Borrowing funds at higher rate & lending to director shows diversion of funds for non-business purpose

Asuda Holdings Private Limited Vs CIT (ITAT Mumbai)

ITAT Mumbai held that there is a clear diversion of funds for non-business purpose as funds are borrowed @18% and lended the same to one of its directors at 13.5%. Accordingly, disallowance under section 36(1)(iii) sustained.

Facts- AO observed that assessee has taken loan from M/s. Elevators News Network Pvt. Ltd. (ENNPL) and paid interest @18%. AO 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 assesse, AO 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, AO invoked provisions of section 36(1)(iii) of the Act to disallow the difference interest @4.5% and disallowed the same to the extent of ₹. 48,11,168/-. CIT(A) dismissed the appeal filed by the assessee. Accordingly, being aggrieved, the present appeal is filed.

Conclusion- Held that 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 with a considerable difference of interest rate i.e., 4.5%. Therefore, it clearly shows that there is diversion of funds for non-business purpose. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A) and we do not intend to get into the issue of deemed dividend at this stage since the assessee is in the business of money lending. We observe that the issue of deemed dividend is not raised by the revenue authorities. Accordingly, ground raised by the assessee is dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 20.09.2022 for the A.Y.2014-15.

2. Aggrieved by the order of Ld.CIT(A), assessee is in appeal before us and raised following grounds in its appeal: –

“1. The Commissioner of Income Tax (Appeal) has erred in confirming with the Assessing Officer to disallow the Brokerage expense and Transfer Charges total amounting to Rs.1,36,140/-which was incurred by the Assessee exclusively for Sale of the Business Premises which was the Depreciable Asset of the Assessee.

Even though Section 50(1) of the I. T. Act 1961 categorically states that these expenses incurred wholly and exclusively in connection with such transfer of such asset expenses will be deducted from Sale Proceeds arising even then, such expenses has been disallowed by the A.O. & confirmed by CIT(A).

In light of the above said facts the disallowance of expenses amounting to Rs.1,36,140/- which is confirmed by the CIT(A) ought to be deleted.

2. The CIT(A) has also erred in confirming the disallowance of excess interest paid amounting to Rs.42,24,423/- to Elevators News Network Pvt. Ltd. The total interest which was paid to Elevators News Network Pvt. Ltd. was @18% amounting to Rs. 1,86,57,929/- & the rate of interest which was received from Mr. Anup Shyam Karnani being the Director of the Company to whom the same loan amount was advanced was @ 13.5%. This excess interest paid been @ 4.5% was disallowed u/s 36(1)(iii) of Income Tax 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 to determine the short term capital gain u/s. 50(2) of the Act as under: –

From the above Assessing Officer has rejected the associated cost of transfer claimed by the assessee relating to brokerage and other charges.

4. Aggrieved, assessee preferred appeal before Ld.CIT(A). Ld.CIT(A) after considering the submissions of the assessee sustained the addition made by the Assessing Officer.

5. Aggrieved, assessee is in appeal before us, at the time of hearing, Ld. AR of the assessee submitted that assessee has sold the property no doubt, which is part of the block of assets. However, assessee has incurred certain expenditure like brokerage charges of ₹.1,20,000/- and other dues pending settlement with the society amounting to ₹.1,36,140/-. He submitted that these are all genuine expenses connected with the transfer of above asset. Therefore, these should be allowed as expenses connected with transfer.

6. On the other hand, Ld. DR relied on the orders of lower authorities.

7. Considered the rival submissions and material placed on record, we observe that assessee has transferred the premises (Gala) situated at Niraj Industrial Estate, Andheri (E). We observe that the assessee has incurred certain expenses on such sale. As per the provisions of section 50(2) the Assessing Officer has to consider only the net consideration for determining the capital profit or loss and not the gross consideration. In the given case Assessing Officer has proceeded to calculate the capital gain by considering the gross sale consideration, overlooking the related expenses incurred by the assessee. The expenses claimed by the assessee are part of such sale like commission and other dues to the society are connected with the transfer. 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.

8. With regard to Ground No. 2, the relevant facts are, Assessing Officer observed that assessee 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 Act to disallow the difference interest @4.5% and disallowed the same to the extent of ₹.48,11,168/- and calculated the amount by applying the formulae as under: –

9. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and filed detailed submissions before him. For the sake of clarity, it is reproduced below: –

““With reference to above and further to our submission which we have submitted to you vide our letter dated 18th May 2022, we would further like to submit as under pertaining only to Ground No.2:-

1) In our letter dated 18th May 2022, we had submitted to your Honour that the Assessing Officer has erred in disallowing the interest u/s 36(1)(iii), because the section 36(1)(iii) was not applicable to the assessee. Having said that, even if this section i.e. 36 (1)(iii) is now applicable still the disallowance made by the Assessing Officer is incorrect.

2) The bare reading of section 36 (1)(iii) is as follows:-

“36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters deal with therein, in computing the income referred to in Section 28-

(i) (ii) ….

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:-

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till date on which such asset was first put to use, shall not be allowed as deduction.

Explanation Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause.”

3) The sub section has three important words or phrases that are core to understanding of this Section I.e. Interest, (1) Borrowed and, (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 capital borrowed for the purposes of the business; and the capital, in this context, means money and not any other asset purchased on credit [Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 561TR 52 (SC)].

Importance of loan settlement For the loan there must be a settlement/agreement between the parties that particular amount would be given by one party to other party. The terms would be that it would be refunded or returned either on demand or on the directions of the creditors and particular interest/no interest would be paid on the said amount. Thus, for the purpose of loan there must be interaction between the parties and there must be a concluded contract. Thus for Section 36(1)(i) the necessary precondition is the existence of a loan transaction or a loan agreement between two parties with an established role of creditor and debtor. There is a Gujarat High Court judgement in the case of Arun Family Trust Vs CIT 298 ITR 437 (Guj), which brings out this fact clearly.

Element of refund is a must. An element of refund or repayment is a must in the concept of borrowing. If there is no obligation to refund the capital provided, interest on such capital is not deductible under Section 36(1)(ii) – Pepsu road Transprot Corpn. V. CIT 130 ITR 18 (P&H).

(iii) The phrase “for the purpose of business” – The expression “for the purpose of business” occurs in Section 36(1)(iii) and also in Section 37(1). A similar expression with different wording also occurs in Section 57(iii) which reads as “for the purpose of making or earning income”. This issue came up for consideration before the Supreme Court and the Honourable Supreme Court while giving judgement in the case of Madhav Prasad Jatia V. CIT, (SC) 118 ITR 200 has established that the expression occurring in Section 36(1)(iii) is wider in scope than the expression occurring in Section 57(ll). Thus, meaning thereby that the scope for allowing a deduction under Section 36(1)(iii) would be much wider than the one available under Section 57(iii).

4) This phrase, as held by many legal pronouncement is the most important yardstick for the allowability of deduction Under Section 36(1)(iii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon’ble Supreme Court in the case of S. A. Builders Ltd. Vs CIT(A), Chandigarh reported in 288 ITR 1 has used the word “commercial expediency 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/partners of the assessee-firm and working solely in the Interest of the assessee-firm/company, would have extended such Interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business.”

6) Thus, for allowance of a claim for deduction of interest under this provision following three conditions are there;

(i) The money, that is capital, must have been borrowed by the assessee.

(ii) It must have been borrowed or the purpose o f business.

(iii) The assessee must have paid interest on the borrowed amount l.e. he has shown the same as an item of expenditure.

The above mentioned three conditions have been established legally by Supreme Court judgement in the case of Madhav Prasad Jatia Vs. CIT, (1979) 118 ITR 200 (SC).

7) Now, on page 5 para 5.9 of the Assessment Order passed u/s 143(3) of the Income Tax Act 1961 for the Assessment Year 2014­15 dated 5th December 2016, the Assessing Officer has relied on the Honourable Supreme Courts decision in case of S.A. Builders Ltd., reported in 288 ITR1 in which the concept of “Commercial Expediency” was used.

8) The Honourable Supreme Court’s order of S. A. Builders Ltd. it has been stated that “As per section 36(1)(ii) of the Income Tax Act 1961 which states that the amount of interest paid in respect of capital borrowed for the purposes of business or profession” has to be allowed as a deduction in computing the Income Tax u/s 28 of the Act.

9) Further, it has been stated in this order that “In Madhav Prasad Jantia Vs C.I.T. U.P. AIR 1979 SC 1291, this court held that the expression “for the purpose of the business occurring under the provision is wider in scope than the expression: for the purpose of earning income, profits or gains” and this has been the consistent view of the court.

10) Further, it has been expressed in the same order that “In our opinion, the decisions relating to section 37 of the Act, will also be applicable to section 36(1)(ll) because in section 37 also the expression used is “for the purpose of business”. It has been consistently held in 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-

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 commercia l expediency.

12) Thus, where the funds of the business were diverted for the interest free loans, the main criteria for permissibility of interest on those funds are based on whether it was for “commercial expediency” or not. The phrase “commercial expediency” has following important traits as established in the above case law cited Supra :-

a) Such purpose as is expected by the assessee to advance its business interest.

b) May include measures taken for preservation, protection, or advancement of its business interest.

c) To be distinguished from the personal Interest of the directors of partners as the case may be.

d) There has to be nexus between the advancing of funds and business interest of the assessee. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee firm/company itself is borrowing funds for running its business.

13. Now, we would like to submit that the Appellant was already under “Money Lending business” since the financial year ended 31st March 2012 onwards

The Income Tax Department has also accepted the same by passing the Assessment Order u/s 143(3) for the A.Y. 2012-13, wherein it’s mentioned that the Appellant is involved in “Money Lending Business”. Copy of the Assessment Order is enclosed herewith for your perusal and records.

14. a) it wouldn’t be out of place to inform you that the Appellant had borrowed the funds from Elevator News Network Private Limited during the financial year ended 31st March 2012. The credit balance which was outstanding as on 31st March 2012 in the books of appellant in the name of Elevator News Network Private Ltd. was Rs. 8,99,78,224/-

This balance amount of Rs. 8,99,78,224/- included the interest amount of Rs. 9,28,224/- (Net of TDS). It wouldn’t be out of place to submit that neither any interest nor any principal amount was repaid back to Lender, during the financial year ended 31st March 2012

b) Further during the financial year ended 31st March 2013 the interest amount which was provided was to the extent o f Rs.1,43,57,181/- and the balance which was outstanding as on 31st March 2013 was Rs.10,39,39,147 (Net of TDS). No amount was repaid to the Lender during the financial year ended 31/3/2013 i.e. neither the interest nor the principal amount c) Further during the financial year ended 31st March 2014 the interest was provided by the Appellant to the Lender was to the extent of Rs.1,86,57,929/-and balance which was outstanding as on 31st March 2014 (Net o f 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 substantia l amount of interest was repaid back to the Lender dunng the financia l year ended 31st March 2013

c) Finally the entire balance amount of Rs 34.44,563/- was repaid back to the Lender as on 21st May 2013.

16) a) Further, we would like to submit that the entire amount which was borrowed by the Appellant from two lenders/e Elevator News Network Private Limited and Regaliaa Buildtech & Services Pvt. Ltd. Was lended to only one person namely Shri Anup Shyam Kamani (ASK).

As on 31st March 2012 the total amount which was outstanding from the above mentioned two Lenders was Rs. 10,25,05,048/- whereas, the Amount which was Lended to Anup Shyam Kamani as on 31st March 2012 was Rs. 10,25,39,984/

This means that entire amount which was borrowed from the Lenders was lended to single Borrower. The rate of interest which was received from the Borrower i.e. Anup Shyam Karnani during the financial year ended 31/03/2012 was 16.25% and the rate of interest which was paid to both the Lenders was 16% and the Appellant made a profit of Rs.13,393. Copy of the Audited Financials along with Computation of Income for the financial year ended 31st March 2012 is enclosed herewith for your perusal and record.

b) Further it wouldn’t be out of place to inform you that interest which was paid to both the Lenders amounting to Rs.36,05,843/-was debited to the Profit & Loss Account under the head Finance Costs and Interest which was received from Mr. Anup Shyam Karnani (amounting to Rs. 36,44,426/-) was credited under the head Revenue from Operations.

c) Further it wouldn’t be out of place to Inform you that in the financial year ended 31/3/2012 the Appellant did not have any other business income other than Money Lending Business.

d) Appellant had offered for tax the profit which as per the Audited Financials for the financial year ended 31st March 2012 under the head “Income from Business and Profession” and the Income Tax Department also accepted the same without making any additions at the time of passing the Assessment Order u/s 143(3).

e) Now this clearly indicates that the amount of interest which was paid in respect of capital borrowed was for the purpose of business or profession hence deduction was allowed u/s 36(1)(ii) of the Income Tax Act while computing the Business Income as per the provisions of section 28 of the Income Tax Act.

f)Since the interest which is received from Mr. Anup Shyam Karnani was offered for tax under the head “Income From Business & Profession” 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 commercia l 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 from Mr. Anup Shyam Karnani still the same was done due to commercial expediency hence, there was no disallowance of Interest which was paid to both the Lenders during the financial year ended 31st March 2013

18) a) Further, during the financial year ended 31st March 2014 the balance amount which was recoverable from Mr. Anup Shyam Kamani was Rs. 12,22,92,499/- This amount included the interest to the extent of Rs. 1,44,33,504/-. The rate of interest was dropped from 16% in the preceding previous year to 13.5% in the current year.

b) Though the rate of interest was reduced or dropped to 13.5% but the most important point which appellant insisted to Shri Anup Shyam Karnani was to repay the entire loan amount immediately because the appellant didn’t want to incur further losses in the subsequent year.

c) Having said that, though the Lenders too didn’t reduce the rate of interest, hence, the Appellant repaid the entire loan amount which was borrowed from the Lenders so that the Appellant did not want to incur losses in the subsequent years.

d) Now, the rate of interest which was reduced by the appellant from Mr. Anup Shyam Karnani was by 2.5% only because of commercial expediency. The only reason why the Appellant agreed to reduce the rate of interest was because he wanted the borrower (Mr. Anup Shyam Kamani) to repay the entire loan immediately, hence, because of this reason the appellant wouldn’t have incurred losses in the subsequent years due to drop in interest rate or also due to recovery of the principal amount.

e) It wouldn’t be out of place to inform you that till date Shri Anup Shyam Kamani hasn’t paid neither the interest nor the principa l amount to the outside parties from whom the loan was taken by him. Hence, the Appellant recovered the entire principal and interest amount so that the Appellant couldn’t incur huge losses. Hence, the interest rate was reduced due to commercial expediency. In light of the above said facts and circumstances of the case no disallowance of interest should be made which is paid by the Appellant to the Lenders. 19) Though the entire facts of the case which is mentioned above in para 16, 17 & 18, was conveyed to the Assessing Officer still he disallowed the interest of Rs. 48,11,168/- for the reasons mentioned in para 5 & 6 of his Assessment Order passed u/s 143 (3) dated 5th December 2016 INCOME aessment OrdTMENT

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 assesse 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 recovered from the director in the financial year ended 31st March 2012 was higher than the interest paid to the Lenders. Hence, this proves the fact that the money which were borrowed was used for Money Lending Business

Since the Interest which was received from the director on the money lended to him, the same interest Income was shown on “Operational Revenue” in the Audited Financial which clearly claims that its Business Income. Hence, this itself proves that money which was borrowed was utilized for money lending business.

21) a) In para 6.2 of the Assessment Order, the Assessing Officer has sated that “In the instant case, on examining the details of the assessee company, it is found that the assessee company has advanced fund to one of its directors and charged interest only at the rate of 13.5% on advances, whereas paid interest to Elevator News Network Pvt. Ltd. at much a higher rate. The assessee company has lent the amount to one of its director i.e. Shri Anup Shyam Karnani with little interest, which proves that the funds borrowed have direct nexus between the borrowings of the funds and diversion thereof for non- business purposes. The same may have been 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 company as at the cost being incurred by the assessee company and the direct would be enjoying the benefits thereof

b) The Assessing Officer has erred in mentioning that the Assessee Company has lent the amount to one of its director i Shri Anup Shyam Kamani with little interest which proves that the funds which were borrowed were diverted for non-business purpose.

To this we would like to submit that when the interest which was received from the director i.e., @13.5% the same was recorded as a Operational Revenue in the Audited Financials, then, how can the Assessing Officer say that was diverted for Non- Business purpose when it was recorded as a Business Income

c) Further the Assessing Officer submitted that the assessee company has lent the amount to the director i.e. Shri Anup Shyam Karnani with little interest i.e. @ 13.5% where as the assessee has paid interest to Elevator News Network Private Ltd. at much higher interest @ 18% To this we would like to submit that 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 2014. The appellant did this deal because he didn’t want to make losses permanently, nor did they want to loose the principal amount. Hence, the moment the director repaid the entire loan amount along with the outstanding interest amount, the appellant in turn paid back to the Lenders the entire amount immediately.

22) a) Further in para 6.3 of the Assessment Order, the Assessing Officer has sated that “It cannot possibly be held that the entire funds diverted to director with little interest were required by the assessee company for the purpose of its business. It does not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purpose. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(ii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to director with little interest are to be disallowed. Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why the assessee who for the purpose of running its business is required to borrow money from Elevator News Network Pvt. Ltd. would be giving loan to its director and that too when pays a heavy interest to its lenders. Further, there is no justification as to why the director i.e., Anup Shyam Kamani, is a sole beneficial of receiving the loan and advances for little interest whereas such benefit could be passed on to others as well This strongly leads us to the conclusion that this has been done to reduce the tax liability of a profit making concern since Shri Anup Shyam Karnani is also a director of Elevator Network Company

b) Now, the Assessing Officer has completely erred in submitting that there is no Justification as to why the director l.e. Mr. Anup Shyam Karnani is a sole beneficial of receiving the loan for little interest whereas such benefit could be passed on to others as well.

To this, we would like to submit that the Appellant had the same situation in the preceding two financial years, but no objection was raised by the Assessing Officer while passing the Assessment Order 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 Network Private Ltd., would also have gone up drastically.

In light of the above said facts it not correct on behalf of the Assessing Officer to open only one window pertaining to Appellant. It is correct if you open all the three windows pertaining to Elevator News Network Private Ltd., Mr. Anup Shyam Kamani and Appellant and check whether the income has been declared correctly by all three of them.

d) Since the Appellant has been doing Money Lending Business it wouldn’t be correct on behalf of the Assessing Officer to disallow interest to the extent of Rs. 48,11,168/- In light of the above said facts and circumstances if the case the addition made by the Assessing Officer amounting to Rs. 48,11,1684 ought to be deleted.”

10. After considering the above submissions, Ld.CIT(A) dismissed the ground raised by the assessee with the following observations: –

“5.3 Ground No. 2 & 3: This relates to the disallowance under section 36(1)(iii) of the I.T. Act. This clause relates to the amount of interest paid in respect of capital borrowed for the purpose of business and profession. The interest payment for the purpose of 36(1)(iii) is restricted to that on money borrowed and not on debt incurred. As per the proviso to section 36(1)(iii) interest on money borrowed for acquiring capital asset till the date on which the asset is brought to use is disallowed. The appellant contends that it has not bought any capital asset during the year so no disallowance under 36(1)(iii) should be allowed. The AO has dealt the issue para 5.14 of the order and I find no reason to differ from the view taken by the AO. In para 6 to 6.4 the Assessing Officer has elaborately discussed how the assessee failed to proved the direct nexus of use of borrowed funds for the purpose of business exclusively. The assessee failed to discharge its onus. The borrowed funds from Elevtor Network Company in which Shri Anup Shyam Karnani is also director were given for the benefit of the same person who happens to be a director the appellant. This is for the benefit of Shri Anup Shyam Karnani and does not fall into the purview of commercial expediency. Therefore I am of the opinion that the AO has rightly disallowed the excess interest payment. Ground No. 2 is therefore disallowed. ”

11. Aggrieved assessee is in appeal before us, at the time of hearing, Ld. AR submitted that assessee 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 income. Therefore, there is no loss to the revenue in the above said transactions. He further submitted that the Director has returned the money in the subsequent assessment year and to substantiate, he brought to our notice Page No. 91 of the Paper Book. He prayed that the addition made by the Assessing Officer may be deleted considering the fact that assessee is in the business of money lending and it is in the interest of business to pay or collect interest for the business exigencies and for the interest of the business.

13. On the other hand, Ld.DR relied on the orders of the lower authorities.

14. Considered the rival submissions and material placed on record, we observe from the record that assessee has no doubt borrowed the funds from ENNPL and paid the interest @18%. We observe 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. In our view, 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. However, 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 with a considerable difference of interest rate i.e., 4.5%. Therefore, it clearly shows that there is diversion of funds for non-business purpose. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A) and we do not intend to get into the issue of deemed dividend at this stage since the assessee is in the business of money lending. We observe that the issue of deemed dividend is not raised by the revenue authorities. Accordingly, ground raised by the assessee is dismissed.

15. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 03^rd April, 2023