Case Law Details
Kamal Translifters Vs ACIT (ITAT Ahmedabad)
Though the assessee’s claim that payment made to the Director, was for business expediency, but the assessee could not prove before us the nexus between the assessee-company with its subsidiary company in the nature of trade and business. Furthermore, Shri Kamal Deshraj Dogra being director of both the companies, payments made directly to the common director of the company is not established with proper material on hand for the so called business exigency. Thus, the assessee’s arguments that there was a running account with the sister concern viz. Kamal Freight Pvt.Ltd., which was not demonstrated any business expediency between the assessee company with that of its subsidiary company.
ITAT upheld disallowance made under section 36(1)(iii) of the Act for interest expenses in respect of interest free advance to Director for non-business purpose on the ground that the assessee has failed to establish commercial expediency in doing the financial transactions.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the assessee against order dated 22.11.2018 passed by the Commissioner of Income-tax (Appeals)-2, Ahmedabad relating to the Asst.Year 2015-16.
2. Brief facts of the case is that the assessee is closely held company engaged in the business of service provider; providing services of goods transport agency and business support services, transportation of heavy vehicle chassis by road. For the Asst.Year 2015-16, the assessee filed its return of income on 29.9.2015 declaring total income of Rs.57,87,230/-. The case of the assessee was selected for scrutiny assessment. During the course of assessment proceedings, the ld.AO noticed that there was transaction of loans and advances between the assessee-company and one of its director, Shri Kamal Deshraj Dogra who was having 50% share holding in the assessee-company. The AO also noticed that the assessee had claimed interest expenses of Rs.38,95,633/-on unsecured loans, but it had given interest free advance to Shri Kamal Deshraj Dogra for non-business purpose. The assessee has extended that substantial amount of Rs.5.97 crores as loan to Shri Kamal Deshraj Dogra during the financial year, and not charged interest on the loan amount, which is contrary to section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). Therefore, show cause notice was issued to the assessee as to why proportionate interest on the interest free loans given to Shri Kamal Deshraj Dogra should not be disallowed. In response to the same, the assessee stated that loans were given for business purpose, and for purchase of the land on behalf of the assessee-company. This reply was not accepted by the AO on the ground that the director of the assessee-company Shri Kamal Deshraj Dogra himself admitted that no payment has been made by him to purchase the property. Thus, the amount received from the assessee was used by the director without interest for non-business purpose. In view of the above, proportionate interest charged at 12%, amounting to Rs.16,81,184/- on the loans given to Shri Kamal Deshraj Dogra is disallowed and added to the total income of the assessee under section 36(1)(iii) of the Act.
3. Aggrieved against the addition, the assessee filed appeal before the ld.CIT(A). The assessee pleaded before the ld.CIT(A) that the appellant-company has advanced loans to Shri Kamal Deshraj Dogra for business expediency, and therefore, as per the Hon’ble Supreme Court judgment n the case of S.A. Builders no disallowance under section 36(1)(iii) of the Act can be made. The assessee in support of its contentions submitted that from the bank account of Shri Kamal Deshraj Dogra with HDFC Bank it could be seen that various transactions have taken place with Kamal Freight Pvt.Ltd. which is a subsidiary of assessee-company, wherein also Shri Kamal Deshraj Dogra is director of that company. After considering the above arguments, theld.CIT(A) held that the assessee failed to establish commercial expediency, and thereby dismissed ground raised by the assessee as follows:
“3.4. The AO in the assessment order has clearly brought out the fact that appellant has borrowed fund and same has been utilised to give advance .free loan to Shri Kamal Dogra. Therefore, AO was justified to make disallowance of interest u/s. 36(1)(Hi) of the Act, As regard to appellant’s argument that the payment was made for business expediency, the appellant has not been able to demonstrate the business expediency in advancing interest free loan. Initially the appellant has argued that loan was advanced to purchase land for the company but same was found incorrect. Appellant’s argument that there was a running account with sister concern M/s. Kamal Freight Pvt. Ltd. in no way demonstrates any business expediency. Therefore, the decision of S. A.Builders is not applicable in appellant’s case. The Honourable Gujarat High Court in the case of Shri Jayesh Raichand Shah [2014] 360 ITR 387 has upheld disallowance u/s. 36(1) (Hi) of the I. T. Act on similar facts. The Honourable Punjab and Haryana High Court in the case of C. R. Auluck & Sons Pvt. Ltd. has also upheld the disallowance made u/s. 36(l)(iii) of . T. Act on the ground that assessee has failed to establish commercial expediency. The around of anneal is accordingly dismissed.”
4. Aggrieved against the order of the ld.CIT(A) the assessee is before the Tribunal raising following grounds:
“1.1 The order passed u/s 250 on 22.11.2018 for A.Y.2015-16 by Ld CIT(A)-2, Abad upholding disallowance of interest expenses to the extent of Rs.16,81,184/- made by AO is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the explanation furnished and the evidence produced by the appellant.
1.3 The Ld. CIT(A) has grievously erred in making the impugned disallowance without giving sufficient and specific opportunity to the appellant and thereby violating the principles of natural justice.
2.1 The Ld. CIT(A) has grievously erred in law and on facts in disallowing interest expenses of RS.16,81,184/-.
2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) has grievously erred in upholding that advances to Shri Kamal Dogra were made for non-business purposes and thereby confirming the disallowance of Rs. 16,81,184/-.”
5. At the time of hearing, the ld.counsel for the assessee has not pressed ground no.1.1 to 1.3, hence, the same are dismissed as not pressed. Now only effective ground for adjudication is ground no.2.1 and 2.2.
6. The ld.counsel for the assessee submitted that the AO failed to appreciate the interest on loan given to Shri Kamal Deshraj Dogra was not charged on account of commercial expediency. As per the land purchase agreement executed on 1.4.2014 between Shri Shankar Lal Kabra, and Shri Kamal Deshraj Dogra in his capacity as director of the assessee-company. It was agreed to sell the plot situated at Bareja, Ahmedabad for a consideration of Rs.5.00 crores and conveyance deed was to be executed on full payment in favour of the company. So taking into account of the purchase of land, Shri Kamal Deshraj Dogra was given with interest free loans of Rs.5.00 crores during the financial year. The ld.counsel for the assessee further argued that from the bank account no.141 of Shri Kamal Deshraj Dogra with HDFC Bank it could be seen that many transactions have taken place with M/s.Kamal Freight Pvt.Ltd. as running account, which is an associate concern of the assessee-company and having business of the similar nature. Thus, strongly relying upon Hon’ble Supreme Court decision in the case of S.A. Builders, 288 ITR 1, it is prayed that no disallowance of interest could be made when interest free advance has been given out for commercial expediency.
7. Per contra, the ld.DR appearing for the Department submits that the assessee’s arguments that the payment was made for business expediency, however, the assessee has not able to demonstrate exigency for advancing interest free loans. Initially, the assessee stated that loan was advanced for purchase of land for the company, but the director, Shri Kamal Deshraj Dogra himself under section 133(6) proceedings admitted that the land was not purchased and no money was given. The assessee vide order sheet dated 14.11.2017 was required to produce Shri Shankar Lal Kabra for verification of the sale of the land. On 29.11.2017 the authorized representative of the assessee and director Shri Kamal Deshraj Dogra attended the hearing and admitted that they were not able to produce Shri Shankar Lal Kabra for verification. It is further agreed that the no payment was made to Shri Kamal Deshraj Dogra for purchase of land. Further, no evidence has been furnished to establish that Shri Shankar Lal Kabra is the owner of the land. Thus, documents and agreement submitted are only to camouflage to protect the provisions of section 2(22)(e) which is an after-thought story made by the assessee. Further, the AO justified in making disallowance under section 36(1)(iii) of the Act, which does not require any interference, and therefore, the ld.DR pleaded that the ground raised by the assessee is to be dismissed.
8. We have heard both the parties and perused material placed before us. Though the assessee’s claim that payment made to the Director, Shri Kamal Deshraj Dogra was for business expediency, but the assessee could not prove before us the nexus between the assessee-company with its subsidiary company in the nature of trade and business. Furthermore, Shri Kamal Deshraj Dogra being director of both the companies, payments made directly to the common director of the company is not established with proper material on hand for the so called business exigency. Thus, the assessee’s arguments that there was a running account with the sister concern viz. Kamal Freight Pvt.Ltd., which was not demonstrated any business expediency between the assessee company with that of its subsidiary company. In the above circumstances, we do not find any infirmity in the order passed by the lower authorities, more particularly, the ld.CIT(A) has clearly held that judgement of S.A. Builders facts is not applicable to the assessee’s case. The CIT(A) has relied upon jurisdictional High Court decision in the case of Shri Jayesh Raichand Shah, 360 ITR 387 wherein disallowance under section 36(1)(iii) of the Act has been upheld on similar facts. Further, Punjab & Haryana High Court in the case of C.R. Auluck & Sans P.Ltd., has also upheld disallowance made under section 36(1)(iii) of the Act on the ground that the assessee has failed to establish commercial expediency in doing the financial transactions. Thus, we have no hesitation in upholding the order of the CIT(A), and this ground raised by the assessee are hereby rejected, accordingly, appeal filed by the assessee is dismissed.
9. In the result, appeal of the assessee is dismissed.
