SUN INFRA,MUMBAI vs. ASST CIT 14(3), MUMBAI

This appeal has been filed by the assessee against the order dated 01.05.2014 passed by the Commissioner of Income Tax (Appeals)-25 (for short ‘the CIT(A), Mumbai, for the assessment year 2010-11, whereby the Ld. CIT(A) has dismissed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee a partnership firm engaged in the business of trading, developing constructed and selling real estate, filed its return of income for the assessment year under consideration declaring Nil income. Since the case was selected for scrutiny, the AO passed assessment order u/s 143(3) of the Act determining the total income of the assessee at Rs. 69,14,660/- after making addition of Rs. 23,78,750/-/- under the head income from house property, Rs. 13,85,000/- on account of interest free loans and Rs. Assessment Year: 2010-11 31,50,911 under the head income from other sources. In the first appeal, the Ld. CIT (A) dismissed the appeal filed by the assessee and confirmed the said additions. Against the said findings of the Ld. CIT (A), the assessee in appeal before this Tribunal 3. The assessee has preferred the present appeal by raising the following effective grounds:- “On the facts and circumstances of the case and in law:-

Before us, the Ld. counsel for the assessee submitted that the assessee had borrowed funds from Bank by way of over draft facility against security of fixed deposits of Rs. 4 crore during the financial year 2007-08. The assessee paid interest of Rs. 60,25,743/- on borrowed funds. The said borrowings were utilized for the purpose of acquiring land for development at Laxmi Market Property in the normal course of business. The said deposits were not made by way of investment of surplus funds to earn interest, but were made under compulsion in order to avail over draft facility. The Ld. counsel further submitted that the borrowed funds were utilized to make FDs and the assessee has paid interest on borrowed funds. The Ld. counsel placing reliance of the judgment of the Hon’ble Bombay High Court delivered in the case of CIT vs. Lokholdings 198 Taxman 452 and the decision of the ITAT Chandigarh in the Assessment Year: 2010-11 case of Samar Estate Pvt Ltd vs. ITO, 61 Taxmann.com 23 submitted that the interest income from FDs may be treated as business Income.

On the other hand the Ld. departmental representative relying on the order passed by the Ld. CIT(A) submitted that the findings of the Ld. CIT(A) are based on the judgments of the Hon’ble Supreme Court in the case of Dr. V Gopinathan 248 ITR 449 and the judgment of the Hon’ble Punjab and Haryana High Court in the case of CIT vs. Greatways P Ltd. The Ld. counsel further submitted that the Ld. CIT (A) has rightly held that since over draft facility was availed by the assessee for business purposes, direct nexus between the interest income on the said FDRs and the interest expenses is not established. Therefore, the appellant is not entitled to get any deduction of interest expenses against the interest income on FDRs.

We have heard the rival submissions and also perused the material on record including the cases relied upon by the parties. Vide ground No. 1 to 1.3, the assessee has challenged the action of the Ld. CIT(A) in holding that the gross amount of interest on fixed deposit of Rs. 31,50.911 under the head income from other sources. We notice that the AO has rejected the contention of the assessee on the basis of the judgment of the Hon’ble Supreme Court in the case of CIT vs. Dr. V. Gopinathan (supra) and the judgment of the Hon’ble Punjab and Haryana High Court. In the case CIT vs. Dr. V. Gopinathan, the Supreme Court has held that where the assessee has a term deposit with bank and had also taken loan on security on the said FDR, the assessee is to be assessed on gross amount of interest received by him on FDRs and not on interest received as reduced by the amount of interest paid on loan taken on security of such deposits. The Hon’ble Punjab and Haryana High Court has held that even where interest on FDs are given to Export Promotion Councils it can still be treated as business income so as to be eligible for the purpose of deduction u/s 80HHG. The Ld. CIT (A) affirmed the view of the AO and held Assessment Year: 2010-11 that interest income should be taxed under the head income from other sources.

However, as pointed out by the Ld. counsel for the assessee, the identical issue was before the Ld. CIT (A) in the assessee’s own case pertaining to the A.Y. 2008-09, wherein the Ld. CIT (A) has held that the interest expenses attributable to FDs should be allowed u/s 57(iii) of the Act. The relevant portion of the order of the Ld. CIT (A) reads as under:- “3.3 I have carefully considered the arguments of the Ld. A.R. as well as findings of the AO on the subject. It is well settled by the decision of Hon’ble Supreme Court that interest income is liable to be taxed under the head income from other sources.’Apart from the decision relied upon by the AO, the Hon’ble Supreme Court in the case of CIT v/s. Pandian Chemicals (129 Taxman 539) had held that interest income should be taxed under the head income from other sources’. Accordingly, the action of the AO confirmed in principle. However, mere is a force in the arguments of the Ld. AO that the expenditure laid out or expended wholly and exclusively for the purpose of earning such income should be allowed u/s 57 (iii) of the Act. The Ld. AR had emphasized that F.Ds are placed out of borrowings made by the assessee. Accordingly, the AO is directed to verify the claim of the assessee and ascertain whether the F.Ds are placed out of borrowings made by the assessee. If the assessee is able to establish the direct nexus of D.Ds. with borrowings made by it, necessary deduction should be allowed as per section 57(iii) of the Act. If the assessee is not able to establish the direct nexus of F.Ds with the borrowings, no such expense should be allowed. In terms of discussion as above, the assessee is entitled for partial relief.”

The Ld. DR submitted that the order of the CIT (A) was not challenged by the department due to low tax effect. Hence, the assessee was given the benefit of section 57 (iii) of the Act in the assessment year 2008-09. We further notice that in the assessment year under consideration the Ld. CIT (A) has taken a different view without assigning any reason or pointing out any change in the material facts. Hence, we are of the considered view that the view taken by the Assessment Year: 2010-11 Ld. CIT (A) in the assessee’s own case for the A.Y. 2008-09 is the correct view in the light of the facts and circumstance of the case. Hence, we agree with the findings of the Ld. CIT (A) given in the assessee’s own case for the A.Y. 2008-09 and set aside the findings of the Ld. CIT (A) in the present case. We accordingly direct the AO to verify the claim of the assessee and ascertain as to whether the FDs were place out of the borrowings made by the assessee and if assessee is able to establish the nexus of FDs with the borrowings made by it to allow deduction as per section 57(iii) of the Act in terms of the order passed by the Ld. CIT (A) pertaining to AY 2008-09 in the assessee’s own case.

Vide Ground No. 2 to 2.5, the assessee has challenged the action of the Ld. CIT (A) in disallowing Rs. 13,71,000/- u/s 36(1) (iii) of the Act. The Ld. counsel submitted that assessee had given interest free loan to its sister concern and the assessee had paid interest on the loan taken from bank and other parties. The assessee contended that unsecured loans and other borrowings were utilized by the assessee for the business purpose. The AO held that interest attributable the interest free loan given to its sister concern is not allowable. Accordingly, the AO disallowed the entire amount of interest claimed by the assessee. In the first appeal, the Ld. CIT (A) confirmed the disallowance holding that the assessee has failed to establish nexus between the advancing of funds of business interest of the assessee. The Ld. counsel submitted that identical issue was dealt with by the Ld. CIT (A) in the assessee’s own case for the A.Y. 2008-09 and the Ld. CIT (A) directed the AO to examine the contention of the assessee as per the actual holding period and disallowed the interest accordingly. 10. The Ld. counsel further relying on the judgment of the Hon’ble Madras High Court in the case of Industrial Feeders vs. ACIT (2016) 68 taxman 92 (Madras) submitted that the claim of the assessee is covered by the said judgment in which it has been held that where both assessee and the sister concern whom the assessee had advanced loans were manufacturers of GI Assessment Year: 2010-11 casting, without indicating difference in nature of the business activities, revenue could not disallow interest on borrowed capital on the ground that loan was advanced on loan business purposes. The Ld. counsel for the assessee further relying on the decision of the Hon’ble Supreme Court in the Hero Cycles Pvt. Ltd. Vs. CIT (2015) 63 taxman.com 308 in which it has been held that no interest can be disallowed if interest free advance to given to sister concern on account of commercial expediency. In the present case, the appellant has given interest free advances to its sister concern M/s Sun Enterprises in which three partners are common and have their share more than 25% and both are in the same lines of business operating in same locality and have common brand name Sun Developers. Since, the advances were given by the assessee for commercial expediency no disallowance of interest is called for.

On the other hand, the Ld. DR relying on the order passed by the Ld. CIT (a) submitted that since the assessee has failed to establish that it had sufficient funds the Ld. CIT (A) has rightly confirmed the disallowance made by the AO, there is no infirmity in the order of the Ld. CIT (A). Hence, there is no merit in the contention of the assessee.

We have heard the rival submissions and also perused the material on record including the cases relied upon by the assessee. The Hon’ble Madras High Court in the case of Industrial Feeders vs. ACIT (supra), has held that where both assessee and the sister concern whom the assessee had advanced loans were manufacturers of GI casting, without indicating difference in nature of the business activities, revenue cannot not disallow interest on borrowed capital on the ground that loan was advanced for non-business purposes. In the case of Hero Cycles P Ltd. vs. CIT (supra), the Hon’ble Supreme Court has held that once it is established that there is nexus between expenditure and purpose of business revenue cannot justifiably claim to put itself in arms chair of business man or in position of Board of Director and assumed role to decide Assessment Year: 2010-11 how much is reasonable expenditure having regard to the circumstances of the case. In the said case, the Assessing Officer had rejected the assessee’s claim on two points firstly, deduction was claimed as business expenditure but substantial money out of the loan taken from the bank was diverted by giving advance to subsidiary company on which no interest was charged and secondly, the assessee had also given advances to its own Directors on which the assessee charged interest @ 10% against the loan taken by the assessee @ 18%. The relevant paras of the order of the Hon’ble Supreme Court reads as under:- “13. In the process, the Court also agreed that the view taken by the Delhi High Court in CIT v. Dalmia Cement (P) Ltd. [2002] 254 ITR 377/121 Taxman 706 wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shows 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.

Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s Hero Fibres Limited to meet the working capital for meeting any cash loses.

It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its share holding in the said M/s Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only Assessment Year: 2010-11 refunded back the entire loan given to M/s Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax.”

In the case of Industrial Feeders vs. ACIT (supra) the assessee had advanced a sum of Rs. 16,07,809 to one of its sister concern M/s Kriscast. Since the net credit balance in the partners’ capital accounts and current accounts was only Rs. 2,95,644, the AO treated the balance of Rs. 13,12,164 as out of interest bearing loans and disallowed interest on the said amount. In the first appeal the CIT(A) partly allowed the appeal and remitted the matter back to AO for re-computation of quantum disallowance. The revenue appealed to the ITAT. The tribunal allowed the appeal and restored the order of the AO. On appeal the Hon’ble High Court decided the issue in favour of the assessee holding as under: “9.Keeping the above admitted facts in mind, if we have a look at the orders of the three Authorities, it could be found that the only reason as to why the Authorities disallowed interest on loan advanced by the assessee to its sister concerns, is the fact that the lending was for non business purposes. 10. But, a look at the orders of the three Authorities would show that there was no basis for the Authorities to come to the conclusion that the amounts were lent for non business purposes. M/s Kriscast is obviously a casting company. The applicant is a manufacturer of G.I. castings. There was no indication about the nature of business that the applicant as well as the borrowers were engaged in. A finding made on thin air that the amounts were lent for non business purposes cannot be sustained. The assessment years are 1991-92 and 1993-94. Therefore, we have ventured to go into the merits of the case rather than sanding the matter back to the Tribunal on the ground of failure to afford a reasonable opportunity. 11. In the result, the appeals are allowed and the questions of law are answered in favour of the assessee.No costs.” Assessment Year: 2010-11