By TIOL News Service

MUMBAI, JAN 19, 2018: THE issue - Whether when advances made to sister concern out of overdraft obtained from bank, is not part of business, then finance cost incurred over such overdraft cannot be claimed as 'business loss'. YES IS THE ANSWER.

Facts of the case:

The Assessee is in the business of Advertising Agency. During the course of its assessment proceedings u/s 143(3) r.w.s. 143(2), it was observed by AO that assessee had debited/incurred finance cost amounting to Rs.1,37,08,749/- as interest on bank overdraft. The assessee was asked by AO to explain why such finance cost should be allowed as business expenses, if there was no business carried on by assessee during the assessment year. In response, the Assessee Company submitted that it had entered into MoU with M/s. Sapphire Land Development Pvt. Ltd. for purchase of Land at Mumbai for a consideration of Rs. 30,00,00,000/- and as a part of advance payment, the company had paid Rs. 26,49,62,262/- by obtaining overdraft facility from Punjab and Maharashtra co-op Bank Limited. However the deal could not be materialized over price issues and Assessee Company had received back the advance amount and closed the overdraft facility by repaying the amount due to the Punjab and Maharashtra co-op Bank Limited. Therefore, the interest claim of Rs. 1,37,08,749/- paid to Punjab and Maharashtra Co-op Bank Limited during the year under consideration pertains to the overdraft amount outstanding during A.Y. 2011-12 and was solely for the purpose of business. The AO however observed that the finance cost could not be allowed as business expenses as there was no business activity during the year under consideration.

Tribunal held that,

++ it is observed that the assessee has claimed to be engaged in the business of Advertising Agency. The assessee has filed copy of Memorandum and Articles of Association wherein the main object clause are relating to the advertisements and other consultancies. The assessee has claimed by virtue of clause B (5) which are objects incidental and ancillary to the main object clause that the assessee is entitled to carry out real estate business. However, it is doubtful to say that such real estate business is merely an incidental or ancillary objects to the achievements of the main objects while the main objects as per MOA of the assessee is to pursue advertising agency business and consultancy business related thereto. No Resolution passed by Board of Directors/shareholders is placed on record to substantiate that the assessee has adopted to carry out business of real estate as are contained in other objects clause. On perusal of the audited financial statements, it is observed that there has been no revenue from activities of advertising agency or real estate business during the previous year relevant to the impugned assessment year. The only revenue earned by the assessee is from dividend income to the tune of Rs. 4.50 lacs. The other expenses apart from finance costs also reveal that there is no business activity of advertising agency / real estate business which was carried on by the assessee as there are negligible expenses such as audit fee, filing fee etc paid by the assesseee during the previous year to keep company afloat and to do statutory compliances. The assessee has claimed that over a period of time it has advanced substantial amount of Rs. 26.49 crore to M/s. Sapphire Land & Development Pvt. Ltd out of total stated consideration of Rs. 30 crores stated to be for purchase of Land, which advances were made out of overdraft/loan obtained from Punjab and Maharashtra co-op Bank Limited. The said amount was stated to have been received back by the assessee. The assessee however failed to bring on record MOU/agreement stated to be entered into with Sapphire Land & Development Private Limited to substantiate its contention that the advances made to M/s. Sapphire Land & Development Pvt. Ltd are towards purchase/acquisition of the said property;

++ it is seen that all three companies namely assessee, Sapphire Land & Development Private Limited and Emarald Realtors Private Limited from whom the assessee received back the said amounts, are sister/associated concerns. It was also not brought on record whether the said MOU was registered with registering authority as is required under amended law as contained in The Registration Act, 1908. The cancellation agreement stated to be entered in July 2011 for cancelling MOU is also not on record and hence it could not be seen as to the terms and reasons for the cancellation of the said MOU. Now it is claimed for the first time before the tribunal that there was a fire in the office of the assessee and all the records were destroyed. In any case, cancellation deed was alleged to be entered, which in any case cannot be part of records alleged to be destroyed in fire and the assessee could have produced cancellation deed for cancellation of MOU. In the absence of any evidence on records, it cannot be concluded whether expenses towards interest costs on bank overdraft were revenue in nature or capital in nature. Merely because the revenue has accepted the said claim of interest as business expenses in the earlier years in the summary proceedings u/s. 143(1) does not create res-judicata as revenue has never gone into the details of the said claim as the return of income was accepted in summary manner u/s 143(1) without scrutiny being conducted u/s. 143(3) r.w.s. 143(2). Thus, mere acceptance of the claim in earlier years in proceedings u/s 143(1) does not debar Revenue from examining the claim on merits in subsequent years and does not create a bar of res-judicata. Thus only bald statements are made by the assessee for claiming that the interest has been paid for the business purposes while no such evidences are brought on record by the assessee to prove its contention that the said loans were used for business purposes by the assessee and mandate of Section 36(1)(iii) was complied with. The payments and the return thereof of the said advances are from the sister concerns and in the absence thereof of the evidences on record to substantiate that these were business expenses. Thus, claim of assessee to allow interest expenses on bank overdraft to the tune of Rs.1,37,08,749/- as business expenses cannot be accepted.

(See 2018-TIOL-113-ITAT-MUM)