INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH “A” KOLKATA

ITA No.1733/Kol /2012 Assessment Year :2008-09
Pashupatinath Himghar Pvt Ltd (Appellant) vs. ACIT (Respondent)
Date of Order: 06-11-2015

ORDER

PER Waseem Ahmed, Accountant Member:-
This appeal by the assessee is arising out of order of Commissioner of Income Tax (Appeals)-XXXVI, Kolkata in appeal No.592/CIT(A)-XXXVI/Kol/Cir.-2,Hgl./10-11 dated 17.10.2012. Assessment was framed by ACIT, Circle-2,Chinshurah u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 27.12.2010 for assessment year 2008-09.

2. First issue raised by assessee in this appeal is that Ld. CIT(A) has erred in confirming the disallowance of Rs.24,98,559/- on account of interest charged at a lesser rate on loans given to farmers.

3. Briefly stated facts are that assessee is a private limited company engaged in the business of trading & storage of potato. During the year assessee has obtained loan from secured sources and had paid an amount on accrued to the tune of ₹62,76,553/- as interest thereon. The assessee had disbursed an amount of ₹1,56,55,180/- as loan to various farmers and agriculturists who had in turn paid minimal interest accrued to a sum of ₹54,256/- which was disclosed as income in its return of income. On this facts, Assessing Officer disallowed a sum of ₹24,98,559/- on a proportionate basis out of interest paid within the provision of Sec. 36(1)(iii) of the Act. The AO has justified the disallowance of interest as aforesaid on the ground that fund of interest bearing loans have been diverted to advances which are not linked to the business. So the interest paid on the secured loan is not exclusively for the purpose of business. Aggrieved by this order, assessee preferred an appeal before Ld. CIT(A) who has upheld the decision of AO by observing that no prudent entrepreneur will advance the loan for fetching less interest than that paid by it on loan taken. In the instant case, assessee pays more interest to the bank but got less interest from the farmers. Aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us.

Shri Somnath Ghosh, Ld. Authorized Representative is appearing on behalf of

assessee and Shri Amitava Bhattacharyya, Ld. Departmental Representative is appearing on behalf of Revenue.

4. We have heard rival parties and perused the materials available on record. Ld. AR submitted paper book containing pages 1 to 166 and demonstrated that advances were given to the farmers for the purpose of business expediency and this practice was very much prevalent in the cold storage industry business. Now as and when there is a requirement of fund to the farmers they approached to the owner of the cold storage to seek financial support at a very nominal rate of interest and owner of the cold storage provide this financial support to farmers so as to ensure their loyalty for getting the supply of potato on year to year basis. The Ld. AR further demonstrated that assessee has been framed assessment u/s. 143(3) of the Act by AO in the subsequent year and the question for disallowance of interest did not arise. The Ld. AR of assessee also cited various judgment in support of his claim where the business expediency was interpreted in different perspective and the deduction of the expenses was allowed accordingly.
1) Caldern Pharmaceuticals Ltd. v. CIT (2004) 265 ITR 245 (Cal)
2) Aruna Mills Ltd. v. CIT (1957) 31 ITR 153 (Bom)
3) CIT v. Neelkanth Synthetics And Chemicals P. Ltd. (2011) 330 ITR 463 (Bom)
4) ACIT v. Kuber Singh Bhagwandas (1979) 118 ITR (MP) (FB)
5) DCIT v. Core Health Care Ltd. (2008) 298 ITR 194 (SC)
6) S.A Builders Ltd. v. CIT And Anrs. (2007) 288 ITR 1 (SC)
7) Sassoon J. David And Co. P. Ltd. v. CIT (1979) 118 ITR 261 (SC)

5. On the other hand, Ld. DR vehemently relied on the orders of authorities below.

6. On careful analysis of the aforesaid discussion, it reveals that the AO has disallowed the interest on the ground that assessee is paying much amount of interest to the bankers and consequently claiming more expenses in the form of bank interest and those loans have been given subsequently to the farmers and assessee has taken very minimal interest from those farmers. So the AO has held that loan has not been exclusively used for the purpose of business and the Ld. CIT(A) has confirmed the view taken by the AO and disallowed the interest on proportionate basis. However, we observe that the amount of loan was given to the farmers for the purpose of business expediency of the assessee. We find that there is no bar against advancing of loan interest-free or at a low rate of interest under the Act. There may be many considerations, including business considerations, for not charging interest or charging interest at a low rate. Dispute between the Revenue and the assessee often arises when money is borrowed with interest and loan is advanced interest-free or at a low rate of interest. In such a case the tendency of the Assessing Officers generally is to disallow the interest paid on the money borrowed either in full or proportionately depending upon the quantum of loan advanced and interest, if any, charged. But whether the assessee charged interest on loan advanced or not is not at all a relevant consideration for determining allowability of interest paid under section 36(1)(iii) of the Act. As already discussed, the relevant consideration is whether the moneys have been borrowed for the purposes of business or profession and whether interest paid. In the interest of maintaining good business relation, interest free loans or loans at a low rate of interest may be given to others with whom the assessee has business relation or with whom he expects to establish business connection or with whom he has other business obligations, present or past. There may be many other reasons also both business or non business. If interest-free loan or loan at a low rate of interest is given for business consideration out of the capital borrowed with interest then also the borrowing would be for the purposes of business, and interest paid on the borrowed capital would be allowable as deduction under section 36(1)(iii) of the Act. There is no compulsion that interest should always be charged on any lending, nor there is any requirement that income must be earned by utilizing the capital borrowed with interest so as to be entitled to the deduction under section 36(1)(iii) of the Act. Merely for the reason that interest was not charged or charged at a low rate on the lending, the interest paid for borrowing cannot be disallowed. It is a matter of business prudence and entirely upto the assessee as to how he utilizes the fund in the interest of his business. The basic requirement is that the borrowed capital should be used for the purposes of business or profession. An argument may be advanced that if interest-free loan had not been given then the assessee could have reduced his debt and consequently the interest payment. In this respect the observation of the Tribunal in the case of Coimbatore Salem Transport (P) Ltd., affirmed by the Madras High Court in CIT vs. Coimbatore Salem Transport (P) Ltd. (1966) 61 ITR 480 (Mad), was as under :

"The worst that can be said is that if such advances had not been given, the assessee could have reduced its indebtedness and thereby its interest charges. But that would be venturing into realms that are not open to the Department. It is a matter of business prudence."

The Madhya Pradesh High Court in the case of D&H Secheron Electrodes (P) Ltd. vs. CIT (1984) 40 CTR (MP) 366 : (1984) 149 ITR 400 (MP) held that where the assessee borrowed capital for business purposes, no portion of the interest could be disallowed even if the assessee had dissipated the funds by giving interest-free loans. Similarly, the Madras High Court held in the case of CIT vs. Pudukkottai Co. (P) Ltd. (1972) 84 ITR 788 (Mad) that, in view of the finding that the amounts borrowed were for the purpose of business, no disallowance of interest paid could be made if the assessee borrowed the funds at a higher rate of interest and lent it at a lower rate.”

So it is evident from the aforesaid discussion that there is an element of business expediency involved in this transaction so as the amount of interest charged by assessee from the farmers at a lesser rate.

From the above cited judgments, we find that interest paid to the bank at a higher rate and charged from other parties at a lesser rate on account of business expediency is allowed. On this basis and taking a consistent view we allow the claim of assessee for receiving lesser rate of interest from the farmers, hence, this ground of assessee’s appeal is allowed.

7. Coming to next ground of assessee’s appeal is regarding that Ld. CIT(A) has erred in upholding the addition to the extent of ₹ 22,777/- on account of failure to deposit EPF towards PF within the prescribed due date. The AO has treated the amount of ₹ 22,777/- as income by virtue of Sec. 2(24)(x) of the Act on the ground that the payment of EPF was not paid within due date as prescribed under the relevant Act. Aggrieved, assessee preferred appeal before Ld. CIT(A) who has upheld the order of AO.

8. Now aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us

9. We have heard rival parties and perused the materials available on record. We find that though the payment was made late as prescribed under the respective Act of the employer PF fund, however, after making reference to the judgment of Hon'ble Supreme Court in the case of CIT v. Alom Extrusions Ltd. 319 ITR 306 (SC), wherein it was held that even the employees PF has been deposited before the filing of income tax return of the assessee for the relevant year under consideration that will not be taken as income u/s 2(24)(x) of the Act. In the instant case the assessee has made the payment before the due date of filing income tax return. Therefore, we relying on the judgment of Hon'ble Supreme Court in the case of Alom Extrusions Ltd.

(supra) we allow this ground of assessee’s appeal.

10. In the result, appeal filed by assessee is allowed.

Order pronounced in the open court 06/11/2015

(Mahavir Singh)           (Waseem Ahmed)
(Judicial Member)        (Accountant Member)