ITO, NEW DELHI vs. M/S. MENORA DEVELOPERS & INFRASTRUCTURE PVT. LTD., NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A”: NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 3125/Del/2016 (Assessment Year: 2011-12) ITO, Vs. Menora Developers & Ward-16(4), Infrastructure Pvt. Ltd, Room No. 304, CR Building, A-60, Naraina Industrial IP Estate, New Delhi Area-I, New Delhi PAN: AAFCM9587Q (Appellant) (Respondent)

ITA No. 2716/Del/2016 (Assessment Year: 2011-12) Menora Developers & Vs. ITO, Infrastructure Pvt. Ltd, Ward-16(4), A-60, Naraina Industrial Area-I, Room No. 304, CR Building, New Delhi IP Estate, New Delhi PAN: AAFCM9587Q (Appellant) (Respondent)

Revenue by : Ms. Ashima Neb, Sr. DR Assessee by: Shri Arvind Kumar, Adv Date of Hearing 26/06/2018 Date of pronouncement 25/09/2018

O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the cross appeals filed by the assessee as well as the ld AO against the order of the ld CIT(A)-20, New Delhi dated 11.03.2016 for the Assessment Year 2011-12. 2. The assessee has raised the following grounds of appeal:- “1. That the ld CIT(A) has erred in law and facts in disallowing the interest expense of Rs. 30351870/- u/s 36(1)(iii) of Income Tax Act, 1961. 3. The revenue has raised the following grounds of appeal in ITA No. 3125/Del/2016:-

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) “1. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) is justified in restricting the disallowance to Rs.39,55,770/- made by the AO u/s 14A of the Income Tax Act, 1961 (Act) read with section 8D of the Income Tax Rules, 1962 (Rules ) and giving a relief of Rs.1,57,42,358/- ? 2. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) is justified in restricting the disallowance to Rs.39,55,770/- made by the AO u/s 14A of the Act by ignoring ratio decidendi as held by Hon’ble Supreme Court in case of CIT Vs. Rajendra Prasad Moody [1978] 115 ITR 519 ITR 519 that deduction of expenditure cannot be conditional upon earning of income i.e., disallowance of expenditure u/s 14A cannot be conditional upon earning of equivalent amount of tax exempt Income? 3. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law.” 4. The brief facts of the case is that the assessee is a company deriving income from interest of FDRs and dividend. It filed its return of income declaring loss of Rs. 34774470/- on 24.08.2012. the assessment u/s 143(3) was made by the ld AO on 18.03.2014. The total income was determined by the ld AO of Rs. 11332258/-. The ld AO disallowed interest expenditure u/s 36(1)(iii) of the Act amounting to Rs. 30351870/- and also disallowance u/s 14A read with Rule 8D of Rs. 19698128/-. The assessee aggrieved with the order and preferred an appeal before the ld CIT(A), who confirmed the disallowance of Rs. 30351870/- on account of interest whereas disallowance u/s 14A made by the ld AO of Rs. 19698128/- was restricted to Rs. 3855770/-. Therefore, the assessee is in appeal against the confirmation of the disallowance of interest of Rs. 30351870/- and revenue is in appeal against the order of the ld CIT(A) restricting the disallowance of Rs. 19698128/- u/s 14A to Rs. 3955770/-. 5. First we take up the appeal of the assessee where the challenge is against the confirmation of disallowance of interest of Rs. 30351870/-. Consequently the assessment u/s 143(3) of the Act was made on 18.03.20147 where the disallowance of Rs. 30351870/- u/s 36(1)(iii) was made. The Ld AO made the disallowance for following reasons:- “DISALLOWANCE OUT OF INTEREST EXPENSES u/s 36(1 Uiii)

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 1. It is seen from the return of income and Memorandum of Association of the assessee company that the assessee company was incorporated on 05.02.2009 with the main object with the main object of carrying on business of contractor, builder, Infrastructure developers, estate developers etc. No such business activities were carried out either in assessment year 2009-10, 2010- 11 or even in assessment year 2011-12. Only funds have been raised through issue of Optional Convertible Debentures of Rs.99,40,000/- and raising secured loan of Rs. 1,00,00,00.000/-. On the secured loan of Rs. 1,00,00,00,000/- the assessee has claimed interest expenses oi Rs.4,99,99,998/-. Out of these funds of Rs. 1,00,99,40,000/-. Rs.98,23,02,600/- has been shown as given to loan, advance and deposit to two corporate entities. In the name of income, it has shown dividend income of Rs.39,55,770/- from three Mutual Funds and claimed as Tax Free Income. Further, interest on FDRs has been shown in the P & L account at Rs. 1,12,90,668/-. In view of above facts the assessee company was asked that since no business has commenced, please show cause as to why the entire expenses claimed by it should not be treated as pre-operative expenses? Why the entire interest income should not be assessed as income from other sources? Since no business has commenced please show cause why the entire expenses claimed by you should not be treated as pre-operative expenses? Why the entire income should not be assessed as income from other sources? In its reply dated 23.12.2013 the assessee stated that as under.- "...that the assessee company was formed with the main object of real estate development or investment in other concerns which are involved in the business of real estate development etc. Since in the year under review, the market conditions were not favorable to carry out the business of real estate development hence the company has not directly invested in any project but had given advances to its group companies having interest in real estate and related business. The assessee is not a manufacturing Unit or involved in trading and has investment business as its subsidiary object. Hence, It would be unwarranted to draw a conclusion that no business has commenced as commencement of business is relative term dependent on the nature of activity of the assessee. It is also a fact that due to depressed conditions in the real estate sectors the assessee instead of making investment and consequent losses in real estate instead took Page | 3

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) the route to finance other concerns which have profitable objects in hand as investment is also an objective of the company. Hence, it is submitted that the business should in the above facts and circumstances be treated as commenced." The above submission of the assessee have been gone through but the contention of the assessee that ",investment is also an objective of the company", is not factually correct because as is evident from the Memorandum of Association of the assessee company, neither in para 1 to 4 of its of its Main objects, nor in para 1 to 40 of its Objects Incidental or Ancillary to the Attainment of the main objects, nor in para 1 to 34 of its Other Objects, there is any mention of any such object of the company of making Investment in the share capital of other companies or Investment in Mutual Funds. In view of these facts no business can be said to have been commenced in respect of its Main Objects, Ancillary objects or Other Objects as per the Memorandum of Association. 2. Further it is seen that funds have been raised through issue of Optional Convertible Debentures of Rs.99,40,000/- and raising secured loan of Rs. 1,00,00,00,000/-. On the secured loan of Rs. 1,00,00,00,000/- the assessee has claimed interest expenses of Rs.4,99,99,998/- i.e. at a rate of interest @ 10% PA. Out of these funds of Rs.1,00,99,40,000/-, the assessee has also given loan and advances/deposits to its two group companies M/s Arosa Infrastructure Pvt. Ltd. Rs.51,01,61,601/- and to M/s Cumulative Investment & Trading Co. Pvt. Ltd. Rs.47,21,41,000/-. But no interest income has been shown from them. In view of the above position, vide this office questionnaire dated 20.11.2013. the assessee was asked that when it has paid huge interest of about 5 crores to M/s. OCFL, then why interest has not been charged from these two parties on loans and advances given to them aggregating to Rs.98 crores. Please show cause as to why proportionate interest @ 10% should not be disallowed. In response to the above, vide its reply dated 23/12/2013 the assessee mainly submitted as under:- "The assessee company has given advances to M/s Cumulative Investment & Trading Co. Pvt. Ltd. and M/s Arosa Infrastructure Pvt. Ltd., both of which are group concerns. The amount advances to the said group concern were for Page | 4

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) further investments in view of the fact that the real estate development option was felt to be a losing business proposition due to depressed market sentiments. The amount is reflected as advance upto the end of the financial year 2010-11 because the investment was not confirmed by 31st March, 2011. Further, the amount was advanced with a business perspective and for the purpose of joint investment in future and hence no interest has been charged as it is not in the nature of loan but was a business advance to exploit new business opportunities jointly." 3. After perusing the submissions of the assessee, vide order-sheet entry dated 23.12.2013 the assessee was apprised and asked that "as stated by it the amount was further advanced with a business perspective and for purpose of joint investment in future" hence asked to state how much interest it has earned till date and what is the status of its advance alongwith confirmation and documentary evidence. 4. In its further reply dated 3.1.2014 the assessee further stated as under- "...the assessee company advanced the amount to M/s Cumulative Investment & Trading Co. Pvt. Ltd. and M/s Arosa Infrastructure Pvt. Ltd. with the object of investment in Financial assets. This was done because the real estate section was looking down and not considered viable. The amount advanced to M/s Cumulative Investment & Trading Co. P. Ltd. was ultimately used for purchase of Equity shares No 889160 of Rs. 138/- each of M/s Arum Investment Pvt. Ltd. and 10994200 Preference share at 0.01% @ Rs.138/- each of the same company in P. Y. 2011-12 from M/s Cumulative Investment & Trading Co. P. Ltd. Since the aforesaid investment option was considered more lucrative hence the amount given to Arosa Infrastructure Pvt. Ltd. was also taken back on 25.05.2011 itself and subsequently utilized in the said investment. The assessee company also purchased Debentures of M/s Arum Investment Pvt. Ltd. @ 17% PA out of amount received back from M/s Arosa Infrastructure Pvt. Ltd. and interest Income of Rs. 1.66 crores was declared from the from the said investments in Asst, year 2013-14. The amount was invested in M/s Arum Investment Pvt. Ltd. with capital growth prospects in 2-3 years as the said company is an NBFC promoted by Edelweiss Fund. Hence, it is expected that the Page | 5

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) investment would result in income in financial year 2014-15. It is submitted that the assessee company has taken a prudent and informed business decision and hence advanced the amount interest free to the concern. As already submitted return on the same have accrued in the P. Y. 2012-13 Regarding the above, it attached the copy of balance-sheet of M/s -Arum Investment Pvt. Ltd. showing the holding of M/s Cumulative Investment & Trading Co. Pvt. Ltd. which was taken over by the assessee company." 5. As the reply of the assessee was not found convincing, further query was raised vide this office questionnaire dated 27.2.2014 as under:- "Sub:-Assessment proceedings for assessment year 2011-12 - Questionnaire u/s 142(1) of the I. T. Act 1961 - Regarding - Please refer to the assessment proceedings pending In your case for the above mentioned assessment year. After examination of the details filed by you like copy of. Bank statement of your account with Syndicate Bank, Bank book, Ledger account of Religare MF, Ledger account of Bharti MF, ledger account of AXIS MF, ledger account of Interest on fixed deposits with ICICI Bank, the following picture emerges: 12.8.2010: Unsecured loan taken from OCFL Rs. 1,00,00,00,000/- @10%PA.Intt. 13.8.2010: Invested In MF of Religare Rs. 50,00,00,000/-

13.8.2010:Invested in MF of Bharti Rs. 50,00,00,000/-

31.8.2010 Dividend reed, from Religare Rs. 11,18,780/- 9.9.2010: Reed Back from Religare Rs. 9,75,00,000/-

15.9.2010: Reed Back from Religare Rs. 7,00,000/- 16.9.2010: Reed Back from Religare Rs. 70,00,000/- 17.9.2010: Reed Back from Religare Rs.10,00,00,000/- 29.09..2010: Reed Back from Religare with dividend Rs. 22,78,01,290/-

13.08.2010: Invested in MF of Bharti Rs. 50,00,00,000/-

13.09.2010 Received back from Bharti with Dividend Rs.50,14,48,473/- Page | 6

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12)

17.9.2010 Out of amount Received from Religare Rs. 10,00,00,000/- amount invested in MF of AXIX

04.10.2010 Reed. Back from AXIX with dividend Rs.10,02,06,006/-

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) a) M/s Arosa Infrastructure Pvt. Ltd. b) M/s Cumulative Investment & Trading Pvt. Ltd. c) M/s A. T. Invofin India Pvt. Ltd. 6. Also rile copy of Form No.16A issued by ICICI Bank. Please also state on which date the FD was made" 6. In response to the questionnaire dated 27.2.2014, the assessee given reply on other issue vide letter dated 7.3.2014 filed on 8.3.2014. However, no explanation has been given as to why no interest has been charged on loans and advances given to group companies. 6(a) In regard to FD with ICICI Bank, the assessee, vide annexure-1 A of its reply dated 7.3.2014 has given the details as under:- Figures as per Annexure-1 A Date Particular Amount Investment In FDR 29.9.2010 Trf.from Syndicate Bank a/c against 10.00 crores Encashment of AXIS Mutual Fund

4.10.2010 Trf.from Syndicate Bank a/c against 28.30 creres Encashment of Religare Mutual Fund 4.10.2010 Cumulative Investment & 11.70 crores Trading Co. P. Ltd 1 (Throuqh M/s Cellcap Invofin India P.Ltd.) 4.10.2010 FDR ICICI Bank 50 crores

6 (b) Copy of FDR account with ICICI Bank as been filed as Annexure-1 D which shows the following transactions. Annexure-1 D Date Particulars Withdrawal Deposits Balance Jgf2010 Trf. From SL 21,70,00,000 21,70,00,000 COLLCL

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 4,10.2010 RTGS/SYNNBH 28,30,00,000 50,00,00,000 1027755516 Menora ~5l0.2010 Transfer to FD 50.00.00.000 Devtoper/SYNB

50,00,00,000 50,00,00,000

6(c) Ledger account of FD with ICICI Bank has been given as per Annexure 3A which shows the following transactions:- Annexure-3A Date Particulars Debit Credit 7J0.2010 ICICI Bank Being FD Made 50,00,00,000 14.2.2011 By (as per details) 50,00,00,00 0 Arosa Infrastructure P. Ltd. 51,01,61,601.00 Dr. Interest on FD 1,12,90,667.80 Cr. TDS(FY 2010-11 11,29,066.80 Cr Being FD matured and paid to AROSA 50,00,00,000 50,00,00,00 0

6(d) Ledger account of M/s Cumulative Investment and Trading Co. Pvt. Ltd. has been given as per Annexure-1 C which shows the following transactions: Date Particulars VchType Debit Credit 9.9.2010 To Syndicate Bank Payment 59,89,25,000 15.9.2010 To syndicate Bank Payment 7,00,00,000 16.9.2010 To syndicate Bank Payment 70,00,000

29.9.2010 To syndicate Bank Payment 10,00,000 29.10.201 By Syndicate Bank Receipt 11,70,00,00 0 0 4 10.2010 By Syndicate Bank Receipt 5,45,00,000 8.11.2011 By syndicate Bank Receipt 84,00,000 5.1.2011 By Syndicate Bank Receipt 82,00,000 2.2.2011 By Syndicate Bank Receipt 83,34,000 Page | 9

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 7.3.2011 By Syndicate Bank Receipt 83,50,000 67,69,25,000 20,47,84,00 0 By closing balance 47.21.41.00 0 67,69,25,000 67,69,25,00 0

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) changing with the dynamic business environment as the real estate and financial market are volatile. Hence it may not be possible for business to take decision in a day or month. It is also not necessary that loan taken on interest by the businessman need to be utilized for a specific purpose unless the commercial arrangements of disbursal specify and such conditions.. The investment decision is the prerogative of the assessee and not of the revenue. A businessman would never borrow money to make loss as the ultimate aim of every business in profit motive unless there is an ulterior motive. As per the submissions till date there is nothing on record to suggest that the transactions are mala-fide neither have your goodself expressed any apprehension of the same being mala-fide. In fact the assessee has made all efforts from the very beginning that the funds taken are not idle. Hence investments were made temporarily in FDR and Mutual Funds. Interest and dividend has been earned on the same. Further the amount advanced to the group concerns was ultimately used for purchase of shares of M/s Arum Investment Pvt. Ltd. (which is a company promoted by the Edelweiss Fund) from M/s Cumulative Investment & Trading Co. Pvt. Ltd. In respect of the investment the assessee has already declared interest in the financial year 2012-13 As proof of the above we are attaching herewith a copy of the balance-sheet of the assessee company as on 31.3.2013 as annexure-1 highlighting the investment made. Hence, it is clear that the amount was advanced for the purpose of further investment. An amount advanced for investment need not necessary result in interest income till the Investment materializes and the same depends on the commercial considerations between the parties. Further expenditure on account of interest payment does not necessary mean that corresponding income will be received In the same year as income is subject to various business and market related factors in which an assessee operates. Hence, the non- charging of interest is only a prudent business decision and is part and parcel of the investment decision. In any case since the companies are of the same group it would not result in any net tax loss to the revenue as the income of one company would be and expenses to the others. In view of the same, we believe no adverse inference is required to be drawn on the facts of the case regarding non-charging of interest on amount advanced for investments.

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) The following technical arguments are filed in support of the above contention of the assessee: Section 36(1)(iii) provided for deduction of interest on monies borrowed for computing business income. Conditions that need to be satisfied for allowance of deduction u/s 36(1)(iii) are that the amount has been borrowed on which interest has been paid and such borrowed amount has been used for the purpose of business. In the case of the assessee company, it is an undisputed fact that amount has been borrowed and interest has been paid thereon. It is also undisputed that borrowed funds have been used for making advances for investment in another NBFC and real estate companies. The only issue raised is whether advance made for investment of such funds interest-free is for the purpose of business of the assessee company. The expression 'for the purpose of business' occurring in section 36(1)(iii) is wider in scope that the expression 'for the purpose of. making or earning income' occurring in section 57 (Hi): The assessee relied upon the decision in the case of Mahadev Prasad Jatia Vs. CIT (1979) 118 ITR 200 (SC), Eastern Investment Ltd. Vs. CIT(1951) 20 ITR 51 (SC), and other decisions as mentioned at page 3 &4of its reply dated 14.3.2014". With utmost regards to the Hon'ble Court and the case laws cited by the assessee company in its above submission but I beg to differ from the same because after going through the above submissions of the assessee and the facts of assessee's case and the submissions made by the assessee are not found to be tenable in the eye of law because of the following factual and legal position:- a) The contention of the assessee that "the amount advanced to M/s Cumulative Investment & Trading Co. Pvt. Ltd. was ultimately used for purchase of Equity shares No 889160 of Rs. 138/- each of M/s Arum Investment Pvt. Ltd. and 10994200 Preference share at 0.01% @ Rs. 138/- each of the same company in F. Y. 2011-12 from M/s Cumulative Investment & Trading Co. Pvt. Ltd. Since the aforesaid investment option was considered more lucrative hence the amount given to Arosa Infrastructure Pvt. Ltd. was also taken back on 25.05.2011 itself and subsequently utilized in the said investment", is of no relevance so far as this assessment year is concerned because in this assessment year the entire funds have been given as interest free loans and advances to these two group companies. Further, the contention of the assessee that "as already clarified in the previous submissions that the amount has Page | 12

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) been advanced for the purpose of further investment as the assessee company felt that direct entry by it into real /estate market in view of the declining and depressed real estate market was not a prudent business preposition by the time the loan was arranged", is more than 100% wrong because as is evident from its balance-sheet for assessment year 2013-14 it is seen that besides the loan of Rs. 100 crores from M/s OCFL, the assessee has further taken secured and unsecured loans of more than Rs. 205 crores and claimed interest expenses of more than Rs. 10 crores in assessment year 2013-14. The entire amount of interest bearing loans has again been invested in shares of group companies etc. to earn tax free income and a little amount of taxable income. b) As per balance-sheet of M/s Arum Investments Pvt. Ltd. for the assessment year 2012-13 it is seen that assessee company's name is nowhere appearing in the Balance-sheet of M/s Arum Investment Pvt. Ltd. c) Whatever income will arise from the investments claimed to be made by M/s Cumulative Investment & Trading Co. Pvt, Ltd. in M/s Arum Investment Co. Pvt. Ltd. (whether taxable or tax free) will be in the hands of M/s Cumulative Investment and Trading Co. Pvt. Ltd. and not in the hands of the assessee. d) As is evident from the above data the assessee company took a loan of Rs. 100 crores from M/s Oswal Chemical & Fertilizers Ltd (OCFL) on 13.8.2010 at interest rate of 10% PA and paid interest of Rs.4,99,99,998/- to the said party. There was boom in real estate business during the period 2010 to 2013. Still the assessee chose to make investments for earning tax free income. e) First, the assessee company chose to make investments of the entire funds in Mutual Funds of M/s Religare, M/s Bharti Axa and M/s AXIS for earning tax-free dividend income thereby making Investment in MuhjaJJAnds of M/s Religare and M/s Bharti Axa of Rs.100 crores on 13.8.2010. f) The entire amount with dividend from M/s Religare MF was received back from 9.9.2010 to 29.9.2010. g) The entire amount with Dividend from M/s Bharti Axa MF was received back on 13.9.2010. h) Out of these funds, the assessee again invested Rs. 10 crores in Mutual Funds of AXIS on 17.9.2010. The entire

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) amount with dividend from AXIS MF was received back on 4.10.2010. i) In the above investments, the assessee has earned tax free dividend income of Rs. 39,55,777/-. j) Out of the total funds of Rs. 100 crores, the assessee claimed to have made FD aggregating to Rs.50 crores with ICICI Bank on 4.10.2010 (Rs. 10 crore on a/c of encashment of AXIS MF+Rs.28.30 crores on a/c of encashment ofRelegare MF + Rs. 11.70 crores on receipt from Cumulative). On this FDR the assessee earned interest income of Rs.1,12,90,668/- from 5.10.2010 to 14.2 2011. k) Out of the remaining amount aggregate amount of Rs.67,69,25,000/- has been shown given to M/s Cumulative Investment & Trading Pvt. Ltd. (a group concern) between the period 9.9.2010 Rs.59.89 crores and balance Rs. 7.80 crores from 15.9.2010 to 29.9.2010. On this loan the assessee has not charged any interest from the said party. Though it continued to pay interest @ 10% PAN on loan of Rs. 100 crores taken from M/s OFCL. I) The amount received back on encashment of FDR on 14.2.2011 was given as interest free loan of Rs. 51,01,61,601/- to another group concern M/s Arosa Infrastructure Pvt. Ltd. on 14.2.2011. m) As is clear from the above data, after receiving the interest bearing loan of Rs. 100 crores, the assessee first chose to invest the entire amount of Rs. 100 crores in Mutual Funds of M/s Religare MF and M/s Bharti MF for earning tax- free dividend income. n) As per the banks statement of the assessee with Syndicate Bank, the encashment of Mutual Funds has been shown as under:- 9.9.2010 Encashment of Bharti MF (including Dividend) Rs. 50,14,48,473/- 9.9.2010 Part encashment of MF of Religare Rs. 9,75,00,000/- 9.9.2010 Given to M/s Cumulative Trdg. Rs. 59,89,25,000/- Rs. 7,00,00,000/- 15.9.201 OPart encashment of MF of Religare 15.9.2010 Given to M/s Cumulative Trdg. Rs. 7,00,00,000/- 16.9.2010 Part encashment of MF of Religare Rs. 70,00,000/- 16.9.2010 Given to M/s Cumulative Trdg. Rs. 70,00,000/- 17.9.2010:Part encashment of MF of Religare Rs. 10.00.00,000/- Page | 14

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 17.9.2010: Invested in Mutual fund of AXIS (Rs.10.00.00.000/-) 29.9.2010:Encashment of Mutual fund of Religare(with dividend) Rs. 22,78,01,290/- 29.9.2010: Trf. To A. T. Invofin (Rs. 38.00.000/-) 29.9.2010.Given to Cumulative Rs. 10,00,000/-( 29.9.2010: Trf. To ICICI Bank a/c Rs. 10.00.00.000/-) 4.10.2010: Encashment of AXIS MF Rs. 10,02,06,006/- 4.10.2010:ByTrf. Cellphone Credit Rs. 5,45,00,000/- 4.10.2010: By Trf. From A. T. Invofin Rs. 15,90,000/- 4.10.2010: By Trf. From A. T. Invofin Rs. 37,81,605/- 4.10.2010:Trf. To ICICI Bank (Rs.28.30.00.000/-) The assessee has not filed copy of its Bank statement of its account with ICICI Bank despite asked for vide this office questionnaire dated 27.2.2014. Thus as is evident from the above figures, the amount of encashment of MF of Bharti (Including dividend) and part of encashment of MF of Religare have been given as interest-free loan to M/s Cumulative Trading & Investment Co. Pvt. Ltd. upto 29.9.2010. Further part of Encashment of Mutual fund of Religare has again been invested in Mutual fund of AXIS to earn tax free income. Thereafter on 4.10.2010 amount of Rs.50,00,000/- (received on account of encashment of MF of Religare and AXIS have been invested in the FD with ICICI Bank for a limited period upto 14.2.2011 on which interest income of Rs. 1,12,90,668/-. After encashment of FD the assessee again given interest free loan of Rs.51,01,61,601/- to M/s Arosa Infrastructure Pvt. Ltd. Thus, as is evident from the above, the assessee had been investing the money either to earn tax free dividend income or giving interest-free loans to group companies Only for a limited period of about 100 days it invested the money in FDR to earn taxable interest income. o) It is seen from the P & L account and Balance sheet of M/s Cumulative Investment & Trading Co. Pvt. Ltd. that out of its total sources funds of Rs.239.75 crores (including the loan of Rs. 67.69 crores from the assessee company) the said company invested its funds in investment with other companies of Rs.151 crores, FDs with Yes Bank Rs.50 crores and loans and advances given Rs.37 crores & Rs.55 crores. Out of such Investments, the said company Page | 15

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) earned tax-free dividend income of Rs.1.54 crores and interest income of Rs. 1,35,92,185/-. p) As per the balance-sheet of M/s Arosa Infrastructures Pvt. Ltd. total funds raised during the year (share capital Rs.5 cores and unsecured loans of Rs.39 crores, an amount of Rs.8.83 crores has been shown as Advances recoverable, Rs.3.15 crore FDs and Rs.45 crores debtors, in its P & L account, this company has shown interest income of Rs.30,40,988/-. in view of above when the assessee has paid huge interest of Rs. 5 crores on loan of Rs.100 crores and the assessee has given interest free loan to its companies of almost the same amount and they are also earning interest on loans and advances given by them and on FDs, then why the interest has not been charged by the assessee on loans and advances given by it to its two group companies. q) The Hon'ble Punjab & Haryana High Court in the case of CIT Vs. M/s Abhishek Industries Ltd. [2006] 286-ITR-1 have held as under:- "As for as the issue of establishment of nexus of the funds borrowed vis- avis the funds diverted towards sister concern on interest free basis is concerned, in our view, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concerns without interest is on the Revenue, is not correct. Section 36(1 )(iii) of the Act provides for deduction of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non- business purposes without any interest and, accordingly, the assessee should be allowed deduction of Interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to sister concerns on interest-free basis, maybe it is pleaded to be out of sale proceeds or share capital or different account, cannot be accepted. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loans, as working capital loan, as sale proceeds etc., do not have any different colour of business receipts and have no separate identification. Sources have no concern whatsoever. The only thing Page | 16

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilized for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concerns would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of funds between borrowings of the funds and diversion thereof for non¬business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concerns on interest-free basis are to be disallowed. If the plea of the assessee is accepted that the interest-free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case. Section 1096 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee, who for the purpose of running its business, is required to borrow money from Banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries." Following the above said decision, the Hon'ble Punjab & Haryana High Court in its decision in the case of CIT Vs. Munjal Sales Corporation [2008] 298ITR-294 Page | 17

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) (P&H), decided the issue against the assessee and in favour of the Revenue, r) As regards the decision of Hon'ble Supreme Court in the case of M/s S.S. Builders (288 ITR 1(SC) relied upon by the assessee company, it is pointed out that the Hon'ble Supreme Court in ACIT \/s. Tulip Star Hotels Ltd. (May 6th, 2012) have held as under:- "S. 36(1)(iii): S. A. Builders 288 ITR 1 (SC) to be reconsidered The assessee borrowed funds and used it to subscribe to the Equity capital of Its subsidiary company. The subsidiary company used the said funds-for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai. The assessee paid interest on borrowed money and claimed that a deduction u/s 36(1)(iii). The A. O. rejected the claim though the CIT(A), Tribunal & High Court (338 ITR 482) allowed it by relying on S.A. Builders Ltd. Vs. CIT 288 ITR-1 (SC). It was held that as the assessee, being a holding company had a deep interest in its subsidiary, and hence if the holding company advanced borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would be entitled to deduction of interest on its borrowed loans. On appeal by the department, HELD by the Supreme Court: Issue notice on the applications for condonation of delay as also on the special leave petitions. In our view, S.S. Builders Ltd. Vs. Commissioner of Income-tax (Appeals) and another, reported in 288 ITR 1, needs reconsideration." s) In the present case of the assessee company the entire funds raised by the assessee company were interest bearing and entire funds have been given to the two group companies free of interest. t) Not only this, even in assessment year 2013-14 (balance-sheet filed by the assessee with its reply dated 14.3.2014), besides the unsecured loan of Rs. 100 crores taken from M/s OFCL taken in assessment year 2011-12, the assessee has raised further secured and unsecured loans aggregating to Rs. 2,05,26,30,000/- from others and again invested in the Equity shares and debentures etc. of various companies aggregating to Rs.349,39,22,626/-. On these secured and unsecured loans the assessee has paid interest of Rs. 10,76,10,955/-. The assessee claimed in its reply that"the amount advanced to the group concerns was ultimately used for purchase of shares of M/s Arum Investment Pvt, Ltd. (which is a company promoted by the Edelweiss Fund) from M/s Cumulative Investment & Trading Co. Pvt. Ltd. In respect of the investment the assessee has already declared interest in the financial year 2012- 13", is again evasive because as per P & L account for assessment year 2013-14 no receipt of any kind has been shown. However, on Page | 18

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) further perusal of finance cost it is found that out of the interest expenses of Rs. 10,76,10,955/- the assessee reduced the interest income of Rs. 1,66,12,424/- and balance amount of interest expenses of Rs.9,09,98,51/- has been debited to the P & L account. The reasons are best known to the assessee for doing such evasive entries in the P & L account. It is also not verifiable as to on which investment it has earned interest income of Rs. 1,66,12,424/-. Even if it is earned from Investments with M/s Arum Investment Pvt. Ltd. the same is of no help to the assessee so far assessment year 2011 -12 is concerned. Even otherwise it is not worthy to make investment by raising secured/unsecured loans of Rs.306 crores and paying interest of Rs. 10.76 crores for earning interest income of Rs. 1.66 crores. No assessing authority will allow such expenditure. In view of these facts, interest paid by the assessee is required to be disallowed. The calculation of interest to be disallowed is by way of charging of interest on interest free loans given by the assessee, which is calculated as under; ON AMOUNT OF INTEREST FREE LOAN GIVEN TO M/S CUMULATIVE TRADING & INVESTMENT CO. PVT. LTD. From date to date Days %PA Amt of intt. On Rs. 598925000 9.9.2010 to 29.9.2010 20 10% 3281781 70000000 15.09.2010 to 29.09.2010 1413 10%”10% 268493/- 7000000 16.09.2010 to 29.09.2010 274/- 1000000 29.09.2010 on day (as 1 10 274 Bank statement of ICICI Bank not filed) 676925000- 29.09.2010 TO 5 10% 767020/- 117000000 04.10.2010

55,99,25,000

55,99,25,000- 4.10.201 Oto 35 10% 48,46,541/- 8.11.2010 5,45.00.000 50,54,25,000 50,54,25,000- 8.11.201 Oto 27 28 -i r\o/ OC 7C CIO/ 5.1.2011 84.00.000 TU/o ou, t u. uh. 0/- 49,70,25,000

49,70,25,000- 5.1.2011 to 10% . *3"7 Ad QOfW 82.00.000

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 2.2.2011 o/,4y,oyu/- 48.88.25.000 48,88,25,000- 2.2.2011 to 33 10% 43,44,165/- 7.3.2011 83.34.000 48.04.91.000 48,04,91,000- 7.3.2011 to 24 10% 31.04.489/- 83.50.000 31.3.2011 47.21.41.000

Total (A) 2,40,62,207/-

ON AMOUNT OF INTEREST FREl E LOAN TO M/s AROSA

INFRASTRUCTURE PVT. LTD. On Rs. From date to date days %PA Amt. of Intt. 51,01,61,600 14.2.2011 TO 45 10% 62.89,663/- 31.3.2011 Total (B) 62,89,663/-

Total amount of interest on the amount of interest free loans given comes to Rs. 3,03,51,870/-(2,40,62,207+ 62,89,663). Hence, out of interest expenses of Rs.4,99,99,998/-, interest amounting to Rs.3,03,51,870/- is disallowed u/s 36(1)(iii) of the I.T. Act and the balance will be disallowed u/s 14A of the Act read with rule 8D.”

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 2. That during the year, the appellant company had given loan to 2 of its sister companies M/s Arosa Infrastructure Pvt. Ltd. Rs.51,01,61,601/- and to M/s Cumulative Investment & Trading Co. Pvt. Ltd. Rs.47,21,41,000/-. But no interest income has been shown from them. 3. That the appellant had made investment in 3 mutual funds and earned tax free dividend income of Rs.39,55,770. 4. That the appellant had further invested in fixed deposits and earned interest income of Rs.1,12,90,668/-. {4.3.2} It is also noted that the secured loan was raised with the main object of real estate development. According to appellant, the intended real estate project could not be started because of downturn in the real estate market. Therefore, the loan amount was diverted to other options. It is seen that eventually the money was invested in mutual funds getting a return @17% and fixed deposits. Also the fund was invested in purchase of shares of the sister concern. But in the intervening period of such investments the appellant company had used the fund to advance it to sister concerns whenever required by them. However, the money so advanced by the appellant company was utilized by the sister concerns in their business but the appellant company did not charge any interest on money so advanced to the sister concerns. Needless to say that the appellant company continued to give interest @ 10% to M/s Oswal Chemicals and Fertilizers limited on such money. Details of the money advanced to the sister concerns without charging any interest are given as under; ON AMOUNT OF INTEREST FREE LOAN GIVEN TO M/S CUMULATIVE TRADING & INVESTMENT CO. PVT. LTD. From date to date Days %PA Amt. of intt. On Rs. ' 59,89,25,000 9.9.2010 to 29.9.2010 20 10% 32,81,781/- 7,00,00,000 15.9.2010 to 29.9.2010 14 10% " 2,68.493/-

70,00,000 16.9.2010 to 29.9.2010 24,931/- 13 10% 10.00.000 29.9.2010 on day (as 1 10% 274/- Bank statement of ICICI Bank not filed)

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 67,69,25,000- 29.9.2010 to 4.10.2010 5 10% 7,67,020/- 11,70,00,000 55,99,25,000 4.10.201 Oto 8.11.2010 35 10% 48,46,541/- 55,99,25,000- 5,45.00.000 50,54,25,000 50,54,25,000- 8.11.201 Oto 5.1.2011 27 10% 36,76,623/- 84.00.000 49,70,25,000 49,70,25,000- 5.1.2011 to 2.2.2011 10% . 37,49,890/- 28 82.00.000 48.88.25.000 48,88,25,000- 2.2.2011 to 7.3.2011 33 10% 43,44,165/- 83.34.000 48.04.91.000 48,04,91,000- 7.3.2011 to 31.3.2011 24 10% 31.04.489/- 83.50.000 47.21.41.000 Total (A) 2,40,62,207/-

ON AMOUNT OF INTEREST FREE LOAN TO M/s AROSA INFRASTRUCTURE PVT. LTD. On Rs. From date to date days %PA Amt. of Intt. 51,01,61,600 14.2.2011 TO 31.3.2011 45 10% 62.89,663/-

Total (B) 62,89,663/-

During the above mentioned period the sister concerns had utilised the interest bearing loan of the appellant without any interest given to the appellant company. Let us go to section 36(1 )(iii) of the Act; 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28:- i.

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) ii. iii. the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; While going into the provisionjof section 36(1)(iii), it is to be seen for what purpose the interest bearing loan was raised. By appellant’s own admission , it was raised for real estate development. In this case, the real estate development was shelved and the money so borrowed was utilised for giving loan to 2 corporate entities without charging any interest. Now, the section is very clear that the amount of interest is allowed as deduction in respect of capital borrowed for the purposes of the business or profession. Even if it is presumed that the appellant had shelved the real estate project because of downturn in real estate business, the money should have been utilised for other business purposes. No business is conceived without profit intent. In this case money was advanced to 2 corporate entities without charging any interest. Thus, it is very clear that the intent of investing the money was never to earn any profit in such investments. Without the intent of profit making there is no business. Therefore, such advancement of loans can not be construed as for business purposes. Therefore, it is my considered view that the assessee is not entitled for any deduction under section 36(1)(iii) for the deployment of fund in interest free advancement of loans to Rs. Corporate entities i.e. M/s. Arosa Infrastructures Pvt. Ltd and to M/s. Cumulative Investment & Trading Co. Pvt. Ltd. Accordingly, amount of interest @10% calculated for the period such funds were enjoyed by the two entitles as per chart above comes to Rs. 30351870/- is disallowed. The addition is confirmed and the appellant’s ground of appeal is dismissed.” 7. Therefore, assessee aggrieved with the above order has preferred this ground of appeal before us. Page | 23

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 8. The ld Authorised Representative vehemently contested the above issue and stated that the disallowance is wrongly confirmed by the ld CIT(A). He referred to page No. 13 of the order of the ld CIT(A), wherein, it was submitted that the amount advanced was used for purchase of equity shares and preference shares in accordance with the memorandum of association of the assessee company. He further referred to page No. 32 to 43 of the paper book and at page No. 36 referred to Clause 32 of the objects incidental or ancillary to the attainment of the main object stating that assessee can lend money and hence, it is the business of the assessee. He further referred to page No. 19 of the order of the ld CIT(A) and referred to page No. 21 to 23 of the ld CIT(A)‟s order wherein, the contentions raised were mentioned. His main thrust was that money was advanced for the purposes of the business and therefore, no interest disallowance should be made. He further stated that the advances made by the assessee have been wrongly construed as loan by the revenue authorities but in fact it is an advance for the purpose of investments which materialized in subsequent years. He therefore, stated that disallowance has been wrongly made. He further stated that charging of interest does not mean that income need to be received in the same year. His argument was that though investment has been made in this year which are converted into the purchase of equity shares in subsequent years does not result into disallowance of interest for this year. He further stated that non charging of the interest was part of prudent business decision. He further stated that advances have been given to two group companies whereas, the entire interest bearing funds has been invested in shares of group companies which deals a very small amount in the hands of the assessee cannot be a ground for the disallowance of interest. To support his case he further referred to various clauses of the memorandum in the paper book. He further raised interesting issue that assessee has given loan to the sister concern and it is strategic investment and therefore, it cannot be disallowed at all. He

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) referred to three decisions of the Hon'ble Madras High Court in CIT Vs. RPG Transmissions Ltd 48 Taxmann.com 57, wherein, it has been held that interest on borrowed fund utilized for investment in group companies for strategic business purposes is an allowable deduction u/s 36(1)(iii) of the Act . He further referred to the decision of the Hon'ble Supreme Court in case of CIT Vs. Malayam Plantation Ltd 53 ITR 140, SA Builders Ltd Vs. CIT 158 Taxmann 74 and Munjal Sales Corporation Vs. CIT 168 Taxmann 43 to support his case. He further referred to the decision of the Hon'ble Delhi High Court in Shivnandan Buildcon Pvt. Ltd Vs. CIT 60 Taxmann.com 347 wherein, it is held that interest free advances to sister concern no notional disallowance can be made. In view of the above facts his argument was that no disallowance u/s 36(1)(iii) of the Act can be made. 9. He further submitted a written note reiterating the above submission as under:-

“Submission before the Hon’ble ITAT. on the issue of disallowance of interest expense:- In order to examine this issue of disallowance of interest expense, it would be necessary to make an analysis of the ingredients of Section 36 (1) (iii), the relevant part of which is as under:- “ The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

Thus from the above, it is apparent that the legal requirement for allowance of interest expense under Section 36 (1) (iii) of the Act can be broken in three parts i.e. (i) it should be paid (ii) in respect to capital borrowed (iii) for the purposes of the business/ profession. The other in built pre-requisite is that since the deduction u/s 36 (1) is with reference to computing the income referred to in Section 28 therefore it is incumbent that the business/ profession should Page | 25

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) have been carried on by the assessee at any time during the year in consideration. It is in this context that the Ld . A.O. did initially raise two questions in as much as the assessee company was asked that since no business has commenced therefore why the entire expenses claimed by it should not be treated as per operative expenses and also as to why the entire interest income should not be assessed as income from other sources. To these query of the Ld. A.O. the assessee had vide letter dated 23.12.2013 inter- alia replied that the assessee company was formed with the main object of real estate development or investment in other concerns which are involved in the business of real estate development. That since the market condition were not favourable to carry out business of real estate development therefore the assessee had not made any direct investment in any project but had given advances to its group companies having interest in real estate and related business. It was also submitted by the assessee that investment business was one of its subsidiary object and therefore instead of making direct investment in real estate sector which was fraught with substantial risk during that period of depressed market conditions the assessee chose to take the route to invest in other group concerns which had profitable projects in hand. It is apparent that the Ld. AO was satisfied with the explanation of the asessee has also the appreciation of the Memorandum of Association of the company which included the main objects to be perused by the company and the objects incidental and Ancillary to the attainment of the main objects and in particular Clauses 32 and 34 read with clause 40 of Part-B of the Memorandum Of Association which does authorize the company to advance moneys to the group companies on such terms as may seem expedient. These clauses are re-produced as below:- “32. To advance, deposit, or lend money, securities and property, (not amounting to the business of banking as defined under the Banking Regulation Act, 1949) to or with such person, association, firms or bodies corporate, as the Company think fit and in particular to customers and others having dealings with the Company and on such terms as may seem expedient, and to discount, buy, sell, and deal in bills, notes, warrants, coupons, and other negotiable or transferable securities or documents and to guarantee and the performances of any contract by any such person. 34. To invest other than investment in Company’s own shares, the surplus funds of the Company, from time to time, in Government securities or in other securities as may from time to time, be determined by the Directors, and from time to time to sell or vary all such investments and to execute all

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) assignments, transfer, receipts and documents that may be necessary in that behalf. 40. To do all such other lawful things and everything necessary and proper, in India or elsewhere, as may be deemed to be incidental or conducive to the attainment of the above objects. ” That From these incidental and ancillary objects to the attainment of the main object as narrated in the Memorandum of Association it is amply justified and authorized on part of the company to have gone ahead with making of investment by way of advance in its groups companies which were already engaged in construction business, in order to minimize its risk in direct venturing into a depressed real estate market. Such financing/ investment business does not require any elaborate and specific set up for its commencement therefore in facts and circumstances of the case it cannot be said that the business of the assessee company had not commenced or was not in existence during the Financial Year 2010-11. Further since the amount was advanced with a business perspective and for purpose of joint investment in future therefore no interest was charged as it was not in nature of loan but was a business advance to exploit new business opportunity. The upshot of the above submissions of the assessee before the Ld. AO was that he has refrained from considering the income from interest under the head “income from other sources” and has considered the activity of investment carried out by the assessee under the head “ income from business”. This is further substantiated from the fact that he has chosen to disallow the interest expense u/s 36 of the Income Tax Act, implying there by that the financing/ investment business and earning interest thereon has commenced during the year, in terms of section 28 of the I.T. Act. This is also fortified from the fact that the interest paid by the assessee has also not been capitalized treating it as pre¬operative expense. Moreover no separate treatment of interest income under the head “income from other sources” further shows that the Learned A.O. has duly considered and accepted the submission of the assessee that the investment / financing is a business activity of the assessee under section 28 of the Act. 4.1 In this connection it may be relevant to refer to the decision of the Hon’ble Supreme Court in case of CIT v. Malayalam Plantations Ltd. [19641 53 ITK 140 wherein the Apex Court has held that the expression for the purpose of the business as envisaged by the legislature in Section 36 (1) (iii) is much wider in scope when compared to Section 57 (iii) wherein the allowability of the expenditure is with reference to the purpose of making or earning of income , which is as under :- "The aforesaid discussion leads to the following result: The expression 'for the purpose of the business' is wider in scope Page | 27

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) than the expression 'for the purpose of earnins profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. "

While on the issue of interpreting the import of Section 36 (1) (iii), reliance is also placed on the decision of the Hon’ble High Court of Madras in Commissioner of Income-tax vs. RPG Transmissions Ltd. (48 taxmann.com 57) wherein it has been held as under:-

“ 46. A careful perusal of Section 36(1) (Hi) contemplates that, firstly, the money should have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and, thirdly, the assessee must have paid interest on the said amount. The learned counsel for the Revenue, vehemently put forth his arguments contending that the Assessing Officer after an overall analysis of the facts had come to a conclusion that the expenditure on account of interest was mainly relatable to the borrowings which were invested for purchase of shares of CESE Ltd., which is a group company of the assessee. The learned counsel also drew our attention to pages 20 to 27 of the assessment order to drive home the point that the expenditure cannot be termed as expenditure incurred for the purpose of the business. In other words, the interest which was paid cannot be treated as business expenditure for the simple reason that the investments were made in a group company. Furthermore, it was contended that the expenditure on borrowings far exceeded the income derived there from.

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) that the investments were made for the purposes of purchase of the shares in CESE Ltd. and that it has been pointed out that one of the purposes of the business of the assessee was also to invest in other business activities, including shares, debentures, etc. Furthermore, there is nexus between the nature of business carried out, i.e., seneration and distribution of electricity, power transmission, etc., and, therefore, the investments was for the purpose of the business and, therefore, no part of the interest expenditure could be disallowed. In this regard, fortifying the said submission, the learned senior counsel also relied upon the decisions of this court as well as other courts. Learned senior counsel to buttress his arguments, relied on the following decision. 48. It is an admitted fact that substantial expenditure on payment of interest was incurred only on account of borrowings which appears to have been invested in shares, savings certificates, fixed deposits, etc. In fact, section 57 lays down the permissible deductions and section 57(iii) lays down that the expenditure so expended should be wholly and exclusively for the purpose of making or earning such income. It is no doubt true that one of the purposes of the assessee's business was also to invest in the shares .of other companies. 49. The Tribunal, in consideration of appeal of the assessee in paragraph 35 of the order dated January 23, 2006, has dealt with this issue at length. The Tribunal has found that there is proximate nexus between the business of the assessee-company and that of the company in which investments were made in the form of shares. It may be true that the returns are not commensurate with the expected returns in the form of interest, but if and when, the shares are liquidated, there is expectancy of substantial gains which fact has been glossed over by the Assessing Officer while confining his findings that the returns are far below the quantum of interest paid on the borrowed funds and, therefore, the basis of analyzing that the payment of interest on borrowed funds has to be tested on the ground of quantum of return is untenable. Furthermore, as rightly pointed out by the learned senior counsel for the assessee, section 36(l)(iii) of the Act does not contemplate any test that the amounts so invested should be "wholly and exclusively for making or earning such income". On a plain reading of section 36(l)(iii), we do not find any such requirement mandated in the section to confine such expense. Furthermore, the section also does not place any embargo for investments to be made in group concerns and subsidiary concerns. ” 4.2 Reliance is also placed on the decision of the Hon’ble Supreme Court of India in S. A. Builders Limited vs. CIT 158 Page | 29

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) Taxman 74 wherein para 20 to 30 it has been held that the expression “for the purpose of business” as used in section 36(l)(iii) includes expenditure voluntarily incurred for commercial expediency , which is expression vide import an includes such expenditure as a prudent business incurs for the purpose of business . In para 31 to 34 of this judgment the Hon’ble Supreme Court has made the following observation , which is relevant to the facts of the instant case and which is reproduced below:- “31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. 32. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(l)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. 's case (supra) that the interest, was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct.

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) its profit. The income tax authorities must put themselves in the shoes of 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. As already stated above, we have 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 was advanced for earning profits. ”

4.3 To similar effect is the decision of Hon’ble Supreme Court is the decision in Munjal Sales Corporation vs. CIT 168 Taxman 434 which has impliedly over rule the decision of Punjab and Haryana High Court in case of CIT \ s. Abhishek Industries Ltd. 286 ITR 1, which has been relied upon by the Ld. AO. and approved by the Ld. CIT.

4.4 To summarize, since in the facts of the case the business in the nature of financing/ investment had commenced and since the interest paid was on account of capital borrowed for the purpose of the business and placing reliance on the principles laid down in the cases referred to above it is prayed that the disallowances made by the A.O. u/s 36 (1) (iii) for Rs. 3,03,51,870, being not in ccordance with the law may kindly be directed to be deleted.”

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) assessee is of contractor and builder and real estate developer. She further stated that assessee has not at all carried out these activities since Assessment Year 2009-10 till this Assessment Year. She further submitted that the various clauses relied by the assessee are incidental object of the assessee for carrying out the main object. When the assessee has not carried out the main object then it cannot be said that giving loans to sister concern and claiming interest expenditure is incidental object of the assessee. She further referred to provisions of section 36(1)(iii) of the Act and submitted that the borrowing is for the purpose of business or profession as stated by the assessee but is used by assessee for non business purposes. She further referred to the page No. 3 of the assessment order wherein, para No. 2 and 3 to state that assessee has not commenced any business at all. She further submitted that it is not the case of the assessee that it has made any investment. Assessee has merely given an advances of huge sums to its sister concern. No details were placed before the lower authorities to justify that investment has been made for the business purposes. She further referred to the annual accounts of the assessee and submitted that assessee has given only the loans and advances and no investment has been made. She referred to Schedule III of balance sheet to show that advances have been given of Rs. 98 crores out of the secured interest bearing loan of Rs. 100 crores. She further stated that assessee has a meager income of Rs. 1.52 crores of the interest whereas has spent Rs. 5 crores as an expenditure and disclosed the net loss of Rs. 3.5 crores. It describes the whole modus operandi of the assessee of claiming interest expenditure without any business. She further referred to Schedule 7 to show that interest on loan of Rs. 5 crores is debited to the profit and loss account and claimed as expenditure. She further referred to the decision of the Hon'ble Supreme Court in case of Malayam Plantation Ltd (supra) and stated that same does not apply to the facts of the case. She stated that it related to estate duty and not to the deduction of interest

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) expenditure. She agreed that the Hon'ble Supreme Court considered the expression of the “for the purposes of the business” in that decision but submitted that there is no business in the case of the assessee. She further referred the decision of the Hon'ble Supreme Court in case of SA Builder (supra) and stated that there is no commercial expediency shown by the assessee and therefore, that decision also do not apply. With respect to the decision of Munjal Sales Corporation (supra) that in that case such advances were given from the own fund and further it was for the business purposes. With respect to the decision of the Hon'ble Madras High Court in RPG Transmission Ltd (supra) she submitted that in that particular case there was a special purpose vehicle to which the advances were given and those advances were held to be for the purpose of the assessee. She specifically referred to para No. 51 of that decision and submitted that facts of the case are different. She further referred to the decision of Shivnandan Buildcon of Hon'ble Delhi High Court and submitted that in that particular case notional income was computed and here the interest expenditure is disallowed. She therefore, submitted that the decision cited by the ld AR are not applicable to the facts of the case. she further relied on the decision of the Hon'ble Punjab and Haryana High Court in CIT Vs. Abhishek Industries ltd 286 ITR1 to support her arguments. 11. The ld Authorised Representative in rejoinder submitted that commercial expediency cannot be decided by the revenue but it falls into the sole discretion of assessee. He therefore, submitted that business expediency is to be seen from the business man‟s point of view and not from revenue. He further submitted the decision of CIT Vs. Abhishek Industries Ltd relied upon by the ld DR has been overruled by the Hon'ble Supreme Court in case of Munjal Sales Corporation. In the end he submitted that disallowance deserves to be deleted. 12. We have carefully considered the rival contentions. The brief facts of the case is that the assessee is a company formed with the object of real

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) estate development, contractor, builder and developer. It is stated that for the purpose of the business, assessee borrowed a loan of Rs. 100 crore at the interest rate of 10%. It is further stated that the proposed real estate plans could not be carried out and therefore, the assessee invested initially above sum in mutual funds and fixed deposits. Subsequently, on maturity the above sum was advanced to two private limited companies of the group M/s. Cumulative Investment and Trading Co. Pvt. Ltd and M/s. Arosa Infrastructure Pvt. Ltd. One of the company returned the funds which were further advanced to first company which invested in shares in its name of other companies. The assessee debited the same as loans and advances in its books of account. The amount of interest paid on loan of Rs. 100 crores amounted to Rs. 5 crores which was debited in the profit and loss account and fully claimed as deductible expenditure. The ld AO noted that assessee has diverted interest bearing borrowed funds to non interest bearing loans and advances to sister concerns. The ld Assessing Officer found the nexus between the amount borrowed and the amount utilized and disallowed proportionately Rs. 3.03 crores u/s 36(1)(iii) of the Act stating that amount borrowed is not for the purpose of the business of the assessee. Ld CIT(A) confirmed the above disallowance. The assessee has mainly stated that it has a clause in its object clause of Memorandum of Association under the head “other objects incidental or ancillary to the main object” that it can lend and invest the funds. The assessee is mainly relying on this clause for the claim of the above stated interest expenditure and also saying that it is the „business expediency‟ of the assessee which is required to be tested. Therefore, it is stated that as investment is the one of the object, funds are borrowed for the purposes of the business and therefore, u/s 36(1)(iii) of the Act such interest expenditure is allowable as deduction. It is the Clauses of memorandum which provide that assessee can make an investment but those falls under the other object which are ancillary and incidental to the main object of the assessee. The ld Assessing Officer has

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) stated that assessee has not commenced any business at all. To verify, this it is interesting to look at the balance sheet of the company, where there are only two streams of income such as dividend and interest on fixed deposits. In the balance sheet of the company the only asset is loans and advances along with cash and bank balances. The profit and loss account on the expenditure side only shows the major expenditure of interest expenditures of Rs. 5 crores. The ld Assessing Officer has stated that since the incorporation of the company, assessee has not carried out any business for which it is formed i.e. of contractors and developers. On appraisal of the balance sheet we also could not find any such business activity carried out by the assessee. The ld Authorised Representative also could not show us any evidence with regard to that. In view of this, it is apparent that assessee has not carried out any business other than the activity of lending money to its sister concern. The object clause which is relied upon by the ld AR is falling under the caption of “other objects incidental or ancillary” to the main objects. The assessee has relied upon clause 32 and 34 of the memorandum. A company has in its memorandum, „main objects‟ which are to be pursued by the company on its incorporation and further the other objects which such company pursue which are incidental or ancillary to the attainment of the „main object‟. The other objects does not have an independent existence in absence of any activity of the „main object‟ of the assessee. Such is the case before us. The assessee has not carried out its „main object‟ but is relying upon other objects to submit that assessee‟s business is of lending and therefore, it is „commercially expedient‟ to grant interest free loan to the sister concern for purchase of shares etc. hence, it is claimed, full interest expenditure should be allowed. The claim of the assessee is that amount paid to Cumulative Investment and Trading Company Pvt Ltd was utlised by that company i.e. borrower, for purchase of shares of one another company and advance of M/s. Arosa Infrastructure Pvt. Ltd was received back subsequently and such sum was further invested in

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) Cumulative and Trading Company Pvt. Ltd which purchased shares of other company. This was the explanation given by the assessee to show that there is a „business expediency‟. On looking at the balance sheet we did not find any such purchase of shares in the name of the company. The ld AR also could not show us that whether the assessee could gain any benefit out of these loans to the sister concerns. Obviously, the investment is made by the borrower (sister concern) in the shares of other company and it will carry the risk and also earn the reward of those investment. Neither the assessee is an investor nor any reward which may accrue to it was demonstrated before us. Therefore, the transactions of giving loan to the sister concern by the assessee has been elaborately discussed by the lower authorities which clearly proves that same does not demonstrate any „business expediency‟ in granting the loan. It is further interesting to see that M/s. Cumulative Investment Pvt Ltd purchased 889160 equity shares of M/s. Arun Investment @138 each and further purchase the 10994200 preference @0.01% @138 each of the same company. Therefore, it is clear that Cumulative Investment Pvt Ltd has also invested into the preference share of the other company where the coupon rate was as low as just 0.01%. Therefore, this also proves that there is diversion of money by the assessee of interest bearing funds by granting loan to the sister concern without interest. Furthermore, what happened in subsequent year cannot be looked into when the facts for the present year are so glaring with respect to the above disallowance. The decision relied upon by the ld AR in case of SA Builders (supra) does not apply to the facts of the assessee as Hon'ble Supreme Court in para No. 35 has made it absolutely clear that it is not the case that in every case the interest on borrowed loan has to be allowed if the assessee advance it to the sister concern and it all depends on the facts and circumstances of the respective case. The Hon'ble Supreme Court therefore, stated that if „commercial expediency‟ is shown in such case then only such interest is deductible. In the present case, neither we nor

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) the lower authorities are impressed with the „commercial expediency‟ explained by the assessee. Therefore, the above decision of the Hon'ble Supreme Court does not help the case of the assessee. The decision of the Hon'ble Supreme Court in case of CIT Vs. Malayam Plantation Ltd (supra) was with respect to deduction of estate duty. The Hon'ble Court has also considered the expression “for the purpose of the business” and held it to be wide. In the present case before us there is no business carried on by the assessee except the activity of granting loan. The other decision of the Hon'ble Supreme Court relied upon of Munjal Sales Corporation (168 Taxmann 43), where it was found that funds were provided out of the own funds and not from borrowed funds. Therefore, same is on different facts and distinguishable. The decision of the Hon'ble Madras High Court relied upon in CIT Vs. RPG Transmission (supra) was held to be for the purpose of the business which is not the case before us. In that particular case the assessee invested money in a special purpose vehicle created for the purposes of the business to strengthen and promote its existing business by combining different business segments and therefore, Hon'ble Court found that deduction is allowable u/s 36(1)(iii) of the Act. This decision is also distinguishable on facts. The assessee further relied upon the decision of the Hon'ble Delhi High Court in case Shivnandan Buildcon Pvt Ltd (supra) where the addition on account of notional interest earned on advance given to sister concern was made. It was held that such addition cannot be made. The case before us not of addition of notional interest but of disallowance of interest u/s 36(1)(iii) of the Act. Hence, reliance on the same is misplaced. In view of the above facts, we do not find any infirmity in the orders of the lower authorities with respect to the disallowance u/s 36(1)(iii) of Rs. 30351870/- on account of interest expenditure for diverting interest bearing advances to the sister concern without charging interest. In the result, the solitary ground of the appeal of the assessee is dismissed.

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) 13. In the result ITA No. 2716/Del/2016 filed by the assessee is dismissed. 14. Coming to the appeal of the revenue in ITA No. 3125/Del/2016 raising two grounds of appeal against the order of the ld CIT(A) in partially deleting the disallowance u/s 14A of the Act. 15. The brief facts shows that assessee has earned tax free dividend income of Rs. 39.55 lakhs by making investment in mutual fund. It was found that assessee has not made any disallowance on account of section 14A of the Act. the ld Assessing Officer noted that as assessee has paid huge interest and has made investment in mutual funds from which tax free dividend is received, the disallowance u/s 14A of the Act is called for. The ld Assessing Officer issued a detailed questionnaire on 22.02.2014 recording his detailed satisfaction on account of disallowance u/s 14A of the Act. Assessee explained that there is nil disallowance as there is no exempt income earning investment as on the opening and closing dates of the financial year. It was further stated that investment in mutual fund is for very small period. The ld Assessing Officer recorded his satisfaction and then applied provisions of Rule 8D of the Act and disallowed Rs. 1,96,98,128/- u/s 14A of the Act. Only component of disallowance was interest expenditure of Rs. 19698128/- out of the total interest expenditure of Rs. 49999998/-. The balance interest of Rs. 30351870/- was already disallowed by the ld AO u/s 36(1)(iii) of the Act. The assessee challenged the same before the ld CIT(A), he restricted the disallowance to the amount of exempt income earned by the assessee of Rs. 39.55 lakhs relying on the decision of Hon'ble Delhi High Court in case of Joint Investment Ltd Vs. CIT. therefore, revenue is in appeal before us. 16. The ld DR relied upon the order of the ld AO and the ld AR relied upon the order of the ld CIT(A). 17. We have carefully considered the rival contentions and perused the orders of the lower authorities. Apparently, assessee has earned exempt income only of Rs. 39.55 lakhs and therefore, in any case the disallowance cannot exceed the amount of dividend income. Such is the Page | 38

Menora Developers & Infrastructure Pvt. Ltd Vs ITO ITA No. 3125/Del/2016 and 2716/Del/2016 (Assessment Year: 2011-12) mandate of Hon'ble Delhi High Court in 59 Taxmann.com 295 . In view of this we do not find any infirmity in the order of the ld CIT(A) and hence, the appeal of the revenue on this solitary ground is dismissed. 18. In the result appeal of the assessee as well as of the revenue are dismissed. Order pronounced in the open court on 25/09/2018. -Sd/- -Sd/- (SUDHANSHU SRIVASTAVA) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:25/09/2018 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi