SIMOCO SYSTEMS AND INFRASTRUCTURE SOLUTIONS LIMITED,KOLKATA vs. ITO WARD 2 (1), KOLKATA

This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, (NFAC), Delhi [hereinafter referred to as “the Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2018-19, dated 20.11.2023, which has been passed against the assessment order u/s 143(3) read with section 144B of the Act, dated 25.09.2021.

Brief facts of the case as culled out from the appellate order of the Ld. CIT(A) and the assessment order of the Ld. AO and the submissions made by the Ld. AR are that the assessee company is engaged in real estate development business, more particularly in developing affordable housing during the previous year 2017-18. The company had e-filed its return of income for AY 2018-19 on 26/09/2018 declaring total income at Rs.NIL. The assessee had shown deemed total income u/s 115JB of the Act at Rs.69,07,501/-. The return was revised on 12/10/2018 showing the same total income as well as the income u/s 115JB. The case of the assessee was selected for Complete Scrutiny under the E- assessment Scheme, 2019 on the issues of (i) Income from Real Estate Business & (ii) Investments/Advances/Loans. In the course of the assessment proceedings, the Ld. Assessing Officer (in short “the Ld. AO”) examined various items, which are stated to have been explained to the satisfaction of the Ld. AO. It is stated that the appellant company, being in the real estate business, had advanced money to various parties towards purchase of land and miscellaneous project expenses in the ordinary course of business. As on 31.03.2018, the aggregate outstanding in respect of such advances amounted to Rs 127,79,03,793/- and this amount was properly disclosed on the assets side of the balance sheet under the head ‘Short Term Loans & Advances’ under the broad head of ‘Current Assets’; the corresponding amount as on 31st March, 2017 being Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 Rs.103,98,49,292/-. On perusal of the Profit & Loss A/c, it was noted by the Ld. AO that no income by way of interest or any other receipt had been offered on these advances/loans. The corresponding figure for the last year was shown at approximately Rs.104 crores, which meant that these amounts had been outstanding for significant amount of time and yet nothing had been offered on these advances/loans by way of interest. The Ld. AO required the assessee company to provide party wise details of such advances and the details of interest earned on these amounts. The assessee provided the details and submitted that no interest had been received or was receivable against such advances, which were paid purely for business purposes for purchase of land and project expenses. The Ld. AO, thereafter, issued notices under section 133(6) of the Act to the parties to ascertain the genuineness and creditworthiness of the parties and to ascertain whether any interest was paid to the assessee for the loans and advances given by the assessee during the year. The appellant company had been informed by the said parties that they could not respond to the notices under section 133(6) of the department due to technical issues in the new income tax e-filing site, which was informed by them to the department without any result. The parties then sent their replies to the assessee who uploaded such replies being loan confirmation letters and copy of returns for AY 2018-19 in respect of 8 parties namely (1) G.S. Electrocom Pvt. Ltd (2) Modern Mobitech Pvt. Ltd (3) SG Aqua & Garden Fresh Pvt. Ltd (4) S.G. Computech Ltd (s) Samastha Infotainment Pvt. Ltd. (6) Transceivers India Ltd (7) S.G. Retails Pvt. Ltd and (8) Basilica Realcon Pvt Ltd through the e-proceeding portal on 24/09/2021 along with the reply to the show cause notice. These 8 parties together covered about 75% of the short-term Loans & Advances reflected in the balance sheet under the broad head ‘current assets’. However, the Ld. AO has commented in para 11 of the assessment order that the loan confirmation letters and copy of returns of only 3 parties namely (1) Basilica 2) G.S. Electronics and (3) Modem Mobitech Pvt. Ltd had been filed, which as per Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 the assessee is not a correct statement of fact. Vide show cause notice dated 23/09/2021, the Ld. AO proposed to add Rs 8,90,29,629/- towards interest income @9% of Short Term Loans and Advances of Rs 10 Lakh or more aggregating to Rs 98,92,18,103/- under section 69A on the ground that: (i) the assessee was paying interest @9% to its creditors (i) the assessee failed to give valid reasons for not charging interest on the loans and advances of more than Rs 10 Lakh given to the parties. It is stated that it is pertinent to note that there is nothing on record to show that the appellant company had paid any interest to its creditors during the previous year 2017-18 relevant to AY 2018-19. In fact, during the AY 2018-19 and AY 2017-18, the appellant did not incur any interest expense since there was no borrowing. Moreover, there is nothing on record to show that the appellant company had earned or had a right to earn any interest income on the said advances which was given in the ordinary course of its real estate business. It is mentioned in the statement of facts filed before the Ld. CIT(A) that though in the show cause notice, the Ld. AO had proposed to add notional interest income by invoking section 69A the Act, however in the final assessment order he chose not to mention any section under which the addition was made. In response to this show cause notice, the assessee submitted sample copies of development agreements in respect of some of the parties to explain the nature of the advances as also balance confirmation letters and copy of Income Tax returns for AY 2018-19 in respect of 8 parties from whom advances were outstanding as on 31 March 2018 and shown in the balance sheet as short-term loans and advance under the broad head ‘current assets’. In the final assessment order, the Ld Assessing Officer reduced the outstanding balances of the parties from the above said aggregate amount of Rs 98,92,18,103/- for whom development agreement documents were submitted and assessed the interest income @9 percent on the balance amount of Rs 53,88,80,204/- to arrive at a notional interest income of Rs 4,84,99,218/- and has added the same to the returned income treating it Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 as undisclosed interest income. It is stated that it is apparent from the assessment order that the only ground on which the Ld. AO has made the addition is the failure of appellant company to provide documentary evidence to prove that no interest has been earned during the previous year 2017-18 even though the Ld. AO did not possess any material to prove receipt of any interest income by the appellant company and this alleged undisclosed interest income is nothing but an imagination of the Ld. A.O. Evidently, the Ld. AO did not mention under which section of the Income Tax Act such a huge addition has been made. It is stated there is no provision under the Income Tax Act which empowers the Assessing Officer to add notional interest to the income of the appellant. The assessment order is thus unjustified, without any factual or legal basis and the addition of Rs 4,84,99,218/- has been made purely on presumption which is beyond the jurisdiction of the assessing authority. In the computation sheet forming part of the assessment order, while allowing the set off, the Ld. AO did not take note of the facts available from past assessment record of the appellant that aggregate carried forward business loss available for set off against income of AY 2018-19 amounted to Rs 5,94,64,678/- which pertains to AYs 2014-15 & 2015-16. Thus, without prejudice to the appellant's contention as regards the unlawful addition of notional interest, even after considering the addition of Rs 4,84,99,218/- the total income of the appellant would have been nil had the carried forward loss been calculated properly and tax demand would also have been Nil. Aggrieved with the additions, the assessee filed the appeal before the Ld. CIT(A) who confirmed the addition by giving the following findings in Para 5.3 of the impugned appeal order:

Rival contentions were heard and the record and the submissions made were examined. While the Ld. AR submitted that the addition was unjustified, the Ld. DR relied upon the order of the Ld. CIT(A).

The Ld. AR drew our attention to the fact that the assessee was a real estate developer and income from development of properties was shown. It was argued that the allegation that the appellant had paid interest to the creditors is totally absurd, based on conjecture and is contrary to the facts on record since there was no finance cost in the profit and loss account as per Note 14 and there had been Nil finance cost in the preceding year as well. In the return, under the head interest expenses, the amount had been shown as NIL and there was no scope for claiming interest as a deduction for determination of the total income. Except for the Annual Maintenance of Rs.9,03,233/- included in the total revenue Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 from operation shown at Rs.97,29,53,734/-, no other income had been earned nor any interest income was, therefore, disclosed. During the year, as is evident from the schedule of other current liabilities vide page 11 of the people amounting to Rs.224,84,38,440/- read with the summary of current liabilities, it would be noticed that there had been substantial receipt of advance from customers (prospective flat buyers) during the years at Rs.91,34,29,504/- and only interest-free advances received from customers had facilitated such interest-free advances which are given in the course of the business. Interest had been alien to either side. It was submitted that the cash flow statement furnished in the course of the hearing would also corroborate the fund availability without interest and the addition of fictional interest in the light of proven facts and the judgements cited in the course of hearing was requested to be deleted in toto. It was submitted that the advances were from interest-free sources, no extraneous interest could be invoked under the law as the Act does not provide for chargeability to tax not founded on ‘real income’. The extract from written submissions filed in the course of the appeal before us is reproduced as under:

We have gone through the written submissions and the facts of the case. In the course of the appeal the assessee submitted that neither any interest was debited nor any interest was credited, therefore, there was no question of charging any interest on the advances on presumptive basis. Even in the past years, no such addition was ever made. It was also submitted that the assessee had sufficient interest free funds which were shown under the head ‘other current liabilities’ and in which the ‘advance from customers’ were shown at Rs.2,03,93,41,274/- as the opening balance to which addition of Rs.91,34,29,504/- was made and after making adjustment of Rs.83,17,70,790/- during the year, the closing balance remained with the assessee at Rs.2,12,09,99,998/-. The Opening balance of Other Current Liabilities was Rs.2,18,81,00,934/- while the closing balance was Rs.2,24,84,38,440/-. The opening cash balance was Rs.27,56,401/- while the closing cash balance was Rs.24,99,311/-. Thus, it was submitted that the assessee had sufficient advance from customers which was given as interest- free advances to the business associates and no interest was Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 charged nor the same was chargeable. Our attention was also drawn to the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh [2007] [2007] 158 Taxman 74 (SC)/[2007] 288 ITR 1 (SC)in which it has been held that: The High Court in the impugned judgment as well as the Tribunal and the income- tax authorities had approached the matter from an erroneous angle. In the instant case, the assessee borrowed the fund from the bank and lent part of it to its sister concern (a subsidiary) as interest-free loan. The test in such a case was really whether this was done as a measure of commercial expediency. [Para 21] The decisions relating to section 37 will also be applicable to section 36(1)(iii) be- cause in section 37 also the expression used is 'for the purpose of business'. It has been consistently held in decisions relating to section 37 that the expression 'for the purpose of business' includes expenditure voluntarily incurred for commercial expe- diency, and it is immaterial if a third party also benefits thereby. [Para 22] In Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on of the business. [Para 23] The High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have en- quired as to whether the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. [Para 24] The expression 'commercial expediency' is an expression of wide import and in- cludes such expenditure as a prudent businessman incurs for the purpose of busi- ness. The expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. [Para 25] No doubt as held in Madhav Prasad Jatia's case (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under sec- tion 36(1)(iii). [Para 26] Thus, the ratio of Madhav Prasad Jatia (supra), is that the borrowed fund advanced to a third party should be for commercial expediency, if it is sought to be allowed under section 36(1)(iii). [Para 27] In the instant case, neither the High Court nor the Tribunal and other authorities had examined whether the amount advanced to the sister concern was by way of commercial expediency. [Para 28] The High Court and other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with the money, in order to decide whether it was for commercial expediency, but that had not been done. [Para 30] Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 It is not in every case that interest on borrowed loan has to be allowed if the as- sessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial ex- pediency in many other circumstances. Where holding company, has a deep interest in its subsidiary, and the holding company advances borrowed money to a subsid- iary and the same is used by the subsidiary for some business purposes, the hold- ing company would ordinarily be entitled to deduction of interest on its borrowed loans. [Para 35] In view of the above, the appeals were to be allowed and the impugned judgments of the High Court, the Tribunals and other authorities were to be set aside and the matter was to be remanded to the Tribunal for afresh decision, in accordance with law and in the light of the observations made above. It was submitted that the assessee’s case was on a better footing as it had not advanced out of interest-bearing funds but from interest-free funds and the Ld. AO could not sit in the chair of the business man. Reliance was also placed on the decisions in the case of Commissioner of Income-tax v. Giriraj Udyog (P.) Ltd. [2006] 151 TAXMAN 75 (ALL.) and Shivnandan Buildcon (P.) Ltd. v. Commissioner of Income-tax [2015] 60 taxmann.com 347 (Delhi) in support of the relief claimed.

It was reiterated that the assessee had ample interest-free funds and had not debited any interest in its books of accounts, therefore, there was no question of charging any interest on the amounts which were advanced for business purposes as the assessee had a project under construction named as “SANHITA”. Reliance was also placed on several other judicial pronouncements, the relevant extracts of the findings of which are as under: 1. Highways Construction Co. Pvt. Ltd. v CTT [1993] 199 ITR 702 (Gauhati HC): "There is no finding of fact to the effect that actually the loan had been granted to the managing director or any other person on interest, or that interest had actually been collected and the collection of the interest was not reflected in the accounts. The finding of the Income Tax Officer is that the assessee ought to have Simoco Systems and Infrastructure Solutions Limited AY: 2018-19 collected interest. In other words, the view of the Income Tax Officer, which has been accepted by the Tribunal, was that the assessee, as a good business concern, should not have granted interest-free loan, or should have insisted on payment of interest. If the assessee had not bargained for interest, or had not collected interest, we fail to see how the Income Tax authorities can fix a notional interest as due, or collected by the assessee. Our attention has not been invited to any provision of the Income Tax Act empowering the Income Tax authorities to include in the income, interest which was not due or not collected. In this view, we answer question No. (ii) in the negative, that is, in favour of the assessee and against the Revenue."

SHIVNANDAN BUILDCON (P) LTD. & ANR. vs. COMMISSIONER OF INCOME TAX ANR- (2015) 233 Taxman 297 (Delhi): Income-Accrual-Notional interest-No notional interest can be added to the income of assessee qua interest-free advance given by assessee There is no provision under the IT Act permitting such addition Assessee. 144 has no application since assessment was made under s. 143(3)-B & A Plantations & Industries Ltd. vs. CIT (2000) 242 ITR 22 (Gau) relied on (Para 6 to 8) Conclusion: No notional interest can be added to the income of assessee qua interest-free advance given by assessee.