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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI JASON P BOAZ & M/s.Elsamex-TWS-SNC Joint Venture,
Assessment year: 2006-07: This appeal by the assessee is directed against the revision order dated 17/3/2011 of the CIT passed u/s 263 of the Income- tax Act,1961 [‘the Act’ for short] for the assessment year 2006- &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 2 07. The assessee is an association of persons (AOP) and is assessed to income-tax. The assessee is a joint venture of (1) M/s.Elsamex S.A, Spain, (2) Thanomwongse Service Co. Ltd., Bangkok and (3) Sri Shankarnarayana Construction Company (‘SCC’ for short). The assessee is carrying on the business of engineers and contractors. For the year under consideration, assessee filed its return of income on 31/10/2006 declaring a loss of Rs.13,17,36,875/-. The assessment was completed u/s 143(3) vide order dated 24/12/2008.
Subsequently, the CIT, on verification of the record found that the AO has allowed the claim of interest expenditure amounting to Rs.3,00,50,905/- on borrowed funds whereas an amount of Rs.11.5 crores has been advanced as interest-free loan to Shri Manohar Shetty who was a partner in SCC which was a member of the assessee joint venture. The CIT observed that interest payable on borrowed funds utilised for making interest- free advance was required to be disallowed u/s 36(1)(iii) of the Act but was wrongly allowed by the AO. The CIT further noted that the AO has allowed expenditure claim on account of interest without proper application of mind to the matter with reference to the facts of the case. Accordingly, the CIT proposed to revise the order of the AO by issuing show-cause notice u/s 263 dated 25/2/2011 requiring the assessee to file objections. In response, the assessee submitted before the CIT that the AO, after verifying &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 3 various details furnished during the assessment proceedings and after applying his mind, passed the order u/s 143(3). Therefore, it was contended that there was no lack of inquiry or inadequate inquiry in the matter. Further, the assessee submitted on the merits of the issue that the assessee AOP (joint venture) was awarded work by National Highways Authority of India (NHAI) for an amount of Rs.195,18,58,171/- and as per the terms and conditions contract, the assessee was to provide performance guarantee for 10% of the total amount of the contract along with mobilisation bank guarantee of equivalent amount which works out at Rs.19.5 crores each. The assessee requested its joint venture partner SCC to arrange bank guarantee to be furnished to NHAI on behalf of the assessee. Accordingly, SCC gave a bank guarantee of Rs.19.15 crores towards performance guarantee and Rs.,19.51 crore as mobilisation advance guarantee and further Rs.9.76 crore towards equipment advance guarantee on behalf of the assessee. It was further submitted that during the year under consideration, there was no transaction between Shri Manohar Shetty and the assessee but in the books of account of the assessee, there was an opening balance of Rs.11.15 crore interest-free advance in the name of Shri Manohar Shetty. The assessee submitted that the interest-free advance given to Shri Manohar Shetty has not been utilised by him for personal purpose and it was only for the purpose of availing credit facility from donor and for purpose of business of the assessee. Thus, the &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 4 assessee contended that the interest-free advance was given for commercial expediency and availing the facility of bank guarantee from its partner. In support of his contention, the assessee relied upon the decision of the Hon’ble Supreme Court in the case of S.A.Builders vs. CIT (288 ITR 1).
Alternatively, the assessee submitted that the disallowance of interest u/s 36(1)(iii) of the Act as proposed was not correct since the amount of Rs.11.5 crores paid as advance to Shri Manohar Shetty was a opening balance which was carried forward from the earlier year and there was no transaction in the previous year relevant to the assessment year under consideration. Thus, the assessee submitted that when two views are possible and the view adopted by the AO is not accepted by the CIT, the order cannot be treated as erroneous or prejudicial to the interests of the revenue. The CIT did not agree with the submissions of the assessee and found that the AO did not conduct any inquiry and therefore, no view was formed by the AO. Therefore, the decision relied upon the assessee in the view of the CIT were not applicable to the facts of the case. Accordingly, the CIT held that the order of the AO is erroneous and prejudicial to the interest of the revenue and the same was set aside with a direction to make fresh assessment in the light of the revision order.
ITA Nos.314&610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 5 4. Before us, learned AR of the assessee of the assessee has reiterated the contentions as raised before the CIT and submitted that the AO passed the order u/s 143(3) after conducting an inquiry and due application of mind. Therefore, the CIT cannot invoke jurisdiction u/s 263 merely because he did not agree with the view of the AO which is a possible view. He referred to the questionnaire dated 21/8/2008 issued by the AO and submitted that under question No.12, the AO asked the assessee to furnish details of the loan and advance (asset). In reply, the assessee vide letter dated 14/10/2008 explained the advance to SCC as well as Shri Manohar Shetty. Further no new advance was given in this year and the amount of Rs.11.5 crore is only a brought forward balance from earlier year. The AO raised a query and after reply of the assessee, did not make any disallowance. Therefore, the AO applied his mind. The learned AR of the assessee has relied upon the decision of this Tribunal in the case of M/s.Saravana Developers vs. CIT in and 48/Bang/2013 dated 6/9/2013 as well as the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Sridev Enterprises (192 ITR 165). Thus, the learned AR of the assessee has submitted that in view of the decision of the Hon’ble Supreme Court in the case of S.A.Builders (supra), when the interest free advance was given due to commercial expediency and the AO after conducting inquiry taken a possible view then the CIT is not permitted to invoke the provisions of sec.263.
&610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 6 On the other hand, learned departmental representative has strongly supported the impugned revision order. He submitted that the assessment order is completely silent on this issue. There is consistency in the stand of the department because for the assessment year 2007-08, the AO disallowed interest on account of interest-free advance in question which has been confirmed by the CIT(A). He further contended that the CIT has recorded a finding that the AO did not conduct inquiry and there is a complete lack of inquiry as well as non application of mind.
We have considered the rival submissions as well as the relevant material on record. The first objection of the learned AR of the assessee is that the AO raised a query and after reply of the assessee, passed the assessment order by due application of mind. A reference was made to question No.12 of the questionnaire dated 21/8/2008 which reads as under: “12. Details substantiating loans and advances(asset)” It is manifest from the above question that the AO asked details of the loan and advance being balance-sheet items (asset) and no question was raised on allowability or disallowability of the interest. Even the AO did not go into the point of interest-free advance in the question asked from the assessee. Thus merely asking the details of loan and advance without questioning the claim of the interest would not by any stretch of imagination &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 7 raise a presumption that the issue of allowability of claim of interest was in the view of the AO. Further, the assessment order does not remotely indicate any thing that there was any thought process by the AO on the interest claim. Rather the AO’s query was restricted to the balance sheet item and does not touch the profit and loss account of the assessee. Therefore, we are in complete agreement with the CIT that there is a lack of inquiry on the part of the AO which renders the assessment order erroneous so far as it is prejudicial to the interests of the revenue.
Now, we will discuss the merits of the issue. The assessee is a joint venture consisting of three partners. One of the partners of the joint venture is SCC. The assessee submitted that interest-free advance to Shri Manohar Shetty was given on commercial expediency that the assessee was required to furnish bank guarantee to NHAI which was given by SCC and Shri Manohar Shetty is partner in said partnership firm. There is no dispute that SCC got the bank guarantee as required by NHAI and furnished the same on behalf of the assessee-joint venture. But at the same time, one shall not forget that it was otherwise obligation of the partners of the joint venture to arrange the bank guarantee required by NHAI as per terms and conditions of the contract awarded to the assessee. Further, each of the partners of the joint venture was required to contribute the requisite capital in the joint venture but SCC contributed only Rs.9.5 crore &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 8 and that amount was nothing but interest-free advance given by the assessee to Shri Manohar Shetty which was received back routing through SCC. Therefore, the transaction of advancing of Rs.11.5 crore to Shri Manohar Shetty does not involve any economic substance or business interest of the assessee and hence there is no commercial expediency. Even the contribution by SCC is nothing but its obligation as per the joint venture agreement. At the cost of repetition, it is pertinent to mention that the bank guarantee was to be arranged by the partners of the joint venture and therefore, furnishing the bank guarantee by one of the partners cannot be linked with the transaction of interest-free advance to Shri Manohar Shetty. In the facts of the case, we do not find any error or illegality in the impugned revision order of the CIT passed u/s 263. The decisions relied upon by the assessee were not applicable to the facts of the present case. The provisions of sec.263 are only a check and balance measure in respect of assessment and any illegality committed by the AO cannot be allowed in perpetuity on the ground that the same is continued from the earlier year. Thus there is no bar on the jurisdiction of the CIT us 263 to set aside the illegality and erroneous order passed by the AO for any particular assessment year and further the order of the AO for any other assessment year would not be a hindrance to such recourse u/s 263 of the Act. &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 9 Assessment year 2007-08: 8. This appeal by the assessee is directed against the order dated 20/12/2010 of the CIT(A) arising from the assessment order passed u/s 143(3) of the Act. The assessee has raised the following grounds:
“1. The order of the authorities below in so far as it is against the Appellant are opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case.
2. The authorities below are not justified in determining the loss at Rs. 11,73,66,587/- as against the loss of Rs. 13,14,39,324/- returned by the appellant.
3. The authorities below are not justified in holding that the provision of Section 199 are applicable for TDS made on advance amount received by the appellant on the facts and circumstances of the case.
The Authorities are not justified in withdrawing the refund granted amounting to a sum of Rs. 22,44,000 being TDS amount deducted on the advance received against an equal amount of bank guarantee furnished by the appellant on the facts and circumstances of the case.
5. The authorities below failed to appreciate that TDS was made on an amount not chargeable to tax and the same is liable to be refunded under the provision of section 237 of the IT Act 1961 and the disallowance with respect to the refunded amount was not warranted on the facts and circumstances of the case.
6. The authorities below was not justified in disallowing interest expenditure of Rs. 1,38,60,000/- on the facts and circumstances of the case.
7. The appellant denies himself liable to be charged to interest under section 244A and 234D of the Income- &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 10 Tax Act, f961 under the facts arid circumstances of the case.
The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above.
9. In view of the above and other grounds that may be urged at the time of hearing of the appeal, your appellant prays that the appeal may be allowed in the interest of equity and justice”.
Grounds No.1 and 2 are general in nature and the assessee has not addressed any argument in respect of these grounds. Accordingly no specific adjudication is required for ground Nos.1 and 2.
Grounds No.3 to 5 are regarding rejection of TDS credit. NHAI inter alia, paid a sum of Rs.10 crores to the assessee towards mobilisation advance and deducted therefrom TDS of Rs.22,44,000/- u/s 194C of the Act and deposited the same to the credit of the Central Government of India. The assessee has not offered the advance received from NHAI holding the same as not assessable to tax. The AO rejected the claim of the credit of the said amount of TDS of Rs.22,44,000/- on the ground that as per the provisions of sec.199(2) of the Act, such credit cannot be allowed when the corresponding receipt has not been offered to tax.
The assessee challenged the action of the AO before the CIT(A). The CIT(A) has confirmed the action of the AO by citing &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 11 reason; that as per provisions of sec.199 of the Act, corresponding income must be offered for tax whereas the assessee has claimed the credit without offering corresponding income to tax.
Before us, learned AR of the assessee has relied upon the decision dated 17/10/2014 of the Hon'ble jurisdictional High Court in the assessee’s own case for the assessment year 2002-03 and submitted that the issue is now covered in favour of the assessee by the decision of this Tribunal which has been confirmed by the Hon'ble jurisdictional High Court.
On the other hand, learned departmental representative has relied upon the orders of the authorities below.
Having considered the rival submissions as well as the relevant material on record, at the outset we note that an identical issue was involved for the assessment year 2002-03 and the matter was carried to the Hon’ble High Court by the revenue against the order of this Tribunal. The Hon'ble jurisdictional High Court has held in CW ITA No.9/2009 in para.6 to 7 as under:
“6. Therefore, the substantial question of law that arises for our consideration is as under:
&610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 12 "Whether the Tribunal was right in holding that the receipts of amounts by the assessee from National Highways Authority of India (NHAI) could be treated as part of release of bank 9uarartee and the amount so received by the assessee should be treated an advance and can it be an exception to the provisions of Section 199 of the Income Tax Act by availing all the benefits under Section 237 of the Act?"
From the material on record, it is clear that the assessee is a contractor who has been paid a sum of Rs.29,28,59,937/- as mobilization advance which is not an income. But by virtue of Section 194C, TDS of Rs.59,12,958/- was deducted and credited to the account of the assessee in part. For the assessment year 2002-2003, the assessee has suffered loss. Consequently, there was no income. In the return-- filed, the assessee sought for refund of the entire amount. The Assessing Authority treated the receipt of Rs.7,32,14,128/- as income and granted a refund of Rs.14,93,568/- out of the TDS amount. He declined to pay the balance amount on the ground that it is adjustable in the future years as and when the assessee offers to tax. If the amount of Rs.29,98,50,937/- is a mobilisation advance and not an income at all, the question of paying income tax would net arise. When the gross receipts of Rs.7,32,14,128/- is offered and in that assessment year he has suffered loss, the question of paying any tax on the said amount also does not arise. He has passed an order for refund of Rs.14,93,568/accepting the loss returns of the assessee. But he was in error in not refunding the balance amount on account on the ground that it is liable to be adjusted in future years. If Rs. 14,93,568/- was refundable as the assessee had no income for the assessment year 2002-2003, the balance amount could not have been retained when there was no income which is liable to tax at the hands of the assessee. In fact the advance has been given after taking hank guarantees. It is here Section 237 of the Act comes into operation. As rightly held by the Tribunal, the said amount is also refundable. A conjoint reading of Sections 194C, 199 & 237 of the Act makes it clear that if there was no liability to pay tax, the TDS paid is liable to be refunded and that is absolutely what the Tribunal has stared. Therefore, we do not see any justification to interfere with the orders passed. Hence, the appeal filed by the revenue is liable to be dismissed”. &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 13 This issue is now covered by the decision of the Hon'ble jurisdictional High Court in the assessee’s own case. Respectfully following the judgment of the Hon'ble jurisdictional High Court, we direct the AO to allow credit in respect of TDS in question. This issue is decided in favour of the assessee.
Ground No.6 regarding disallowance of interest on account of interest-free advance made to Shri Manohar Shetty. The issue raised in this ground is identical to the issue involved in the appeal against the revision order for the assessment year 2006- 07. The CIT(A) has decided this issue in paras.16 & 17 as under:
“16. Admittedly, in this case ,loan has been given to Sri. Manohar Shetty in F.Y. 2001-02 and 2002-03 amounting Rs.16.30 crores and also on F.Y. 2004-05 of Rs.6.75 crores. In other words loan has not been given in relevant A.Y. 2007-08. On this background of financial transactions the moot question to be answered is whether the loan was from own funds and also for the purpose of business. Admittedly the loans are given out of borrowed funds on which interest is also paid. But it is claimed that such loan was for business purpose and hence the addition made by the A.O. should be deleted.
The appellant is an AOP. M/s. Shankarnarayana Construction Company, a Partnership Firm, in short, SNC is a member of appellant AOP. The appellant was awarded the contract in this year to execute the work of widening the NH from Bhadrak to Balasore in Orissa for a contract price of Rs.195.19 crores. It states that it has no bank account or credit facility in any bank. Therefore it decided to utilize the financial facilities of SNC which was having bank guarantee limit of Rs.30 crores and FIC limit of Rs.10 crores. The NHAI had asked for two types of guarantees viz., performance &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 14 guarantee and bank guarantee for advance ibilifl5iieach amounting Rs.19.52 crores thus in total Rs.39.04 crores. SNC in total was enjoying limits of Rs.40 crores which could have been sufficient to get the contract work from NHAI. Therefore the argument that the existing facilities of SNC was not found equal to the situation lacks merit. However, for arguments sake it is accepted that the Bank could have asked for further collateral securities to increase the facility and SNC needed to increase its financial capacity in the eye of the Bank to get the increased bank facilities so that it can provide the same to the appellant AOP for onward transfer to NHAI to get the desired work contract. The appellant therefore devised a circuitous route Mr.Manohar Shetty (MS) is one of the partners of SNC. The appellant gave interest free loans to MS. MS deposited the same in SNC as capital contribution. SNC deposited the same in the Bank. Bank increased the guarantee of SNC to 80 crores. The appellant utilized the same and got the contract. Thus it is pleaded that the funds borrowed from Bank on Mortgage of property was given as loan to MS for utilization of the same to increase the bank guarantee of SNC to 80 crore to obtain the work contract of 195 crores and the same was for the purpose of business of getting contract only and hence deserves deletion. I find loopholes in the above explanation. The loans were given to MS in F.Y. 2002-03, 2003-04 and 2004-05. The NHAI asked for the bank guarantee in F.Y. 2006-07. The appellant AOP is not an astrologer. He is not expected to know the course of future events. It could not have even got the scent that the loans given to MS in F.Y.2002-o3 and its closing balance would utilized in F.Y.2006-07. Therefore, I find it a case of reverse engineering an- Thence not acceptable. Besides I have pointed out above there was no necessity at all to go for increased bank credit facility to get the contract from NI-TAT. Thus two- pronged fallacy viz., time gap between the loan given and loan utilization and also lack of any business necessity to increase the credit facility militates against the principles of commercial expediency argued as the anchor for claiming the relief. Thus the argument that the interest free loan had been given for the purpose of facilitating the procedure of getting the work contract from NHAI does not appeal to reason and therefore fails to fulfill the test of preponderance of probability and also commercial expediency. In short, it cannot be held that the loan was for the purpose of business. It is by chance and &610/Bang/2011 M/s.Elslamex TWS SNC Joint Venture Page 15 opening balance was there which was made a cog in the wheel of the reverse engineering. Besides it is admittedly not from own funds. Besides, MS cannot be held as a sister concern of the appellant. Therefore A.O. is justified to treat the interest receivable from MS as the income of the appellant. Ground of appeal is dismissed. Addition is found justified. ”
Thus it is clear that the interest-free loan was given from borrowed fund. In view of our finding on this issue for the assessment year 2006-07, we uphold the impugned order of the CIT(A) qua this issue.
Ground No.7 is regarding interest u/s 234B which is consequential and automatic.
In the result, the appeal for the assessment year 2006-07 is dismissed and the appeal for assessment year 2007-08 is partly allowed.