M/S. LUCINA LAND DEVELOPMENT LTD.,NEW DELHI vs. ACIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘E’ NEW DELHI

BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER

ITA No.962/Del/2017 Assessment Year: 2012-13 M/s. Lucina Land Vs. ACIT, Development Ltd., Circle-15(2), M-62 & 63, 1st Floor, New Delhi Connaught Place, New Delhi PAN :AABCL2130N (Appellant) (Respondent)

Appellant by Sh. Gautam Jain, Adv. Sh. Lalit Mohan, CA Respondent by Ms. Sarita Kumari, CIT(DR) Date of hearing 18.11.2021 Date of pronouncement 26.11.2021 ORDER PER O.P. KANT, AM:

This appeal by the assessee is directed against order dated 23/12/2016 passed by the learned Commissioner of Income Tax (Appeals)-5, New Delhi [in short ‘the learned CIT(A)’] for assessment year 2012-13, raising following grounds: 1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs.3,30,99,771/- fully, as made by Ld. AO on account of interest expenses u/s 36(1)(iii). 2. That in any case and in any view of the matter, action of Ld. CIT(A) in sustaining the proportionate disallowance of interest expenses with regard to advances given u/s 36(l)(iii), is bad in law and against the facts and circumstances of the case.

2 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

3 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

is before the Tribunal by way of raising the grounds as reproduced above. 3. The learned counsel for the assessee filed a paper-book, case laws compendium and written synopsis in physical form as well as through email. 4. We have heard learned Representative of both sides on the issue in dispute and perused the relevant material on record. 4.1 Before us, the assessee is agitated in respect of two additions. The first addition in respect of disallowance of interest, which was capitalized in the earlier year, however, claimed as revenue expenditure in the year under consideration. The Ld. Assessing Officer has made this addition following the finding of the Assessing Officer in assessment year 2010-11 and 2011-12. The Assessing Officer in the impugned order has noted that assessee-company raised an interest bearing loan of Rs.426.28 crores from M/s India Bulls Real Estate Ltd., but advanced interest-free loans to its subsidiary companies to the extent of Rs.410.07 crores without any business exigencies. The Assessing Officer in assessment year 2010-11, held that interest of ₹ 14,39,12,048/- in respect of the loans taken, which was capitalised in that year, was not allowable as business expenditure in the respective years of declaration of income following percentage completion method. The Assessing Officer in the year under consideration held that 71% of the project had already completed and balance 23% of the project was completed in the year under consideration and therefore 23% of the interest expenses of ₹ 14,39,12,048/- has been held to be disallowable in the year under consideration as non-business expenses in terms

4 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

of section 36(1)(iii) of the Act. The Ld. CIT(A) in the year under consideration has noted that his predecessors has allowed the appeal of the assessee in the assessment years 2010-11 in 2011- 12, however, he observed that the facts related to aspects of business expediency were not lucidly discussed either in the assessment or appellate orders and, therefore, he asked for additional information from the assessee and reviewed finding of his predecessors. The Ld. CIT(A) examined the money advanced by the assessee to its six subsidiary companies from para 3.7.3.1 to para 3.7.8 of the impugned order. For ready reference, said finding is reproduced as under: “3.7.3.1 From the facts narrated above it is quite clear that there is no correlation or nexus between the utilization of the borrowed funds that were advanced to M/s Sylvanus Builders & Developers Ltd. The land was already acquired prior to the appellant's taking over the loan liability from Indiabulls Real Estate, no construction activities are demonstrated and the appellant has divested itself of the shareholding in the said company as at the end of the impugned financial year. There could be no commercial expediency that is discernible in the entire transaction.

3.7.4 The second company to whom advance has been given in A.Y. 2010-11 of Rs. 171,76,31,100/- is Nilgiri Infrastructure Development Ltd. The balance outstanding in the impugned year is Rs. 123,22,94,100/-. The financials of this company show that the amount was invested in equity shares of three companies, Park View Promotors Pvt. Ltd., Highland Meadows Pvt. Ltd. and Park Land Development Pvt. Ltd. amounting to Rs.150 crores. The company shows Rs.50 crores advance for land in A.Y. 2010-11. It claimed interest cost of Rs.14.01 cores and thereby incurred a loss for the year of Rs. 14.02 crores in A.Y. 2010-11. No activity was carried out by this company in the interim assessment year 2011-12 yet it still received another tranche of Rs.2 crores from the appellant company without interest. When the financials of this company for the year 2012-13 are examined, it is found that the advance given for land of Rs.50 crores has been received back. Thus the financials of this company do not reflect any worthwhile business activities as on 31.3.2010, 31.3.2011 and 31.3.2012 and yet the appellant continued to block its interest bearing funds by way of this interest free advance. There could be no commercial expediency in the entire

5 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

transaction. Hence the disallowance of interest by the AO on this account in respect of this advance made for A.Y. 2010-11 is confirmed.

3.7.5. The third company to whom interest free advance of Rs.21,93,00,000/- was given is Serida Properties Ltd. It is noted that the investment of Rs.5 lacs in this company was transferred by Indiabulls Real Estate Ltd. to the appellant company during F.Y. 2009-10 and this company debited Rs.21 crores and Rs.96.96 lacs as interest cost and daimed business losses of Rs.29 cores and 97 lacs respectively for A.Ys. 2009-10 and 2010-11. No activities relating to acquisition of land or business are seen in these years. The financials for A.Ys 2011-12 & 2012-13 also do no demonstrate any activity at all. Hence, there is no apparent commercial expediency in the advances made to this company. The AO's finding in this regard is confirmed.

3.7.6. The fourth party M/s Noble Realtors Ltd., to whom interest free advance of Rs. 12,45,42,100/- was given in A.Y. 2010-11 is another fully owned subsidiary of the appellant company. As in all the other Cases, the equity in this company was transferred to the appellant company from Indiabulls Real Estate Ltd. during the A.Y. 2010-11. Although the appellant has not filed the ledger accounts of all the inter-corporate deposits, it seems that the loan of Rs. 14.20 crores given by Indiabulls stands transferred to the books of the appellant during the year. The total balance sheet figure of this company as on 31.3.2009 is Rs.16.28 crores yet it has shown land owned at Rs.24.7 crores as on 1.4.2009 and claimed substantial losses on sale of land in A.Ys. 2009-10 and 2010-11. The cost of land sold debited to P&L account is Rs.16.3 crores and Rs.10.23 crores and the business losses incurred in A.Ys. 2009-10 and 2010- 11 are Rs.6.41 crores and Rs.5.28 crores respectively. There are no lands owned as on 31.3.2010 till date. No activity relating to real estate is seen in the balance sheet for A.Ys. 2011-12 & 2012-13. From these events, it would seem that the holding company has created subsidiaries to whom interest free funds have been given and these subsidiaries are not doing any worthwhile real estate activities but generating losses resulting out of interest burden and/or sale of land. It is apparent from the facts on record that there is no expediency in the entire transaction with Noble Realtors Ltd. The balance outstanding from this Company was Rs.12.45 crores and the AO's action in disallowing the capitalized interest on this amount is confirmed.

3.7.7. The fifth company is M/s Devona Infrastructure Ltd., to whom interest free advance of Rs. 100,07,41,000/- is given in F.Y. 2009- 10. This company in turn gave an advance of Rs.87.63 crores apparently towards land. It paid interest of Rs.7.44 crores and

6 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

Rs.4.80 crores and claimed business losses of Rs.7.50 crores and 4.92 crores respectively in A.Ys. 2009-10 & 2010-11. The outstanding balances as on 31.3.2011 & 31.3.2012 were Rs.91.10 crores and Rs.91.45 crores respectively. In other words, the appellant company received back Rs.8.96 crores and Rs.34.62 lacs from this company respectively in this period. In the books of that company for these years the land advances of Rs.87.60 crores stand reduced to Rs.78.63 crores. Loss of Rs.6.64 lakhs and Rs.34.67 lakhs have been booked for A.Ys. 2011-12 & 2012-13. There is no actual land acquired by this company till date. The audit report also does not specify as to whom the land advances were given, and the appellant has not clarified as to whether any land has been acquired by this company in the subsequent years. Accordingly, the AO's action in this regard is confirmed.

3.7.8. The sixth company to whom advance has been given by the appellant of a sum of Rs.68,30,25,000/- is M/s Albina Real Estate Ltd. This amount was advanced for purchase of land of Rs.61.66 crores. This land was subsequently acquired and construction of real estate project has commenced. The company follows percentage completion method of accounting and has offered income for tax in accordance with this method of accounting. The interest free advance stands reduced to Rs.39.20 crores as on 31.03.2012. Keeping these facts and circumstances in mind, it is held that there is a direct nexus between the interest expenditure claimed by the appellant for the A.Y. 2010-11 and for the current A.Y. under appeal.

4.2 Thus, out of six companies to whom interest-free money was advanced by the assessee, in the case of M/s Albina Real Estate Ltd., the Ld. CIT(A) held advances for business expediency and accordingly directed the Assessing Officer to delete the proportionate addition, but in respect of the other companies, he sustained the addition observing as under: “3.10.1 The appellant is not an investment company, but a builder and developer. However, the shares held in the subsidiary companies, namely Noble Realtors Ltd., Nilgiri Infrastructure Development Ltd., Albina Real Estate Ltd., Devona Infrastructure Ltd. and Serida Properties Ltd. are classified in the balance sheet as 'long term investments'. Profits on the same, are taxable under the head capital gains, as claimed by the appellant in the current year. Dividend income, if any, received is taxable under the head 'income

7 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

from other sources'. The facts borne out from the records show that the appellant's intention was to earn capital gains from their sale and dividends from such holding, accordingly, the interest expenditure incurred by the appellant for purposes of acquiring these shares cannot be allowed u/s 36(l)(iii). For the reasons discussed in para 3.6 to 3.10 hereinabove, it is held that the addition made by the Assessing Officer by disallowing pro-rata interest in respect of interest free advances given to M/s Albina Real Estate Ltd. is not justified but the balance addition in respect of the interest capitalization for A.Y. 2010-11 is confirmed. The AO would give proportionate relief on the interest (@ rate of interest paid by appellant in A.Y. 2010-11) in respect of the advance of Rs.68,78,26,000/- made in A.Y. 2010-11 to M/s Albina Real Estate Ltd. Subject to these remarks, Ground no. 1 is held to be partly allowed.”

4.3 Before us, the Learned Counsel of the assessee submitted that the Tribunal in ITA No. 1465 and 1464/Del/2016 for assessment years 2010-11 and 2011-12, has upheld the order of the Ld. CIT(A) deleting the identical addition made under section 36(1)(iii) of the Act following the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd Vs CIT (supra). The relevant finding of the Tribunal (supra), is reproduced as under: “7. We have heard both the parties and perused all the relevant material available on record. As regards Ground No. 1, the CIT(A) has deleted this addition on the basis of Honble Supreme Court decision in case of SA Builders Ltd. 288 ITR 1. The Assessing Officer has given observation that this amount has to be disallowed in the assessment order itself. The CIT(A) held as under:

“GROUND NO. 2:- Ground No. 2 of the appeal is against the disallowance of interest expenses of Rs. 143,912,048/capitalized in real estate project under development. The AO, is his assessment order, alleged that loans have been granted without any business exigency. On the other hand, the appellant has argued that the assessee borrowed j m.11.IA.S for the purpose of its business (particularly for its running project) and debited the interest cost in the project work-in-progress, amounting to Rs. 14.39 crs. As, such interest cost was not debited into P & L account, the assessee did not claim it in tax, during

8 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

the year under consideration. In order to fruitfully use the available funds, following the principles of commercial expediency, the assessee partially gave such funds to its wholly-owned subsidiaries for their business purposes. The companies, to whom funds were given, were 100% subsidiaries of the assessee (evidence filed with submission dt. 22.10.2014) and the assessee had full control over the management of those entities. In other words, businesses of the subsidiaries were actually the business of the assessee itself. The appellant has given reference to several case laws in support of its argument including SA Builders case of Hon’ble Supreme Court of India. On considering the facts of the case and the arguments forwarded by the appellant, it is observed that there is no dispute as far as the allowability of interest expenses u/ s 36(l)(iii) of the Act is concerned. The facts of the case of Malayalam Plantation Ltd. on which the AO has relied, are entirely different. The appellant has relied upon the decision of Hon’ble Supreme Court in the case of SA Builder Limited, it was held by the Hon’ble Court that the expression “for the purpose of business” occurring in Section 36(l)(iii) is wider in scope than the expression “for the purpose of earning profits”. In order to claim a deduction, it is enough to show that the money is expended on ground of commercial expediency. The AO has wrongly interpreted the fact of the case and mentioned in his assessment order that the above preposition in not applicable. Through, the preposition laid by the decision of Supreme Court is completely applicable in the instant case, as the loans given to its subsidiary companies in order to I achieve its business objects and the assessee has a deep interest in the business of subsidiary companies. Thus the interest on loan taken being meant for the purpose of business is duly allowable as business expenditure. These 2 case laws interpreted by AO are not proper. The first case law on SA Builders says that interest disallowance on loans and advances given to group concerns^- should not be disallowed on the basis of commercial expediency. If interest is disallowed in one company, then interest is to be added as income of the other company, then both transactions taken together will not add extra revenue to the department. The companies are assessed at a flat tax rate of 30% slab. Therefore, these 2 transactions make the ultimate analysis as tax neutral. Hence there is no need to disallowance of interest when parent company has borrowed money from financial

9 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

institution and given interest free loan to the subsidiaries. In this theory, the AO’s finding of interest disallowance is not proper and justified. Hence, this ground of appeal is allowed. The second case law of AO for the purpose of business which has been written in page no. 4 and 5 of his order. The AO had disallowed the explanation of the appellant on the ground that the appellant company is not engaged in the business of raising loans at concessional rate and extending them at higher rates. The appellant has failed to use the money of the purpose for which it has been raised, and by capitalized interest. The assessee has increased the cost of inventory was the comments of the AO. These views of the AO appear to be reverted and distorted. The appellant company and its parent company are into different businesses like appellant company doing real estate work and parent company is IndiaBulls Real Estate Ltd., a real estate company. Both the interest of the company are to earn profits but within the framework of corporate law and other allied laws. Therefore, I do not support the view of AO and advice AO to always apply fresh case laws of recent years as appearing in last 5 to 10 years by different High Courts and Supreme Court. With the change of time and advancement of science and technology and development of the country, the situation in which company run their business also differs. Therefore as officers of the department, we should be more practical and pragmatic while making assessment of the companies. The facts being so and in view of the decisions of Hon’ble SC Court in case of SA Builders Limited 288 ITR 1 (SC) on the subject, the AO’s action in disallowing the interest expenditure of 143,912,048/- is not justified and the same is directed to be deleted. Having concluded that the interest paid by the assessee is duly allowable under Income Tax Act as the loan to the subsidiaries has been given for the purpose of its business, it is also directed that the disallowance of the interest cost, made in the AY 2011-12 amounting to Rs. 6,90,77,783/-, being 48% of Rs. 143,912,048/- is also to be deleted. Ground No. 2 of the appeal is allowed.”

Thus the CIT(A) has rightly allowed this issue with a detailed finding as well as by discussing the case laws referred by the Assessing Officer. The reliance by the Ld. DR on the decisions of Tulip Star Hotels Ltd. (supra) and Punjab Stainless Steel Inds. (supra) are not at all relevant as., the. factrjal aspect in the present case is totally different. There is no need to interfere with the observations of the C1T(A). Ground no. 1 of the revenue’s appeal is dismissed.”

10 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

4.4 The Learned Counsel also relied on the decision of the Hon’ble Bombay High Court in the case of PCIT-9 Vs E City Investment in Holdings Co Private Limited reported in (2020) 117 taxmann.com 123 (Bom) and SLP filed against which by the Department was rejected by the Hon’ble Supreme Court as reported in (2020) 117 taxmann.com 124 (SC). In the said decision, Hon’ble Bombay High Court has relied upon the finding of Hon’ble Supreme Court in the case of SA builders Ltd (supra) as under: “2. We notice that a similar issue had come up for our consideration before this Court in the case of the very le assessee in Income-tax Appeal No. 213 of 2017 and the appeal was dismissed making following observation:

“2. Respondent-assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee's return for the assessment year 2008-09. Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee. The Tribunal referred to and relied upon the decision of the Supreme Court in case of S. A. Builders Ltd. v.CJT 228 ITR 1 ISC) and concluded as under: — "If the aforesaid ratio laid down by Hon’ble Apex Court is analyzed by keeping the same in juxtaposition with the facts of the present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, we note that advancing loan to the sister- concem was for the purposes of "Commercial Expediency", thus, we find merit in the contention of the Id. Counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and purpose of the busienss (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably

11 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

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 his profits." 3. We do not find any error in view of the Tribunal. The entire issue is quarely covered in favour of the assessee in case of S. A. Builders Ltd. (supra). The Tribunal correctly held that the assessee's decision to fund its subsidiaries driven by business exigency. 4. In the result, no question of law arises. Income-tax Appeal is dismissed.' 3. In the result, this Appeal is also dismissed.”

4.5 The Learned Counsel also relied on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Tulip Star Hotels Ltd. reported in (2011) 16 taxmann.com 335 (Delhi). The relevant finding of the Hon’ble High Court is reproduced as under: “2. A perusal of the orders passed by the Tribunal would reveal that it is noted by the Income-tax Appellate Tribunal that the assessee is in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management it had invested in a wholly owned subsidiary, namely, M/s. Tulip Star Hospitality Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 the Tribunal has held that the assessee was entitled to the deduction of interest on the borrowed funds. The observations made by the Supreme Court in S. A. Builders Ltd.'s case (supra) were quoted by the Tribunal as under (page 10):

"... where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."

12 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

expenditure would be allowed even under section 57(iii) of the Act. Though there may be some controversy as to whether the aforesaid expenditure is allowable under section 57(iii) of the Act or not, we have no doubt, in our mind, that the expenditure incurred under the aforesaid circumstances would be treated as expenditure incurred for business purposes and was thus allowable under section 36 of the Act. Mr. O. S. Bajpai, learned senior advocate appearing for the assessee, has produced a copy of the memorandum of association of the assessee which, inter alia, specifies the following objects: "To own, purchase, construct, acquire, equip, operate, manage, conduct or in any other manner and in all its aspects deal in hotels, motels, resorts, inns, guest houses, apartments, food courts, shopping plazas, commercial complexes, casinos, entertainment parks, water parks, amusement centres, gaming centres, bowling alleys, wild life parks, restaurants, cafes, refreshment rooms, lodging houses of every kind and sort including all the conveniences, amenities and facilities adjunct thereto, in India or in any other part of the world and to act as consultants, advisors, experts, technical collaborators, valuers, surveyors, inventory analysts in all matters, pertaining to setting up of hotels, resorts, all form of lodging, touristic and leisure projects."

4.6 Before us, the Learned DR relied on the order of the Ld. CIT(A) and submitted that Hon’ble Supreme Court vide order dated 30/04/2012 while admitting the SLP of the Department in the case of Tulip Star Hotels Ltd. directed that earlier view of the court in the case of SA Builders Ltd (supra) should be referred for reconsideration to another bench of the Court. The Hon’ble Supreme Court in the case of SA builders Ltd. (supra) in para 35 observed that “where it is obvious that a holding company has deep interest in the subsidiary, and hence, if the holding company advances borrowed money to subsidiary and the same is used by the subsidiary for some business purposes, the assessee would ordinarily be entitled to interest on its borrowed loans”. We find that Tribunal (supra) in earlier years has upheld the deletion of interest by the Ld. CIT(A) in view of the above finding of the Hon’ble Supreme Court. Though, the Learned DR

13 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

referred to the observation of the Hon’ble Supreme Court in the case of Tulip Star Hotels Ltd while admitting the SLP. The said observation of the Hon’ble Supreme Court as reported in (2012) 21 taxmann.com 97(SC) are reproduced as under:

“Order Issue notice on the applications for condonation of delay as also on the Special Leave Petitions. Mr. Mahesh Agarwal, learned counsel, appears for the respondent.

In our view, S.A. Builders Ltd. Vs. Commissioner of Income-Tax (Appeals) and Another, reported in 288 ITR 1, needs reconsideration.”

4.7 On the other hand, the Learned Counsel of the assessee submitted that the SLP of the Revenue was dismissed in the case of Tulip Star Hotels Ltd. on 7/02/2019, for non-prosecution. The relevant order of the Hon’ble Supreme Court is reproduced as under: “For Petitioners(s) Mrs. Anil Katiyar, AOR [N/P] For Respondent(s) Mr. E.C. Agrawala, AOR [N/P] The Court made the Following O R D E R None appears for the petitioners. The Special Leave Petitions are dismissed for non-prosecution. [VINOD LAKHINA] [ANAND PRAKASH] AR-cum-PS BRANCH OFFICER”

4.8 Before us, the learned DR failed to substantiate his claim of non-operation of the finding of the Hon’ble Supreme Court in the case of SA Builders Ltd (supra). Despite the observation of the Ld. CIT(A) in respect of the each entity to whom loans were advanced

14 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

interest-free by the assessee, this fact is undisputed that those companies are subsidiary company of the assessee and assessee having deep interest in those subsidiary companies, who are engaged in the field of real estate, which is one of the main activity of the assessee company, and therefore, case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd (supra). Thus, respectfully following the finding of the Tribunal (supra), the disallowance of interest in terms of section 36(1)(iii) of the Act in respect of interest claimed, deduction in the year under consideration out of interest capitalized is deleted. 5. The second issue in the grounds raised is of enhancement of income of the assessee by Rs. 74.71 crores. The Ld. CIT(A) issued a notice on 25/07/2016 asking the assessee to substantiate with documentary evidence as how the interest expenditure of Rs. 74.74 crores against the interest-bearing loans which stood at Rs. 866.89 crores as on 31/03/2011, but reduced to ₹ 398 crores as on 31/03/2012, particularly when interest-free funds of ₹ 288 crores were given during the year under consideration. The assessee objected the enhancement notice and also submitted that funds have been advanced for a land to subsidiary companies that were in the same business as that of the assessee, and therefore, interest paid was allowable. The Ld. CIT(A) rejected the objection of the assessee as well as submission on merit and held that assessee failed to brought on record any evidence in support of commercial expediency involved in making those advances, and therefore, he disallowed the interest amounting to ₹ 74.71 crores observing as under:

15 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

“4.1. At the outset, mention needs to be made of the appellant's objection to the enhancement notice, which has been challenged on the ground that the reason for enhancement, the section under which enhancement was being proposed and the quantum of enhancement had not been spelt out. These objections are not valid as the enhancement notice clearly mentioned in the very first para that the appellant was required to substantiate the claim of interest expenditure of Rs.74.71 crores with documentary evidences and to clarify purposes of loans taken and advances made. The appellant was asked to specifically explain (to quote) "kindly explain how interest on loans and advances can be allowed under the provisions of section 36(l)(iii) or alternatively u/s 37(1)." Section 251(2) only provides that a reasonable opportunity be given to an assessee for show cause against an enhancement and that has been duly done.

4.2. I have given serious consideration to the submissions made by the appellant from time to time. Interest on borrowed funds are allowable under the specific provision of section 36(l)(iii) when such funds are utilized for the "purposes of business". The appellant has claimed interest cost of Rs.74.71 crores, details of which are as under:

Date of S. No Name of company Address PAN Amount interest 1. Indiabulls Financial M 62, & 63, lst AAACI8570Q 71,506,849 12% Services Ltd. (merged Floor, with Indiabulls Connaught Housing Finance Place, New Limited) Delhi Elena Power and Do AABCE9688G 328,612,340 6% 2. Infrastructure Ltd. 3. Indiabulls Real Estate Do AABCI5194F 198,501,139 14% Ltd. Lakisha Real Estate 4. Ltd. Do AABCI6194B 8,700.055 13% Fornax Real Estate 6.5% to 5. Ltd. Do AABCF12590 72,810.217 11% Svlvanus Properties 6. Ltd. Do AAJCS9992H 66,985,395 13% Total 747,115,999

4.3. The interest has been claimed on loans borrowed from above 6 parties, which at the end of the year stand reduced from Rs.866 crores to Rs.398.21 crores. The appellant has not provided the ledger accounts of parties from whom loans were taken i.e. lenders, on which interest was paid on the ground that these are running ledger accounts and hence one to one correlation with the monies borrowed and spent is not feasible. Even the balances outstanding as on 31.3.2012 were not provided, let alone the facts relevant to the usage of these borrowed funds, although these were specifically requisitioned in the letter dated 25.7.2016. However, from the notes to Financial Statements of the audited account, it is noted that the appellant has squared off the loan

16 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

taken from Elena Power & Infrastructure Ltd, against whom outstanding balance as on 31.3.2011 was Rs.166,90,00,000/-. Interest of Rs.32.86 crores has been paid and claimed as revenue expenditure. There is no mention of loan taken from Indiabulls Financial Services Ltd. or Indiabulls Housing Finance Ltd. (which was merged with Indiabulls Financial Services Ltd., as claimed by the appellant) in the said financial statements on which interest of Rs.7.15 crores has been claimed as expenditure in the P&L account. Even if loan taken from these entities has been squared off during the year, the same should have been reflected in the notes to the financial statements under the 'statement of material transaction with related parties'. The total interest expenditure incurred as per notes, is Rs.34,69,96,804/- (in respect of parties at SI. Nos. 3 to 6 at table 4.1) and the interest payable is Rs.31,22,97,124/- which is as under:

4.4. From the facts narrated above, it is clear that actual interest paid during the year is only Rs.3,46,99,880/- (34,69,96,804 - 31,22,97,124). The appellant claims that the entire interest is allowable u/s 36(l)(iii) as the investment in shares of subsidiary companies, advances made towards land and other direct expenses on land acquisition and construction are to be construed as business activities. However, the theory that investment in shares of subsidiary companies amounts to promotion of business, stands disproved in view of the fact that the appellant has divested itself of the share holding in Sylvanus Builders (w.e.f. 28.09.2011) and there are frequent mergers and demergers of many of the fellow subsidiary companies from the holding company M/s Indiabull Real Estate Ltd. For example, Elena Power and Infrastructure Ltd. stand demerged from the holding company w.e.f. 01.04.2011. moreover, it cannot be said that simply because one company is a subsidiary of another company, the advancement of borrowed funds free of interest by a holding company to a subsidiary company is commercially expedient, just because both are in the same line of business, this aspect is discussed at paras 3.9.5 & 3.9.6 supra. Be that as it may it is seen that the business model that has been espoused by the appellant for promotion of business through acquisition of shares, is found to be for non business purposes. Even otherwise, the Delhi High Court decision has been discussed at paras 3.10 & 3.10.1 for the view that that interest expense cannot be allowed u/s 36(l)(iii) for acquisition of shares in subsidiary companies.

17 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

4.5. In so far as the direct business activities relating to real estate are concerned, it is seen that in the accounting period relevant to A.Y. 2010- 11, the monies invested in real estate business i.e. land & construction was around Rs.35 crores. From the appellant's own financials for A.Y. 2011-12 it is noted that the total cost on construction and development incurred during that year was Rs. 323.51 crores. Hence it is clear from the financials that the entire borrowed funds of Rs. 866.89 crores as on 31.03.2011 (some of which has been received back during the year) have not been utilized for the core business activities namely construction and acquisition of land. The appellant has also claimed that the sum of Rs. 326.50 crores advanced towards land to related party M/s Indiabulls Infrastructure Construction Ltd. (IINFC Ltd.) which has been received back in the year under consideration was for acquisition of land. The appellant has explained that the same was received back as the transactions did not materialize. However, the documentary evidences that have been filed before the undersigned, namely an agreement with M/s Indiabulls Infrastructure Company P. Ltd. do not show that any actual efforts were put in by the said company to aid and assist the company in purchasing land banks/ plots of land in Delhi and NCR. There is no evidence placed on record to show that the amount was given for procurement of land or even to show that this company conducted any real estate business activities. The appellant had also advanced interest free advances of Rs. 398.20 crores to related parties in that year. The argument of the appellant is that it had sufficient interest free funds to make such advances and the borrowed funds had been utilized for purposes of business only. I have examined this argument vis-a-vis the sources of funds available and the summary of fund utilized as on 31.03.2011 (reproduced in the table at para 4 above) which clearly demonstrates that there were no sufficient owned funds available for making the impugned short term loans and advances of Rs.724.70 crores (Rs.326.50 Cr. + Rs.398.20 Cr). The appellant has also not explained the reasons for making loans and advances of Rs. 288.28 crs to related parties, except to say that all the related parties were involved in similar business and the appellant had a deep interest in their business. Above all, the appellant has not brought on record any commercial expediency involved in making these advances as it has been admitted in the written submissions reproduced at para 3.5 herein above, "one to one correlation with the money borrowed and spent is not possible as the appellant had a running account with the lenders".

4.2.2 The outstanding balance of loans and advances given interest free are as under:

Name of the Party As on 31.3.2011 As on 31.3.2012 Svlvanus Builders & Developers Ltd. 30,50,00,000 - Noble Realtors Ltd. 12,45,92,100 12,46,43,100 Nilqiri Infrastructure Developers Ltd. 173,23,81,100 123,22,94,100 Albina Real Estate Ltd. 69,06,65,000 39,20,05,000

18 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

Devona Infrastructure Ltd. 91,10,91,000 91,54,53,000 Serida Properties Ltd. 21,93,50,000 21,94,00,000 Total 398,30,79,200 288,28,95,200

4.2.3. The transaction/business activities of these companies stand discussed at paras 3.7.3 to 3.7.8 hereinabove, wherein it is found that except for advances made to Albina Real Estate Ltd., no commercial purposes is manifest in any of the other advances made. The interest has been paid on borrowed funds of Rs.866.89 crores brought forward from 1.4.2011, whereas the total cost of real estate project as at the end of the impugned year i.e. 31.3.2012 is only Rs.563.09 crores. Even the loan amount taken from Indiabulls Financial Services Ltd./ Indiabulls Housing Finance- Ltd. is not even mentioned in the financial statements, let alone the usage of such loan been specified. The impugned interest free advance also have been found to have no nexus with the business of the appellant, as elaborately discussed in paras 3.7.3 and 3.7.10, and therefore not reiterated here. Needless to say, it is the appellant's appeal but when a show cause is given proposing to enhance the income by the interest claimed during the year of Rs.74.71 crores, it was incumbent upon it to produce all evidences and facts necessary to show that the said interest claim was allowable. However, that has not been done, even though sufficient time and opportunities were given. It has not been demonstrated that proper TDS compliances on the same has been done as the interest payable stands at a huge figure of Rs.31,22,97,124/- at the end of the year.

4.2.4 Hence, keeping all the facts & circumstance in mind, it is held that the interest expenditure of Rs.74,71,15,995/- is not relatable for business purposes and hence the same is not allowable u/s 36(l)(iii). The income of the appellant stands enhanced by a sum of Rs. 74,71,15,995/- for the year.”

5.1 Before us, the learned Counsel of the assessee submitted that advances were utilized for construction and acquisition of the land by those companies. The learned Counsel provided details of interest cost of Rs. 74.74 crore as under: Name of company Address PAN Amount Sr. Rate of No. Interest 1. AAAC18570Q 71,506,849 12% Indiabulls Financial M 62, & 63, Services Ltd. (merged 1st Floor, with Indiabulls Connaught Housing Finance Place, New Limited). Delhi -do- AABCE9688G 328,612,340 6% Elena Power and 2. Infrastructure Ltd

19 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

5.2 The learned Counsel also provided details of loans and advances given interest-free as under: Name of the Party As on As on 31.3.2011 31.3.2012

30,50,00,000 - Sylvanus Builders & Developers Ltd Noble Realtors Ltd 12,45,92,100 12,46,43,100 Nilgiri Infrastructure Developers ltd 173,23,81,100 123,22,94,100 Albina Real Estate Ltd 69,06,65,000 39,20,05,000 Devona Infrastructure Ltd 91,10,91,000 91,54,53,000 Serida Properties ltd 21,93,50,000 21,94,00,000

5.3 The Learned Counsel of the assessee contended that assessee was having sufficient interest-free funds to make such advances and the borrowed funds had been utilised for the purpose of the business only. 5.4 The Learned Counsel objected for enhancing the income by bringing to tax in a new source of income by making disallowance of ₹ 74.71 crores. He submitted that enhancement by the learned CIT(A) in the impugned order is beyond the scope of the powers vested under section 251(2) of the Act and thus beyond the jurisdiction of Ld. CIT(A). The learned Counsel contended that Ld. CIT(A) has power to enhance an income or tackle a source only in respect of the issues, which arise from an order of the assessment

20 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

and cannot touch upon an issue which does not arise from the order of the assessment or outside the scope of the order of the assessment. The Learned Counsel relied on the decision of the Hon’ble Bombay High Court in the case of Shapoorji Pallonji Mistry Vs CIT reported in 34 ITR 342 and decision of Hon’ble Delhi High Court in the case of Gurinder Mohan Singh Nindrajog Vs CIT reported in 384 ITR 170 . 5.5 The Learned Department Representative, on the other hand, supported the action of the Ld. CIT(A) in enhancing the income. 5.6 We find that the issue-in-dispute regarding enhancement is, that according to the assessee, it is new source of income which is not being dealt by the Assessing Officer, whereas according to the Revenue, it is not new source of income and part of interest disallowance made by the Assessing Officer under section 36(1)(iii) of the Act. 5.7 We find that Hon’ble Bombay High Court in the case of Shapporji Pallonji Mistry (supra) held as under: “It is always wise to consider the practical effects of ones judgment and especially in matters of tax and revenue. It is not as if a court should come to a different conclusion was inescapable in law even though its decision may lead to serious difficulties in the way lead to loss of revenue or evasion of tax, it should hesitate before it comes to a particular conclusion. Now, in this case, our decision will not in any way put difficulties in the way of the taxing department. In this very case two remedies were open to the Department neither of which was resorted to. It was open to the Income-tax Officer to have proceeded against the assessee under the first part of section 34; or alternatively, the Commissioner could have exercised his powers of revision under section 33B. Section 34 expressly deals with a case where an assessee fails to disclose fully and truly all material facts necessary for his assessment; and clearly this is a case where the assessee failed to disclose the sum of Rs. 40,000. Now, if we were to hold that the Appellate Assistant Commissioner has the power - which Mr. Joshi contends he has - he in effect would be bringing to tax an income which the assessee had failed to disclose and which had never been

21 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

subjected to the process of assessment. That surely is not the power which section 31 gives to the Appellate Assistant Commissioner when it refers to the power of enhancing an assessment.”

5.7.1 The findings of the Hon’ble Delhi High Court in the case of Gurinder Mohan Singh Nindrajog (supra) is reproduced as under: “19. We have considered the submissions of both the parties. There is no doubt about the fact that while framing the assessment even under section 143(3) of the Act, the Assessing Officer may omit to make certain additions of income or omit to disallow certain claims which are not admissible under the provisions of the Act thereby leading to escapement of income. The Income-tax Act provides for remedial measures which can be taken under these circumstances. While framing an assessment under section 143(3) of the Act, any of the following situations may occur:

(a) the Assessing Officer may accept the return of income without making any addition or disallowance ; or

(b) the assessment is framed and the Assessing Officer makes certain addition or disallowance and in making such additions or disallowances, he deals with such item or items of income in the body of order of assessment but he under assessed such sums ; or

(c) he makes no addition in respect of some of the items, though in the course of hearing before him holds a discussion of such items of income ;

(d) yet, there can be another situation where the Assessing Officer inadvertently omits to tax an amount which ought to have been taxed and in respect of which he does not make any enquiry ;

(e) further another situation may arise, where an item or items of income or expenditure, incurred and claimed is not at all considered and an assessment is framed, as a result thereof, a prejudice is caused to the Revenue, or

(f) where an item of income which ought to have been taxed remained untaxed, and there is an escapement of income, as a result of the assessee's failure to disclose fully and truly all material facts necessary for computation of income.

22 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

5.8 In the light of the above decisions, it is evident that item of income, which has been enhanced, must emanate from the same item of income which has been disallowed/discussed by the Assessing Officer in the assessment order. But, in the instant case, we find that the Assessing Officer in the assessment order, disallowed the part of the interest claimed, which was capitalized in earlier by the assessee. But the item of the disallowance of the interest, which has been enhanced by the Ld. CIT(A) is altogether in respect of different loans advanced to different parties and not

23 ITA No.962/Del/2017 (M/s. Lucina Land Development Ltd.)

in respect of the parties for which disallowance was made by the Assessing Officer. In our opinion, this being altogether a new source of expenditure (income), which has been considered by the Ld. CIT(A) for enhancement, therefore, this action of Ld. CIT(A), is beyond his jurisdiction. Accordingly, we quash the enhancement of income of ₹ 74.74 crore by the Ld. CIT(A) being without jurisdiction. Since, we are quashing the enhancement, we are not adjudicating on merit of the addition, as same is rendered only academic. 6. In the result, grounds no. 1 to 4 of the appeal are allowed. The ground No. 5, being consequential, is dismissed as infructuous. 7. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 26th November, 2021

Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 26th November, 2021. RK/-(DTDC) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi