IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “G”, MUMBAI

ITA No. : 7564/Mum/2013
Assessment year: 2009-10
Global Exim (Appellant) vs Jt. Commissioner of Income Tax (Respondent)
Date of Order: 30-10-2015

ORDER

PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against impugned order dated, 03.10.2013, passed by CIT(A)-24, Mumbai-24 for the quantum of assessment passed u/s 143(3) for the assessment year 2009-10, on the following effective ground :-

“On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in law in disallowing Rs. 8,52,582/- on account of Interest on Advances given for Business purpose to various parties. Looking to the facts & circumstances of the case, Your appellant request your honour that the assessing officer may be directed to delete the said disallowance of Interest amounting to Rs. 8,52,582/- in toto”.

2. Brief facts of the case are that, assessee-firm is a trader and importer of solvent chemicals and drugs besides commission agent in DFRC and DEPB Licenses. During the course of assessment proceedings, on examination of details of loans and advances given by the assessee, the AO noted that assessee had given interest free advances to following 3 parties:-

1 Anand Agrochem Rs. 20,73,141
2 Trident India Rs. 49,00,000
3 Goel Enterprises Rs. 25,00,000

In response to the show cause notice, the assessee submitted that these interest free advances were given to above three parties for procuring Exim scripts/licenses from actual exporters at competitive rates, however, deals with these three parties did not materialize and they have also not given back these advances to the assessee, hence it was contemplating to write off these sums. However, AO held that these advances were not for business purposes and accordingly, he disallowed interest of Rs. 8,52,582/- @ 9%. The advance of Rs. 25 lakhs given to Goel Enterprises was received back on 27.04.2010, as noted by the AO.

4. Before the CIT(A), the assessee made very exhaustive submissions which have been dealt and incorporated by the CIT(A) from pages 8 to 12 of the appellate order. In sum and substances the assessee’s submission was that it is engaged in the purchase and sales of DFRC and DEPB Licences for which it has given advances to certain parties and there was no stipulation of charging interest on these advances as same were for business purposes. None of these parties are related to the assessee and since there was shortage of certain Exim licenses and products and were not readily available in the market, therefore, to enable them to purchase the licenses and in the interest of its business/trade, assessee has to give interest free advances to certain parties/clients. These advances were purely for the business purposes and no notional interest could be charged on these advances. Reliance was placed on catena of decisions in support of this contention. The Ld. CIT(A), however, confirmed the said addition on the ground that, assessee has failed to substantiate its explanation that these advances were given for the business purpose. The assessee has paid interest of Rs. 1,66,29,733/- on borrowings and Rs. 2,58,528/- to the banks and Rs. 1,68,682/-to the partners. All these interest paid have been claimed as deduction. The sundry creditors also could not have funded interest free advances, because assessee has closing stock at Rs. 15,64,74,658/- and sundry debtors of Rs. 9,75,82,468/- as on 31.03.2009. There was no other source of interest free funds available to the assessee. Thus, it is clear that borrowed funds have been utilized for giving these advances, which are apparently not for business purpose. Therefore, such a disallowance made by the AO is to be confirmed.

5. Before us, the Ld. Counsel submitted that these advances were brought forward from the earlier years and no such disallowance of interest have been made in assessment year 2008-09, even when the assessment was completed u/s 143(3). The copy of the assessment order u/s 143(3), dated 10.05.2010 was also filed before us. Otherwise also, these advances were given to nonrelated party, for acquiring the licenses which was for the business carried out by the assessee. Thus, it was a purely a trade advance and such a trade advance cannot be held for non-business purpose. Total advance given to these three parties is Rs. 1 crore, out of which Rs. 25 lakhs was received back. However, the two parties have not paid back the amount. Thus, on these facts no notional disallowance of interest can be made on such advances, because they were purely and purely for business purpose and assesee’s case is squarely covered by Hon’ble Supreme Court judgment in the case of S A Builders Vs CIT, reported in [2007] 288 ITR 1.

6. The Ld. DR strongly relied upon the order of the CIT(A).

7. We have heard the rival submissions and perused the relevant material placed on record. It is an undisputed fact that one of the main business of the assessee was trading in DEPB and DFRC licenses. It has given advances to three parties for purchase of these licenses. Thus, such an advance is purely a trade advance which had been given in the normal course of business, especially when it has not been given to any related party. Such an advance was given in order to ensure that the assessee gets the licenses when there was acute scarcity of licenses in the market. Further, these advances were given in the earlier years and no adverse inference has been drawn by the Department inasmuch as no disallowance of interest has been made in the scrutiny assessment completed u/s 143(3). Hence, in the earlier years when such an advance has not been treated as for non-business purpose, then no disallowance of interest could be made, unless there is something on record to show that the advances made in the earlier yeas were not for the business purpose. Apart from that, once assessee has taken the loan and has paid the interest on such capital borrowed then what is required to be seen is genuineness of the borrowings and also whether the borrowings was for the purpose of business or not. Once the money has been utilized for the purpose of business, then interest paid on such borrowings has to be allowed, unless it has been brought on record by the AO that the borrowed funds have been diverted for assessee’s personal / non-business purpose. Here in this case, nothing of that sort has been brought on record that advances made were for personal nature or to some related party or for non-business purpose, except for bald assertion. Thus, such a disallowance made by the AO and confirmed by the CIT(A) cannot be sustained. Accordingly, the disallowance of Rs. 8,52,582/- on account of notional interest stands deleted.

8. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 30th October, 2015.

                Sd/-                                    Sd/-
(D. KARUNAKARA RAO)           (AMIT SHUKLA)
ACCOUNTANT MEMBER       JUDICIAL MEMBER