Income Tax Appellate Tribunal - Mumbai
Madhu Mehta, Mumbai vs Assessee on 11 April, 2016
आयकर अपील
य अ धकरण "B" यायपीठ मंब
ु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND
SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A. No. 579/Mum/ 2012
( नधा रण वष / Assessment Year : 2008-09)
Smt. Madhu Me hta, बनाम/ The Dy. Commissioner of
C/o G.P. Mehta & Co. CAS, Income Tax - Cir.12(3 ),
v.
807, Tulsiani Chambers, 4 t h Floor,
212, Nariman P oint, Aayakar Bhavan,
Mumbai - 400 021. M.K. Marg,
Mumbai - 400 020.
थायी ले खा सं . /PAN : AAEPM 1552D
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Assessee by Shri G.P. Mehta
Revenue by : Shri Sachchidanand Dube
(D.R.)
ु वाई क तार ख / Date of Hearing
सन : 27-01-2016
घोषणा क तार ख /Date of Pronouncement : 11-04-2016
आदे श / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being ITA No. 579/Mum/2012, is directed against the order dated 02-12-2011 passed by learned Commissioner of Income Tax (Appeals)- 23, Mumbai (hereinafter called "the CIT(A)" ), for the assessment year 2008-09, the appellate proceedings before the CIT(A) arising from the assessment order dated 04-10-2010 passed by the learned assessing officer(hereinafter called "the AO") u/s 143(3) of the Income Tax Act,1961(Hereinafter called "the Act").
2 ITA 579/Mum/2012
2. The grounds raised by the assessee in the memo of appeal filed with the Tribunal read as under:-
"01. The orders passed by the learned lower authorities are bad in law and bad in facts.
02. The learned lower authorities have grossly erred in making/upholding an addition of Rs. 71,519/- by recourse to Section 40(a)(ia) of the I.T. Act, 1961, even though said provisions are not attracted in appellant case.
03. The learned lower authorities have grossly erred in holding that provisions of Sec.194-C of the I.T. Act, 1961, were applicable to payments made to C.HA for reimbursement of expenses on account of air freight at Rs. 67,297/- and balance service Charges Rs. 4,222/-. Reasons assigned for the impugned addition/disallowance are wrong and contrary to the provisions of the Act read with judicial precedents.
04. The learned lower authorities have grossly erred in making/upholding an addition of Rs. 118,000/- on account of notional interest, even though, no provision for assessing notional interest exists in the I.T. Act, 1961. The reasons assigned for the impugned addition are wrong and contrary to the Scheme of the Act.
05. Having regard to the facts of the case, provisions of law and judicial propositions, the impugned disallowances/additions are wrong and untenable in law.
06. The appellant may please be permitted to raise any additional or alternative ground on or before the hearing of appeal."
3. The brief facts of the case are that the assessee's sources of income during the year are from house property income, business and other sources. The A.O. observed from the details furnished by the assessee that she has made payment to the C & F agent of Rs. 71,519/- but the assessee has not deducted tax at source on the payment made to C & F agent which is covered by the provisions of section 194C of the Act. The assessee was specifically asked as to why the expenditure incurred on payment to C & F agent should not be disallowed u/s 40(a)(ia) of the Act as the assessee has not deducted tax at source on the same. The assessee could not justify its claim of non-
3 ITA 579/Mum/2012 deduction of tax at source and agreed for the disallowance of Rs.71,519/-. In view of non-deduction of tax at source in view of provisions of section 194C of the Act, the expenditure of Rs.71,519/- on the payment made to C & F agent was disallowed by the A.O. u/s.40(a)(ia) of the Act and added to the total income of the assessee, vide assessment order dated 04-10-2010 passed by the AO u/s. 143(3) of the Act.
4. Aggrieved by the assessment order dated 04-10-2010 passed by the AO u/s. 143(3) of the Act, the assessee preferred an appeal before the CIT(A).
5. Before the CIT(A), the assessee submitted that the payment for the bill of the freight and forwarding charges was paid to a shipping agent which payment was made on 16-01-2008. Thus, as at the end of the financial year, nothing is payable and / or outstanding. The assessee submitted that the provisions of section 40(a)(ia) of the Act are applicable only in respect of amounts payable and not for payments already made before the end of the year. In support of her contentions, she relied upon the decision of the Tribunal in the case of Jaipur Vidyut Vitran Nigam Ltd., 26 DTR (JP)(Tribunal) 79. It was submitted by the assessee before the CIT(A), without prejudice, that the provisions of section 40(a)(ia) of the Act are not attracted because out of a total sum of Rs.71,519/-, a sum of Rs.67,297/- relates to reimbursement of expenses being air freight and insurance incurred by the shipping agent and Rs. 4,222/- is the amount attributable to shipping agent charges and under the provisions of section 194C of the Act, what is intended to tax is only that portion of the payment which has some incidence of income. The assessee relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Siemens Aktiongesellschaft 2008 TIOL 569 (Bom.HC) and ITAT Mumbai decision in Utility Powertech Ltd. v. ACIT (2010) TIOL 545 (Mum.). The CIT(A) after considering the submission of the assessee in the light of decision in the case of Jaipur Vidyut Vitran Nigam 4 ITA 579/Mum/2012 Ltd.,(supra) observed that the assessee has argued that the provisions of section 40(a)(ia) of the Act are not applicable for two reasons, one that no amount was payable as at the end of the year since the amount had been paid before the end of the financial year, second that tax deducted at source provisions are not applicable to reimbursement of expenses. The decision in Jaipur Vidyut Vitran Nigam Limited(supra) is given in the context of payment of transmission charges, wheeling and SLDC charges to an electricity transmission company with whom the tax-payer, an electricity distribution company entered into a 'transmission service agreement' and the main finding was that there is no liability to deduct tax at source on transmission/ wheeling/ SLDC charges u/s.194J and 194C of the Act and the observation of the ITAT on whether sec. 40(a)(ia) of the Act applies only when the amount is payable or where the expenditure is paid is a supplementary observation more in the nature of 'obiter dicta'. The CIT(A) held that the case law relied upon by the assessee is distinguishable and section 40(a)(ia) of the Act is applicable in assessee's case. Reliance in the case of Siemens Aktiongesellschaft (supra) is not relevant as it refers to the taxability of reimbursement of expenses of a German Company in the context of DTAA, thus, section 40(a)(ia) of the Act is applicable and accordingly A.O.'s action was confirmed, vide orders dated 02-12-2011.
6. Aggrieved by the orders dated 02-12-2011 of the CIT(A), the assessee is in appeal before us.
7. The ld. Counsel for the assessee submitted that there was a total amount of Rs. 71,519/- paid by the assessee to C & F agent , out of which reimbursement of air freight charges of Rs. 65021/- for export consignment to Lusaka(Zambia) from India and reimbursement of insurance charges of Rs. 2246/- was paid with respect to insuring the export consignment to C & F Agents M/s S. Natesa Iyer & Co. vide their invoice dated 12-1-2008, thus 5 ITA 579/Mum/2012 there was a reimbursement of expenses amounting to Rs. 67,297/- towards air freight , insurance charges and Rs.30/- towards postage charges , towards export consignment to Lusaka(Zambia) and balance Rs. 4,222/- was paid towards agency charges of the clearing and forwarding agent M/s. S. Natesa Iyer & Co. The assessee submitted copy of bill of M/s S. Natesa Iyer & Co. dated 12-1-2008 and submitted that no tax is to be deducted at source as the amount payable to M/s S. Natesa Iyer & Co. is only Rs. 4222/- towards their agency charges for handling export shipment consignment which is below the threshold limit as prescribed u/s 194C of the Act and no tax need to be deducted at source as per provisions of Section 194C of the Act. The ld. Counsel relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Opera Global Private Limited (2014) 109 DTR (Del.) 121, Hon'ble Bombay High Court in the case of CIT v. Siemens Aktiongesellschaft , 2008-TIOL-569- HC-MUM-IT and the Mumbai-tribunal decision in the case of Utility Powertech Ltd. v. ACIT,2010-TIOL-545-ITAT-MUM and Emersons Process Management India Private Limited (2011) 13 taxmann.com 149(Mum. Trib.), decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Janapriya Engineers Syndicate, (2015)113 DTR 311 (AP) and ITAT- Visakhapatnam -Special Bench in the case of Merlyn Shipping & Transporters v. Addl. CIT, (2012) 16 ITR (Trib) 1 (Visakhapatnam, [S.B.] .
8. The ld. D.R., on the other hand, strongly supported the orders of CIT(A).
9. We have heard the rival contentions and also perused the material available on record. We have observed that reimbursement of expenses being air freight of Rs. 65021/- for export consignment sent to Lusaka(Zambia) , insurance charges for insuring export consignment to Lusaka(Zambai) of Rs. 2246/- was paid and Rs.30/- towards postage charges were paid to M/s S. Natesa Iyer & Co. against their invoice dated 12-1-2008 towards the export consignment sent by the assessee to Lusaka (Zambai). These payments were 6 ITA 579/Mum/2012 made towards reimbursement of air freight , insurance and postage charges in connection with export consignment sent by the assessee from India to Lusaka(Zambia). The Hon'ble Delhi High Court has dealt with non- applicability of provisions with respect to tax deducted at source with respect to air freight on export consignment in CIT v. Opera Global Private Limited (supra) as under:
"4. Section 194C was inserted by Finance Act, 1972 to mandate deduction of tax at source, on payments made to a contractor for carrying out any work including supply of labour. Tax was to be deducted by the stipulated payer at the rate of 1 or 2 per cent.
5. The expression 'carrying out any work' or the word 'work' was interpreted by the Delhi High Court, for the purpose of the said Section, in S.R.F. Finance Ltd. v. CBDT [1995] 211 ITR 861, to exclude professional services. It was observed, the said expression and word was wide enough to include any kind of work which could be undertaken by another, but was restricted to the work which was to be carried out. Therefore, it would not include brokerage paid to the broker who procured or secured fixed deposits from third parties as the said broker was not carrying out any work but had procured money for fixed deposits. The broker worked for himself and got paid.
6. In Birla Cement Works v. CBDT, [2001] 248 ITR 216/115 Taxman 359 (SC) question arose before the Supreme Court, whether deduction under Section 194C was mandated when payment was made to transporters and whether the said payments were for "carrying out any work". It was held that the expression 'any work' was wider and should not be 7 ITA 579/Mum/2012 confined to a mere 'work contract', but, it would not include payment made to the transport contractor before Explanation III was added to the said Section w.e.f. 1st July, 1995. Further, Explanation III was not retrospective.
7. As Explanation III is applicable to the assessment years in question, we deem it appropriate to reproduce the said Explanation along with relevant portion of Section 194C of the Act, as on 1st April, 2008:--
"194C:- Payments to contractors and sub-contractors.--(1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and--
(a) the Central Government or any State Government ; or
(b) any local authority ; or
(c) any corporation established by or under a Central, State or Provincial Act ; or
(d) any company ; or
(e) any co-operative society ; or
(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both ; or
(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of
8 ITA 579/Mum/2012 India ; or
(h) any trust ; or
(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or
(j) any firm ; or
(k) any individual or a Hindu undivided family, or an association of persons or a body of individuals, whether incorporated or not, other than those falling under any of the preceding clauses whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor, shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to-
(i) one per cent. in case of advertising, (ii) in any other case two per cent.,
of such sum as income-tax on income comprised therein :
Provided that no individual or a Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.
(2) Any person (being a contractor and not being an individual or a Hindu undivided family), responsible for paying any sum to any resident
9 ITA 579/Mum/2012 (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent. of such sum as income-tax on income comprised therein.
** ** ** Explanation I.--For the purposes of sub-section (2), the expression "contractor" shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a Foreign enterprise or any association or body established outside India.
** ** ** Explanation III.--For the purposes of this section, the expression "work" shall also include--
(a) Advertising;
(b) Broadcasting and telecasting including production of programmes for
such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of transport other than
by railways ;
10 ITA 579/Mum/2012
(d) catering.
(3) No deduction shall be made under sub-section(1) or sub-section (2) from--
(i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees :
Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (1) or, as the case may be, sub-section (2) shall be liable to deduct income-tax under this section :
** ** **"
8. Explanation III in clause (c) states that the "work", for the purpose of Section 194C, shall also include carriage for goods and passengers by any mode of transport other than railways.
9. In this context, we would like to refer to Circular No. 715 dated 8th August, 1995 issued by CBDT explaining Revenue's point of view with reference to amended Section 194C w.e.f. 1st July, 1995. Question No's. 6 and 7 are relevant for the purpose of understanding whether tax at source was required to be deducted in the present case. The said questions and opinions/answers given by CBDT in the said circular read as under:
"Question 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods?
11 ITA 579/Mum/2012 Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provisions of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agents for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods."
10. A reading of the aforesaid questions and answers would indicate that payment made to a travel agent or airline for purchase of the air ticket for travel was not required to be subjected to deduction of tax at source. However, in case of a chartered flight or bus etc., provisions of Section 194C would be attracted. Payment made to clearing and forwarding agents for carriage of goods would be subjected to tax at 12 ITA 579/Mum/2012 source under Section 194C of the Act. A perusal of answer to question No.7 clarifies that travel agents issuing tickets on behalf of airlines for travel of individual persons would not be required to deduct tax at source, but in case of clearing and forwarding agents, who act as independent contractors, payment made to them would be liable for deduction of tax at source.
11. The Tribunal in the orders has held that the bills, subject matter of the dispute were for reimbursement of the air freight charges paid to airlines. Air freight charges would not include commission, handling or other charges, which were payable for the services rendered by the clearing and forwarding agents. For the said services, separate bills were issued and tax at source was deducted under Section 194C. It is not the case of the Revenue that TDS had to be deducted on air freight paid to airlines. The payment towards air freight was required for exporting the goods as the respondent assessee was an exporter and the consignor. Delhi High Court in CIT v. Hardarshan Singh [2013] 350 ITR 427/216 Taxman 283/30 taxmann.com 245, has held that on applying principle of privity of contract, mere reimbursement of charges would not require deduction of taxes at source.
12. The findings of the Tribunal being factual and the Revenue having preferred these appeals challenging the said findings, by the order dated 23rd September, 2013 passed in ITA 359/2012, it was inter alia directed :--
"Learned counsel for the appellant has filed two charts along with copies of sample invoices. Initially, she had submitted that MSS-I invoices submitted by the respondent were incorrect and no break up was given.
13 ITA 579/Mum/2012 However, we find that MSS-I invoices have been also filed by the appellant themselves.
Learned counsel for the respondent has drawn our attention to the assessment order and referred to paragraph 8 and 9 thereof. In paragraph 9, the assessing officer has mentioned that the expenses amounting to Rs.1240288/- were claimed under the head clearing and forwarding and list of 31 parties was furnished. Payments to 30 parties were below the amount on which TDS was required to be deducted. In respect of one party, the assessee had furnished a certificate issued by the Department that no TDS was required to be deducted. The assessing officer thereby did not make any disallowance on the said payments.
The submission of the respondent is that addition Rs.4861509/- made by the assessing officer was towards freight charges on export outwards as per the heading of paragraph 8 of the order. Freight charges were reimbursed and there was no element of commission or service charges. Clearing or forwarding agencies who were paid service charges etc were covered by paragraph 9.
Learned counsel for the appellant submits that this is not correct and the amount mentioned in paragraph 8 includes the commission and other service charges.
The appellant will file an affidavit of the Commissioner that the amounts mentioned in paragraph 8 as per the assessment order and the records, 14 ITA 579/Mum/2012 includes the commission or service charges other than freight charges. The said affidavit will be filed within a period of two weeks.
Documents filed by the appellant are returned to be filed along with affidavit. The Commissioner will also state whether the invoices with regard to Rs.1240288/- were on record and filed before the assessing officer and it will be stated whether the invoices of freight charges and clearing and forwarding agents were issued by the same party."
13. It is clear from the said order that the Assessing Officer in paragraph 9 of the assessment order for the assessment year 2008-09 had accepted that on Rs.12,40,288/- paid to clearing and forwarding agents, tax at source was deducted and paid, but on payment of Rs.48,61,509/-, no tax at source was deducted. The Tribunal had accepted that this amount was towards reimbursement of air freight charges paid to airlines and did not include work/service charges paid to the clearing and forwarding agents, which were to the tune of Rs. 12,40,288/- on which TDS had been deducted.
14. Commissioner of Income Tax has filed affidavit dated 21st December, 2013, in which he has accepted that 14 out of 15 parties mentioned in paragraph 8 of the assessment order also find mention in paragraph 9. Paragraph 9 refers to of 31 parties and relates to payment of Rs.12,40,288/- to the persons to whom clearing and forwarding charges or fee had been paid on which tax at source was deducted. A perusal of paragraph 4 of the Tribunal‟s order would reveal that the parties had raised separate bills, which were reimbursed, as it was paid to the 15 ITA 579/Mum/2012 airlines for export of goods. In other words, the factual findings of the Tribunal are correct and the plea and stand taken by the Revenue is incorrect and wrong.
15. Similar directions were issued to the Commissioner of Income Tax to file an affidavit in ITA 359/2012. In the affidavit of the Commissioner of Income tax, relating to Assessment Year 2006-07, it is stated that 41 parties had raised invoices on account of freight charges and 31 parties on account of clearing and forwarding charges 14 parties were common. Certain invoices were not available on record.
16. We are not inclined to accept prayer of counsel for the revenue of remand, on issue relating to matter of facts. Assessment years are 5 and 7 years old. Assessing Officer should have conducted the said exercise earlier.
17. On the second amount of Rs 14,57,703/- relating to Assessment Year 2006-07, the finding of the Commissioner of Income Tax (Appeals) and Tribunal is that none of the said parties were paid in excess of the stipulated amount of Rs 50,000/- and hence payments were not required to be subjected to TDS under section 194C(5) of the Act. The finding is factual and no details and particulars are filed to show that the finding is incorrect or perverse.
18. In view of the factual findings recorded by the Tribunal, affirming the decision of the Commissioner of Income Tax (Appeals), we hold that there is no merit in the present appeals and the same are dismissed."
16 ITA 579/Mum/2012 Thus, payment of reimbursement of air freight of Rs.65,021/- , insurance charges of Rs.2246/- and postage charges of Rs 30/- to C & F agent S. Natesa Iyer and Company towards reimbursement of expenses on export consignment being sent from India to Lusaka(Zambia) stood excluded from provisions of deductibility of tax at source u/s.194C of the Act in view of the fact these payments are in the nature reimbursement of expenses and there is no element of commission and service charges payable to clearing and forwarding agent S. Natesa Iyer and Company. Thus, in view of decision of Hon'ble Delhi High Court in the case of Opera Global Private Limited(supra) where the facts are identical to the instant case ,we hold that reimbursement of expenses of Rs.67297/- paid by the assessee to S. Natesa Iyer and company for reimbursement of air freight , insurance charges and postal charges in connection with export consignment shipped from India to Lusaka(Zambia) cannot be disallowed by invoking provisions of Section 40(a)(ia) of the Act as there is no liability on the assessee to deduct tax at source u/s 194C of the Act on these reimbursement of expenses paid by the assessee company. However, payment of Rs. 4,222/- which was paid to M/s S. Natesa Iyer & Co. vide invoice dated 12-01-2008 for work performed by them for handling custom clearance etc. was subject to deduction of tax at source u/s 194C of the Act but the same was below the threshold exemption limit provided u/s 194C of the Act as per the facts emerging from the records, hence , the same stood out of the applicability of provisions of Section 194C of the Act. In our considered view , the order of the CIT(A) is to be set aside and disallowance of Rs.71,5119/- made by the A.O. and confirmed by the CIT(A) is ordered to be deleted. This ground of the appeal raised by the assessee is allowed. We order accordingly.
10. The second ground is with respect to upholding of notional interest amounting to Rs. 118,000/- as income of the assessee. It was observed by the A.O. that the assessee had taken a loan from 5 parties, on which the assessee 17 ITA 579/Mum/2012 was paying interest. The assessee had also given loans to two parties, i.e., Shri O.P. Mehta and Smt Vimla Mehta of Rs.3,03,102/- and Rs. 6,82,617/- respectively. The assessee was asked that since the assessee is paying interest on loan taken by him , why the interest is not charged for loans given to the persons and why interest at the rate of 12% should not be charged on loans given to these two parties and added under the head 'income from other sources'. The assessee submitted that loans had been given to the relatives and therefore no interest is charged on the same. This contention of the assessee was not found acceptable and rejected by the A.O. The A.O. held that any prudent business man when he himself is paying interest on loans which are interest bearing should have charged interest from the persons to whom loans have been given. The A.O. accordingly worked out disallowance at Rs.1,18,286/- as notional interest income and added the same to the total income of the assessee under the head 'income from other sources', vide assessment order dated 04-10-2010 passed by the AO u/s. 143(3) of the Act
11. Aggrieved by the assessment order dated 04-10-2010 passed by the A.O. u/s 143(3) of the Act, the assessee preferred an appeal before the CIT(A).
12. Before the CIT(A), the assessee submitted that the loans were advanced for purchasing a piece of land and construction of a residential house and over a period of time a good portion of the advance was repaid and only some amount was left outstanding as at the end of the present previous year. It was stated before the A.O. that the said loan was given by the assessee out of own resources and no interest-bearing funds were diverted for advancing these interest free loans. The assessee submitted that after verification of past records and financial statements of the assessee, the A.O. was satisfied that no interest-bearing funds have been diverted for giving these interest-free advances which is evident from the fact that no disallowance out of interest outflow has been made by him. The A.O., however, was of the view that the 18 ITA 579/Mum/2012 assessee should have charged interest and accordingly the AO has worked out interest on notional basis and made addition to the returned income. The concept of "deemed interest income" on interest-free advances out of own resources has not been codified in the Act. Thus no addition on this count can be made for loan advanced in these exigencies, to an employee and his wife for the purpose of purchase of a piece of land for building a residential house. In support, the assessee relied on the decision of the Tribunal in the case of ITO v. C.J. Rathod 11 ITR (Tribunal) 252 (Ahmedabad), Ashok Bros v. ITO 76 TTJ (Hyd) 427. The CIT(A) after considering the submission and the A.O.'s order observed that the A.O. has made addition estimating interest chargeable on the loans given to parties from whom the assessee had not charged any interest. While no addition can be made on the basis of notional interest per se, however, it is also the case that while interest on borrowing on business is allowable as deduction u/s. 36(1 )(iii) of the Act , such borrowing, if diverted would cease to be borrowing for the purposes of business, so that the proportionate interest is liable for disallowance. In support, the CIT(A) relied upon the decision in the case of K. Somasundaram & Brothers (1999) 238 ITR 939 (Mad) and the decision of Hon'ble Allahabad High Court in the case of CIT v. H. R. Sugar factory (P) Ltd (1991) 187 ITR 363 (All.) wherein it is held that in case of common pool of funds , proportionate disallowance can be made. The CIT(A) also referred to the judgment of Hon'ble Punjab and Haryana High Court decision in CIT v. Abhishek Industries Limited, (2006) 286 ITR 1 (P & H Hc), wherein it has been held that there should be a nexus of use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii) of the Act . The CIT(A) held that it is thus for the assessee to prove that funds borrowed for business were utilized for the purpose of business, it is not for the Revenue to establish nexus between the borrowed funds and interest free funds advanced, hence, A.O. was directed to make proportionate disallowance from the interest claimed u/s 36(1)(iii) of the Act at the same 19 ITA 579/Mum/2012 rate of interest as had been paid on the borrowings, vide orders dated 02-12- 2011.
13. Aggrieved by the orders dated 02-12-2011 of the CIT(A), the assessee is in appeal before the Tribunal.
14. The ld. Counsel for the assessee submitted that notional interest have been disallowed by the A.O. to the tune of Rs. 1,18,286/-. The ld counsel contended that the loans have been given to the employees and his wife for buying a piece of land and constructing building there-on . The employees are relatives of the assessee. He submitted that the capital of the assessee is around Rs. 41.94 lacks while the loan have been granted to the tune of Rs.9,86,874/- as on 31-3-2008 and the loans outstanding were of Rs. 12,33,772 as on 31.3.2007. The assessee is having sufficient owned funds being capital of Rs. 41.94 lakhs which is interest free and hence there is a presumption that the assessee has deployed interest free funds towards grant of interest free advances to employee of the assessee Shri O.P. Mehta and his wife Smt. Vimla Mehta. The ld. Counsel relied upon the decision in the case of CIT v. Reliance Utilities and Power Limited (2009) 178 taxman 135(Bombay) and CIT v. HDFC Bank Limited (2014)366 ITR 505(Bom.). The assessee has also relied upon the following decisions:-
1. DCIT v. ANANDA MARAKALA, 150 ITD 323 (BANG).
2. CIT v. GAUTAM MOTORS, 45 DTR 89(DEL).
3. RELIANCE INDUSTRIES LTD v. ADDL CIT, 79 DTR 315 (MUM TRIB).
4. TATA CHEMICALS LTD v. ACIT, 138 ITD 458 (MUM)
5. VENUS RECORDS & TAPES (P) LTD. v ADDL CIT, 152 TT J (MUM) 1.
20 ITA 579/Mum/2012
6. PRANIK SHIPPING & SEVICES PVT LTD v ACIT, 70 DTR 17(MUM TRIB).
7. GUPTA GLOBAL EXIM P LTD v ACIT , 18 TAXMANN.COM 255.
8. MADHU INDUSTRIES LTD v. ITO, 1132 TTJ 233. (AHD).
9. YAMUNA PRASAD RESHWA v. DY CIT, 143 TTJ 615. (JDH) .
15. The ld. D.R. relied upon the order of ld. CIT(A).
16. We have heard the rival contentions and also perused the material available on record including the case laws relied upon by the rival parties. We have observed that the assessee has advanced interest free loans to her employee and his wife, who are also relatives of the assessee which was outstanding to be receivable to the tune of Rs. 9,86,874.18 as on 31-3-2008 and Rs. 12,33,772.00 as on 31-3-2007 as per audited financial statements submitted by the assessee . The assessee's total owned interest free funds being owned capital is Rs.41,93,799.52 as at 31-03-2008 and Rs.34,89,597.58 as at 31-03-2007 as per audited financial statements and there is a presumption that assessee has utilized its own interest free funds being owned capital for granting interest free loans to employee and his wife who are also relatives of the assessee. As could be observed that the assessee owned capital invested in the concern of Rs 34.89 lacs as at 31-03-2007 is much higher than the interest free loan advanced of Rs.12.34 lacs as at 31- 03-2007 , whereby it could be seen that interest free funds of Rs.34.89 lacs owned by the assessee are much more than the amount of Rs.12.34 lacs advanced by the assessee as interest free loans and the presumption as laid down by the judgments of jurisdictional Hon'ble High Court of Bombay in the case of CIT v. Reliance Utilities and Power Limited (2009) 178 taxman 135(Bombay) and CIT v. HDFC Bank Limited (2014)366 ITR 505(Bom.) shall squarely apply that the assessee has deployed its owned funds for grant of interest free loans and hence the additions made by the AO and as confirmed 21 ITA 579/Mum/2012 by the CIT(A) with respect of interest of Rs.1,18,286/- as 'income from other sources' is ordered to be deleted. We order accordingly.
17. In the result, the appeal filed by the assessee in ITA N0. 579/Mum/2012 for the assessment year 2008-09 is allowed.
Order pronounced in the open court on 11th April, 2016. आदे श क घोषणा खुले #यायालय म% &दनांकः 11-04-2016 को क गई ।
Sd/- sd/-
(AMIT SHUKLA) (RAMIT KOCHAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मुंबई Mumbai; &दनांक Dated 11-04-2016
[
व.9न.स./ R.K., Ex. Sr. PS
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु:त(अपील) / The CIT(A)- concerned, Mumbai
4. आयकर आयु:त / CIT- Concerned, Mumbai
5. =वभागीय 9त9न?ध, आयकर अपील य अ?धकरण, मुंबई / DR, ITAT, Mumbai "D" Bench
6. गाडC फाईल / Guard file.
आदे शानुसार/ BY ORDER, स या=पत 9त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai