 Facts of the case, in brief, are that the assessee is a company engaged in the
business of providing IT support services to clients online basis outside India. It
ITA No.6822/Del/2019

filed its return of income on 30th September, 2015 declaring loss of
Rs.10,88,271/-. The case was selected for limited scrutiny under CASS to
examine the interest expenses claimed during the year.

4. During the course of assessment proceedings, the AO noted that the
assessee company has claimed expenditure of Rs.31,92,450/- under the head
‘Finance cost’ in the Profit & Loss Account. The AO, therefore, asked the
assessee to explain as to why the interest expenses should not be disallowed to
the extent of interest free loans and advances given. It was explained by the
assessee that it has not given any interest free loan during the year and, therefore,
no disallowance is called for. However, the AO rejected the explanation given by
the assessee. From the perusal of details of loans taken and interest thereon
furnished by the assessee in the course of the assessment proceedings, he noticed
that opening balance of loan from M/s DJ Group Holdings Pvt. Ltd. is
Rs.2,81,43,836/- on which interest of Rs.30 lakhs has been claimed. Similarly,
opening balance of loan given is Rs.62,31,705/- on which interest at different rate
has been received. The AO, therefore, held that a sum of Rs.2,19,12,131/- has
been used for investment in shares, etc. which is not yielding any income. Since
the assessee company, according to the AO, could not establish the nexus of the
opening balance of interest bearing loans taken and failed to prove the
genuineness of the claim of interest expenses for business purpose, the AO

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disallowed interest of Rs.30 lakhs and added the same to the total income of the

assessee.

5. In appeal, the ld.CIT(A) upheld the action of the AO by observing as

under:-

“7.1 I have carefully considered the assessment order and written
submissions filed by the Ld. AR. During the course of the appellate
proceedings, Ld. AR has stated that the appellant is in the business of
finance & investment, the interest paid is exclusively for earning interest
income. Ld AR has stated that the interest income has been included in total
taxable income. The Ld. AR has explained that the opening balance of
unsecured loan of Rs. 2,81,43,838/- taken by the appellant is to earn interest
income and during the last year end, part of the loan was returned, which
was Rs. 1,75,00.000/- redeployed on 13/05/2015. Ld. AR has stated that the
details of loan taken and loan given as well as the interest earned and
interest paid is given vide submission dated 04/10/2018 as per paper book
page no 9 to 11. Ld.AR has stated that the AO was not justified in making
an addition of Rs. 30,00,000/- as the investment has been made in equity
shares out of owned capital & reserves. Ld, AR has clarified that the
appellant has not taken bank loan during the year. At the time of investment
there was only vehicle loan and unsecured loan from other parties. Ld. AR
has stated that the appellant has earned interest income of Rs. 30,27,571/-
against the interest expenses of Rs. 31,92,450/-. I have carefully considered
the facts of the appellant company.-The share ’capital of the appellant
company is Rs. 5,05,10,000/- as on 31,03.2016. There is hardly any activity
in the appellant company. The appellant company has disclosed loss of Rs.
10,88,271/- in its return of income for AY 2016-17. There is no justification
for the appellant company to take huge loans which does not fetch any
income. With huge share capital of Rs 5,05.10,000/-, the appellant company
has shown loss of Rs 10,88,271/- for AY 2016-17. The assessment order
reveals that the appellant company is not doing any genuine business
activity. Considering the facts of the case, I am of the view that the payment
of interest of Rs. 30,00,000/- is not for the purpose of any genuine business
activity. Accordingly, the disallowance of interest of Rs. 30,00,000/- u/s
36(1)(iii) is upheld. Ground No. 2 & 3 are decided against the appellant.”

6. Aggrieved with such order of the CIT(A), the assessee is in appeal before

the Tribunal.

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7. The ld. Counsel for the assessee, at the outset, submitted that the own
capital and free reserves of the assessee company is Rs.5.05 crores whereas the
investment in shares is Rs.4.70 crores. Further, no borrowed funds were utilized
for investment in shares. He submitted that the company was formed in the year
1995 and in no other years it is held that no genuine business activity has been
carried out. He submitted that the opening balance of unsecured loan of
Rs.2,81,43,836/- taken by the assessee is to earn interest income since the
assessee is in the business of finance and investment. The interest paid on loan is
exclusively for earning interest income from further financing. During the last
year, part of the loan was returned which was Rs.1,75,00,000/- re-deployed on
30th May, 2015. He submitted that the assessee has not taken any bank loan
during the year. At the time of investment, there was only vehicle loan and
unsecured loan from other parties. However, the assessee has earned interest
income of Rs.30,27,571/- against the interest expenses of Rs.31,92,450/-. The
interest receipts were shown as business income. Further, the assessee has
borrowed funds @ 12% per annum and charged interest @ 12.5% and 27%. For
a part of the year some funds have remained unutilized. Therefore, it is not
proper to disallow the interest expenditure of Rs.30 lakhs paid to DJ Group. He
also relied on the decision of Hon’ble Delhi High Court in the case of CIT vs.
EKL Appliances Ltd., reported in 355 ITR 41 and the decision of the Hon’ble
Supreme Court in the case of CIT vs. Balchand & Company, reported in 65 ITR
381, apart from various other decisions.

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8. The ld. DR, on the other hand, heavily relied on the order of the CIT(A).
He submitted that since the CIT(A) has given proper justification for sustaining
the addition of Rs.30 lakhs, therefore, the same should be upheld and the grounds
raised by the assessee should be dismissed.

9. I have considered the rival arguments made by both the sides, perused the
orders of the AO and the CIT(A) and the paper book filed on behalf of the
assessee. I have also considered the various decisions cited before me. I find, the
AO, in the instant case, made addition of Rs.30 lakhs on the ground that the
assessee has taken loan from DJ Group on which interest of Rs.30 lakhs has been
paid. According to the AO, the difference between the closing balance of
Rs.2,81,43,836/- and opening balance of Rs.62,31,705/- amounting to
Rs.2,19,12,131/- has been used for investment in shares which has not yielded
any income. Since the assessee could not prove the genuineness of the claim of
interest expenses for business purpose, the AO disallowed the interest of Rs.30
lakhs paid to the DJ Group Holdings Pvt. Ltd. I find, the ld.CIT(A) upheld the
action of the AO, the reasons for which have already been reproduced in the
preceding paragraphs. It is the submission of the ld. Counsel that the assessee is
in the business of finance and investment and the interest paid is exclusively for
earning interest income. Further interest has been included in the taxable income
and no such disallowance has been made in the past.

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10. I find some force in the above arguments of the ld. Counsel for the

assessee. I find the name of the assessee is AKT Investments Pvt. Ltd., and is

engaged in the business of finance and investment. It is not known how the AO

has mentioned that the assessee is engaged in the business of providing IT

support services to clients. Further, the submission of the ld. Counsel that it has

earned interest income of Rs.30,27,571/- and offered such interest receipts as

business income could not be controverted by the ld. DR. Further the submission

of the ld. Counsel that it has borrowed funds @ 12% interest per annum and has

charged interest @ 12.5% and 27% also could not be controverted by the ld. DR.

The submission before the CIT(A) that the assessee is in the business of finance

and investment and the interest paid is exclusively for earning interest income

also could not be controverted by the ld. DR.

11. I find, the Hon’ble Delhi High Court in the case of CIT vs. EKL

Appliances Ltd. (supra) while dismissing the appeal filed by the Revenue has

observed as under:-

“Held, dismissing the appeal, that the financial health of the assessee
never be a criterion to judge the allowability of an expense; there was no
authority for that. So long as the expenditure or payment had been
demonstrated to have been incurred or laid out for the purposes of
business, it was no concern of the Transfer Pricing Officer to disallow it
on any extraneous reasoning. As provided in the OECD guidelines, he was
expected to examine the international transaction as he actually found
them and then make suitable adjustment but a wholesale disallowance of
the expenditure, particularly on the grounds which had been given by the
Transfer Pricing Officer was not contemplated or authorised. Even on the
merits the disallowance of the entire brand fee/royalty payment was not
warranted. The assessee had furnished copious material and valid reasons
as to why it was suffering losses continuously. Full justification supported

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by facts and figures had been given to demonstrate that the increase in the
employees cost, finance charges, administrative expenses, depreciation
cost and capacity increase had contributed to the continuous losses. There
was no material brought by the Revenue to show that these were incorrect
figures or that even on the merits the reasons for the losses were not
genuine. The Tribunal had not committed any error in confirming the
order of the Commissioner (Appeals) for both the years deleting the
disallowance of the brand fee/royalty payment while determining the arms
length price.”

12. Since, the assessee, in the instant case, is in the business of finance and
investment and the interest paid is exclusively for earning interest income and
such interest income has been included in the total taxable income and further
considering the fact that own capital and free reserves of Rs.5.05 crores is much
more than the total investment in shares of Rs.4.71 crores, therefore, respectfully
following the decision of Hon’ble Delhi High Court in the case of EKL
Appliances Ltd., cited (supra), I hold that no disallowance of interest in the
instant case is called for. I, therefore, set aside the order of the CIT(A) and direct
the AO to delete the addition. The ground raised by the assessee is accordingly
allowed.

13. In the result, the appeal filed by the assessee is allowed.

The decision was pronounced in the open court on 14.10.2021.

Sd/-

(R.K. PANDA)
ACCOUNTANT MEMBER

Dated: 14th October, 2021
dk

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Copy forwarded to : ITA No.6822/Del/2019

1. Appellant Asstt. Registrar, ITAT, New Delhi
2. Respondent
3. CIT
4. CIT(A)
5. DR

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