SRI.RATAN BABULAL LATH,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

There are basically two issues raised by the assessee in this appeal viz., disallowance of interest of Rs.47,62,545 u/s. 36(1)(iii) of the Income- Tax Act, 1961 [“the Act”] and another addition of Rs.1,00,20,000 being interest receivable from M/s. RPG Capital & Credits Ltd. [“RPG”].

As far as the first issue is concerned, the facts are that the assessee is a company engaged in the business of real estate development. In the course of u/s. 143(3) of the Act, the AO noticed that the assessee had advanced interest free loan of Rs.63,50,06,012 as on 31.3.2007 to M/s. Dynasty Developers Pvt. Ltd., [“DDPL”]. DDPL is a company in which the directors of the assessee have substantial interest. The assessee did not charge any interest on the sum advanced to DDPL. The AO noticed that the assessee availed of loans of Rs.578,46,86,896 from HDFC Bank and paid interest on such loans. The AO also found that the monies that were received as advance from HDFC Bank were transferred to DDPL.

The provisions of Sec.36(1)(iii) of the Act, reads as follows:

Thus, for allowance of a claim for deduction of interest under this provision following three conditions are required to be satisfied viz., (i) The money, that is capital, must have been borrowed by the assessee; (ii) It must have been borrowed for the purpose of business. (iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. If the borrowed funds are not used for the purpose of business but are used for giving loans/advances to sister concern or third parties, then the interest expenditure to the extent borrowed funds are diverted for non business purposes, will not satisfy the test of “borrowed for the purpose of business of the Assessee” and interest expenditure will not be allowed as a deduction. The law on this issue is settled after the Hon’ble Supreme Court judgment in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC), in which the concept of “commercial expediency” was used. Thus, where the funds of the business a diverted for interest free loans the main criteria for permissibility of interest on those funds are based on whether it was for commercial expediency or not. The phrase “commercial expediency” has following important traits as purpose as is expected by the assessee to advance its business interest. It may include measures taken for preservation, protection or advancement of its business interests. It has however to be distinguished from the personal interest of its directors or partners, as the case may be. There has to be a nexus between the advancing of funds and business interest of the assessee. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business. The Hon’ble Supreme Court has also delved into the case where there would be mixed fund at the disposal of the assessee. It further clarifies that under Section 36(1)(iii) the ultimate use of the

In the present case, as we have already seen borrowed funds on which interest was paid and which was claimed as deduction while computing income from business had been used to the extent of RS.63,50,06,102/- for giving interest free loan to DDPL. In the above circumstances, the AO was of the view that interest expenses claimed as deduction while computing income from business, on loans from HDFC Bank as a deduction should be disallowed to the extent of 9% of the amount advanced to DDPL of Rs. 63,50,06,012 on the ground that the loans on which interest was paid was not used for the purpose of business of the assessee and therefore the condition for granting interest expenditure as a deduction u/s. 36(1)(iii) has not been satisfied.

In reply to the aforesaid query of the AO, the assessee submitted that the loan in question was given by HDFC Bank as a commercial loan which could be used for any purpose. The assessee submitted that interest free advances given to the assessee’s sister concern, DDPL, has to be considered as utilization of loans for the purpose of business. In this regard, the assessee submitted that it was in the business of real estate and the sum in question was given to DDPL for procuring property. Hence the interest free loan given to DDPL was for the purpose of business and

The AO called upon the assessee to furnish corroborative evidence to show that advances were given to DDPL for procurement of property. The assessee filed a letter dated 1.4.2003 from DDPL wherein there is a reference to arrangement for purchase of 9 acres of land at Kadubeesanahalli, Bangalore. The AO was of the view that but for the aforesaid letter, no other evidence was produced to show whether subsequently the property was registered in assessee’s name in subsequent assessment years. In these circumstances, the AO disallowed a sum of Rs.47,62,545 [9% of 63,50,06,012] out of interest expenses claimed as deduction by the assessee.

Aggrieved by the aforesaid addition made by the AO, the assessee preferred appeal before the CIT(Appeals).

Even before the CIT(Appeals), the assessee did not produce any evidence to substantiate its case of advance to sister concern – DDPL, being for business purposes. The CIT(Appeals), therefore, held that merely because both the assessee and its sister concern are engaged in real estate business, there cannot be a presumption that the money advanced to DDPL was for the purpose of business of the assessee. Before the CIT(Appeals), the assessee had also taken a plea that funds on which interest was paid and which was claimed as deduction in the P&L account were not used for the purpose of making advances to DDPL. The assessee had claimed that it had non-interest bearing funds of Rs.288.97 crores including sundry creditors which was utilised for advancing money to DDPL. This plea was also not substantiated with sufficient evidence.

The ld. counsel for the assessee drew our attention to the balance sheet & P&L account of assessee as on 31.3.2007 and Note 16 of the Notes to Accounts, wherein there is a reference to the assessee having paid a sum of Rs.99,87,30,918 as business consultancy services remuneration to DDPL. Our attention was also drawn to the fact that the assessee had incurred certain expenses on behalf of DDPL and those were reimbursed to the extent of Rs.20,41,328. In the above circumstances, it was submitted that there was a business connection between the assessee and DDPL. Therefore, it should be presumed that interest free loan was given owing to commercial expediency. It was also submitted that the CIT(Appeals) in confirming the order of the AO, has made a reference to the decision of the Hon’ble High Court of Karnataka in the case of Embassy Development Corporation v. ACIT [ 2015] 52 taxmann.com 234, wherein it was held that there was no business expediency in advancing loans to sister concern on identical facts as in the case of the Assessee in this appeal. In the aforesaid case, the assessee as well as its sister concern were engaged in real estate business. Money was advanced to the sister concern out of borrowed funds for the purpose of acquiring part of property which was to be developed by the sister concern. Even after 3 years, no such purchase was made. In these circumstances, it was held that the amounts borrowed were not utilised for the purpose of business of assessee. According to the ld. counsel for the assessee, the aforesaid decision is distinguishable for the reason that there was no evidence of property not having been purchased by the sister concern i.e., DDPL in the present case.

The ld. DR relied on the order of CIT(Appeals).

We have considered the rival submissions and are of the view that the plea put forth by the ld. counsel for the assessee cannot be accepted. As rightly held by the CIT(Appeals), there was no business purpose established by the assessee for which advances were given to DDPL. The claim of assessee that advances were given for purchase of property by the sister concern has not been established. Moreover, from the fact that assessee and sister concern were both in real estate business, advances given by one to the other cannot be treated as for business purpose, unless evidence is let in to show expenses of business purpose. Even before us, the plea of existence of own funds out of which interest free advances were given to sister concern has also not been established. The argument of the learned counsel for the Assessee that in the present case there is no evidence to show that properties were not purchased by DDPL in the present case cannot be the basis to distinguish the decision of the Hon’ble Karnataka High Court in the case of Embassy Development Corporation (supra). The Assessee is claiming deduction of interest expenditure and it is for the Assessee to establish that borrowed funds on which interest was paid and which is claimed as deduction in computing income from business is in fact used for the purpose of business. In these circumstances, we uphold the order of CIT(Appeals) and find no merits in the first issue raised by the assessee.

The second issue that arises for consideration is with regard to addition of Rs.1,00,20,000/- on account of interest receivable from RPG. The facts in this regard are that the assessee had given an advance of Rs.16 crores to RPG by way of Inter-Corporate Deposits [“ICDs”]. On such deposit, interest was payable by RPG. RPG had in its books of account debited interest expenses payable to assessee and had also made deduction of tax at source (TDS). Though RPG had not paid interest to the

Before the CIT(Appeals), the assessee submitted that the aforesaid AIR information was not brought to the notice of assessee by the AO in the course of assessment proceedings. However, the assessee did not furnish any specific explanation as to why the interest income should not be brought to tax on accrual basis in the hands of assessee. Aggrieved by the order of CIT(A), the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee submitted before us that the sum of Rs.16 crores due and payable by RPG had been assigned to M/s. More Finance Share Investments Pvt. Ltd. as early as in AY 2005-06 and in such circumstances, the interest income in question cannot be brought to tax in the hands of assessee. We have considered the submissions and are of the view that no such plea was put forth before the lower authorities. Even before us, no evidence has been let in to substantiate the claim of assessee with regard to assignment of ICDs by the assessee to a third party. In these circumstances, we find no merit in the relevant grounds of appeal of the assessee. Accordingly, the second issue is also decided against the assessee.

In the result, the assessee’s appeal is dismissed.

This appeal by the assessee is against the order dated 30.11.2016 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2008-09.

In this appeal, two issues arise for consideration viz., (1) disallowance of interest on advances made to DDPL of Rs.3,50,42,297 and disallowance of interest on interest-free loans to Topaz Investments Pvt. Ltd. [“TIPL”] of Rs.72,36,903. Both the aforesaid disallowance of interest are us.36(1)(iii) of the Act and (2) disallowance u/s. 14A of the Act of Rs.2,32,511.

The second issue was not pressed for adjudication and the same is dismissed as not pressed.

On the first issue, as far as disallowance u/s. 36(1)(iii) of the Act on account of borrowed funds which were diverted as interest-free loans to DDPL is concerned, the facts are identical to the facts as it prevailed for AY 2007-08. Even in this assessment year, the assessee has not been able to establish that interest-free loans to sister concern was for the purpose of business of the assessee or owing to commercial expediency. In these circumstances, we find no merit in the grounds of appeal raised by the assessee.

As regards disallowance of interest u/s. 36(1)(iii) of the Act on the ground that interest bearing loans were used to give interest-free funds to TIPL of Rs.72,36,903, the facts are identical to the facts as it prevailed for the AY 2007-08 wherein a similar disallowance was made in the case of assessee, in proceedings u/s. 148 of the Act. The disallowance for interest paid to DDPL which was subject matter of discussion in ITA No.333/Bang/2017 was also made for the same AY 2007-08 but that was in

In the result, the appeal of the assessee is treated as partly allowed for statistical purposes.

This appeal by the assessee is against the order dated 30.11.2016 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2009-10.

There are basically two issues that arise for consideration in this appeal viz., disallowance of interest u/s. 36(1)(iii) of the Act on the ground that interest bearing funds were diverted to DDPL and TIPL being for non- business purposes and not having any commercial expediency. The facts

In respect of disallowance of interest of advance to TIPL, the issue is remanded to the AO for fresh consideration as directed by the Tribunal for the AY 2007-08, which we have referred to in the earlier part of this order.

In the result, the appeal by the assessee is partly allowed for statistical purposes.

This appeal by the assessee is against the order dated 30.11.2016 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2010-11.

As far as this appeal is concerned, there are basically three issues that arise for consideration. (i) The first issue is with regard to the computation of disallowance u/s. 14A of the Act r.w.s. Rule 8D(2)(iii) of the I.T. Rules while determining total income under the Normal Provisions of the Act. (ii) The second issue is with regard to disallowance of expenses incurred for the purpose of earning income which does not form part of total income under the Act under Chapter III of the Act while computing book profits for the purpose of levy of tax on book profits u/s.115JB of the Act. (iii) The third issue is with regard to deduction claimed by the assessee on account of capital advances written off of Rs.9,64,74,211 which was not allowed by the revenue authorities.

As far as the first and the second issue are concerned, the facts are that the assessee earned exempt income and therefore expenditure

The disallowed u/s. 14A of the Act was arrived at by the AO in the following manner:-

On appeal by the assessee, the CIT(Appeals) confirmed the order of AO.

It is the plea of the assessee before us that while applying the formula prescribed under Rule 8D(2)(ii) and (iii) and while computing the disallowance u/s. 14A of the Act and while determining total income of assessee under the normal provisions of the Act, the average value of investments should be worked out without including the investments which did not yield exempt income during the relevant previous year.

As far as the amount to be added to the profit as per P&L account u/s. 115JB of the Act is concerned towards expenditure incurred in earning income exempt u/s. Chapter III of the Act, the plea of the assessee was that the disallowance u/s. 14A of the Act made while computing total income under the normal provisions of the Act should not be automatically added while determining the book profits u/s. 115JB of the Act. In support of the stand taken by the assessee, the assessee has placed reliance on the decision of the Delhi Special Bench of ITAT in the case of ACIT v. Vireet Investments Pvt. Ltd., 165 ITD 25 (Del)(SB). In the aforesaid decision, two questions were considered by the Special Bench which are as follows:-

As far as the amount to be added while computing book profits u/s. 115JB of the Act is concerned, the AO cannot add the sum determined as disallowance u/s. 14A of the Act while computing total income under the normal provisions of the Act and he has to adopt a basis as laid down by the Special Bench in the aforesaid decision viz., direct expenditure associated with earning of income. We direct the AO to compute the disallowance u/s. 14A accordingly under the normal provisions of the Act as well as on the basis of book profits u/s.115JB of the Act.

The relevant grounds of appeal of assessee is treated as allowed for statistical purposes. Issue Nos.1 & 2 are decided accordingly.

As far as the third issue is concerned, the assessee claimed deduction of a sum of Rs.9,64,74,211 as impairment of capital advances. The claim of assessee in this regard was that advances given were not realizable and therefore it was decided to write off in the books of account in accordance with the Accounting Standards. When the AO called upon the assessee to justify the deduction on account of impairment of capital

The CIT(Appeals) found that the claim of assessee was not legally correct for the reason that the Assessee on its own admitted that this item of expenditure is not admissible while computing income under the normal provisions of the Act. The following were the relevant observations of the CIT(A):-

In the result, the appeal of the assessee is partly allowed.

This appeal by the assessee is against the order dated 30.11.2016 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2011-12.

There are basically two issues that arise for consideration in this appeal, viz., disallowance of interest u/s. 36(1)(iii) of the Act of Rs.22,71,40,434 and disallowance of expenses u/s. 14A of Rs.53,553.

The issue with regard to disallowance of interest u/s. 14A of the Act was not pressed before us, hence the same is dismissed as not pressed.

As far as disallowance of interest u/s. 36(1)(iii) of the Act is concerned, the facts are that the Assessee had availed of secured loans of Rs 1035,81,74,018. The AO also noticed that the Assessee had given the following advances for the following purposes:

The AO called upon the Assessee to why interest expenditure debited to profit and loss account should not be disallowed proportionate to the extent the same was used for giving advances to sister concerns as detailed above, for the reason that interest expenditure to that extent cannot be regarded as expended wholly and exclusively for the purpose of assessee's business. In response the assessee's authorized representative claimed that the amounts were given for business purposes. However, the

Before the CIT(A) the assessee that it made an advance of Rs.14.70 crores to group companies viz., M/s. D M Estates (P) Ltd., and M/s. GV Properties (P) Ltd. and an advance of Rs.61.50 Crores, M/s. Embassy Property Development (P) Limited (EPDPL) and submitted that these advances were made for business ventures and development of property. The Assessee submitted that all the entities to which the Assessee gave advances and the Assessee were engaged mainly in the business of land development and therefore, the advances made to these entities should be considered as advance made for the purpose of business. The CIT(A) held that the Assessee has not furnished any specific purpose for which money was advanced to the group companies as referred above. He held that the Assessee has not explained how such advances made to those companies complemented the business interest of the Assessee. According to CIT(A) the fact that all group companies are engaged in the real estate business cannot be the basis to infer that any

With regard to advance of Rs.146,49,22,969/- for purchase of shares including share application money, the Assessee submitted that a sum of Rs.131,15,22,969/- was given towards share application money for acquiring shares of Umbel Properties (P,) Ltd (UPPL). The Assessee claimed that the investment in UPPL was for developing a big project in Bangalore. The Assessee claimed that it was one of the promoters of the said project and shares had been allotted to the Assessee in the subsequent year. The CIT(A) held that since the money was given for acquiring shares of another company, interest payable on such advance cannot be allowed as revenue expenditure. In this regard the CIT(A) relied on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. LK Trust (2008) 297 1TR 53, (Karnataka), in which it was held that interest on money borrowed for acquiring shares where the assessee had borrowed money for investment in shares which was not in line with the business of the assessee, interest on such borrowings cannot be allowed as deduction from the business income. The CIT(A) also held that the claim of the Assessee that the amounts were advanced for business promotion and the funds have been fully utilized for the specified projects was not

The CIT(A) however found that the Assessee has received interest of Rs.1,75,48,359/- from the group companies in respect of the advances made. The CIT(A) found from financial statements that a sum of Rs.1,75,48,359/- was included under the head "Other income", which was evident from Note 13 in the Schedule to the Profit & Loss account. He also found that tax was deducted in respect of the said income. Accordingly, the CIT(A) held that to the extent of interest received on advances, the disallowance made by the AO should be deleted. The relevant findings of the CIT(A) in this regard was as follows:-

As far as sum of Rs.146,49,22,969 is concerned, the plea of the ld. counsel for the assessee was that a sum of Rs.131,15,22,969 was share application money to acquire shares of UPPL for the purpose of developing of a big project. The assessee claimed that it was promoter of this company and was a major shareholder of the company. This claim of assessee was also rightly rejected by the revenue authorities for the reason that no evidence was let in to prove the commercial advantage that the assessee would receive by such investments or the business expediency of making the aforesaid investments. The CIT(Appeals) in this regard has rightly placed reliance on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. L.K. Trust, 297 ITR 53 (Kar).

The ld. counsel for the assessee made an alternative submission that if the interest expenditure disallowance is upheld, then the rate of interest that should be applied should be the average rate in respect of all the borrowings of the assessee because mixed funds were used for the purpose of giving advances or acquiring shares. No such plea was put forth by the assessee before the lower authorities and therefore at this stage it is not possible to entertain such a claim. Even before the Tribunal, no details have been furnished by the assessee in this regard. Therefore, the alternate plea of assessee is also rejected.

In the result, the appeal by the assessee is dismissed.

This appeal by the assessee is against the order dated 30.11.2016 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2012-13.

56. The only issue that arises for consideration in this appeal is with regard to disallowance of interest expenses u/s. 36(1)(iii) of the Act. The facts are identical to the facts as it prevailed in the AY 2011-12. For the year under consideration the Assessee has made the following advances to various group concerns.

On appeal, the CIT(Appeals) confirmed the order of AO and held that the Assessee failed to prove that the above advances/investments were for the purpose of business of the Assessee. The CIT(A) held that the Assessee did not furnish any specific details to establish the existence of commercial expediency in respect of the amounts advanced to Embassy Property Development (P) Ltd and Embassy Real Estate and Properties Holding (P) Ltd. Similarly with regard to the inter corporate deposits advanced to GV Properties (P) Ltd., and DM Estates (P) Ltd., no specific information has been furnished with regard to the specific utilization of the money advanced to these companies to demonstrate the existence of business expediency. Therefore considering the specific facts of the case and in the absence of specific evidence with regard to the utilization of the money by the group companies, the CIT(A) held that the loans and advances in question cannot be said to be for the purpose of business.

The Assessee claimed before the CIT(A) the advances made to the group companies were not made out of interest bearing funds and own funds of the Assessee. The Assessee also furnished a working of interest which can be disallowed u/s 36(1) (iii). The CIT(A) found that the claim has not been demonstrated with specific facts and figures. He also found that the total amount of Share capital of the Assessee was only Rs.20 lakhs. The total reserves was negative i.e., (-) Rs.98.39 crores as on 31.03.2012 in view of the deficit in the Profit & Loss account. Therefore the CIT(A) rejected the contention of the Assessee that the advances to group companies were made out of the own funds of the company is contrary to the fact presented in the financial statements.

The Assessee also presented a statement showing the amount of interest which could be disallowed based on its own working. As per the statement the total amount of interest which could be disallowed u/s 36(1)(iii) is stated to be Rs. 785.73 lakhs. However the CIT(A) noticed that the Assessee had taken into consideration the non-interest bearing funds to the extent of Rs.382 crores comprising of long term liabilities, other current liabilities and depreciation written off. The CIT(A) held that it cannot be accepted that the long term and current liabilities have been utilized to finance the loans and advances paid to group companies. Hence, the CIT(A) held that the Assessee has not demonstrated how the advances to the group companies were made out of the current liabilities and depreciation written off. Therefore the contention of the appellant made in this regard was also not accepted by the CIT(A).

The Assessee claimed before the CIT(A) that the AO has taken into consideration Rs.1,61,63,11,120/- as the advance given to related concerns but the correct figure is Rs.145,50,99,834/-. The CIT(A) directed the AO to verify the amount and adopt the correct amount of advance for computing the disallowance.

The Assessee claimed before CIT(A) that it had received interest of Rs.3,61,86,594/- from the group companies in respect of the advances made. The Assessee furnished the financial statements to substantiate its claim in this regard. The CIT(A) held that interest of Rs.3,61,86,594/- was included under the head "Other income" as interest on loans and securities and interest on deposits, which was evident from Note 19 of the 'Note on Accounts'. The CIT(A) held that the amount of interest disallowance made by the AO should be reduced by the amount of interest received from these companies. The AO was directed to delete disallowance of interest to the extent interest income was received on advances and offered to tax.

Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal.

Before the Tribunal, the ld. counsel for the assessee made a prayer that as per Schedule 18 and Schedule 8 to the P&L account and balance sheet, it had sufficient own funds and this needs to be looked into by the AO. We have considered the submission and we find that the CIT(Appeals) has elaborately discussed the availability of own funds, which has not been shown to be incorrect by the ld. AR before us. In these circumstances, we find no merit in this appeal and accordingly the same is dismissed.

ITA No.339/B/17 is an appeal by the assessee, while IT(TP)A No.384/B/17 is an appeal by the revenue. Both these appeals are against the order of the CIT(Appeals)-3, Bengaluru dated 30.11.2016 relating to assessment year 2013-14.

As far as the appeal of revenue is concerned, the same is in relation to disallowance u/s. 14A of the Act. The CIT(Appeals) deleted the addition made u/s. 14A of the Act on the ground that the assessee did not earn any exempt income during the previous year and following several decisions wherein it was laid down that if there was no exempt income earned during the previous year, there can be no disallowance of expenses u/s. 14A of the Act. At the time of hearing of this appeal, it was brought to our notice by the ld. counsel for the assessee that the admitted factual position in the present case is that there was no dividend income or other exempt income earned by the assessee during the relevant previous year. The ld. counsel for the assessee drew our attention to the decision of the Bangalore Bench of ITAT in the case of M/s UB Infrastructure Projects Ltd., Vs. DCIT, ITA No. 2098/Bang/2016 (asst. year 2012-13) order dated 22/12/2017, wherein this Tribunal took the view that there can be no disallowance of expenses u/s 14A of the Act, if there is no exempt income earned during the relevant previous year. The following are the relevant observations of the Tribunal in this regard.

In view of the aforesaid decision of the Tribunal, we are of the view that the disallowance of expenditure u/s 14A of the Act was rightly deleted by the CIT(A).

As far as the appeal by the assessee is concerned, the only issue that arises for consideration in this appeal is with regard to disallowance of interest u/s. 36(1)(iii) of the Act. The facts and circumstances under which disallowance of interest was made by the revenue authorities and the submissions of the Assessee are identical to the facts and submissions of the Assessee, as it prevailed in the AY 2012-13. For reasons given while deciding similar issue in AY 2012-13, we find no merit in this appeal by the assessee. Accordingly, the same is dismissed.

In the result, the appeal of the revenue in ITA No.384/Bang/2017 is dismissed.

In the combined result, the following appeals by the Assessee viz., ITA No.333/Bang/2017 (For AY 2007-08) is dismissed, ITA Nos.334, 335 & 336/Bang/2017 (For AY 2008-09 to 2010-11) are partly allowed for statistical purposes, ITA Nos.337, 338 & 339/Bang/2017(For AY 2011-12 to

Pronounced in the open court on this 10th day of May, 2019.

The Appellant 2. The Respondent(s) 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file