TMI Blog2023 (5) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer. Therefore, we direct the Assessing Officer to allow the claim of the assessee and consider to determine the capital gain or loss by considering the net sale consideration, accordingly, this grounds of appeal is allowed. Disallowance of excess interest paid - diversion of funds for non-business purposes - assessee has advanced funds to one of its Directors and charged interest only @13.5% whereas paid interest to ENNPL at higher rate - HELD THAT:- As observed from the balance sheet submitted before us that the assessee has borrowed huge funds for the purpose of business and paid the interest @18% and at the same time assessee has lent the huge amount of loan to one of its director Mr. Anup Shyam Karnani. There is no other funds available in the business than the borrowed funds and the same were utilized to pay the loan to one of the its Director. It is immaterial how the loan was treated by the Director - as far as the assessee is concerned, assessee has borrowed funds @18% without there being any other funds i.e. interest free funds in the business, therefore, it clearly shows that assessee has utilized interest bearing funds to lend the money to one of its Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act 1961. The loan amount which was advanced to Mr. Anup Shyam Karnani was on account of Commercial Expediency not for Personal Purpose. As a prudent business, the Appellant agreed to reduce the rate of interest from 16.25% to 13.5% only with condition to repay the entire loan amount immediately so that Appellant doesn't default in repaying the loan back to Lender. In light of the above said facts the disallowance of excess interest paid to Elevators News Network Pvt. Ltd amounting to Rs.42,24,423/- ought to be deleted. 3. With regard to Ground No. 1 the relevant facts are during the year assessee has sold premises at ₹.48,00,000/- on 16.10.2013 and the Assessing Officer observed from Profit and Loss Account that assessee has shown the Sale of Gala (net of expenses) at ₹.43,62,219/- under the head other non-operating income . Further, Assessing Officer observed that assessee has shown sale of premises situated at Niraj Industrial Estate, Andheri (E) Mumbai at ₹.43,62,219/- after deducting brokerage charges and other society transfer charges of ₹.4,21,641/-. After considering the submissions of the assessee, Assessing Officer proceeded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has taken loan from M/s. Elevators News Network Pvt. Ltd. (in short ENNPL ) and paid interest @18% and he further, observed that assessee has given a huge loan to one of its Director Mr. Anup Shyam Karnani and charged the interest @13.5%. When the assessee was asked to substantiate on the above transactions, assessee filed its submissions. After considering the submissions of the assessee the Assessing Officer rejected the same by observing that assessee has advanced funds to one of its Directors and charged interest only @13.5% whereas paid interest to ENNPL at higher rate. He observed that assessee has lent the amount to one of its Director with little interest, which proves that the funds borrowed have direct nexus between the borrowing of the funds and diversion thereof for non-business purpose. The same may be lent for the reason that the assessee company has some loans or other interest bearing debts to be repaid. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee and the Director would be enjoying the benefit thereof. Accordingly, he invoked provisions of section 36(1)(iii) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (iii) For the purpose of Business or Profession. In the following paras we would elucidate the meaning of these with reference to this particular section (1) Meaning of Interest - The definition of interest in Section 2(28A) means interest payable in any manner in respect of any moneys borrowed or debt incurred. But for Section 36(1)(ii), interest is restricted to that on money borrowed and not on debt incurred. In simple words, the essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal, It may be regarded either as representing the profit he might have made if he had had the use of his money or conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. (ii) Concept of borrowed - Provisions of Section 36(1)(iii) concern capital borrowed and not other debts or liability. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources and a loan is one of such sources. The legislature has, under this clause, permitted as an allowance interest paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further in the judgement 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 5) Further, following this judgement 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 interest, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial if a third party also benefits thereby- 11) a) Further, the Honourable Supreme Court in the above mentioned case of S.A. Builders Ltd. has also relied on in the case of Atherton Vs British Insulated Helsby Cables Ltd. (1925) 10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (Supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. VS CIT(1951) 20 ITR 1, CIT Vs Chandulal Keshavlal CO. (1960) 38 ITR 601 etc. b) The expression commercial expediency is an expression of wide import and Includes such expenditure as prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 12) Thus, where the funds of the business were diverted for the interest free loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs.1,86,57,929/- and balance which was outstanding as on 31st March 2014 (Net of TDS) is Rs. 12,23,89,766, Further, even during the financial year ended 31st March 2014, the Appellant couldn't pay to the Lender neither the Interest nor the principal amount. 15) a) Further it wouldn't be out of place to inform you that the Appellant had also borrowed the funds from Regaliaa Buildtech Services Pvt. Ltd. (RBSPL) during the financial year ended 31st March 2011. The credit balance which was outstanding as on 31st March 2012 in the books of appellant in the name of Regaliaa Buildtech Services Pvt Ltd. was Rs. 1,25,28,824/- (Net of TDS). This balance included interest on the loan amount of Rs. 25,74,483/- The Appellant had repaid back this Lender the principal amount. b) Further the credit balance which was outstanding as on 31st March 2013 in the name of Regaliaa Buildtech Services Pvt Ltd. was Rs 34,44 563/- The interest which was paid during the financial year ended 31st March 2013 was Rs 31,87,058/- A substantial amount of interest was repaid back to the Lender dunng the financial year ended 31st March 2013 c) Finally the entire balance amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fession this clearly indicates that the Loan given to Mr. Anup Shyam Karnani was for Business Purpose Only and not for any other reason. Though Mr Anup Shyam Karnani was a director of the company still the money was advanced to him for Business Purpose only and not for Private Purpose. g) Hence the Appellant had incurred the business expenditure of the Interest paid to Lenders which was paid voluntarily for commercial expediency and it was immaterial whether the third party i.e. the Borrower i.e., Mr. Anup Shyam Karnanl also benefited from Lending the same amount to him 17) a) Further in the financial 2013 the balance which was outstanding in the books of the Appellant in the name of Elevator News Network Pvt. Ltd. was Rs. 10,73,59,534/- which is inclusive of interest amounting to Rs. 1,75,23, 144/- @ 16% Balance which was outstanding was net of TDS b) During the financial year ended 31st March 2013 the rate of interest was dropped from 16.5% in the preceding previous year to 16% in the current year because Mr. Anup Shyam Karnani was borrowing funds from outside parties at lower rate of interest c) Even though the rate of interest was charged by the Appellant f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 5th December 2016. 20) a) On page 7 para 6 of the Assessing Officer has stated that in respect of interest received by the Appellant from Shri Anup Shyam Karmani, it is worthwhile to mention that section 36(1)(ii) of the Act provides for deduction of interest on loans raised for business purpose. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that loans raised were used for business purpose. If in process of examination of genuineness of such a deduction, it transpires that the assessee had advanced funds to director of the company or any other person for nominal interest, then, heavy onus is on the part of the assessee to substantiate its claim before Assessing Officer. b) To this, we would like to submit that the loans which were raised from two Lenders i.e. Elevator News Network Private Limited and Regaliaa Buildtech Services Pvt. Ltd. during the financial year ended 31/03/2012 were used for business purpose only. The business of the Appellant is Money Lending Business. Hence, the funds which were borrowed were lended to the director of the company. The interest which was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer has ignored the facts that in the financial year ended 31st March 2012, the rate of interest which was obtained from the director 1.e. Shri Anup Shyam Kamani was more than the rate of interest given to the Lenders. As submitted in para 16 we have submitted that in financial year ended 31st March 2012 the Assessee has earned interest income from Mr.Anup Shyam Kamani @ 16.5% and gave interest to Lenders Le. Elevator New Network Pvt.Ltd. and Regaliaa Buildtech Services Pvt. Ltd. @ 16%. d) Further, in the financial year ended 31/3/2013 the rate of interest which was obtained from the director i.e. 16% was the same on the rate of interest given to the Lenders i.e.. 16%. e) Finally in the financial year ended 31/03/2014 the rate of interest which was taken from Shri Anup Shyam Kamani was reduced by 2.5% is from 16% it dropped to 13.5% because the director had obtained loan from other parties @12% hence, he negotiated with the appellant to reduce the interest by 2.5% f) The Appellant agreed with the director to reduce the interest rate only if he repays the entire due immediately. This was done by the director and he repaid the entire dues by May 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/s 143(3). Now, the reason why the Assessing Officer has changed his stand is only because of the fact that appellant had taken interest from Mr. Anup Shyam Karnani @13.5% whereas it paid Interest to Elevator News Network Private Ltd. @ 18% To this we would like to submit that if the Appellant had reduced the interest from 16% to 13.5% from Mr. Anup Shyam Kamani, then it is evident that the profit of Mr. Anup Shyam Kamani had increased by 2.5%. Had Mr. Anup Shyam Karani given interest to Appellant @16% then the loss of Mr. Anup Shyam Karnani would have gone up by 2.5%. We submit herewith the Profit Loss A/c of Mr. Anup Shyam Kamani, wherein it has declared a loss of Rs.35,85,670 Now if the interest rate would have been more than 13.5% then the loss would have gone up drastically. c) Further, we would like to submit that Elevator News Network Private Ltd., and Mr. Anup Shyam Karnani are related parties to the Appellant, this does not mean that Appellant has done some tax planning to reduce its profit. Obviously if the loss of Appellant is reduced by paying less rate of interest to the Lender ie Elevator News Network Private Ltd., then the loss of the Elevator News ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is in the business of money lending and in this regard he submitted copies of memorandum of association and highlighted the object clause of the company. Further, he submitted that assessee has lent the money to one of the Director with the lesser interest and he brought to our notice Page No. 145 of the Paper Book which is the Assessment Order for the A.Y. 2012-13 in which the case of the assessee was assessed u/s. 143(3) of the Act with the observation that assessee is carrying on business of investment and invested the funds of the company in India and elsewhere. 12. Further, he agreed that for the purpose of lending business assessee has taken loan and also gave loan during the year and accepted that there is a difference in charging the interest with the difference of 4.5% which was given to one of the Director and he relied on the submissions made before the Ld.CIT(A). Further, argued that the interest payment made to ENNPL which the company has declared the same in its return of income. Therefore, to that extent of income is already charged to tax. With regard to interest received from the Director he submitted that the Director also disclosed the same in his return of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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