CADENCE REAL ESTATES PRIVATE LIMITED,GURUGRAM, HARYANA vs. ITO WARD-5(2), DELHI

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ITA 3613/DEL/2024Status: DisposedITAT Delhi29 May 2025AY 2017-18Bench: SHRI SATBEER SINGH GODARA (Judicial Member), SHRI MANISH AGARWAL (Accountant Member)1 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that since the interest on the loan was capitalized and not claimed as revenue expenditure, disallowance under Section 40A(2)(a) was not justified. Regarding processing charges, the Tribunal found a nexus between these expenses and interest income earned, allowing them as deduction under Section 57(iii).

What were the facts?

The assessee company engaged in real estate business took a loan of INR 5.75 crores from a group company at 15% interest, which was higher than the previous rate. The AO disallowed a portion of the interest and also added loan processing charges, treating them as capital in nature. The CIT(A) partly allowed the assessee's appeal.

What were the issues?

Whether interest paid on a loan, capitalized in books, can be disallowed as excessive under Section 40A(2)(a)? Whether loan processing charges are deductible under Section 57(iii) when linked to earning interest income?

Which sections of the Income-tax Act were involved?

Section 40A(2)(a),Section 143(3),Section 250,Section 57(iii)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI “B” BENCH: NEW DELHI

Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL

For Appellant: Shri R. S. Singhvi, CA &, Shri Satyajeet Goel, CA
For Respondent: Shri Rajesh Kumar Dhanesta, Sr.DR
Hearing: 29.05.2025Pronounced: 29.05.2025
1.

The present appeal is filed by the assessee against the order dated 29.06.2024 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld.CIT(A)”] in Appeal No. CIT(A), Delhi-2/10662/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of Assessment Order dated 21.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2017-18.

2.

Brief facts of the case are that assessee is a Private Limited company engaged in the business of real estate. The return of income for the year under appeal was e-filed on 29.10.2017, declaring total income of INR 1,66,90,360/-. The case of the assessee was selected for complete scrutiny under CASS to assess the income from Real Page | 1 Estate business. The AO observed that the assessee has taken loan of INR 5.75 crores from its group company namely, M/s. Talvi Builders & Developers Pvt. Ltd. on which interest was paid @ 15% as against the interest rate of 11.7% paid earlier and thus the assessee had paid excess interest by 3.3%. The AO invoked the provision of section 40A(2)(a) of the Act and disallowed the interest to the extent of INR 19,97,500/-. Besides this, the loan processing charges of INR 67,02,300/- was also added to the income of the assessee by holding that the assessee has not engaged in business activity during the year and expenditure is capital in nature.

3. Against the assessment order, the assessee preferred appeal before Ld.CIT(A) who vide impugned order dated 29.06.2024, has partly allowed the appeal of the assessee.

4. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before the Tribunal wherein following grounds are taken:- 1.1. “That on the facts and circumstances of the case, the Ld. CIT(A) has grossly erred in upholding the disallowance to the extent of Rs. 9,48,750/- u/s 40A(2)(a) on the alleged ground of excess interest expenditure in total disregard to explanation furnished. 1.2. That the interest paid on loan taken from M/s. Talvi Builders & Developers P. Ltd. having been capitalized in the books of account, the disallowance of interest and resultant addition to the income is arbitrary and wholly on mechanical basis. 1.3. That in any case, the rate of interest @15% being reasonable and comparable with similar rate of advances, finding regarding excessiveness of the same and the invocation of section 40A(2)(b) and consequential disallowance is invalid and devoid of merits. 2.1 That on the facts and circumstances of the case, the Ld. CIT(A) was not justified in confirming the disallowance to the extent of Rs. 65,83,750/- being claim of processing charges u/s 57(iii) without appreciating the submission furnished.

2.2 That the claim of processing charges is in respect of secured loan taken from M/s. India Bulls Housing Finance Ltd. and the loan so taken having been utilized for earning interest income, the disallowance of claim of expenses is violative of section 57(iii) of the Act. 2.3 That the assessing officer having allowed the claim of interest on said loan u/s 57(iii), the disallowance of processing charges which are of incidental nature is inconsistent, self-defeating and contrary to the facts and legal principle. 2.4 That in the absence of any finding regarding genuineness of claim of processing charges, there is no ground or basis for any such disallowance.

3.

That the orders passed by the lower authorities are not sustainable on facts and bad in law.

4.

That the appellant craves leave to add, alter, amend or forgo any of the grounds of appeal at the time of hearing.”

Ground of appeal Nos. 1.1 to 1.3 raised by the assessee are 5. with respect to the disallowance of INR 9,48,750/- confirmed by ld. CIT(A) out of total disallowance of INR 18,97,500/- made by AO.

6. Before us, Ld. AR for the assessee submits that assessee took loan from M/s. Talvi Builders & Developers Pvt. Ltd. in the month of September, 2016 of INR 5,75,00,000/- which was utilized for repayment of old loan taken from India Bulls Housing Finance Ltd. The ld. AR submits that total interest paid @ 15% was of INR 44,43,493/- which was capitalized and no amount was claimed in the Profit & Loss Account towards such interest. As per Ld. AR, AO invoked the provision of section 40A(2)(a) of the Act and made disallowance however, since he made the disallowance for entire year therefore, Ld. CIT(A) had reduced it for the period during which the loan was taken by the assessee. Ld.AR submits that since no expenditure was claimed on account of the interest paid on the loan taken from M/s Talvi Builders & Developers Pvt. Ltd., no Page | 3 disallowance should be made. He further submits that the interest was paid at same rate in the subsequent Assessment Year wherein the assessment was completed u/s 143(3) where such payment was accepted as reasonable. Copy of the order is placed at page 38 to 39 of the Paper Book filed by the assessee. He, therefore, prayed for the deletion of the disallowance made by the AO.

7. On the other hand, Ld. Sr. DR vehemently supported the orders of the lower authorities and submits that the assessee has paid interest in excess of prevailing market rate more particularly, when the assessee was availing credit facilities at a lower rate of interest therefore, there was no reason to take the loan at a higher rate of interest. It is further submitted by ld. Sr. DR that ld. CIT(A) has already reduced the disallowance for the period during which loan was not taken. Accordingly, he prayed for the confirmations of the orders of the ld. CIT(A).

8.

Heard the contentions of both the parties and perused the material available on record. It is seen that assessee took new loan of INR 5,75,00,000/- from the group concern namely, M/s. Talvi Builders & Developers Pvt. Ltd. which was utilized for making repayment of the loan taken earlier from India Bulls Housing Finance Ltd. It is also an admitted fact that no expense on account of interest paid on the loan from M/s. Talvi Builders & Developers Pvt. Ltd. was claimed in the Profit & Loss Account as the loan taken from India Bulls Housing Finance Ltd. was utilized for purchase of land and therefore, the interest paid on the fresh loan from M/s. Talvi Builders & Developers Pvt. Ltd. which was utilized for repayment of loan of India Bulls Housing Finance Ltd., was also capitalized and added to the cost of land. Under these circumstances, when no expense is claimed by the assessee as revenue expenditure in the Profit & Loss Account no disallowance could be made by holding the same as excessive under the provision of section 40A(2)(a) of the Act. In view of above discussion, we hereby direct the AO to delete the disallowance as upheld by Ld.CIT(A) to the extent of INR 9,48,750/-. Accordingly, Grounds of appeal Nos. 1.1 to 1.3 raised by the assessee are allowed.

Grounds of appeal Nos.2.1 to 2.4 raised by the assessee are 9. with respect to the disallowance of loan processing charges of INR 65,83,750/- claimed by the assessee u/s 57(iii) of the Act.

10.

Heard the contentions of both the parties and perused the material available on record. The facts of the case reveals that assessee claimed loan processing charges and fee and miscellaneous expenses totaling to INR 80,82,300/- under the head “legal expenditure” out of which a sum of INR 13,80,000/- was suo-motto disallowed by the assessee in the computation of income and balance amount was claimed as expenditure. The lower authorities held that the loan processing charge is to be capitalized as the loan was utilized for acquiring capital assets. From the details filed by the assessee, we find that the loans taken by the assessee from India Bulls Housing Finance Ltd. to the extent of INR 74,00,00,000/- were partly utilized for giving interest bearing loans to various entities from where assessee is having interest income. Since there is a direct nexus between the interest income which was offered for tax as income from other sources and the expenditure incurred for earning such income, thus the same is allowable u/s 57(iii) of the Act. Therefore, the processing charges paid on the loans taken and used for earning interest income are eligible for the deduction out of the interest income earned on such funds. In view of these facts, we hereby direct the AO to delete the disallowance of INR 67,02,300/-. Hence, Grounds of appeal Nos. 2.1 to 2.4 raised by the assessee are allowed.

11.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 29.05.2025.

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