Mannohar Lal Hira Lal Ltd, Ghaziabad V. ITO,Ward- 2(1)(4), Ghaziabad

ITA 2663/DEL/2022

AI Insights

The case involves Manohar Lal Hira Lal Ltd., the appellant, contesting the disallowance of interest expenses claimed in the assessment year 2017-18. The interest disallowance of Rs. 8,73,760 was initially made by the Assessing Officer (AO) and upheld by the CIT(A), on the basis that the funds were diverted for non-business purposes, specifically for an advance given for the purchase of land in FY 2007-2008. The Tribunal's decision was based on the finding that the appellant failed to establish a direct nexus between the borrowed funds and the business activities, and that the funds were effectively diverted towards a non-genuine transaction.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131125 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 11-06-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 06-11-2022
• Other Referred Cases: Madhav Prasad Jatia V. CIT, S. A. Builders Ltd. Vs. CIT(A) Chandigarh, Punjab Stainless Steel Inds. Vs. CIT, ACIT Vs. Rohit Kochar
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Revision of order; Commercial expediency
• Section: 147; 263; 143(3)

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “SMC” BENCH: NEW DELHI BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER ITA No.2663/Del/2022 [Assessment Year : 2017-18] Manohar Lal Hira Lal Ltd., C/o-Praveen K.Agarwal & Associates, D-17, 3 rd Floor, RDC, Raj Nagar, Ghaziabad, Uttar Pradesh-201001. PAN-AABCM1295R vs ITO, Ward-2(1)(4), Ghaziabad. APPELLANT RESPONDENT Appellant by None Respondent by Shri Om Prakash, Sr.DR Date of Hearing 12.06.2023 Date of Pronouncement 15.06.2023 ORDER PER KUL BHARAT, JM : The present appeal filed by the assessee for the assessment year 2017-18 is directed against the order of Ld. CIT(A), National faceless Appeal Centre (“NFAC”), Delhi dated 08.08.2022. The assessee has raised following grounds of appeal:- 1. “That on the facts and in the circumstances of the case and in law, the order passed by the Learned Commissioner of Income Tax Appeals-NFAC Delhi (Ld. CIT(A)') is bad in law. 2. That the Ld. CIT(A) has grossly erred in not deleting the addition of Rs.873760 on account of disallowance of Interest on borrowed capital even though there was no nexus proved by the AO between loan borrowed and amount advanced for purchase of land. 3. That the Ld. CIT(A) has grossly erred in confirming an addition of Rs.873760 merely on assumption/ presumption and without any categorical finding either in the assessment order or in the appellate Page | 2 order in respect of nexus between borrowed funds and fund used for advance for purchase of land given in FY 2007-2008. The Appellant craves leave to alter, amend or withdraw all or any of the Grounds of objections herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary either before or during the hearing.” 2. No one attended the proceedings on behalf of the assessee. It is seen from the records that no one has been attending the proceedings on behalf of the assessee despite various notices. However, a written submissions dated 13.01.2022 submitted by the assessee is placed on record. Under these facts, the appeal is taken up for hearing in the absence of the assessee and is being disposed off on the basis of material available on record. 3. Facts giving rise to the present appeal are that in this case, the assessee filed its return of income on 31.10.2017 declaring total income at NIL and also claimed brought forward losses of Rs.85,37,766/-. The case of the assessee was selected for scrutiny assessment through CASS. In response to the statutory notices, Ld.AR for the assessee filed its reply. The Assessing Officer (“AO”) after adjusting brought forward losses, assessed the income at NIL and brought forward losses were reduced by Rs.8,73,760/- by disallowing interest expenses as claimed by the assessee. 4. Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who after considering the submissions, dismissed the appeal of the assessee and sustained the addition. Page | 3 5. Aggrieved against the order of Ld.CIT(A), the assessee preferred appeal before this Tribunal. 6. On the other hand, Ld. Sr. DR opposed the submissions of the assessee and supported the orders of the authorities below. 7. I have heard Ld. Sr. DR for the Revenue and perused the material available on record. I find that the assessee has filed written submissions. For the sake of clarity, the written submissions of the assessee are reproduced as under:- “We refer to the appellate proceedings in respect of above matter. In this connection, written submission in respect of grounds of appeal filed are as under: GROUNDS OF APPEAL NO.1 1. That the order passed by Ld. CIT (Appeal) is bad and erroneous on facts of the case, as there is no categorical finding given in the appellate order on the funds borrowed during the year for the purposes of bill discounting and LC discounting and interest paid on such short term credit facilities availed in respect of goods sold by the appellant against LC (letter of Credit) and Interest paid on such borrowings. There was no nexus proved by the authorities below between borrowed funds and advances given of Rs. 3.13 crore for purchase of land, given in F.Y. 2007-2008. Disallowance of interest is made purely based on hypothetical and presumption of diversion/siphoning of funds. However, there was no concrete finding on borrowed funds for alleged advance given for land of Rs.3.13 crore in F.Y. 2016-17. GROUNDS OF APPEAL NO. 2&3 That the Id. CIT (Appeal) has erred in law and on facts of the case, by confirming disallowance of interest of Rs.8,73,760/-, which was Page | 4 paid during the year on LC and Bill discounting, purely based on hypothetical and presumption diversion/siphoning of funds, even though there was no loan or advance was given, during the year. That the Id. CIT (Appeal) has erred in law and on facts, by confirming disallowance of interest of Rs.873760 without proving the direct nexus of utilization of borrowed funds. No advance or loan was given during the year. Interest paid during the year was related to LC and bill discounting, and such credit facility was specifically used for credit facility availed on sales made and bill discounting, specifically for business transactions for the year under consideration. 2. In respect of the above disallowance of interest confirmed in the appellate order of Rs. 873760/-, it is submitted that interest was paid on borrowed funds, which were taken and utilized during the year for bill discounting and LC credit facility for making secured payment to the suppliers and early realization of funds towards sales made to the customers and such short term credit facility was specifically and exclusively for sales and purchases related to the main business of the assessee. It is therefore there was no direct nexus of borrowed funds utilized for non-business purposes. Ledger accounts of interest paid are enclosed as Ann-1 and Ann-2 and the summary of interest paid are as under: Interest paid on indirect taxes (Net) Rs.40446/- Interest paid on LC discounting for short term financing (NET) Rs.833314/- Total Rs. 873760/- 3. Further, advance for purchase of land was given in FY 2007-2008 of Rs.31355399/- and there was no addition made towards disallowance of interest in the assessment order passed u/s 143(3) of the Income Tax Act, 1961. A latest copy of the assessment order is enclosed as ANN-3 for AY 2014-2015. Page | 5 Further, details of advance given for land in FY 2007-2008, was given specifically for purchase of land as per agreement dated 31.03.2008 and the copies of account of last three years and agreement are enclosed as ANN-4. In view of the above documents already placed before the authorities below and enclosed in the paper book as per Ann-1, Ann-2, Ann-3, Ann-4, there is no direct nexus of borrowed funds and Advance given for purchase of land in FY 2007-2008. During the year under consideration, Interest was paid on short-term financing as LC discounting on purchases of goods and bill discounting on sales of goods, which have no direct or indirect nexus with the advance given in FY 2007-2008.Such nexus neither proved in the assessment order nor in Appellate order. 4. It is well settled in law that in case there is no directs nexus between borrowed funds utilized for non-business purposes, disallowance of interest is unsustainable on facts and in law. Reliance is placed on the followings: The phrase "for the purpose of business" - The expression "for the purpose of business" occurs in Section 36(1)(iii) and in Section 37(1). A similar expression with different wording also occurs in Section 57(iii) which reads as "for the purpose of making or earning income". This issue came up for consideration before the Supreme Court and the Hon'ble Supreme Court while giving judgment in the case of Madhav Prasad Jatia V. CIT, (SC) 118 ITR 200 has established that the expression occurring in Section 36(1)(iii) is wider in scope than the expression occurring in Section 57(iii). Thus, meaning thereby that the scope for allowing a deduction under Section 36(1)(iii) would be much wider than the one available under Section 57(iii). This phrase, as held by many legal pronouncements, is the most important yardstick for the allowability of deduction Under Section 36(1)(iii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon'ble Supreme Court In the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word "commercial expediency". By using this phrase Hon'ble Supreme Court has given a new dimension and Page | 6 clarified the concept further. In the Judgment the Supreme Court has defined commercial expediency as "an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency". Further, following this judgment the High Court of Delhi, in the case of Punjab Stainless Steel Inds. Vs. CIT 324 ITR 396, has further elaborated "The commercial 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, which 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- firm. 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-firm and working solely in the interest of the assessee-firm/ company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". Thus, for allowance of a claim for deduction of interest under this provision following three conditions are there: (i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business. (iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. The above mentioned three conditions have been established legally by Supreme Court judgment in the case of Madhav Prasad Jatia Vs. CIT, (1979) 118 ITR 200 (SC). Page | 7 5. The appellant also relied upon an identical case of appellate order of Hon'ble Delhi Bench "D" In the case of ACIT Vs. Rohit Kochar, AY 2010.11 dated 30.11.2018 in ITA no. 3338/DEL/2016, wherein disallowance of interest is deleted by the Id. CIT (Appeal) and affirmed by the Hon'ble bench of ITAT, New Delhi, wherein Revenue has failed to establish any nexus between interest bearing funds and interest free advances made to his relatives and friends. Relevant extracts of the judgment are as under: "When there is factual finding given by the CIT (A) that as regards the interest free advances given by the assessee even prior to the loan raised from the bank for acquiring vehicles and business properties, the Revenue has failed to establish any nexus between the interest bearing funds and interest free advances made to his relatives and friends. Moreover, no cogent evidence is there on the file if secured loans have not been used by the assessee for business purposes. Assessee proved to have taken the secured loans for specific purpose and their utilization has not been disputed by the AO. AO has merely made the addition on the ground that the assessee has utilized sizable amount out of the secured loans to be given as interest free advances to his family members, related concerns and for acquiring property for their personal needs." 6. In view of the above interpretation and case law discussed and facts of the case are that the assessee has utilized the borrowed funds for the business activity and not utilized any borrowed funds for non-business activity. This fact can be verified from the loan schedule in the balance sheet of FY 2016-17, enclosed as per Ann-5. 7. While passing the assessment order, the AO has recorded arbitrary findings which were neither relevant nor have any adverse impact on revenue loss during the year under consideration, as the advance for purchase of land was given in FY 2007- 2008 after this financial year several assessment were completed u/s 143(3) of the Income tax Act, 1961 and copy of latest assessment order for AY 2014-2015 enclosed as per Ann- 4, which were never challenged u/s 263 of the Income tax Act, 1961. It is Page | 8 thus the findings recorded by the AO have no valid basis and on that ground no addition is sustainable on facts and in law. Further, Income tax assessment for the AY 2014-15, has been recently completed u/s 147 read with section 144B of the Income Tax Act, 1961 on 29.03.022, wherein no disallowance of interest has been made. In view of the above facts, it is requested to kindly allow the appeal of the appellant in the interest of natural law and justice and oblige.” 8. It is seen from the records that similar explanation was offered by the assessee to the Ld.CIT(A) who after considering the submissions, given finding on facts as under:- 7.3. Finding a) Appellant contended that this interest of Rs.8,73,760/- was paid towards Bills and LC discounting facility availed which is exclusively for sales & purchase related to business of Appellant. There was no disallowance of Interest in order u/s 143(3) for AY. 2014-15 in case of Appellant. There is no direct nexus of loan taken with loan or advance given. Interest paid of Rs.8,73,760/- has not direct nexus with advance given in FY. 2007-08. Appellant stated that it used borrowed funds for its business activity and did not use it for non business activity. It was stated that AO recorded arbitrary findings and has no valid basis and addition is not sustainable. b) The detailed facts of this transaction is outlined in para 2(b) to 2(e) of this order. The finding on these Grounds of Appeal is as under:  Appellant advanced loan of Rs.3.13 Cr to M/s Pasondia Steels in FY. 2007-08. This loan was advanced out of Interest bearing funds and not out of Interest free funds. Since neither loan could be repaid nor interest was paid, it was agreed that Pasondia Steels will sell its factory land to Appellant for Rs.5.79 Cr. and this loan was adjusted as advance against sale of land on 31.03.2008 and copy of agreement was signed between two parties. Page | 9  The Agreement signed is very peculiar. A general clause was mentioned that Pasondia Steels will clear all liabilities on land and free it from all encumbrances. Once the land is free from liabilities and encumbrances the sale will be executed in one month from same.  Appellant or M/s Pasondia Steels was unable to explain as to what were the liabilities on said land or what encumbrances had to be freed. Appellant or M/s Pasondia Steels could not explain whether any part of liability has been paid off till date or not. Thus, the agreement was drafted in such a manner that sale deed was to be executed as per sweet will of both parties and no time limit was prescribed.  Even till 01.01.2020 (starting from 31.03.2008) the payment has not been made and land is not transferred to the Appellant. In this period M/s Pasondia Steels has become a defaulter as per the Director of said company.  These facts clearly show that Appellant has blocked its interest bearing funds on which not even a single penny of interest has been earned.  There was no effort on part of Appellant to recover the loan/advances in form of litigation in some court of law. This clearly points of needle of suspicion towards the whole transaction. AO has concluded that it is diversion/siphoning off of funds. 7.4 The above facts clearly show that on one hand the Appellant has advanced interest bearing funds of Rs.3.13 Cr on Interest free basis to a default and a loss making company since 31.03.2008 and no efforts have been made to recover such interest bearing finds. Had the Appellant recovered those funds then there was no need to borrow more interest bearing funds and incur the liability of interest. This clearly shows that these Interest bearing funds have been diverted towards a sham/non genuine transaction whereby the conditions mentioned in Agreement will never be fulfilled and sale deed will never be executed. As on date of order Page | 10 the loans of company too have been taken over by M/s Edelweiss Assets Reconstruction Company. 7.5 In view of above facts, the action of AO in disallowing Interest of Rs.8,73,760/- is sustainable and is hereby upheld. Grounds of Appeal No. 2 to 4 are dismissed.” 9. I find that the assessee has not rebutted the above findings on fact by placing any contrary material on record. Therefore, I do not see any reason to interfere in the findings of Ld.CIT(A), the same is hereby affirmed. Thus, Grounds raised by the assessee are dismissed. 10. In the result, the appeal of the assessee is dismissed. Order pronounced in the open Court on 15 th June, 2023. Sd/- (KUL BHARAT) JUDICIAL MEMBER * Amit Kumar * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI