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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ NEW DELHI
Before: SHRI G.D. AGRAWAL, HON’BLE & SHRI SUDHANSHU SRIVASTAVAShri Lalit Mohan, Advocate
order dated 5.2.2018 passed by the Ld. CIT (Appeals)-9, New Delhi for A.Y. 2014-15.
2.0 The brief facts of the case are that the assessment in this case was completed u/s 143(3) of the Income Tax Act, 1961 ('the Act') at a total income of Rs. 2,29,03,330/- against returned loss of Rs.1,63,86,529/- after making a disallowance on account of interest expenses. During the course of assessment proceedings the Assessing Officer (A.O. for short) had noticed that interest expenses of Rs. 3,92,89,856/- had been claimed by the assessee company. During the assessment proceedings it was noticed that the assessee company had taken loan from Yes Bank for the purpose of payment of advance to sub contractors towards execution of EPC contract. Out of the said loan amount, Rs. 36 crores was given to M/s IIC Limited. Further, the assessee company had invested Rs. 14.72 crores in OCD of its sister concern M/s Innus Infrastructure (P) Ltd. from which no income had been received by the assessee company. The AO formed an opinion that the assessee company did not use the loan for its own construction business and out of the said loan, Rs. 36 crores was given to M/s IIC Ltd. as loan and the company had further invested Rs. 14.72 crores in OCD of its sister concern M/s Innus Infrastructure (P) Ltd. The assessment was completed at a total income of Rs. 2,29,03,330/- after making a disallowance of Rs. 3,92,89,856/- u/s 36(1)(iii) of the Act.
2.1 On appeal by the assessee before the Ld. Commissioner of Income Tax (Appeals), the learned Commissioner of Income Tax (Appeals) dismissed the grounds of the assessee and now the assessee is in appeal and has challenged the upholding the disallowance of claim of deduction of Rs. 3,92,89,856/- representing interest paid on loans raised for business purposes and eligible for deduction u/s 36(1)(iii) of the Act by raising the following grounds:
“1. That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in upholding disallowance of a claim of deduction of Rs. 3,92,89,856/- representing interest paid on loans raised for business purposes and eligible for deduction u/s 36(l)(iii) of the Act.
1.1 That the learned Commissioner of Income Tax (Appeals) has upheld the disallowance by failing to appreciate the fact and circumstances of the case of the appellant, statutory provisions of law and evidence on record, including the submissions filed by the appellant company.
1.2 That the finding of the learned Commissioner of Income Tax (Appeals) that “investment in OCD amounting to Rs. 14.72 crores in one of its group concern namely M/s Inuus Infrastructure (P) Ltd. has been made out of Rs. 12 crores received from M/s Cleta Infracon Pvt. Ltd. on which no interest expenditure incurred has not filed any cogent evidence or document to buttress its claim of the said investment in the OCD has been out of the interest free borrowings” is factually incorrect, contrary to evidence on record and therefore unsustainable.
1.3 That furthermore even the conclusion that advancing of loan in the group concern in terms of investment in OCD has been as a measure in commercial expediency has not been established is also not based on correct appreciation of facts and circumstances of the case of the appellant alongwith evidence placed on record and therefore untenable.
1.4 That even the finding that appellant is not engaged in the business of financing fails to appreciate the factual matrix of the appellant company for the year under consideration.
1.5 That in any case and without prejudice that disallowance made is highly arbitrary and excessive therefore unsustainable.
1.6 That various adverse findings and conclusion recorded by the learned Commissioner of Income Tax (Appeals) are also factually incorrect, contrary to record, legally misconceived and untenable.
2 That the learned Commissioner of Income Tax (appeals) has erred both in law and on facts in upholding the erroneous finding of fact of the learned Assessing Officer that the money was borrowed for non business purposes.
3 Without prejudice to the each of the above grounds the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the action of the learned Assessing Officer who treated the interest income as business income on one hand and rejected the claim of interest expenses on the other.
4 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the learned Assessing officer was correct initiating the penalty proceedings disregarding the fact that the assessee neither concealed any particulars nor submitted any inaccurate information.
5 That the appellant craves leave to add, amend, alter or omit any of the above grounds of appeal as the circumstances my warrant.
It is therefore prayed that disallowance made and sustained of Rs. 3,92,89,856/- may kindly be deleted and appeal of the appellant company be allowed.”
3.0 The Ld. AR drew our attention to the chart tabulated by learned Commissioner of Income Tax (Appeals) at page 3 of the order which is as under:
“Details of loan taken outstanding as on Details of loan given outstanding as on 31.3.2014 and interest incurred thereon 31.3.2014 and interest earned thereon Interest Name of Amount of Interest Name of Amount of incurred borrower loan (in Rs.) earned lender loan (in Rs.) Yes Bank 40,70,00,000 3,92,89,856 IIC Limited 36,00,00,000 2,98,99,727 Cleta 12,00,00,000 Nil Innus 14,72,30,000 Nil Infrastructure Infracon Pvt. Ltd. (P) Ltd. (Investment in OCD) Total 52,70,00,000 3,92,89,856 Total 50,72,30,000 2,98,99,727”
3.1 On the basis of the aforesaid, it was contended by the Ld. AR that the assessee had declared interest income in respect of loan to M/s. IIC Ltd. of Rs. 2,98,99,727/-. It was contended that the disallowance of the claim of deduction in entirety was ex facie not tenable. It was further submitted that the investment in OCDs were out of the interest free loan of Rs. 12,00,00,000/- from the holding company M/s. Cleta Infracon (P) Ltd. and, thus, there was no diversion of funds for non-business purposes. It was submitted that quantum of interest income cannot be a ground to deny the eligibility of interest expenditure incurred in the course of business by the assessee company. It was highlighted that interest processing fee of Rs. 69,72,591/- stood allowed as deduction and, therefore, even logically, once the expenditure of processing fee stood allowed, expenditure of interest has to be allowed as such.
4.0 The Learned Sr. DR, on the other hand, placed reliance on the orders of the authorities below for disallowance of interest.
5.0 We have heard the rival submissions and have also perused the relevant material placed before us. All the grounds that are raised relate to disallowance of a claim of deduction of Rs. 3,92,89,856/- being expenditure on interest claimed u/s 36(1)(iii) of the Act. The factual matrix emanating from the orders below, undisputedly, is that the assessee had raised a loan of Rs. 40.70 crores from Yes Bank. It has also been noted by the Ld. CIT (A) that the assessee had also raised loan of Rs. 12 crores from its holding company M/s Cleta Infracon (P) Ltd. The above funds aggregating to Rs. 52.70 crores had been utilized either in respect of loan to M/s. IIC Ltd. of Rs. 36 crores and/or investment in OCDs of Innus Infrastructure (P) Ltd. of Rs. 12 crores. In respect of loan to IIC Ltd., the assessee had earned income of Rs. 2.99 crores and therefore, there was no justification to deny the deduction of expenditure incurred on the loan raised from Yes Furthermore, it is noted that the assessee had made investment in OCDs out of the interest free borrowings of Rs. 12 crores. It is well settled law that once interest free funds are available then to that extent, no disallowance can be made under section 36(1)(iii) of the Act. It is also pertinent that the processing fees of Rs. 62 lacs incurred on the borrowings made from Yes Bank were allowed as deduction. The Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340 has held as under:
“10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India
Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT.”
5.1 Also the Hon’ble Delhi High Court in the case of CIT v. DD Industries Ltd reported in 231 Taxman 784 (Del), following the earlier judgment in the case of CIT Vs. Bharti Televentures Ltd. reported in 331 ITR 502 (Del), has held as under:
“10. The record before the ITAT showed that the paid up equity of the assessee was Rs.8,00,00,000/- for all the years, i.e., as on 31.03.2006; 31.03.2007, 31.03.2008 and 31.03.2009. The general reserves and surplus as on 31.03.2006 was Rs.14,68,82,450; as on 31.03.2007, it was Rs.16,36,68,384/-; as on 31.03.2008, it was Rs.17,10,43,019/- and as on 31.03.2009 it was Rs.15,28,48,354/-. Sundry debtors as on 31.03.2006 was Rs.22,82,38,320/-; as on 31.03.2007 it was Rs.28,58,66,349/-; as on 31.3.2008 it was Rs.22,53,78,479/-; as on 31.03.2009 stood at Rs.11,61,95,359/-. Thus, there is material to show that the amounts were not in fact advanced for the assessment years in question, i.e., 2007-08, 2008-09 and 2009-10. The assessee had provided further material disclosing that the loans taken were for specific purposes from different financial institutions such as purchase of cars, stocks, raw materials etc. These supported its contentions that adequate funds were available during the assessment years and that since in the past the Revenue had accepted the assessee's plea in this regard and not brought the amounts to tax under Section 36 (1) (iii), there was no question of its being brought to tax for the three assessment years in question. Applying the ratio in Sahara India Corpn. Ltd. (supra), it is held that the Revenue could not have taken a different view for these three years, particularly, when advances were not made at this time without any conclusion that in fact general reserves, surpluses and other funds were not available. The Court here also notices that several decisions were relied upon by the ITAT (CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.), CIT v. Hotel Savera [1999] 239 ITR 795/102 Taxman 247 (Mad), CIT v. Tin Box Co. [2003] 260 ITR 637/[2004] 135 Taxman 145 (Delhi)) in support of the conclusion that when the assessee is possessed of mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn.
The next aspect is as regards the question whether the purpose for which the loan was given, i.e., to book 40,000 sq. ft. property for the assessee's use in an upcoming commercial complex was sufficient. We notice that the ITAT held against the Revenue on this aspect. The ITAT noted the terms of the Memorandum of Understanding (MOU) dated 28.05.2005 entered into with D.D. Properties where it had agreed to invest money in the project by way of advance. This document had not been rejected either by the AO or the CIT (A). The balance sheet of D.D. Properties Pvt. Ltd., a sister concern was also considered by the ITAT. This disclosed that as on 31.03.2006 it had inventories in the form of land to the extent of `32.4 crores. In these circumstances, given the nature of the MOU, the ITAT in our opinion rightly concluded that the Revenue's reasoning was unsound. The ITAT also relied upon Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC). This Court had in a similar context, held in CIT v Bharti Televenture Ltd. [2011] 331 ITR 502/200 Taxman 39 (Mag.)/11 taxmann.com 356 (Delhi) that: "11. The Hon'ble Supreme Court further held that though, the borrowed amount was not utilized by the assessee in its own business and had been advanced as an interest-free loan to the sister concern, but that is not relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency? The law laid down 10
by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 was overruled whereas that of the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 was approved. It was further held that it all depends on the facts and circumstance of the case as to whether the directors of the sister concern utilized the amount advanced to it by the assessee for their personal benefit, which obviously could not be said to be an advance as a measure of commercial expediency.”
5.2 In such circumstances, in our considered opinion, the Assessing Officer ought to have restricted the computation of disallowance to the extent of Rs. 2.72 crores being the difference between the interest free funds available of Rs. 12 crores and investment in OCDs of Rs. 14.72 crores. The Assessing Officer is accordingly directed to re-compute the disallowance of interest on the differential amount of 2.72 crores.
6.0 In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 11th October, 2018.