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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the Revenue challenging the impugned order dated 07/06/2017 passed under section 250 of the Income Tax Act, 1961 („the Act‟) by the learned Commissioner of Income Tax (Appeals)–52, Mumbai [‘learned CIT(A)’], for the assessment year 2011–12.
In this appeal, the Revenue has raised the following grounds:
“1. On the facts & in the circumstances of the case & in law, the Ld CIT(A) erred in deleting the addition of Rs.1,38,19,802/- made by AO on account of disallowance of interest expenditure, without appreciating the that the assessee
Kukreja Development Corporation ITA No.5766/Mum./2017 failed to furnish the requisite details called for by the AO to prove that the loans availed were used for the business related to windmill." 2. On the facts & in the circumstances of the case & in law, the Ld CIT(A) has erred in deleting the addition of Rs.30,33,734/- made by AO u/s 68 of the IT Act, 1961, without appreciating the that the assessee could not furnish any material facts or information regarding the said unsecured loan during the assessment proceedings" 3. On the facts & in the circumstances of the case & in law, the Ld CIT(A) has erred in accepting additional evidences/submission without giving opportunity to the AO in contravention of the rule 46A of the IT Rules." 4. The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal, if need be. 5. The appellant, therefore, prays that on the grounds stated above, the order of the CIT(A)-52, Mumbai, may be set aside and that of the Assessing Officer restored.”
The issues arising in ground No. 1, raised in Revenue’s appeal, is pertaining to the deletion of disallowance of interest expenditure.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of construction and real estate. For the year under consideration, the assessee filed its return of income on 30/09/2011, declaring a total income of Rs. 5,62,90,623. The case was selected for scrutiny and assessment order was passed under section 143(3) of the Act on 28/01/2014, assessing the total income of the assessee at Rs. 5,65,54,240, after making disallowance on account of the difference in opening stock of Rs. 2,63,54,238. Subsequently, notice under section 263 of the Act was issued to the assessee, and assessment order passed under section 143(3) of the Act was proposed to be modified/set aside. During the revisionary proceedings, it was observed that the assessee has claimed the interest of Rs. 1.38 crore against secured loans for its windmill projects. The
Kukreja Development Corporation ITA No.5766/Mum./2017 learned CIT observed that the applicability of provisions of section 36(1)(iii) along with explanation 8 to section 43(1) of the Act does not appear to have been looked into by the Assessing Officer (‘AO’). In reply, the assessee submitted that interest was paid after the commencement of the project and therefore the same was correctly claimed and allowed. After considering the submissions of the assessee, learned CIT, vide revision order dated 17/12/2014, passed under section 263 of the Act, set aside the assessment order, inter-alia, on the issue of interest expenditure claimed by the assessee. The AO was directed to examine the applicability of section 36(1)(iii) along with explanation 8 to section 43(1) and decide the issue as per the provisions of the Act.
Pursuant to the aforesaid order, the assessee was asked to give justification for the claim of interest as a deduction. In reply assessee furnished details of starting of operation, copy of the commencement certificate of windmill, the date on which the asset was put to use as per the commencement certificate. The AO vide order dated 26/02/2016, passed under section 143(3) r/w section 263 of the Act disallowed interest expenditure of Rs. 1.38 crore.
In appeal, learned CIT(A) vide impugned order allowed the appeal filed by the assessee on this issue, observing as under:
“9. I have considered the facts of the case, submissions and contentions of the assessee as also the order of the AQ. It is gathered that the assessee has debited interest expenses of Rs. 1,38,19,802/- in the P&L A/c. during the year. I however appears that this interest has been paid to IDBI bank on account of
Kukreja Development Corporation ITA No.5766/Mum./2017
loan taken for the purposes of Windmill installation. The assessee has submitted voluminous details in this regard which are part of the paper book. As per the details available on record, the assessee installed 3 different mills at different places in the earlier years viz. Sangli Windmill was installed during A.Y. 2007-08 on 30/09/2006, Sinner Windmill has been installed in the A.Y. 2010-11 as on 26/08/2009. Likewise, Jodhpur Windmill has been installed in AY. 2010-11 on 25/09/2009. It is further gathered that for installing these windmills, the assessee raised 3 different term loans from IDBI As per the loans sanction letter of IDBI, the loan was given for the purposes of installation of windmill. It is further noticed that IDBI has directly paid loan to the Company wherefrom the assessee has purchased these windmills viz. Suzlon Infrastructure Services Ltd, Suxlon Energy Ltd. and Suzlone Towers and Infrastructure Ltd. It is further gathered that the assessee debited interest expenditure of Rs. 69,90,148/- in respect of the above loan in the A.Y. 2010- 11, it was allowed by the then AO while completing the assessee in the assessee's case for A.Y. 2010-11 vide order dated 13/03/2013. The fact that windmill had been installed is also proven from the fact that during the year under consideration, the assessee has shown revenue/income from sale of windpower to the tune of Rs. 3,13,39,657/- during the year and a revenue of Rs. 1,88,11,508/- in the immediately preceding year. Therefore, the claim of the AO in this regard does not appear to be justified. As regards the contention of the AO that assessee had given certain advances for purchase of plot of land to the employees, it is relevant to mention over here that advances for plot of land was given much before the loan taken for windmill in the AY 2008.09 and there is no evidence that loan taken for windmill purposes was diverted for purchase of plot of land. Further, the advance given for purchase of plot of land is meant for business of the assessee itself and therefore it cannot be stated that such loan was given for purposes other than business. As regards, a similar amount of advance given to employees also can be attributed to the purpose of business. 10. In view of the above facts, I hold that the claim of the expenditure towards interest of Rs. 1,38,19,802/- is entirely for the purposes of the business of the assessee and the same is therefore allowable in accordance with the provisions of sec. 36(1)(iii). In the circumstances, the disallowance made by the AO does not appear to be sustainable in law and same is therefore directed to be deleted. Thus, this ground of the assessee is allowed.”
Being aggrieved, the Revenue is in appeal before us.
During the hearing, the learned Departmental Representative (‘learned DR’) submitted that the learned CIT(A) relied upon fresh evidence filed by the assessee without calling for any remand report. The learned DR also vehemently relied upon the order passed by the AO.
Kukreja Development Corporation ITA No.5766/Mum./2017
On the other hand, the learned Authorised Representative (‘learned AR’) submitted that vide revision order passed under section 263 of the Act learned CIT issued specific directions and only directed the AO to examine the applicability of section 36(1)(iii) along with explanation 8 to section 43(1) of the Act as the details furnished during the revisionary proceedings were not there before the AO and neither was the same examined while accepting the assessee’s claim. The AR submitted that vide assessment order passed under section 143 (3) r/w section 263 the AO has gone on aspects that are beyond the directions of learned CIT under section 263 of the Act.
We have considered the rival submissions and perused the material available on record. As noted above, learned CIT noticed that the assessee has claimed the interest of Rs. 1.38 crore against secured loans for its mineral project. It was further observed that the said claim was allowed by the AO without examining the applicability of section 36(1)(iii) along with explanation 8 to section 43(1) of the Act. As per the learned CIT, the interest paid for any period beginning from the date on which the capital was borrowed for such acquisition till the date on which such asset was put to use, shall not be allowed as a deduction. During the course of revisionary proceedings, the assessee submitted that interest was paid after the commencement of the project and therefore the same was correctly claimed and allowed. Since the details given by the assessee were not examined by the AO, therefore, the assessment order was set aside on this issue and the AO was directed to examine the applicability of section 36(1)(iii) along with explanation 8 to
Kukreja Development Corporation ITA No.5766/Mum./2017 section 43(1). The relevant observations of learned CIT vide order passed under section 263 of the Act are as under:
“2. On perusal of records for the year under consideration, It Is seen that the assessee has shown receipts of Rs.44.33 on account of sale of flats and Rs.3.13 crores on account of power generation activities. On going through the records, it is noticed that the assessee had claimed interest of Rs.1.38 crores against secured loans for its Windmill projects. The provisions of Section 36(1)(1) alongwith explanation 8 to Section 43(1) does not appear to have been looked into. The Interest on borrowings used for capital expenditure relating to a totally new business apart from existing business is to be capitalized as pre- commencement expenditure. Interest paid for any period beginning from the date on which the capital was borrowed for such acquisition till the date on which such asset was first put to use, shall not be allowed as deduction. The interest element of the earlier year should also be verified which shall have a consequent Impact during the current year. 3. ………… 4. ………… 5. ………… 6. It was submitted that interest was paid after commencement of the project. Hence, the same was correctly claimed and allowed. It was further submitted that it did not have any investment in which exempt income can accrue. Hence, there is no question of applicability of Section 14A of the IT Act. It also filed details of loans etc and requested to drop the proceedings u/s.263 of the IT Act. The assessee also filed details of loans. 7. I have examined the contention of the assessee. The details given were not there before the AO neither did he examine the same while accepting the assessee's claim. The assessment order is therefore set aside on the specific issue discussed above. The AO will examine the applicability of Section 36(1)(iii) alongwith explanation 8 to Section 43(1) and decide the Issue as per the provisions of IT Act. AO will also examine the applicability of Section 14A vis-à- vis exempt income and decide the matter as per the provisions of the IT Act. The Assessing Officer will examine the unsecured loans taken by the assessee. Needless to say that Assessing Officer will give adequate opportunity to the assessee and will decide the matter with an open mind.”
During the course of assessment proceedings pursuant to the order passed under section 263, the assessee furnished details of starting of operation, copy of the commencement certificate of windmill, the date on which the asset was put to use as per the commencement certificate. However, it is evident from the record, the AO also started examination on Page | 6
Kukreja Development Corporation ITA No.5766/Mum./2017 aspects viz. evidence regarding the flow of funds from the loan account to purchase the windmills, installation certificate of windmills, total no. of windmills to be installed, no. of windmills genuinely operating, understanding / MOU / agreement with State Electricity Board about the quantum of electricity to be supplied from the said windmills, total capacity of electricity that could be generated, etc., which were not even directed by the learned CIT vide its order passed under section 263 of the Act. The relevant findings of the AO in this regard are as under:
“4.3 From the details on record, it could be seen that assessee availed loan facility, the relevant loan papers are on record and claimed the interest expenditure. However mere claim of interest expenditure is not sufficient within itself. Assessee has to prove with ample evidence the flow of funds from the said loan account to purchase the said windmills, Assessee has to justify the claim relied on loan sanctioning letter, however it needs to be stated that in the said loan sanctioning documents the land, building and WTG were only security. Further it needs to be borne that the installation certificate of the said windmills was not placed on record. In absence of installation certificate, the date of commencement of windmill project cannot be ascertained with certainty. What needs to be seen is the exact date when the windmills were put into use for generation of electricity. The necessity for such date becomes essential as assessee not only claimed interest on funds, as claimed to have parked in the said windmills but also depreciation thereon. Further one even fails to understand that if the windmills were put into operation then why the generation of electricity from the said windmills is only to the tune of Rs 3.13 crores when in fact the interest expenditure is to the tune of Rs 1.38 crores. No where during the course of relevant proceedings, the assessee offered a picture about the total number of windmills to be installed for generation of electricity and out of it the windmills genuinely operating. In fact assessee didn't even furnished the diagram of the site showing the numbers of windmills to be installed. The understanding/MOU/agreement with Rajasthan State Electricity Board and Maharashtra State Electricity board about the quantum of electricity to be supplied from the said windmills were also not furnished, further the final memorandum of approval from the said Boards for supply of electricity was also not on record. What needs to be furnished is the number of windmills installed by assessee and the same duly certified and installation ratified by the said Boards. The certified engineer's certificate showing the number of windmills installed was also not available. In such scheme circumstances, it can be stated with certainty that assessee in the garb of non disclosing entire facts claiming interest expenditure and even depreciation for those windmills which are not even installed and ready for generation of electricity as of date. Borrowings pertaining to new line of business definitely calls for capitalization of the interest in the cost of the asset. Assessee nowhere furnished information about Page | 7
Kukreja Development Corporation ITA No.5766/Mum./2017 the total capacity of electricity that could be generated from said windmills purchased and also didn't furnished the capacity installed. A clear cut picture was not evident from the records submitted. Assessee has to justify the claim, time and again reiterated about the generation of electricity during the year under consideration but kept silence on the total capacity of said capital expenditure and the capacity installed and put to use duly certified and ratified by the engineer's of the Electricity Boards. 4.4 In this connection, reliance is placed on the judgement of Bombay High Court in the case of Phalton Sugar Works Limited Vs CIT 208 ITR 989 the operative part of the said judgement is reproduced as under: “Section 36(1)(ii) of the Income-tax Act, 1961, provides for deduction for payment of interest only if the assessee borrows capital for its own business. The business of the subsidiary company cannot be considered in law as the business of the assessee. The finding of the Tribunal based on commercial expediency appears to us to be incorrect. The fact remains that the moneys borrowed were utilised for business of the subsidiary company and not for the business of the assessee as such. In this view of the matter, we hold that the Tribunal was not justified in holding that the interest on loans borrowed for advancing to its subsidiary company was allowable under section 36(1)(ii) of the Income-tax Act, 1961. The plain language of section 36(1)(ii) of the Income-tax Act, 1961, militates against the submissions urged on behalf of the assessee." The Hon'ble Kerala High Court in the case of CJ.T. Vs. V.L. Baby & Co. 254 ITR 248 has held that the disallowance on account of proportionate interest was proper. In the above case the assessee had given advances to partners, their relatives and sister concerns. The assessee had made the above investments in sister concerns and was not charging any interest. The Hon'ble High Court held that the assessee with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the Bank on interest for business purpose. Such borrowings will not be for business purpose but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as assessee is not the beneficiary of the investments made by the partners, their relatives and sister concerns and so long as the advances are interest free, the Assessing Officer is perfectly justified in disallowing the interest in proportion to the advances made. The Hon'ble Supreme Court in the case of SA Builders 288 ITR 1 has also reiterated the aforesaid principles, unless the Assessee Company can prove that the amounts advanced to sister concerns/subsidiary are for the commercial expediency of these concerns. Moreover, the Bombay High Court in the case of Reliance Utilities & Power Ltd. has not accepted the contention of the Assessing Officer as no exercise for establishing the nexus of owned funds with investments was carried out during the course of assessment proceedings. As stated earlier, in spite of repeated opportunities, the Assessee Company has not submitted any evidence in support of their claim that the funds were advanced for business purposes or the commercial expediency in advancing the interest free loans. The above decisions are squarely applicable in the assessee's case considering the facts discussed in the earlier paragraphs. 4.5 Hence considering the above factual position the claim of interest expenditure of Rs.1.38 crores is disallowed and added to total income of the
Kukreja Development Corporation ITA No.5766/Mum./2017 assessee. Penalty proceedings under section 271(1)(c) is initiated for furnishing inaccurate particulars and concealing income thereof.”
It is pertinent to note that the proceedings before the AO were pursuant to the order passed by the learned CIT under section 263 of the Act, whereby certain specific directions were issued to the AO. The learned CIT was of the view that the interest paid for the period beginning from the date on which the capital was borrowed till the date on which the asset was first put to use is not allowable and therefore in such circumstances the date on which the asset, i.e. windmill, was first put to use becomes relevant. In order to substantiate its claim, the assessee furnished details of starting of operation, copy of the commencement certificate of windmill, the date on which the asset was put to use as per the commencement certificate before the AO. Thus, in view of the above, we are of the considered opinion that once the assessee has furnish the aforesaid documents to substantiate its claim that interest was paid after commencement of the project, therefore, further aspects, as stated above, gone into by the AO are contrary to the directions of the learned CIT vide order passed under section 263 of the Act. It is not a case wherein the learned CIT set aside the assessment order and directed the AO to conduct de novo assessment on this issue. Rather in this case assessment order was set aside on the specific issue discussed by the learned CIT as noted above. Thus, the AO was under obligation to comply with the limited directions issued by the learned CIT vide order passed under section 263 of the Act instead of going into aspects that are beyond the directions under the aforesaid order. Further, the fact as noted by the learned CIT(A) in the impugned order that during the
Kukreja Development Corporation ITA No.5766/Mum./2017 year under consideration, the assessee has shown Revenue/income from the sale of wind power to the tune of Rs.3,13,39,657, and Revenue of Rs. 1,88,11,508, in immediately preceding year also justifies the fact that windmills in respect of which loan was obtained by the assessee were already in operation since preceding years and the interest claimed during the year is post the commencement of the project. In view of the aforesaid findings, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground No. 1 raised by the Revenue is dismissed.
The issue arising in ground No. 2, raised in Revenue’s appeal, is pertaining to the deletion of addition made under section 68 of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the revisionary proceedings, the learned CIT noted that during the year fresh interest-free unsecured loan of Rs. 91.54 lakh was raised from Omprakash & Co (Prop) and unsecured loan of Rs. 4.78 crore have been squared up. The learned CIT also observed that loan creditors have not been examined during the course of assessment proceedings and fresh capital introduced by the partners has been verified merely on the basis of partners’ capital account. Accordingly, learned CIT vide order passed under section 263 of the Act directed the AO to examine the unsecured loans taken by the assessee. Vide order passed under section 143(3) r/w section 263 of the Act, the AO made an addition of Rs. 30,33,734, under section 68 of the Act in absence of any proof of the genuineness of the transaction and creditworthiness of the loan creditors.
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The learned CIT(A) vide impugned order allowed the appeal of the assessee on this issue by observing as under:
“17. I have considered the arguments of the assessee and the facts of the case. From the perusal of the return of income in case of Suman Kukreja, it is gathered that she has shown an income of Rs. 4,22,57,163/- for A.Y. 2011-12 Her main source of income is from house property: From the perusal of her bank account, it is gathered that she had a decent balance throughout the year. She has also given a confirmation in this regard. She had given loan of Rs. 30 lacs to the assessee. Apparently, there are no cash deposits in her account and her account was showing decent balance over a period of time. Similarly, Reshma Kukreja has shown an income of Rs. 21,27,041/- for A. Y. 2011-12. Her main sources of income are from house property, capital gains and other sources. She has a capital of Rs. 6,89,19,795/- as per her Balance sheet and had given loan of Rs. 33,734 to the assessee from her bank account with Standard Chartered Bank. Looking to the facts of the case all three ingredients like identity of creditor, their capacity to lend and genuineness of transaction is proved. 18. In view of the above, it may be concluded that the assessee has given sufficient details in respect of loan of Rs. 30,33,734/-. The loans have been given from close family members of the assessee viz. Suman Kukreja, mother of the partner and Reshma Kukreja, wife of one of the partners. Therefore, identity is not in question. Further, the loan creditors have independent source of income, are assessed to tax and have shown significant incomes in their hands for A.Y. 2010-11. Further, the loans have come through banking channels and copies of bank statements have been submitted to prove the genuineness of the transactions. Therefore, in my considered view, the assessee has discharged its onus in respect of the above loan. Not only this, these loans have been repaid in subsequent years. In view of these facts, the addition of Rs. 30,33,734/- made by the AO is directed to be deleted. Thus, this ground of the assessee is allowed.”
During the hearing, learned AR fairly agreed that on the genuineness of the transaction and creditworthiness of the loan creditors the assessee has not filed any detail. By referring to page 37 of the paper book, learned AR submitted that though in the submission before the AO it is mentioned that details of unsecured loans are enclosed, however, no such details form part of the submission. The learned AR prayed that one more opportunity be granted to the assessee to furnish the details regarding the loan. The learned DR, in all Page | 11
Kukreja Development Corporation ITA No.5766/Mum./2017 fairness, did not object to the prayer so made for complete adjudication of this issue.
Having heard the submissions of both sides and perused the material available on record, we deem it appropriate to remand this issue to the AO for de novo adjudication. The assessee is directed to furnish all the details in support of its claim in respect of this issue. Needless to mention that no order shall be passed without affording reasonable opportunity of being heard to the assessee. As a result, ground No. 2 raised in Revenue’s appeal is allowed for statistical purposes.
In the result, the appeal by the Revenue is partly allowed for statistical purposes. Order pronounced in the open Court on 17/11/2022
Sd/- Sd/- PRASHANT MAHARISHI SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 17/11/2022 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai