TaxTMI 
TaxTMI 
2019 (4) TMI 1655
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.... upholding the disallowance of interest u/s 36(1)(iii) of the Act on proportionate basis in the facts and circumstances of the case. 3.1. The brief facts of this issue are that the assessee is a public limited company engaged in the business of providing financial services to various companies and had filed its return of income for the Asst Year 2011-12 on 29.9.2011 declaring total income of Rs. 22,97,171/- under normal provisions of the Act and book profits of Rs. 50,88,348/- u/s 115JB of the Act. The ld AO observed that in the course of assessment proceedings, the assessee furnished computation of total income, balance sheet, profit and loss account, tax audit report in Form 3CA and 3CD and various other documents , as called for, by him. On perusal of profit and loss account, the ld AO observed that assessee had credited an amount of Rs. 12,96,57,884/- on account of interest income and debited an amount of Rs. 12,95,71,373/- on account of interest and finance charges as expenditure during the previous year relevant to Asst Year 2011-12. The assessee furnished the details of loans and advances before the ld AO and gave the break up of interest received in the sum of Rs. 12,96,....
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....al Fees' of Rs. 15,00,000/- which form part of cost of acquisition of fund. Accordingly, the ld AO asked the assessee to explain as to why the proportionate disallowance of interest u/s 36(1)(iii) of the Act should not be made and added to the total income of the assessee. 3.4. The ld AR replied that the average rate of interest on secured loans works out to 12.79% and that of interest paid on unsecured loans works out to 14.71%. Thus the assessee company had paid more interest on unsecured loans by 1.92% in comparison with payment of interest on secured loans. The assessee submitted that it had borrowed secured loans as under:- Sr. No. Name of the Party Total amount take during the year Rate of interest 1. SICOM Limited 80,00,00,000 13.26% 2. Barclays Investment and Loan (India) Ltd., 15,00,00,000 11.75% 3. Bright Brothers Limited 3,00,00,000 17.50% 4. India Infoline Investment Services Limited 15,00,00,000 12.25% Total amount 113,00,00,000 3.5. Against the above secured loans, the assessee company has given loans to parties, as under:- ....
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....rpose of financing the business of the company subject 10 restrictions and rules in force at that time and to lend money to customers and others having dealings with the company and to execute alt deeds, writings and assurances for any of the aforesaid purposes." From the above, the ld AO observed that the assessee is involved in the financial activity of providing finance to various parties. He observed that the assessee had only Rs. 41,68,75,932/- of funds of its own and almost the entire funds were borrowed by it on interest either from financial institutions or from other parties and out of that, substantial amounts to the extent of Rs. 89,36,00,000/- and Rs. 161,34,25,577/- were given to Smt Archana Mittal , M/s Mega Management Services Pvt Ltd respectively. He observed that the assessee is not registered as a non-banking financial company. Hence the loans advanced by the assessee were at all given as a measure of commercial expediency is to be tested. The ld AO observed that the assessee had advanced loans to its related parties either at the same rate of interest on which borrowings were made or at the rate lower than the borrowings rate. The ld AO arrived at the differen....
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.... 1 Mega Management Services Pvt. Ltd., 161,34,25,577 14.00% 2. V.K. Industries Ltd., 51,11,000 12.00% 3. Varun Retreas Ltd., 1,89,097 12.00% 4. Shree Mahaveer Associates & Development & Housing 1,00,00,000 (op.Bal) 12.00% Average rate of interest received - 12.40% 5.2. The ld CITA concluded that since assessee is in the business of financing activities, it had borrowed monies at an average rate of interest at 13.5% and lent to various persons at an average rate of interest at 12.40%. Based on this, he concluded that no prudent businessman would borrow at a higher rate and lend at a lower rate of interest. Accordingly, the ld CITA restricted the disallowance of interest u/s 36(1)(iii) of the Act by applying the differential rate of interest at 1.1% and arrived at the disallowance of Rs. 70,16,489/- as under:- Sr. Name of the Date Amount No. of days Amount 1 Sicom Limited 08.04.2010 10.00 Cr 385 10,78,904 2 Sicom Limited 31.08.2010 25.00 cr 213 16,04,794 3 Sicom Limited 25.11.2010 10.00 cr 127 38,27,39 4 Sicom Limited 08.11.2010 35.00 cr 144 15....