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Income Tax Appellate Tribunal, DELHI BENCHES “SMC”: DELHI
Before: SHRI BHAVNESH SAINI
ORDER This appeal by Assessee has been directed against the Order of the Ld. CIT(A)-27, New Delhi, Dated 17.12.2018, for the A.Y. 2015-2016, challenging the Order of the Ld. CIT(A) in confirming the disallowance of Rs.30,35,945/- under section 36(1)(iii) of the I.T. Act, 1961.
The facts of the case are that the assessee company filed its return of income declaring loss of 2 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. Rs.30,23,140/-. During the year under consideration, assessee has declared income only under the Head “Income from Business and Profession”. The assessee has shown income of Rs.1,56,959/- and claimed finance cost of Rs.30,35,945/- and other expenses of Rs.2,78,737/-. There were not any business activities done by the assessee during the year under consideration. The A.O. asked the assessee to explain the interest claimed in the P & L A/c. The A.O. found that assessee has taken unsecured loan from 05 parties namely (1) M/s Flex International Pvt. Ltd., (2) M/s AR Leasing Pvt. Ltd., (3) M/s Anshika Consultants Pvt. Ltd., (4) M/s Apoorva Extrusion Pvt. Ltd. and (5) M/s AR Infrastructure & Projects Pvt. Ltd., that these loans were utilized for investment made in M/s Minor Hotels Pvt. Ltd., another group company of assessee. Assessee has claimed expenses of Rs.30,35,945/- as business expenditure paid to above mentioned 05 parties. During the year under consideration, assessee has not shown any income from investment made in M/s Minor Hotels Pvt. Ltd. The assessee is a real estate company engaged in the business
3 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. of development and construction of real estate projects as there is no business activity done during the year under consideration only unsecured loans are taken to made payment for old continuing unsecured loan claim interest expenses. Assessee’s investment in M/s Minor Hotels Pvt. Ltd. is not comes under the category of business done by the assessee company. As these expenses were not wholly and exclusively made for the purposes, therefore, A.O. asked the assessee as to why the claim of interest should not be disallowed. The assessee submitted before A.O. that assessee has made long term investment in the Group companies mainly to control and having controlling interest on these companies. During last three years, no dividend has been declared by these companies nor the share of these companies have been sold to earn capital gain. Assessee relied on various case laws and tries to establish that investment made in M/s Minor Hotels Pvt. Ltd. as a part of the business activity of the assessee. The A.O, however, did not accept the contention of assessee because the expenditure must be made for the purpose of carrying
4 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. on business. The A.O. noted that on one hand assessee paid interest to these related parties for the loans taken and on the other hand assessee has invested in share of M/s. Minor Hotels Pvt. Ltd., and no taxable return shown by the assessee company. It was, therefore, inferred that this is not business expenditure and the same was disallowed.
The assessee company challenged the addition before the Ld. CIT(A) and same submissions were reiterated. It was submitted that assessee company was incorporated on 11.11.2005 with the object to carrying on business as owners, builders, colonizers, developers, promoters, proprietors, lessor, civil contractors, maintainers of residential, commercial and industrial buildings, colonies, hotels, mills etc., more specifically mentioned in the Memorandum of Association of the Company. The assessee company has made investments through equity participation in it's group companies which is evident from the balance-sheet. The assessee company is holding 32% of equity share capital and 100% of preference share capital issued by Minor hotels. It was submitted that it is in terms
5 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. of the memorandum and articles of association of the assessee company that the assessee has as a matter of fact undertaken the hotel business by equity participation for having controlling interest in 'it's group companies with attending/consequential earning of dividend and consequential appreciation of investment. The A.O. has denied the claim of assessee because no business activity have been carried. The assessee company relied upon decisions in support of the contention that interest is an allowable expenditure. It was submitted that in real Estate and Infrastructure business, the company do project either in its own name or in the form of making a joint venture and forming a separate SPV( (Special Purpose Vehicle) to pursue and carry out the business. The investment is mainly in the group companies. Therefore, the business model of assessee company in the instant case is strategic investment in pursuance of its business and by way of forming JVC for a particular business purpose. It was submitted that Hotel project was allotted, but, there was some litigation, therefore, the hotel project could not have 6 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. been taken-up in due course of time. However, efforts are being made towards starting of the stated project. It was, therefore, submitted that it was business purpose of assessee, therefore, interest is allowable.
The Ld. CIT(A) noted that assessee company assessee company is doing the business of financing and investment as opposed to the activities mentioned in the MoA of the company. The AO was correct in interpreting that there was no business activity as contemplated in MoA except the receipt of loans from entities and investment in the equity shares of the company involved in the hotel project. The Ld. CIT(A), therefore, upheld the addition.
I have heard the Learned Representative of both the parties and perused the material available on record.
Learned Counsel for the Assessee reiterated the submissions made before the authorities below and referred to Memorandum of Association [“MoA”] PB-17, in which, one of the business activity of the assessee is “Hotels”. He has submitted that assessee wanted to expand the business
7 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. activities, therefore, made investment in group company and assessee has an idea to control the sectors for the purpose of business in the said hotel investments were made in shares of SVP. He has submitted that during the assessment year under appeal, assessee has interest income only. On loss, he has submitted that it is not always necessary that assessee should earn profit in a particular assessment year. He has submitted that investment was made by assessee utilizing the borrowed funds for strategic business purposes. The borrowed funds have been used for business purposes, therefore, assessee is entitled for deduction of the interest. In support of his contention, he has relied upon the following decisions :
(1) Ram Kishan Oil Mills vs., CIT, U.P. [1965] 56 ITR 186 (2) Madhav Prasad Jatia vs., CIT [1979] 118 ITR 200 (SC) (3) Regal Theatre vs., CIT [1997] 225 ITR 205 (Del.) (4) CIT vs., Rajeeva Lochan Kanoria [1994] 208 ITR 616 (Cal.)
8 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. (5) CIT-8 vs., M/s. Srishti Securities Pvt. Ltd., [2010] 321 ITR 498 (Bom.) (6) CIT vs., Spencers And Co., Ltd., (No.3) [2013] 359 ITR 644 (Mad.) (7) CIT vs., RPG Transmissions Ltd., [2013] 359 ITR 673 (Mad.)
On the other hand, Ld. D.R. relied upon the Orders of the authorities below and submitted that there is no nexus with the payment of interest and business activities of the assessee, therefore, addition was correctly made.
I have considered the rival submissions. The conditions for getting deduction under section 36(1)(iii) of the I.T. Act, 1961, in respect of the interest are – (1) money must have been borrowed by the assessee (2) it must have been borrowed for the purpose of business (iii) the assessee must have paid interest on the said amount and claim it as deduction.
9 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. 8.1. The Hon’ble Calcutta High Court in the case of CIT vs., Rajeeva Lochan Kanoria [1994] 208 ITR 616 (Cal.) in which it was held as under :
“Held, that directorship is nothing but a vocation. The assessee was admittedly a director of several controlled companies. The activity of controlling, managing, administering and financing companies is nothing but a business/professional/vocational activity. A businessman, like the assessee in this case, did not purchase shares of different companies for acquiring controlling interest therein only for earning dividends. Acquiring controlling interest in companies and managing, administering, financing and rehabilitating companies under control were for business and/or professional purpose. Interest on capital borrowed for investment in shares was deductible.”
10 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. 8.2. The Hon’ble Madras High Court in the case of CIT vs., Spencers And Co. Ltd., [2013] 359 ITR 644 (Mad.) held as under :
“(iv) That the appellate authorities found that the investment made in shares by the assessee utilising borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36 (1) (iii). No material was adduced to show that the borrowed capital was utilised by the assessee for non-business purposes. The appellate authority was correct in allowing the claim of the assessee and deleting the disallowance made by the assessing authority. The Tribunal in correct appreciation of the matter had in turn confirmed the finding of the appellate authority.”
11 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. 8.3. The Hon’ble Madras High Court in the case of CIT vs., RPG Transmissions Ltd., [2013] 359 ITR 673 (Mad.) held as under :
“(iv) That the CIT(A) and the Tribunal found that the investments made in shares by the assessee by utilising borrowed capital were for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36(1) (iii). The Revenue did not adduce any material to show that the borrowed capital was utilised by the assessee for non-business purposes.”
8.4. Considering the facts of the case in the light of above decisions, it is clear that one of the object of the assessee company for which it was established are, to carry on business in Hotels also. The assessee during the year
12 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. under consideration has earned interest on loan only. The assessee claimed that in pursuance of the objects, the assessee made investment in M/s. Minor Hotels Pvt. Ltd. The assessee company is holding 32% of equity share capital and 100% of preference share capital issued by Minor hotels. The assessee was in the process of establishing hotel project, but, due to some litigation it was delayed. It is not always necessary that assessee should earn profit in assessment year under appeal in order to claim deduction of the expenditure. The assessee made investment in the group companies to take controlling interest in the group company. The assessee for that purpose has joined the JV and SVP also. It is not in dispute that assessee has borrowed money for business purpose and made investment in M/s. Minor Hotels Pvt. Ltd., and paid interest also. The genuineness of the payment of interest is not in dispute. Therefore, the above facts would clearly show that assessee is entitled for deduction of the interest in assessment year under appeal. The assessee made investment utilizing the borrowed funds for strategic
13 ITA.No.956/Del./2019 M/s. Saga Realtors Pvt. Ltd., New Delhi. business purposes and the amount borrowed have been utilised for business purpose only. Considering the above discussion, I am of the view that assessee has satisfied the conditions of Section 36(1) (iii) of the I.T. Act, 1961. I, accordingly, set aside the Orders of the authorities below and delete the addition.
In the result, appeal of the Assessee allowed.
Order pronounced in the open Court.