Case Law Details
Brief- High Court of Bombay at Goa has held in the case of Vassantram Mehta & Co. (P) Ltd. vs. JCIT that Interest not to be disallowed if interest free advance granted to sister concern due to commercial expediency and is for business purpose of assessee.
Brief about case
The appellant-assessee filed its return of income declaring a total income of Rs.28.61 lakhs after claiming deduction of expenditure incurred on account of interest aggregating to Rs.27.03 lakhs on pre-shipment packing credit facility obtained and Rs.12.85 lakhs as loss on foreign exchange fluctuation. The A.O. disallowed the entire expenditure on account of interest of Rs.27.03 lakhs on the ground that interest paid in respect of credit facility obtained was not for the appellant’s own business as part of amount of Rs.9.36 crore out of pre-shipment packing credit funds had been diverted as advance to its sister concern M/s Bandekar Brothers Private Limited (BBPL) from whom it purchased iron ore of Rs.6.02 crores. Simultaneously out of total loss of Rs.12.85 lakhs booked on foreign exchange fluctuation on advances received for supply of iron ore from foreign parties, only a sum of Rs.3.59 lakhs was verified by A.O. being the actual loss and consequently the excess foreign exchange loss claimed of Rs.9.26 lakhs was disallowed. As a result, appellant’s income from Rs.28.61 lakhs was enhanced to Rs.35.87 lakhs after adjusting enhanced deduction u/s 80HHC of the Act. On an appeal CIT(A) upheld the decision of A.O. but restricted the disallowance to Rs.17.21 lakhs being the interest payable by the appellant in respect of advances made by it to BBPL (diverted funds) out of the packing credit facility obtained by it. However w.r.t to currency fluctuation loss, entire amount incl.Rs.3.59 lakhs allowed by A.O. was disallowed on the ground that amount received by the appellants are only in the nature of advances and the loss on account of exchange fluctuation could be only allowed as and when the goods are supplied against the advances received and not on a notional basis. On an appeal before Tribunal, order of CIT(A)was upheld. Being aggrieved by the impugned order of the Tribunal, the assessee raised following substantial question of law before the court.
- Whether on the facts and in the circumstances of the case, the appellate Tribunal is right in disallowing the claim of interest payment because of the interest-free advances made to sister concern, solely impelled by commercial expediency and used by the payee company for its business only, on the ground that the advances were excessive considering the requirements of assessee’s trade with that concern?
- Whether on the facts and in the circumstances of the case, the appellate Tribunal is right in confirming the order of the Commissioner (Appeals) disallowing the actual loss incurred due to fluctuation in currency rates in respect of advance received from a foreign buyer and demurrage payable to a foreign buyer ?
Contention of the Assessee
Advance was given to M/s BBPL for the purpose of the appellant’s business so as to ensure an uninterrupted supply of iron ore from BBPL. Moreover, it had funds of its own available for the purpose of making advances to its sister concern which was an admitted positions as recorded in the order of A.O. The assessee also contended for the allowability of whole of loss related to currency fluctuation.
Contention of Revenue
The ld. counsel of the revenue relied on the order of lower authorities and submitted no interference is warranted to the impugned order.
Held by Court
It was an admitted position, mentioned in the assessment order dt.26/03/2004 passed by the A.O., that appellant had enough funds of its own to make advances to M/s BBPL. However, all the authorities under the Act have come to the finding of fact that the appellant had advanced money to M/s BBPL out of the interest bearing borrowed funds. However the apex court in S. A. Builders Ltd held that even where the funds are advanced out of interest bearing funds to its sister concern, yet the deduction of interest paid on account of the borrowed funds cannot be disallowed as an expenditure if the amounts have been given to a sister concern on account of commercial expediency. This is for the reason that it would then be satisfying the test of utlilising the funds for the “purposes of its business”. The Apex Court also observed that each case would be decided on its own facts, depending upon how the funds lent to the sister concern have been utlilised satisfying the test of purpose of assesse’s business. It was found that impugned order had not carried out the aforesaid exercise. Neither the Revenue led any evidence to show how the borrowed funds were utilized by BBPL or the appellant given an opportunity to establish the need of the funds by BBPL for the benefit of appellant-assessee. In view of above the order of the Tribunal disallowing payment of interest to the extent of Rs.17.27 lakhs was set aside and the issue was restored to the Tribunal for fresh consideration and to decide the applicability of Apex court decision in S.A. Builders Ltd to the present facts after letting the parties before it an opportunity to produce evidence in support of their respective cases.
With regard to the question of allowability of currency fluctuation loss, it was held that the issue now stands covered by Apex Court decision in Commissioner of Income Tax V/s. Woodward Governor India P. Ltd. reported in (2009) 312 ITR 254 (SC). This revenue loss is not to be postponed to a future date when the transaction gets crystalised either by performance and/or cancellation of the contract. Therefore, in view of the above, the impugned order dated 08/08/2007 with regard to question (B) was also set aside. However, the issue was restored to the Tribunal for deciding the quantum of loss on account of foreign exchange fluctuation which was to be allowed to the appellant-assesse under Section 37 of the Act on the facts of this case.
