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Income Tax Appellate Tribunal, DELHI BENCH : F : NEW DELHI
Before: SHRI R.K. PANDA & MS SUCHITRA KAMBLE
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER Assessment Year : 2012-13 ACIT, Vs. Powerlinks Transmission Ltd., 10th Floor, DLF Tower-A, Circle 20(1), New Delhi. Distt. Centre, Jasola, New Delhi. PAN: AABCT7775M (Appellant) (Respondent) Assessee by : Shri Manoneet Dalal, Shri Vishu Goel & Shri Dipanshu Mutreja, Advocates Revenue by : Shri Surender Pal, Sr. DR Date of Hearing : 06.02.2019 Date of Pronouncement: 08.02.2019 ORDER
PER R.K. PANDA, AM:
This appeal by the Revenue is directed against the order dated 20th January, 2016 of the CIT(A)-7, New Delhi, relating to assessment year 2012-13.
The facts of the case, in brief, are that the assessee is a company engaged in the business of transmission of electricity. It filed its return of income declaring total income of Rs.28,76,36,810/-. Subsequently, the assessee filed its revised return on 28th September, 2012 declaring nil income after claiming unabsorbed depreciation.
The case was selected for scrutiny and notices u/s 143(2)/142(1) were issued. The Assessing Officer, during the course of assessment proceedings, asked the assessee to explain the claim of deduction u/s 36(1)(iii) on account of interest and to furnish the information regarding details of investments made as on 31.03.2011 and 31.03.2012 amounting to Rs.1655.62 lakhs and Rs.3210.00 lakhs respectively. From the details furnished by the assessee, the Assessing Officer noted that the average investment worked out to Rs.2,432.81 lakhs. However, no income was generated on these investments although the assessee has incurred expenses on account of administration and other costs and paid substantial interest on the funds raised as loans. He noted that the assessee company is into the business of transmission of power and investment is not the business of the company, the company had raised substantial loans which remained unpaid during the year and huge interest was paid or accrued on such loans.
He analysed the details of loans and interest expenditure which are as under:-
Opening balance of loans as on 01.04.2011 Rs.63240.10 lakhs Closing balance of loans as on 31.03.2012 Rs.55830.11 lakhs Average of loans for the year 2010-11 Rs.59535.105 lakhs Total interest paid on loans Rs.6170.49 lakhs
From the balance sheet as at 31.03.2012 following investments are taken to note: Opening balance Rs.1655.62 lakhs Closing investments Rs.3210.00 lakhs Average investments Rs.2432.81 lakhs
Since there was no disallowance made by the assessee u/s 14A, therefore, he asked the assessee to explain as to why disallowance u/s 36(1)(iii) should not be made since the assessee has paid huge interest of Rs.6170.49 lakhs on various loans and did not earn any exempt income during the year from investments made and the funds so invested towards shares could have been utilized for repayment of loans and substantial amount could have been saved, the Assessing Officer also analysed the provisions of section 28 and held that the payment of interest cannot be allowed as an expenditure since the funds are utilized for the purposes other than the business of the assessee company. The funds kept in investments is not the business of the assessee company. He, therefore, held that payment of interest to the extent of funds utilized as investments does not qualify for eligible expenses within the provisions of law and is liable to be disallowed. Rejecting the various explanations given by the assessee and observing that the assessee company used substantial amount of funds as investments for a purpose other than its business, he disallowed an amount of Rs.9,07,57,000/- u/s 36(1)(iii) of the IT Act. While doing so, he also relied on various decisions.
Before the CIT(A), it was argued that under identical circumstances the CIT(A) in assessee’s own case for assessment years 2007-08 and 2010-11 has deleted such disallowances. It was argued that the investments in mutual funds and FDRs were from own funds and not from any borrowed funds. Relying on various decisions including the decision of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utility & Power Ltd., 313 ITR 340 (Bom), it was argued that if there are funds available with the assessee in the form of overdraft/loans then presumption would arise that investment is out of interest free funds generated or available with the company, if interest free funds were sufficient to make investment. It was substantiated before the CIT(A) that the own capital and free reserves at Rs.50,583.66 lakhs as on 31.03.2012 is much higher than the total investment of Rs.12,924.00 lakhs as on 31.03.2012. The assessee further argued that the investments in FDRs, etc. should be viewed from the point of view of commercial expediency. Relying on various decisions, it was argued that no disallowance u/s 36(1)(iii) of the IT Act is called for. The assessee, relying on various decisions, further argued that as per the provisions of section 36(1)(iii) of the Act, when the capital is borrowed by the assessee for the purpose of business or profession and interest on such borrowed capital has to be paid by the assessee, then, no disallowance u/s 36(1)(iii) of the IT Act can be made. Relying on various decisions, it was argued that the Assessing Officer is not justified in making disallowance u/s 36(1)(iii) of the Act.
4.1 Based on the arguments advanced by the assessee and following his order for assessment year 2010-11, the ld.CIT(A) deleted the addition by observing as under:- 3.3. I have carefully considered the facts of the case, order of the AO and submissions made by the AR of the appellant company. I find that an identical issue has been decided by my predecessor in favour of the appellant for A. Y. 2010-11 vide order dated 09.04.2014 in Appeal No. 98/12-13. The CIT(Appeals) had held as under: "6. Ground No. 2 is in respect of disallowance under section 36 (1)(iii). 6.1. The AO held that the appellant company used substantial amount of funds which were borrowed as investments, which was not the business of the company. Therefore, the AO• disallowed proportionate interest paid on account of funds utilized as investments stating that it was for non business purposes.
6.2. The appellant on the other hand stated that the loans borrowed and the utilization of funds was purely for business purposes. A part of the loans was utilized for investment in debt oriented funds. These 4 funds were the appellant's own funds. The balance funds were used for investments in banks. The appellant stated that it had entered into a loans agreement with the lenders of capital. As per the agreement, the appellant was compulsorily to keep a deposit in the bank and not withdraw it.
The appellant has quoted the case of the Hon'ble Supreme 6.3. Court in Madhav Prasad Jatia vs. CIT AIR 1979 SC 1291: 118ITR 200, 208.
The judgment of Bombay High Court in the case of CIT v 6.4. Reliance Utility & Power Ltd. as well as Woolcombers of India Ltd. and of the apex court in the case of East India Pharmaceuticals Ltd. has held that if there are funds available with the appellant then the presumption would arise that investment would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment. The judgment of S A Builders Ltd. v CIT held that what is relevant is whether the amount was advanced as a measure of commercial expediency. The judgment of the Hon 'ble Delhi High Court in the case of CIT v Dalmia Cement Ltd. has held that it should be established that there was nexus between the expenditure and purpose of the business.
As per section 36(l)(iii) the clause envisages the fulfillment, 6.5. of three conditions before interest can be allowed as a deduction: (1) There should a borrowing; (2) Capital must have been borrowed for business purposes; and (3) Interest should have been paid or payable in respectthereof.
6.6. Borrowal implies a consensual act: The word 'borrow' has not been defined in the statute and, therefore, its dictionary meaning has to be looked up. The meaning of the word 'borrow' as given in the Shorter Oxford Dictionary is to take (a thing) on security given for its safe return. Since borrowing implies a consensual act by a debtors receiving money from a creditor, it would not cover a case of any and every liability. Borrowing money and payment or interest is a mere commercial transaction. Where the appellant, a public limited company, carrying on the business in manufacture of sugar, owning about 2000 acres of land on which it grew sugarcane, borrowed a certain sum which was credited to the agricultural section of the appellant, it was held that the interest payable on the borrowings credited to the agricultural section was an admissible deduction. The borrowing must be a genuine borrowing and not a bogus one. The borrowing may be on a permanent footing such as by way of debenture loan or a spasmodic one such as from year to year, or for short term such as by way of overdrafts from banks, or loans from time to time.
6.7 The amount should be borrowed for the purposes of the business. The moneys should be borrowed by the appellant for purposes of the appellant's business. Further, the expression for the purpose of the business' may take into account not only the day to day running of a business but several other matters. A borrowing diverted from business would cease to be a borrowing for purpose of business, so that the interest proportionate to such diverted funds is liable for disallowance. In order to be allowable as expenses, it should be in respect of business which was carried on by the appellant and the profits of which are computed and assessed, and should be incurred after the business is set up. Where the expenses were in connection with or related to a business which was yet to commence, the decision of the Tribunal in disallowing the deduction claimed by the appellant was correct. Interest on money borrowed for investment in a joint venture company could be treated as one borrowed for appellant's business and therefore deductible. Where an appellant borrows money for expansion of its existing business, the interest paid thereon is allowable.
6.8 In state of Madras vs. Coelho (GJ), the Supreme Court has held that, in ordinary commercial practice, payment of interest is taken as a revenue expenditure. The money borrowed must be for the purposes of the appellant's business or profession that is carried on during the year of account.
6.9 In respect of interest paid, deduction permissible under this clause is in respect of interest as distinguished from other kinds of compensation. Interest is a permissible deduction under this clause only if it has been 'paid'. It need not have been actually paid in cash. It may have been paid by way of adjustment in accounts by any equivalent mode when the accounts are maintained on the mercantile basis. Interest on borrowed capital is allowable under this clause.
6.10 The issue whether borrowed capital had been actually used for business is one relating to facts and does not give rise to a question of law. Even if it were a question of law, it may not give rise to a substantial question of law where the appellant agrees to pay interest on loan originally treated as interest free. The inference that borrowing is for non-business purposes on the particular facts of the case may be a question of fact. But it may give rise to a question of law where the inference does not follow the facts of the case.
6.11 It is quite apparent that the appellant is not incurring any such expenditure which is not a business expenditure. All expenditure has been incurred for the purpose of business. The appellant had borrowed funds which was for business purposes and was paying interest on these funds. In view thereof, the addition of Rs. 6,45,21,521/- is deleted. The ground of appeal is ruled in favour of the appellant. " 3.4. Since the facts are similar in the present appeal, following the above decision, disallowance of Rs.9,07,57,000/- u/s 36(1 )(iii) of the Act made by the AO is ordered to be deleted. The ground of appeal is ruled in favour of the appellant.”
Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:-
“1. On the facts and under the circumstances of the case, the ld.CIT(A) has erred in deleting the addition of Rs.9,07,57,000/- made by the A.O. u/s 36(1)(iii) of the Act on account of disallowance of interest expenditure, by not appreciating the fact that the assessee company has used the borrowed funds for non-business purpose.
2. On the facts and under the circumstances of the case, the ld.CIT(A) has erred in deleting the above addition u/s 36(1)(iii) of the Act by not appreciating the fact that the A.O. has mentioned detailed reasons of disallowances in the assessment order itself.”
We have heard the rival arguments made by both the sides and perused the orders of the authorities below. We have also considered various decisions relied on by both the sides. We find the Assessing Officer disallowed an amount of Rs.9,07,57,000/- on the ground that the assessee has paid substantial interest on borrowed funds which have been utilized in mutual funds and other deposits and the borrowed funds are not utilized for business purposes. We find the ld.CIT(A), following his order for assessment year 2010-11 deleted the addition, the reasons for which have already been reproduced in the preceding paragraphs. We find the order of the CIT(A) for assessment years 2007-08 and 2010-11 were challenged before the Tribunal by the Revenue and the Tribunal vide & 3870/Del/2014, order dated 21.12.2018 decided the issue in favour of the assessee and dismissed the appeal filed by the Revenue by holding as under:-
“4) We have heard both sides patiently and we have perused the materials on record, including the paper book, synopsis etc. filed in the course of appellate proceedings in ITAT, carefully. We have also considered the judicial precedents referred to in the record and also the precedents brought to our attention, at the time of hearing before us. (4.1) The common issue involved in both the appeals filed by Revenue is regarding disallowance of interest U/s 36(1)(iii) of I.T. Act. As mentioned earlier, the Ld. DR did not dispute the facts contended by the Ld. Counsel for assessee. The relevant facts are not in dispute. It is not in dispute that the investments in mutual funds had not started till the time, the assessee started earning operating income from transmission of electricity. It is also not in dispute that the borrowed funds were entirely used by the assessee for investment in fixed assets for the purposes of business. It is further not in dispute that the assessee had adequate interest free funds of its own for making investments in mutual funds. It is, furthermore, not in dispute that there were contractual restrictions imposed on assessee in respect of utilization of borrowed funds; and also, the assessee was liable for payment of substantial amounts of liquidation damages/pre-payment charges in case the assessee made pre-payment of loan repayments. Thus, it is also not in dispute that due to contractual restrictions and liquidation damages/pre-payment charges, as aforesaid; it was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments even if the assessee had its own interest free funds. In these specific and peculiar facts and circumstances, there is no case for any disallowance of interest U/s 36(1)(iii) of I.T. Act. Moreover, Ld. DR failed to bring any material facts to our notice to distinguish the facts of the assessee with the facts of the judicial precedents on which the Ld. CIT(A) relied upon and on which the Ld. Counsel for assessee relied upon during appellate proceedings in ITAT. The Ld. DR thus failed to make any case for any interference by us with the order of Ld. CIT(A) on this issue. (4.2) In view of the aforesaid specific and peculiar facts and circumstances of the case, and in view of the foregoing discussion, we decline to interfere with the decision of Ld. CIT(A) on the issue of disallowance of interest U/s 36(1)(iii) of I.T. Act, on merits. Accordingly, both the appeals filed by the Revenue are dismissed.”