Q : When will Interest on loan from Debtor disallowed?
Where assessee-company received loan of certain sum from its holding company, ‘F’ and claimed interest on said loan, since ‘F’ was a debtor of assessee-company of more than double amount of loan, allowance of deduction was amount to diversion of income of assessee-company; interest paid was to be disallowed
IN THE ITAT DELHI BENCH ‘B’
Dilli Karigari Ltd.
Deputy Commissioner of Income-tax
CHANDRAMOHAN GARG, JUDICIAL MEMBER
IT APPEAL NOS. 5837 & 6120 (DELHI) OF 2012
[ASSESSMENT YEAR 2009-10]
FEBRUARY 2, 2015
Section 36(1)(iii) of the Income-tax Act, 1961
Navin Kumar Jain, CA for the Appellant. Smt. Parwinder Kaur for the Respondent.
Chandramohan Garg, Judicial Member – These appeals have been preferred by the assessee and the Revenue against the order of the Commissioner of Income-tax (Appeals)-XIII, New Delhi dated September 5, 2012 in Appeal No. 212/11-12 for the assessment year 2009-10.
2. Briefly stated the facts giving rise to these appeals are that the assessee-company is engaged in the business of sale of branded readymade garments and made up articles of textiles. The assessee-company is also trading in personal care, organics, jewellery and fabric. The case was selected for scrutiny under CASS and the Assessing Officer issued notice under sections 143(2) and 142(1) of the Income-tax Act, 1961 (for short the Act), along with a detailed questionnaire which were duly served upon the assessee. After considering the details and explanation of the assessee, the Assessing Officer has held that the assessee is subsidiary of Fab India Overseas Pvt. Ltd. which deals in artisans based products of designer quality and the assessee-company is doing the role of co-ordinator between artisans and Fab India Overseas Pvt. Ltd. (FOPL). Thus, the assessee-company neither carried out any manufacturing activity nor any trading activity during the relevant period under consideration. The Assessing Officer disallowed Rs. 1,25,70,364 out of total rent paid by the assessee-company, also disallowed Rs. 22,43,080 out of professional charges paid by the assessee-company and further disallowed interest payment of Rs. 6,57,669 paid by the assessee-company. The Assessing Officer finalised the assessment at Rs. 3,03,70,867 as against the returned income of the assessee of Rs. 1,48,99,754. Being aggrieved by the above assessment order, the assessee company preferred an appeal before the Commissioner of Income-tax (Appeals) which was partly disallowed on the issue of disallowance of interest payment to the group companies but partly allowed on the issue of rent payment and professional charges. Now, the aggrieved assessee as well as the Revenue has preferred these appeals before this Tribunal.
Assessee in I.T.A. No. 5837/Del/2012
3. The assessee has raised sole ground in this appeal which reads as under:
“1. (a) The learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of Rs. 6,57,669 made by the Assessing Officer on account of interest paid to M/s. Fab India Overseas P. Ltd.”
4. Apropos sole ground of the assessee, the learned authorised representative submitted that the Assessing Officer was not justified in making disallowance of Rs. 6,57,669 by holding that when both companies happen to be group companies and transactions are covered under section 40A(2)(b) of the Act, then the assessee-company is not subsidiary company of Fab India Overseas P. Ltd. The authorised representative further contended that admittedly the assessee-company has received a sum of Rs. 2,52,89,149 from its holding company as unsecured loan but at the same time, the company has shown Fab India as its debtor for a sum of Rs. 5,26,61,159. The authorised representative reiterating its submission before the Assessing Officer submitted that the assessee-company is paying interest on unsecured loan and the same company is a debtor, as the assessee-company from day one maintained separate ledger for loan account and separate ledger account for sales to Fab India Overseas Pvt. Ltd. on bill to bill basis and the assessee-company is receiving payments against sales from FOPL on bill to bill basis. The authorised representative also contended that the assessee-company is getting funds from FOPL which has invested in purchases which were made for FOPL and accordingly, the interest pertains to purchase amount. The authorised representative has also drawn our attention towards paper book and submitted that the purchases made are ultimately sold to FOPL and, accordingly, beneficiary for the purchase is also FOPL.
5. Replying to the above, the learned Departmental representative placed reliance on the orders of the authorities below and submitted that it was claimed by the assessee-company that both accounts are separately maintained on bill to bill basis and payments are received from FOPL in respect of sales made. The Departmental representative further submitted that it is also a claim of the assessee-company that unsecured loan were raised from FOPL for smooth conducting of business ; if the assessee-company had not taken from FOPL, then it would have borrowed the same from other parties. The Departmental representative further submitted that this explanation and contention of the assessee is not sustainable because the assessee-company could have asked FOPL to clear its dues of sales made instead of taking loans from the same company as unsecured loan on interest. The Departmental representative has also drawn our attention towards the fact that the amount of sundry debtors is huge and it may be pertaining to the sales of more than one month, therefore, low unsecured loan transaction from the assessee-company FOPL cannot be isolated with the amount of debt lying with FOPL. The Departmental representative finally submitted that the accounting principle makes it clear that credit and debit entry should go side by side and the only impact ultimately has to be seen for calculating interest and since amount of debt is higher than the amount of loan, therefore, interest on such loan cannot be allowed.
6. On a careful consideration of above submissions, we observe that the Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer confirming the disallowance with the following observations and conclusion :
I have considered the submission of the appellant and observation of the Assessing Officer. It is seen that the appellant-company has received a sum of Rs. 59,149 from M/s. Fabindia Overseas Pvt. Ltd. It is also seen that the appellant-company has shown FOPL as debtor of Rs. 5,26,61,159 in its balance sheet. The appellant-company is paying interest on the loans taken from FOPL but not charging interest on the amount shown as debtor in the balance sheet. The appellant is a group company of FOPL. It is claimed by the appellant that both accounts are separately maintained and bill to bill payments are received from FOPL in respect of sales made. It is also claimed by the appellant that loan was from FOPL for smooth conducting of business and if appellant had not taken loan from FOPL then it would have borrowed the same from other parties. It is claimed by the appellant that unsecured loan account and debtors account cannot be co-related with each other. It is seen from the facts of the case that at one side the appellant is supplying goods to FOPL and showing debtor of Rs. 5,26,61,159 and on the other side it is receiving loans from same company on interest. The appellant-company could have ask the FOPL to clear its dues of sales made instead of taking loans from the same company as unsecured loans. The amount of sundry debtor is huge and it may be pertaining to the sales of more than one month. The transaction of the appellant from FOPL cannot be isolated with the amount of debt lying with FOPL. The accounting principle makes it clear that credit and debit entry should go side by side and only the ultimate impact has to be seen for calculating the interest. Since the FOPL is a debtor to the extent of Rs. 5,26,61,159 as against the loan amount of Rs. 2,52,89,149. Therefore, interest on such loan cannot be allowed. Even after adjusting the loan amount against the sundry debtor of Rs. 5,26,61,159 the appellant still to receive Rs. 2,73,72,010 from FOPL. Therefore, the accounting policy adopted by the appellant is not in accordance with the principle of accountancy and same cannot be allowed. The expenditure claimed by the appellant on interest of Rs. 6,57,669 is not laid out and expanded for the business purposes. It is indirect benefit given by the appellant to the FOPL and same amounts to diversion of income by the appellant. Hence, the disallowance of interest of Rs. 6,57,669 made by the Assessing Officer on loan amount of Rs. 2,52,89,149 is upheld and this ground of appeal of the appellant is rejected.”
7. On a careful consideration of rival submissions of both parties and conclusion of the Commissioner of Income-tax (Appeals), we note that admittedly the assessee-company received loan of Rs. 2,52,89,149 from FOPL and at the same time FOPL was a debtor of Rs. 5,26,61,151 as per balance sheet of the assessee submitted before the Assessing Officer. Although the assessee-company has explained that the unsecured loan was necessary for the smooth operation of the assessee-company which was also taken on lower rate of interest, but when the amount of sales is more than double of unsecured loan, then the transaction of unsecured loan and transaction of sale with the same company may be seen by the intention of the parties but ultimate purchaser of the product of the company is a debtor to the extent of Rs. 5.26 crores as against the loan amount of Rs. 5.52 crores, then interest on such loan cannot be allowed. We are in agreement with the conclusion of the Commissioner of Income-tax (Appeals) that even after adjusting the loan amount against the sundry debtor, the assessee-company is still to receive Rs. 2,73,72,010 from FOPL, therefore, interest on such loan cannot be allowed and expenditure claimed by the assessee-company on interest is not allowable. If interest so paid is allowed, then it would be indirect benefit given by the assessee-company to the FOPL and the same amounts to diversion of income of the assessee-company which is not permissible. In view of the above and on the basis of foregoing discussion, we uphold the action of the Assessing Officer and we are unable to see any ambiguity, perversity or any other valid reason to interfere with the findings of the Commissioner of Income-tax (Appeals) on the impugned addition on this point. Accordingly, sole ground of the assessee being devoid of merits is dismissed.