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2016 (4) TMI 1127 - ITAT JAIPUR

2016 (4) TMI 1127 - ITAT JAIPUR - TMI - Disallowance of interest paid by the appellant to the bank as well as to the other parties - Held that:- The assessee was able to establish that he had incurred the expenditure wholly and exclusively for the purpose of business and therefore there is no justification for the revenue to disallowance the interest component. The revenue cannot claim to put itself in the armchair of the businessman and decide how much is reasonable expenditure. The revenue is .....

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: Smt. Neena Jeph (JCIT) ORDER PER SHRI LALIET KUMAR, J.M. This is an appeal filed by the assessee arising from the order dated 14.08.2014 passed by the learned CIT (A), Alwar for the A.Y. 2010-11. The ground raised by the assessee is as under :- That the ld. CIT (A) has misdirected himself in coming to the conclusion that the amount borrowed from bank has not been utilized for the purposes of business and in the process sustaining the disallowance of ₹ 48,85,314/- as made by the learned A .....

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assessee company has invested ₹ 3,28,08,080/- in M/s. Mascot Footcare, Noida and ₹ 1,45,76,154/- in M/s. Mascot Udhyog, Noida. The assessee had shown a profit of ₹ 8,01,141/- from the above two firms under the head Other Income in Schedule 8 of the profit & loss account. It is also noticed that Mrs. Kamlesh Lakhani, Mr. K.C. Lakhani and Mr. Gunjan Lakhani, directors of the assessee company are also the partners in the above two companies i.e. M/s. Mascot Footcare and M/s. M .....

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h is very much higher than the rate of return from these investments. The AO further observed that if the assessee would not have made the above investment, he would have saved the amount of interest paid on unsecured loan and bank loan to the extent of 10.31% i.e. 12% - 1.69% of the investment made which comes to ₹ 48,85,314/- (10.31% of ₹ 4,73,84,234/-). Therefore he observed that the investment made by the assessee company was not justified and it was detrimental to the interest o .....

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terest should not be disallowed as the same has not been used for the purpose of the business of the company resulting in mis-utilization of interest bearing funds causing loss to company. In reply filed by the assessee dated 01.03.2012 on this issue is reproduced hereunder:- Details of investment made by the company in M/s. Mascot Footcare and M/s. Mascot Udhyog enclosed. Please note that the investment in capital of M/s. Mascot Footcare was made as under :- a) 1988-1989 ₹ 5,00,000/- b) 1 .....

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t Udhyog. Moreover the investment in the above firms were made not out of borrowed funds but only out of internal accruals. The assessment of the company is being made almost regularly u/s 143(3) of the Income Tax Act and based on the above facts the department has never made addition on this account. You are, therefore, requested not to make any addition on this account. The AO considered the reply of the assessee carefully but found it not acceptable. The AO discussed the reasons for not accep .....

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s), who has upheld the action of the AO by observing as under :- 4.3. I have perused the assessment order as well as submissions made by the appellant and find that a disallowance of ₹ 48,85,314/- out of the interest payments made by the appellant on loans has been made by the AO on the ground of mis-utilization of interest bearing funds. The AO has stated that an amount of ₹ 3.28 crores stands invested as capital in M/s. Mascot Footcare and amount of ₹ 1.45 crores stands inves .....

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was made in M/s. Mascot Udhyog by the appellant during 1998-2000. The remaining balance represents investments out of internal accrual and not out of borrowed funds. Therefore, there is no justification in making the disallowance out of interest payments made by the company. 4.5. Having considered the submissions made by the appellant and evidence available on record, I find that the concerns in which the appellant company has made substantial investment fall within the ambit of specified perso .....

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the investment made other persons (who are shareholders/directors of the appellant company). The appellant has not been able to controvert that the interest payments made to the specified persons and to the banks are justifiable in view of the utilization of the funds. The AO has given a finding that the funds have been utilized for the purposes of purchase of shares of another group company and thus do not stand covered within the ambit of for the purposes of the business . Further, it is found .....

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ation for the purposes of the business of the company. Moreover, there is no justification for payment of interest on loans taken from related persons, whereas the funds of the company have been parked in other concerns where such related persons are holding substantial interest. Hon ble Kerala High Court has held in the case of CIT vs. Accelerated Freeze Drying Pvt. Ltd. 324 ITR 316 that interest paid is not deductible as money was given to sister concern without interest. Further, Hon ble Alla .....

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ns of both the parties and perused the material available on the record. The only point raised in the appeal in the aforesaid matter is with regard to the disallowance of ₹ 48,85,314/-out of interest of ₹ 1,91,99648/-paid by the appellant to the bank as well as to the other parties. It was contended by the ld AR for the assessee that the investments in the partnership firm were not made in the year under consideration and were made in earlier years. In fact the detail has been provid .....

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that no borrowed funds were utilized during those years for making the investment in the above said concerns. 4.2. The ld. D/R for the revenue has submitted that the investment in these concerns were not part of the business of the assessee company and there is no profit to the business of that the assessee from such investment. It was further submitted that the assessee company has taken a loan from the Punjab National Bank at the rate of 12% and it was submitted that if the assessee company h .....

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estment made by it . The assessee not recalling the investment from M/s Mascot Udyog and taking loan from Punjab National bank, clearly shows that the commercial interest of the assessee has been compromised by the assessee. It was submitted on behalf of the revenue that the M/s Mascot Udyog had invested the major amount in equity shares of M/S Lakhani India Ltd. Thus ld DR, emphasised that the money of the assessee has been rooted for the purchase of equity shares of M/S Lakhani India Ltd . The .....

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s also an admitted position that out of the said available funds, the said concerns had invested in Ms Lakhani India Ltd. The assessment year in which the investments were made in the equity share of M/s Lakhani India Ltd, by M/s Mascot Udyog were as under :- 1995-96 ₹ 24378150 1996-97 ₹ 351110 2001-02 ₹ 237144 Total ₹ 24966404 Thus it is clear that no investment were made in M/s Lakhani India Ltd in the year under consideration. The assessing officer had failed to prove .....

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he armchair of the businessman and decide how much is reasonable expenditure. The revenue is required to examine the issue from the perspective of the prudent businessmen rather from its own angle. Revenue authorities have failed to bring on record any cogent evidence and material to show that the borrowed funds have been utilized for the purposes of investment and were not used for the business purposes. It would be relevant to reproduce below the finding recorded by the assessing officer in pa .....

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which it is paying interest@ 12% which is very much higher than the rate of return from these investment In our view the authorities below have failed to bring on record any material which shows that the borrowed funds have not been used for the purposes of business. In the light of the above the appeal of the assessee is required to be allowed as no fresh investment has been made in the year under consideration and further no loan amount was used for that purposes. 4.6. Our view is also suppor .....

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expression "commercial expediency" is 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. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 (SC)], if the borrowed amount was donated for some sentimental or personal reasons .....

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cial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this court that the expre .....

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ere is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put .....

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ce, the AO could not disallow part of the interest. It is also an admitted fact, as observed by the Tribunal, that the AO .vas not able to pin pointedly come to a definite conclusion that how interest bearing loans had been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-a-vis interest free loans/advances, therefore, in our view as well, once the AO was not able to come to a definite conclusion as to nexus having been establ .....

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