Loan syndication fees not allowable if no proof of services rendered submitted by Assessee

Finquest Financial Solutions Pvt. Ltd. Vs DCIT (ITAT Mumbai)

During the course of assessment the assessing officer observed that assessee has debited an amount of Rs.15,00,000/- to the profit & loss account under the head loan syndication fees claimed to be paid to M/s Moncon Exports Pvt. Ltd, and M/s Niyoshi Trading and Investment P. ltd. During the course of appellate proceedings before us the ld. Counsel has placed the detail of loan syndication fees as per page no. 21 to 23 of the paper book. After perusal of the same it is noticed that assessee has filed only the debit note pertaining to /s Moncon Exports Pvt. Ltd & M/s Niyoshi Trading and Investment P. ltd, showing this amount pertained to Investment Advisory Services. The assessee has not filed any other documentary evidences to substantiate that this amount of Rs.15,00,000/- was pertained to loan syndication fees. The assessee has also not filed any specific detail of the loan arranged by these two parties. Further, on the similar issue and identical facts, coordinate bench of the ITAT, vide ITA No. 7383/Mum/2016 and ITA No. 7241/Mum/2016, dated 28.02.2019 in the case of the assessee itself for assessment year 2012-13 has sustained the disallowance of Rs.15,00,000/- shown as Investment Advisory Services to the same parties. During the year under consideration also the assessee could not substantiate with relevant evidences that these expenses were related to loan syndication fees and the same was claimed as Investment Advisory Services without any break up of the detail of loan advances arranged by these two parties. Therefore, we do not find any infirmity in the decision of ld. CIT(A) after following the decision of coordinate bench of the ITAT as supra. Accordingly, this ground of appeal is dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present filed by the assessee is directed against the order passed by the CIT(A)-16, Mumbai, which in turn arises from the assessment order passed by the A.O u/s 143(3) of the Income Tax Act, 1961, dated 27.12.2016 for A.Y. 2014-15. The assessee has assailed the impugned order on the following grounds before us:

“1. Disallowance under section 40A(2) out of interest paid:

On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred in confirming the disallowance of Rs.1,14,59,016/- u/s. 40A(2) made by the Ld. A.O., being alleged excessive interest paid to Bharat J. Patel, a Director of the appellant. Your appellant, therefore, prays that the Ld. AO be directed to delete the disallowance of Rs.1,14,59,016/- made u/s. 40A(2) of the Act.

2. Disallowance of fees paid towards Investment Advisory Services:

On the facts and in the circumstances of the case, and also in law, the Ld. CIT(A) erred in confirming the disallowance of Rs.15,00,000/- made by the Ld. A.O. being professional fees paid by the appellant towards Investment Advisory Services rendered by Moncon Exports Pvt. Ltd. and Niyosi Trading and Investment Pvt. Ltd. Your appellant, therefore, prays that the disallowance of Rs. 15,00,OOO/- be deleted.

Your appellant craves leave to alter, modify, amend or delete any of the above grounds of appeal, or to add one or more new ground(s), as may be necessary.”

2. The fact in brief is that return of income was filed by the assessee declaring total income of Rs.5,33,187/- on 30.09.2014. The case of the assessee was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 28.08.2015. The relevant facts of the case are discussed while adjudicating the ground of appeal filed by the assessee as follows:

“1. Disallowance under section 40A(2) out of interest paid:

On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred in confirming the disallowance of Rs.1,14,59,016/- u/s. 40A(2) made by the Ld. A.O., being alleged excessive interest paid to Bharat J. Patel, a Director of the appellant. Your appellant, therefore, prays that the Ld. AO be directed to delete the disallowance of Rs.1,14,59,016/- made u/s. 40A(2) of the Act.

3. During the course of assessment the A.O noticed that assessee has shown unsecured loan to the tune of Rs.62,36,70,556/-under the head short term borrowings on which it had paid interest amount of Rs.3,71,37,937/-. Detail of payment of interest on the loan amount obtained from various parties as reflected at Page No. 5 of the assessment order is reproduced as under:

On perusal of the aforesaid detail the assessing officer observed that assessee paid interest @ 18% to Shri Bharat J. Patel who was director in the assessee company, while the other parties, i.e M/s Runner Marketing Pvt. Ltd and M/s Vibgyor Investors and Dev. P. ltd, have been paid only 11% on the loan obtained, and an amount of Rs.20,94,59,761/- was obtained from related party M/s Pasha Finance Pvt. Ltd., without paying any interest amount by the company. The assessee was asked to justify the payment of higher rate of interest on loan obtained from M/s Bharat J. Patel. In response the assessee submitted that it had obtained loan from the director @ 18% and this was the prevailing rate in the normal course of the business. The assessee has also submitted that it had granted loan to various parties at a rate ranging between 18% to 36%. The assessee has also submitted that the prevailing rate of interest on secured loan was 15%, therefore, 18% loan on the unsecured amount was not of higher side. The assessee has also stated that no interest was charged from one of its related party i.e M/s Pasha Finance Pvt. Ltd because of being the debtor of the assessee company it had paid extra advance to the assessee company.

The assessing officer has not agreed with the submission of the assessee. The assessing officer stated that comparatively the assessee had paid interest @ 15% to the unrelated party namely Nirma Ltd, and also paid interest @ 11% to the another independent party M/s Runner Marketing Pvt. Ltd, whereas to its own director who was having shareholding of 56.55% was given unreasonable higher rate of interest. The A.O has further stated that assessee has not given any evidence of charging interest on the loan advance by it @ 18% to 36%, therefore, the A.O has restricted the payment of interest to Shri Bharat J. Patel @ 12% as against 18% of rate of interest paid by the assessee. The difference of interest amount of Rs.1,14,59,016/- was added to the total income of the assessee.

4. Aggrieved, assessee carried the matter in appeal before the CIT(A). The ld. CIT(A) had dismissed the appeal of the assessee.

5. During the course of appellate proceedings before us the ld. Counsel referred Page No. 37 of the paper book submitted before us during the course of appellate proceedings, he submitted that the average prevailing rate of secured loan charged by the bank was about 15%. The ld. Counsel has further contended that because of risk factor involved in the unsecured loan its rate is always higher than the interest amount charged on the secured loan. The ld. Counsel also submitted that assessee has obtained more quantum of loan from the director, therefore interest paid @ 18% was not on higher side.

On the other hand, the ld. D.R has supported the order of ld. CIT(A) and referred part 6.5.3 of the order of the ld. CIT(A) wherein it is stated that out of its interest free funds the assessee company has extended the interest free loan of Rs. 6.32 crores to M/s Superior Consultancy Services Pvt. Ltd, which was related party and covered u/s 40A(2)(b) of the Act.

6. Heard both the sides perused the material on record. Without retreating the facts as elaborated above, during the course of assessment the assessing officer observed that assessee has paid interest @ 18% to one of its director, however, it has charged interest from two of the unrelated party @ 15% and @ 11% respectively. During the course of appellate proceedings before us, the ld. Counsel has referred the decision of CIT Vs. Aditya Mediasales Ltd. (Tax Appeal No. 559 of 2009) (Guj High Court) wherein it is held that interest of unsecured borrowing was always higher than rate of interest paid to the bank or financial institution from where the loan raised were secured loan and accordingly unsecured interest paid to sun pharmaceutical @ 24% per annum as reasonable. The ld. Counsel has also referred an other case i.e Kortex Export Vs. ACIT, ITA No. 4960/Mum/2018 of the Bombay ITAT, wherein it is held that in the absence of any material to indicate that the interest rate paid by the assessee is excessive or unreasonable, the unsecured loan taken @ 18% or even @ 20% is quite in consonance with the ground reality in business.

During the course of assessment proceedings the assessee has also brought to the notice of the lower authorities that the transaction between the assessee and its director Bharat J. Patel was tax neutral since return of income of Bharat J. Patel for assessment year 2014-15 was of Rs.3,86,04,868/- and there was no any attempt of tax evasion made by the assessee. On this issue of tax neutrality the ld. CIT(A) has stated that assessee has not filed supporting documentary evidence. The submission of the assessee of comparatively prevailing bank interest rate of secured loan was not controverted by the ld. CIT(A). Further, it is noticed that ld. CIT(A) has simply rejected the submission of the assessee on the issue of tax neutrality stating that no evidences was furnished. In this regard after perusal of the material available in the paper book, it is noticed that assessee has filed copy of Income Tax return of Bharat J. Patel for assessment year 2014-15 along with detail of unsecured loan as on 31st March, 2014, vide its submission dated 7.11.2016 made before the assessing officer demonstrating that because of showing of higher return of income of Rs.3,86,04,868/- there was no any attempt to evade tax and the same was tax neutral. In the light of the above facts and circumstances we consider that decision of ld. CIT(A) is not justified, therefore, this ground of appeal of the assessee is allowed.

7. 2nd Ground of appeal:-

2. Disallowance of fees paid towards Investment Advisory Services:

On the facts and in the circumstances of the case, and also in law, the Ld. CIT(A) erred in confirming the disallowance of Rs.15,00,000/- made by the Ld. A.O. being professional fees paid by the appellant towards Investment Advisory Services rendered by Moncon Exports Pvt. Ltd. and Niyosi Trading and Investment Pvt. Ltd. Your appellant, therefore, prays that the disallowance of Rs. 15,00,000/- be deleted.

7. During the course of assessment the A.O notice that assessee has claimed an amount of Rs.26,00,000/- under the head administrative and selling expenses on account of loan syndication fees. On query, the assessee explained that an amount of Rs.9,00,000/- and Rs.2,00,000/-was paid to M/s Dev D. Developers P. Ltd, and Deepak Vora for arranging loan and balance amount of Rs.7,50,000/- each was paid to M/s Moncon Exports Pvt. Ltd, and M/s Niyoshi Trading and Investment P. ltd. for Investment Advisory Services. On the basis of supporting detail and evidences filed the assessing officer has allowed the claim of 11 lac amount paid to M/s Dev D. Developer Pvt. Ltd, and Deepak Vora for arranging of loan. However, the remaining amount of Rs.7,50,000/- each to Moncon Exports Pvt. Ltd, and M/s Niyoshi Trading and Investment P. ltd was disallowed on the reason that both these companies have provided only investment advisory services to the assessee and not the services related to loan syndication as claimed by the assessee.

8. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

9. Heard both the sides perused the material on record. During the course of assessment the assessing officer observed that assessee has debited an amount of Rs.15,00,000/- to the profit & loss account under the head loan syndication fees claimed to be paid to M/s Moncon Exports Pvt. Ltd, and M/s Niyoshi Trading and Investment P. ltd. During the course of appellate proceedings before us the ld. Counsel has placed the detail of loan syndication fees as per page no. 21 to 23 of the paper book. After perusal of the same it is noticed that assessee has filed only the debit note pertaining to /s Moncon Exports Pvt. Ltd & M/s Niyoshi Trading and Investment P. ltd, showing this amount pertained to Investment Advisory Services. The assessee has not filed any other documentary evidences to substantiate that this amount of Rs.15,00,000/- was pertained to loan syndication fees. The assessee has also not filed any specific detail of the loan arranged by these two parties. Further, on the similar issue and identical facts, coordinate bench of the ITAT, vide ITA No. 7383/Mum/2016 and ITA No. 7241/Mum/2016, dated 28.02.2019 in the case of the assessee itself for assessment year 2012-13 has sustained the disallowance of Rs.15,00,000/- shown as Investment Advisory Services to the same parties. During the year under consideration also the assessee could not substantiate with relevant evidences that these expenses were related to loan syndication fees and the same was claimed as Investment Advisory Services without any break up of the detail of loan advances arranged by these two parties. Therefore, we do not find any infirmity in the decision of ld. CIT(A) after following the decision of coordinate bench of the ITAT as supra. Accordingly, this ground of appeal is dismissed.

10. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 01.02.2022