Case Law Details
Apostle Trading Consultants Private Limited Vs DCIT (ITAT Delhi)
ITAT Delhi held that huge amount as interest free advances given to company which is neither relative/ partner nor connected with Assessee based on MOU which is neither on stamp paper nor stamped or registered creates a reasonable doubt. Matter remanded for further inquiry.
Facts- On perusing the financials of the Assessee, AO observed that the Assessee has claimed large business losses set-off against other heads of income. The Assessee has borrowed long term and short-term capital loans of ₹. 15,14,96,918/- ₹. 5,02,14,477/- respectively. AO further observed that nature of business of the Assessee is to trade in Ladies Garments and Rental Income and has no other business apart from these two. The Assessee has borrowed huge loan and same has been diverted in the form of loans and advances and given to M/s. Flourish Decorators Pvt. Ltd., (in short “FDPL”). Therefore, the Assessee had to pay large interest on loan. The Assessee has also shown outstanding loan and advances of ₹.11,94,87,926/- while total loan and advances given to FDPL is of ₹.13,80,00,000/-.
Consequently, AO show caused the Assessee, as to why the interest expenses of ₹.1,65,60,000/-(outstanding loan advances of ₹.13,80,00,000 x rate of interest @12% on loan borrowed) should not be disallowed. AO disallowed the proportionate interest expenses of ₹.1,65,60,000/- u/s.36(1)(iii) of the Act and added back the same to the total income of the Assessee.
Conclusion- Held that the Assessee though given huge amount of ₹.15 crores to ‘FDPL’ who admittedly is neither relative/partner nor connected with the Assessee in any mode except as claimed and infact is a stranger, but still without securing its interest paid the huge amount of Rs. 15 Crores, on the basis of alleged MoU which is neither on stamp paper nor stamped or registered and even unsigned by the witnesses and therefore at its prima facie look, creates a reasonable doubt. In the absence of registered documents/MoU and on failure to get implementation of terms and conditions of MoU, the Assessee would have produced ‘FDPL’ and/or other connected persons and any corroborative cogent evidence qua transaction entered into between the Assessee and FDPL for establishing the genuineness of transaction of Rs. 15 Crores, but still it failed to do so and therefore acts of the Assessee appears, to be against the theory of Human Probability.
We for the just decision of case and for the ends of justice, deem it fit and proper to direct the Assessing Officer to inquire about the surrounding circumstances qua transactions entered into by the Assessee with FDPL, and the profile and work done by FDPL, by directing the Assessee to produce FDPL or summoning FDPL directly .
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal has been preferred by the Assessee against the order dated 09.02.2018, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals)-1, New Delhi [hereinafter in short “Ld. Commissioner”] u/s. 250 of the Income-tax Act, 1961 (in short “Act”) for the A.Y. 2014-15.
2. The Assessee stated to be engaged in the business of trading and retailing of apparels and cosmetics and during the assessment year under consideration declared loss of (-) ₹.1,88,70,104/- under normal provisions and (-) ₹.1,63,46,820/-under MAT provisions by filing its return of income on dated 29.11.2014. Subsequently, the case of the Assessee was selected for scrutiny and therefore statutory notices have been issued to the Assessee, against which the Assessee attended the assessment proceedings from time to time and filed necessary details, as called for by the Assessing Officer.
3. On perusing the financials of the Assessee, the Assessing Officer observed that the Assessee has claimed large business losses set-off against other heads of income. The Assessee has borrowed long term and short-term capital loans of ₹. 15,14,96,918/- ₹. 5,02,14,477/- respectively. The Assessing Officer further observed that nature of business of the Assessee is to trade in Ladies Garments and Rental Income and has no other business apart from these two. The Assessee has borrowed huge loan and same has been diverted in the form of loans and advances and given to M/s. Flourish Decorators Pvt. Ltd., (in short “FDPL”). Therefore, the Assessee had to pay large interest on loan. The Assessee has also shown outstanding loan and advances of ₹.11,94,87,926/- while total loan and advances given to FDPL is of ₹.13,80,00,000/-. Consequently, the Assessing Officer show caused the Assessee, as to why the interest expenses of ₹.1,65,60,000/-(outstanding loan advances of ₹.13,80,00,000 x rate of interest @12% on loan borrowed) should not be disallowed.
4. The Assessee, in response to the show cause, by filing its reply submitted as under: –
“1.1 It is further submitted that a sum of Rs. 13,80,00,000/-was paid by the Assessee company to M/s flourish Decorators private limited under an agreement for organizing retail shops in Delhi & NCR for the Assessee company. Since the amount was paid as business advance, no interest on the same was chargeable by the Assessee under the agreement.
However as on 31.03.2013, balance in the said account was Rs. 13,65,00,000/-
1.2 It is further submitted that a total sum of Rs. 1,76,00,000/- was received back during the year by the Assessee company in twelve installments out of the amount of Rs. 13,80,00,000/- advanced for organizing retail shops in Delhi & NCR as Flourish Decorators Private Limited could not organize retail shops in Delhi & NCR within the time prescribed. Balance outstanding amount as on 31.03.2014 is Rs. 11,89,00,000/-
2. With respect to detailed note of business activity of the Assessee company, it is submitted that the company was incorporated on 12.06.2007 and its first year of assessment is 2008- 2009. The Assessee company owns a property at C-29, sector -7 Noida (U.P.) since the year 2008. The property has been let out to M/s Asia Excel Trading Limited since the year 2009 at a monthly rent of Rs. 75,000/- Rental income is the only source of the Assessee company during the year under consideration. The Assessee company has during the year let out another property owned by it during the year for a rent of Rs.2,00,000/- per month Thus a total sum of Rs.33 Lakhs is considered as Income from house property in the return of Income.
2.1 It is further submitted, the Assessee company has during the year started trading activity of ladies garments and accessories. The Assessee is importing such items from M/s Accumon concept Limited from china and Hongkong. These items are being sold to M/s Forever new apparels private limited. Further Assessee is purchasing locally within India from M/s Sun International sparks and moissanite Apparels private limited of ladies garments and accessories and is selling the same to M/s Madura Fashion & styles.
3. With respect to your query number-3, regarding details of interest paid along with statement of bank loan has already been filed with you in para 1 of the Assessee’s submission dated 06.12.2016.”
5. By perusing the reply of the Assessee, the AO disallowed the proportionate interest expenses of ₹.1,65,60,000/- u/s.36(1)(iii) of the Act and added back the same to the total income of the Assessee by observing as under:
“That the Assessee was asked to give the new business line in subsequent period to till date but no new business was started with FDPL. In the absence of any proof of starting of new business, Assessee‟s claim is hereby rejected. As mentioned above, it is nothing but unique case of diversion of funds. I am of the view that proportionate interest expenses disallowance of ₹.1,65,60,0000/-, the main reason of current year business loss, should be disallowed u/s. 36(1)(iii) of the Act and added back to the total income of the Assessee. Hence proportionate interest expenses/disallowance of ₹.1,65,60,000/-is disallowed u/s.36(1)(iii) of the Act and added back to the total income of the Assessee.”
5.1 The Assessing Officer also made the addition on account of disallowance u/s. 14A of the Act which is not in consideration before us.
6. The Assessee being aggrieved by filling first appeal, challenged the aforesaid additions before the Ld. Commissioner and reiterated its claim as made before the Assessing Officer. The Ld. Commissioner by considering the judgements passed by the Hon’ble Apex Court in the case of S.A. Builders v. CIT(A), Chandigarh [288 ITR 1] and the Hon’ble Delhi High Court in the case of Punjab Stainless Steel Inds. v. CIT [324 ITR 396], considered the case of the Assessee from the point of view of commercial expediency and affirmed the addition of ₹.1,65,60,000/- made on account of disallowance of the proportionate interest expenses u/s.36(1)(iii) of the Act , by observing as under:
“1. The interest bearing loan has been diverted to sister concern without any interest.
2. The business purpose or commercial expediency defined is that the concern. “M/s Flourish Decorators (P) Ltd shall organize retail shops in Delhi and NCR for the appellant. In support of this an MOU dated 15.02.2013 has been filed wherein a clause of security deposit of Rs. 15 crore has been highlighted.
3. This MOU is not a registered document nor on any stamp paper hence the element of back dating/creation for justifying a defect cannot be ruled out.
4. The transactions were not carried through and none of the terms of the MOU were executed by M/s Flourish Decorators (P) Ltd – no such retail outlets were expedited
5. None of the findings submitted by appellant at assessment stage or at appellate stage display any efforts by either parties which display commercial expediency.
6. Clearly the payment was not influenced by business considerations. It appears to have been influenced by considerations of relationship and other extraneous considerations such as the desire to evade liability for payment of the proper amount of tax.”
7. The Ld. Commissioner ultimately held that it is true that the Assessee is entitled to arrange his affairs in such a way as to reduce his tax liability by all legal ways but the arrangement ultimately adopted must be genuine and not sham. If the object of the borrowing was illusory or colorable and not genuinely for business purposes, these provisions will have no application [Govan Bros. CIT (1963) 48 ITR 930, 941 (All)].
8. The Assessee being aggrieved is in appeal before us.
9. The Assessee at the outset claimed that it has availed loan from “Yes Bank” with the purpose of “Funding of capital expenditure and refundable security deposit for new apparel stores to be opened on leasehold basis”. The terms and conditions of loan availed are given as under: –
a. Facility: Term Loan
b. Amount: INR 15,00,000/-
c. Nature: Non Revolving
d. Purpose: Funding of capital expenditure and refundable security deposit for new apparel stores to be opened on leasehold basis.
e. Tenure: Maximum 60 Months (Including moratorium period of 12 months)
f. Interest: Effective interest rate 11.50% per annum
9.1 The Assessee in order to strengthen the purpose of loan, drew our attention to Application/document {Page Nos. 127 to 144 of Paper Book} “qua” credit facility sanctioned by Yes Bank and also claimed as under:
”That because FDPL was engaged in the business of organizing retails shops in Delhi NCR and therefore the Assessee for opening approx. 10 retails shops, during the Financial Year under consideration, entered into a Memorandum of Understanding “MoU” with FDPL on dated 15.02.2013 (Page Nos. 119 to 123 of the Paper Book). The Assessee by availing loan from “Yes Bank”, paid the same to “FDPL” as interest free advances/security deposit for acquisition of retail shops across Delhi NCR. Lateron, the deal with „FDPL‟ got cancelled and „FDPL‟ refunded the entire Advance/Security deposit to the Assessee and the Assessee without any delay repaid the loan of „Yes Bank‟ availed for the said purpose and according to the provisions of section 36(1)(iii) of the Act, the Assessee claimed the interest paid on „yes bank‟ loan, in its return of income. However, the same was disallowed by the Assessing Officer, and on appeal affirmed by the Ld. Commissioner.
Both the authorities below, without any basis, wrongly assumed that the Assessee has diverted loan for other than business purposes, by ignoring the facts that Assessee has availed said loan from „Yes Bank‟ for funding of capital expenditure/ refundable security deposit, for new apparel stores to be opened on leasehold basis.
As the Assessing Officer itself has clearly observed in its Assessment Order that the nature of business of the Assessee is to trade in Ladies garment and rental income and the Assessee has no other business apart from these two. The said observations of the AO infact strengthen the genuineness of the Assessee‟s business. The Ld. Commissioner wrongly held that borrowed loan has been diverted by the Assessee to its sister concern without any interest, whereas the Assessee entered into a MoU dated 15.02.2013 with FDPL, wherein the clause of security deposit of ₹.15 Crores has been specified, which shows the business purpose or commercial expediency. Further, without giving clear cut finding, the Ld. Commissioner taken an adverse view about diversion of loan by the Assessee to its sister concern without any interest, which at all therefore not sustainable. The Ld. commissioner also held that MoU is neither a registered document nor on any stamp paper, hence the element of back dating/creation for justifying a defect cannot be ruled out. In fact there is no legal requirement for registration of a MoU and the Assessee is entitled to arrange his affairs according to its commercial expediency. The loan borrowed was never diverted to its sister concern, but on the contrary, the amount had been advanced to „FDPL‟ under MoU for organizing retail shops in Delhi and NCR. „FDPL‟ is neither the sister concern nor related entity of the Assessee company as Directors/shareholders or relative of such directors/shareholders of the Assessee and „FDPL‟ neither related by blood or otherwise and even have no substantial interest in respective businesses of each other. From the ROC record, it is clear the Directors of the Assessee and „FDP‟L are altogether different and addresses of the Assessee and FDPL are also at different places. Merely because MoU was not registered and unstamped, the disallowance of interest expenses under the provisions of section 36(1)(iii) is not warranted, as the prime and basic condition of section 36(1)(iii) is that the interest should be paid on capital borrowed for the purpose of business. In the instant case the Assessee has borrowed loan for the purpose of commercial expediency of its business and therefore interest paid on such borrowing should be allowed to the Assessee, considering the provisions of section 36(1)(iii) of the Act. The Ld. Commissioner erred in holding that no evidence was furnished in support that any efforts were made by either parties to display commercial expediency. In fact, the said finding is highly vague and based on mere suspicion by overlooking the terms of agreement and evidence placed on record. It is a fact that the Assessee‟s turn over/sale from trading of ladies garments and cosmetics products during the A.Y. 2013-14 was ₹.9,40,91,033/- which further increased in A.Y. 2014-15 and A.Y. 2015-16 respectively to ₹.49,39,61,082/- and ₹.33,67,60,636/-, which goes to show that the Assessee has expanded its business in future years and therefore it clearly reflects „business expediency‟. Even the Hon’ble Delhi High Court in the case of Punjab Stainless Steel Inds. v. CIT [324 ITR 396] has clearly held that 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 interests, which has to be distinguished from the personal interest of its directors or partners, as the case may be.
9.2 The Assessee further claimed that following facts represents the commercial expediency: –
a. The Assessee company has borrowed loan for the purpose of “Funding of capital expenditure and refundable security deposit for new apparel stores to be opened on leasehold basis”
b. For opening of new apparel stores, Assessee company has given interest free advance/refundable security deposit to M/s Flourish Decorates Private Limited as per the terms of MOU
c. During the year under consideration Assessee company has started business of trading in ladies garments and cosmetic products
d. Also, in subsequent years, sale of the Assessee company has increased.
Therefore, the recording of adverse finding by the Ld. Commissioner that the object of borrowing was illusory or colorable and was not genuinely for business purpose, is incorrect.
10. On the contrary, Ld. DR refuted the claim of the Assessee by drawing our attention to the MoU and submitted that MoU is neither registered nor stamped and witnessed and even not signed by the witnesses and there is no material available on record to suggest the genuineness of the transaction and therefore both the authorities correctly rejected the claim of the Assessee.
11. Having heard the parties and perusing the material available on record, we observe that though the Assessee had taken loan from „Yes Bank‟ as it appears from the documents at Page No. 119 to 123 of the Paper Book wherein the allegedly the purpose of loan has specified as “Funding of capital expenditure and refundable security deposit for new apparel stores to be opened on leasehold basis”. However, it is fact that the Assessee though given huge amount of ₹.15 crores to „FDPL‟ who admittedly is neither relative/partner nor connected with the Assessee in any mode except as claimed and infact is a stranger, but still without securing its interest paid the huge amount of Rs. 15 Crores, on the basis of alleged MoU which is neither on stamp paper nor stamped or registered and even unsigned by the witnesses and therefore at its prima facie look, creates a reasonable doubt. In the absence of registered documents/MoU and on failure to get implementation of terms and conditions of MoU, the Assessee would have produced „FDP‟L and/or other connected persons and any corroborative cogent evidence qua transaction entered into between the Assessee and FDPL for establishing the genuineness of transaction of Rs. 15 Crores, but still it failed to do so and therefore acts of the Assessee appears, to be against the theory of Human Probability, as laid down in CIT v. Durga Prasad (1971) 82 ITR 540 (SC) by the Hon’ble Apex Court at pages 545-547, where made a reference to the test of human probabilities in the following fact/situation:
“…Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an Assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide-open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.
Now, coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas, in others, it may be nominal. There is nothing rigid about it.
„…Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as
to the reliability of a piece of evidence. But, in that sphere, the decision of the final fact-finding authority is made conclusive by law.”
p. 545).
11.1 In the case of Sumati Dayal v. CIT, and Sumati Dayal v. CIT (1995) 214 ITR 801 : 80 Taxman 89 (SC) the Hon’ble Supreme Court has dealt with the relevance of human conduct, preponderance of probabilities and surrounding circumstance, burden of proof and its shifting on the Department in cases of suspicious circumstances, by making following observations:
“ It is, no doubt, true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the Assessee.”
11.2 The Hon’ble Apex Court in the said cases has clearly held that the Revenue can look into the surrounding facts and circumstances by applying the test of human probabilities to determine genuineness of a transaction and correct narrative. Apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.
11.3 Coming to the instant case, though we are unable to convince our self qua genuineness of MOU relied upon by the Assessee for paying the huge amount of Rs. 15 Crores without securing its interest, however following the dictum of the Hon’ble Apex Court and considering the surrounding circumstances, such as alleged purpose of loan taken by the Assessee and the turnover resulted from trading of Ladies Garments and cosmetic products, which increased manifold in the subsequent assessment years and the FDPL is neither related to the Assessee nor the Assessee has any substantial interest, as it appears from the ROC record , we for the just decision of case and for the ends of justice, deem it fit and proper to direct the Assessing Officer to inquire about the surrounding circumstances qua transactions entered into by the Assessee with FDPL, and the profile and work done by FDPL, by directing the Assessee to produce FDPL or summoning FDPL directly . Further to examine the purpose of loan availed, by summoning the bank officials of „Axis Bank‟. The Assessee shall also produce cogent/relevant material/evidence and „FDPL‟ in order to prove genuineness of the said transactions. We clarify that primary onus would be on the Assessee to establish its case. Accordingly, the case is remitted to the file of the Assessing Officer for decision afresh in the aforesaid terms, suffice to say by affording reasonable opportunity of being heard to the Assessee.
12. In the result, appeal filed by the Assessee stands allowed for statistical purpose.
Order pronounced in the open court on 27-06-2023.
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