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M/s. Sanjay Trade Corporation Versus Jt. CIT (OSD) 13 (3) Mumbai.

2015 (9) TMI 896 - ITAT MUMBAI

Advances made to the sister concern - Disallowance of interest regarding non charging of interest on the loans advanced to sister concern - Held that:- As far as business expediency is concerned, we find that the assessee has not proved as to how its business was benefited directly or indirectly by advancing interest free loans to sister concerns and other related parties.In our opinion,the onus of proving justification was on the assessee and it did not discharge the same.Saving the reputation .....

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d not have been any problem. State should not be made party to those items of expenditure that are unrelated with business of an assessee.In the case before us,the assessee has done the same thing.It wants to shift the burden of its generosity in form of claiming an untenable claim.In our opinion there was no commercial expediency in the transactions entered in to by the assessee i.e. non charging of interest from WCPL,PBIPL and others was necessitated by any business consideration.

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al infirmity as far as first direction of the Tribunal in concerned.

Considering the second direction of the Tribunal availability of funds has been discussed by the FAA. In our opinion,availability of funds from partners’ account has be seen in light of the principle laid down by the Hon’ble Apex Court in the case of Reliance Utility (supra). For the limited purpose of calculation,we are remitting back the matter to the file of the AO. He would consider the argument taken by the asse .....

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ome Tax, (Appeals)-24,Mumbai erred in confirming the disallowance of interest of ₹ 86,80,1951-regarding non charging of interest on the loans advanced to sister concern. 1.1 The learned CIT(A) failed to appreciate the advances made to the sister concern where whose recovery was doubtful and as such, your appellant has not charged any interest on the loans given to them. 1.2 Your appellant further submits that the CIT (A) ought to have considered the explanation given by your appellant rega .....

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gaged in the business of dealing in dial caliper,Gear Tooth,micrometer,filed its return of income on 25.11.2003,declaring income of Rs.() 89.53 lakhs. Assessing Officer (AO) finalised the assessment on u/s.143(3)of the Act on 28.02.2006,determining the income of the assessee at ₹ 35,40,500/. 2. During the original assessment proceedings,the AO found that the assessee had debited a sum of ₹ 86,83,951/under the head Interest in the P&L a/c for the year under the appeal. As per the .....

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d by this order, assessee had preferred an appeal before the First Appellate Authority(FAA),who,vide his order dated 10.07.2006 dismissed the assessee's appeal.The assessee challenged the order before the Tribunal.On 15.07.2011,while deciding the appeal no.5727/Mum/2006,the Tribunal held as under: 5. We have heard.the rival submissions. The learned counsel for the assessee submitted before us that funds were given to the sister concern purely out of commercial expediency. It was also submitt .....

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TR 1. In this regard, learned counsel for the assessee has filed before us copy of balance sheet and profit and loss account and wanted to substantiate availability of interest free funds and also demonstrate commercial expediency in giving interest free loans to sister concern.We are of the view that these issues were not raised by the assessee either before the Assessing Officer or before learned CIT(A).It is not clear as to what is the nature of business that sister concerns of the assessee w .....

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aspects and the Assessing Officer will examine the claim of the assessee in accordance with law. The AO directed the assessee to submit details proving commercial expediency and availability of interest free surplus funds.In response to the notice the assessee filed its reply on 28.12. 2011. After considering the same the AO held that there was no business expediency in advancing loans to World Wide Commodities Pvt.Ltd.,(WWPL)Priya Blue Ind.Pvt.Ltd.(PBIPL),Sanjay Sales Corporation(SSC),that the .....

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ibutable to the loans given to the said three loanees by the AO. With regard to the loan of ₹ 63,09,174/advanced to Sanjay P. Mehta(SPM),the assessee,vide his letter dated 23.12.2011,claimed that he was an ex partner,that he was a partner in the firm till 7thFebruary,that there was no provision for either paying interest on capital account or charging interest on debit balance of the partners. He directed the assessee to furnish the copy of the capital account of SPM and a copy of the part .....

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nt the assessee's contention that there was no provision for either paying interest on capital account or charging interest on debit balance of the partners was not correct in view of class VII of the deed of Partnership dated 07. 02.2003. He reproduced the clause that read as under: The partner shall be entitled to a simple interest @ 12% per annum or at such other rate as may be laid down in section 40(b) of the I. T. Act 1961 from time to time. The interest shall be credited to the capita .....

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od.Therefore,he held that the interest free advance to the ex partner were not acceptable. Before the AO the assessee had furnished a copy of the ITAT,Mumbai Bench Cs order dated 16.03.2009(ITA/No.5236 and 5237/Mum/2007 for A.Y. 200405) in the cases of Chimanlal U Shah and Sadguna C.Shah(Late) in support its claim. As per the AO,the facts of the said cases were different from that of the instant case,that in that the issue involved was disallowance u/s 40A(b) and the interest not charged on the .....

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at WCPL was having profitable business and subsequently it sunk into losses,that Umesh Mehta,partner of the assesseefirm was also a director of WCPL,that he was the moving force behind the company,that he had to support the company to save his reputation,that had he not supported WCPL it would have adversely affected the activities of the firm..The assessee also submitted copies of the financial statements of its own and also of WWCPL to explain the issue. After considering the submissions of th .....

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y submitted by it during the setaside proceedings revealed that interest was not be collected with regard to the amounts advanced to its associate/sister concerns as they were in not in sound financial conditions. He further held that that the fact of safeguarding the reputation of the partner by advancing loan to WCPL was not established,that it was not clear as to how advancing of loan was beneficial to the assesseefirm, that advancing interest free loans to WCPL was not beneficial to the busi .....

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st it would have adversely affected the functioning of the firm,that the reason/ explanation furnished by the assessee did not hold water,that the assessee's partners' dispute could not be a reason for noncharging of interest,that it would not automatically become a reasonable cause for lending amounts free of interest. About Sanjay Sales Corporation (SSC),it was stated that Umesh Mehta,partner of assessee'sfirm was also a partner in SSC,that due to some commercial disputes the amoun .....

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formation or details/evidence to prove that there was commercial expediency involved in giving the loan, that the Tribunal had also directed the assessee to establish both the aforesaid aspects before the AO,that it failed to establish either of the above before AO,that it had not discharged the onus cast upon it by the Tribunal even before him.The FAA upheld the order of the AO. 4. During the course of hearing before us,Authorided Representative(AR)argued that the assessee had advanced loans in .....

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₹ 3.13 crores, that partner s capital had to be adjusted first. He relied upon the case of Reliance Utility (313 ITR 340) and Sridev Enterprises(192 ITR165)of the Hon ble Karnataka High Court.The Departmental Representative (DR) argued that the assessee had not explained as to how the reputation of the assessee firm was at stake in case if the sister concerns failed, that it was also not clear as to how the assessee was benefited by not charging interest from them,that commercial expedienc .....

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mounts,that the AO and the FAA, in the second round of litigation,deliberated upon both the aspects as directed by the Tribunal and held that claim made by the assessee had to be rejected. Before proceedings further we would like to mention certain principles governing the allowing/disallowing interest expenditure claimed by an assessee and same can be narrated as under: i.Section 36(1)(iii) of the Act provides for deduction of interest on loans raised for business purposes.Once an assessee clai .....

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spite of the pending term loans and working capital loans on which the assessee is incurring liability to pay interest, there was justification to advance loans to sister concerns for nonbusiness purposes. ii. Business expediency is a term used by business house to showcause that the transaction was required to be done in pure commercial purpose. It means by doing such transaction there will be profit to an assessee.It also means that if such transaction is not done, there will be losses to the .....

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of commercial expediency. It may be the case of the assessee that the amounts lent to the associate concerns were turned out to be bad subsequently,does not entail it not to follow provisions of law. v.The business 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.The business interest of the assessee has to be distinguished from the personal i .....

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stfree advance when the assessee itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of the mixed funds, which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended. vi. Equity and law are strangers to each other and on that count the provisions of law cannot be applied.The courts have also dealt with the .....

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ed then it has be held that if the assessee advances loans bearing interest to others without charging interest the AO is not unjustified in disallowing the same in absence of commercial expediency. vii. A sum of money expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of business expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of .....

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bjective standard is to be judged from the point of view of a businessman. It applies to interest expenditure also. 5.a.Now,we would like to consider the facts of the case in light of the above principles. As far as business expediency is concerned,we find that the assessee has not proved as to how its business was benefited directly or indirectly by advancing interest free loans to sister concerns and other related parties.In our opinion,the onus of proving justification was on the assessee and .....

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to the related persons and WCPL,there would not have been any problem.On the one hand the assessee acts as a benevolent savior to an entity that was difficult situation and on the other it wants that the Sovereign should also shoulder its benevolence by allowing an expenditure that has no business connection. Good deeds have to be appreciated, but not at the cost of the exchequer.In other words,State should not be made party to those items of expenditure that are unrelated with business of an a .....

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