TMI Blog2014 (4) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... rates, charged ostensibly at prevailing rates by the assessee, in excess of that charged, stands furnished – there is a deficit in the amount of borrowing relent as well – thus, the order of the CIT(A) upheld – Decided against Assessee. Disallowance of stamp duty – Loan from Bank – No business activity carried on during the year - Held that:- The loan advanced by the Bank of America is for funding working capital in the main, while no trading or manufacturing activity stands undertaken, for and toward which the said capital could be said to have been availed of – there was no reason as to why it has been considered as secured, which perhaps is also the reason for it being classified as an unsecured loan by the assessee in its audited balance-sheet, while at the same time claiming expenses on stamp duty, which is only toward the registration of the hypothecation agreement - the assesse to have not carried out any business - No part of the borrowed capital could be said to be availed of for business purposes, so as to validate the assessee’s claim u/s. 37(1) of the Act. The assessee has abysmally failed to show that the same stood incurred toward making or earning any income - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , came to be disallowed thereat, in the remand proceedings, as directed by the first appellate authority, the assessee furnished statements listing the rates at which interest stood charged by it to various borrowers (PB pg.20), as well as that charged to it by different banker/lenders (PB pg.21). The rates exhibited a wide variation, even from or qua the same lender, viz. at 8.50% to 12.45% p.a. (from Bank of America) and 8.75% to 12.35% p.a. (from Mozaki Finance and Investment Pvt. Ltd.). Likewise for the lending rates charged by the assessee, varying from as low as 3% to 13% p.a.. However, no comparative data, i.e., to match the borrowing and lending rates at any given point of time stood furnished, so as to be able to draw any meaningful comparison. So, however, it was clear that the lending rate/s were lower than or unfavourable w.r.t. the borrowing rate/s. The lending of money is governed by the clauses 29 and 30 of the assessee s Memorandum of Association (MOA). The same fall under Part III-B thereof (PB pgs.13-19), i.e., The objects incidental or ancillary to the advancement of the main objects . The same, therefore, cannot be considered as the assessee s business. Consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, was liable to be assessed as income from other sources (i.e., u/s.56) and, as such, only interest expended wholly and exclusively for the purpose of making or earning the said income, exigible to deduction there-against (i.e., u/s.57(iii)). This finding stands endorsed by the ld. CIT(A) in the appellate proceedings. Their concurrent finding remains un-repudiated and, in fact, unanswered. Merely adverting to the statement of the assessee s business (at para 3 of the assessment order) would be of no consequence, when the same is itself a subject matter of dispute. In fact, as would be apparent from the reading of the assessment order, the A.O. considered or, rather, treated the assessee to be engaged in financing business and, accordingly, effected the impugned disallowance u/s.37(1) of the Act while framing the assessment (refer para 4.1 of the assessment order). It is only subsequently, on an examination of the assessee s case on merits in the remand proceedings, whereat only the assessee furnished the details, that on the basis of the material adduced he concluded (vide para 3(v) of his remand report) the assessee to have not engaged in any business activity during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (dated 16.11.2010), on being confronted thereto by the ld. CIT(A), in perspective. 5.3 The first question that arises is: Whether the assessee borrowed the funds for its business? The assessee refers to Clauses 29 30 of its MOA to impress of the same being so. The said clauses read as under: 29. To invest any monies of the Company not immediately required for the purpose of its business in such investments or securities as may be thought expedient. 30. To lend and advance money or give credit on such terms as may seem expedient to customers and others having dealings with the Company and to give guarantees or become sureties for any such persons. The same fall under Part III-B of the MOA, titled The objects incidental or ancillary to the attainment of the main objects . The same are, thus, only enabling objects, authorizing the company to act or do various things for and toward undertaking and in accomplishing its main objects. They are, rather, more in nature of powers the company is invested with in doing its business. This is also abundantly clear and manifest in the clear language employed therein, authorizing the company to invest monies no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not necessarily done in the course of its business, what is to be seen is both the object/s as well as to whether they are actually being pursued. We have done exactly that, to find that the financing activity stands in fact precluded and, in fact, being not pursued. To say, therefore, that the company is formed for and actually engaged in financing business is fallacious. The lending of the company is only of its surplus funds (assuming its borrowings to be a part of the company s funds), i.e., till the time it finds suitable avenue/s for their user. We, accordingly, have no hesitation in upholding the interest income as being assessable as income from other sources. 5.5 Continuing further, the company has nowhere been able to establish that the interest rates at which the loans are given by it represent the prevailing market rates, being itself at wide variance from borrower to borrower, though consistent throughout for the same borrower. The same would warrant an explanation inasmuch as there is therefore no basis toward the said rates. It is also not that a particular loan/or loan tranche stands wholly lent to a particular borrower (27 in number), so that the same stood le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a manufacturer of knitted fabrics, charged interest @ 12% p.a. to three parties to whom advance was made by it. The assessee having borrowed funds at 16% p.a., the Revenue sought to disallow the deficit of 4% p.a. The tribunal found that the capital had been borrowed and used for the purpose of business. In that event, it held that there was no occasion for the Revenue to contend that the rate charged was not reasonable. The hon ble court, in view of the clear findings by the tribunal, declined to admit the reference inasmuch as no question of law arose. Firstly, a decision or ruling is an authority only for what it actually decides, and not that may remotely or even logically flow from it (refer: Goodyear India Ltd. vs. State of Haryana [1991] 188 ITR 402). The hon ble court had only held that no question of law, in the facts and circumstances of the case, given the tribunal s finding in the matter, arose. In fact, even on merits, we observe no correspondence between the facts of the said case with of that at hand. The very fact that the borrowed capital was deployed for business, implying that the advances to three parties were for business purposes, should be normally the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of loan transactions with sister concerns which were given on unfavourable terms. The same was disallowed by the A.O. being not wholly and fully expended for the purpose of business. During the course of appellate proceedings, it was submitted that the loan was obtained from Bank of Amercia is utilized for the business of the company on which Rs.10 lacs was incurred as stamp duty. In the remand report the A.O. has observed that as per Memorandum of Association, lending of money was not the business of the appellant and hence the amount borrowed is not incurred wholly and exclusively for the purpose of business. Appellant has not offered any comments on observations of A.O. In view of this, in my opinion the A.O. has rightly made the disallowance which is upheld. We are unable to see as to what infirmity attends the Revenue s stand. We have, rather, on the basis of the examination of the material on record, issued our independent finding/s to the same effect, i.e., of the borrowing and lending activity by the assessee as not representing or constituting a business activity or the assessee s business (refer paras 5.3 to para 5.6 of this order). In fact, the loan advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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