TATA REALTY & INFRASTRUCTURE LTD,MUMBAI vs. PR. CIT- 2, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

M/s. Tata Realty & Infrastructure Ltd., PCIT. The ground No.3 raised by the assessee is challenging the validity of action of the ld. PCIT in directing the ld. AO to disallow the interest paid on borrowed funds u/s.36(1)(iii) of the Act.

 Tamilnadu Industrial Development Corporation Limited (TIDCO) had released an offer inviting for a joint venture partner to develop Special Economic Zone (SEZ) for IT and ITES sector at Chennai (‘the Project’) and as per the terms of the bid document, it was essential for the assessee to set up a separate joint venture (JV) company in this project since TIDCO was supposed to hold 26% equity stake in such JV company firm for execution of the project. Thus, the JV was created in the name of TRIL Infopark Ltd.,

M/s. Tata Realty & Infrastructure Ltd.,

 The assessee formed consortium with Indian Hotel Company Ltd., (IHCL) for the said bid since development of luxury five star hotel was envisaged as part of the project. A Special Purpose Vehicle (SPV) named TRIL Inforpark Ltd., was formed wherein TIDCO was supposed to acquire 26% stake; IHCL to acquire 10% stake and assessee to hold 64% stake.  However, the Board of Approvals refused to grant permission for construction of 5 star hotel as part of the project. Hence, IHCL wanted to exit consortium. Since, investment made in TRIL Infopark was of strategic nature for the assessee, it locked this opportunity to acquire 10% stake of IHCL by granting an advance of Rs.71.10 Crores to IHCL.  In this regard, an arrangement was agreed between the assessee and IHCL wherein assessee had to advance interest free sum of Rs.71,10,00,000/- to IHCL in consideration of getting right to purchase equity investments of IHCL in TRIL Infopark. Accordingly, it was pleaded that advance of Rs.71.10 Crores was given by the assessee to IHCL purely from strategic purpose to lock IHCL to sell its entire stake in TRIL InfoPark to the assessee whenever the option of purchase was exercised by the assessee. The said advance of Rs.71.10 Crores was paid to IHCL in two trenches i.e.22 Crores in F.Y.2009-10 and Rs.49.10 Crores in F.Y.2011-12.

3.1. The ld. PCIT observed in para 5.2 of his order that assessee company is engaged in the business of investment advisory services, project management of consultancy, development management services and real estate development software services. Based on this nature of business, the ld. PCIT observed that it is not justifiable that assessee extended an interest free loan to IHCL using borrowed funds when the M/s. Tata Realty & Infrastructure Ltd., assessee is in the business of investment, where the primary motive is to earn interest income on loans extended to the parties. Since, this matter was not examined by the ld. AO, the ld. PCIT held the order of the ld. AO is erroneous in so far as it is and prejudicial to the interest of the revenue and the ld. PCIT also observed that as per Explanation 2 to Section 263 of the Act which is brought into statute w.e.f 01/06/2015, the order passed by the ld. AO would become erroneous and prejudicial to the interest of the Revenue, if, in the opinion of the ld. PCIT, the order is passed without making enquiries or verification which should have been made, has not been made. He accordingly, held that the ld. AO did not examine the correctness of the claim in respect of claim paid by the assessee company on borrowed funds to advance interest free loans of Rs.41.15 Crores to IHCL.

3.2. The ld. PCIT further on merits had observed in his 263 order that within the total sum extended to IHCL as interest free advance of Rs.71.10 Crores, the assessee had used its own funds of Rs.29.95 Crores and borrowed funds of Rs.41.15 Crores. Accordingly, the ld. PCIT directed the ld. AO to disallow the interest on borrowed funds u/s.36(1)(iii) of the Act on the borrowings of Rs.41.15 Crores which was utilised for advancing interest free loans to IHCL.

3.3. At the outset, we find that there is a complete incorrect assumption of fact by the ld. PCIT on the actual nature of business of the assessee company. We find that the ld. PCIT is of the opinion that assessee company is an investment company engaged in the business of investment and hence, the main source of income is only to earn interest income on loans extended thereon. This in our considered opinion is factually incorrect in as much as assessee actually is a real estate

M/s. Tata Realty & Infrastructure Ltd., company and not a company engaged in the business of financing. Hence, it could be safely concluded that earning interest income on loans extended is not a primary activity of the assessee company. Accordingly, we hold that the entire basic premise of the ld. PCIT about the nature of business is factually incorrect and consequential decision making process thereon would also become incorrect.

3.4. We find that with regard to the claim of interest on borrowed funds, the ld. PCIT in para 5.2. of his order says that this aspect was not at all examined by the ld. AO in the course of assessment proceedings. Whereas, we find from the detailed paper book furnished by the assessee, that proper enquiries were indeed conducted by the ld. AO in the course of original assessment proceedings. We find that the ld. AO vide letter dated 30/10/2017 during the course of original assessment proceedings had specifically issued show-cause to the assessee vide point No.4 thereon asking about as to why interest should not be disallowed u/s.36(1)(iii) of the Act in respect of interest free advance given to IHCL. We find that assessee had filed a detailed written submission thereon together with all supporting documents vide his reply letter dated 29/11/2017 filed before the ld. AO. In the said reply, the assessee had given a complete detailed note on why there should not be any disallowance of interest explained u/s.36(1)(iii) which are enclosed in page 6-13 of the paper book. Admittedly, these detailed submissions were indeed filed before the ld. AO at the time of assessment proceedings which contains facts of the case, purpose of assessee advancing interest free loans to IHCL, reasoning given stating that advance was made on the basis of commercial expediency together with various case laws of Hon’ble High Courts and Hon’ble Supreme Court relied upon by the assessee. We find pursuant to further query raised by the ld. AO, the M/s. Tata Realty & Infrastructure Ltd., assessee had furnished yet another reply before the ld.AO on 19/12/2017 as to why notional interest income on the advances given to IHCL should not be brought to tax both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. The replies in this regard are enclosed in pages 15 to 18 of the paper book filed before us. The aforesaid facts would clearly reveal that adequate enquiries were indeed carried out by the ld. AO in the course of original assessment proceedings with regard to the impugned issue of borrowed funds being utilised for interest free advances to IHCL and consequential allowability of interest on borrowed funds u/s.36(1)(iii) of the Act. Infact, we also find that ld. PCIT himself states in para 6 page 6 of his order about the examination carried out by the ld. AO with regard to this impugned issue, which is totally contrary to his earlier stand taken in para 5.2 of his order wherein he says no enquiries were carried out by the ld. AO. For the sake of convenience, the relevant portion of order of ld. PCIT in para 6 page 6 is reproduced hereunder:-

“6. Allowability of interest on borrowed funds: The assessee has extended an interest free loan to Indian Hotel Co. Ltd. (IHCL) amounting to Rs 71,10,00,000/-. It is stated that for extending this loan the assessee has used its own funds of Rs 29,95,00,000/- and the balance amount of Rs 41,15,00,000/- was borrowed fund. On a query by the assessing officer as to why the interest expense corresponding to the interest free advance given to IHCL should not be disallowed u/s 36(1)(iii) of the Act, the assessee submitted that an arrangement was agreed between the assessee company and IHCL wherein the assessee company had to advance interest free sum of Rs.71,10,00,000/- to IHCL in consideration of getting right to purchase equity investments of IHCL in TRIL Infopark. The assessing officer has failed to take into account that the assessee is in the business of investment advisory services, project management consultancy, development management services and real estate development software services. It is not justifiable that the assessee extended an interest free loan to IHCL using borrowed fund, when the M/s. Tata Realty & Infrastructure Ltd., assessee is in the business of investment, where the primary motive is to earn interest income on loans extended to the parties. Therefore, the payment of interest on the borrowed funds of Rs 41,15,00,000/- should have been disallowed as the expense is not related to its business. It is also pertinent to note that building of a luxury 5 star hotel by forming consortium with IHCL was not essential in setting up Joint Venture with TIDCO and the same was not even allowed. The ultimate purpose claimed by the assessee is right to purchase shares of IHCL in TRIL. Even this would not have resulted in any business income and as such interest on capital borrowed for non-business purpose is disallowable u/s 36(1)(iii) of the I.T. Act. Therefore, the assessment order dated 28.12.2017 is erroneous in so far as it is prejudicial to the interest of revenue.” (Underline provided by us) 3.5. Hence, it could be safely concluded that sufficient enquiries were carried out by the ld. AO with regard to allowability of interest on borrowed funds u/s.36(1)(iii) of the Act; utilisation of borrowed funds for making interest free advances to IHCL; interest free advances to IHCL was also accepted to be for business purposes by the ld. AO and consequentially allowed the interest on borrowed funds u/s.36(1)(iii) of the Act. When sufficient enquiries were indeed carried out by the ld. AO in the course of original assessment proceedings, the same cannot be the subject matter of revision jurisdiction u/s.263 of the Act by the ld. PCIT. Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Nirav Modi reported in 390 ITR 292. The relevant operative portion of the said judgment is reproduced hereunder:-

“7. Firstly, the Revenue contends that the exercise of powers under Section 263 of the Act is justified as in this case, as no inquiry in respect of the gifts received during the subject years was done by the Assessing Officer for the Assessment orders for Assessment Years 2007-08 and 2008-09. This according to the Revenue is evident from the Assessment Orders dated 31st December, 2009 and 30th December, 2010 which does not even make a mention of the gifts received much less discuss and/or deal with the same. This issue is no longer res integra as this Court in Idea Cellular Ltd. v. Dy. CIT [2008] 301 ITR 407 (Bom.) has held that if during Assessment

M/s. Tata Realty & Infrastructure Ltd., proceedings queries were raised and the assessee responded to the same, then even if an Assessment order does not mention the same, it does not mean that the Assessing Officer has not applied his mind to the issues. It would be well-nigh impossible for an Assessing Officer to complete all assessments assigned to him under Section 143(3) of the Act if he is required to deal with all issues which arose during the Assessment Proceedings. Thus, the Assessment Order primarily deal with only those issues in respect of which the Assessee has not been able to satisfy him and give reasons for his conclusion. This would enable the Assessee to challenge the same, if aggrieved. In fact the Gujarat High Court in CIT v. Nirma Chemical Works Ltd. [2009] 309 ITR 67/182 Taxman 183 has observed that if an assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order. In this case, during the assessment proceedings for both the Assessment Years, the Assessing Officer issued a query memos to the assessee, calling upon him to justify the genuineness of the gifts. The Respondent-Assessee responded to the same by giving evidence of the communications received from his father and his sister i.e. the donors of the gifts along with the statement of their Bank accounts. On perusal, the Assessing Officer was satisfied about the identities of the donors, the source from where these funds have come and also the creditworthiness/capacity of the donor. Once the Assessing Officer was satisfied with regard to the same, there was no further requirement on the part of the Assessing Officer to disclose his satisfaction in the Assessment Order passed thereon. Thus, this objection on the part of the Revenue, cannot be accepted.

3.6. We find that the Revenue preferred Special Leave Petition before the Hon’ble Supreme Court against this decision which was dismissed by the Hon’ble Supreme Court in 77 Taxmann.com 15.

3.7. In view of our aforesaid observations, it could be safely concluded that the ld. AO had made adequate enquiries in the original assessment proceedings itself with regard to the issue of interest on borrowed funds and respectfully following the aforesaid decision, we hold that the said

M/s. Tata Realty & Infrastructure Ltd., assessment completed after due enquiries, cannot be the subject matter of revision proceedings u/s 263 of the Act by the ld PCIT. Hence, we have no hesitation in holding that revision order passed by the ld. PCIT u/s.263 of the Act deserves to be quashed and is hereby quashed on this count itself.

3.8. It is not in dispute that the borrowings and interest free advances to IHCL were made in earlier years and not during the year under consideration. In earlier orders we find that the borrowings made by the assessee and its utilisation thereof by way of interest free advance to IHCL has been accepted by the Revenue in scrutiny assessment proceedings, as meant for business purposes. The details of various assessments completed in this regard are as under:-

Sr. No. A.Y. Assessment Particulars a. 2010-11 u/s.143(3) dated 25/03/2013, wherein no disallowance of interest u/s.36(1)(iii) was made. Infact, in para 6 of this order, the ld. AO had specifically stated that lending of funds is not the business of the assessee b. 2011-12 u/s.143(3) dated 18/03/2015, wherein no disallowance of interest u/s.36(1)(iii) was made. c. 2012-13 u/s.143(3) dated 18/03/2016, wherein no disallowance of interest u/s.36(1)(iii) was made. d. 2013-14 u/s.143(3) dated 23/03/2016, wherein no disallowance of interest u/s.36(1)(iii) was made. e. 2014-15 u/s.143(3) dated 29/12/2016, wherein no disallowance of interest u/s.36(1)(iii) was made.

3.9. We also find that the ld. PCIT invoked revision jurisdiction u/s.263 of the Act for A.Y.2013-14 but did not initiate any action with reference to this issue of disallowance of interest u/s.36(1)(iii) of the Act though the borrowings and utilisation thereon by way of interest free advance to IHCL were made prior to A.Y.2013-14. All these assessment orders and M/s. Tata Realty & Infrastructure Ltd., order of ld. PCIT u/s.263 of the Act were indeed available before the ld. AO while framing the assessment for A.Y.2015-16 which drives home the principle of consistency as well as the stand taken by the department in assessee’s own case for various years. While this is so, the ld. AO taking a consistent view thereof in A.Y.2015-16 i.e. the year under consideration, cannot be categorised as passing erroneous order. On the contrary the ld. PCIT has passed an erroneous order in the instant case. Hence, revision jurisdiction u/s.263 of the Act invoked by the ld. PCIT deserves to be quashed even on this count both on technicality as well as on merits.

3.10. Since, we have already held that sufficient enquiries were indeed carried out by the ld. AO in the course of original assessment proceedings, the reliance placed by the ld. PCIT on the provisions of Explanation-2 to Section 263 of the Act would not be relevant at all for the purpose of adjudication. Accordingly, the grounds raised by the assessee are allowed.

Order pronounced on 22/04/2021 by way of proper mentioning in the notice board.