Loan Advanced to Non-Relative Partner of Company without Securing Interest in Absence of Registered Documents: ITAT directs Re-Adjudication [Read Order]

The Income Tax Appellate Tribunal (ITAT) Delhi Bench while directing re-adjudication in cases related to loan advanced to Non-relative partners of the company without securing interest in absence of registered documents.

The assessee Apostle Trading Consultants Private Limited engaged in the business of trading and retailing of apparels and cosmetics during the assessment year assessee declared loss of (-) ₹.1,88,70,104/- under normal provisions and (-) ₹.1,63,46,820/- under MAT provisions by filing its return of income.

Subsequently, the assessee's case was selected for scrutiny. During the proceedings, the AO noted that Assessee has claimed large business losses set-off against other heads of income.

Further observed that the nature of business of the Assessee is to trade in Ladies Garments and Rental Income and has no other business apart from these two.

The Assessee has borrowed huge loans and the same has been diverted in the form of loans and advances and given to M/s. Flourish Decorators Pvt. Ltd.

The AO asked the assessee why the interest expenses should not be disallowed. After considering the submissions of the assessee, the AO disallowed the expenses.

Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax Appeals (CIT(A)).

The CIT(A) after considering the Appeal held that Assessee was entitled to arrange his affairs in such a way as to reduce his tax liability by all legal ways but the arrangement ultimately adopted must be genuine and not a sham. Then the appeal filed by the assessee was dismissed.  

Further, the assessee filed the second appeal before the tribunal.

Before the tribunal, Mohit Gupta, counsel on behalf of the assessee submitted that loan availed from “Yes Bank” with the purpose of "Funding of capital expenditure and refundable security deposit for new apparel stores to be opened on leasehold basis".

Further, the counsel submitted that “The Assessee by availing loan from “Yes Bank”, paid the same to “FDPL” as interest-free advances/security deposit for acquisition of retail shops across Delhi NCR. Later on, the deal with "FDPL" got cancelled and "FDPL" refunded the entire Advance/Security deposit to the Assessee and the Assessee without any delay repaid the loan of "Yes Bank‟ availed for the said purpose and according to the provisions of section 36(1)(iii) of the Act, the Assessee claimed the interest paid on "yes bank‟ loan, in its return of income”

Kanv Bali, the counsel on behalf of revenue contented that the MoU is neither registered nor stamped and witnessed and even not signed by the witnesses and there was no material available on record to suggest the genuineness of the transaction and therefore both the authorities correctly rejected the claim of the Assessee.

It was observed by the tribunal that the assessee gave a huge amount of ₹.15 crores to "FDPL" who admittedly is neither relative/partner nor connected with the Assessee in any mode except as claimed and in fact is a stranger.

Thus, still without securing its interest paid the huge amount of Rs. 15 Crores, on the basis of the alleged MoU which is neither on stamp paper nor stamped or registered and even unsigned by the witnesses and therefore at its prima facie look, creates a reasonable doubt.

After reviewing the facts and submissions, the two-member bench of the tribunal comprising Anil Chaturvedi (Accountant Member) and N.K. Choudhry (Judicial Member) directed the Assessing Officer to inquire about the surrounding circumstances qua transactions entered into by the Assessee with FDPL, and the profile and work done by FDPL, by directing the Assessee to produce FDPL or summoning FDPL directly.

To Read the full text of the Order CLICK HERE

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