M/S. VERACIOUS BUILDERS & DEVELOPERS PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 7(1)(2), BANGALORE

O R D E R Per Shri A.K. Garodia, Accountant Member Both these appeals are filed by the assessee and these are directed against the combined order of ld. CIT(A)-7, Bangalore dated 06.03.2019 for Assessment Years 2014-15 and 2015-16. Both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. 2. The grounds raised by the assessee for Assessment Year 2014-15 in are as under. “The orders of the lower authorities in so far as they are against the appellant is opposed to law, equity and weight of evidence, probabilities, facts and circumstance of the case. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the appellant has furnished the satisfactory explanation. The Appellant has made a bona fide claim of expenditure in the profit and loss account and had accordingly filed the return of income, without any intention of concealing the facts and evading taxes. The Assessing Officer has concluded the assessment proceedings and has made addition/disallowance of certain income and expenditure without considering the actual facts of the case and that there was no deliberate intention on the part of the Appellant to conceal facts. I. Addition of Notional Interest at the rate of 14.5% Prime Lending Rate of SBI: & 952/Bang/2019 Page 2 of 9 The Assessing Officer has added a sum of Rs. 76,18,415/-stating that the assessee company has given interest free loan to sister concern M/s Legno Door Systems Pvt. Ltd which is incurring loss under section 36(1)(iii) of the Income Tax Act, 1961 stating that there is no nexus between the advance amount paid by the Appellant to the sister concern for the purpose of business. In this regard, we inform your good-selves that M/s. Legno Door Systems Pvt. Ltd. is one of the major vendors who mainly supply and install the Doors and Windows with Frames, Shutters, hardware locks, inches etc. for the Residential Flats/Apartments constructed by us. Further, they are also into supply of materials for furniture and interiors of these Residential Flats/Apartments. The Appellant makes advance payments towards supply and installation of these materials from the said vendor. The intention of these revolving advances are to ensure that there is no price escalation in the materials cost for the wood whether it is Burma Teak, Assam Teak, Sal Wood etc. which are used as doors and windows to the residential apartments constructed by the Appellant. In the present market condition, the wood rates are very volatile and are increasing on a day by day basis considering the scarcity of these materials and thereby it is important to freeze the cost of these materials used for the completion of a constructed apartment. Further, to ensure that the total cost of the Apartment is reasonable and to compete in pricing to sell these flats, huge advances are made towards purchase of these material suppliers. It is a common factor that the majority of the cost of flat is related to civil works, wood works and flooring works. Thereby, it is sensible to protect the cost of these supplies by blocking the inventory at an affordable price by paying sufficient advances to these suppliers by estimating the total requirements for completion of any residential apartment project, in terms of the cost of raw materials required and accordingly blocking the inventory at a reasonable rate to ensure that the total cost of the construction is within the allocated budget. Such advance paid support the supplier to procure the raw materials and complete the desired products production and thereby fulfills the material requirement by continuous supply for our various projects in hand. From the above discussions one can conclude that the advance paid to the supplier M/s. Legno Door Systems Pvt. Ltd. (though our sister concern), is for the purpose of business only and thereby this in turn establishes the existence of Commercial Expediency. It is important to understand that once it is established that there is nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the position of the businessman or of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The Income Tax authorities must put themselves in the position the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point & 952/Bang/2019 Page 3 of 9 but that of a prudent businessman. One has to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount is advanced for earning profits. The Appellant further states at this juncture that, it had sufficient funds to pay advance towards supply and installation of wood related materials in the form of Doors, windows along with the frames and shutters, to M/s. Legno Door Systems Pvt ltd. Reference is invited in: a. Dail Investment Ltd. v. Dy. CIT (2001) 74 ttj (Cal) 22, 27 - wherein the learned authority has upheld the fact that since the borrowed capital was utilized for the purpose of assessee's business and the interest free advance was made essentially in the course of achieving its business purpose, interest paid on borrowings was held admissible as a deduction. b. ITO v. R.N. Trading Co., (1982) 13 TTJ (Pat) 204, 206 -wherein the learned authority has upheld the fact that interest was allowed as deduction since Tribunal found that the loans were not diverted for non- business purposes. c. Meenakshi Synthetics (P) Ltd V. CIT (2003) 84 ITD 563 (Lucknow) wherein the learned authority has upheld the fact that Non-charging of interest on loans given by an assessee cannot itself be a sufficient ground for disallowing interest paid by an assessee on loans taken by it in the absence of any nexus between borrowed capital and interest free advances or in the absence of any finding that borrowed funds or part thereof was diverted towards interest free advances. d. ITO v. Naresh Fabrics (2002) 75 TTJ (Jodh.)386 wherein the learned authority has upheld the fact that where nothing has been brought on record by the revenue to provide that interest bearing funds available with the assessee is not utilized for the purpose of business but is given as interest free loans or advances, disallowance of interest on borrowed capital is unjustified. e. Gujarat Narmada Valley Fertilizers Co. Ltd. V. Deputy CIT, (2001) 73 TTJ (Ahmd) 787, 794 - There is no clear evidence that the interest- bearing loans taken by the assessee company for the purpose of its own business have been diverted for non-business purposes. No direct nexus has been proved either by the AO or by the CIT(A) between the interest bearing loans taken and the interest free advances given. f. Hotel Apsara & Sagar Bar Restaurant v. ITO (1982) 13 TTJ (Pat) 202, 204 - Deduction for interest allowed holding that loan was taken for business purposes. g. Ram Chand Hari Chand v. ITO (1982) 13 TTJ (Chd) 300 -Deduction of interest was allowed as it was found that no direct link between the borrowing and its use for non-business purpose was established. h. Babulal Sukhlalal v. ITO (1986) 25 TTJ (pune) 542, 543 - Borrowings being for genuine business needs, no part having any direct nexus with the interest-free advances, interest thereon was allowable. i. Hindustan Engg. Co. v. ITO (1987) 27 TTJ (.7.0,) 505, 505-06 - Deduction eligible in respect of interest paid on borrowed money as it could not be denied that borrowed funds were used for purpose of & 952/Bang/2019 Page 4 of 9 business. j. United Agencies v. ITO (1990) 37 TTJ (Ahmd) 374, 377 - Where the interest-free funds and the current profit of the assessee were substantially more than the amount of interest-free loan advanced to the sister concern, the entire amount of interest paid on borrowings is admissible. k. Sutlej Cotton Mills Ltd. v. Asst. CIT (1998) 60 TTJ (Del) 1, 12 - Assessee Company having advanced unsecured loans to its subsidiary companies for strengthening their financial position with which the business prospects of the assessee are inseparably linked, interest on borrowings cannot be disallowed. l. Hindustan Trading Co. v. ITO (1982) Taxation 67(6)94, 96 (Born) - If the sum total of capital accounts and non-interest bearing advances from constituents exceed borrowings by the firm, interest to be allowed. The principles enunciated in various decisions are that if there are sufficient funds on a particular date to cover the advance, merely because the assessee has also taken some loan, it cannot be attributed that the interest-bearing funds are diverted for non-business purposes. In other words, the benefit of doubt of utilizing the own funds from the common pool account, should be given to the assessee. It is worthwhile to specify here that the Appellant is regular in compliances and does not have any intention to evade taxes and cause loss to the revenue. The Appellants only contention is with regard to the actual facts of the case which were totally discounted by the Assessing Officer. On account of the above stated grounds and in the circumstances of the case and in law the Assessing Officer erred in making the following additions and disallowance, without appreciating the actual facts and transactions of the present case: a. Addition of Notional Interest at the rate of 14.5% Prime Lending Rate of SBI. b. Interest on Late Payment of TDS. The Appellant prays that the addition of Rs 76,18,415/- and disallowance of Rs. 8,57,622/- made in respect of above stated facts be deleted. The Appellant craves leave to add, amend, alter, vary and/or withdraw any or all the above grounds of Appeal The Appellant further prays to consider the above grounds, delete the addition made, allow the expense claim and drop the proceedings in the interest of natural justice.”

3. Similarly, the grounds raised by the assessee for Assessment Year 2015-16 in are as under. “The orders of the lower authorities in so far as they are against the appellant is opposed to law, equity and weight of evidence, probabilities, facts and circumstance of the case. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the appellant has furnished the satisfactory explanation. The Appellant has made a bona fide claim of expenditure in the profit and loss account and had accordingly filed the return of income, & 952/Bang/2019 Page 5 of 9 without any intention of concealing the facts and evading taxes. The Assessing Officer has concluded the assessment proceedings and has made addition/disallowance of certain income and expenditure without considering the actual facts of the case and that there was no deliberate intention on the part of the Appellant to conceal facts. I. Addition of Notional Interest at the rate of 12.5% Prime Lending Rate of SBI: The Assessing Officer has added a sum of Rs. 80,45,360/-stating that the assessee company has given interest free loan to sister concern M/s Legno Door Systems Pvt. Ltd which is incurring loss under section 36(1)(iii) of the Income Tax Act, 1961 stating that there is no nexus between the advance amount paid by the Appellant to the sister concern for the purpose of business. In this regard, we inform your good-selves that M/s. Legno Door Systems Pvt. Ltd. is one of the major vendors who mainly supply and install the Doors and Windows with Frames, Shutters, hardware locks, inches etc. for the Residential Flats/Apartments constructed by us. Further, they are also into supply of materials for furniture and interiors of these Residential Flats/Apartments. The Appellant makes advance payments towards supply and installation of these materials from the said vendor. The intention of these revolving advances are to ensure that there is no price escalation in the materials cost for the wood whether it is Burma Teak, Assam Teak, Sal Wood etc. which are used as doors and windows to the residential apartments constructed by the Appellant. In the present market condition, the wood rates are very volatile and are increasing on a day by day basis considering the scarcity of these materials and thereby it is important to freeze the cost of these materials used for the completion of a constructed apartment. Further, to ensure that the total cost of the Apartment is reasonable and to compete in pricing to sell these flats, huge advances are made towards purchase of these material suppliers. It is a common factor that the majority of the cost of flat is related to civil works, wood works and flooring works. Thereby, it is sensible to protect the cost of these supplies by blocking the inventory at an affordable price by paying sufficient advances to these suppliers by estimating the total requirements for completion of any residential apartment project, in terms of the cost of raw materials required and accordingly blocking the inventory at a reasonable rate to ensure that the total cost of the construction is within the allocated budget. Such advance paid support the supplier to procure the raw materials and complete the desired products production and thereby fulfills the material requirement by continuous supply for our various projects in hand. From the above discussions one can conclude that the advance paid to the supplier M/s. Legno Door Systems Pvt. Ltd. (though our sister concern), is for the purpose of business only and thereby this in turn establishes the existence of Commercial Expediency. It is important to understand that once it is established that there is nexus between the expenditure and the purpose of the business, the & 952/Bang/2019 Page 6 of 9 Revenue cannot justifiably claim to put itself in the position of the businessman or of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The Income Tax authorities must put themselves in the position the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. One has to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount is advanced for earning profits. The Appellant further states at this juncture that, it had sufficient funds to pay advance towards supply and installation of wood related materials in the form of Doors, windows along with the frames and shutters, to M/s. Legno Door Systems Pvt ltd. Reference is invited in: a. Dail Investment Ltd. v. Dy. CIT (2001) 74 ttj (Cal) 22, 27 - wherein the learned authority has upheld the fact that since the borrowed capital was utilized for the purpose of assessee's business and the interest free advance was made essentially in the course of achieving its business purpose, interest paid on borrowings was held admissible as a deduction. b. ITO v. R.N. Trading Co., (1982) 13 TTJ (Pat) 204, 206 -wherein the learned authority has upheld the fact that interest was allowed as deduction since Tribunal found that the loans were not diverted for non- business purposes. c. Meenakshi Synthetics (P) Ltd V. CIT (2003) 84 ITD 563 (Lucknow) wherein the learned authority has upheld the fact that Non-charging of interest on loans given by an assessee cannot itself be a sufficient ground for disallowing interest paid by an assessee on loans taken by it in the absence of any nexus between borrowed capital and interest free advances or in the absence of any finding that borrowed funds or part thereof was diverted towards interest free advances. d. ITO v. Naresh Fabrics (2002) 75 TTJ (Jodh.)386 wherein the learned authority has upheld the fact that where nothing has been brought on record by the revenue to provide that interest bearing funds available with the assessee is not utilized for the purpose of business but is given as interest free loans or advances, disallowance of interest on borrowed capital is unjustified. e. Gujarat Narmada Valley Fertilizers Co. Ltd. V. Deputy CIT, (2001) 73 TTJ (Ahmd) 787, 794 - There is no clear evidence that the interest- bearing loans taken by the assessee company for the purpose of its own business have been diverted for non-business purposes. No direct nexus has been proved either by the AO or by the CIT(A) between the interest bearing loans taken and the interest free advances given. f. Hotel Apsara & Sagar Bar Restaurant v. ITO (1982) 13 TTJ (Pat) 202, 204 - Deduction for interest allowed holding that loan was taken for business purposes. g. Ram Chand Hari Chand v. ITO (1982) 13 TTJ (Chd) 300 -Deduction of interest was allowed as it was found that no direct link between the & 952/Bang/2019 Page 7 of 9 borrowing and its use for non-business purpose was established. h. Babulal Sukhlalal v. ITO (1986) 25 TTJ (pune) 542, 543 - Borrowings being for genuine business needs, no part having any direct nexus with the interest-free advances, interest thereon was allowable. i. Hindustan Engg. Co. v. ITO (1987) 27 TTJ (.7.0,) 505, 505-06 - Deduction eligible in respect of interest paid on borrowed money as it could not be denied that borrowed funds were used for purpose of business. j. United Agencies v. ITO (1990) 37 TTJ (Ahmd) 374, 377 - Where the interest-free funds and the current profit of the assessee were substantially more than the amount of interest-free loan advanced to the sister concern, the entire amount of interest paid on borrowings is admissible. k. Sutlej Cotton Mills Ltd. v. Asst. CIT (1998) 60 TTJ (Del) 1, 12 - Assessee Company having advanced unsecured loans to its subsidiary companies for strengthening their financial position with which the business prospects of the assessee are inseparably linked, interest on borrowings cannot be disallowed. l. Hindustan Trading Co. v. ITO (1982) Taxation 67(6)94, 96 (Born) - If the sum total of capital accounts and non-interest bearing advances from constituents exceed borrowings by the firm, interest to be allowed. The principles enunciated in various decisions are that if there are sufficient funds on a particular date to cover the advance, merely because the assessee has also taken some loan, it cannot be attributed that the interest-bearing funds are diverted for non-business purposes. In other words, the benefit of doubt of utilizing the own funds from the common pool account, should be given to the assessee. It is worthwhile to specify here that the Appellant is regular in compliances and does not have any intention to evade taxes and cause loss to the revenue. The Appellants only contention is with regard to the actual facts of the case which were totally discounted by the Assessing Officer. On account of the above stated grounds and in the circumstances of the case and in law the Assessing Officer erred in making the following additions and disallowance, without appreciating the actual facts and transactions of the present case: a. Addition of Notional Interest at the rate of 14.5% Prime Lending Rate of SBI. b. Interest on Late Payment of TDS. The Appellant prays that the addition of Rs 76,18,415/- and disallowance of Rs. 8,57,622/- made in respect of above stated facts be deleted. The Appellant craves leave to add, amend, alter, vary and/or withdraw any or all the above grounds of Appeal The Appellant further prays to consider the above grounds, delete the addition made, allow the expense claim and drop the proceedings in the interest of natural justice.”

4. Both these appeals were fixed for hearing on 17.07.2019 and notice was sent by RPAD and duly served on the assessee as per the acknowledgement & 952/Bang/2019 Page 8 of 9 available on record. In spite of this, none appeared on behalf of the assessee on the appointed date of hearing and hence, these appeals were heard ex- parte qua the assessee. The ld. DR of revenue supported the orders of authorities below.

5. We find that the issue in dispute is decided by ld. CIT(A) as per para 4.8 of its order which is reproduced hereinbelow for ready reference. “4.8 In the instant case, the appellant has advanced large amounts to the sister concern without interest. At the other hand, the appellant has been paying interest at market rate on borrowed funds. This is a case of replenishing interest-hearing funds through borrowing to advance the same free of interest by the appellant. No details or documents submitted to show that such advance to the sister concern was not from the borrowed funds of the appellant. If such loan was not given by the appellant, its interest burden would have reduced proportionately. Thus, the interest to the extent not charged from the sister concern M/s Legno Door Systems Pvt Ltd is to be disallowed under section 36(1)(iii) of the Act. Such borrowings to that extent cannot be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Therefore, proportionate disallowance of Rs 76,18,415/- for AY 2014-15 and Rs 80,45,360 for AY 2015-16 by the AO out of interest debited by the appellant in its accounts, is upheld. The grounds of appeal of the appellant are dismissed.”

6. From the above para reproduced from the order of ld. CIT(A), it comes out that the assessee has not been able to establish that the advances given by assessee to its sister concern M/s. Legno Door Systems Pvt. Ltd. is for business purpose. Hence, disallowance has been made by the AO and confirmed by ld. CIT(A) u/s. 36(1)(iii) of the IT Act. A categorical finding has been given by ld. CIT(A) that no detail or argument was submitted to show that such advance to the sister concern was not from the borrowed funds of the assessee. In view of this categorical finding of ld. CIT(A), we find no reason to interfere in the order of ld. CIT(A).

7. In the result, both the appeals filed by the assessee are dismissed. Order pronounced in the open court on the date mentioned on the caption page.