IN INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR BEFORE: SHRI A.D. JAIN, JM & SHRI VIKRAM SINGH YADAV, AM ITA No. 38/JP/2016 Assessment Years : 2011-12 M/s Lakhani Shoe Co. Pvt. Ltd., Assistant Commissioner Plot No. 130, Sector-24, Vs. of Income Tax, Faridabad. Circle-2, Alwar. PAN/GIR No.: AAACL 2991 Appellant Respondent Assessee by : Shri S.C. Vasudeva (CA) Revenue by: Shri R.A. Verma (Addl.CIT) Date of Hearing : 14/09/2016 Date of Pronouncement : 15/09/2016 ORDER PER: A.D. JAIN, J.M. This is assessees appeal for A.Y. 2011-12 filed against order dated 13/10/2015 passed by ld. CIT(A), Alwar. sole ground taken by assessee is as under:- 1 (a) That learned CIT(A) had misdirected himself in confirming addition made by learned Assessing Officer amounting to Rs. 50,93,997/- out of interest payment on loans on alleged contention that interest bearing funds have been 2 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT used for investment in M/s Mascot Footcare and M/s Mascot Udyog. (b) Without prejudice to above, ld. CIT(A) was not justified in stating that investment made in M/s Mascot Footcare and M/s Mascot Udyog was Rs. 3,34,80,424/- and Rs. 1,45,76,154/- respectively, which is in actual capital balance of appellant in said concerns as on 31/3/2011. actual amount of investment was Rs. 60,00,000/- and Rs. 45,00,000/- respectively and difference is on account of share of profit and interest amount from said concerns. 2. While making disallowance, Assessing Officer observed as follows:- 4.1 On perusal of Audited balance sheet of assessee company, it was gathered that assessee company has invested Rs. 3,34,80,424/- in M/s Mascot Footcare, Noida and Rs. 1,45,76,154/- in M/s Mascot Udhyog, Noida. assessee had shown profit of Rs. 6,72,343/- from above two firms under head other income in Schedule-8 of profit and loss account. 4.2 directors of assessee company are Mrs. Kamlesh Lakhani, Mr. K.C. Lakhani and Mr. Gunjan Lakhani. Directors of assessee company are also partners in above mentioned two firms i.e. M/s Mascot Footcare, Noida and M/s Mascot Udhyog, Noida. 3 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT 4.3 aggregate rate of return from investment of assessee company in above two firms is 1.40%. On other hand, assessee is paying interest to Punjab National Bank (PNB) and ICICI bank @ 12%. Hence on one side assessee had invested huge amounts in firms (in which directors of firm are partners) at very low rate of return, on other hand, assessee company is having loans on which it is paying interest @ 12% which is very much higher than rate of return from these investments. 4.4 If assessee would not have made above investment he would have saved amount of interest paid on unsecured loan and Bank Loan to extent of 10.60% i.e. 12%-1.40% of investment made which comes to Rs. 50,93,997/- (10.40% of Rs. 4,80,56,578/-). Hence investment made by assessee company was not reasonable and it was detoriating to interest of company, therefore, it is not allowable. 4.5 assessee company vide order sheet entry dated 20.01.2014 was asked to show cause as under:- As per schedule-5 of balance Sheet you have invested amount of Rs.33480424/- in M/s. Mascot Foot care, Noida and Rs.14575154/- in M/s. Mascot Udhyog, Noida as capital contribution out of interest bearing funds. rate of return from above two investments is below 2% and rate of payment of interest on Bank loans is 12%. Show cause as to why 4 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT difference amount of interest should not be disallowed and added to income of assessee as same has not been used for purpose of business of company resulting in mis-utilization of interest bearing funds of company. 4.6 assessee company filed its reply on 30.01.2014 on this issue which is produced as under:- In connection with above assessment year and queries raised at time of last hearing, we beg to reply as under:- Please note that investment in capital of M/s. Mascot Foot care was made as under:- 1. 1988-1989 Rs.5,00,000/- 2. 1998-1999 Rs.25,00,000/- 3. 1999-2000 Rs.30,00,000/- Similarly investment in capital of M/s. Mascot Udhyog was made as under:- a) 1988-1999 Rs.5,00,000/- b) 1999-2000 Rs.40,00,000/- After adding profit year by year and interest, capital in M/s. Mascot Footcare become Rs.33480423.56 and in M/s. Mascot Udhyog Rs.14576154.59 so it is incorrect that company has invested Rs.33480423.56 in M/s. Mascot Footcate and Rs.14576154.59 in M/s. Mascot Udhyog. This is outstanding figure appearing as on 31.03.2011 which comprises original investment upto date. Share of profit and interest. Investment in above firms were made not out of borrowed funds but only out of internal accruals. 5 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT internal accruals of M/s. Lakhani Shoe Co.(P) Limited when investment was made in M/s. Mascot Footcare was as under:- Year Net Profit Depreciation Total Internal Investment accruals made in M.F. 1988-1989 2109885 638684 2748569 500000 1998-1999 12322055 2546355 14868410 2500000 1999-2000 8232621 2796978 11029599 3000000 assessment of company is being made almost regularly u/s 143(3) of Income Tax Act and based on above facts department has never made addition on this account. You are, therefore, requested not to make any addition on this account. Similarly when investment was made in M/s. Mascot Udyog, Internal accruals of company were as under:- Year Net profit Depreciation Total Internal Investment accruals made in M.U. 1988-1989 2109885 638684 2748569 500000/- 1999-2000 8232621 2796978 11029599 4000000/- Moreover assessment of company is being made almost regularly u/s 143(3) of Income Tax Act and based on above facts department has never made addition on this account. You are, therefore, requested not to make any addition on this account on basis of wrong facts. We are also enclosing details of investment made by company and status of capital in each year will show that 6 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT present outstanding is on account of apart from original investment share of profit in each year and interest whenever company received. 4.7 reply of assessee was carefully considered and not found to be acceptable due to following reasons:- 4.7.1 business of assessee company is manufacturing of Hawai Chappal to earn profit from such activities. Investment in some other firm is not part of business of assessee, and there is no profit to business of assessee from such investment. Therefore, amount of capital of assessee company remained invested in above partnership firms is not reasonable and it should have been withdrawn. 4.7.2 During year under consideration assessee company has taken loan from PNB which has been shown in balance sheet under secured loans. loan was sanctioned on 03.02.2010 and rate of interest on this loan is 12%. assets of assessee company were also hypothecated/Mortgaged for aforementioned loan. If assessee would have withdrawan its capital for firms M/s. Mascot Footcare, Noida and M/s Mascot Udhyog, Noida need of taking loan in company would not have rised, and 7 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT liability of interest to bank would have been avoided. 4.7.3 On perusal of partnership deeds it was found that assessee company is having 10% share in profits of both firms i.e. M/s. Mascot Footcare, Noida and M/s Mascot Udhyog, Noida but capital contribution of assessee company in both firms is very high as compared to other partners who are having larger share in profits of firms. 4.7.4. Most of capital in M/s. Mascot Footcare and M/s Mascot Udhyog is from assessee company. Furthermore, during year under consideration there was no business at all in M/s. Mascot Udhyog, therefore, it is not justifiable as to why assessee company is keeping it funda idle and taking interest bearing funds from banks, even assessee is not receiving interest on capital from aforementioned two firms. 4.7.5 It is also worthwhile to mention here that partners having less capital are taking most of profits as their profit sharing ratio is more. Even few partners have debit balances of capital account are taking major part of share of profit, which clearly indicates that modus operandi of 8 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT company is such that it is intentionally causing loss to itself. 4.8 In view of above discussion and carefully considering reply of assessee. amount of Rs.5093997/- is added to income of by way of disallowance of interest on unneeded loans, as it is clear that if assessee would not have kept capital invested there would have no requirement of loans. 4.9 Since assessee has furnished inaccurate particulars of income penalty u/s 271 (1)(c) of act will be initiated separately. 3. ld. CIT(A) confirmed assessment order by holding as follows: 4.3 I have perused assessment order as well as submissions made by appellant and find that disallowance of Rs.5093997/- out of interest payments made by appellant on loans has been made by AO on ground that interest bearing funds have not been used for purpose of business. AO has stated that amount of Rs.3.34 Crores stands invested as capital in M/s. Mascot Footcare and amount of Rs.1.45 Crores stands invested as capital in M/s. Mascot Footcare and amount of Rs.1.45 crores stands invested as capital in M/s. Mascot Udhyog. profits earned on investment made by company is only 1.40% and rate of interest paid by appellant at 12% is much higher and therefore disallowance @ 10.60% on interest paid on unsecured and 9 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT bank loan has been made by AO which comes to Rs.5093997/- (10.60% of Rs.48056578/-). 4.4 appellant has stated that investment of Rs.60 lacs has been made in M/s. Mascot Footcare and investment of Rs.45 lacs was made in M/s. Mascot Udhyog by appellant during 1998-2000. remaining balance represents investments out of internal accrual and not out of borrowed funds. Therefore, there is no justification in making disallowance out of interest payments made by company. 4.5 Having considered submissions made by appellant and evidence available on record, I find that concerns in which appellant company has made substantial investment fall within ambit of specified persons as defined in provisions of section 40A(2)(b) of IT Act. Directors/Share holders of company are having substantial interest in above mentioned firms, in which appellant company has invested substantial amounts as capital + accumulated profits over years. 4.6 appellant has merely reiterated submissions filed before AO and has not been able to produce any evidence so as to controvert findings given by AO. Further, on examination of these facts, I do not find any argument or justification being given by appellant for obtaining huge loans and their utilization for purposes of business of company. Moreover, there is no justification for payment of interest on loans, whereas funds of company have been parked in other concerns where related persons are holding substantial interest. Hon ble Kerala High Court has held in case of CIT v/s Accelerated Freeze Drying Pvt. Ltd. 324 ITR 316 that interest paid is not deductible-as 10 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT money was given to sister concern without interest. Further, Hon ble Allahabad High Court has in case of CIT v/s Sahu Enterprises Pvt. Ltd. 352 ITR 008 has held that onus is on assessee to prove utilization of borrowed funds for purposes of business. Interest was held not allowable u/s 36(1)(iii) of IT Act. 4.7 It is not denied by appellant that percentage of share of profits being given to company is disproportionate to amount of investment made vis-a-vis percentage of share of profits and investment made by other persons (who are share holders/ directors of appellant company). appellant has not been able to controvert that interest payments made are justifiable in view of utilization of funds. Further, I find that this issue has already been considered by undersigned in case of appellant for A.Y. 2010-11 in appeal No.51/2013-14 vide order dated 14.08.2014. 4.8 Since there is no change in facts of case, therefore, following order passed for preceding year, I uphold action of AO in making disallowance and confirm addition of Rs.50,93,997/- out of interest payments on loans claimed by company. 4. ld. Counsel for assessee has contended that issue under consideration stands decided in favour of assessee by order dated 18/03/2016 (APB 54 to 65) passed by Tribunal in assessee s own case for immediately preceding assessment year, i.e., A.Y. 2010-11, in ITA No. 724/JP/2014. 11 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT 5. Per contra, ld. Sr. DR has placed strong reliance on impugned order. 6. Having considered rival contentions of both parties in light of material placed on record, it is seen that for immediately preceding assessment year, i.e., A.Y. 2010-11, this very issue of disallowance of interest was before Tribunal. Tribunal, vide order dated 18/3/2016, has decided matter in favour of assessee as follows:- 4.1. We have heard rival contentions of both parties and perused material available on record. only point raised in appeal in aforesaid matter is with regard to disallowance of Rs 48,85,314/-out of interest of Rs 1,91,99648/-paid by appellant to bank as well as to other parties. It was contended by ld AR for assessee that investments in partnership firm were not made in year under consideration and were made in earlier years. In fact detail has been provided to assessing officer in following manner: M/s Mascot Footcare M/s Mascot Udyog Year Amount Year Amount 1988-89 500000/* 1988-89* 500,000 1998-99 25,00,000 1999-2000 40,00,000 1999-2000 30,00,000 12 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT *As per *As per assessee assessee it Should be Rs should have 125000/ 89 been1989-90 and Rs 375000/ in 1989-90 It was thereafter submitted that capital initially contributed has increased on account of share profit and interest accruing to assessee. It was submitted that no borrowed funds were utilized during those years for making investment in above said concerns. 4.2. ld. D/R for revenue has submitted that investment in these concerns were not part of business of assessee company and there is no profit to business of that assessee from such investment. It was further submitted that assessee company has taken loan from Punjab National Bank at rate of 12% and it was submitted that if assessee company has withdrawn investment from these concerns then there was no necessity to take loan from Punjab National bank. It was also highlighted that share in profit of assessee is only 10% whereas capital consideration is very high in comparison to other partners of firm. 4.3. ld D/R further submitted that M/s Mascot Udyog is not doing any business and capital of assessee is lying blocked and no steps have been taken by assessee to 13 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT recall capital investment made by it. assessee not recalling investment from M/s Mascot Udyog and taking loan from Punjab National bank, clearly shows that commercial interest of assessee has been compromised by assessee. It was submitted on behalf of revenue that M/s Mascot Udyog had invested major amount in equity shares of M/S Lakhani India Ltd. Thus ld DR, emphasised that money of assessee has been rooted for purchase of equity shares of M/S Lakhani India Ltd . Thereafter it was submitted that there was no justification for payment of interest on loans taken from related persons and banks. 4.4. In our view, admitted position as emerges from record is that assessee has made investments in M/s Mascot Footcare and M/s Mascot Udyog prior to assessment year 1999-2000 and said investment made by assessee in those years have increased many folds on account of profit, interest etc. to tune of Rs 47,38,4234/-. Moreover it is also admitted position that out of said available funds, said concerns had invested in Ms Lakhani India Ltd. assessment year in which investments were made in equity share of M/s Lakhani India Ltd, by M/s Mascot Udyog were as under :- 1995-96 Rs 24378150 1996-97 Rs 351110 14 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT 2001-02 Rs 237144 Total Rs 24966404 Thus it is clear that no investment were made in M/s Lakhani India Ltd in year under consideration. assessing officer had failed to prove nexus between interest paid to related parties and bankers and investment made by assessee in current assessment year. No new investments were made by assessee in year under consideration. 4.5. In our view assessee was able to establish that he had incurred expenditure wholly and exclusively for purpose of business and therefore there is no justification for revenue to disallowance interest component. revenue cannot claim to put itself in armchair of businessman and decide how much is reasonable expenditure. revenue is required to examine issue from perspective of prudent businessmen rather from its own angle. Revenue authorities have failed to bring on record any cogent evidence and material to show that borrowed funds have been utilized for purposes of investment and were not used for business purposes. It would be relevant to reproduce below finding recorded by assessing officer in paragraph 4.3 to following effect: 4.3 aggregate rate of return from investment of assessee company in above two firms is 1.69%. On 15 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT other than assessee is paying interest on unsecured loan from Shri Gunjan Lakhani @12% and interest to Punjab National bank @ 12%. Hence on one side assessee had invested huge amounts in firms ( in which directors of firms are partners) at very low rate of return, on other hand assessee company is having loans on which it is paying interest@ 12% which is very much higher than rate of return from these investment In our view authorities below have failed to bring on record any material which shows that borrowed funds have not been used for purposes of business. In light of above appeal of assessee is required to be allowed as no fresh investment has been made in year under consideration and further no loan amount was used for that purposes. 4.6. Our view is also supported by judgment of Hon ble Supreme Court in matter of Hero Cycle Ltd. vs. CIT, 63 Taxman.com 308 wherein it is held as under :- 12. Insofar as loans to sister concern/subsidiary company are concerned, law in this behalf is recapitulated by this Court in case of S.A. Builders Ltd. v. CIT (Appeals) [2007 (288) ITR 1/158 Taxman 74]. After taking note of and discussing on scope of commercial expediency, Court summed up legal position in following manner: '26. expression "commercial expediency" is expression of wide import and includes such expenditure as prudent businessman incurs for purpose of business. expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. 16 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 (SC)], if borrowed amount was donated for some sentimental or personal reasons and not on ground of commercial expediency, interest thereon could not have been allowed under section 36(1)(iii) of Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], borrowed amount was donated to college with view to commemorate memory of assessee's deceased husband after whom college was to be named, it was held by this court that interest on borrowed fund in such case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that borrowed fund advanced to third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of Act. 29. In present case, neither High Court nor Tribunal nor other authorities have examined whether amount advanced to sister concern was by way of commercial expediency. 30. It has been repeatedly held by this court that expression "for purpose of business" is wider in scope than expression "for purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971 82 ITR 166 (SC)], etc.' 13. In process, Court also agreed that view taken by Delhi High Court in CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377/121 Taxman 706 wherein High Court had held that once it is established that there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), Revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. It further held that no businessman can be compelled to maximize his profit and that income tax authorities must put themselves in shoes of assessee and see how prudent businessman would act. authorities must not 17 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT look at matter from their own view point but that of prudent businessman. Further, Hon ble Jurisdictional High Court in matter of CIT vs. Ram Kishan Verma has held as under :- 13. Taking into consideration fact as noticed hereinabove, in our view as well, when there was no agreement to charge interest from persons, to whom assessee advanced short term loan/advance, AO could not disallow part of interest. It is also admitted fact, as observed by Tribunal, that AO .vas not able to pin pointedly come to definite conclusion that how interest bearing loans had been diverted towards interest free advances and since AO was not able to prove nexus between interest bearing loans vis-a-vis interest free loans/advances, therefore, in our view as well, once AO was not able to come to definite conclusion as to nexus having been established about interest bearing loans having been diverted towards interest free loans/advances, and such being finding of fact based on appreciation of evidence, in our view no substantial question of law arise on this question as well. It can be observed that this court in similar circumstances and on identical facts, when capital of partners/proprietor being more than interest free short term advances, has in case of CIT v. Vijay Solvex Ltd. [2015] 59 taxmann.com 294 (Raj.) while relying on judgment rendered in (a) S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC); (b), Munjal Sales Corpn. v. CIT [2008] 298 ITR 298/168 Taxman 43 (SC); (c), CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All.); (d), CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377/121 Taxman 706 (Delhi); (e), CIT v. Britannia Industries Ltd. [2006] 280 ITR 525/[2005] 148 Taxman 654 (Cal.) and (f) CIT v. Motor Sales Ltd. [2008] 304 ITR 123 (All.), held as under: "16. In view of authoritative pronouncement of Apex Court and other judgments referred supra, in our view, assessee admittedly had its own funds, as referred to earlier, and admittedly such funds/reserves being substantially higher than, even otherwise, advances to debtors, no notional interest or hypothetical interest could have been disallowed on such facts. revenue has failed to prove 18 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT nexus. In our view, ITAT has correctly appreciated facts and law." Similar views have been expressed by Hon ble Madras High Court in matter of CIT vs. Premier Poly Sacks Pvt. Ltd., 321 ITR 450 (Mad). 5. In result, appeal of assessee is allowed. 7. facts in year under consideration are not any different from those in A.Y. 2010-11. Even ld. CIT(A) has observed in impugned order, inter alia, that issue had been considered by him in his order dated 14/8/2014, in assessee s case for A.Y. 2010-11. It was said order of ld. CIT(A) for A.Y. 2010-11, against which assessee s appeal was allowed by Tribunal vide its aforesaid order dated 18/3/2016. 8. Therefore, respectfully following Tribunal order (supra), in assessee own case for A.Y. 2010-11, disallowance made for year under consideration is deleted. 9. We hold that no nexus between borrowed funds in investments made having been proved and borrowel having been made for business purposes, interest thereon is allowable U/s 36(1)(iii) of Act. Too, as per record, assessee is partner in M/s 19 ITA 38/JP/2016_ M/s Lakhani Shoe Co. Pvt. Ltd. Vs ACIT Mascot Footcare, Noida and M/s Mascot Udhyog, Noida, where assessee made capital contribution out of its own internal accruals, which contributions have grown over time due to share of profit and interest on capital. 10. In view of above, grievance of assessee is found to be justified and is accepted as such and order under appeal is cancelled. 11. In result, appeal of assessee is allowed. Order pronounced in open court on 15/09/2016. Sd/- Sd/- (Vikram Singh Yadav) (A.D. Jain) Accountant Member Judicial Member Jaipur Dated:- 15th September, 2016 Ranjan Copy of order forwarded to: s 1. Appellant- M/s Lakhani Shoe Co. Pvt. Ltd., Faridabad. 2. Respondent- ACIT, Circle-2, Alwar. 3. CIT 4. CIT(A) 5. DR, ITAT, Jaipur 6. Guard File (ITA No. 38/JP/2016) By order Asst. Registrar M/s Lakhani Shoe Co. Pvt. Ltd. v. Assistant Commissioner of Income-tax, Circle-2, Alwar