ACIT, NEW DELHI vs. M/S. ESCORTS HEART INSTITUTE & RESEARCH CENTRE LTD., NEW DELHI

ORDER Per L.P. Sahu, A.M.: These two appeal at the instance of Revenue are directed against the orders dated 31.07.2015 of ld. CIT(A)-14, New Delhi for the assessment years 2010-11 and 2011-12 respectively. Following grounds have been raised by Revenue in both the appeals :

Grounds for A.Y. 2010-11:

1. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of Rs. 21,60,000/- made out of interest expenses being interest bearing funds given to sister concerns without interest.

2. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of Rs. 12,07,349/- made out of interest expenses on account of interest on Capital Work in Progress.

3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of depreciation of Rs.59,13,664/-on assets which were received without any consideration.

4. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs.6,30,720/- on account of profit on sale of assets which were acquired without any consideration.

Grounds for A.Y. 2011-12:

2. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of Rs. 26,86,443/- made out of interest expenses on account of interest on Capital Work in Progress.

3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of depreciation of Rs.50,68,167/-on assets which were received without any consideration.

4. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs.4,20,415/- on account of profit on sale of assets which were acquired without any consideration.

4. The Assessing Officer further observed that the assessee has shown capital work in progress including capital advances amounting to Rs.1,00,61,241/-. In this regard, the assessee was asked to explain as to why interest proportionate to capital borrowings in assets not put to use, should not be disallowed. In response, the assessee made detailed submissions and relied on some case laws. The Assessing Officer, however, disallowed 12% interest and worked out the disallowable interest to the tune of Rs.12,07,349/-, which was added to the income of the assessee, holding that the amount invested in the capital work in progress not put to use is not allowable.

5. The other issue raised in this appeal is against deletion of disallowance of depreciation amounting to Rs.59,13,664/- on assets which were received without any consideration. The facts apropos this ground are that a society in the name of Escorts Heart Institute and Research Centre was formed at Delhi on 21.10.1981. Another society with the same name was formed at Chandigarh on 11.11.1999. Whereas the Delhi society had charitable objects and its income was exempt u/s 10(21), the Chandigarh society did not have the object of relief to the poor. Both the societies merged on 01.04.2000. On 30.05.2000 Chandigarh society was registered as a company, namely, Escorts Heart Institute and Research Centre Ltd. Upon such conversion, the assets of the erstwhile Chandigarh and Delhi societies came to be considered as the assets of the assessee company. The assessee claimed depreciation, inter alia, on the assets acquired from Delhi Society. The Assessing Officer opined that since full deduction of the cost of these assets was allowed as application of income u/s 11 of the Act, the written down value of this asset in the hands of the society was only a notional book value. The Assessing Officer canvassed a view that by taking over of the assets and liabilities of the Society on the book value of these assets, an artificial enhanced value of these assets was shown by the assessee company on which the depreciation could not be allowed. The Assessing Officer, therefore, disallowed the depreciation on such assets amounting to Rs.59,13,664/- by applying the Explanation 4A and 6 to section 43 and section 43(1) of the IT Act.

7. Being aggrieved by the assessment order, the assessee preferred an appeal before the ld. CIT(A), where he made detailed written submissions and relied on various case laws. He further submitted that before the ld. CIT(A) that similar issues raised by the AO in preceding assessment year 2008-09 have been decided by the first appellate authority in favour of the assessee vide order dated 03.09.2013 in appeal No. 91/2012-12. The ld. CIT(A) after considering the submissions of the assessee and following the decision of his predecessor, as noted above, deleted the additions made by the Assessing Officer vide the impugned order. Aggrieved, the Revenue is in appeal before the Tribunal.

8. The learned DR relied on the order of the Assessing Officer and submitted that the ld. CIT(A) was not justified in deleting the impugned additions ignoring the facts considered by the Assessing Officer in his order.

9. On the other hand, the ld. AR relied on the order of the ld. CIT(A) and submitted that ground No. 1 & 3 are covered in favour of the assessee and against the Revenue by the order of Co-ordinate Bench in assessee’s own case for the assessment year 2008-09, which has also been upheld by Hon’ble jurisdictional High Court. In respect of ground No. 4, the ld. AR further submitted that it is consequential to ground No. 3 because the assets sold was the part of block of assets held by the assessee and the block of assets did not exhaust by making sale of some of the assets therefrom.

10. After hearing the submissions of both the parties and perusing the entire material available on record, we find that the issues involved in ground No. 1 & 3 have been decided in favour of the assessee in its own case for the assessment year 2008-09 in the similar facts and circumstances of the case by the Co-ordinate Bench in ITA No. 6674/Del./2013 vide order dated 18.04.2017. The findings reached by the Tribunal read as under :

“4. We have heard both the sides and perused the relevant material on record. There is no dispute on the fact that a sum of Rs.2.84 crore was given as share application money. This amount was given in an earlier year and for this year, it was an opening brought forward balance. It is a matter of record that no disallowance of interest has been made in any of the earlier years on such money given to subsidiary companies. Once it has been accepted in the earlier years that this money was not given out of any interest free funds, a new case cannot be set up in the instant year, as it would impliedly reverse the settled position in earlier years in this regard. Going by the rule of consistency, we hold that no disallowance is warranted to this extent. As regards the major amount of interest free loan of Rs.24.19 crore, we find that the assessee obtained fresh loan amounting to Rs.32.78 crore during the year which was utilised for specific business purpose, namely, acquisition of fixed assets. As against the interest free loans amounting to Rs.24.19 crore given by the assessee to its subsidiary companies without charging any interest, the assessee had its own share capital with reserves standing at a whopping sum of Rs.188.89 crore. Section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non-business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2001) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders’ funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs.213 crore was invested by the assessee out of its own funds and Rs.1.74 crore out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs.2.40 crore. It was argued on behalf of the assessee that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs.418.04 crore and the assessee had also raised capital of Rs.7.90 crore, apart from receiving interest free deposit of Rs.10.03 crore. It was, therefore, submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee’s submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders’ funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient funds of its own for making investment without using the interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon’ble High Court, it was contended by the Department that the shareholders’ funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon’ble High Court observed that : “In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders’ fund to the tune of over Rs.172 crore was utilized for the purpose of fixed assets in terms of the balance-sheet as on March 31, 1999, is fallacious.” In upholding the order of the Tribunal, the Hon’ble High Court held that : “If there be interest free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available”. Thereafter, the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon’ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that : “The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment”. Consequently the interest was held to be deductible in full. From the above judgment, it is manifest that there can be no presumption that the shareholders’ fund of a company was utilized for the purchase of fixed assets. If the assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest free funds at the disposal of the assessee.

5. Similar view has been taken by the Hon'ble jurisdictional High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified.

6. Adverting to the facts of the instant case, we find that the assessee has its own share capital and reserves amounting to Rs.188.89 crore. As against that, only sum of Rs.24.19 crore was given as interest free loan to subsidiary companies. The amount of share capital and reserves is many times higher than the amount of interest free loan given to subsidiary companies. Guided by the ratio laid down by the Hon'ble jurisdictional High Court in Tin Box Company and that of the Hon'ble Bombay High Court in Reliance Utilities and Power Ltd., we hold that the ld. CIT(A) was justified in deleting this disallowance.

8. The only other ground raised in this appeal is against the deletion of disallowance of depreciation amounting to Rs.1,00,30,472/- on assets which were received without any consideration. The facts apropos this ground are that a society in the name of Escorts Heart Institute and Research Centre was formed at Delhi on 21.10.1981. Another society with the same name was formed at Chandigarh on 11.11.1999. Whereas the Delhi society had charitable objects and its income was exempt u/s 10(21), the Chandigarh society did not have the object of relief to the poor. Both the societies merged on 01.04.2000. On 30.05.2000 Chandigarh society was registered as a company, namely, Escorts Heart Institute and Research Centre Ltd. Upon such conversion, the assets of the erstwhile Chandigarh and Delhi societies came to be considered as the assets of the assessee company. The assessee claimed depreciation, inter alia, on the assets acquired from Delhi Society. The Assessing Officer opined that since full deduction of the cost of these assets was allowed as application of income u/s 11 of the Act, the written down value of this asset in the hands of the society was only a notional book value. The Assessing Officer canvassed a view that by taking over of the assets and liabilities of the Society on the book value of these assets, an artificial enhanced value of these assets was shown by the assessee company on which the depreciation could not be allowed. The ld. CIT(A) overturned the assessment order on this point. The Revenue is in appeal on this issue.

11. A bare perusal of the above provision indicates that where any income has been applied for the purchase of assets on which exemption has been granted, then, no separate claim by way of depreciation in respect of such assets can be allowed in the same or any other year. In fact, this is the view point canvassed by the Assessing Officer in disallowing the claim of depreciation. However, it is important to note that sub-section (6) has been inserted to section 11 w.e.f. 01.04.2015. The Hon'ble Delhi High Court in DIT (E) vs. Indraprastha Cancer Society (2015) 53 taxmann.com 463 (Del), has held that insertion of subsection (6) to section 11 is prospective and, hence, no disallowance on account of depreciation can be made in years prior to the assessment year 2015-16.

13. It has also been brought to our notice that though the assets were acquired by the assessee company in an earlier year, but, the disallowance on account of depreciation was never made in the past. It was also stated that the assessments for the assessment years 2004-05 to 2007-08 were reopened but the ld. CIT(A) quashed the reopening. The ld. AR submitted that the quashing of reassessment by the ld. CIT(A) has been accepted by the Revenue and no further appeal was filed to the Tribunal. This contention has not been controverted by the ld. DR. This shows that such depreciation has been allowed to the assessee in all earlier years.

14. The ld. DR relied on certain orders of the Chennai and Cochin tribunal to buttress his point of view of not allowing depreciation on assets whose cost was allowed u/s 11. These decisions will not support the case of the Revenue in view of the direct judgment of the Hon’ble jurisdictional High Court on the point, granting depreciation in such circumstances. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was justified in deleting the disallowance.”

3. The Assessee provides Health Care Services; its return for the concerned Assessment Year were scrutinized by the Assessing Officer on the ground that the interest free advance given to the sister concern be disallowed under Section 36(1)(iii).

6. In the circumstances, disallowance was not warranted. On this' aspect, the question having been considered by the CIT(A) and I confirmed by the ITAT, the Court is of the opinion that no question/ of law arises.

7. So far as the question on account of depreciation rule is concerned, the Court notices that firstly, similar disallowances were not permitted - when re-assessment was sought to be made.

9. In the light of the foregoing discussions, this Court is of the opinion that no substantial question of law arises.”

12. Respectfully following the above decisions, Grounds Nos. 1 & 3 for A.Y. 2010-11 and ground No. 3 of A.Y. 2011-12 of the Revenue are dismissed.

(c) There is no evidence of any interest bearing funds finding there way to the CWIP. In my opinion and on the basis of the facts and circumstances of the case the appellant has explained that it had sufficient funds during the year under consideration for making investments adequately backed by interest free funds and it is also admitted that no borrowed funds were used to make the said investments .Accordingly, the disallowance of Rs. 12,07,349/- out of interest corresponding to the sum of Rs.1,00,61,241/- shown against capital work in progress (CWIP) is deleted. This ground of appeal is allowed.”

Further, on perusal of the balance sheet filed before us, we find that the assessee has not taken any fresh loan during this year and has earned profit of Rs.34.00 crores approx. Therefore, no adverse inference can be drawn that these capital work in progress incurred by the assessee amounting to Rs.1,00,61,241/- has been expended out of borrowed funds. The Revenue could not adduce any evidence that this amount has been incurred out of any borrowed funds. In view of the above, ground No. 2 raised by the Revenue is dismissed.