Borrowing money at a higher rate and lending it to the director demonstrate the use of money for purposes other than business

Fact and issue of the case

This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 20.09.2022 for the A.Y.2014-15

Aggrieved by the order of Ld.CIT(A), assessee is in appeal before us and raised following grounds in its appeal

The Commissioner of Income Tax (Appeal) has erred in confirming with the Assessing Officer to disallow the Brokerage expense and Transfer Charges total amounting to Rs.1,36,140/-which was incurred by the Assessee exclusively for Sale of the Business Premises which was the Depreciable Asset of the Assessee.

Even though Section 50(1) of the I. T. Act 1961 categorically states that these expenses incurred wholly and exclusively in connection with such transfer of such asset expenses will be deducted from Sale Proceeds arising even then, such expenses has been disallowed by the A.O. & confirmed by CIT(A). In light of the above said facts the disallowance of expenses amounting to Rs.1,36,140/- which is confirmed by the CIT(A) ought to be deleted. 2. The CIT(A) has also erred in confirming the disallowance of excess interest paid amounting to Rs.42,24,423/- to Elevators News Network Pvt. Ltd. The total interest which was paid to Elevators News Network Pvt. Ltd. was @18% amounting to Rs. 1,86,57,929/- & the rate of interest which was received from Mr. Anup Shyam Karnani being the Director of the Company to whom the same loan amount was advanced was @ 13.5%. This excess interest paid been @ 4.5% was disallowed u/s 36(1)(iii) of Income Tax act 1961. The loan amount which was advanced to Mr. Anup Shyam Karnani was on account of Commercial Expediency & not for Personal Purpose. As a prudent business, the Appellant agreed to reduce the rate of interest from 16.25% to 13.5% only with condition to repay the entire loan amount immediately so that Appellant doesn’t default in repaying the loan back to Lender

In light of the above said facts the disallowance of excess interest paid to Elevators News Network Pvt. Ltd amounting to Rs.42,24,423/- ought to be deleted

The CIT(A) has also erred in confirming the disallowance of excess interest paid amounting to Rs.42,24,423/- to Elevators News Network Pvt. Ltd. The total interest which was paid to Elevators News Network Pvt. Ltd. was @18% amounting to Rs. 1,86,57,929/- & the rate of interest which was received from Mr. Anup Shyam Karnani being the Director of the Company to whom the same loan amount was advanced was @ 13.5%. This excess interest paid been @ 4.5% was disallowed u/s 36(1)(iii) of Income Tax act 1961. The loan amount which was advanced to Mr. Anup Shyam Karnani was on account of Commercial Expediency & not for Personal Purpose. As a prudent business, the Appellant agreed to reduce the rate of interest from 16.25% to 13.5% only with condition to repay the entire loan amount immediately so that Appellant doesn’t default in repaying the loan back to Lender. In light of the above said facts the disallowance of excess interest paid to Elevators News Network Pvt. Ltd amounting to Rs.42,24,423/- ought to be deleted

3. With regard to Ground No. 1 the relevant facts are during the year assessee has sold premises at ₹.48,00,000/- on 16.10.2013 and the Assessing Officer observed from Profit and Loss Account that assessee has shown the Sale of Gala (net of expenses) at ₹.43,62,219/- under the head “other non-operating income”. Further, Assessing Officer observed that assessee has shown sale of premises situated at Niraj Industrial Estate, Andheri (E) Mumbai at ₹.43,62,219/- after deducting brokerage charges and other society transfer charges of ₹.4,21,641/-. After considering the submissions of the assessee, Assessing Officer proceeded to determine the short term capital gain u/s. 50(2) of the Act as under

Sale consideration received	₹.48,00,000/-
Less: Written Down Value of the block of asset at the beginning of the previous year:	₹.3,01,641/-
Short Term Capital Gain	₹.44,98,359/-

From the above Assessing Officer has rejected the associated cost of transfer claimed by the assessee relating to brokerage and other charges

Observation of the court

Aggrieved assessee is in appeal before us, at the time of hearing, Ld. AR submitted that assessee is in the business of money lending and in this regard he submitted copies of memorandum of association and highlighted the object clause of the company. Further, he submitted that assessee has lent the money to one of the Director with the lesser interest and he brought to our notice Page No. 145 of the Paper Book which is the Assessment Order for the A.Y. 2012-13 in which the case of the assessee was assessed u/s. 143(3) of the Act with the observation that assessee is carrying on business of investment and invested the funds of the company in India and elsewhere

12. Further, he agreed that for the purpose of lending business assessee has taken loan and also gave loan during the year and accepted that there is a difference in charging the interest with the difference of 4.5% which was given to one of the Director and he relied on the submissions made before the Ld.CIT(A). Further, argued that the interest payment made to ENNPL which the company has declared the same in its return of income. Therefore, to that extent of income is already charged to tax. With regard to interest received from the Director he submitted that the Director also disclosed the same in his return of income. Therefore, there is no loss to the revenue in the above said transactions. He further submitted that the Director has returned the money in the subsequent assessment year and to substantiate, he brought to our notice Page No. 91 of the Paper Book. He prayed that the addition made by the Assessing Officer may be deleted considering the fact that assessee is in the business of money lending and it is in the interest of business to pay or collect interest for the business exigencies and for the interest of the business

On the other hand, Ld.DR relied on the orders of the lower authorities

Considered the rival submissions and material placed on record, we observe from the record that assessee has no doubt borrowed the funds from ENNPL and paid the interest @18%. We observe from the balance sheet submitted before us that the assessee has borrowed huge funds for the purpose of business and paid the interest @18% and at the same time assessee has lent the huge amount of loan to one of its director Mr. Anup Shyam Karnani. In our view, there is no other funds available in the business than the borrowed funds and the same were utilized to pay the loan to one of the its Director. It is immaterial how the loan was treated by the Director. However, as far as the assessee is concerned, assessee has borrowed funds @18% without there being any other funds i.e. interest free funds in the business, therefore, it clearly shows that assessee has utilized interest bearing funds to lend the money to one of its Director with a considerable difference of interest rate i.e., 4.5%. Therefore, it clearly shows that there is diversion of funds for non-business purpose. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A) and we do not intend to get into the issue of deemed dividend at this stage since the assessee is in the business of money lending. We observe that the issue of deemed dividend is not raised by the revenue authorities. Accordingly, ground raised by the assessee is dismissed

In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 03rd April, 2023