DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD vs. PRAGATI GREEN MEADOWS & RESORTS LIMITED, HYDERABAD

Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A).

Before the Ld. CIT(A), the assessee submitted that, it paid amount to M/s. Pragati Kamadhenu Finance Pvt. Ltd for purchase of lands and the above company purchased lands and entered into development agreement with the assessee which resulted in substantial revenue to the assessee and thus, the loans given to the above company are in the course of normal business transactions and thus, the provisions of Section 36(1)(iii) cannot be invoked. The Ld. CIT(A), after considering the submissions of the assessee and also taking note of the arguments, observed that, from the submissions of the assessee, it is evident that, the assessee company has advanced loans to sister concerns which in turn earns income to the assessee company. Hence, the amount has been advanced for the purpose of commercial expediency and thus, interest on the funds given to sister concern is allowable under Section 36(1)(iii) of the Income-tax Act, 1961.

Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before the Tribunal.

The learned counsel for the Revenue, Dr. Sachin Kumar, Senior A.R., submitted that, the Ld. CIT(A) erred in deleting the additions made towards disallowance of interest of Rs. 87,60,291/- under Section 36(1)(iii) of the Act, by passing a cryptic order without assigning any reasons as to how the loans given by the assessee company to M/s. Pragati Kamadhenu Finance Pvt. Ltd fall under the business advances. The learned counsel for the Revenue referring to the order of Ld. CIT(A) submitted that, the Ld. CIT(A) has deleted the addition in one-line finding and simply accepted the arguments of the assessee even though the assessee has not filed any evidence to prove commercial expediency between two companies. Although the assessee claims that, the advance was given to the above assessee company for purchase of land and the above land was given for development which resulted into revenue to the assessee company, but failed to furnish any evidence. He submitted that, the Ld. CIT(A) without appreciating the relevant facts, simply deleted the additions made by the A.O.

The learned counsel for the Revenue further referring to the decision of Hon’ble High Court of Karnataka in the case of DCIT Vs. Yenepoya Resins & Chemicals (2020) 116 taxmann.com 457 and also the decision of Hon’ble Supreme Court in the case of SA Builders Ltd. Vs. CIT (2007) 158 Taxman 74 (SC) submitted that, in order to allow interest under Section 36(1)(iii), there should be nexus between advances and commercial expediency. If advance is given without any business purpose, then the same partakes the nature of loan and diversion of funds on which interest paid on loans borrowed from financial institutions cannot be allowed. The A.O. after considering the relevant facts has rightly disallowed the interest. However, the Ld. CIT(A) without discussing the issue deleted the additions made by the A.O. Therefore, he submitted that, the order of the Ld. CIT(A) should be set aside and the additions made by the A.O. should be upheld.

The learned counsel for the assessee Shri P. Murali Mohan Rao, on the other hand, supporting the order of Ld. CIT(A), submitted that, there is no dispute with regard to the fact that, the assessee company had given advances to M/s. Pragati Kamadhenu Finance Pvt. Ltd for purchase of lands and the above company has purchased the lands and entered into agreement with the assessee company for development of flats which resulted into revenue to the assessee company. Since there is a business nexus between advances given to sister concern and the loan borrowed from the bank, the question of disallowance of interest under Section 36(1)(iii) does not arise. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the addition made by the A.O.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, the assessee company had given advances to M/s. Pragati Kamadhenu Finance Pvt. Ltd for purchase of land. In fact, the A.O. in his assessment order, categorically admitted that, the advances have been given for purchase of land. The A.O. disallowed interest on loans given to the above company under Section 36(1)(iii) of the Act, on the ground that, the interest-bearing funds have been diverted to other companies for non-business purposes. The assessee has furnished relevant evidence before the Ld. CIT(A) and explained that, the assessee company is into the business of development of Resorts and Service Centre, had given advances to M/s. Pragati Kamadhenu Finance Pvt. Ltd for procurement of land, and in turn, the above company had entered into development agreement with the assessee company, which resulted into revenue to the assessee company. Further, the assessee company, after the sister concern purchased land, got them back for development of land into flats and subsequently sell these flats to the customers. Thus, from the above, it is evident that, the amount has been advanced to sister concerns in the ordinary course of the business, which resulted in revenue to the assessee company. Since there is a commercial expediency or business exigency between advances to M/s. Pragati Kamadhenu Finance Pvt. Ltd and funds borrowed from the bank, in our considered view, interest paid on funds borrowed from bank cannot be disallowed under Section 36(1)(iii) of the Act. Although the Ld. DR referred to the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd Vs. C.I.T. (supra) and more particularly Para 35, in our considered view, the Hon’ble Supreme Court in the above case very categorically held that, it is not their opinion that, in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for a commercial expediency in many other circumstances (which need not be enumerated here) However, 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. The learned counsel for the Revenue also relied upon the decision of Hon’ble High Court of Karnataka in the case of Yenapoya Resins and Chemicals Vs. DCIT (supra). We find that, once again, in the above case, the facts are that, the company has borrowed interest bearing funds and advanced to sister concern, and thus, it was held that interest paid on loan borrowed from bank cannot be allowed under Section 36(1)(iii) of the Act.

In the present case, facts brought on record clearly show that there is a commercial expediency or business exigency between the assessee company and sister concern, which is evident from the understanding between both the companies where the sister concern purchased land and gave back to the assessee company for development, which resulted in revenue to the assessee company. Since the transaction between the assessee company and the sister concern are in the ordinary course of business, in our considered view, the same cannot be considered as diversion of interest-bearing funds for non-business purpose. The A.O., without appreciating the relevant facts, simply disallowed the addition under Section 36(1)(iii) of the Income-tax Act. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the addition made by the A.O. Thus, we are inclined to uphold the findings of the Ld. CIT(A) and dismiss the appeal filed by the Revenue.

In the result, the appeal filed by the Revenue is dismissed.

The assessee has filed cross-objection and raised various legal grounds, including validity of re-opening of the assessment under Section 147 of the Income-tax Act, 1961. The cross-objection filed by the assessee is delayed by 2915 days, for which the assessee could not explain the reasons for the delay in filing the appeal. Therefore, in our considered view, the cross-objection filed by the assessee needs to be dismissed in ‘limine’ for not explaining the delay in filing the cross- objection. Thus, we dismiss the cross-objection filed by the assessee.

In the result, the Cross-Objection filed by the assessee is dismissed.

To sum up, both the appeal of Revenue and Cross Objection of assessee are dismissed.