YARDSTICK DEVELOPERS P.LTD,MUMBAI vs. ITO 14(3)(2), MUMBAI

O R D E R

Per Amit Shukla, Judicial Member:

YARDSTICK DEVELOPERS P.LTD 1) The Learned CIT (A) has erred in passing the impugned order dated 28.02.2019 in gross contravention of natural justice by disallowing Interest Expenses amounting to Rs. 1,84,48,676/- which was not disallowed during the assessment u/s. 143(3) resulting in enhancement of appeal without providing any opportunity to the appellant to justify the same.

2) The Learned CIT(A) has erred in law and in facts by disallowing proportionate interest expense amounting to Rs. 1,84,48,676/- u/s 36(1)(iii) out of the total amount of Rs. 2,74,58,680/-on loan taken from M/s Guardex Realtors Pvt. Ltd by contending that the transaction entered in by the appellant fails the commercial expediency.

3) The Learned CIT (A) has erred in law & on facts in upholding the Learned AO's action of disallowing the travelling expenses incurred for business purpose to the tune of Rs 32,03,995/- by holding that the said expenses are incurred on extra-commercial reasons and therefore are not allowable u/s. 37(1) of the Income-tax Act, 1961.

YARDSTICK DEVELOPERS P.LTD Since, there was no proper evidence in reply, he treated the entire expenditure debited under the head traveling expanses of Rs. 3,06,62,625/- as not allowable and same was added to the income of the Assessee.

9.4 The appellant claims that it has incurred only Rs.32,03,995/- as travelling expense and the balance Rs.2,74,58,630/- as interest expense. Thus, the dispute is related to two issues namely, the YARDSTICK DEVELOPERS P.LTD genuineness of travelling expense of Rs.32,03,995/- and allowability of interest expense of Rs.2,74,58,630/- which stayed out of scrutiny proceedings with the A.O, as the amount was not separately reflected in the profit and loss account. 9.5 The appellant has submitted a chart mentioning officials visited within and out of country and copies of their travelling bills. It is evident from the remand report that the A.O has perused the bills diligently and brought on record bill wise details clearly and the reasons of disallowance of the said expenses. During the course of appellate proceedings, it is observed that some bills stand in the name of the director of the assessee company Shri Kapil Wadhawan, certain bills are in the name of family members including children and few persons whom the appellant claims as employees of the company. The appellant has neither claimed any salary expense during the year nor submitted any relationship with the persons with the appellant company. The appellant has claimed that the directors, individual experienced experts or employees of the group holding company visited different cities in and out of the country on its behalf in search of new business opportunity. The appellant did not explain the purpose of the children travelling with parents on same date. The appellant has not brought out any record in respect of what particular job the experts carried out, their credentials and how much they were paid to justify the purpose of the business. Details like who are the clients, which place the meeting is held on, how many members attended the meeting from the assessee side and the opposite side,

YARDSTICK DEVELOPERS P.LTD why all the meetings resulted in failure etc are not submitted. The assessee has not even produced list of employees who are on its payroll and whether they are authorised by the board of directors to undertake air travel. By no stretch of imagination, an assessing authority can accept that children are sent on foreign tour for the purpose of business. Merely making a statement will not support the case of the assessee to get relief of the deductions claimed. The claims need to be supported by appropriate documentary evidences. Sec 37(1) of the Act deals on the concept of expenses wholly and exclusively for the purpose of business clearly and there should be a nexus between the expense incurred and the business interest. In the same lines, the assessee in its case has not proved beyond doubt the live-link of its expenses with the business interests and failed to produce the appropriate documentary evidences in support of its claim. For elucidation of the facts of the case, Section 37 of the Income tax Act, 1961, a residuary section for allowability of business expenditure is reproduced below:- "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

YARDSTICK DEVELOPERS P.LTD [Explanation 1-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] Explanation 2- For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assesse on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. 9.6 In line with the aforesaid section, the A.O. has brought cogent material on record in the assessment order and remand report which suggests that the expenses claimed by the assessee as deduction u/s 37(1) of Income-tax Act, 1961 were not incurred whole and exclusively for the purpose of business. The mere fact that the travelling expenses have been incurred in the names of directors and employees of the assessee company cannot lead to a conclusion that the entire expenses are incurred by the assessee company for the purpose of business only. 9.7 A paragraph as pronounced by Hon'ble Gujarat High Court in the case of Bombay Mineral Supply Co Pvt Ltd laying down a general principle with regard to foreign tours of family members of directors is reproduced below in the present context:

YARDSTICK DEVELOPERS P.LTD "We are sure that the tax collectors do not want to discourage business executives and managing directors from undertaking foreign tours for business purposes not to deprive them of the company of their wives in such tours, but for that we do not think in law, it would be permissible for the Income-tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of the personal needs of those executives.” 9.8 Reliance is also placed on the judicial pronouncement of Hon'ble ITAT Mumbai in the case of M/s Harinagar Sugar Mills Ltd Vs ACIT wherein travelling expense disallowed by the A.O was sustained. Merely producing travelling tickets do not entail the assessee to claim the entire amount as expenses incurred for business purpose. The assessee has not brought on record to relate the tickets submitted with the purpose they have been booked. As the assessee failed to substantiate existence of business element in the expenses incurred on air travel, it is considered that the appellant has incurred travel expense of Rs.32,03,995/- on extra-commercial reasons, and thus same is not deductible u/s 37(1) of Income-tax Act, 1961. 9.9 The second issue contested relates to interest expense of Rs 2,74,58,630/- which the A.O could has disallowed and added to the total income of the assessee, The AO in the remand report has requested to verify the said disallowance during the appellate proceedings and disallow proportionate interest expense on the facts and circumstances of the case as the appellant showed it

YARDSTICK DEVELOPERS P.LTD under the head travelling expenses and therefore, the AO could not examine the issue. The appellant stated that the said expense was inadvertently shown under the head travelling expenses and adjudicated in accordance with the powers conferred upon CIT(A) u/s.251 of the Act. From the material placed on record, it is seen that the interest was paid to M/s. Guardex Realtors Pvt. Ltd. on the loan of Rs.18 crores taken from this party on 17.04.2012 The loan taken was advanced to M/s. Wadhwan International Investment Ltd. (WILL), a Dubai based group company. The appellant company charged interest @5.25% per annum on the loan advanced to the group company WILL whereas the appellant paid interest @16% on the loan taken from M/s. Guardex Realtors Pvt. Ltd. The AO has disallowed the entire expense during the course of assessment proceedings. 9.10 I have considered the submissions filed by the Appellant and reasons recorded by the AO The Appellant submitted that the advances were made due to commercial expediency and related to its business and relied on many landmark judgements. It is pertinent to note that the Appellant has neither explained about its business relationship with WILL nor nature of business carried out by WILL. While the appellant company is engaged in the business of real estate developers, from the name of WILL, it can be inferred that WILL is an investment company investing capital on multifarious activities. The test of commercial expediency would have passed in the case of the appellant company advancing the loan to a concern dealing with functions of building construction or YARDSTICK DEVELOPERS P.LTD real estate development only It would have been understandable, if the appellant company had proved the entire loan amount had been utilized by WILL in financing a real estate project. Further, WILL is an external concern and not an inland sister concern where the appellant put the money. Therefore, a blanket statement that the advances has considerable commercial expediency and related to its business do not have any merit. The conclusions drawn by Hon'ble SC in the case of S.A. Builders Ltd. Vs. CIT (2007) ITR 1 cannot be applied ipso facto and in a sweeping manner to all the advances an assessee makes without charging any interest or lower interest than its pays to a lender. The Appellant needs to explain the reasons of advancing borrowed funds without charging any interest while it pays high rate of interest on the borrowed funds. In view of the factual matrix enumerated above, I am of the considered opinion that the transaction failed the test of commercial expediency. In accordance with the provisions of Sec 36(1)(iii) of the Act, it is considered that disallowance of the entire interest expense is excessive and disallowance of Rs. 184,48,676/- @ 16% - 5.25% -10.75% is confirmed. Accordingly, the AO is directed to delete the balance amount of Rs.90,09,863/- (@5.25%) added to the total income of the appellant. Therefore, this ground of appeal is partly allowed.

7. After hearing the Ld. DR and on perusal of the impugned order, we find that in so far as traveling expanses of Rs. 32,03,995/-, it is seen that Assessee has claimed that certain officials have visited

YARDSTICK DEVELOPERS P.LTD within and outside countries for which copies of traveling bills submitted. It is further noted that, some of the bills stood in the name of director of the Assessee Company, Shri. Kapil Wadhwan and certain bills were in the names of family members including children and few persons whom the Assessee has claimed to be the employees. However, no salary expanses have been shown against such employees nor Assessee has submitted any relationship with these persons. No way could the Assessee explain as to what the purpose of traveling of the children and what was the business purpose for such foreign traveling. No details like the client’s place of meeting etc. or details have been submitted. The aforesaid finding of the Ld. CIT (A) has not been controverted by any cogent material on record before the Ld. CIT (A).

YARDSTICK DEVELOPERS P.LTD 9. In so far as interest expenditure is concerned, it is seen that interest was paid to M/s Guardex Private Ltd. on a loan of Rs. 18 Crore and this loan was advanced to M/s Wadhwan International Investment Ltd., a Dubai based group company. The Assessee has charged interest at the rate of 5.25% per annum on the loan advanced to Group Company, whereas Assessee has paid interest at the rate of 16% on the loan taken from M/s. Guardex P. Ltd. Nowhere the Assessee could point out the business relationship with Wadhwan International nor the nature of business carried out by that company. The Assessee Company is in the business of Real Estate Developers whereas the business of Wadhwan International Investment Ltd. Company has not been brought on record and what was the commercial expediency in advancing such high interest bearing loan on such a low interest. Thus, Ld. CIT (A) is justified confirming the disallowance of exces interest rate of 10.75%.