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: –
