Case Law Details
Spaarkon Trading Chennai Pvt. Ltd. Vs ACIT (ITAT Chennai)
Upon perusal of loan sanction letter dated 12-05-2010 issued by Standard Chartered Bank, it could be seen that the assessee has been sanctioned term loan of Rs. 32 Crores for the purpose of part financing the purchase of equipments to be leased by the assessee under a Lease Agreement on a BOO/BOOT basis to M/s Everonn Education Limited (EEL). These Equipments would be used by EEL to execute the contract that it has received from Director General of School Education, Haryana State Government. The tenor of the loan is 5 years and Equipments would include assets in the nature of Computers, UPS etc. aggregating to Rs.23.50 Crores and assets in the nature of furniture & fixtures, electrical fittings, generator etc. aggregating to Rs.16.50 Crores. All these Equipments will be charged to the Lender.
Pursuant to the same, the assessee has entered into master rental agreement (MRA) with EEL on 14-05-2010. As per the recitals of the agreement, the assessee has been granted certain credit facilities for the purpose of financing part of the goods under the agreement. The assessee agrees to let the Equipments to EEL and it would receive rentals in 19 installments over a period of 5 years. On the basis of all these documents, it could be concluded that the assessee had business connection with EEL whereby EEL would lease the computer hardware owned by the Assessee for the project that EEL would receive from Haryana State Government. For the same, the assessee obtained a loan from Standard Chartered Bank to fund the purchase of equipment. Accordingly, the capital advances have been made by the assessee in furtherance of its business purposes. The lease income thus earned by the assessee would be offered as business income and interest so paid would be claimed as business expenditure. In fact, the lease income has been offered to tax as ‘Business income’. The financial statements as placed on record support the case of the assessee. Another fact to be noted is that the loan was obtained in financial year 2010-11 and there is nothing on record which would suggest that any such disallowance was made in earlier years. Accordingly, rule of consistency also favor the case of the assessee. Therefore, considering the facts and circumstances of the case, the impugned addition stand deleted. The loans thus obtained by the assessee could be said to be utilized for its business purposes and therefore, interest so paid would constitute business expenditure and accordingly, an allowable deduction.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2013-14 arises out of the order of learned Commissioner of Income Tax (Appeals)-15, Chennai [CIT(A)] dated 28-03-2018 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 30-03-2016. The grounds taken by the assessee read as under:
1. The order of the Ld. CIT(Appeals) in ITA No.132/2016-17/CIT(A)-15 dated 28.03.2018 for the impugned AY 2013-14 is contrary to the circumstances of the case and is opposed to the principles of equity, natural justice and fair play.
2. The Ld. CIT(A) failed to provide the appellant with a reasonable opportunity of being heard with respect to the addition of Rs.2,87,52,372/-, being disallowance of interest on loan, thereby violative of the principles of natural justice.
3. The Ld. CIT(A) erred in passing the impugned order dated 28.03.2018, enhancing the appellant’s income by an amount of Rs.2,87,52,372/- without according the appellant a reasonable opportunity of being heard and the same is in stark contravention of the provisions of Section 251(2) of the Act.
4. The order of the Ld. CIT(A) is bad in law, insofar as the enhancement of the appellant’s income by an amount of Rs.2,87,52,372/- is beyond the jurisdiction conferred upon the Ld. CIT(A), completely ignoring documents produced before him which clearly demonstrated that the provisions of section 36(1)(v) does not arise for the interest disallowance.
5. The Ld. CIT(A) erred in enhancing the Original Assessment by an amount of Rs.2,87,52,372/-, being disallowance of interest on loan, despite the subject matter not forming part of the original assessment.
6. The Ld. CIT(A) ought to have followed the ratio held by the Apex Court in the case of CIT v. M/s. Shapoorji Paloonji Mistry (1962) 44 ITR 891 (SC) and various other High Courts, wherein it was settled that the CIT(A) cannot enhance assessment for Income from a new source not considered in the original assessment.\
7. For the aforesaid grounds and for other grounds to be raised at the time of hearing, the order of CIT(Appeals) may be set aside and justice be rendered.
As evident, the assessee is aggrieved by confirmation of interest disallowance u/s 36(1)(iii).
2. The Registry has noted delay of 600 days in the appeal. However, the delay would stand ignored in view of the directions of Hon’ble High Court of Madras in assessee’s Writ Petition No.19523 of 2018 and WMP Nos.22962 to 22964 of 2018 dated 06-02-2020. By way of this writ, the assessee had challenged the enhancement made by the Ld. CIT(A) in the impugned order. The Hon’ble Court, vide para-10 of the order, did not find any justification for interfering in the impugned order in terms of Article 226 of the Constitution of India as facts necessary for adjudication of the matter on merits were not placed before the authorities. However, a liberty was granted to the assessee to file statutory appeal within a period of 2 weeks. In para-11, it was held that if the appeal is filed as aforesaid, it shall be taken on file without reference to limitation and would be disposed off within a period of 2 months from date of conclusion of personal hearing. We find that the appeal has been filed by the assessee in accordance with the directions of Hon’ble Court and therefore, we admit the appeal and proceed to dispose-off the same on merits as directed by Hon’ble Court.
3. The Ld. AR advanced agreement to submit that the advances were granted for business purposes and therefore, the interest disallowance as made by Ld. CIT(A) u/s 36(1)(iii) could not be sustained. To bolster the submissions, the attention has been drawn to various documents and financial statements as placed on record. The Ld. Sr. DR, on the other hand, controverted the arguments of Ld. AR and submitted that the complete onus was on assessee to establish the nexus of advances with the business purposes. Having heard rival submissions and after perusal of case records, our adjudication would be as under.
Proceedings before lower authorities
4.1 The assessee being resident corporate assessee is stated to be dealing in digital equipment, computer hardware, software and electronic items etc. An assessment was framed against the assessee u/s 143(3) on 30-03-2016 wherein the returned income of Rs.54.46 Lacs was determined at Rs.248.08 Lacs after making disallowance u/s 14A for Rs.193.61 Lacs.
4.2 Upon further appeal, Ld. CIT(A) deleted the disallowance u/s 14A on the ground that disallowance would not apply in case of interest free loans and advances. However, the Ld. CIT(A), in the alternative, proceeded to make interest disallowance u/s 36(1)(iii) on the ground that the assessee borrowed an amount of Rs.32 Crores from Standard Chartered Bank (SCB) and paid interest of Rs.287.52 Lacs. The assessee extended interest free loan to another entity i.e., M/s Everonn Education Ltd. (EEL) and therefore, the interest could not be allowed u/s 36(1)(iii).
4.3 The assessee submitted that the loan was utilized for business purposes. However, the assessee, in the opinion of Ld. CIT(A), could not demonstrate the business nexus of borrowings and lending. Therefore, Ld. AO was directed to disallow the interest expenditure of Rs.287.52 Lacs. Aggrieved, the assessee is in further appeal before us.
Our findings and Adjudication
5. Upon perusal of loan sanction letter dated 12-05-2010 issued by Standard Chartered Bank, it could be seen that the assessee has been sanctioned term loan of Rs. 32 Crores for the purpose of part financing the purchase of equipments to be leased by the assessee under a Lease Agreement on a BOO/BOOT basis to M/s Everonn Education Limited (EEL). These Equipments would be used by EEL to execute the contract that it has received from Director General of School Education, Haryana State Government. The tenor of the loan is 5 years and Equipments would include assets in the nature of Computers, UPS etc. aggregating to Rs.23.50 Crores and assets in the nature of furniture & fixtures, electrical fittings, generator etc. aggregating to Rs.16.50 Crores. All these Equipments will be charged to the Lender.
6. Pursuant to the same, the assessee has entered into master rental agreement (MRA) with EEL on 14-05-2010. As per the recitals of the agreement, the assessee has been granted certain credit facilities for the purpose of financing part of the goods under the agreement. The assessee agrees to let the Equipments to EEL and it would receive rentals in 19 installments over a period of 5 years. On the basis of all these documents, it could be concluded that the assessee had business connection with EEL whereby EEL would lease the computer hardware owned by the Assessee for the project that EEL would receive from Haryana State Government. For the same, the assessee obtained a loan from Standard Chartered Bank to fund the purchase of equipment. Accordingly, the capital advances have been made by the assessee in furtherance of its business purposes. The lease income thus earned by the assessee would be offered as business income and interest so paid would be claimed as business expenditure. In fact, the lease income has been offered to tax as ‘Business income’. The financial statements as placed on record support the case of the assessee. Another fact to be noted is that the loan was obtained in financial year 2010-11 and there is nothing on record which would suggest that any such disallowance was made in earlier years. Accordingly, rule of consistency also favor the case of the assessee. Therefore, considering the facts and circumstances of the case, the impugned addition stand deleted. The loans thus obtained by the assessee could be said to be utilized for its business purposes and therefore, interest so paid would constitute business expenditure and accordingly, an allowable deduction. The Ld. AO is directed to recompute the income of the assessee.
7. The appeal stand allowed in terms of our above order.
Order pronounced on 07th September, 2022.
