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Income Tax Appellate Tribunal, DELHI
Before: SH. ANIL CHATURVEDI & SH. ANUBHAV SHARMA
The appeal has been filed by the Assessee against order dated 27.06.2019 in appeal no. Del/CIT(A)-5/0271/2016-17 in assessment year 2014-15 passed by Commissioner of Income Tax (Appeals)-5, New Delhi (hereinafter referred to as the First Appellate Authority in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 27.12.2016 u/s 143(3) of the Income Tax Act, 1961 passed by DCIT, Circle-13(2), New Delhi (hereinafter referred to as the Assessing Officer ‘AO’).
The facts in brief are that the return of loss of Rs. 33,46,75,992/- under normal provisions and at book loss of Rs. 33,69,25,413/- was filed by the assessee. Ld. AO observed that assessee has given interest free advance to its subsidiary M/s. JITF Water Infrastructure (Naya Raipur) Ltd. amounting to Rs. 24,26,00,000/- while assessee was paying interest on term and working capital loans @ 13%. Ld. AO sought explanation to which the assessee company submitted that the subsidiary company has been promoted being SPV company for bidding the infrastructure project (BOT Scheme) by Naya Raipur Development Authority. Since the SPV company did not have the funds to execute the work as assigned, money had to be provided to the SPV by the assessee company, therefore, interest free loans were given out of commercial expediency. However, Ld. AO was not satisfied and relying the judgment of Hon’ble Punjab & Haryana High Court in CIT vs. Abhishek Industries Ltd. 286 ITR 1 (P&H) case disallowed the proportionate interest of Rs. 3,15,38,000/- being 13% of the total advance Rs. 24,26,00,000/- and complete the assessment with further additions not under dispute in the present appeal. Ld. CIT(A) restricted the disallowance to Rs. 2,38,39,675/- to the extent of actual incurred interest expenses on working capital and term loan.
The assessee is in appeal before this Tribunal raising following grounds :
“1. On the facts and circumstances of the case and in law Ld. CIT(A) erred in upholding AO’s act of disallowing appellants genuine business expenditure on interest of Rs. 2,38,39,675/- [disallowed by AO at Rs. 3,15,38,000/- but disallowance reduced to Rs. 2,38,39,675/- by Ld. CIT(A)] 2. On the facts and circumstances of the case and in law lower authorities failed to appreciate that interest free loan of Rs. 24.26 crores was advanced to 100% subsidiary out of commercial expediency.
3. On the facts and circumstances of the case and in law the ld. CIT(A) failed to appreciate that amount of Rs. 24.26 crores was advanced to its subsidiary for execution of project awarded to appellant itself by Naya Raipur development authority, government of Chhattisgarh.
On the facts and circumstances of the case and in law the lower authorities have failed to appreciate that appellant had advanced interest free loan of Rs. 24.26 crores to its 100% subsidiary out of its own funds of Rs. 50 crores and no borrowed funds were used.
On the facts and circumstances of the case and in law the ld. CIT(A) has acted against judicial proprietary by disallowing appellant interest expenditure by following decision laid down by non jurisdictional High Court vis a vis principles laid down by jurisdictional High Court in the cases of CIT vs. Orissa Cement Ltd. (252 ITR 878), Tin Box Co (260 ITR 637) and PR. CIT vs. Basti Sugars Mills Co. ltd. (2018) 408 ITR 184 (Del.) 6. On the facts and circumstances of the case and in law the ld. CIT(A) erred in not appreciating that during the year appellant had earned income from its business operations to the tune of Rs. 140 crores (approx) wherein borrowed funds were used.
7. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in upholding disallowance of interest of Rs. 2.38 crores due to interest free advance of Rs. 24.26 crores given by appellant to its subsidiary without appreciating that out of the same sum of Rs. 23.48 crores were given in the preceding years where no disallowance of such interest expenditure was made.
8. That the above grounds of appeal
are mutually exclusive and without prejudice to each other.
9. Appellant craves for grant of permission to add, alter, or withdraw any ground(s) of appeal at or any time before the hearing of appeal.”
4. Heard and perused the record.
5. At the time of final arguments vide an endorsement on the appeal memo the Ld. AR scribed for not pressing ground no. 2 to 8. Ld. DR supported the findings of Ld. CIT(A) while on behalf of the assessee it was submitted that when assessee company had received the bid for development of water supply system in Naya Raipur City Chhattisgarh as per the stipulations in the agreement special purpose vehicle (SPV) was required to be formed. Therefore, the subsidiary company was formed and interest free advances were given by the appellant to its subsidiary over a period of three years for execution of project awarded to the appellant. These funds were given out of own funds generating from its business operations and share capital / application money. Reliance was placed on the details of funds available at page no. 240 of the paper book. It was submitted that proposition of law held in Abhishek Industries Ltd. (supra) has been wrongly applied as in the case in hand the assessee company had substantial business interest in the subsidiary company and in fact the subsidiary company was extended arm to complete the bid received by the assessee company. It was also submitted that when the earlier assessment years were completed and there was no disallowance made then Ld. AO had fallen in error in making disallowance for the advances made in the previous year and only a sum of Rs. 78,00,000/- were advanced during the present financial year. It was submitted that department is under obligation to establish that the assessee did not have substantial capital and interest free fund available with it not only in the precedent year but also under the year under consideration which was not done. Relying judgment of Hon’ble Supreme Court of India in S.A.Builders vs. CIT(A) 288 ITR 1 (SC) it was submitted that when the assessee was bidder and subsidiary company was merely executing the project then that was sufficient explanation of the commercial expediency. Reliance was also placed on the following judgment : “1. S.A.Builders Vs. CIT 288 ITR 1 (SC) 2. Hero Cycles Pvt. Ltd. Vs. CIT 379 ITR 347 (SC) 3. CIT vs. Orissa Cement Ltd. 252 ITR 878 (Del.) 4. CIT vs. Tin Box Co. 260 ITR 637 (Del) 5. PCIT vs. Basti Sugars Mills Ltd. 408 ITR 184 (Delhi)] 6. DCIT vs. Raghuvir Singh Synthetics Ltd. 397 ITR 1 7. CIT (LTU) Vs. Reliance Industries Ltd. 410 ITR 466 8. CIT vs. Vegetable Products Ltd. 88 ITR 192(SC) 6. Giving thoughtful consideration to the matter on record and the submissions in regard to the ground presses to be decided, at the outset, it will be relevant to reproduce the observations of Supreme Court in the case of S.A.Builders (Supra) :
“To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
In the case in hand there is no dispute to the fact that the assessee company once allotted the bid by Naya Raipur Development Authority was directed to set up special purpose company as per the request for proposal document. A copy of letter dated 12.08.2009 written by Naya Raipur Development Authority to assessee company as lead member of the consortium establishes the same.
The bench is of considered opinion that when subsidiary company is established as special purpose vehicle out of stipulation of the bid documents, the commercial expediency has to be rather presumed and the question of use of borrowed funds or using interest free advances is not of much consequence. The money being advance in furtherance of the holding company, which is lead member of the consortium, being successful to get the bid and the subsidiary company being special purpose vehicle formed for execution of award, only advances the business interest of the holding company.
Even otherwise the fact that assessee company was having sufficient own funds is not disputed. Relevant will be to reproduce that details of the same as available in PB:
Shareholder’s Fund As on 31.03.2011 As on 31.03.2012 As on 31.03.2013 As on 31.03.2014 Share Capital 3,32,40,130 3,32,40,130 3,32,40,130 3,32,40,130 Share Premium 6,54,80,260 6,54,80,260 6,54,80,260 6,54,80,260 Share Application 45,00,015 45,00,000 11,90,00,000 39,02,00,000 Money Reserved and surplus 11,86,26,333 20,04,50,911 26,52,95,302 3,68,72,198 Excluding Share Premium Shareholder’s Fund 22,18,46,738 30,36,71,301 48,30,15,692 52,57,92,588 at end of the year
Thus, in any case the assessee company was justified to advance money to its subsidiary without interest cost.
Lastly, the matter of fact is that the amount considered by Tax Authorities for calculating disallowance was not the advance of one year. At page no. 145, assessee has provided the details of the advances and same shows that out of Rs 24,26,00,000/- total advanced, in financial year 2011-12 as sum of Rs. 1,48,00,000/- was advanced and in financial year 2012-13 Rs. 22,00,00,000/- was advanced and in the relevant financial year 2013-14 for the present AY 2014-15 only the sum of Rs. 78,00,000/- was advanced. The assessment year for A.Y. 2012-13 and 2013-14 stand concluded and the copy of same is available at page no. 134-144 of the paper book. Thus, when in the assessment of previous years, to which advances related, the advances were accepted by the Ld. Tax Authorities Below, there was no justification to make disallowance in this year.
Consequently, the grounds no. 1 as pressed stands allowed. The appeal of assessee is allowed.