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Facts
A search and seizure operation was conducted on the 'Mahagun Group of Companies', leading to allegations of bogus purchases and unaccounted cash. Subsequently, a notice under Section 153A was issued to the assessee. The Assessing Officer (AO) made an addition of Rs. 2,80,10,435/- based on interest-free advances given to a sister concern, presuming it was out of secured loans.
Held
The Tribunal held that the CIT(A) was correct in deleting the addition. It was found that the advance was made out of interest-free own funds or as a business advance for commercial expediency. Both the assessee and the sister concern were paying taxes at the maximum marginal rate, making the transaction revenue-neutral and not an attempt at tax evasion.
Key Issues
Whether the disallowance of interest on advances to a sister concern, made out of interest-bearing funds, was justified under Section 36(1)(iii) of the Income Tax Act when the transaction was revenue-neutral and for commercial expediency.
Sections Cited
153A, 143(3), 36(1)(iii), 132, 142(1), 139(1), 194A, 260A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, ‘C’: NEW DELHI
Before: SHRI SUDHIR KUMAR & SHRI MANISH AGARWAL
ORDER
PER SUDHIR KUMAR, JM:
This appeal by the revenue is directed against the order dated 28.07.2022 of the learned Commissioner of Income Tax (Appeals)-28, New Delhi [hereinafter referred to as “CIT(A)”] pertaining to A.Y. 2016-17 arising out of the assessment order dated 30.12.2018 under section 153A r.w.s. 143(3) of the Income Tax Act 1961 [hereinafter referred as ‘the Act’].
The assessee has raised following grounds of appeal,
i. Whether on the facts and in law, the Ld.CIT(A) is correct in deleting the addition made u/s 36(1)(iii) of the IT Act, 1961 amounting to Rs 2,80,10,43S/- by stating that the interest free advances given by the assessce to its sister concern was purely for business purposes and AO has not made any findings to prove that the assessee has advanced interest bearing funds for non business purposes and for no commercial expediency. ii. Whether on the facts and in law, the Ld.CIT (A) is correct in deleting the addition by stating that the case does not indicate any tax evasion plan as both the companies are taxpaying entities at the same rate of tax, ignoring the fact that the rate of taxation of both the companies were found to be different and the assessee had mentioned the tax paid figure without incorporating surcharge and cess payable on the tax. iii. Whether on the facts and in law, the Ld. CIT(A) is correct in ignoring the facts that the assessee has not provided any documentary evidence to prove the services received by the assessee company from its sister concern such as trade name for marketing its products, technical knowhow, office space and infrastructure, skilled staff and bank guarantors etc from its sister concern in lieu of interest free funds. iv. Whether on the facts and in law, the Ld. CIT (A) is correct in ignoring the facts that the AO had given opportunity to the assessee for submitting its reply regarding disallowance u/s 36(1)(iii) of the Act, but the assessee has not submitted any documentary evidence to prove that the interest bearing funds were utilized for business purpose by its sister concern. v. Whether on the facts and in law, the Ld. CIT (A) is correct in ignoring the facts that the assessce company has not provided any documentary evidence regarding giving of loans to its sister concern out of interest free funds received from advance from customers, loans from other group entities etc. for utilization of the interest free funds for business purpose by the sister concern.
Brief facts of the case are that a search and seizure operation u/s 132 of the Act was conducted on 03-08-2016 and on the subsequent dates in different business and residential premises of “Mahagun Group of Companies”. This group is alleged that several companies of group are involved in substantive amount of bogus purchase from non-existing entitles 7 large components, of receipt in cash unaccounted. During the search & seizure operation various incriminating papers / documents were seized. A notice u/s 153 A of the Act was issued on 06-10-2017 and served upon the assessee. In the response of the notice the assessee filed its return of income for the A.Y. 2016-27 on 17-10-2017 declaring total income at Rs. 2,32,97,910/-. Again, notices u/s 143(2) and 142(1) of the Act were issued to the assessee. In the response of the notice the authorized AR attended the proceedings. Relying the decision in the case of Embassy Development Corporation vs. ACIT (2015) 378 ITR of the Hon’ble Karnataka Court the Assessing Officer completed the assessment after making the addition of Rs. 2,80,10,435/-. The ld. A.O. has observed in the order as under:
HEBE Infrastructure Pvt. Ltd. “Thus, the assessee’s case is clearly hit by the provisions of the section 36(1) of the Act the interest charged on the money sourced by the assessee in the form of debenture / loans on interest and given to the sister concern /subsidiary company of Rs. 87,00,00,000/- on the excess/ difference of the secured loan taken i.e. Rs. 68,07,97,420/- on which interest is charged in P&L account and the amount as invested in WIP i.e. Rs 44,73,77,126/- is being disallowed @12 % (2,80,10,435/-) and added back in the income of the assessee as per calculation Particulars Amount Secure loans taken by assessee Rs. 6,80,797420/- Less; Invested in business activities -WIP Rs 4,47,377,126/- Amount utilized for advance in other group companies Rs. 2,33,420,294/- Interest calculated @ 12 % PA Rs. 2,80,10,435/- 4. Aggrieved the order of the A.O the assessee has preferred the appeal before the Ld. CIT(A) who vide his order dated 28-07-2022 allowed the appeal of the assessee. Being aggrieved the order of the Ld. CIT(A) the revenue is in appeal before the Tribunal.
Ld. CIT DR has submitted that the assessee case is clearly hit the provisions of the section of the 36(1) (iii) of the Act. The assessee company has diverted the borrowed funds providing the advances to other parties without any business or commercial expediency. He relied the order of the Assessing officer. available on the record.
Ld. CIT(A) has observed in his order as under:
5. Ground No.2 of Appeal: This Ground challenges the legality of jurisdiction as assumed by the AO U/s 153A of the Income Tax Act. The appellant has submitted that it was categorically informed to the A.O. during the course of assessment proceedings that in the absence ofany incrementing material being found during search and survey proceedings by the department for the year under review, verification of expenses claimed, revenue receipts, and verification of assets & liability of the appellant and consequent additions/disallowances if any, will be out of jurisdiction. However, the A.O overlooked the legal issue raised by the appellant and framed the impugned order under section 153A/143(3) of the Act after making addition u/s 36(1)(iii) of the Act. 5.1 In the Assessment Order, the AO has noted that in the case of the Appellant the Warrant of Authorization Us 132 of the Income Tax was issued and the search & seizure operation was conducted on 03.08.2016 business at the premises of the appellant. The Group companies including the appellant company were found to be involved in debiting bogus expenses and receiving large amount of unaccounted cash. Accordingly, proceedings U/s 153A was initiated and notice was issued on 06.10.2017 5.2 I have considered the facts of the case and points raised by the appellant. I am not in concurrence with the submissions made by the AR. The AO has rightly initiated the proceedings u/s 153A of the appellant. The language of section 153A in my opinion is clear and unambiguous in as much as it empowers the AO to issue notice and make assessment of specified six years where search is initiated HEBE Infrastructure Pvt. Ltd. u/s 132 or requisition is made us 132A. The initiation of valid search u/s 132(2) or requisition u/s 132A is the only condition for invoking provisions of section 153A. The search and survey operation has been conducted at the business premises of the appellant on 03.08.2016 whereas the appellant has filed its return of income u/s 139(1) on 06.10.2016. Therefore, the assessment proceedings for the year under review was "pending" as on the date of search. Accordingly, initiation of proceedings u/s153A of the Act by the AO is not contrary to the law. Moreover, it is wrong on the part of appellant that no incriminating material has been found during the search and survey proceedings by the department in view of the surrender of additional income made by the group entities of the appellant during the search and survey proceedings u/s 132 of the Act. Therefore, the AO has correctly invoked the provisions of section 153A and the ground taken by the appellant is hereby dismissed.
Ground No.3 of Appeal: This Ground relates to the disallowance of Rs. 2,80,10,435/- u/s 36(1)(iii) of the Act. The appellant submitted that this addition U/s 36(1)(iii) of the Act is arbitrary, illegal and uncalled for as the appellant has utilized interest bearing funds for the purpose of its business. The appellant further submitted that, it was explained to the A.O. that the appellant company is a construction company engaged in construction of flats and selling the same to the proposed buyers. Likewise, the sister concern to whom advances has been given is also engaged in the identical business. The funds so given to the sister concern were out of own funds owned by the appellant whereas the borrowed funds have been utilized for the business purpose of the appellant. It was also explained to the A.O. that the advances so given to sister concern was part of overall business plan of the appellant company and it has no connection with the interest-bearing funds and those has been utilized for the business of the appellant.
HEBE Infrastructure Pvt. Ltd. 6.1 The AO in his remand report has submitted that: "An addition amounting to Rs. 2,80,10,435/- was made by this office u/s 36(1)(iii) of the Income Tax Act, 1961 in the case of the assessee company on account of interest free advances given by the assessee out of interest-bearing funds. The stated disallowance was made by the Ld. AO on account of violation of provisions of section 36(1)(iii) of the Income Tax Act, 1961. The stated provision or any other provisions in the income tax act nowhere allow the deduction of interest disallowance made under section 36(1)(iii) of the act to the assessee who has received interest free advances. If such would have been the intention of the law makers, he would have specifically mentioned the same in the above stated provisions. M/s. Hebe Infrastructure Pvt. Ltd. and M/s. Nexgen Infracon Pvt. Ltd. are separate legal entity and income of both the assessee have to be assessed separately as per the provisions of the Income Tax Act, 1961. With due respect, intent of law has never been mentioned in the statute itself. It is upto the judicial authorities to read in between the line and what is written behind the lines while adjudicating upon the matter pending before it. It is needless to say the assessee is always entitled to claim deduction out of its gross income of legitimate business expenditure incurred by it, particularly, when the transactions are between two associated enterprises. Therefore, the contention as made by the AO in this paragraph about the intent behind the law has no merit. If the assessee would have charged interest from M/s. Nexgen Infracon Pvt. Ltd. then it would have been required to deduct TDS u/s 194A of the Income Tax Act, 1961 which would have to be deposited to the account of govt. by the 7ih of the subsequent month. Further any delay in the HEBE Infrastructure Pvt. Ltd. deduction or payment of TDS would have attracted various penal provision as per the Income Tax Act, 1961. The AO is correct while stating that TDS out of interest income would have been deducted and would have been deposited by h of subsequent month and delay if any, in deduction or payment of TDS would have attracted various penal provisions as per Income Tax Act, 1961. However, the AO has failed to appreciate that when such transactions are between related parties, interest invariably credited to the account of payer only at year end and tax is deducted at source simultaneously. Meaning thereby the payee company need to pay advance tax as it would get credit of TDS as per law in due course of time. However, in the present case both the payee and payer company has paid advance tax periodically meaning thereby the department has got revenue periodically as against getting TDS at the end of financial year." In the assessment order the AO has relied on the judgement of Hon'ble Karnataka High Court in the case of Embassy Development Corporations Assistant Commissioner of Income-tax, Central Circle- 2(3), Bangalore[2015] 378 ITR 677 where it has been held that "Assessee sought for deduction of interest paid on loan availed by assessee - Assessing Officer disallowed assessee's claim of interest on ground that though assessee availed loan from KSIIDC, same was diverted to its sister concern and amount received was not utilized for business of assessee - Assessee submitted that borrowed amount advanced to its sister concern was in nature of sale consideration for purpose of acquiring a portion of property in project proposed to be developed by sister concern - It was found that even after three years, loan amount advanced to sister concern had not been used for construction of proposed project but it was used for some other project. "So, the deduction claimed was disallowed.
HEBE Infrastructure Pvt. Ltd. The AO has also relied on the judgement of Hon'ble Delhi High Court in the case of Punjab Stainless Steel Industries vs. CIT [2011] 324 ITR 397 wherein it was observed that there was a clear-cut finding by the AO that the interest bearing funds were utilised for non-business purpose. It has been also observed that "We find that in the case of Tin Box Company [Commissioner of Income Tax & Another v. Tin Box Co: (2003) 260 ITR 637 (Del)] the capital of the firm and interest free unsecured loans available with the appellant far exceeded the amount advanced to the sister concern in all the years under appeal. The question as to whether the loans to the sister concern were extended for commercial expediency or not was neither raised nor examined in that case. Considering the decision of Supreme Court in S.A. Builders(Supra), what is relevant in such a case is as to whether the loan was extended for any commercial expediency or not and, therefore, it would be immaterial whether the assessee firm had interest free funds available to it or not." In this case of Punjab Stainless Steel, Hon'ble Court also held that it did not deem it appropriate to allow the argument to be raised in an appeal under Section 260A of Income Tax Act, particularly when the advances made by the assessee firm do not stand the test of commercial expediency laid down by the Supreme Court in the case of S.A. Builders(supra). In both of the above cases the Hon'ble Courts have relied on the test of commercial expediency. The case of the appellant is different since there is no finding by the AO that the fund transferred for non-business purposes or there was no commercial expediency. 6.2 I have gone through assessment order, written submissions as filed by the appellant, remand report furnished by the AO and the rejoinder filed by the appellant. The issue involved in this case is that appellant has advanced an interest free loan of Rs. 87,00,00,000/- to its sister concern i.e. M/s Nexgen Infracon Pvt. Ltd. (Investee HEBE Infrastructure Pvt. Ltd. company/sister concern/associate company). At the same time, it has debited its profit & loss account on account of interest of Rs. 9,20,10,623/-as paid to the banks and financial institutions on secured loan raised for construction/working capital etc. The AOhas observed that the appellant has employed only Rs. 44,73,77,126/- in work in progress as against secured loan of Rs 68,07,97,420/- and accordingly, the AO has calculated impugned amount of Rs2,80,10,435/-@ 12% on Rs23,34,20,294/- (being difference between secured loan amount at Rs 68,07,97,420/- and loan amount invested in WIP Rs.44,73,77,126/-)presuming that the same has been advances to sister concern as interest free loan out of secured loan and has made addition u/s 36(1)(iii) of the Act to the taxable income of the appellant. As against above observation the appellant has submitted that the impugned amount of Rs2,80,10,435/- is allowable as deduction u/s 36(1)(iii) of the Act as firstly the impugned advance of Rs. 87,00,00,000/- given to investee company is out of interest free own funds available with it in the shape of share capital, Reserve and surplus and Advance from customers and secondly the same has been advanced as business advance out of commercial expediency. The appellant in support of his contention has also filed copy of agreement dated 01.07.2014 between the assessee company and its sister concern. The AO has not disputed the contents of the agreement which is primarily agreement for business support services. The appellant has also stated that it is tax neutral disallowance. Both the companies i.e. appellant companyand the investee company are taxpaying company at maximum marginal rate of tax. Copy of ITR acknowledgement of investee company is also filed during appellate proceedings. The AR of the appellant company urged that both the companies are taxed at the flat rate of taxation i.e. 30.09%, therefore, it is not a case of claiming expenditure in the hand of appellant company to reduce its tax liability without claiming interest from Investee Company on interest free HEBE Infrastructure Pvt. Ltd. loan. Even if the appeal of the appellant is allowed, in that case also there is no loss to the department. I have verified the copy of ITR of Investee Company as filed by the appellant during appellate proceedings. It has been observed that both the appellant company and the investee company has declared taxable income and has paid corresponding tax at maximum marginal rate of taxation as under:- Particulars M/s Hebe Infra M/s Nexgen (the appellant INfracom (Investee company) Company) Taxable income as per 2,32,97,910/- 12,39,06,440/- ITR for A.Y.2016-17 Taxes Paid 77,02,988/- 4,28,81,537/- Effective Tax Rate 33.06% 34.60%
From the above table it is evident that the effective tax rate in the investee company is more than the appellant company. Further, in the Remand Report, the AO himself has admitted that "in the present case both the payee and payer company has paid advance tax periodically meaning thereby the department has got revenue periodically as against getting TDS at the end of financial year". This shows that there was no intention of tax evasion on the part of the Appellant company or by the investee group company. There is no finding on record by the AO which shows that the transfer of fund was made for non-business purposes or to evade due taxes. The Hon'bleDelhi High Court in the case of CIT v/s. M/s. Gautam Motor 2010) 194 Taxman 21 (Delhi) also 334 ITR 326 (Del) is held as under: "There is no case made out by the department that any tax avoidance has been attempted by these arrangements. We therefore, see no justification to hold the additions made by HEBE Infrastructure Pvt. Ltd. the Ld. AO and sustained by the CIT(A), the same is directed to be deleted and this ground of the appellant is allowed." In the case of Glaxo Smithkline Asia Pvt. Ltd. (SLP Civil No.18121/2007) the Hon'ble Supreme Court has held that in the case of related party transactions the authorities must examine whether there is any loss of revenue. And if exercise is revenue neutral, than the matter may be decided accordingly. So long as the arrangement is genuine and payments have actually been made and there is no tax evasion planning involved, when both the entities are paying tax at the maximum marginal rate, there cannot be any justification is disallowing any amount on estimated basis. Such revenue neutral addition made by AO unnecessarily increases avoidable academic exercise. In the case CIT v/s M/s. Excel Industries Ltd. (itatonline.org) in appeal No. 125 of 2013 vide order dated 08.10.2013 the Hon'ble Supreme Court held that the AO is required to be pragmatic and not pedantic. The Apex Court also observed that Revenue cannot be allowed to flip flop on the issue and if ought let the matter raised rather than spend the tax payers money in pursuing litigation for the sake of it. In the similar facts and circumstances of the case, the Apex Court observed that, it is not as if the revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present AY as well as in the subsequent AY. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was therefore, no need for the revenue to continue with this litigation when it was quite clear that not only was if fruitless (onmerits) but also that it may not have added anything much to the public offers. The Hon'ble Supreme Court in the case of S A Builders Ltd. vs CIT [2007] 288 ITR 1 (SC)held that "We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is HEBE Infrastructure Pvt. Ltd. established that there was nexus between the expenditure and the 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 its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. "It was also held that if the advances to sister concerns/ subsidiaries is for commercial expediency the deduction Us 36(1)(iii) of the Act is allowable. Hon'ble Madras High Court in the case of CIT vs KEC International Ltd. [2020] 113 Taxman 532 (Mad)has held that interest paid on borrowed funds utilized for investment in group companies for strategic business purposes is allowable as deduction under Section 36(1)(iii) of the Income Tax Act. In view of the above judgements particularly in the case of S A Builders Ltd. vs CIT [2007] 288 ITR 1 (SC) and provisions contained in Section 36(1)(iii) of Income Tax Act, the interest paid by the assessee in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction. Hence, the question to be considered in a case such as in the case of the Appellant is as to whether the interest free advance was made by the assessee for commercial expediency or not. In the case of the Appellant, there is nothing on record to prove that the interest free advance to the sister concern was made for non-business purposes. Further, the investee company has HEBE Infrastructure Pvt. Ltd. been regularly paying the advance tax and the effective tax rate in the hands of investee company is more than the Appellant company. Therefore, under these facts and circumstances of the case, in my view, the case does not indicate any tax evasion plan. Both the companies are taxpaying entities at the same rate of tax. Therefore, so long as the arrangement is genuine and bonafide and the intention is not to evade taxes, it cannot be disregarded for the purpose of determination of tax liability of the appellant. Accordingly, disallowance as made by the AO u/s 36(1)(ili) of the Act is deleted and Ground No.3 is thus allowed.
Perusal of the order of the Ld. CIT(A) reveals that the assessee company has advanced an interest free loan of Rs. 87,00,00,000/- to its sister concern and it has debited its profit & loss account of interest of Rs. 9,20,10,623/- as paid to the banks and financial institution on secured loan raised for construction etc. The Ld. CIT(A) called the remand report during the appeal proceedings and found that there is nothing on record to prove that the interest free advance to the sister concern was made for non-business purposes.
From the order of the Ld. CIT(A) it is evident that the investee company has been regularly paying the advance tax and effective tax rate in the hands of investee is more than the assessee. Ld. CIT(A) has examined the issue in correct prospective and rightly deleted the additions towards disallowances u/s 36(1) (iii) of the Act made by relief is on proper appreciation of law expounded by the Judicial dicta. We do not find any reasons to interfere with the findings of the Ld. CIT(A). The appeal filed by the revenue is liable to be dismissed.
In the result the appeal of the revenue is dismissed.
Order pronounced in the open court on 28th May, 2025.