HORIZON INFRASTRUCTURE LTD,MUMBAI vs. ACIT CC 38, MUMBAI

In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of development of infrastructure projects. In an assessment finalised u/s 143(3) of the Act dated 26.3.2013, the total income was determined at Rs.16,53,00,190/- as against returned income of Rs.6,64,36,950/- after making certain additions/disallowances. The assessee’s appeal against such additions/disallowances was partly allowed by the CIT(A) and not being satisfied with the order of CIT(A), assessee is in further appeal before us on the aforestated Grounds of appeal.

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4 M/s. Horizon Infrastructure Ltd. entities at a rate lower than the rate at which interest was paid to the bank. The Assessing Officer noted that since there was a direct nexus between the funds borrowed from the bank and the advances made to the two entities, the interest expenditure incurred on payment to the bank was allowable only to the extent it was recouped from the two entities. In this view of the matter, the Assessing Officer held that interest expenditure was allowable to the extent of Rs.8,49,02,373/-, which was the amount recovered from the two entities, as against assessee’s claim for deductibility of expenditure of Rs.15,07,16,855/- representing the interest paid to the bank. As a consequence, an addition of Rs.6,58,14,482/- was made to the returned income. At this point, we may also notice that the loan processing charges of Rs.1,01,25,000/- incurred by the assessee for the purpose of obtaining the aforesaid loan from the bank has also been disallowed by the Assessing Officer for the reasons taken by him to disallow a portion of the interest expenditure. Both these aspects were carried in appeal before the CIT(A), who has upheld the same. Before us, said issues have been agitated by the assessee by way of Ground of appeal nos. 1 & 2 respectively.

5. At the time of hearing, the learned representative for the assessee vehemently pointed out that the partial disallowance of interest expenditure by the lower authorities is unjustified. The learned representative explained that the lower authorities have made a disallowance of Rs.6,58,14,482/- out of the total expenditure of Rs.15,07,16,855/-, which is comprised of two parts, namely, firstly, the 5 M/s. Horizon Infrastructure Ltd.

difference between the rate of interest paid to the bank and the rate of interest charged from the two entities – Rs.1,18,83,557/-; and secondly, penal interest stated to have been paid to the bank for failure to provide timely security – Rs.5,40,00,000/-. The learned representative has referred to pages 36 to 43 of the Paper Book wherein is placed a copy of the loan sanction letter of the bank dated 7.9.2009, and it is sought to be canvassed that the loan has been sanctioned with the purpose of meeting the expenditure on initial development work of various infrastructure projects, which, inter-alia, was required to be secured by offering collateral security of non-agricultural land of approx. 100 acres owned by Mahakaleshwar as well as furnishing of corporate guarantee by Mahakaleshwar. The learned representative explained that assessee had proposed to develop an industrial cluster at Navi Mumbai, which was to be spread over 300 to 500 acres, and in order to achieve this objective, Mahakaleshwar was identified to help in acquisition of land, an entity which later on became assessee’s subsidiary on 5.10.2010. Since such a project required acquisition of large pieces of land, assessee also approached Shri Bhakti and its proposed subsidiary, Mahakaleshwar to aggregate land for the project. In order to enable Mahakaleshwar to acquire land from time to time, the amount was advanced by the assessee. The learned representative also referred to pages 149 to 154 of the Paper Book to point out the utilisation of the loan raised by referring to the copies of the bank account placed therein. Attention was also invited to pages 155 to 165 of the Paper Book wherein is placed the bank statement of the assessee of the account maintained with HDFC Bank. Reference has also been made to the copy of bank account of the assessee with State Bank of 6 M/s. Horizon Infrastructure Ltd.

India placed at page 166 to 263 of the Paper Book. All these material have been referred by the assessee to show that over a period of time the amount of loan raised from the bank was deployed for undertaking the development of projects by advancing monies to Mahakaleshwar and Shri Bhakti. It is pointed out that in the interregnum, assessee had also placed some amount of funds with its bankers as fixed deposits, which had also earned interest.

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“The appellant also could not adduce any proof of payment of penal interest of Rs.5.40 crores during the F.Y relevant to the A.Y under consideration. Thus, there is no concrete evidence or cogent materials on record so as to support the claim of the appellant for deduction of penal interest of Rs.5.40 crores said to have been paid to the Bank.”

At the time of hearing, apart from reiterating the reliance on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd.,

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288 ITR 1 (SC), the following decisions have been relied upon to support the case of the assessee:- i) Bombay Samachar Ltd., 74 ITR 723 (Bom) ii) Walchand and Co. (P) Ltd., 65 ITR 381 (SC) iii) Indian Bank, 56 ITR 77 (SC) iv) Century Flour Mills Ltd., 334 ITR 377 (Madras) v) Agarwal Global Steels Ltd., 141 ITD 76 vi) Hero Cycles (P.) Ltd., 379 ITR 347 (SC)

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10 M/s. Horizon Infrastructure Ltd. furnished by the assessee before the income tax authorities and as well as before us, assessee was proposing to develop an industrial cluster at Navi Mumbai spread over 300 to 500 acres and in order to achieve this objective, it identified the aforesaid two concerns who would acquire the lands and act as land aggregators. Insofar as the transaction with Mahakaleshwar is concerned, it was explained that subsequently the said concern became assessee’s subsidiary and the relevant loan raised from the bank was also transferred to the said entity, as it carried on the project further. With regard to Shri Bhakti, it was explained that the land offered by it was not found suitable and ultimately, the money was received back and redeployed in the project thereafter. The case made out by the Revenue is that in the instant year, the amounts were advanced to the two concerns @ 11.50% whereas assessee raised the loan @ 13.50%, and thus there is no commercial expediency in the transaction. Notably, the absence of commercial expediency has been found only with respect to portion of interest short-recovered from the two concerns, since the disallowance is limited to the difference between the interest paid to the bank and the amount charged from the two concerns.

business”, a slightly wider and flexible approach is required, as has been emphasised by the Hon'ble Supreme Court in the case of Madhav Prasad Jatia vs. CIT, AIR 1979 SC 1291 as well as in Commissioner of Income Tax vs. Malayalam Plantations Ltd., 53 ITR 140 (SC). In the case of Madhav Prasad Jatia (supra) the borrowed amount was donated to college with a view to commemorate the memory of assessee’s deceased husband, and it was held that the interest on such borrowed fund was not allowable as it could not be said to be advanced for commercial expediency; so however, what was emphasised by the Hon'ble Supreme Court was that the expression “for the purpose of business” was much wider than the expression “for the purpose of earning income, profits or gains”. The said view has been further reiterated and confirmed by the Hon'ble Supreme Court in the case of Malayalam Plantations Ltd. (supra) as well as S.A. Builders Ltd. (supra). Considered in this light, in our view, the factum of the assessee having recovered only 11.50% rate of interest from the two concerns, as against 13.50% charged to it by the bank, is of no consequence to determine the commercial expediency so long as it can be demonstrated that the funds were otherwise advanced to the two concerns in furtherance of its business purpose. At this stage, we may also refer to another important aspect which is emerging from the record that the impugned loan from the bank was secured against the personal guarantee of the Directors as well as the collateral security of non-agricultural land of approximately 100 acres owned by Mahakaleshwar. We are pointing out the said fact only to emphasise that Mahakaleshwar was not a complete stranger to the transaction of raising of loan by the assessee from the bank and its utilisation. In fact,

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Mahakaleshwar became assessee’s subsidiary subsequently and since it has been canvassed that the project has thereafter been undertaken under the aegis of the said concern, the liability for the loan from the bank also stood transferred to the said concern subsequently. All this goes to show that both at the time of raising of the loan as well as at the time of advancing of monies to Mahakaleshwar, assessee was acting as a prudent businessman with the purpose of furthering its stated business of infrastructure development. No doubt, with respect to Shri Bhakti, the purpose of land procurement was not achieved as it was not found suitable, but as explained, the amount has been received back and thereafter utilised in the business of infrastructure development. Therefore, on an overall consideration of facts, it is quite clear that there is a nexus between the interest expenditure and the business purpose of the assessee, namely, business of infrastructure development and once it is so established, the reasonableness or otherwise of the quantum of return or profits cannot be a factor to decide its commercial expediency. In this context, we may reproduce hereinafter the following observation of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) :-

“We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the 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. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see

13 M/s. Horizon Infrastructure Ltd. 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.”

“Where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(iii) of the Income-tax Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. If the capital is used in the year of account and the use is for the purpose of the business of the assessee, it is immaterial whether the user of the capital actually yielded profit or not and it is not open to the department to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital is unremunerative.” [underlined for emphasis by us] To the similar effect is the ratio of the judgment of the Hon'ble Supreme Court in the case of Walchand & Co. Pvt. Ltd. (supra).

two concerns were for the purpose of business of land aggregation for its infrastructure development project in Navi Mumbai, and thus a part of the interest expenditure relatable to such deployment of funds could not be disallowed u/s 36(1)(iii) of the Act.

15 M/s. Horizon Infrastructure Ltd. proceedings did not show that assessee made any claim that the advance to the sister concern was actuated by way of any commercial expediency. The only plea of the assessee was that the interest-free advances were made out of interest-free funds available with it. The Hon'ble High Court upheld the disallowance of interest by noticing the absence of any case being set-up by the assessee of commercial expediency in advancing the interest-free loan to the sister concern. The fact-situation in the instant case stands on a different footing, as our aforesaid discussion has revealed, therefore, the ratio of the judgment of the Hon'ble Delhi High Court is not applicable in the present case.

discussed the issue in paragraphs 5.3.3 and 5.3.4 of his order and specifically in paragraph 5.3.4, he notes that there is no proof of payment of penal interest of Rs.5,40,00,000/- during the year under consideration. The learned representative has pointed out that in the absence of any evidence of assessee having paid such interest, the correct course for the CIT(A) ought to have been to delete the addition and not uphold the same. The learned representative vehemently pointed out that the issue of payment of penal interest does not arise inasmuch as even in the loan sanction letter of the bank, which is placed at pages 36 to 43 of the Paper Book, there is no clause providing for payment of penal interest. The statement of Term loan of Central Bank of India, placed at page 149 of the Paper Book, has also been referred to, to justify that there is no claim by the bank of recovering any penal interest. In our considered opinion, the plea of the assessee with regard to the disallowance of penal interest is not without merit. Ostensibly, if there is no claim/recovery by the bank of penal interest, the question of any disallowance of the same would not arise. So however, since the said fact involves a factual appreciation, we direct the Assessing Officer to verify as to whether the penal interest has been paid to the bank or not. If it is found that no penal interest of Rs.5,40,00,000/- has been paid to the bank, no disallowance would be warranted and the entire expenditure of interest would be allowable u/s 36(1)(iii) of the Act in view of our aforesaid discussion. If his finding is to the contrary, the Assessing Officer shall be free to decide the allowability as per law, after hearing the assessee. Therefore, for this limited purpose, the matter is remanded back to the file of the Assessing Officer.

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no. 2 is concerned, the same relates to disallowance of Rs.1,01,25,000/- in respect of loan processing charges paid to the bank. The said disallowance was made by the lower authorities as a consequence of disallowing a portion of the interest paid to the bank, an issue which we have dealt with in Ground of appeal no.

1. Since we have held that the interest expenditure is allowable, as a consequence, the expenditure incurred by the assessee in respect of loan processing charges deserves to be allowed. We hold so. Accordingly, Ground of appeal no. 2 is allowed.

19. The last Ground in this appeal relates to disallowance sustained by the CIT(A) u/s 14A of the Act at Rs.89,57,903/- as against Rs.1,98,62,048/- made by the Assessing Officer. The stand of the assessee is that the CIT(A) has wrongly part-sustained the disallowance made by the Assessing Officer whereas in the facts and circumstances of the case no disallowance u/s 14A of the Act is warranted.

20. In brief, the relevant facts are that assessee had earned dividend income – Rs.4,09,024/- and Long Term Capital Gain – Rs.5,20,778/-, which were claimed as exempt. In the course of assessment proceedings, the Assessing Officer noted that inspite of declaring exempt income, assessee had not made any disallowance u/s 14A of the Act in relation to the expenditure incurred on earning such exempt income. The claim of the assessee was that no expenditure has been 18 M/s. Horizon Infrastructure Ltd.

incurred in relation to the exempt income, which was not accepted by the Assessing Officer. Instead, the Assessing Officer determined the disallowance u/s 14A of the Act at Rs.1,98,62,048/- by applying the formula contained in Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’). In terms of Rule 8D(2)(ii) of the Rules, the Assessing Officer computed the disallowance out of interest expenditure at Rs.1,87,36,126/- and in terms of Rule 8D(2)(iii) of the Rules, the disallowance out of overheads/administrative expenses was determined at Rs.11,25,992/- thereby resulting in total disallowance of Rs.1,98,62,048/-. In appeal before the CIT(A), assessee raised various submissions, inter-alia, pointing out that during the year under consideration no fresh investments have been made and that the exempt income has been earned on shares/securities which were invested in the past years. It was also pointed out that the major investment was in 100% owned subsidiary, Metrotech Technology Parks Ltd. and other associated concerns, which were in the nature of strategic investments and ought to be excluded while computing the disallowance u/s 14A of the Act. Assessee also pointed out that out of the interest expenditure of Rs.15,21,78,000/-, the Assessing Officer had disallowed Rs.6,58,14,482/- u/s 36(1)(iii) of the Act itself and that the balance of the interest was inclusive of interest of Rs.9,60,759/- paid on car loan and Rs.5,00,716/- on delayed payment of TDS; and, the aforesaid sums ought to have been removed for the purpose of computing the disallowance u/s 14A, if any. Even with regard to the disallowance out of overheads/administrative expenses, the claim of the assessee was that no particular expenditure has been incurred for such purpose. The CIT(A) partly accepted the plea of the assessee and 19 M/s. Horizon Infrastructure Ltd. noted that the Assessing Officer ought to have computed the disallowance out of interest expenditure by excluding the amount of interest disallowed u/s 36(1)(iii) as also interest paid on car loan and on delayed payment of TDS. The CIT(A) also directed the Assessing Officer to exclude the value of investments made in assessee’s 100% subsidiary while computing the disallowance out of overheads/administrative expenditure in terms of Rule 8D(2)(iii) of the Rules. As a consequence, the CIT(A) determined the disallowance at Rs.89,57,903/-, which comprises of Rs.78,64,831/- as per Rule 8D(2)(ii) of the Rules on account of interest expenditure; and, Rs.10,93,072/- as per Rule 8D(2)(iii) of the Rules out of overheads/administrative expenditure. Not being satisfied with the order of CIT(A), assessee is in further appeal before us.

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Rule 8D(2)(ii) of the Rules. Considering the entirety of facts and circumstances of the case, in our view, no disallowance in terms of Rule 8D(2)(ii) of the Rules is merited out of interest expenditure. Thus, on this aspect, assessee succeeds.

Order pronounced in the open court on 15th November, 2017.