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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & SHRI LAXMI PRASAD SAHU
Tax Act, 1961 ; in short “the Act”. As the facts and grounds are common in these appeals, the same were clubbed and heard together, therefore, a common order is passed for the sake of convenience.
To dispose of these appeals, we refer to the facts for AY 2007-08 being , hence, the decision taken in this appeal, shall mutatis-mutandis apply to other appeals as well. The grounds raised
in this appeal, which are common in all the appeals, are as under: “1. On the facts and in the circumstances of the case, the order of the ld. Commissioner of Income Tax (Appeals)-12, Hyderabad, dismissing the appeal of the Appellant is erroneous, illegal and unsustainable on facts and in law.
2. The Commissioner of Income Tax (Appeals) erred upholding the disallowance of interest expenditure of Rs. 56,18,466/- on the amount advanced to M/ s. Mohan Project Contractors Private Limited for business purposes.
3. The authorities below mentioned failed to appreciate the nature of Appellant's business and the necessity of advancing the amount to M/s. Mohan Project Contractors Private Limited for expanding the Appellant's business activity. The Authorities below ought to have appreciated that the amount was advanced to M/ s. Mohan Projects Contractors Private Limited for business purposes and hence interest expenditure claimed is allowable as business expenditure.
4. The findings of the Commissioner of Income Tax (Appeals) on the joint venture understanding submitted
:- 3 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd. by the Appellant are factually incorrect and legally unsustainable. The Commissioner of Income Tax (Appeals) ought to have appreciated that it is not the 'form' of arrangement which is relevant, but it is the intention of the parties and conduct of the parties which should be considered while determining the nature of advancement of money.
5. The Commissioner of Income Tax (Appeals) ought to have ordered for deletion of interest levied u ] s. 220(2) of the Act. For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon'ble Tribunal may be pleased to allow the appeal.”
Briefly the facts of the case are that the assessee company filed its return of income for the AY 2007-08 on 26/10/2007 admitting income of Rs. 91,07,330/-. Subsequently, the case was selected for scrutiny under CASS and accordingly, statutory notices were issued to the assessee. The assessment was completed u/s 143(3) on 14/12/2009 assessing the income at Rs. 2,13,73,675/-, which was confirmed by the CIT(A) vide his order dated 25/08/2010, against which, the assessee filed appeal before the ITAT and the ITAT restored the matter to assessing officer (AO) to verify the issues in dispute.
Therefore, this is the second round of litigation before the ITAT.
:- 4 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd.
During the course of assessment proceedings, the AO observed that the assessee had obtained loan from HDFC Bank and the same had been given as interest free loan to M/s Mohan Project Contractors Pvt. Ltd. (in short ‘MPCPL’). Therefore, the AO asked the assessee to show cause as to why the proportionate interest on interest free loan given to MPCPL should not be disallowed. In response, the assessee filed its submissions stating that the assessee had entered MoU with MPCPL to set up a Joint Venture (JV) for the project to be executed wherein the project will be implemented through the JV created specifically for the execution of the project. The AO asked the assessee to furnish a copy of the income-tax return of the JV, but, the assessee furnished a copy of the return of MPCP instead of Joint Venture as asked by the AO. Before the AO, the assessee also confirmed that the JV was not formed as stipulated in the MoU as per letter dated 23/07/2015. The AO, therefore, noted that since no business activity was started till dated, there was no commercial expediency in giving loan/advances to MPCPL. He, therefore, disallowed the amount of Rs. 56,18,466/- paid to Bank towards interest on loan taken from Bank.
When the assessee preferred an appeal before the CIT(A), the CIT(A) after considering the detailed submissions filed by the assessee before him, dismissed the appeal of the assessee by observing as under:
:- 5 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd.
“5.0 Disallowance of Interest Expenditure- Rs.56,18,466/-:- 5.1 During the course of assessment proceedings, it has been observed that the assessee-company had made interest free advance amounting to Rs.8,08,81,458/- to M/s. Mohan Project Contractors Pvt. Ltd., on which no Interest was charged. Whereas, the Interest on loans obtained from M/s. HDFC Bank was worked out at Rs.56,18,466/-. The AO called for evidence to substantiate that the advance was given for commercial expediency. The assessee's submissions showed that the conditions Implied in the MOU with M/s.Mohan Project contractors was not Implemented and a Joint venture was not formed for executing the projects. Thus on facts, the AO did not accept the submissions of the assessee, and found and opined that as there was no business activity, in purported joint venture and there was no ]V constituted as such the advance given to M/s. Mohan Project Contractors Pvt. Ltd, cannot be constituted as used for business of the assessee and the amount of Rs.56,18,466/- has been added back the same to income returned. 5.2 The appellant objected for such disallowance and furnished written submissions Indicating the reasons for allowing the claim of expenses on the lines of commercial expediency. The essence of submissions run as under: "With a view to expand business operations, the company has tied up with Mohan project contractors Pvt. Ltd., (MPCPL) for construction of housing ventures, multiplex, commercial property and advanced an amount of Rs. 7 ,92,23, 712/- as its share to MPCPL. As the advance was given for expanding the company’s business, it was deemed to have been borrowed for the purpose of business and hence there is no question of charging any interest on the advance given.
:- 6 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd.
The loan was taken from HDFC Bank Ltd, for Rs.5,75,00,000/and interest was payable for the loan taken which amounted to Rs.74,15,695/-. As the loan was used to expand the business of the Company for construction of commercial complex, purchase of property etc. along with Mohan Project Contractors Pvt. Ltd., the advance was given for commercial expediency. Bank Certificate from HDFC Bank in support of the expenditure of Rs. 74,15,695/- is enclosed. In S.A. Builders Ltd., vs. CIT(A) 288 ITR 1 (SC) it was held that if the holding company advances borrowed money to a subsidiary for some business purpose, the assessee would, ordinarily be entitled to deduction of interest on its borrowed loans since the advance was given for commercial expediency. Further in Calico Dyeing & Printing Works vs CIT (1958) 34 ITR 265 (Bom.) it was held that if however the capital borrowed is not utilized for the purpose of the business. In CIT vs. Dalmia Cement (B) Ltd., (2002) 254 ITR 377 (Delhi), that no businessmen need be compelled to maximize his profit. The authorities should put themselves in the shoes of the assessee and consider what a prudent businessman would do. It is not the case of Income Tax department, that the funds lent to the subsidiary company were used for non-business purposes." 5.3 Perused the submissions of appellant and the observations of the Assessing Officer in the Assessment Order. As could be seen from the facts of the cas.e, the appellant-company shown to have been engaged in the business of maintaining the property complexes, and during the year an amount of Rs.56,18,466/- was claimed as expenses towards interest on the borrowed funds. It was further observed that the appellant company had advanced huge amounts to M/s. Mohan Project Contractors Pvt. Ltd. and no interest was charged on them. The amounts of such advances
:- 7 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd. outstanding at the end of the year under reference were put at Rs.8,08,81,458/- and on enquiry by the AO, it was stated that the said amounts were paid to M/s. Mohan Project contractors Pvt. Ltd., as it's share, for construction of housing ventures, commercial complexes etc., as per the tie up/joint venture had by the assessee-company with M/s. Mohan Project contractors Pvt. Ltd. However, on insistence, the assessee failed to furnish the basic information such as joint venture formation/agreement between the two companies, to establish the business connection between the amounts borrowed by assessee-company and advancements made to M/s. Mohan Project contractors Pvt. Ltd. and what has been furnished/submitted is nothing but an MoU, which is also not registered and as such the same cannot be treated as relevant/reliable document/basis to establish the business' nexus of the assesse-company with the related company/concern under reference. Since the assessee-company failed to furnish the said information of copy of joint venture agreement, the nexus of advancement of amounts and the business/commercial expediency was held to be non- existing or not established. Accordingly, the' AO calculated the proportionate interest @ 12% PA chargeable on the amounts of RS.8,08,81,458/-. However, while making the disallowance, the AO restricted to Rs.56,18,466/- which is the actual amount of interest incurred by the assessee on borrowed amounts/funds. 5.4 During the course of appeal proceedings, the appellant submitted that, the copy of ]V agreement entered into between M/s.ICPL (the assessee-company) and M/s. Mohan project contractors Pvt. Ltd., could not be produced before the AO as the same was not immediately available, being misplaced. The appellant submitted that they are furnishing the Copy of JV agreement dated 09-05-2005 and wanted the same to be adjusted as additional information/evidence.
:- 8 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd.
However on examination, the referred document dated 9-5-2005, is nothing but an MoU entered between M/s. ICPL and M/s.Mohan Project contractors Pvt. Ltd. and by no means or imagination such document could be called as a joint venture agreement. Further, the document/MoU dated 9-5-20015 was neither registered nor it was· the joint venture agreement, as claimed. Hence, treatment of the said document as basis for establishing the business association nexus between the assessee company and M/s. Mohan Project contractors Pvt. Ltd.. is held to be not tenable. Further, the examination of the account of M/s. Mohan Project Contractors Pvt. Ltd. In books of the assessee-company for the year under reference and subsequent years clearly indicate that the funds were flown on continuous basis, routinely without there being any reference to the so called MoU/JV or Agreement. Thus the funds flows from the assessee company to M/s. Mohan Project contractors Pvt. Ltd. Are not clearly indicative of the angle of business expediency, as claimed by the assessee. Since the angle of business/commercial expedience Is failed to be established between the assessee-company and M/s. Mohan Project contractors Pvt. Ltd., the claim for not charging interest on the amounts advanced to M/s. Mohan Project Contractors Pvt. Ltd. on the basis of business expediency, held to be not established, and the disallowance of interest u/s.36(1)(iii) of IT Act and the case laws relied upon by the assessee are held to be not applicable to the facts of the case under reference. In case of SA Builders Ltd., vs CIT and other cases, the main issue was that interest would not be chargeable on advances/amounts lent to sister /group concerns, on the basis of commercial or business expediency. Coming to the facts of the case, the assessee/appellant failed to establish the business relation less say the angle of commercial expediency with that of M/s. Mohan Project Contractors Pvt. Ltd., where joint venture agreement between ICPL and M/s. Mohan Project contractors Pvt. Ltd. was never established to have been signed. With :- 9 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd. the assessee failed to furnish the proof for signing such JV agreement with M/s. Mohan Project contractors Pvt. Ltd. Hence, the advancing/lending of the amount to Mis. Mohan Project contractors Pvt. Ltd., on lines of commercial expediency is not established, as such charging of interest on the amounts lent to M/S. Mohan Project Contractors Pvt. Ltd. are held to be justified. Accordingly, the addition of Rs.56,18,466/- by making disallowance of claims of interest paid on borrowed funds stand confirmed. Thus the grounds related to the issue are dismissed.”
Aggrieved by the order of the CIT(A), the assessee is in appeal before the ITAT.
Before us, besides reiterating the submissions made before the CIT(A), the ld. AR of the assessee submitted that there was a business expediency with the MPCPL as per the MoU executed between the assessee and MPCPL, which is placed before the lower authorities. Further, he submitted that the CIT(A) has wrongly interpreted the JV formed by the assessee and MPCPL as it was not only MoU, but, it was a JV. He submitted that the phrase “for the purpose of business” – the expression “for the purpose of business occurs in section 36(1)(iii) and also in section 37(1) and a similar expression with different wording also occurs in section 57(iii) which reads as “for the purpose of making or earning income. For this proposition, he relied on the judgement of the Hon’ble Supreme Court in the case of Madhav Prasad Jatia Vs. CIT (SC), 118 ITR 200 wherein the Hon’ble Court has established that the expression occurring
:- 10 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd. in section 36(1)(iii) is wider in scope than the expression occurring in section 57(iii). He, therefore, submitted that the interest has been rightly paid on capital borrowed and therefore, is allowable deduction u/s 37(1) of the Act. He also relied on the judgments, which were quoted before the CIT(A) and the same are placed in the paper book filed before us.
The ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that the CIT(A) has rightly dismissed the appeal of the assessee by holding that there was no Joint Venture(JV) formed by the assessee and MPCPL as it was only a MoU. He submitted that even before the AO, the assessee could not file any documentary evidence in respect of JV as the JV is a separate entity and it is assessed separately as AOP/BOI. He submitted that the amounts were given only to MPCPL but not for the benefit of the assessee company. He submitted that had the JV been formed, the amounts should have been transferred to the JV, but, till the date of assessment as well as before the first appellate authority, the assessee failed to establish the business expediency for giving interest free loans to MPCPL and the amount is still remained with the MPCPL. He, therefore, submitted that the case law relied on by the assessee are not applicable to the facts of the case of the assessee.
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We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We observe that the assessee has obtained loan from the HDFC Bank and the same was given to MPCPL as interest free advances. We find that there is no business nexus between the loan taken by the assessee from the Bank and giving the same to MPCPL as interest free advances, as there was no JV agreement entered into between the assessee and MPCPL, which is clear from the findings of the CIT(A) as quoted supra. There is also direct nexus between the loan taken and given which is clear from the records available. We have also gone through the documents, on which reliance placed by the ld. AR during the course of hearing and find that only MoU was entered by the assessee and MPCPL and the JV was to be formed by both the parties and till date the assessee failed to produce any JV agreement entered with MPCPL. Also no projects were executed by the JV as well as MPCPL.
10.1 The ld. AR of the assessee relied on the judgment of the Hon’ble Supreme Court in the case SA Builders Ltd. Vs. CIT, 288 ITR 1, in which, the assessee has advances given to its subsidiary company, out of the debit balance from loan account and payments received from others, whereas, in the case under consideration, the amounts were taken from the bank as loan and given to MPCPL as interest free loan. Therefore, the said judgment is not applicable to the case of :- 12 -: to 396/Hyd/2017 Indira Constructions Pvt. Ltd., Hyd. the assessee under consideration. Other cases relied upon by the assessee also held as distinguishable by the CIT(A) in his order. In view of the above observations, we do not find any infirmity in the order of CIT(A) in confirming the addition of Rs. 56,18,466/- made by the AO towards interest paid on borrowed funds and upholding the same, we dismiss the grounds raised by the assessee on this issue.
As the facts and grounds are materially identical in & 396/Hyd/2017 to that of ITA No. 394/Hyd/2017, we dismiss these appeals.
In the result, all the appeals of the assessee are dismissed in above terms. A copy of this common order be placed in the respective case files.
Pronounced in the open court on 28th October, 2021.