M/S. SURENDRA SINGH BHATIA, Indore V. THE ACIT 3(1), Indore

CO 42/IND/2014

AI Insights

The case involves Shri Surendra Singh Bhatia, who appealed against the order of the Commissioner of Income-Tax (Appeals) which partially upheld the disallowance of interest expenditure claimed by the assessee. The original assessment by the Addl. CIT disallowed Rs. 41,04,159, which was later reduced to Rs. 12,71,784 by the CIT(A). The Tribunal dismissed the appeal, agreeing with the CIT(A)'s decision, and noted that the assessee failed to prove that the loans to sister concerns were made from interest-free funds. The Tribunal also highlighted that the interest rates on loans given to sister concerns were lower than the rates at which the assessee borrowed, which lacked commercial justification.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 128084 (ITAT-INDORE)
• Duration Of Justice: 8 year(s) 11 month(s) 26 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 06-07-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 30-04-2023
• Assessment Year: 2009-2010
• Appeal Filed On: 10-07-2014
• Other Referred Cases: D&H Secheron Electrodes Pvt. Ltd. Vs. CIT (1983) 142 ITR 528 (MP)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Tax effect; Proportionate interest; Commercial expediency
• Section: 143(3); 153

Judgement Text

आयकर अपीलȣय अͬधकरण, इंदौर Ûयायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI B.M. BIYANI, ACCOUNTANT MEMBER C.O.No.42/Ind/2014 (Arising out of ITA No.413/Ind/2014) Assessment Year: 2009-10 Shri Surendra Singh Bhatia, Guru Villa, 12-14, Pipliya Road, Aditya Nagar, Indore. बनाम/ Vs. Addl. CIT, Range-3 Indore (Assessee / Appellant) (Revenue / Respondent) PAN: ABHPB 5246 R Assessee by Shri Harsh Vijaywargiya, C.A. & AR Revenue by Shri Ashish Porwal, Sr. DR Date of Hearing 01.05.2023 Date of Pronouncement 07.07.2023 आदेश/O R D E R Per B.M. Biyani, A.M.: Feeling aggrieved by appeal-order dated 24.03.2014 passed by learned Commissioner of Income-Tax (Appeals)-I, Indore [“Ld. CIT(A)”], which in turn arises out of assessment-order dated 26.12.2011 passed by Addl. CIT, Range- 3, Indore, [“Ld. AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2009-10, the assessee has filed this Cross-Objection. Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 2 2. Heard the learned Representatives of both sides at length and case- records perused. 3. The present Cross-Objection by assessee arises out of Revenue’s Appeal being ITA No. 413/Ind/2014. The said appeal was dismissed by ITAT vide order dated 13.04.2023 on account of low-tax effect. However, section 253(4) of the act prescribes that the Cross-Objection shall be disposed of as if it were an appeal. Therefore, the assessee’s Cross-Objection is taken up for hearing and being disposed of by this order. 4. The assessee has raised following effective grounds: 1. That on the facts and in law and circumstances of the case, the Ld. CIT(A) has rightly deleted the addition of Rs. 40,00,000/- made towards freight expenses by the AO. 2. That on the facts and in law and circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance u/s 36(1)(iii) to Rs. 12,71,784/- out of the total amount claimed at Rs. 41,04,159/-. The Ld. CIT granted a relief of Rs. 28,32,375/- and not of the entire amount of Rs. 41,04,159/- as claimed in the grounds of appeal by the departmental representative. 3. That on the facts and in law and circumstances of the case, the Ld. CIT(A) has rightly deleted the addition of Rs. 25,000/- made towards travelling expenses. 5. Ld. AR submitted that the Ground No. 1 and 3 do not project any grievance to assessee, they are merely supporting the action of CIT(A) qua the relief granted to assessee. Since the Revenue’s appeal stands dismissed, these grounds have become infructuous for assessee; accordingly they ought to be dismissed. Ld. DR agreed. Dismissed accordingly. 6. Now only Ground No. 2 remains for adjudication by us. This ground relates to the disallowance u/s 36(1)(iii) out of interest expenditure claimed by assessee. The AO made disallowance of Rs. 41,04,159/- out of which CIT(A) granted part-relief of Rs. 28,32,375/- and upheld the remaining disallowance Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 3 of Rs. 12,71,784/-. Now, the assessee is aggrieved by CIT(A)’s action in upholding part-disallowance of Rs. 12,71,784/-. 7. Facts apropos to this issue are such that during assessment-proceeding, the AO observed that the assessee has advanced loans to its sister concerns/ family members by charging interest @ 9%, 4% or 6% whereas the assessee has himself taken loans @ 12%. When the AO confronted assessee for disallowance of proportionate interest, the assessee submitted that (i) the loans were given for short-period, and (ii) the loans were given out of interest-free own funds available with assessee in the form of capital and not out of borrowed funds. Ld. AO, however, was not satisfied with assessee’s submission. He observed that the loans were not for short period. He further observed that the assessee has failed to establish that he has not advanced funds from interest-bearing borrowed funds. Relying upon certain judicial rulings, he disallowed the interest-expenditure of Rs. 41,04,159/- fully. 8. During first appeal, Ld. CIT(A) analysed the facts and figures in Para No. 4.2.2 of his order and thereafter granted part-relief as well as upheld part- disallowance. The order of Ld. CIT(A) is extracted below for an immediate reference: “4.2.2 The appellant during the course of appellate proceedings demonstrated that total interest earning funds with him was of Rs. 8,10,97,786/- as on 31.03.2009, break up of the same is as under :- S. No. Nature of loans Amount 1. Unsecured loans 2,83,51,641 2. Secured loans 5,27,46145 8,10,97,786 As against his total loan liabilities of Rs. 8,10,97,786/-, an amount of Rs.14,91,64,133/- was due from debtors, Rs. 1,47,50,294/- invested in the Fixed Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 4 assets and Rs. 3,97,50,180/- shown as cash and Bank balances as on 31.03.2009. Thus, the total amount invested in the business works out to Rs. 20,36,64,607/- as against loan of Rs. 8,10,97,786/-. The appellant with the availability of the total funds calculated that effective rate of interest as paid on the amount of total funds available which includes interest free and interest bearing calculated comes to 1.20% only. The appellant also provided details of interest received and interest paid. On perusal of the detail of interest paid as filed on Page No.164, it was noticed that interest to Shri Aman Deep Singh Bhatia of Rs. 13,38,734/- were paid at 6% P.A. only and interest to other parties at 12% P.A. Similarly, on perusal of the detail of interest received as filed on Page No.162 of the compilation it is noticed that interest of Rs. 12,37,238/- was charged from M/s. Bhatia International Limited at 4% and interest of Rs. 4,05,836/- was charged from M/s. BCC Estates P. Limited at 9% and Rs. 5,17,886/- charged from M/s. Bhatia Coal Corporation Limited at 6%. The amount of interest paid to Shri Amandeeep Singh Bhatia and interest as charged from M/s. BCC International Limited was more or less same. Although charging of interest mainly depends upon market conditions, but appellant has to provide reason if interest is charged at lower rate and paid at higher rate and such disparities could be levelled to a great extent by adopting matching principle. Hence as the rate of interest as paid to Shri Aman Deep Singh Bhatia was at 6% but interest was charged from M/s. Bhatia International Limited at 4%. I, therefore, direct the AO to calculate the amount as charged from M/s. Bhatia International Limited at 6% in place of 4% and the difference of the same is considered for disallowance out of interest paid. Similarly, the rate of interest as charged from M/s. BCC Estates P. Limited at 9% and from M/s. Bhatia Coal Corporation was at 6% only as against interest paid by the appellant to other parties at 12%. Thus, difference of rate of interest as charged and as paid is considered as disallowable. The amount as disallowable is calculated as under:- S.No . Name of the parties from whom loans given Rate of interest charged Amount of interest Interest to be charged Amount of interest Difference of interest 1. Bhatia International Limited 4% 1,237,238 6% 1,855,857 618.619 2. BCC Estate P.Limited 9% 405.836 12% 541,115 135.279 3. Bhatia Coal Corporation 6% 517.886 12% 1,035,772 517.886 1,271,784 In view of the above, I am of the opinion that an amount of Rs. 12,71,784/- only is to be disallowed u/s 36(1)(iii) of the Income tax Act in place of Rs. 41,04,159/- as disallowed by the AO. I, therefore, direct the AO to restrict the amount of Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 5 disallowance to Rs. 12,71,784/- and appellant accordingly gets relief of Rs. 28,32,375/-.” 9. During hearing before us, Ld. AR for the assessee made several contentions. Firstly, he submitted that the AO has made a wrong inference that the assessee has given loans out of interest-bearing borrowed funds. Relying upon certain rulings, he submitted that it is a well-established that where the assessee is having mixed funds i.e. interest-free as well as interest-bearing, there will be a presumption that the interest-free loans have been made out of interest-free funds and not out of interest-bearing. Therefore, in the present case also, it should be accepted that the assessee had given loans out of interest-free funds available with him. Secondly, he carried us to Page No. 153 of the Paper-Book where a statement showing “party-wise loans” containing details of loans given to 3 parties for which the CIT(A) has upheld disallowance is placed, namely (i) M/s BCC Estate (P) Ltd., (ii) M/s Bhatia International Ltd., and (iii) M/s Bhatia Coal Corporation. Regarding M/s BCC Estate (P) Ltd and M/s Bhatia Coal Corporation, Ld. AR submitted that there were credit balances at the start of year which show that the assessee had taken loans from those parties although at the end of the year, there were debit balances indicating loans given by assessee. Ld. AR contended that the credit balance at the beginning of year clearly shows that when necessity arises, the assessee is also taking loans from those very parties. Therefore, Ld. AR submitted, there is a mutual help from one-another sometimes by assessee to those parties and sometimes by those parties to assessee. Ld. AR submitted that in such a scenario, it is not good to draw any adverse inference against assessee. Thirdly, he carried us to Page No. 135 of the Paper-Book where a statement of loans taken by assessee is placed. Referring to same, he submitted that as on last day of the previous year, the assessee had taken a loan of Rs. 5.27 crore from Bank of India against FDR and loan of Rs. 2.83 crore from sister concerns/relatives which shows that the assessee has not taken any loan from C/C limit etc. Fourthly, he submitted that the assessee has given loans for the reason of commercial expediency. Lastly, he relied upon the decision of Hon’ble Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 6 Jurisdictional High Court in D&H Secheron Electrodes Pvt. Ltd. Vs. CIT (1983) 142 ITR 528 (MP). Ld. AR submitted that the Hon’ble High Court has clearly held that no disallowance can be made even if loans have been made to sister concerns without charging interest. 10. Per contra, Ld. DR for the Revenue opposed the very submission of Ld. AR. Firstly, he submitted that the assessee is merely making a superficial claim but has not given any evidence to lower-authorities to prove that the loans were given out of interest-free funds. Secondly, he submitted that there is no evidence or explanation given by assessee to substantiate that there was a commercial expediency. Thirdly, he submitted that the department is not against giving loans to sister concerns/relatives but there is no logic of giving loans at the cheaper rate of 4% to 9% when the assessee has himself taken loans at the rate of 12%. Lastly, he submitted that the CIT(A) has made a cogent working and after due consideration granted substantial relief to assessee and upheld part-disallowance which is very much proper. Therefore, in such circumstances, Ld. DR prayed to uphold the part-disallowance confirmed by CIT(A). 11. We have considered rival submissions of both sides and perused the orders of lower authorities. On a careful consideration, we firstly note that the assessee is not disputing the finding made by lower-authorities that loans were given to relatives/sister concerns at interest rate of 4%, 6% and 9%. At the same time, the assessee is also not disputing that it has taken loans at interest rate of 12% (6% from Aman Deep Singh Bhatia as found by CIT(A) in Para 4.2.2 of his order). Further, it is also not the case of assessee that 4%, 6% or 9% at which loans were given to the relatives/sister concerns was a fair rate of interest prevailing at the time when loans were given. Therefore, one fact is clearly discernible that the assessee has taken loans at a higher rate but given loans at a much lesser rate. Going to contentions advanced by learned Representatives, we firstly find merit in the submission of Ld. DR that the Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 7 assessee has not given any explanation to prove that the impugned loans were really given from interest-free funds available with him. The assessee is simply placing reliance on certain rulings and insisting for presuming that the loans were given out of interest-free funds available with him. Going further, we find that there is no material available with the assessee to prove the existence of commercial expediency. During hearing before us, neither the Ld. AR is able to prove the factum of giving of loan out of interest-free funds nor the existence of commercial expediency though such claims are iterated. The only explanation put forward by Ld. AR is that there were credit balances in two parties which shows that the assessee is not only giving loans but also taking loans from those parties in case of necessity. But in our considered view, this much is not sufficient to prove the commercial expediency. In fact, on perusal of “Statement of interest received” filed at Page No. 71 of Paper-Book, we find that the assessee has recovered interest @ 9% from M/s BCC Estate Pvt. Ltd. but then on perusal of “Statement of interest paid” filed at Page No. 91 of Paper-Book, we find that the assessee has paid interest @ 12% to the very same party. Therefore, when the assessee has paid 12% interest to very same party, we fail to find any justification in charging interest @ 9%. It is also noteworthy that in the present case the assessee has not made interest-free advances to sister concerns but it is a case where the assessee has given interest-bearing loans to relatives/sister concerns at cheaper rate of interest despite himself borrowing at a higher rate and there is no logic or justification for such disparity. Thus, keeping in view these facts, the reliance placed by assessee on the above-cited decision of jurisdictional High Court even does not help the assessee. Lastly, we also find that the CIT(A) has made a careful analysis of the loans taken by assessee and given by assessee with their interest-rates and upheld the disallowance of Rs. 12,71,784/- while granting a substantial relief of Rs. 28,32,375/-. Therefore, looking to all factors noted here, we are of the considered view that the CIT(A) has rightly upheld part-disallowance. Finding no infirmity in his order, we hereby uphold the same. With this, Ground No. 2 is also dismissed. Shri Surendra Singh Bhatia, Indore vs. Addl. CIT Range 3, Indore C.O.No.42/Ind/2014 – Arising out of I.T.A.No. 413/Ind/2014 A.Y.2009-10 8 12. Resultantly, this appeal is dismissed. Order pronounced in the open court on 07/07/2023. Sd/- sd/- (VIJAY PAL RAO) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore Ǒदनांक/Dated : 07.07.2023 CPU/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Indore Bench, Indore