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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’, NEW DELHI
Before: SH. I.C. SUDHIR & SH. O.P. KANT
ORDER Per O.P. KANT, A.M.: These three appeals consist of two appeals of Revenue for assessment years 2003-04 and 2005-06 and one appeal of the assessee for assessment year 2004-05. These appeals were heard and disposed off by the Income-tax Appellate Tribunal (in short ‘the Tribunal’), however on further appeal by the respective parties, the Hon’ble High Court of Delhi, in 909/2009 and 1409/2010 vide order dated 10.01.2013, set aside the order of the Tribunal with following directions:
The counsel for the parties are agreed that these matters require to be re-considered by the Tribunal. We have also noticed that the Memorandum of Understanding (MOU) dated 21.12.2002 has been considered by the Tribunal from the standpoint as to whether the said MOU was part of the record before the Assessing Officer or not. This also needs to be looked into by the Tribunal. Consequently, we are setting aside the impugned orders except the portion with regard to the annual letting value in respect of the assessment year 2003-04, 2004-05 and 2005-06. The rest of the contentions of the parties will be gone into afresh by the Tribunal.
In all the three appeals, common issue is involved and, therefore, same were heard together and disposed off by this consolidated order for sake of convenience.
ITA No. 1661/Del/2007 for AY: 2003-04 3. First we take up the appeal of the Revenue in for assessment year 2003-04. The ground raised in the appeal is reproduced as under:
“1. On the facts and in law and in circumstances of the case, the learned CIT(A) has erred in deleting the addition of 62,78,643/- made on account of interest paid on loans.”
Briefly stated facts of the case are that the Assessing Officer observed interest payment of Rs.62,78,643/- paid by the assessee to M/s Trent Limited against loans received of Rs.17,73,93,600/-. The Assessing Officer also observed interest free loan of Rs. 15 crores to M/s. Vivek Malhotra Trust of Rs. 8 crores and to Mr. Laxmi Nath Malhotra of Rs. 7 crores by the assessee. The Assessing Officer asked the assessee as why the interest payment of Rs.62,78,643/-paid to M/s. Trent Ltd. may not be disallowed in view of interest free loans of Rs. 15 crores to above mentioned parties. The Assessing Officer also asked the assessee to explain the purpose for which loan of Rs. 15 crores has been given to the parties along with various other details. The Assessing Officer has noted on page No. 1 of the assessment order that the assessee had chosen not to reply to the above query and on this basis, the Assessing Officer came to the conclusion that the assessee has no explanation to offer on this point and he accordingly disallowed the interest payment of Rs.60,78,643/-. The learned Commissioner of Income-tax (Appeals), decided the issue in favour of the assessee on the basis of following three reasons: (i) The assessee submitted that advances given to Sh. L. N. Mehrotra and Vivek Mehrotra Trust were towards purchase of factory of the trust at Lucknow and adjacent 10-15 acres of land in Lucknow. The assessee also submitted a Memorandum of Understanding (MOU) dated 21.12.2002 between the assessee and Sh. L. N. Mehrotra and Vivek Mehrotra Trust. The Ld. CIT-A accordingly concluded that the assessee company for its own
business purposes wanted to develop the real estate project at the place where the factory owned by the aforesaid trust as well as in the nearby areas and for this purpose interest free advances were given by the assessee were for commercial consideration. (ii) The assessee submitted that amount was borrowed from M/s. Trent Ltd. on the security of the building by executing proper lease deeds etc. and it was undoubtedly utilized for the construction work of the building and for providing ancillary utilities and facilities and no part of it was utilized for advancing interest free loan as alleged in the assessment order. The assessee further contended that such expenditure qualifies for deduction under section 36(1)(iii) of the Act. In view of the submissions, the learned CIT-A held that the Assessing Officer could not prove that the funds received from M/s. Trent Ltd. were utilized to give interest free advances to the aforesaid trust. (iii) That the assessee company was also having interest free funds as advance from customers, which were at the beginning of the year at Rs. 16,20,48,200/-
It appears from the order of the Ld. CIT(A) that no remand report was called from the Assessing Officer on the submissions of the assessee.
On appeal by the Revenue, the Tribunal upheld the finding of the Ld. CIT(A) observing that the MOU dated 21/12/2002 between the assessee and the trust was duly notarized and, therefore, there was no basis in the contention of the Revenue that the said MOU was an afterthought.
On further appeal by the Revenue, the Hon’ble High Court noticed that the MOU dated 21/12/2002 has not been considered by the Tribunal from the standpoint as to whether the said MOU was part of the record before the Assessing Officer or not and the matter has been set aside for fresh consideration.
Before us, learned Senior DR submitted that before the Assessing Officer it was not contended that said advances were for commercial consideration and the MOU dated 21/12/2002 was not available to the Assessing Officer in assessment proceeding. He further submitted that before the Ld. CIT(A) the assessee first-time contended that advances were for commercial consideration along with another two contentions that loans borrowed were utilized towards construction and the assessee was having sufficient own funds for giving interest free advances. The Ld. Senior DR submitted that Ld. CIT-A was required to forward those submissions and evidences to the Assessing Officer for his comment and which he did not and, thus, entire decision of the Ld. CIT(A), which was upheld by the Tribunal, was without proper appreciation of evidences and, thus, Hon’ble High Court has rightly observed on the availability of the said MOU before the Assessing Officer. In view of above contention, the Ld. Senior DR submitted that matter may be restored to the file of the Assessing Officer to examine the MOU dated 21/12/2002 and another contentions of the assessee regarding utilization of borrowed funds towards construction and availability of own funds for giving interest free advances. 9. On the other hand, the Ld. counsel of assessee, filed a paper book containing 1 to 46 pages and submitted that Memorandum of Understanding (MOU) was available to the Assessing Officer. He referred to pages 17 to 20 of the paper book, which is a reply of the assessee to the Assessing Officer with respect to questionnaire dated 06/03/2006. He submitted that in this reply certain enclosures were enclosed, which contained a copy of MOU also. Thus according to him, the Ld. CIT(A) committed no error, in not calling any comments on said MOU.
In the rejoinder, the Ld. Senior DR submitted that in the reply of the assessee in response to questionnaire dated 6/03/2006, there was a mention of agreement between the assessee and M/s Trent Ltd. in para- 3 of the said letter with reference to loan taken against security of plot at Alankar Cinema and there was no mention of any reply with respect to the interest free advances to the aforesaid trust and Sh. Malhotra. Thus, the MOU referred in said letter as enclosure, is not the MOU dated 21/12/2002 between the assessee and the aforesaid trust. The Ld. Senior DR also submitted a letter written by the present Assessing Officer dated 11/08/2015, according to which, said MOU dated 21/12/2002 was not available before the Assessing Officer in the year under consideration, however, it was available on the assessment record of subsequent year.
We have heard the rival submissions and perused the relevant material on record. The issue in dispute in the cases is of disallowance of interest amounting to Rs.62,78,643/- paid by the assessee to M/s Trent Ltd. towards secured loan of Rs.17,73,93,600/-. The allegations of the Assessing Officer are that out of the said loan the assessee has extended interest free loans of Rs. 15 crores to 2 parties and, therefore, the interests paid is not allowable. The interest paid in respect of capital borrowed is allowed as a deduction in terms of section 36(1)(iii) of the Act, which reads as under:
“36. Other deductions
(1) the deduction provided for in the following clauses shall be allowed in respect of matters dealt with therein, in computing the income referred to in section 28- (i) ………………………………. (ia)……………………………… (ib)……………………………… (ii)………………………………. (iia) ……………………………. (iib) ……………………………. (iii) the amount of interest paid in respect of capital borrowed for the purpose of 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 capitalized as in the books of accounts or not); for any period beginning from the date on which 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.”
Further, Hon’ble Supreme Court in the case of SA Builders Ltd. Vs. CIT(Appeals), (2007) 288 ITR 1(SC) held that no interest on funds borrowed by the assessee to give an interest free loan to sister concern should be disallowed as deduction under section 36(1)(iii) if the loan given by the assessee was as a measure of commercial expediency.
In the instant case, a copy of the submissions filed by the assessee before the Assessing Officer, have been made part of the paper book. On perusal of the said submissions, which are available on page 30 to 32, page 25 to 29 and pages 17 to 20 of the paper book, we find that the assessee did not file any details as how the said loan amount was borrowed for the purpose of business of the assessee or the interest free advances extended to the aforesaid trust and Mr. Malhotra was for commercial expediency or sufficient own interest free funds were available before extending the interest free loans to these two parties. On perusal of the order of the Ld. CIT-A, we find that for the first time, the assessee claimed before the Ld. CIT(Appeals), that amount borrowed from M/s Trent Ltd. on the security of the building by executing proper lease deed etc. was utilized for construction of building and for providing ancillary utilities and facilities and claimed that payment of interest was allowable deduction under section 36 of the Act, as the amount in question has been utilized wholly and exclusively for the purpose of business of the assessee. It is it is evident from the order of the Ld. CIT-A, that he relied only on the submission of the assessee and matter was not sent to the Assessing Officer for verification of the facts of utilizing the borrowed funds for the purpose of business. Regarding the submission of the assessee that advances given to Sh. L.N. Mehrotra and M/s Vivek Mehrotra Trust were only part payment in the form of advance for purchase of a sum as stock in trade, the Ld. CIT(A), relied on the Memorandum of Understanding (MOU) between the assessee and the trust. The Ld. CIT(A), simply relying on the terms of MOU, without carrying any enquiry in this respect at his own or referring the matter to the Assessing Officer calling for a remand report, concluded that advances were for commercial consideration. The Ld. CIT(A) also noted that the assessee company was having interest free funds available as advance from customers amounting to Rs.16,20,48,200/- at the beginning of the year, however, from the records, we are not able to confirm whether the Ld. CIT(A) examined the availability of interest free funds on the date of extending interest free advances to the two parties.
In view of above facts and circumstances, we feel it appropriate to restore the issue in dispute to the file of the Assessing Officer for deciding the matter afresh after taking into consideration the MOU dated 21/12/2002 and after carrying out enquiries deemed necessary on all the three aspects as under: (i) The capital borrowed was for the purpose of business or profession of the assessee. (ii) The interest free advances were made for commercial consideration. (iii) The assessee was having own sufficient interest free funds prior to extending interest free advances.
It is needless to mention that the assessee shall be afforded sufficient opportunity of hearing. Accordingly, the sole ground of the appeal is allowed for statistical purposes. 16. In the result, the appeal is allowed for statistical purposes.
ITA No. 3184/Del/2007 for AY : 2004-05 17. Now, we take up the appeal of the assessee in for assessment year 2004-05. The grounds of appeal are reproduced as under: “1. That the learned Commissioner of Income Tax (Appeals) has grossly erred both of facts and in law in upholding the disallowance of interest of Rs. 60',00,000/- out of total interest paid by the appellant company to M/s. Trent Ltd. on the assumption that the sum of Rs. 15,00,00,000/- had been advanced as interest free loan to directors /beneficiary owners of the appellant company. 1.1 That while upholding the aforesaid disallowance, the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the sum borrowed by the appellant company from M/s Trent Ltd. had been utilized for business purposes and as such, the interest so paid on the monies borrowed was an eligible business expenditure u/s 36. (l)(iii) of the Act, particularly when identical claim had been allowed by him in the immediately preceding assessment year. 1.2 That the learned Commissioner of Income Tax (Appeals) has further failed to appreciate that the amount advanced by the appellant company of Rs. 15,00,00,000/- to L.N. Mehrotra HUF and Vivek Mehrotra Trust was under a Memorandum of Understanding dated 21.12.2002 and as such, the same was in the course of business and therefore, by no stretch of imagination could be held that the moneys borrowed had been advanced for non-business purposes so as to warrant disallowance u/s 40A(2)(b) of the Act. 1.3. That the disallowance so made is based on complete misconception of the facts of the case and mis-appreciation of the provisions of law and as such, the same is wholly untenable and unsustainable. 1.4. That the learned Commissioner of Income Tax (Appeals) has further failed to appreciate that in absence of any nexus between the borrowers’ funds and monies advanced by the appellant company, the disallowance was otherwise wholly improper and therefore, unsustainable. 1.5. That even otherwise, the learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance without appreciating that judgment of the Apex Court in the case of S.A. Builders Vs. CIT reported in 288 ITR Page 1 was fully applicable to the facts of the instant case since he himself had held in the order for the immediately preceding year that the advance made was .-on account of commercial expediency.
2. That the learned Commissioner of Income Tax (Appeals) has further erred both on in facts and in law in upholding the computation of annual value of the property let out to M/s Trent Ltd. at Rs. 2,74,68,000/- under head ‘Income from house property’. 2.1 That while upholding the aforesaid computation of annual value under the head ‘Income from house property’, the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the assesses company was engaged in the business of developing of real estate and therefore, rental income derived in the course of such business had to be assessed as income from business irrespective of the fact that such income had been declared by the assessee company under the head ‘Income from house property’. Hence, the rental income assessable from the aforesaid property was Rs. 62,40,000/- and as such, the addition made is wholly untenable. 2.2 That without prejudice to the aforesaid and in the alternative, the learned Commissioner of Income Tax (Appeals) has further failed to appreciate that the enhancement of annual value of the property from Rs. 62,40,000/- to Rs. 2,74,68,000/- was based on misreading of the Agreement dated 29th July, 2002 with M/s Trent Ltd. and the statutory provisions of law contained in Section 22 read with Section 23 of the Act. 2.3 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that once the loan of Rs. 17,73,92,600/- had been granted to the assessee company by M/s. Trent Ltd., there was no justification much less any valid basis to hold that' the annual value should be computed on the basis of lease rent of Rs. 22,89,000/- per month particularly, when the municipal value of the property itself had been determined at Rs. 64,71,390/- 2.4 That while upholding the aforesaid addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate various judicial pronouncements relied upon by the appellant company including the judgment of jurisdictional High Court in the case of M/s John Tinson Private Limited Vs. CIT wherein it has been held that the annual value of the property has to be determined on the basis of municipal valuation. 2.5 That lastly and without prejudice to the aforesaid and in the alternative, the learned Commissioner of Income Tax (Appeals) has further failed to appreciate that the difference between the notional annual value and the actual rend received by the appellant-company should have been allowed as deduction u/s 36(l)(iii) of the Act in view of the decision of Delhi Bench of the Income Tax Appellate Tribunal in the case of Bharat Hotels Ltd. Vs. CIT reported in 53 ITD 450.
3. That the learned Commissioner of Income Tax (Appeals) has erred in passing the impugned order without granting the fair and proper opportunity to the appellant company and as such, the same is contrary to the principles of the natural justice.
4. That the learned Commissioner of Income Tax (Appeals) has further erred in upholding the assessment framed u/s 143(3) of the Act by failing to appreciate that since no notice u/s 143(2) of the Act was served within a period of 12 months from the end of the month in which return was filed, the assessment so framed was without jurisdiction and therefore, deserve to be quashed as such.
5. That the learned Commissioner of Income Tax has further erred -in upholding the levy of interest u/s 234B, 234-C and 234D of the Act which on the facts of the instant case was not leviable at all. It is, therefore, prayed that the it be held that the assessment framed was without jurisdiction and in the alternative, the addition and disallowances so made and upheld by the learned Commissioner of Income Tax (Appeals) were untenable in law and are, therefore, directed to be deleted and the appeal of the appellant company should be allowed.”
18. In the appeal, the assessee has agitated two issues. The first issue is of disallowance of interest of Rs.60,00,000/- paid to M/s Trent Ltd. against secured loans. The second issue is regarding the annual letting value of the property. Since the Hon’ble High Court has set aside the order of the Tribunal except the portion with regard to annual letting value, the only issue for consideration before us in respect of disallowance of interest paid to M/s Trent Ltd. The grounds of disallowance of interest paid to M/s Trent Ltd. has already been restored to the AO by us in the appeal of the Revenue in for assessment year 2003-04. Since the disallowance of interest in the year under consideration is in respect of the same transaction of loan, which was in question in the previous year corresponding to the assessment year 2003-04, we feel it appropriate to restore the issue in dispute to the file of the Assessing Officer with similar directions. We order accordingly. The grounds No. 1 to 1.5 of the appeal are accordingly allowed for statistical purposes.
ITA No. 2301/Del/2009 for AY: 2005-06. 18. Now, we take up the appeal of the Revenue in for assessment year 2005-06. Following grounds were raised in the appeal:
On the facts and in the circumstances of the case, Learned CIT(A) has erred in law & facts in deleting the addition of Rs.60,00,00/- made by the A.O. on account of proportionate interest paid on loan of Rs.15 crores for the reason that the interest bearing loans were not utilized wholly and exclusively for the purposes of assessee’s business.
2. On the facts and in the circumstances of the case, learned CIT(A) has erred in law & facts in directing the A.O. to adopt the Annual Value of property at Lajpat Nagar Market, New Delhi at Rs.64,71,390/- being the Municipal Valuation as against the value adopted by the A.O. at Rs.2,74,68,000/- and assessee’s value of Rs.62,40,000/-. 3. The appellant craves to be allowed to amend, deleted or add any other grounds of appeal.
19. Since the Hon’ble High Court has set aside the order of the Tribunal except the issue of annual letting value, the only issue for consideration before us in respect of disallowance of Rs.60,00,000/- for interest paid to M/s Trent Ltd. We find that issue in dispute in respect of the same transaction of loan from M/s Trent Ltd, which we have already discussed in the appeal of the revenue for assessment year 2003-04 in thus accordingly following the same finding, the issue in dispute in the year under consideration is also restored to the file of the Assessing Officer with similar directions. The ground No. 1 of the appeal is accordingly allowed for statistical purposes.
The appeal is allowed for statistical purposes. 21. To sum up, all the three appeals (two appeals of the Revenue and one appeal of the assessee) are allowed for statistical purposes. The decision is pronounced in the open court on 19th May, 2017.