Interest on borrowed fund allowed only on the portion used in the business

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCHES: “E” NEW DELHI

BEFORE SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER

AND SHRI C.M.GARG, JUDICIAL MEMBER

ITA No: 3938/Del/2011

Assessment Year: - 2007-08

Metro Institute of Medical Sciences P.Ltd.

X-1, Sector 12, Noida, UP

Pin 201 301

(Appellant)

vs.

ACIT, Range 6

New Delhi

(Respondent)

ITA No: 3949/Del/2011

Assessment Year: - 2007-08

ACIT, Range 6

New Delhi

(Appellant)

Vs.

Metro Institute of Medical Sciences P.Ltd.

Noida, UP

 (Respondent)

Appellant by: Shri Hiren Mehta, C.A.

Respondent by: Shri R.S.Negi, Sr.D.R.

O R D E R

PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER

These are Cross Appeals and are directed against the order of the Ld.CIT(A)-IX, New Delhi dt. 25.5.2011 for the Assessment Year 2007-08.

2. The facts in brief. The assessee is a company engaged in the business of running of hospitals under the brand name “Metro” in various parts of the country. The company has high expertise in operating and managing Nursing Homes/Hospitals specially with respect to Cardio Vascular Care. It filed its return of income for the Assessment Year 2007-08 on 31.10.2007 declaring an income of Rs.7,13,10,790/-.

The A.O. completed the assessment u/s 143(3) on 29.12.2009, assessing income at Rs.7,60,620/-, where interalia he has disallowed interest on borrowed capital as well as u/s 14A of the Income Tax Act, 1961. Aggrieved the assessee carried the matter in appeal before the CIT. The First Appellate Authority deleted the disallowance on proportionate interest made by the A.O. He also restricted the disallowance made u/s 14A. Aggrieved both the assessee and the Revenue are in appeal before us.

3. We have heard Mr. R.S.Negi, Sr.D.R. and Mr.Hiren Mehta, C.A. Ld.Counsel for the assessee. We first take up Revenue’s appeal. The grounds raised by the Revenue are as follows.

“1. The order of Ld. CIT(A) is erroneous and contrary to facts and law.

2. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in deleting the addition of Rs.26,30,636/- made by the Assessing Officer by disallowing the proportionate interest in respect of interest free advances given by the assessee ignoring that:

2.1 The assessee had borrowed huge funds on which it was paying interest and claiming same as expenditure in its P&L a/.c;

2.2. The assessee itself submitted that 35.71% of the total funds used for the purpose of making interest free advances were borrowed funds and remaining funds were assessee’s own funds.

2.3. Similar disallowances made in the case of assessee itself for Assessment Year 2006-07 were upheld by the Hon’ble ITAT B bench of Chandigarh in ITA no.1432/Chandi/2010 vide order dt. 28.2.2011.

3. The appellant craves leave to add, alter, amend any grounds of appeal raised above at the time of hearing.”

4. The main contention of the Ld.D.R. is that the facts and circumstances under which the Chandigarh Bench of the Tribunal in its order in ITA 1057/Ch./2008 dt. 24th September,2009, wherein it followed the judgement of the Jurisdictional High Court in the case of CIT vs. Abhishek Industries, (2006) 286 ITR p.1 and confirmed the disallowance remain the same. He further submitted that another the Chandigarh Bench of the Tribunal in ITA 1432/Ch./2010 order dt. 28^th Feb.,2011 had followed its earlier order and confirmed the same disallowance. He argued that the precedence set by the Co-Ordinate Bench of the Tribunal in the assessee’s own case has to be followed. He pointed out that the assessee in his explanation has also submitted that disallowance can be made on proportionate basis and had given reasons for the same. Thus he submits that it cannot argue otherwise. He further submitted that the Commissioner of Income Tax (Appeals) has accepted additional evidence from the assessee and without confronting the A.O. with this additional evidence, had adjudicated the matter. Hence he submitted that the order of the Ld.CIT(A) has to be reversed.

5. The Ld.Counsel for the assessee on the other hand submitted that the facts are different in this year and that case law relied upon by the Tribunal for the earlier A.Ys is no more good law in view of the subsequent judgement of the Hon’ble Supreme Court in the case of S.A.Builders, 288 ITR p.1. Thus he submitted that the judgement of the Hon’ble P&H High Court in the case of Abhishek Industries cannot be followed. He further submitted that the case now falls under the

jurisdiction of the Delhi High Court and that the assessee satisfies the proposition laid down by the Jurisdictional High Court in the case of CIT vs. H.B.Stock Holding Ltd. 325 ITR 316 and submitted that the issue is covered in its favour. The Ld.Counsel’s submissions are summarized as under.

(a) the borrowings were for the purpose of business from PNB Centurian Bank and others and for specified business purpose and hence the interest paid on the loans cannot be disallowed;

(b) that the assessee has sufficient interest free funds, which have to be presumed to have been advanced as interest free advances. Reliance is placed on the decision of the Bombay High Court in the case of CIT vs. Reliance Utilities 313 ITR 340 @ page 344. He further relied on the following decision:-

i. CIT vs. DCM Ltd.325 ITR 310 Delhi;

(c) that secured loans given by banks for specific purposes are not allowed to be diverted;

(d) the advances were given keeping in view commercial expediency;

(e) that the CIT called for the remand report from the Assessing Officer on the evidences admitted by him, and hence there can be no grievance of not having an opportunity.

6. In reply the Ld.D.R. tried to distinguish the decision of the Delhi High Court by submitting that it was a case where interest free advance was given prior to taking a loan.

7. On the assessee’s appeal, the ld.counsel for the assessee thoughnot leaving this ground ultimately submitted that he is not pressing the same in view of the smallness of the amount.

8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record and the orders of the authorities below we hold as follows:-

9. The loans in question, on which interest has been paid by the assessee and part of which is sought to be disallowed by the Assessing  Officer is given below:-

10. It is common knowledge that loans granted by banks for specific purposes such as working capital or term loan are to be utilized for an agreed specified purpose and that the utilization is monitored by the Bank and that the quantum of working capital advance limit depends on the level of stocks and sundry debtors of the organization taking the loans and that term loans are disbursed only on acquiring of specified assets. The working capital limits vary in direct proportion to the net current assets. Similarly term loans granted are tied up for specific purposes and the Banker insists on bills etc. to monitor utilization. The presumption in such cases should be that the Banker have monitored the disbursements and that the loans granted by the banker have been utilized only for the purpose for which they have been granted. This presumption is a rebuttable presumption and the A.O. should have some evidence or material on record to hold otherwise. There is no such evidence in this case.

11. The earlier Benches of the Tribunal have followed the decision of the Hon’ble P&H High Court in the case of Abhishek Industries. The proposition laid down in this judgement are at variance with the judgement of the Hon’ble Supreme Court in the case of S.A.Builders Ltd. Vs CIT (S.C.)(2007) 288 ITR 1 has held as follows:-

22. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency.

23. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of business”. It has been consistently held in the decisions relating to section 37 that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.

25. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed.

26. The 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.

31. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done.

32. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.

35. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the 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. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”

In the case of Munjal Sales Corporation Vs. CIT, 298 ITR 298, the Hon’ble Supreme Court has observed as follows.

“17. One aspect needs to be mentioned during the Assessment Year 1995-96, apart from the loan to its sister concern amounting to Rs.5 lakhs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee firm out of its own funds, and, therefore, it was not entitled to claim deduction under Section 36(1)(iii). This finding is erroneous. The opening balance as on April 1, 1994, was Rs.1.91 crores whereas the loan given to the sister concern was a small amount of Rs.5 lakhs. I our view, the profits earned by the assessee during therelevant year were sufficient to cover the impugned loan of Rs.5 lakhs”

12. Thus applying the propositions laid down by the Hon’ble Supreme Court, we have to uphold the order of the First Appellate Authority. It is not the case of the Assessing Officer that the borrowings in question are not for business purposes. The A.O. has no material to disbelieve the claim of the assessee. Hence the assessee should succeed.

13. Even otherwise the interest free funds available with the assessee are Rs.44.28 crores. The assessee has earned profit of Rs.5.93 crores during the Assessment Year 2007-08. If depreciation of Rs.2.88 crores is added, the cash accruals during the year would be Rs.8.81 crores. The interest free advances are to the tune of Rs.14.89 crores. The Hon’ble Bombay High Court in the case of CIT vs. Reliance Utility and Power Ltd. 178 Taxman 135 Bombay held that in such situations the presumption would be that interest free funds were used for the purpose of giving interest free advances. The A.O. has not dislodged this presumption.

Hence on this ground also, the issue is to be decided in favour of the assessee.

14. The Commissioner of Income Tax (Appeals) has also called for the remand report from the Assessing Officer on the details filed before him and hence the argument that the Assessing Officer has not been given an opportunity is against the facts of the case. Admission of additional evidence has not been challenged by Revenue.

15. For all these reasons, we uphold the order of the Commissioner of Income Tax (Appeals) and dismiss this appeal of the Revenue.

16. Coming to the assessee’s appeal, the Ld.Counsel for the assessee did not press the same, in view of the smallness of the amount and on the condition that it would not set a legal precedent. Accepting this proposition we dismiss this appeal; by the assessee.

17. In the result both the Revenue’s appeal and the assessee’s appeal are dismissed.

Order pronounced in the Open Court on 29th August, 2012.

                                                   Sd/-                         Sd/-

                                       (C.M. GARG)        (J.SUDHAKAR REDDY)

                                   JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: the 29th August, 2012

*manga

Copy of the Order forwarded to:

1. Appellant;

2.Respondent;

3.CIT;

4.CIT(A);

5.DR;

6.Guard File

By Order

Dy. Registrar

1. Date of Dictation: 17/7

2. Draft placed before the Author on:27/8

3. Draft proposed and placed before Second Member on:28/8

4. Draft discussed/approved by the Second Member on:28/8

5. Approved draft came to Sr.P.S. on:29/8

6. Date of Pronouncement: 29/8

7. File sent to Bench Clerk on :30/8

8. Date on which file given to Head Clerk on:

9. Date of dispatching the Order on: