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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
Date of hearing 06-09-2021 Date of pronouncement 14-09-2021 O R D E R Per Saktijit Dey (JM) Captioned appeal by the revenue arises out of order dated 29-06-2016 of learned Commissioner of Income Tax (Appeals)-16, Mumbai for the assessment year 2012-13. The effective grounds raised by the revenue read as under:- “i) "Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in following the precedent of the assessee's appeal for AY 2011- 12 not appreciating that in that year, the interest income of Rs. 1,59,47,8597- was held to' be having a direct nexus with interest expenditure of Rs. 1,44,15,962/- resulting in net income of Rs.15,31,897/- and the assessability of such income under the head 'Profits and gains from business or profession' instead of 'Income from other sources' and consequently the eligibility of the 2 ITA 5589/Mum/2016 set off of brought forward business losses against it had a tax effect below the ceiling for the filing of appeal to the lTAT?" ii) "Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) failed to give any cogent reason why the interest on idle funds borrowed for the business which had not commenced nor was carried on during the year, is assessable as business income eligible to be set off against brought forward business losses?"
Briefly the facts are, the assessee, a resident company is engaged in the business of real estate development. In course of assessment proceedings, the assessing officer, while verifying the Profit and Loss Account of the assessee noticed that the assessee has credited interest income received on loan advanced amounting to Rs.1,71,90,376/- and has also booked corresponding expenditure. Being of the view that the interest income received on loan advanced cannot be treated as ‘Income from business’ since the assessee is not in money lending business, the assessing officer show caused the assessee to explain as to why such income should not be assessed under the head “Income from other sources”. Though, the assessee furnished its reply justifying its claim that the interest income has to be assessed as “Income from business”; however, the assessing officer was not convinced. Ultimately, while completing the assessment, the assessing officer treated the interest income earned on loan advanced as “Income from business” and disallowed corresponding expenses of Rs.2,95,415/- on the reasoning that such expenditure was not incurred wholly and exclusively for earning the interest income. Assessee contested the decision of the assessing officer before learned Commissioner (Appeals). Following his order passed in assessee’s own case for assessment year 2011-12, learned Commissioner (Appeals) held that the interest income earned on loans advanced has to be 3 ITA 5589/Mum/2016 treated as “Income from business”. As regards the disallowance of expenditure, learned Commissioner (Appeals) also deleted such disallowance.
At the outset, learned counsel for the assessee submitted, identical dispute arising in assessee’s own case in assessment year 2012-13 was decided in favour of the assessee by holding that interest income is to be assessed as “Income from business”. Further, he submitted, similar issue arising in case of assessee’s sister concerns, viz. M/s Asian Infra Projects Pvt Ltd has been decided in favour of the assessee. Finally, he submitted, in assessee’s own case in assessment year 2013- 14, the assessing officer had accepted the interest income as “Income from business” and allowed corresponding expenditure. Though, the assessment order was revised under section 263 of the Act; however, the Tribunal, while deciding assessee’s appeal, quashed the revision order. Thus, he submitted, the order passed by learned Commissioner (Appeals) should be upheld.
4. Though, learned departmental representative agreed that the issue is covered by the decisions of the Tribunal; however, he relied upon the observations of the assessing officer.
We have considered rival submissions and perused materials on record. It is observed, identical dispute arose in case of assessee’s sister concern, M/s Asian Infra Projects Pvt Ltd in assessment years 2009-10 and 2011-12. Though, learned Commissioner (Appeals) decided the issue in favour of the assessee; however, the revenue carried the matter in further appeal before the Tribunal. While deciding the appeals in & 5583/Mum/2016 in order dated 03-01-2020, the co-ordinate bench held as under:- “3. The grounds raised by the revenue read as under: - i) Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that there was a nexus between interest bearing
4 ITA 5589/Mum/2016 borrowings and interest yielding advances ignoring that, at best, there was only partial nexus and not complete nexus as evidenced by the fact that interest earned was Rs.1,44,41,920/- whereas interest paid on borrowings made for making the interest yielding advances was Rs.2,38,56,459/-? ii) Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that notwithstanding a partial nexus between interest paid on borrowings utilized for interest yielding advances, the entire interest attributable to borrowings not utilized for making interest yielding advances could not have been allowed as business loss in view of the fact that neither the business had commenced nor was it carried on during the year?" The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the DCIT 9(1)(2) be restored."
We have carefully heard the rival submissions including written submissions and documents placed on record. We have also deliberated on judicial pronouncements as cited before us including decision rendered by Tribunal in assessee's own case for AY 2012-13 in an appeal filed by the revenue vide order dated 06/02/2017 . 5.1 Facts on record would reveal that the assessee being resident corporate assessee stated to be engaged in the business of real estate, was assessed for year under consideration on 14/03/2014, wherein the income of the assessee was determined at Rs.146.65 Lacs after certain additions / adjustments as against returned loss of Rs.95.60 Lacs e-filed by the assessee on 27/09/2011.
5.2 During assessment proceedings, the perusal of Profit & Loss Account for the year under consideration as well as for the preceding year revealed that the assessee did not carry out any business activity of real estate. However, the assessee reflected interest income of Rs.144.41 Lacs which mainly consisted-off of interest on loans for Rs.136.57 Lacs and interest on Income Tax Refund for Rs.7.77 Lacs. The said income was offered as business income despite the fact that the business activity of the assessee was that of real estate and not money lending. Against interest income, the assessee claimed administrative and other expenses of Rs.1.64 Lacs as well as interest expenditure of Rs.238.56 Lacs.
5.3 As per the observations of Ld. AO, the loans obtained by the assessee appeared to have been diverted to directors / sister concerns. The assessee paid interest of 12% to couple of lenders and interest of 16% to one lender whereas it was receiving interest of 12% on its own lending which was evident from the fact that interest income was Rs.136.57 Lacs Asian infraprojects Private Limited Assessment Years-2009-10 & 2011-12 against income expenditure of Rs.238.58 Lacs. It was noted that the assessee was not a financing company and it had no license of money lending and therefore, the interest income was assessable under the head income from other sources as against business income offered by the 5 ITA 5589/Mum/2016 assessee. The failure of the assessee to defend the same during the course of assessment proceedings led Ld. AO to treat the interest income as income from other sources. Consequently, interest expenditure was not allowed as deduction since the assessee failed to substantiate the nexus of interest expenditure with the interest income earned by the assessee. 5.4 The interest expenditure was also not allowed by invoking explanation to Section 37(1) since the assessee, in the opinion of Ld.AO, could not carry out the business of money lending and such activity was in violation of provisions of the Bombay Money Lenders Act. In the alternative, Ld. AO held that the excess interest of 4% amounting to Rs.40.96 Lacs being paid to one of the lender entities was to be disallowed u/s 36(1)(iii) / 57 of the Act.
5.5 Finally, the interest income was assessed under the head Income from other sources and total income was determined at Rs.146.65 Lacs. The interest expenditure of Rs.238.56 Lacs was not allowed as deduction either u/s 36(1)(iii) or u/s 57 of the Act.
6.1 Before learned CIT(A), the assessee, inter-alia, submitted that the assessee had borrowed funds for the purpose of its business. However, due to slowdown in the market, the projects could not be commenced whereas the assessee's liability to pay interest on borrowed funds had Asian infraprojects Private Limited Assessment Years-2009-10 & 2011-12 started. Therefore, the loans were advanced by the assessee so as to reduce the overall interest cost. It was also submitted that under normal circumstances when the assessee did not earn any income during the year, still the expenses would be allowable which would ultimately result into losses to the assessee. To avoid huge financial losses and to reduce overall financial burden towards interest liability, the assessee advanced money out of the borrowed funds to its associated entities. If such loans were not given, the resultant accumulated losses would even lead to bankruptcy or liquidation of the assessee. In the aforesaid background, the assessee pleaded that the interest was assessable under the head business income and interest expenditure would be an allowable deduction. 6.2 Regarding nexus between borrowed funds vis-à-vis lending made by the assessee, the attention was drawn to the fact that requisite details were filed by the assessee during the course of assessment proceedings vide letter dated 05/03/2014 which were not considered by Ld. AO while framing the assessment order. It was submitted that the funds were borrowed for business purposes and the lending were made to reduce overall interest cost as the project could not be started. Therefore, the interest expenditure having direct nexus with interest income was an allowable deduction. 6.3 Without prejudice, it was submitted that even if interest income was to be assessed as Income from Other Sources, the corresponding interest expenses having direct nexus with such income ought to have been allowed to be reduced / set-off therefrom since the prime intent of the assessee was to reduce the interest cost so as to avoid default in timely ITA Nos.5583- 84/Mum/2016 Asian infraprojects Private Limited Assessment Years-2009-10 & 2011-12 servicing of loans by way of repayment of principal and interest on funds borrowed. The attention was drawn to the financial statements to support the fact
6 ITA 5589/Mum/2016 that there was direct nexus between borrowings and lending. 6.4 Finally, the assessee also assailed the proportionate disallowance of Rs.40.96 lacs as proposed by Ld.AO, in the alternative, by submitting that interest expenses were incurred for the existence of business. 7.1 After due consideration of factual matrix, it was observed by learned first appellate authority that the assessee had already started real estate business and given and received advances for this purpose in earlier years also. In fact, the assessee earned profit from real estate business in AY 2008-09. To support the same, the details of income earned by the assessee during AYs 2008-09 to 2010-11 has already been tabulated in para 5.1.1 of the impugned order.
7.2 Upon perusal of various clauses of Memorandum of Association (MOA), it was seen that although the primary business of the assessee was to acquire / develop properties but the assessee could invest and deal with the money of the company not immediately required. The assessee could receive deposits as well as advance money and therefore, it could not be said that the said activity violated the objectives of the assessee. Reliance was placed, inter-alia, on the decision of Hon'ble Bombay High Court rendered in CIT V/s Lok Holdings (308 ITR 356) wherein it was held that interest received by the assessee property developer, on temporary deposits of surplus money out of advances received by from intending purchases was business income and not income from other sources. In the Asian infraprojects Private Limited Assessment Years-2009-10 & 2011-12 above background, it was also noted that interest income as well as interest expenditure was accepted by the department in earlier years to be the business income of the assessee. Therefore, Ld. AO was directed to treat the interest income as business income and allow interest expenditure against the same. Alternatively, if the interest income was to be treated as Income from other sources, then interest expenditure would still be allowable u/s 57 of the Act. At the same time, Ld. CIT(A) confirmed the stand of Ld. AO in making proportionate disallowance of Rs.40.96 Lacs, being interest paid at excess rates since the borrowed capital was diverted at lower rates of interest.
7.3 The perusal of order giving effect dated 27/11/2015 passed by Ld. AO would reveal that ultimately, the income of the assessee was determined at a loss of Rs.53.85 Lacs, inter-alia, after disallowance of interest expenditure of Rs.40.96 Lacs. The interest income was assessed under the head business income.
Aggrieved by aforesaid adjudication, the revenue is under further appeal before us.
Upon due consideration of factual matrix as enumerated in preceding paragraphs, we find that Ld. CIT(A) has clinched the issue in the right perspective. It is quite evident that the business of the assessee was already set-up since the assessee had already reflected income from real estate business during AY 2008-09. The perusal of assessee's financial statements for year under consideration would show that the assessee has obtained unsecured loans of Rs.583.56 Lacs which has substantially been Asian infraprojects Private Limited Assessment
7 ITA 5589/Mum/2016 Years-2009-10 & 2011-12 advanced to directors & others (to the extent of Rs.185.45 Lacs) and to make-up for the accumulated losses of Rs.317.31 Lacs incurred by the assessee over the years. The assessee do not have any other source of fund except Share capital of Rs.1 Lac. Therefore, there was complete nexus between the borrowings and lending made by the assessee. This being the case, the interest expenditure having direct nexus with interest income was clearly allowable to the assessee.
So far as the question of applicability of head of income is concerned, rule of consistency favor's assessee's stand which is evident from the fact that the assessee was following consistent method of offering such income as business income. The Ld. AR has placed on record status of assessment for AYs 2008-09 to 2015-16, the perusal of which would reveal that similar interest income has been accepted by revenue as business income in scrutiny assessment proceedings u/s 143(3) for AYs 2013-14 to 2014-15. In AYs 2008-09, 2010-11 & 2015-16, there was no scrutiny assessment and assessee's claim was accepted in self-assessment. Further, relying upon AY 2011-12, similar view was taken by Ld. CIT(A) in AY 2012-13, against which revenue preferred further appeal before this Tribunal vide order dated 06/02/2017 wherein the appeal of the revenue was dismissed.
Finally, the undisputed findings are that the assessee, in terms of its Memorandum of Association, could receive deposits as well as advance money and therefore, it could not be said that the said activity violated the objectives of the assessee. The ratio of decision of Hon'ble Bombay High Asian infraprojects Private Limited Assessment Years-2009-10 & 2011-12 Court rendered in CIT V/s Lok Holdings (308 ITR 356) was clearly applicable wherein it was held that interest received by the assessee property developer, on temporary deposits of surplus money out of advances received by from intending purchases was business income and not income from other sources. Therefore, no fault could be found in the impugned order, in this regard.
Keeping in view the entirety of facts and circumstances, we find that Ld. CIT(A) was correct in directing Ld.AO to assess the interest income as business income and allow interest expenditure against the same to the extent as specified in the impugned order. The ground stand dismissed to that extent.”
It would be relevant to observe, in assessee’s own case in assessment year 2013-14, while completing the assessment under section 143(3) of the Act, the assessing officer treated the interest income received on loans advanced as “Income from business” and also allowed the corresponding expenditure. However, the revisionary authority in exercise of powers conferred under section 8 ITA 5589/Mum/2016 263 of the Act revised the assessment order and directed the assessing officer to treat the interest income as “Income from other sources”. While deciding assessee’s appeal against revisionary order passed under section 263 of the Act, the Tribunal in dated 03-01-2020 not only quashed the order passed under section 263 of the Act, but also restored the assessment order passed by the assessing officer treating the interest income earned on loans advanced as business income and also allowing corresponding expenditure. In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals) dismiss the grounds raised