2015 (6) TMI 70 - AT - Income Tax

ITAT sets aside trade advance issue for re-examination, directs AO to decide afresh

The ITAT set aside the matter to the AO for a detailed re-examination of the trade advance of Rs. 43.60 crores to M/s. Prayag Enterprises Ltd. The AO was ... Dis-allowance of interest on borrowed funds - Interest free advances given - Commercial Expediency - Held that:- It is not disputed that the advance given to M/s Prayag Enterprises Ltd. was directly out of the borrowing from the Bank. According to the assessee M/s Prayag Enterprises Ltd. was appointed as assessee's sales promotion agent/representative throughout the state of Andhra Pradesh for the sale of IML products of UB Group of Companies, manufactured by the assessee. At that time, the assessee was a partnership firm and later on converted into a limited company. This relationship has been continued through the agreements dated 28.10.2004, 1.4.2006, 1.4.2009 and 1.4.2010 and is still continuing. During the period the business relationship of the assessee with M/s Prayag Enterprises Ltd has been very extensive both in volume and value. M/s Prayag Enterprises Ltd has very efficient and vast marketing network in the state of Andhra Pradesh including the UB Group of Companies and is engaged in the services for marketing their products. In our opinion M/s Prayag Enterprises Ltd. may have continued its relationship with the assessee in the course of business of the assessee, but there should be a valid reason and expectation that the amount advanced is for the purpose of the business and the recipient is expected to carry out some specific activities to improve the business of the assessee. In the present case it has been stated that the assessee expected to expand the market reach. It was further stated that the assessee was looking out for fresh acquisition of additional manufacturing facility. The assessee has not explained elaborately as to how Prayag Enterprises Ltd. is expected to expand its market reach and also not brought out any details of specific direct companies which have been identified in connection with fresh acquisition. Hence, a mere statement that advances have been made for these purposes cannot be accepted. Further examination as to the specific services expected to be done either for expanding the market reach or for making fresh acquisition do not appear to have been made by the lower authorities. In SA Builders [2002 (6) TMI 162 - ITAT CHANDIGARH-A],it has been held that the borrowed funds, if advanced to a third party, it should be for commercial expediency if it is sought to be allowed u/s 36()(iii) of the Act. Hence commercial expediency should be established more specifically in this case which requires further examination. The assessee is to be more specific as to what they expect M/s Prayag Enterprises Ltd to do and what exactly M/s Prayag Enterprises has achieved by granting of these advances of ₹ 43.60 crores to the assessee. In these circumstances, we are of the opinion that the matter should be set aside to the file of the AO and the assessee should be given another opportunity to explain in detail the specific reasons and purposes for which the trade advance of ₹ 43.60 crores has been given and what has resulted from the utilisation of the advance - Allowed revenue's appeal for statistical purpose. Issues Involved:1. Disallowance of interest attributable to a loan from ICICI Bank.2. Justification of a trade advance of Rs. 43.60 crores to M/s. Prayag Enterprises Ltd.Issue-Wise Detailed Analysis:1. Disallowance of Interest Attributable to a Loan from ICICI Bank:The assessee-company, engaged in the manufacture of Indian Made Foreign Liquor, filed its return of income for the Assessment Year 2009-10. During the assessment proceedings, the Assessing Officer (AO) questioned the business use of a loan from ICICI Bank and proposed disallowance of the interest attributable to this loan, alleging it was not put to business use. The assessee contended that the loan was fully utilized for business purposes, including a trade advance of Rs. 43.60 crores to M/s. Prayag Enterprises Ltd., a long-term delcredere agent for the assessee. The AO, however, was skeptical about the business prudence of giving such a substantial interest-free trade advance from interest-bearing borrowed funds.2. Justification of a Trade Advance of Rs. 43.60 Crores to M/s. Prayag Enterprises Ltd:The assessee argued that the trade advance to M/s. Prayag Enterprises Ltd. was for strengthening its marketing and distribution network and scouting for acquisitions. The assessee provided a detailed history of its business relationship with Prayag, which had been ongoing since April 1, 2003, and included multiple agreements over the years. The assessee emphasized Prayag's efficient and vast marketing network and its significant influence among IML manufacturers in Andhra Pradesh. The term loan from ICICI Bank was used to pay Rs. 57.42 crores to M/s. Pearl Distilleries Ltd., Rs. 22.00 crores to M/s. Diadem Enterprises P. Ltd., and Rs. 43.60 crores to M/s. Prayag Enterprises Ltd. The AO accepted the business purpose of the advances to Pearl Distilleries and Diadem Enterprises but disallowed the interest on the advance to Prayag, citing a lack of evidence of services rendered.CIT (A) Findings:The Commissioner of Income Tax (Appeals) [CIT (A)] sided with the assessee, noting the longstanding business relationship and the commercial expediency of the advance. The CIT (A) emphasized that the AO's satisfaction with the services rendered by Prayag was irrelevant; it was the assessee's satisfaction that mattered. The CIT (A) criticized the AO for disallowing the interest without assigning cogent reasons or presenting material evidence to counter the assessee's claims.ITAT Judgment:The Income Tax Appellate Tribunal (ITAT) considered whether the Rs. 43.60 crores advance to Prayag could be deemed for business purposes, thus allowing the interest on the related loan under Section 36(1)(iii) of the Income Tax Act. The ITAT noted the extensive business relationship between the assessee and Prayag and the latter's significant marketing clout. However, the ITAT found the assessee's explanations vague and lacking specific details on how Prayag would expand the market reach or identify acquisition targets. The ITAT highlighted the necessity of establishing commercial expediency, referencing the Supreme Court's decision in S.A. Builders Vs. CIT(A) [288 ITR 1], which emphasized that advances to third parties should be for commercial expediency to be deductible under Section 36(1)(iii).Conclusion:The ITAT set aside the matter to the AO, instructing a detailed re-examination of the specific reasons and purposes for the trade advance of Rs. 43.60 crores and the results from its utilization. The AO was directed to decide the issue afresh in accordance with the law, giving the assessee another opportunity to substantiate its claims. The Revenue's appeal was allowed for statistical purposes.Order Pronounced:The order was pronounced in open Court on 28.01.2015.