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Income Tax Appellate Tribunal, “E” Bench, Mumbai
O R D E R Per Shamim Yahya (AM):- This appeal by the Revenue is directed against order of learned CIT(A) dated 13/9/2017 and it pertains to assessment year 2014-15.
The grounds of appeal
read as under :-
1. Whether on the facts & circumstances of the of the case and in law, Ld, CIT(A) has erred in deleting the addition made to the income under the head income from other sources of Rs.72,07,590/- being the interest received on FD?
2. Whether on the facts & circumstances of the of the case and in law, Ld, CIT(A) has erred in not appreciating the fact that the decision of the Hon’ble Apex court in the case of M/s. Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 93 (SC) is squarely applicable to the assessee's case in respect of the netting of interest received on fixed deposits with banks against the interest expenditure capitalized in the closing Work-in-progress. Further the decisions relied upon by the Ld. CIT(A) are distinguishable from the facts of the case of the assessee. In fact the interest received from the fixed deposit was revenue in nature whereas interest expended was capital in nature?
3. Whether on the facts & circumstances of the of the case and in law, Ld, CIT(A) has erred in not appreciating the fact that since creation of fixed deposits was not the condition precedent for availing the bank credit, therefore the fixed deposits were not created for business purpose but only
2 M/s. Evita Constructions Pvt. Ltd. to earn bank interest and said interest is taxable under the head 'Income from Other Sources?
4. Whether on the facts & circumstances of the of the case and in law, Ld, CIT(A) has erred in not appreciating the fact that the decision of Hon'ble Punjab & Haryana High Court's in the case of CIT Vs Abhishek Industries Ltd. [205 CTR P H 304, (2006) 286 ITR 1 (PH)] is squarely applicable to the assessee's case in respect of diversion of interest bearing funds as a interest free loans to the sister concern?
5. Whether on the facts & circumstances of the of the case and in law, Ld, CIT(A) has erred in applying the ratio of Hon'ble Apex Court's decision in the case of SA Builders (288 ITR 1) as well as the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Communication Infrastructure Ltd. (ITA No.3155 of 2009) holding that the funds were advanced to sister concerns out of business expediency when in fact the assessee had obtained funds to purchase land?
Apropos first issue :-Ground no 1 to 4
Brief facts are that the ground relates to the assessing officer treating interest on FD amounting to Rs.72,07,590/- as "Income from Other Sources". The assessing officer has has mentioned that appellant submitted a letter dated 02/12/2016 stating interest of Rs. 0.72 crores has been netted off with interest expenses and capitalised. The assessing officer rejected the contention of the appellant observing that appellant had deposited unutilised funds and earned interest thereon. The assessing officer held there was no direct connection between interest paid and interest received. Holding the interest received as revenue receipt, the assessing officer brought it to tax as "income from other sources" relying on Tuticorin Alkali Chemicals & Fertilizers Ltd vs CIT (SC).
Upon assessee’s appeal learned CIT(A) deleted the addition holding as under :-
“The facts and circumstances of the case indicate that the fixed deposits were created for availing banking facilities for business. Therefore, it is seen that there is a nexus between the deposits made out of business necessity and the interest earned on term deposits temporarily made to reduce interest burden on funds borrowed for purchase of land. The funds had to be put in FDs as there was delay in acquisition of land. It is also noted that rate of interest on term loans taken and OD facilities were higher than interest
3 M/s. Evita Constructions Pvt. Ltd. earned on FD, supporting the contention that the FDs were made primarily to reduce the cost of funds for the project and were accordingly netted and reduced from WIP. Under the circumstances, the ratio of following judgments apply to the facts of the case:
Particulars Judgement
Treatment of interest earned by the assessee who is CIT Vs. Lok Holdings 2009- engaged in business of development of properties, on TMI-32351/(2009) 308 ITR deposits made out of advance money received from 356 (Bom) customers who booked properties came for consideration. The high Court while confirming the decision of ITAT, held that such interest income is to be assessed as business income and not income from other sources. Interest incomes from deposits made out of surplus Satishchandra and Co. Vs. business funds were assessable as Income from CIT (1998) 234 ITR 79 (Kar) Business and not from Income from Other Sources. Interest income was closely connected with business of the assessee and was part of the business income It was a case of temporary surplus fund available to the Voltas International Ltd. assessee not immediately required for its business Vs. ACIT (2010) 2 ITR (Trib) purposes which was kept in fixed deposits but ne 410 (Mum) vertheless, the funds were meant only for the assessee's construction activities and, therefore, they were inextricably /inked with the assessee's activities and hence, assessable as income from business Interest earned on short term deposits made out of spare Snam Progetti SPA Vs. funds is assessable as business income. Add.CIT (2010) 132 ITR 70 (Del) Unutilized funds were invested in interest bearing short- Eveready Industries India term deposits. The assessee earned interest on such Ltd. Vs. CIT (2010) 323 ITR short-term fixed deposits made out of the business 312 (Cal) funds available with the assessee before they were utilized for actual business and, therefore, the same was incidental to the business activity of the assessee- company and interest on such short-term deposit must be treated as business income. Whether where surplus funds, which are not readily VBC Industries Ltd. Vs. required by assessee for its business purpose, are placed DCIT (2011) 44 SOT 55 in FDRs or in term deposits, interest generated thereon (Visk) (URO) would certainly be business income, being income out of commercial assets of business and not an income from other sources - Held, yes Interest arising from deposits made out of business CIT Vs. Tirupati Woolen funds lying idle, is income from business and not from Mills Ltd. (1992) 193 ITR other sources 252 (Cal) Upon the peculiar facts of the case, it was held that the CIT Vs. Tamil Nadu Dairy interest accrued on short term deposits of the company, Development Corporation made out of the business funds available with the Ltd. (1995) 216 ITR 536 company, before the same were utilized for actual (Mad) business, should be treated as Business Income.
4 M/s. Evita Constructions Pvt. Ltd.
Idle amounts were deposited with the bank or given on CIT Vs. Paramount temporary loans until such time as they were required Premium P. Ltd. (1991) 190 for construction. Thus, interest was earned on these ITR 259 (Bom) amounts. In due course the assessee's appeal was considered by the Tribunal and the Tribunal recorded a finding that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. This Court held that the aforesaid interest was assessable as income from business and affirmed the correctness of the view of the Tribunal that the interest so earned was "Income from business". "In the present case, on facts, the assessee had CIT Vs. Nagarjuna Steels borrowed funds. Some of the borrowed funds which were Ltd. [1988] 171 ITR 663 not immediately required were kept by the assessee in (AP) deposits and some interest was earned. There was a direct nexus between the borrowed funds and the deposited funds, since the deposited funds came out of the borrowed funds. And it cannot be assessed under the head "Income from Other source.".
The ratio of case laws relied upon by the appellant and reproduced above under contentions also support the view that the interest earned is capital receipt and has rightly been capitalised and reduced from WIP to effectively reduce the cost of borrowed funds. This ground is, therefore allowed.”
Against the above order revenues in appeal before us.
We have heard both the parties and perused the records. We find that learned CIT(A) has given the finding that the fixed deposits were created and thereafter used as margin for pertaining bank loan for the purpose of business. In this way of the matter the Nexus with business is duly established. The case laws referred by the CIT(A) duly supported proposition. Furthermore in our considered opinion the issue may not have much of the revenue impact. Hence in considered opinion once it is established that there was business nexus there is no infirmity in the order of learned CIT(A) allowing the netting off of the same. Accordingly the upon the order of learned CIT(A) on this issue Apropos second issue : ground no 5
Though no specific issue is referred in this ground, Learned counsel of the assessee has submitted that this ground is relating to the assessing officer’s action of disallowing interest for diversion of interest-bearing funds.
5 M/s. Evita Constructions Pvt. Ltd.
Brief facts are that the assessing officer enquired as to why interest bearing funds have been diverted to give interest free loan to related parties. The assessing officer has further referred to explanation offered by the assessee vide letter dated 02/12/2016. . In brief, it was contended by the assessee that the company had made advances to wholly owned subsidiaries who owned plots of lands which were being developed by the assessee- company and similar advances were given to various other vendor's in the normal course of business of allotment of existing projects.
The assessing officer rejected the explanation offered by the appellant and disallowed proportionate interest to subsidiaries by observing, "it is clear that the assessee is diverging interest-bearing loans to interest free loans to its associate/subsidiary concerns. The assessee is in the business of construction and development activity and not of advancing loans. Hence these funds have not been advanced for any business exigencies. No prudent business would pay interest on borrowing without getting any return from advancing these interest-bearing funds so as to mitigate/reduce the burden of interest paid.
Upon assessee’s appeal learned CIT(A) deleted the addition by holding as under :- “In the first instance, it is noted that the assessing officer has not disputed the facts relevant to the issue. He has not disputed that the impugned advances were made to wholly owned subsidiaries of the appellant who actually owned the parcels of land on which development/construction was being done by the appellant company. The assessing officer has also not disputed that the appellant obtained Rs. 425 crore bank loan from Oriental Bank for purchase of assets through e-auction. The copy of loan sanction was made available to the assessing officer during assessment proceedings along with other relevant details. In view of the above undisputed facts, it becomes evident that the appellant had obtained the loan to make payments to HDFC for purchase of land e- auctioned under SARFAESI Act. Subsequently, the same was shown as receivable from subsidiary companies in appellant's books. The appellant has entered into facilitation agreements with the subsidiaries in question for development/construction on the impugned plots of land. In my opinion, the facts and circumstances of the case establish that the interest free advances to wholly owned subsidiaries had direct nexus with the business of the 6 M/s. Evita Constructions Pvt. Ltd.
appellant and were made out of commercial expediency. The subsidiary companies owned the land and the appellant had entered into facilitation agreement with the subsidiaries for development of that land. This establishes that the business of the appellant was inextricably linked with that of the subsidiaries and was in fact dependent on the land resources available with subsidiaries in their books.
5.3.5 The appellant has relied upon the ratio of judgement of Hon'ble Supreme Court in S.A. Builders Ltd. vs CIT, 288 ITR 1. Similar issue was examined by Hon'ble Bombay High Court in The Commissioner of Income Tax-7 Vs M/s Reliance Communications Infrastructure Ltd, Income Tax Appeal No. 3155 OF 2009 wherein the Hon'ble Court made the following observation on the above mentioned judgement:
"10. In S.A. Builders, the Assessing Officer had observed that the assessee had transferred a certain amount to its subsidiary out of a cash credit account in which there was a debit balance. The Assessing Officer found that the assessee had diverted its borrowed; funds to a sister concern without charging any interest and that consequently, a proportionate part of the interest relating to that amount, out of the total interest paid by the assessee to the Bank, had to be disallowed. The CIT(A) had observed that out of the total amount advanced by the assessee to its subsidiary, only an amount of Rs. 18 lakhs had a nexus with borrowed funds and he had directed the Assessing Officer accordingly to calculate the disallowance. The Tribunal allowed the appeal by the Revenue and dismissed the appeal of the assessee. The order was confirmed by the High Court. The Supreme Court observed that the Income Tax authorities, the Tribunal as well as the High Court had approached the matter from an erroneous perspective. The Supreme Court held that where the assessee had borrowed funds from a Bank and lent some of them to a subsidiary as an interest free loan, the test to be applied is whether this was a matter of commercial expediency. The expression "commercial expediency", held the Supreme Court, is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. An expenditure, which is commercially expedient, may not be incurred under a legal obligation, but so long as it meets the requirement of commercial expediency, it has to be allowed. However, the Supreme Court held that it is not in every case that interest on borrowed loans would have to be allowed if the assessee advanced the money to a sister concern. Where the amount is advanced to a sister concern, for the personal benefit of its directors, for instance, it would not qualify to be regarded as commercial expediency. However, noted the Supreme Court, where a holding company "has a deep interest in its subsidiary advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would ordinarily be entitled to deduction of interest on its borrowed loans." The Supreme Court accordingly set aside all the orders passed by the authorities below including the judgment of the Tribunal and of the High Court and remanded the matter for a fresh decision."
7 M/s. Evita Constructions Pvt. Ltd.
Guided by the judgement in S.A. Builders Ltd. (supra), Hon'ble Bombay High Court further observed:- "Where the assessee, as in the present case, has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business connection, there is no reason or justification to make a disallowance in respect of the deduction which is otherwise available under Section 36(1)(iii)."
In conclusion, the Hon'ble Bombay High Court observed:
".......the finding is that the funds were deployed as a matter of commercial expediency and to further the business of the assessee. The latter finding is independent of whether borrowed funds were or were not utilized, for in view of the judgment of the Supreme Court held, the fact that borrowed funds were utilized for making investments or, as the case may be, for making advances would not disentitle the assessee to the deduction so long as business expediency exists."
In the instant case, as discussed above, business expediency of making interest free advances to wholly owned subsidiaries has been established. Accordingly learned CIT appealed deleted the disallowance of proportionate interest by the assessing officer.
Against the above order assessee is in appeal before us.
We have heard both the parties and perused the records. We find that it is undisputed fact of the case that assessee has granted funds to subsidiaries as well as other parties whose land was being used for development. Assessing officer has disallowed the interest portion which was attributable to the funds granted to subsidiary companies. In our considered opinion when the funds have been granted to subsidiary companies for the purpose of business, the business expediency is established. In such circumstances the ratio from honourable Supreme Court decision in the case of S.A. Builders supra is directly applicable. It is also not disputed that assessee has granted funds to the various parties whose land was being used for development by the assessee. Hence once the business expediency is established no disallowance on account of diversion of interest-bearing funds is permissible as per the ratio
8 M/s. Evita Constructions Pvt. Ltd. of above said Supreme Court decision. Hence in our considered opinion there is no infirmity in the order of learned CIT(A). Accordingly we uphold the same
In the result, the appeal by the revenue stands dismissed. Order pronounced under Rule 34(4) of the ITAT Rules by placing the result on notice board on 11.12.2020.