ADDL . CIT, SPECIAL RANGE- 4, NEW DELHI vs. GAURSONS REALTY PVT. LTD., NEW DELHI

The appeal by the Revenue is directed against the order dated 27.12.2018 of the Ld. Commissioner of Income Tax (Appeals)- 35, New Delhi (“CIT(A)”) pertaining to the assessment year (“AY”) 2015-16.

2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing interest u/s 36(i)(iii) despite the fact that no interest free funds were available to the assessee. The assessee was under obligation not to deviate the funds raised from its customer in one project to some other project, but still assessee unethically diverted these funds for no business expediency.

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the deposit of employee’s contribution towards Provident Funds of Rs. 10,840/- even when the appellant deposited the said amount beyond the due date u/s 36(1) (va) which is an contrast to the CBDT Circular No.22/2015 dated 17.12.2015 wherein the Board has clarified the employees contribution deposited after the due date as per PF.ESI and LWF rules has to be seen within the provisions of section 36(1)(va) of the Income Tax Act,?”

4. We have heard the Ld. Representative of the parties, perused the orders of the Ld. AO/CIT(A) and the material available in the records. The Revenue has challenged the deletion of disallowance of interest of Rs. 16,26,88,315/- out of interest paid to Bank of Baroda and Andhra Bank in its ground No. 1 and 2. Our attention has been drawn to the order of the Tribunal dated 07.05.2018 in in the case of assessee for immediately preceding AY 2014-15 wherein the disallowance of interest expenditure of Rs. 5,68,97,378/- was made by the Ld. AO holding that the assessee has given interest free funds and advances and share capital to various sister concerns and therefore interest free funds had been diverted by the assessee towards non-interest bearing loans and advances. The Ld. CIT(A) had confirmed the disallowance against which the assessee had gone in appeal before the Tribunal. The Tribunal in its order(supra) copy of which appears at page 115-140 of the assessee’s paper book. The Tribunal reversed the findings of the Ld. AO/CIT(A) observing as under:-

“16. ...The various amount advanced by the assessee to the various parties is required to be tested on this ground. i. share application money of Rs. 53.22 crores and loan of Rs. 79.65 cores given to Gaursons Realtech Pvt. Ltd. M/s. Gaursons Realtech Pvt. Ltd is a company of the Gaur Group. As the assessee is engaged in the business of the real estate according to the main object as mentioned in memorandum of association of the assessee company, this company found that one of the group companies M/s. Gaursons Realtech Pvt. Ltd has entered into an agreement with Jaypee Infratech Ltd for purchase of land admeasuring 300 acres. Therefore, assessee entered into a memorandum of understanding on 30.03.2013 with the sister concerns forming part of above land admeasuring 88500 sq meters, which was to be purchased out of the above land of 300 acres. The above plot was to be used for the purposes of residential cum commercial construction. The above plot of land, which was to be leased by the above party to the assessee, was free from all the charges and possession of the plot was to be given only after receipt of 100% consideration by the above party from assessee. The assessee has paid Rs. 79.65 cores as advance to the above party and same was shown as advance against plots and classified under Note No. 19 titled as “short term loans and advances” in the annual accounts. The total consideration was of Rs. 159.30 crores as per clause NO. 13 of the above agreement and out of which 50% payment was made by the assessee. The detail of the payments was directly made by the assessee to M/s. JP Infratech Ltd as an advance for land on behalf of Gaursons Realtech Pvt. Ltd. Due to the business circumstances, which resulted into dispute with the farmers , the JP Infratech Ltd could not purchase the above plot and also could not be sold to Gaursons Realtech Ltd and consequently lease of the land in favour of the assessee also could not be fructified. Therefore immediately, subsequently, in the next year as the transaction of land could not be fructified, total payment made by the assessee was refunded to the assessee. Therefore, it is apparent that the assessee originally made payment of Rs. 79.65 crores was for long lease of interest in land as per memorandum of understanding dated 30.03.2013. The ld Assessing Officer has not disputed the content of the memorandum of understanding for lease of land. It is not in dispute that assessee is also engaged in the real estate business and therefore, buying land or acquiring lease of the land would be the business of the company. Further the ld AO also could not show any infirmity in the facts that borrower of the funds from the assesses as to acquire the land of 300 acres from J P Infratech Ltd. It is also not denied that the whole transaction is 3 related to the real estate business f the assessee company and the group. In view of this, it cannot be held that assessee has advanced the sum of Rs. 79.65 crores to the above company without any commercial purposes. In view it cannot be said that assessee has diverted the interest bearing funds for non-business purposes. Further, the assessee has also invested Rs. 53.22 crores in the share application money of the above company. The main intention of making investment in the above company was for acquiring interest in real estate business of this company, which was to buy 300 acres of the plot of land in Sport City. It is further to the recalled that the Gaursons Realtech Pvt Ltd was to purchase land admeasuring 300 acres and assessee was purchasing was subscribing to the shares of this company. Out of the 300 acres the plot of 88500 sq mtr was agreed to be sold to the assessee for whom advances were given and in the balance land bank by making investment in the share capital of the company assessee was acquiring controlling interest. It is not the case of the revenue that the business of Gaursons Realtech Pvt. Ltd was not of real estate. It is always a case that a holding company would always have interest in the success or failure of a subsidiary company. It is also a fact that when the JP Infratech Ltd could not sale the land bank to the Gaursons Realtech Pvt. Ltd , all funds invested by the assessee which were shown by both the parties as share application money pending allotment were refunded by Gaursons Realtech Pvt. Ltd to the assessee company. The flow of the funds stated by the ld Assessing Officer is undeniably shows that the source of money invested in the above company is from various bank accounts as shown by the Assessing Officer. However, it cannot be said that the assessee has used money for non-business purposes because as both the companies were in the real estate business it cannot be said that investment made by the assessee in the above company is not for the purpose of the business. Moreover, the assessee has also shown this sum as advance against plot of land in its balance sheet and share application money. Hence, we are of the opinion that sum of Rs. 79.65 crores given as advance to Gaursons Realtech Pvt Ltd for the purpose of the acquisition of the land and sum of Rs. 53.22 crores deposited as share application with Gaursons Realtech Pvt. Ltd is for the purpose of the business of the company and interest applicable to these advances cannot be disallowed in the hands of the assessee. ii. Advance of Rs. 85944137/- to M/s. Gaursons Realtech Pvt. Ltd. The assessee has submitted that the above amount was given by the assessee as a mere loan without any purpose to that company on 27.02.2014 in two tranches of Rs. 5 crores and Rs. 3.5 crores totaling of Rs. 8.5 crores. The assessee has charged interest thereon, of Rs. 944137/- thereon, and shown as income. The total of the amount outstanding as mentioned by the AO of Rs. 85944137/- is comprising of the loan of Rs. 8.5 crores and interest thereon of Rs. 9.44 lacks as the assessee has charged interest on the above sum @12% for the appropriate period it cannot be said that above amount given by the assessee is interest free advance. In view of this the ld Assessing

Officer is directed to delete the disallowance of interest proportionate to the above loan. iii. Loan of Rs. 52.36 crores given to M/s. Gaursons India Ltd. The assessee has given the above sum to M/s. Gaursons India Ltd and it is shown in Note No. 19 to the balance sheet as advance against plot. The party to whom the loan is given is a holding company of the assessee and assessee is its subsidiary company. The above company was allotted a plot of land of Rs. 16320 sq meter in Indirapuram Development Plan admeasuring 16320 sq mtr at a price of Rs. 40050/- per sq meter valued at Rs. 65.36 crores. That company was to deposit Rs. 16.34 crores as a bid price and further earnest of Rs. 9.20 crores and further sum of Rs. 7.14 crores within 7 days. The balance sum of 75% was to be paid later on. The assessee has also placed an agreement between Ghaziabad Development Authority and the Gaursons India Ltd dated 31.03.2012. Therefore, for purchase of the above land the assessee paid advance of Rs. 52.36 crores to the above company. Later on there was a dispute between Ghaziabad Development Authority and the various farmers and due to that the above allotment letter could not fructify and hence agreement to sale dated 31.01.2012 been cancelled. As the assessee is the subsidiary of the company in the real estate business the above amount was given by assessee to the holding company. Therefore, the claim of the assessee is that it is advance for the purpose of the business of the assessee company but ultimately it could not be executed due to non- allotment of land by the Ghaziabad Development authority to the holding company. Subsequently, the money was refunded by the holding company on cancellation of the allotment. The ld Assessing Officer did not dispute the above fact. It was also not denied that the holding company was to be allotted the above plot of land for development and assessee had interest in the above land. Even otherwise as per the balance sheet of the company the assessee was having Rs. 16.70 crores of the share holders fund, Rs. 11.11 crores of share application money, Rs. 108.68 crores of the advances received from the customers. This gives the assessee interest free funds available with it of Rs. 136.49 crores. Therefore, as assessee is having mixed funds with it their part of the funds are interest bearing and part of the funds is non- interest bearing. The only presumption that arises in favour of the assessee is that the amount of advances given is out of non-interest bearing funds. Further, the Hon'ble Bombay High Court in 85 Taxmann. Com 88 in Pr CIT VS. Sesa Resources Ltd on identical facts and circumstances wherein the assessee borrowed funds and provided interest free funds to its sister concern where it cannot be shown that the advances was for the personal purposes then only possible other purposes as oppose to that it can be said that it is for business purposes or commercial expediency can be expected. The Hon'ble High Court in para No. 12 of that judgment has held so. Furthermore, Hon'ble Delhi High Court in CIT Vs. DD Industries Ltd 57 Taxmann.com 310 has held that when assessee had sufficient adequate funds then the amount of loan given no disallowance can be made. Furthermore, as pointed out by the ld AR the assessee has also earned gross revenue from operations of Rs. 139 crores, which is also available for advance and same being interest free. In view of the above facts it cannot be said that there can be any interest disallowance on account of interest free advances provided to the holding company of the assessee of Rs. 52.36 crores. iv. Other advances The ld AO has also considered the advances made to following parties for making disallowance. i. Gaursons Infratech Pvt. Ltd Rs. 18000/- ii. Banbari Lal Gaur Rs. 1.50 crores iii. SKA Realtech Pvt. Ltd Rs. 3 crores iv. Gaursons Sports wood Pvt. Ltd RS. 2 crores v. Shyam Buildcon Pvt. Ltd Rs. 1 crore. vi. UP Township Pvt. Ltd Rs. 1 crore All the above advances even if it is presumed that they are not given by the assessee for the non-business purposes they do not exceed the funds available with the assessee without interest.

interest has been charged and therefore, it cannot be included in the interest free advances given by the assessee. Furthermore, a sum of Rs. 52.36 crores given to holding company of the assessee M/s. Gaursons India Ltd for acquiring plot of land from Ghaziabad Development Authority cannot also be included for the purpose of interest disallowance for the reasons given by us above. Even otherwise, the above amount of advance of Rs. 52.36 crores coupled with other advances of Rs. 8.5 crores are far less than the interest free funds available with the assessee. In view of this on this sums too, as held by Hon'ble Delhi High Court and Bombay High Court no disallowance of interest can be made.”

5. Perusal of the assessment order would show that while making the impugned disallowance the Ld. AO observed at page 5 of his order that the matter in this year (i.e. AY 2015-16) is also similar to the AY 2014-15, accordingly, in this year also similar conclusion is drawn. The case of the assessee is that there is no change in amount of share application money of Rs. 53.22 crores and loan of Rs. 79.65 crores given to Gaursons Realtech Pvt. Ltd. during AY 2015-16. It is same as in the AY 2014-15. The Tribunal in its order (supra) has recorded the finding that Rs. 79.65 crores given as advance to Gaursons Realtech Pvt. Ltd. was for the purpose of the acquisition of the land and sum of Rs. 53.22 crores deposited as share application with Gaursons Realtech Pvt. Ltd. was for the purpose of the business of the assessee company and therefore, interest applicable to these advances cannot be disallowed. Moreover, it is the contention of the assesee that the Revenue has not established any nexus between the borrowed funds and interest free advances to the related party. The impugned disallowance of interest is entirely based on the assessment order of the preceding AY 2014-15. Not only this, no finding has been recorded by the Ld. AO that the money borrowed has been utilised by the assessee company for purposes other than its business.

5.1 It has been brought to our notice that the Revenue had gone in appeal before the Hon’ble High Court of Delhi against the order of the Tribunal dated 07.05.2018 for AY 2014-15 in the case of the assessee. The Hon’ble High Court vide order dated 13.02.2020 upheld the order dated 07.05.2018 of the Tribunal (supra) by observing as under:-

3. There are two different entities to which the amounts were either advanced as interest free loans, or wherein investment was made as share application money by the assessee. The first transaction relates to Gaursons Realtech Pvt. Ltd.. The assessee had invested Rs. 53.22 crores towards share application money and had also advanced a loan of Rs. 79.65 crores in Gaursons Realtech Pvt. Ltd. The submission of learned counsel for the Appellant is that the Assessing Officer had undertaken a forensic examination of the money trail and found that the loans received from the two Banks namely, Bank of Baroda and Andhra Bank aggregating to Rs. 158.50 crores, had been channeled by the assessee inter alia to Gaursons Realtech Pvt. Ltd. The Tribunal has found that, as a matter of fact, the assessee had paid the amount of Rs. 79.85 crores on behalf of Gaursons Realtech Pvt. Ltd. to JP Infrastructure Ltd in respect of an agreement whereunder Gaursons Realtech Pvt. Ltd. had agreed to purchase land ad measuring 300 acres from JP Infrastructure Ltd. At the same time, there was an underlying transaction between the assessee and Gaursons Realtech Pvt. Ltd. by way of a Memorandum of Understanding dated 30.03.2013, whereunder the assessee was to get land ad measuring 88,500 sq. mtrs. (which translates to about 22 acres). That apart, by investing in the share capital of Gaursons Realtech Pvt. Ltd. with the deposit of share application money of Rs. 53.22 crores, the assessee was to acquire a controlling stake in Gaursons Realtech Pvt. Ltd. which was also engaged in the business of real estate development. Therefore, there is a direct nexus between the expenditure incurred and the purpose of business. It has been held in Hero Cycles (P) Ltd v Commissioner of Income Tax (Central) Ludhiana [2015] 63 taxmann.com 308 (SC), that once it is established that there is nexus between expenditure and purpose of business, revenue cannot justifiably claim to place itself in arm¬chair of businessman, or in the position of the Board of Directors, and to decide how much is reasonable expenditure having regard to circumstances of case. In this regard, we may also note the ratio of the decision of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Anr.(2007) 288 ITR 1 (SC), wherein the Supreme Court held that the decisions relating to Section 37 of the Act will also be applicable to Section 36 (1) (iii) because in Section 37 also, the expression used is “for the purpose of business and that while interpreting Section 37, “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. In our view the Tribunal rightly allowed the appeal of the assessee and restored the deduction claimed by the assessee under Section 36 (1) (iii) of the Act.

CIT(A) held that deposit of employee’s contribution towards Provident Fund of Rs. 10,840/- by the assessee beyond the due date under section 36(1)(va), but before the due date of filing income tax return is allowed. In this regard, the Ld. CIT(A) analysed the issue and observed as under :- “4.3.3.4 ... (i) Briefly the facts are that in respect of employees' contribution the PF & ESI in certain months, the appellant has deposited the amounts beyond the due dates prescribed in the respective Acts. The deposits have been mace the due date of filing of Income Tax Return. (ii) The appellant has claimed that after deletion of second proviso n section 43B by Finance Act, 2003, w.e.f. 01.04.2004, payments d employees contribution to PF and ESI are allowable as deduction if the same is paid before the due date for filing of Income Tax Return, as per section 43B, even if the amounts were not deposited before the due dates prescribed in the respective Acts (PF & ESI Act). (iii) On the other hand, the Assessing Officer has not found the expenditure allowable u/s 43B of the I.T. Act. Employees contribution to PF and ESI is deemed as income of the employer u/s 2(24)(x), and the same is allowable as deduction u/s 36(1)(va) of the I. T. Act. Section 36(1)(va) stipulates that such payment by employer is allowed only if such sum is credited to the employee's account in the relevant fund or funds on or before the due date under the relevant Act. The Assessing Officer has concluded that section 36(1)(va) is applicable in respect of employee's contribution to PF and ESI, and if the same is not deposited within the due date prescribed under the respective Acts, the same does not become allowable by virtue of section 43B, even if it is deposited before the due date of filing of Income Tax Return. Accordingly, the Assessing Officer has disallowed such amounts of employee's contributions where the deposit has been made by the appellant after the due dates under the respective Acts. (iv) Aggrieved with this, the appellant has filed the appeal claiming that the amount should be allowed u/s 43B as it has been deposited before the due date of filing of return. The arguments taken before the AO have been reiterated in the appeal. (v) It is pertinent to note that contribution to PF and ESI have two different components. The employee's contribution is deducted from the salary/wages of the employees and the employer also makes contribution. PF and ESI are important legislation for providing social security to employees. Under section 2(24)(x) of the I. T. Act, any sum received by an assessee from its employees as contribution to PF or ESI is deemed to be income of the assessee. The same is allowed as a deduction u/s 36(1)(va), if it is credited in the employee's account in the relevant funds before due date. As per explanation to this clause, the due date means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account under the relevant fund under any Act, rule etc. Section 43B provides for allowablity of certain deduction only on actual payment. Prior to 01.04.2004, the second proviso to section 43B specified the conditions for allowablity u/s 36(1)(va). To be allowable, cash payments were required to be made on or before the due date prescribed M/s. Gaursons Realty Pvt. Ltd. Appeal No.60/17-18 u/s 36(1) (va), and for payments made other than in cash, the sum has to be realized within 15 days from the due date. However, the second proviso to section 43B was omitted by Finance Act, 2003, w.e.f. 01.04.2004. This had led to the controversy in respect of the aiiowabiity of such sums. The appellant's contention is that after deletion of second proviso to section 43B w.e.f. 01.04.2004 such payments are now covered under first proviso to section 43B, which allows deduction for payments of such sums on or before the due date of filling of Income Tax Return. (vi) There are several judicial pronouncements dealing on this issue. The Hon'ble Gujarat High Court in the case of CIT vs. Gujarat State Road Transport Corporation 366 ITR 170 (Gujarat)(2014) has dealt with the issue and has analysed the provisions in detail. (vii) CBDT circular No. 22/2015 dated 17.12.2015 has further clarified about the deletion of second proviso and amendment of first proviso to section 43B are applicable in the case of employer's contribution to PF and ESI and payments made before due date of filing of RoI are allowable u/s 43B. However, this circular states that it does not apply to claim of deduction relating to employee's contribution to welfare funds which are governed by section 36(1)(va). (viii) However, the Hon’ble Delhi High Court in its judgement in the case of CIT vs AIMIL Ltd. (321 ITR 508) while examining this issue in 2010 had held that no disallowance could be made in view of the provisions of section 43B, as amended by Finance Act, 2003.”