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Facts
The assessee, a real estate developer, collected advances from customers for sale of flats, with a clause for interest payment in case of delayed delivery. The Assessing Officer disallowed finance charges (interest paid on these advances) on the grounds that the funds were diverted for non-business purposes, as the assessee had interest-free funds available. The CIT(A) upheld this disallowance.
Held
The Tribunal held that the interest paid on customer advances was for the purpose of business, as it was a commercial expediency arising from the real estate development business. The Tribunal also noted that the funds received from customers were utilized for the assessee's business, and it was not a case of diversion for non-business purposes.
Key Issues
Whether interest paid on customer advances in a real estate development business is a disallowable expense if the assessee has interest-free funds.
Sections Cited
36(1)(iii), 147
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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI LALIET KUMAR, HON’BLE & SHRI MANJUNATHA G, HON’BLE
O R D E R PER G. MANJUNATHA, A.M. : These appeals & 1219/Hyd/2024 filed by the assessee are directed against the order of learned Commissioner of Income Tax (Appeals)–National Faceless Appeal Centre [in short “NFAC”], Delhi, for the assessment years 2016- 17 and 2017-2018. Since common issues are involved in these appeals, these appeals were heard together and are being disposed of by this single consolidated order for the sake of convenience and brevity.
2 ITA.Nos.1218 & 1219/Hyd./2024
Facts of the case, in brief, are that the assessee is a private limited company engaged in the business of construction and sale of residential and commercial plots. The assessee has filed its return of income for the assessment year 2016-17 on 13.10.2016 admitting total income of Rs.77,51,330/-. The Assessing Officer determined the total income of the assessee at Rs.51,28,612/- as per sec.36(1)(iii) of the Act. While completing the assessment, the Assessing Officer worked out the interest paid for non-business activity @ 12% and accordingly, out of Rs.4,27,38,434/- the interest attributable to the diverted interest bearing funds is worked out at Rs.51,28,612/- vide order dated 30.03.2022 passed u/sec.147 of the Act.
On being aggrieved, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) after examining the submissions of the assessee confirmed the order of the Assessing Officer in absence of any supporting documents and evidences placed before him.
Aggrieved by the order of the learned CIT(A), the assessee carried the matter in appeal before the Tribunal and has raised the following grounds :
3 ITA.Nos.1218 & 1219/Hyd./2024 1) “The order of the learned CIT (A) is erroneous both on facts and in law; 2) The learned CIT (A) erred in confirming the addition made by the Assessing Officer of Rs.51,28,612/-. 3) The learned CIT (A) erred in observing that the amount was utilized for non business purpose and that interest at the rate of 12% on such amount worked out to Rs. 51,28,612/- is disallowable from the expenditure debited to the profit and loss account. 4) The learned CIT(A) ought to have followed the decision of the Hon'ble Income Tax Appellate Tribunal in the assesee own case and allowed the appeal. 5) Any other ground/grounds that may be urged at the time of hearing.”
During the course of hearing, Learned Counsel for the Assessee drew the attention of the Bench an order of Coordinate Bench of this Tribunal vide its common order in Hyd/2020 dated 21-03-2022, setting aside the issue to the file of AO for verification. The assessee filed an appeal before the Hon'ble High Court of Telangana against the common order passed by the Tribunal and contested that the Tribunal can decide only those issues which are subject to appeal before the Tribunal, and the issues already decided by the ld. CIT(A) and not challenged by the Department cannot be decided, nor can 4 ITA.Nos.1218 & 1219/Hyd./2024 the appeal be set aside in total. The Hon'ble High Court of Telangana vide its order dated 02.02.2023, set aside the common order of the Tribunal passed on 21.03.2022, and directed the Tribunal to hear the appeals before it on the limited grounds urged by the appellant, namely, disallowance of finance charges under Section 36(1)(iii) of the Act to the extent disallowed by the first appellate authority as well as the validity of the reassessment proceedings.
The solitary issue that came up for our consideration in the instant assessee's appeal is the disallowance of finance charges of Rs.51,28,612/- made by the AO under Section 36(1)(iii) of the Income Tax Act, 1961. During the course of the assessment proceedings, the AO noticed that as on 31.03.2016 the assessee company has interest free funds at Rs.4,11,56,889/- and the value of non-current investment remains at Rs.8,38,95,323/-. Therefore, the Assessing Officer noted that interest bearing funds have been diverted to non- business purpose to the tune of Rs.4,27,38,434/-. The Assessing Officer also further noted that the assessee paid interest on sales advances ranging from 10 to 14% and such interests were deducted from the P & L A/c. As per sec.36(1)(iii)
5 ITA.Nos.1218 & 1219/Hyd./2024 of the Act, the Assessing Officer determined the interest paid to non-business activity @ 12% i.e.,. Rs.51,28,612/- out of Rs.4,27,38,434/-.
During the course of hearing, Learned Counsel for the Assessee submitted that the assessee was engaged in development of lay-outs and sale of plots. As per the MOU, the potential customer has to pay 80% of the sale consideration and choose an advance PUT option for redeeming the advance given. Depending upon the period of advance PUT option, interest will be paid ranging from 10% to 14% as per MOU. The potential customer can get the office space or flat registered by paying the balance 20% of the consideration before the advance PUT option period ended. If the potential customer withdraws the advance amount earlier to advance PUT option, he will be given much lesser interest than the promised interest. The AO observed that the assessee has interest free funds of Rs.4,11,56,889/- and the value of non-current investment remains at Rs.8,38,95,323/-. Therefore, the Assessing Officer was of the view that interest bearing funds have been diverted for the non-business purpose to the tune of Rs.4,27,38,434/- and worked out the interest paid for the non-business activity @ 6 ITA.Nos.1218 & 1219/Hyd./2024 12% of Rs.51,28,612/- without considering the submissions of the assessee to the effect that since the customer has paid an advance amount of about 80% of the sale value, as per the agreement with the customers, the appellant had paid interest ranging from 10% to 14% for a period of 1 year to 4 years. Therefore, the assessee submitted that interest paid on customer advances was wholly and exclusively for the purpose of the business of the assessee and thus, allowable as a deduction. The Learned Counsel for the assessee, further submitted that the ld. CIT(A) is erred in sustaining the addition made by the AO towards disallowance of finance charges on altogether a different ground, even though, the AO disallowed interest on the ground that the appellant has not established utilization of advances from customers for the purpose of business of the assessee. The learned counsel for the assessee further submitted that the assessee is into the business of real estate development, collects advances from customers for sale of residential flats and commercial space. The customers pay 80% of consideration in advance in terms of MOU. The MOU provides for payment of interest @ of 10% to 14% in case of delay in delivery of flats. As per the agreement between customers, the 7 ITA.Nos.1218 & 1219/Hyd./2024 appellant has paid interest on customers' advance and the same has been debited under the head finance charges. The ld.CIT(A) without appreciating the relevant facts, simply sustained the addition made by the AO and therefore, the orders of the learned CIT(A) should be set aside.
The learned DR, on the other hand, vehemently relied on the orders of the authorities below. He submitted that in absence of supporting documentary evidences, the AO, was not convinced with the explanation furnished by the assessee. According to the AO, although the assessee has furnished general reply regarding the purpose of the funds received as an advance for the purchase of office space, but failed to explain the utility of the advances for the purpose of the business of the assessee. The AO further observed that the appellant has diverted advances received from customers to various non- business purposes. Therefore, the AO opined that the interest paid can not be justified just because TDS has been deducted on the said interest. Accordingly, the AO disallowed the interest debited under finance charges and carried forward to work-in- progress amounting to Rs.51,28,612/- under Section 36(1)(iii) of the Income Tax Act, 1961. The said observations of the 8 ITA.Nos.1218 & 1219/Hyd./2024 Assessing Officer were confirmed by the learned CIT(A) in absence of supporting documentary evidences. The learned DR accordingly submitted that the order of the learned CIT(A) be confirmed.
We have heard the rival submissions and perused the material on record and gone through the orders of the authorities below. The fact borne out from the record indicates that the assessee being in the business of real estate development, has collected advances from customers for sale of flats/commercial complexes, plots in terms of MOU. As per the terms of MOU between the appellant and the customers, there is a provision for payment of interest ranging from 10% to 14% in case of any delay in delivery of flats to the customers. As per the contractual agreement with the customers in terms of MOU, the assessee has paid interest on customers' advances and debited under the head finance charges. The AO has disallowed interest expenses on the ground that the appellant failed to prove utilization of advances received from customers for the purpose of business. The ld. CIT(A) confirmed the order of the Assessing Officer. We find that the basic business of the assessee is real estate development, and in that process, the assessee collected 9 ITA.Nos.1218 & 1219/Hyd./2024 advances from customers for sale of flats. As per the agreement with the customers, the assessee has paid interest in case of delay in delivery of flats. The assessee had also proved that the funds received from the customers in the form of advances have been utilized for the purpose of business of the assessee. In fact, it is not a case of the AO that the assessee had diverted funds for non-business purposes. Assuming for a moment that loans and advances given to group concerns are diversion of interest- bearing funds, the fact remains that, as the AO himself noted, the group companies of the assessee are also engaged in the business of real estate development and there is a business nexus between the appellant and the group concerns and thus, in our considered opinion, loans and advances given to other group companies can be said to be in the normal course of the business of the assessee and thus, there is a commercial expediency. Therefore, we are of the considered view that the AO erred in disallowing finance charges being interest paid on customers’ advances without any valid reasons. The ld. CIT(A), without appreciating the relevant facts, simply sustained the addition made by the AO. Thus, we set aside the order of the ld. CIT(A) and direct the AO to delete the addition made towards 10 ITA.Nos.1218 & 1219/Hyd./2024 disallowance of finance charges amounting to Rs.51,28,612/- for the A.Y. 2016-2017 and Rs.75,14,898/- for the A.Y. 2017- 2018 on identical facts and grounds raised before the Tribunal. Accordingly, the grounds raised by the assessee in appeals ITA.Nos.1218 & 1219/Hyd./2024 are allowed.
In the result, appeals ITA.Nos.1218 & 1219/Hyd./ 2024 of the assessee are allowed. A copy of this common order be placed in the respective case files.
Order pronounced in the open Court on 24.02.2024.