Income Tax Appellate Tribunal - Chandigarh
Acit, Patiala vs M/S A.B. Motors Pvt. Ltd., Patiala on 27 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND
DR. B.R.R. KUMAR, ACCOUNTANT MEMBER
ITA No.719/Chd/2017
Assessment Year:2012-13
The ACI T Vs. A.B. Motors Pvt. Ltd.
Circle, #1, Jagdish Marg
Patiala The Mall, Patiala
PAN No. AABCA5528M
(Appellant) (Respondent)
Assessee By : Sh. Tej M ohan Singh
Department By : Sm t. C. Chandrakanta
Date of hearing : 21/09/2017
Date of Pronouncement : 27/09/2017
ORDER
PER DR. B.R.R. KUMAR, A.M:
The appeal filed by the Revenue is directed against the order dated 27/02/2017 passed by the CIT(A,)Patiala.
2. The Revenue has raised the following grounds of appeal:
1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs. 20,71,451/- made by the Assessing Officer on account of disallowance of interest on unsecured loans.
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs. 28,32,000/- made by the Assessing Officer on account of disallowance in respect of interest free advances.
3. It is prayed that the order of Ld. CIT(A) be set aside and that of the AO restored.
3. Brief facts : During the assessment proceedings the Assessing Officer noted that the assessee had a minimum of Rs. 2,57,81,895/- as cash is on hand and a minimum of Rs. 2,84,53,260/- as bank balance and a minimum total of both stood at Rs. 5,35,20,482/- throughout the year. However, despite that the 2 assessee raised substantial loans and paid interest expenses amounting to Rs.9,18,15,259/- during the year. The AO held that the assessee was having ample amount of liquid funds in the form of cash in hand and bank balances. It was further held that despite sound liquidity position the appellant paid huge interest to banks, NBFCs and on unsecured loans. He held that "when assessee is having minimum of Rs. 5.35 crores as cash in hand and bank balances with him, then there is no necessity to take the unsecured loans amounting to Rs. 1,21,81,061/-. Assessee's imprudent action is beyond human probabilities". Not satisfied with the explanation of the appellant in this regard, the AO made a disallowance of interest of Rs. 20,71,451/- paid on unsecured loans.
4. Aggrieved the assessee filed appeal before the Ld.CIT(A). During the appellate proceedings, the assessee has submitted as under:
"That the company is operating at Ten different locations having fully functioned branches maintaining independent cash book and bank accounts. These are maintained as it is necessary for smooth functioning of the braches and to meet their requirements. The figures given in the assessment order are consolidated figures.
We have to submit that the allowability of expenditure on account of Interest paid is covered under Section 36(l)(iii) of the Income Tax Act, 1961. It states as under:
"36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 -
(i) and( i i ) ******
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :-
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction."
The Hon'ble Supreme Court in the case of Madhav Prasad Jatia V. CJT [1979] 118 TTR 200 (SC) laid down certain conditions for claiming deductions under this sub clause, the basic requirements are:
A. The money must have been borrowed by the assessee. B. It must have been borrowed by the assessee for his business, profession or vocation; and C. The assessee must have paid interest on the amount and claimed it as an allowance.
In our case, the Ld. Assessing Officer has disallowed the Interest paid on unsecured loan, assuming that there were surplus funds in the form of cash and bank balance. It is humbly submitted that every business has its own requirements of cash and bank balance and how anyone can say that how much is sufficient or surplus. The business expediency and prudence is to be judged by the assessee only. It is further submitted that the Assessing Officer cannot sit in the armchair of businessman and decide what the assessee has to do to maximize his 3 profits. It is for the assessee to run the show and he is the best judge to manage the affairs of the business. Moreover, there are no guidelines in any business regarding levels of cash and bank balance, inventory, Debtors\Creditors etc to be maintained by such business. It is to be worked out individually and it keeps on changing as per the business requirement.
Moreover, It is well settled legal position that the AO cannot sit in the armchair of the businessman to decide whether the decision taken by him are in his best interest or not. We find support from the decision of Hon'ble Jurisdictional Bench of ITAT, Chandigarh in the case of Bakemens Home Products v. Income Tax Officer [1984] 7 ITD 371 (CHD.) which held as under,:
"19. Thus, it can be easily seen that the parties to the agreement had, from either side, commercial consideration as the first priority. Moreover, it is easier to sit in an armchair and try to find whether the payment is excessive or unreasonable with what may be called 'hind sight'. A successful industrial undertaking does not necessarily operate upon the strength of its capital, though it is indeed important. Much depends upon the business acumen of the parties involved. This is amply demonstrated by the example in hand.
Whereas Rieta Biscuits were finding it difficult to make any headway with the same plant and machinery, the lessee-assessee has made it a thumping success. So the genuine payments wholly and exclusively made for the purpose of the business cannot be considered excessive or unreasonable by applying the subjective standards of the ITO, because the highest Court of this land has laid down, as seen in the following cases, that reasonableness of the expenditure has to be seen from businessman', point of view."
. CIT v. Walchand & Co. (P) Ltd.[1967] 65 ITR 381(SC) • J.K. Woollen Manufacturers v. CIT[1969] 72 ITR 612 (SC) • Aluminium Corpn. of India L TD. v. CIT [1972] 86 ITR 11 (SC) Moreover, the unsecured loans are accepted as per the requirements of the business and there is no justification in disallowing the interest paid to them as there is no direct nexus between the unsecured loans and Cash & Bank balance. Most of the Loans are old and all lenders are Income Tax assessee and are paying Income Tax on such Interest Income. The disallowance to the assessee amounts to double taxation.
We also draw support from the decision of the following courts, the Hon'ble High Courts have held that even when the assessee has ample funds of own, it was held that, the department has no right to question the need for borrowing.
1. CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bombay)
2. CIT v. Gautam Motors [2010] 194 Taxman 21 (Delhi) It was held by the Hon'ble Apex Court in the case of CIT vs A. Raman & Co. reported in 67 ITR 11 (SC) wherein it has been held that the law does not oblige a trading transactions. Income which accrues to a trader is taxable in his hands; income which he could have, but has not earned, is not made taxable as income accrued to him."
It is imperative to note that in the case of SR. Venkata Ratnam Vs CIT reported in 127 ITR 807(Kar) wherein it has been held that, "Once the petitioner - assessee disclosed the source as having come from withdrawal made on a given date from a given bank, it was not for IT authorities to concern themselves with what the assessee did with that money i.e. whether he had kept the same in his house or utilize the services of a bank by depositing the same."
The Ld. Assessing Officer has quoted the case of Sumati Dayal Vs Commissioner of Income Tax,[ 1995 AIR 2109, 1995 SCC Supl. "(2)453], "... As laid down by this court, apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are 4 entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities."
In this regard, we have to submit that the facts of the case are altogether different and therefore the case law quoted is not applicable in our case. In our case, the apparent is real as the Ld. Assessing Officer has not pointed out any inconsistency in our submission".
5. The Ld. CIT(A) held that only raison d'etre for making the impugned disallowance of interest by the AO is that the appellant should not have raised loans especially unsecured loans at the interest rate of 18% per annum when it had sufficient liquid funds available and such reason cannot be accepted.
5.1 The Ld. CIT(A) further held that the allowability of expenditure on account of interest paid is governed u/s 36(i)(iii) of the IT. Act, 1961 which stipulates as under:-
"36 (1) the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-
(i) to (iia) ********
(ii) the amount of interest paid in respect of capital borrowed for the purposes of the business or profession :
[Provided that*********] Explanation- *********"
Further, the Hon'ble Supreme Court in the case of Madhav Prasad Jatia v CIT (1979) 118 ITR 200 (SC) has explained that the basic requirements for allowability of deduction under this sub clause are as under:-
i) the money must have been borrowed by the assessee.
ii) it must have been borrowed by the assessee for his business, profession or vocation; and
ii) the assessee must have paid interest on the amount so borrowed and claimed it as an allowance.
5.2 The Ld. CIT(A) also held that the appellant fulfils all the above-mentioned requirements as the AO has not at any stage questioned/doubted the factum of unsecured loans, the payment of interest and the business purpose thereof. Once the AO accepts all the above-mentioned three things it is not open to him to look for other reasons to make disallowance on this score. It is a trite law that it is for the businessman to take decisions based on expediency and business exigencies. The AO is not entitled to intrude into the territory which is the exclusive domain of the businessman. In the instant appeal, the appellant company has explained the reasons for its borrowings. The AO cannot go into the sufficiency of those reasons. It is a fact that the veracity of having raised 5 unsecured loans, payment of interest thereon and the purpose of business for the borrowings has been accepted by the AO as no doubts/questions have been raised by him in that regard.
5.3 Holding thus, the Ld. CIT(A) deleted the disallowance of claim of interest.
6. Aggrieved with the order of the Ld. CIT(A) the Revenue filed appeal before us.
7. We have gone through the assessment order and the rationale given by the Ld. Cit(A) while deleting the addition on account of disallowance of interest. The primary reason for disallowing the interest on loan by the Assessing Officer was that the assessee had sufficient funds / liquidity at their disposal so taking loan of any sort is beyond human probability. The Ld. CIT(A) has dealt the requirements of deduction under section 36(i)(iii) as per the Income Tax Act, 1961 in a very lucid way and held that the Assessing Officer cannot determined how the business should run. We are in total agreement with the decision of the Ld. CIT(A) which allowed the deduction of interest on the loans received which were needed for business purpose. Hence we decline to interefere with the order of the Ld. CIT(A) on this ground.
8. In the result this ground of Revenue is dismissed.
9. Ground No. 2 assails the disallowance of Rs. 28,32,000/- on account of interest free advances of Rs. 2.36 crores.
10. Brief facts of the case are that the assessee has given interest free advances to its directors namely Ms. Amarinder Kaur and Ms. Bhupinder Kaur. The Assessing Officer has disallowed interest on this amount of advances given on the grounds that the assessee has been paying interest on the loans obtained.
11. Aggrieved the assessee preferred an appeal before the Ld. CIT(A).
12. Before the Ld. CIT(A), the assessee submitted as under:
The Assessing Officer never asked for the aforesaid information during assessment. The observations appear to have been made at the time of framing the order and in order to justify his contention the Ld. Assessing Officer has raised frivolous issues.
The Land in question is being used by the company since it started its business operation in Ludhiana i.e. more than fifteen years ago. This issue has never come up before. In support of the ownership of the Land, we enclose copies of the sale deed(Annexure-l) proving the ownership of Smt. Amrinder Kaur & Smt. Bhupinder Kaur.6
............ that the interest free advance in form of security deposits was made to Smt. Amarinder Kaur W/o S. Jagatjit Singh and Smt. Bhupinder Kaur W/o S. Raj Naresh Singh, the owner of a plot of land measuring 1064 Sq. Yd. situated on the main G. T Road Ludhiana. The Company Showroom at Ludhiana is constructed on this plot of land. It is used by the appellant for its business. Hence, the inference of the Ld. Assessing Officer that Rs.2,36,00,000.00 advanced free of interest for the purpose other then business is absolutely wrong.
The Company constructed its office and showroom on land owned by it and including the aforesaid land measuring 1064 Sq. Yd. which is situated on the Sherpur Byepass, Main G. T Road, Ludhiana. The Company is not in a position to purchase the land immediately and as such has given security deposits to the owners. The practice of giving interest free advance\deposit to the owner for using the land/assets is a business practice and the Companies generally adopt this practice. Thus the advance made was for business purpose as the Land in question is being used and is occupied by the Company.
13. The Ld. CIT(A) held that the submissions of the appellant are supported by the judicial pronouncements in the case of of S.A. Builders Pvt. Ltd reported in 288 ITR 1 (SC) and deleted the addition made @ 12% of Rs. 2.36 Crores amounting to Rs. 28,32,000/-.
14. Aggrieved with the order of the Ld. CIT(A) the Revenue filed appeal before us.
15. The Ld. DR argued that the amount needs to be disallowed as the interest free advances have been given in spite of the interest bearing funds availed by the assessee.
16. The Ld. AR argued that the advances were given as the plot of land owned by the Directors is being used for conducting of business and the showroom at Ludhiana East situated on this vary land. It was also argued that the advance was purely a business advance and in terms of principles of commercial expediency.
17. We have gone through the assessment order and the rationale given by the Ld. CIT(A) while deleting the addition.
The Hon'ble Supreme Court in case of S.A. Builders 288 ITR 1(Supreme Court) held as under:
(i) "The expressions 'for the purpose of business is wider in scope then the expression for the purpose of earning profits'. For the purpose of business includes expenditure voluntarily incurred for 'commercial expediency" and it is immaterial if third party also benefits thereby. It was specifically held by the Hon'ble apex court that the decisions relating to section 37 will also be applicable to section 36(1) (Hi) because in that section also the expression used is for the purpose of business."
(ii) To consider whether one should allow deductions u/s 36(l)(iii) of interest paid by the assessee on amount borrowed by it for advancing to sister concern, the authorities and 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 7 advanced as interest free loan to its sister concerns is not relevant. What is relevant is whether the amount was advanced as measure of "commercial expediency" and not from the point of view whether the amount was advanced for earning profits.
(iii)Once it is established that there was nexus between the expenditure and purpose of 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 businessman or in the position of Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No business man can be compelled to maximize his profits."
Various Courts have held that the commercial expediency of a businessman's decision to incur an expenditure cannot be tested on the touchstone of a strict legal liability to incur such an expenditure. Such decisions in the very nature of things have to he taken from a business point of view and have to be respected by the authorities no matter that it may appeal to the latter that the expenditure incurred was un-necessary or avoidable.
18. In the instant case it can be observed that the advances were given against use of plot on which a show room was constructed and being used for the business purpose, which goes to prove in definite terms the commercial expediency and the purpose of business. The Ld.CIT(A) has clearly dealt these issues in detail. Hence we decline to interefere with the order of the Ld. CIT(A) on this ground
19. In the result, appeal is of the Revenue is dismissed.
Order pronounced in the Open Court on
Sd/- Sd/-
(DIVA SINGH) (DR.B.R.R. KUMAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 27/09/2017
AG
Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR