ACIT, NEW DELHI vs. M/S. UTECH DEVELOPERS LTD., NEW DELHI

ORDER PER SUDHANSHU SRIVASTAVA, JM In this appeal, Revenue is aggrieved by the order dated 23rd March, 2016 passed by the Ld. Commissioner of Income Tax (Appeals)-XXIX, New Delhi {CIT (A)}.

ACIT vs. M/s. Utech Developmers Ltd.

2.0 Briefly stated, relevant facts of the case are that the assessee is engaged in the business of Real Estate and Infrastructure Development. For the year under consideration, a return declaring Total Loss of Rs. 7.09 crores was filed by the assessee. The case was selected for scrutiny and subsequently the income of the assessee was determined at a loss of Rs.1.70 crores.

In this regard, in the order of assessment the Assessing Officer (AO) has made following additions / disallowances:

(i) Disallowance of Rs.2,73,209/- being 20% of total travelling expenses, and (ii) Disallowance of Rs.5,35,90,353/- out of interest expenses 2.1 Aggrieved, the assessee filed an appeal before Ld. CIT (A) who found substantial merit in the claims made by the assessee.

The appeal was allowed on both the above issues.

2.2 Now, the revenue is in appeal before us and has raised the following grounds of appeal:

“1. That on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and on facts in deleting the addition

ACIT vs. M/s. Utech Developmers Ltd. of Rs.2,73,209/- made on account of disallowance of 20% of total travelling expenses without appreciating the fact that the onus was on the assessee to establish the genuineness of expenses u/s 37(1) which the assessee failed to discharge. 2 That on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.2,73,209/- made on account of disallowance of 20% of total travelling expenses without appreciating the fact that similar additions were confirmed by ld. CIT (A) in earlier assessment years.

are without prejudice to each other.

6. That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.

ACIT vs. M/s. Utech Developmers Ltd.

3.0 It is seen that in Grounds 1 & 2, the department is aggrieved by the action of the Ld. CIT (A) in deleting disallowance of Rs.2,73,209/- made out of total Travelling Expenses. Relevant facts in this regard are that during the year under consideration the assessee had claimed a deduction u/s 37(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) on account of Travelling Expenses of Rs13.66 lakhs. During assessment it was claimed that these expenses have been incurred on tour and traveling of officers and employees of the company and the purpose of travel was meeting prospective buyers, sellers, visits to difference sites and prospective markets etc. The AO, however, was unimpressed and in the order of assessment he made a disallowance of 20% of the total expense incurred by assessee on travel by observing as under:-

“3.2 The assessee was asked to submit the details regarding the travelling and conveyance expenses together with justification for the business purpose. The assessee has filed the details in this regard. The purpose of visit has not been explained. Neither it has been properly established that the persons concerned who traveled are employees of the assessee company nor any evidence regarding nature of work of these persons has been brought forth to justify the business needs. As ACIT vs. M/s. Utech Developmers Ltd. such these expenses are also not properly justified in the hands of the assessee company. In the earlier assessment year also disallowance on account of travelling and conveyance expenses were made which were confirmed by the ld. CIT(A)-III, New Delhi. 3.3 Keeping in view the foregoing discussion, and considering the genuine business needs of the assessee, it is held that travelling expenses claimed during the year amounting to Rs.13,66,045/- lacs are quite excessive. After taking into consideration all the facts of the case and the contentions put forth on behalf of the assessee, it is considered reasonable to disallow the claim of the assessee under this head to the extent of Rs.2.73 lacs (being 20% of total travelling expenses). Accordingly, an addition of Rs.2,73,209 is made on this account to the total income declared by the assessee company.” 3.1 Before the Ld. CIT (A), it was submitted by the assessee that during the course of assessment vide letter dated 14th November, 2011 the assessee had submitted all the requisite details before the AO. It was submitted that in the details filed, the assessee had clearly mentioned the names of persons who had travelled, cost of tickets, boarding and lodging expenses, conveyance and other expenses, period of travel, places of visit and purpose. It was also clarified by the assessee that the expenses

ACIT vs. M/s. Utech Developmers Ltd. were incurred solely on travelling of the employees of the assessee concern. The Ld. CIT (A) has recorded the purpose of visit of the employees at pages 6 & 7 of the impugned order. Finding substantial merit in the claim made, the Ld. CIT (A) deleted the disallowance by observing as under:-

“I have gone through the above submissions of the appellant and have considered the facts and evidences on record. I have also perused the case laws relied upon by the appellant. It has been observed that the addition has been made on estimate basis @ 20% of the total travelling expenditure which includes domestic as well as foreign travel and conveyance to the employees. The AO has not provided any cogent reasoning or working, based on which such disallowances has been made. During assessment stage, the appellant had provided the submissions/details of such travelling expenditure, justifying the allowability of the same. The addition has been made on the reasoning that appellant failed to explain the purpose of travel, name of the persons who have undertaken the travel and nature of work to justify the business need. Further, disallowance is also made as the same was confirmed by the CIT (A) in the earlier assessment years. In this regard the detailed submission made during assessment proceedings as well as appellate proceedings were perused, as ACIT vs. M/s. Utech Developmers Ltd. reproduced earlier. The appellant company has provided the name of the persons who have travelled with its justifications and other details and substantiated its claim regarding such travelling expenditure. Out of total travelling expenses of Rs.13,66,045/-, Rs.4,92,629/- has been spent as daily conveyance expenses of the employees. Rest of the expenditure of Rs.8,73,416/- has been incurred in domestic travelling and foreign travelling by the executives of the appellant company. Appellant has demonstrated to justify that such expenditure has been incurred in the regular course of business of appellant and allowable under the provisions of section 37(1) of the Act. It is also observed from the order of CIT (A), as quoted, that during earlier year the appellant has made payments towards the chartered plane and claimed expenditure. Various details were also not available during that period. However, for the year under consideration the details have been provided with the name and justification of such travelling and no such expenditure shown to have incurred for payments of chartered plane. Further, the appellant is a company and therefore any question related to personal expenditure or non business expenditure does not arise. It is also noted that there is no bar on the quantum of expenditure under any head, as long as it is incurred for the purpose of business, in the wisdom of the appellant. Therefore, it is not opened for the AO to consider any ACIT vs. M/s. Utech Developmers Ltd. such expenditure as excessive, especially looking to the facts and circumstances of this case and the law as relied upon in various judgments. In view of the discussions in the foregoing paragraphs and looking to the case laws relied upon by the appellant, which is found applicable in the case of appellant, the addition on account of travelling expenditure on estimate basis is directed to be deleted. The appellant gets a relief of Rs.2,73,209/-. The appeal is allowed on this ground.” 3.2 Before us, the Ld. DR has relied upon the order of assessment and has submitted that the Ld. CIT (A) was not justified in deleting the disallowance.

3.3 On the other hand, the Ld. AR has vehemently supported the impugned order.

4.0 We have carefully considered the facts of the case and the material on record. The Ld. DR has not brought on record any justifiable reason requiring any interference with the conclusions recorded by the Ld CIT (A) in the impugned order on this issue. As noted above, the assessee has filed requisite details of travel expenses not only before the AO but also before Ld. CIT (A).

We find no merit in the case of the AO for making an ad hoc

ACIT vs. M/s. Utech Developmers Ltd. disallowance @ 20%. The AO has not even highlighted or pointed out any deficiency in the details submitted by the assessee.

Considering this, we find no reason to interfere in the conclusions recorded by the Ld. CIT (A). Grounds 1 & 2 are hence dismissed.

5.0 In Ground No.3, the department is aggrieved by the action of Ld. CIT (A) in deleting the disallowance of Rs.5,35,90,353/- made by the AO out of interest expenses. Relevant facts in this regard are that during course of assessment it was observed by the AO that one of the major items of expense incurred and claimed as deduction by the assessee was of Rs.5,35,90,353/- incurred as expense on loan taken from its 100% Holding Company M/s Uflex Ltd. It was observed by the AO that during the year under consideration assessee had own funds amounting to Rs.10,85,97,807/- and it had taken loans of Rs.116 crore on which it had to incur interest expenses of more than Rs. 5 crores. The AO further observed that from a perusal of the Profit & Loss A/c of the assessee for the year under consideration, business operations were conceptually absent. Premised the above facts, the AO made a ACIT vs. M/s. Utech Developmers Ltd. disallowance of Rs.5,35,90,353/- out of interest expense by concluding as under :-

“From the assessee’s submissions two important contentions are brought to the fore. i. Whether, by simply holding its stock, the assessee has carried out any activity which would mandate incurring of huge interest expenses on borrowed funds. The answer is in the negative since simply holding back its stock would require minimal, if any, activity on the part of the assessee, whose expenses anyway have been debited to the P&L account in the form of “Administrative expenses” and have been allowed. ii. The second contention to be addressed is whether by investing in the shares of AKC Developers and Q-Cell, the assessee has carried on business activities. The assessee has tried to prove the same by taking a position that it has invested in such companies which allegedly perform business activities which are similar to the objects of the assessee company. The contention of the assessee is far-fetched to say the least. In any Memorandum of Association one can find a clause which allows a company to invest in shares of other companies, whether they perform similar business activities or not. That does not mean that investing in other companies becomes the business of the company. The AR has submitted in his reply that “entering into a joint venture and promoting an infrastructure company and ACIT vs. M/s. Utech Developmers Ltd. holding substantial equity stock therein is itself a business which has been done by the assessee company in pursuance of its object duly mentioned in the object clause of the memorandum.” It would be pertinent to mention here that had this been the case, the assessee would have been required to classify the shares of investee companies as its stock or as trade investments and not simply as investment as shown in the balance sheet. It needs to be asserted here that that business purpose in relation to an expenditure needs to be direct and proximate and not indirect and distal. In the case at hand the purpose for incurring the loan is too distanced from the actual business of the assessee to be allowed as genuine business expenditure. On the issue of giving out loans from the borrowed funds, the assessee has not offered any explanation and it is safely presumed that the assessee has nothing to prove that these loans were given for any business purpose. From the foregoing discussion it is concluded that – i) Assessee has not carried out any business activities during the year ii) it has borrowed funds from outside on which it has incurred interest expenses of Rs.5,35,90,353/- iii) There is no nexus between the utilization of borrowed funds and the business activities of the assessee.”

ACIT vs. M/s. Utech Developmers Ltd.

5.1 Aggrieved, the assessee submitted before the Ld. CIT (A) that it was engaged in the business of real estate and infrastructure development. It was submitted that Assessment Year (AY) 2009-10 was the third year of the operation of the assessee company. In the first financial year i.e., FY 2006-07, the assessee had carried out business operations for only 3.5 months and had recorded sales of Rs.14.25 crores and in the second year of existence i.e., FY 2007-08 it had recorded revenue from business operations of Rs.68.27 crores. It was also submitted that in the year under consideration, although, the assessee was not able to make any sale but it continued to pursue its business by way of holding stock of property, to keep on participating in various objects of real estate and infrastructure by way of forming SPV and joint ventures.

In this regard, it was submitted by the assessee before the Ld. First Appellate Authority as under:-

“Your Honour, during the year under consideration the appellant applied for certain bids. In some of them it was successful. It had also participated as a joint venture partner in infrastructure/IT project at Ghambia and in the Municipal Solid Waste Processing Projects in the state of U.P. and Haryana. It

ACIT vs. M/s. Utech Developmers Ltd. had also promoted 100% subsidiary company for retain chain business. It had also participated in SDZ project in Greater Noida. It also appointed agents for land aggregation in and around Kanpur as well as in and around Bhopal, NCR region etc. It had also participated in Bid for allotment of IT/OTSEZ project in Noida. A detailed chart of participation in project and other business activities undertaken by the appellant during the year under consideration are attached at page no.218 to 421.” 5.2 The Ld. CIT (A) found merit in the submissions made by the assessee and allowed the claim made for deduction u/s 36(1)(iii) of the Act by observing as under :-

“I have gone through the above submissions of the appellant and have considered the facts and evidences on record. I have also perused the case laws relied upon by the appellant. The appellant has taken loan from its 100% holding company M/s Uflex Ltd. @ 10% per annum on interest. During the year under consideration the appellant has disclosed interest and other income, whereas claimed various expenditures including interest on borrowed funds and other financial charges amounting to Rs.5,35,90,353/-. This amount includes the bank charges of Rs.5,08,161/- and interest paid of Rs.5,30,82,192/- on borrowed funds. Addition has been made by the AO on the basis that there is no business activity by the appellant during the year, the appellant has borrowed funds from outside and ACIT vs. M/s. Utech Developmers Ltd. incurred interest expenses, however there is no nexus between the utilization of borrowed funds and the business activities of the appellant. As submitted in detail, as reproduced earlier, it is contended by the appellant that though there is no revenue shown during the year from the business activity, however there has been business operations in the last two years and subsequent years. The appellant having dealings in development and sales in real estate business cannot be stated to be having no business activity during the year, simply because there is no revenue receipts shown in the profit and loss account. It is also contended that AO himself has considered the travelling expenditure and made certain disallowances which clearly indicates that the appellant has not stopped its business or no business during the year. The other business expenditures are allowed by the AO thereby recognizing the business activities for the year under consideration. Further, being in real estate there cannot be an abrupt discontinuation of business in one year. The appellant has demonstrated that it has made various efforts to enter into various business activities during the year under consideration. It has undertaken more than 9 projects and also carrying inventory of Rs.53.87 crores of traded goods in the form of apartments, which is ready for sale and has been sold subsequently. The appellant had also participated in joint

ACIT vs. M/s. Utech Developmers Ltd. venture partner in two projects outside India and also indulged into promoting subsidiary for retail chain business. The various activities of the appellant company carried out during the year under consideration are covered within the inclusive definition of the business, as defined in the Act. Further, the activities carried on by the company is duly covered within its mandate as mentioned in the Memorandum and Articles of Association of the appellant. It is a reality in modern times that the business is being carried out through joint ventures and small purpose vehicles (SPC) and real estate and infra projects are being taken up in most of bids issued by the government and semi government bodies through this model of business, where investment and fund raising is much convenient and pooled. Therefore, looking to the facts and circumstances of this case and following the case laws relied by the appellant and as discussed in the foregoing paragraphs, the business activity during the period under consideration has been established by the appellant through its mandate, conduct and actions as such. No revenue sales cannot be a basis to arrive at a conclusion that there is no business activity during the year, especially when there has been business activities in the past two years and in subsequent years, as well as understanding the fact that appellant is in the business of real estate which has constant development of various business projects.

ACIT vs. M/s. Utech Developmers Ltd.

With regard to the AO’s findings that there is no nexus between the utilization of borrowed funds and the business activity of the appellant, it has been duly demonstrated by the appellant that the funds borrowed has been deployed/invested for various business projects of the appellant such as Rs.10 crores utilized for getting bank guarantee for bidding the allotment of lease hold rights from Rail Land Development Authority, Rs.25.50 crores for aggregation of land to develop residential/commercial complex-which is main business of the company, Rs.6.05 crore for payment of interest and other expenses, Rs.22 crores paid to AKC Developers Ltd. as equity contribution in JV of Municipal Solid Waste Project Rs.7.35 crores to Qcell Ltd. Gambia as its contribution for JV of IT enabled services etc. It is noted that one of the object and business of the appellant is to enter joint venture and forming SPV to carry out real estate and infrastructure business. In order to carry out its business, the appellant has to enter into various joint ventures or become part of consortium, bringing financial and technical resources together with co-participants in various projects in the real estates. This type of arrangement is very common, especially with the Government and semi Government projects, where the bid can be made through consortium also. Further, it is the prerogative of the appellant to conduct its business in the manner it finds appropriate or expedient. It is ACIT vs. M/s. Utech Developmers Ltd. not open for revenue authorities to challenged the same, as also held in various judicial pronouncements. The AO has relied upon the judgement in CIT vs. HR Sugar Factory P. Ltd. 187 ITR 363, while making disallowance. In this regard, the appellant has submitted, as reproduced earlier, that the facts of the case relied upon by the appellant is not applicable in the instant case due to the reason that the appellant has given advance to the various parties, not related to it and for the business projects being undertaken by the appellant. Therefore, this cannot be treated as interest free loans and advances given for non business purposes. Looking to the facts of this case I tend to agree with the submissions of the appellant in this regard as the facts are found distinguishable and hence the judgement relied upon by the AO is not applicable in the instant case. Looking to the facts of this case, where it is established that there is a business activity during the year by the appellant and the borrowed funds have been duly deployed/invested for the business purposes and the AO has recognized the other expenditures, and following various decision relied upon by the appellant, the said claim of interest amounting to Rs.5,35,90,353/- is allowed as business expenditure within the meaning of provisions of section 36(1)(iii) of the Act. The appellant gets relief accordingly.”

ACIT vs. M/s. Utech Developmers Ltd.

5.3 During the course of hearing before us, the Ld. DR has relied on the order of assessment and as submitted that the Ld. CIT (A) was not justified in deleting the disallowance.

5.4 On the other hand, the Ld. AR has vehemently supported the impugned order.

6.0 We have carefully considered the facts of the case and the material available on record. We find no merit in the observations of the AO that the assessee has not carried out its business of real estate and infrastructure development during the year under consideration. The Ld. DR has not been able to demolish the facts recorded by Ld. CIT (A) wherein it is noted that during the year under consideration, the assessee had made various efforts to enter into business activities. It had undertaken more than 9 projects and also carried inventory of 53.87 crores of traded goods in the form of apartments which was ready for sale and which were also sold subsequently in the future years. The assessee had also participated in joint venture projects outside India. These activities of the assessee were in consonance with its Memorandum of Association. During the year under consideration, the assessee had ACIT vs. M/s. Utech Developmers Ltd. made fresh borrowings of Rs 78.82 crore from its holding company.

The assessee had submitted details of utilization of this sum which is on record and noted by the Ld CIT (A) at pages 27 to 30 of the impugned order. Once these details are perused, the obvious conclusion is that there is a clear connection between the money borrowed and its utilization for purposes of business of real estate and infrastructural development carried on by the assessee. We, therefore, find no merit in the disallowance made by the AO and the impugned order is therefore upheld. Ground No.3 is, therefore, dismissed.

7.0 Grounds 4, 5 & 6 are general in nature and no specific grievance has been addressed by the Ld. DR in this regard.

These grounds are also dismissed.

ACIT vs. M/s. Utech Developmers Ltd.

8.0 In the final result, the appeal of the Department stands dismissed.

Order pronounced on 30th June, 2021.