COMMISSIONER OF INCOME TAX (C) -III vs. M/s DD INDUSTRIES LTD

Versus

M/s DD INDUSTRIES LTD.

..... Respondent

Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates.

AND

ITA No.519/2013

COMMISSIONER OF INCOME TAX (C) -III ..... Appellant

Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate.

Versus

M/s DD INDUSTRIES LTD.

..... Respondent 2015:DHC:2476-DB

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Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates.

AND

ITA No.526/2013

COMMISSIONER OF INCOME TAX (C) -III ..... Appellant

Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate.

Versus

M/s DD INDUSTRIES LTD.

..... Respondent

Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates.

CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA

MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) %

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(in ITA No. 63-64/Del/2013; Nos. 264-266/Del/2013 and ITA No. 635/Del/2013). 2. The revenue urges the following substantial questions of law for the decision of this Court: (1) Did the ITAT fall into error in its interpretation of Section 36 (1) (iii) regarding advance of borrowed funds, to its sister concern?; (2) Did the ITAT fall into error in holding that the sum of `25,04,385/- brought to tax by the AO on the interest free deposit of ` 1,75,50,000/- was not sustainable?; (3) Is the ITAT’s order- that the assessee’s revised net taxable income of ` 4,08,24,559/- held by the CIT (A) to be unsustainable - and its acceptance of Rs. 1,63,60,896 as net taxable income (for AY 2008-09) erroneous?

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amount be not disallowed. In reply to this, the assessee has stated that during the year under assessment working capital limit has been increased and short-term funds have been utilized for booking a show room with DD Properties. In addition, to the assessee also responded in writing, to the following effect: “The advance to DD Properties (P) Ltd has been made for booking of space for an additional showroom for the expanding business of the assessee company. The allotment has not yet been made by the said company, and thus it cannot be said to have crystallized and as such the interest cannot be capitalized. The capitalization of interest will be from the date of actual allotment made by the said company up to the date of delivery of possession. Thus till the allotment is made, the interest paid is of revenue nature and as such has to be allowed as expenditure of business.”

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out to `3,32,27,695/-, the AO added back that sum and brought it to tax. Likewise, similar amounts were added back for other years: `3,21,09,750/- (for 2008-09) and `3,25,85,450/- (for 2009-10).

“direct nexus between the interest bearing funds and interest free funds of Rs. 23,28,50,000 given to DD Properties (P) ltd. The Balance Sheet shows that the appellant has a working capital limit with Indian overseas Bank and it is appearing under the head „Secured loans‟. Further from the perusal of copy of account of Indian Overseas Bank from which the appellant has issued cheqeus to DD Properties (P) ltd. as interest free funds, (being alleged as advance for properties), it is seen that on all the days when the payments were made to DD Properties (P) ltd., the balance as per bank statement had always been a debit balance i.e. overdraft. Hence beyond any iota of doubt, it is evident that interest bearing funds from Indian Overseas Bank have been given to DD Properties (P) Ltd….. In such an event when there is a direct payment from the Indian Overseas Bank on which interest is being paid by the appellant, I fail to understand how the appellant claims that the payment made to DD Properties (P) ltd is from his own funds and from interest free funds, when the facts and evidences show that the appellant has paid Rs.2,94,62,056 as interest to Indian Overseas Bank on enjoying the working capital facility. Hence in view of the above, I hold that there is a direct nexus between the payments made to DD Properties (P) ltd. out of the interest, 2015:DHC:2476-DB

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bearing funds taken from Indian Overseas Bank and thus the appellant is wrong in claiming that the payment to DD Properties (P) ltd. has been made from interest free funds.”

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findings that the claim was admissible u/s 36(1)(iii) of the Act and the reliance placed on the judgment of this Court in Commissioner of Income Tax vs. Sahara India Corpn Ltd. (2000) 296 ITR 285 (Delhi). Most crucially, it noted that the amount of `23,28,50,000/- was advanced in the F.Y, 2005-06 and F.Y. 2006-07 from out of surplus funds for purchase of show room and no borrowed funds were used for these advances and that no disallowance of interest expenditure was made during those years in orders made under Section 143(3) and no disallowance could be made in the assessment years in dispute, as facts were identical. It was also held that the disallowance under Section 36(1)(iii) cannot be extended to advances given in the AY which are opening balances during the year. 8. The ITAT recorded its conclusions as follows:

“14. We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case, a perusal of the papers on record and the orders of the authorities below, we hold as follows.

“From the perusal of the appellant‟s submissions, I am in agreement with the appellant‟s claim that in their case the disallowance u/s 36(1)(iü) cannot be made because no property/capital assets have been acquired by them.”

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general provisions of S.37( 1) for the purpose of allowance or disallowance. The Jurisdictional High Court in the case of CIT vs. Sahara India Corp. Ltd. (supra) reported in 296 ITR 285 held that the Tribunal is not bound to answer a question not raised before it. Hence when the question whether the deduction is allowable or not u/s 36(1)(iii) not before us or even disputed, we need not go into this aspect.

The ITAT cited Dy. CIT vs. Core Health Care Ltd. (SC) (2008) 298 ITR 194 for the proposition that the dichotomy inherent in the use of borrowed funds, i.e borrowing itself does not create an asset, but the use of that borrowing to create an asset, which results in it. Having regard to the authorities, it was held that Section 37 could not be resorted to, because of applicability of Section 36 (1) (iii). The ITAT also held that:

“In fact the said were amounts were advanced during the FY 2005-06 and 2006-07. Orders were passed by the AO u/s 143(3) for both these years in which the scrutiny assessments have taken place, and no disallowance was made either u/s 36(1)(iii) or u/s 37(1). The advance to sister concerns in question in the case on hand are opening balance carried forward from the Previous Year and when so no disallowance can be made.”

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must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and thirdly, the assessee must have paid interest on borrowed capital. The expression “for the purpose of business” occurring in section 36(1)(iii) specifies that deduction under this section is admissible only when capital ¡s borrowed directly “for the purpose of business” of the assessee. It is argued that ITAT fell into error in appreciating section 36(1)(iii) even otherwise, because the proportionate amount of interest is needed to be added back, as the assessee during the course of the assessment proceedings has itself submitted that it has advanced the loans to its associate company for the purpose of acquiring a show room. This clearly meant “extension of existing business or profession”. The revenue also disputes the factual findings of the ITAT regarding the actual advances having been made in previous years, pointing out that financial years 2005-06 and 2006-07 correspond to the assessment years in dispute. It is also urged that the finding regarding the acceptance- in scrutiny assessments- for previous years, having become final could not have been rendered. It is argued that the ITAT should not have followed the previous year’s decisions, given that each assessment year constitutes a fresh cause, affording the revenue a new look at the materials placed before it. The assessee, on the other hand, contends that the ITAT’s decision is entirely fact based, as it had the benefit of looking into the records. It is urged that in fact, for the assessment years in question, no advances were made to the assessee’s sister concern. Having accepted the amounts lent during previous 2015:DHC:2476-DB

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years, it was not open for the revenue to now change its opinion when there was no material in that regard. 10. The record before the ITAT showed that the paid up equity of the assessee was `8,00,00,000/- for all the years, i.e., as on 31.03.2006; 31.03.2007, 31.03.2008 and 31.03.2009. The general reserves and surplus as on 31.03.2006 was `14,68,82,450; as on 31.03.2007, it was `16,36,68,384/-; as on 31.03.2008, it was `17,10,43,019/- and as on 31.03.2009 it was `15,28,48,354/-. Sundry debtors as on 31.03.2006 was `22,82,38,320/-; as on 31.03.2007 it was `28,58,66,349/-; as on 31.3.2008 it was `22,53,78,479/-; as on 31.03.2009 stood at `11,61,95,359/-. Thus, there is material to show that the amounts were not in fact advanced for the assessment years in question, i.e., 2007-08, 2008-09 and 2009-10. The assessee had provided further material disclosing that the loans taken were for specific purposes from different financial institutions such as purchase of cars, stocks, raw materials etc. These supported its contentions that adequate funds were available during the assessment years and that since in the past the Revenue had accepted the assessee’s plea in this regard and not brought the amounts to tax under Section 36 (1) (iii), there was no question of its being brought to tax for the three assessment years in question. Applying the ratio in CIT v. Sahara India Corporation Ltd, (2000) 296 ITR 295 (Del), it is held that the Revenue could not have taken a different view for these three years, particularly, when advances were not made at this time without any conclusion that in fact general reserves, surpluses and other funds were not available. The Court here also notices that several decisions were relied upon by 2015:DHC:2476-DB

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the ITAT (Reliance Utility and Power Ltd. v. CIT, 313 ITR 340 (Bom.), CIT v. Hotel Savera, 239 ITR 795 (Mad), CIT v. Tin Box Company, 260 ITR 637 (Del.)) in support of the conclusion that when the assessee is possessed of mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn. 11. The next aspect is as regards the question whether the purpose for which the loan was given, i.e., to book 40,000 sq. ft. property for the assessee’s use in an upcoming commercial complex was sufficient. We notice that the ITAT held against the Revenue on this aspect. The ITAT noted the terms of the Memorandum of Understanding (MOU) dated 28.05.2005 entered into with D.D. Properties where it had agreed to invest money in the project by way of advance. This document had not been rejected either by the AO or the CIT (A). The balance sheet of D.D. Properties Pvt. Ltd., a sister concern was also considered by the ITAT. This disclosed that as on 31.03.2006 it had inventories in the form of land to the extent of `32.4 crores. In these circumstances, given the nature of the MOU, the ITAT in our opinion rightly concluded that the Revenue’s reasoning was unsound. The ITAT also relied upon Sassoon J. David & Co. Pvt. Ltd. v. CIT, 118 ITR 261 (SC). This Court had in a similar context, held in Commissioner of Income Tax v Bharti Televenture [2011] 331 ITR 502 (Del) that: “11. The Hon'ble Supreme Court further held that though, the borrowed amount was not utilized by the assessee in its own business and had been advanced as an interest-free loan to the 2015:DHC:2476-DB

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sister concern, but that is not relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency? The law laid down by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 was overruled whereas that of the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 was approved. It was further held that it all depends on the facts and circumstance of the case as to whether the directors of the sister concern utilized the amount advanced to it by the assessee for their personal benefit, which obviously could not be said to be an advance as a measure of commercial expediency. 12. In the instant case, from the order of the Commissioner of Income-tax (Appeals) and that of the Income-tax Appellate Tribunal, as reproduced above, in paragraphs 3 and 6, we note that the assessee was maintaining a bank account with mixed common funds in which all the deposits and withdrawals were made. There was no specific instance noted by the Assessing Officer in respect of any direct nexus between the borrowed fund and the said advances made to the subsidiaries. The Assessing Officer had made general observations without going into the depth of the matter and without pointing out any specific instance where an interest bearing borrowing was advanced to the subsidiaries or establishing that the borrowings made by the appellant were not for business purposes. Both appellate authorities below were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee's own capital. At the relevant time the assessee was found to be having an adequate non-interest bearing fund by way of share capital and reserves. Even otherwise, the advances were found to be made to the subsidiaries for business considerations which is nothing but the commercial expediency of the assessee. That being the factual position reflected from the record of the assessee, the onus that laid on it stood discharged.” 2015:DHC:2476-DB

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v. CIT (Appeals) [2007] 288 ITR 1 (SC) where the views of this Court in Commissioner of Income Tax v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that “once it is 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”, and further that no businessman can be compelled to maximize his profit, were approved. The Supreme Court also held that: “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. *********************

******************* 26. The expression " commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency…” The disallowance initially ordered by the AO and finally set aside by the ITAT for AY 2007-08 thus requires no interference. The impugned order does not suffer from any infirmity on this count. The views of ITAT are therefore, affirmed. 2015:DHC:2476-DB

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S. RAVINDRA BHAT (JUDGE)

R.K. GAUBA (JUDGE) MARCH 13, 2015 2015:DHC:2476-DB