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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the revision order dated 29-03-2016 passed by learned Principal CIT-28, Mumbai and it relates to the assessment year 2011-12. The assessee is challenging the validity of revision order passed by learned Pr. CIT, Mumbai u/s 263 of the Act.
2. The facts relating to the case are stated in brief. The assessment in the hands of the assessee for the year under consideration was passed by the assessing officer under section 143(3) of the Act on 29-01-2014. On examination of the assessment record, the learned Pr. CIT took the view that the assessment order passed by the assessing officer is erroneous and prejudicial to the interests of the revenue and accordingly he issued a show cause notice to the assessee, the contents of which read as under:-
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“On perusal of the balance sheet it is seen that the assessee is having its own fund to the tune of Rs.15,31,000/-. The assessee had borrowed funds firm the following concerns:
India Bulls - Rs. 30.42 cr Bombay Mercantile - Rs. 4.49 Cr. Unsecured loan - Rs. 8.42 cr. Out of the above borrowed funds, the assessee had made investment in share application of M/s. Ken Construction P. Ltd. of Rs. 25.80 Crores & M/s. Gami Properties P. Ltd. of Rs. 93,50,000/- which are sister concerns of the assessee.
Further amount given to the related parties are as follows :-
1. M/ s. Top Ten Electronics - Rs. 13,00,000/- 2. Dinesh Manila! Shah - Rs. 1,00,00,000/- 3. Dhanji Patel - Rs. 50,00,000/- 4. Asha Goods Pvt. Ltd. - Rs. 49,50,000/ -
The assessee had borrowed interest bearing funds and given the loans to the sister concerns as interest free.
The interest on borrowed funds invested in the form of share capital in the sister concerns cannot be allowed as deduction u/ s 36(1)(iii). In the case of Crescent Organics (P) Ltd, (49 taxmenn. Corn 128), the jurisdictional High Court has hold that on interest on borrowed capital utilized for investments in a foreign company was not in course of assessee’s business and claim for deduction u/s. 36(1)(iii) of the I.T. Act has been rejected.
For the amount given to the sister concern the assessee has not proved the commercial expediency as held in various decisions for allowability of interest.
Under these circumstances, the A. O. ought to have disallowed the proportionate interest u/s. 36(i)(iii) of the Income Tax Act, 1961 for diversion of interest bearing funds for interest free investments/ loans Omission to do so has resulted in under assessment of income.
In view of the above, it is evident that the Assessing Officer had not followed the settled position of law. Therefore, the order dated 29.01.2014 u/s.143(3) of the Income-tax Act, 1961 is erroneous and prejudicial to the interest of revenue within the meaning of Sec.263 of 3 Real Trade Techologies the Income-tax Act, 1961 read with clause (a) of Explanation 2 thereof.”
In effect, the case of the learned Pr. CIT was of the view that the assessee has diverted interest-bearing funds for giving interest free advances to the sister concerns and others. Hence a portion of interest expenditure claimed by the assessee would call for disallowance under section 36(1)(iii) of the Act.
3. Before learned Principal CIT, the assessee submitted that the assessment was completed by the assessing officer after making specific enquiries with regard to the loans taken by the assessee and also loans advanced by the assessee. It was also submitted that there was commercial expediency in giving advances to the sister concerns and others. The detailed explanations given by the assessee before learned Pr. CIT are extracted below, for the sake of convenience:- 6. The assessee, vide reply dated 21.03.2016 submitted asunder:
"With reference to show cause notice U/s 263 of the Act dated 15.03.2016 issued by your good self to us regarding non disallowance u/s 36(1)(iii) of the Act, for diversion of interest bearing funds for interest free investment/ loans to do so has resulted in under assessment of income. In this rirtqw regards we hereby would like to state and submit as under :
= 1. Order u/s 143(3) of the Act was passed on dated (t. 29.01.2014 for assessment year 2011-12 by the Joint b a k * cas Commissioner of Income Tax considering the various details and ra_t submissions filed during the course of assessment proceedings by us as demanded in notice u/s 142(1) of the Act and other details required from time to time necessary for the purpose of assessment of the firm.
During the course of assessment proceedings u/ s 143(3) of the Act, the Assessing Officer specifically asked the details loans taken given, loans taken, investments and ledger copy of Ken Construction Pvt. Ltd. & Shri Gami Properties Put. Ltd. for the period of 01.04.2009 to 31.03.2012 in his questionnaire issued u/s 142(1) of the Act, which we submitted during the course of assessment.
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In show cause notice u/s 263 of the Act, your goodself has stated that we had made invested as share applications in Ken Construction Put. Ltd. of Rs.25.80 crores and in Shri Gami Properties Rs.93.50 lacs. We state that the firm has not invested in any share application money of any company during the A.Y. 2011-2012.
4. Ken Construction Put. Ltd. is the Associates company of the firm and in which partner of the firm are also director for the Company. The Account with Ken Construction Put. Ltd. is in the nature of Current account operation where the fund are given and taken on regular basis throughout the year, to meet the short term requirement from either firm. This fact can be verified from ledger account of the company which we are enclosing herewith for the [period 01.04.2009 to 2013.
Regarding the payment of Rs. 93.50 lacs to Shri Gami Properties Put. Ltd., this is in the nature of advance, paid toward the purchase of Plot No.336, Sangam Wadi, Ghorpady Pune, which firm proposed to buy under MOU dated 28.05.2010. The deal still being pending the amount paid was lying as advances. The firm will claim this refund back Shri Gami Properties Pvt. Ltd. if it fails to fulfill the terms of the MOU. Accordingly no interest can be charged to Gami Properties Pvt. Ltd. as is not in the nature of loan. Copy of MOU is enclosed herewith for reference and record.
6. The firm had raised loan from Indiabulls Housing Finance in A.Y. 2008-09 (Copy of sanction letter are enclosed) and from Bombay Mercantile co-Op. Bank Ltd in A.Y. 2010-11. All these loans were raised form construction purposes only and the fund was not utilized for giving any loans or for investment.
7. The firm is regular in paying due installments and interest from time to time as and when due and any surpluses whatever as firm being temporally in nature could not be utilize for prepayment of term loan because term loan once paid cannot be easily raise again. The Firm, is not enjoying any cash credit or overdraft facility from any bank and any surplus lying in the current account will not yield any interest to the Firm. This temporary surplus only utilized for given short term advances to Ken Constructions P. Ltd.
The unsecured loans of Rs.8.42 crores were mostly taken much before A. Y. 2011-2012 to meet the cost of construction in the Firm and no new loan was raised in A. Y. 2011-2012. However firm has also given a sum of Rs. 6.75 crores to Mr. M. C. Jain & Mr. M.P. Patel in the assessment year 2011-12 and recovered interest of Rs. 65.47 lacs.
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9. Payment made to Top Ten Electronics Rs. 13.00 lacs were advance towards CC TV Camera to be installed in the project and are not in the nature of loans.
10 Mr. Dinesh M. Shah, M/ s. Astha Goods Pvt. Ltd. and Mr. Dhanji Patel are the parties who had taken loans from the firm and these loans were given to them in the natural course of business to earn interest out of the internal accruals of the firm. However, these parties have not paid interest as stipulated in spite vigorous efforts by the firm. Interest, if any, recovered from these parties will be offered to tax as and when collected on cash basis.
Considering above your goodself will appreciate that the firm have not diverted any interest bearing fund for interest free investment or loans and accordingly the ratio of judicial pronouncement in the case of Crescent Organics P. Ltd.(49 Taxmenn.com 128) relied in case of the Firm are not applicable as relied in the show cause notice u/ s 263 of the Act issued to us. We hope your good self will he kind to drop the proceedings initiated u/s. 203 of the Act and in case any further detail or document is require in the matter we will be pleased to submit the same on hearing from you."
6.1. Further, vide letter dated 29.03.2016, the assessee has submitted the following:-
Ledger copies of the parties to whom the loans and advances were given and interest received thereon.
2. Xerox copy of the proforma invoice for CCTV camera against which the advances were given to M/ s. Top Ten Electronics.
3. Xerox copies of the details submitted during the course of hearing for) assessment u/s. 143(3) of the Act."
However, the learned Pr. CIT did not fully agree with the submissions made by the assessee. In respect of advance of Rs.93.50 lakhs given to M/s Gami Properties Private Limited, the Ld Pr. CIT took the view that it can be accepted up to a sum of Rs.11.00 lakhs only, since the balance payment of Rs.82.50 lakhs was given prematurely, i.e., prior to the date stated in the Memorandum of Understanding entered between the assessee and the above said company. Accordingly, the Ld Pr. CIT took the view that the excess
6 Real Trade Techologies payment of Rs. 82.50 lakhs cannot be considered to have been given for business purposes. The learned Pr. CIT accepted the assessee’s explanation with regard to the advance given to M/s Top Ten electronics and accordingly held that the advance of Rs.13.00 lakhs given to the above said company is for business purposes. Accordingly the Learned Pr. CIT took the view that the remaining advances are non-business advances and hence interest relatable to those advances should be disallowed. In this regard, he placed reliance on the decision rendered by Hon’ble Supreme court in the case of S.A. Builders (288 ITR 1)(SC) and also the decision rendered by Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries (286 ITR 1). Accordingly the Learned CIT set aside the assessment order passed by the assessing officer and restored the matter to his file with the direction to pass a speaking order after giving an opportunity of being heard to the assessee. Aggrieved by the order passed by learned Pr. CIT, the assessee has filed this appeal before us.
5. The learned AR submitted that the assessing officer has made specific enquiries with regard to the interest free advances given to the associate concerns & others during the course of assessment proceedings. In this regard, he invited our attention to page number 22 of the paper book filed by the assessee, more particularly to question number 8 asked by the assessing officer along with the notice issued by him under section 142 (1) of the Income tax Act. He further submitted that the assessing officer, in the above said query no.8, has specifically asked the details of loans taken and loans given in a particular format, which included the rate of interests, interest amount paid/ received, TDS deducted and date of deposit of TDS amount. Inviting our attention to Query No. 10, the learned AR submitted that the assessing officer has asked for copies of Ledger account of M/s Kem constructions private limited and also M/s Gami properties Private Limited for the period from 01.04.2009 to 31.03.2012, i.e., for 7 Real Trade Techologies three years. Inviting our attention to page number 41 of the paper book, the learned AR submitted that the assessee has furnished the details called for by the assessing officer in the format requested by him. He further submitted that the assessee has also furnished the Ledger account copies of the above said two companies for the period of three years, referred above. Accordingly, the learned AR submitted that the assessing officer has examined the details of loan taken and the loans given in a proper perspective during the course of assessment proceedings. He submitted that the AO found that the disallowance is called for only in respect of interest free advance given to Shri Ambalal B Gami. Accordingly he disallowed a sum of Rs. 16.89 lakhs from out of interest expenditure. Accordingly the Ld A.R submitted that the other advances were given out of commercial expediency and for business purposes and the same has been accepted by the AO. Accordingly the learned AR submitted that the assessing officer has applied his mind on the impugned issue and has taken a possible view of the matter. He submitted that the Learned Pr. CIT has only drawn inferences in these matters, i.e., he has not demonstrated as to how these advances can be considered to have been given for non-business purposes or how there was no commercial expediency in giving these advances. Accordingly the Ld A.R submitted the Ld Pr. CIT is not entitled to revise the assessment order on mere inferences drawn by him. Accordingly he contended that the revision order passed by the learned Pr. CIT is not in accordance with the mandate of law and hence the same should not be sustained.
The Ld A.R submitted that the assessee, M/s KEN Construction P. Ltd and M/s. Gami Properties P Ltd are engaged in the construction business only and there were having current account transactions between these companies, which were carried out, depending upon business requirements. The learned AR further submitted that the assessee had borrowed funds from M/s India Bulls
8 Real Trade Techologies financial services Ltd with the specific purpose of funding various construction projects within the group companies. Hence the advances were given as per the terms of loan taken by the assessee. He submitted that all the partners of the assessee firm are directors of M/s KEN construction P Ltd and the assessee was constrained to take care of commercial interests of the above said company also. Hence there was commercial expediency in advancing loans to the above said company as held by Hon’ble Supreme Court in the case of S.A. Builders (supra). With regard to the advance given to M/s Gami properties P Ltd, the learned AR submitted that the same was given as per the memorandum of understanding entered between the assessee and above said company. He submitted that the learned Pr. CIT considered a portion of advance so given, i.e., Rs.82.50 lakhs as for non-business purposes, only for the reason that the same has been paid prior to the date agreed in the MOU. He submitted that the Ld Pr. CIT, having accepted the MOU as for business purposes and having accepted the part payment of Rs.11.00 lakhs also for business purposes, was not justified in considering the balance payment of Rs.82.50 lakhs as for non-business purposes. With regard to the advances given to three other concerns, the learned AR submitted that they have been given in the earlier years on interest terms in the normal course of business, but those parties have failed to pay interest. With regard to the reliance placed by Learned Pr. CIT on the decision rendered by Honourable Punjab and Haryana High Court in the case of Abhishek industries (supra), the learned AR submitted that the Hon’ble Supreme Court in the case of Hero cycles Private limited (379 ITR 347) has held that the approach adopted by Honourable Punjab and Haryana High Court in the above said case was clearly faulty in law and cannot be countenanced. Accordingly the learned AR submitted that the impugned revision order passed by learned Pr. CIT CAD is not sustainable in law and accordingly prayed that the same may be set aside.
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The Ld D.R submitted that the questionnaire issued by the assessing officer contains questions of routine nature and hence merely because the assessing officer has asked for the details of loans taken and loans given does not mean that the AO has applied his mind. He submitted that the issue is whether the AO has carried out proper enquiry or note. He submitted the AO, in the instant case, cannot be considered to have made proper enquiry on the impugned matter by merely asking a routine question. He submitted the arguments put before the bench were not available before the AO. He submitted that the Learned Pr. CIT has accepted part of advances as for business purposes, where ever there was proper explanation from the assessee side. He submitted that the co-ordinate bench of Tribunal has considered the scope of the provisions of sec. 263 of the Act in the case of Horizon Investment Co Ltd (ITA No.1593/Mum/2013 dated 27.06.2014) by considering the decisions rendered in the following cases:- (a) Malabar Industrial Company Ltd (243 ITR 83)(SC) (b) Addl CIT Vs. Gee Vee Enterprises (1975)(99 ITR 375)(Delhi) (c) Rampyari Devi (67 ITR 84) (d) Tara Devi Agarwal (88 ITR 323) The Co-ordinate bench held that the failure on the part of the AO to make proper enquiries as warranted in the facts and circumstances of the case would render the assessment order erroneous and prejudicial to the interests of the revenue. The Ld D.R also relied upon the decision rendered in the case of CIT Vs. Infosys Technologies Ltd (341 ITR 293)(Kar). The Ld D.R also relied upon the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Amitabh Bachchan (Civil Appeal No.5009 of 2016 dated 11-05-2016. However, after hearing Ld A.R, we noticed that the said decision was not applicable to the present case, as it has been rendered in a different context. In effect, the Ld D.R contended that the AO has not carried out proper enquiries and hence the Ld Pr. CIT was justified in revising the assessment order.
8. In the rejoinder, the Ld A.R submitted that the AO has made proper enquiries at the time of assessment. He has called for ledger account copies of 10 Real Trade Techologies sister concerns, that too for three years. The Ld A.R submitted that one of the partners of the assessee appeared before the AO and furnished the relevant details. Thus the AO has made specific enquiries in respect of loans received and advances given. The AO has also applied his mind on this issue and hence has taken a view that disallowance is called for in respect of diversion of interest bearing funds to give interest free advances in respect of the advances only. Accordingly he has taken a conscious decision of the matter and accordingly determined the interest amount to be disallowed.
We have heard rival contentions and perused the record. Before going into the merits of the issue, we would like to discuss about the legal position with regard to the power of Learned CIT to invoke revision proceedings under section 263 of the Act. The scope of revision proceedings initiated under section 263 of the Act was considered by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble Supreme Court. The relevant observations are extracted below: “Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and 11 Real Trade Techologies
is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) :
“The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.”
The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.”
Now we shall analyse the facts prevailing in the instant case. From the explanations furnished by the assessee, we notice that the assessee has submitted that the advances outstanding in the name of Shri Dinesh M Shah, M/s Astha Goods Pvt Ltd and Shri Dhanji Patel were given in the normal course of business on interest terms. It was further submitted that the interest income shall be offered as and when collected from them. We notice that the Ld Pr. CIT has not at all examined this explanation. With regard to the advances given to M/s Gami Properties P Ltd, the Ld CIT has accepted part of advance given, i.e., to the extent of Rs.11.00 lakhs. As noticed earlier, the Ld CIT held the remaining advance amount of Rs.82.50 lakhs as for non- business purposes, simply for the reason that the advance amount was given by the assessee prior to the determined date. In our view, what is required to be seen is the purpose of advance. When the Ld Pr. CIT is accepting one part of advance amount as having commercial expediency and for business purposes, he cannot treat the remaining part of the advance as not having commercial expediency/non-business purposes on the reasoning given by him.
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In respect of the advance given to M/s KEN Construction P Ltd, the Ld Pr. CIT has taken the view that the same was given as share application money. The assessee has submitted in its written submissions that it is having running current account with the above said concern and the funds are transferred between them in accordance with the business requirements. The assessee has also submitted that there is commercial expediency in advancing the amount to the above said company, since the partners of the assessee firm are the directors of the above said company and further both of them are engaged in civil construction business. Accordingly, by placing reliance on the decision of Hon’ble Supreme Court in the case of S.A Builders (supra), it was submitted that there was commercial expediency in giving advances to the above said company.
Besides the explanations with regard to the commercial expediency in advancing the loans, we notice that the assessing officer has raised specific query with regard to the loans given, loans received, interest paid, interest received, the details of TDS payments. The AO has also asked for ledger account copies of two sister concerns, viz., M/s KEN Construction P Ltd and M/s Gami Properties P Ltd for three years, i.e., from 1.4.2009 to 31.3.2012. There is no dispute with regard to the fact that the assessee has furnished the details as called for by the AO including the ledger account copies of the above said companies. After examination of the details, the AO has come to the conclusion that the interest free advance given to Shri Ambalal B Ghami was non business purposes and accordingly disallowed interest expenditure to the tune of Rs.16.90 lakhs. In view of the above, we are unable to agree with the contentions of Ld D.R that the assessing officer has failed to make proper enquiries and the query raised by the AO was a routine enquiry. The above narrated sequences, in our view, show that the AO has examined the matter relating the interest free advances in proper perspective and has taken a plausible view of the matter.
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The Hon’ble Supreme Court has held in the case of Malabar Industrial Company (supra) that the assessment order cannot be termed as erroneous and prejudicial to the interests of the revenue, if the view taken by the assessing officer is one of the possible views. Accordingly, we are of the view that the impugned revision order passed by Ld Pr. CIT is not sustainable in law, since the view taken by the AO is one of the possible views. Accordingly, we set aside the impugned revision order passed by Ld Pr. CIT.
In the result, the appeal filed by the assessee is allowed. Order has been pronounced in the Court on 22.7.2016