ASSTCIT (OSD) 8(3), MUMBAI vs. VICNA DEVELOPERS P.LTD, MUMBAI

आदेश / O R D E R

PER SANDEEP GOSAIN, JUDICIAL MEMBER

(A.Y. 2010-11) ACIT vs. M/s. Vinca Developers Pvt. Ltd. i. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of interest made u/s 36(1)(iiia) of the Act to Rs. 12,80,166/- as against Rs. 1,62,70,200/- disallowed in the assessment order thereby granting a relief of Rs. 1,49,90,034/- ?" ii. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of interest without appreciating the fact that the assessee did not have sufficient own funds to give interest-free advances to M/s. Ackruti City Ltd.?" iii. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of interest without appreciating the fact that the assessee could not substantiate with corroborative evidences the direct nexus between its own funds and the interest-free advances given to its sister concern, M/s. Ackruti City Ltd. of Rs. 13,55,85,000/-?" iv."Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest ignoring the ratio laid down in the Kerala High Court judgement in the case of CIT vs. V.I. Baby & Co. (254 ITR 248) wherein the Hon'ble Court was held that the assessee with liquidity cannot claim that it can give interest-free advances to the partners & others and then borrow funds from the Bank on interest for business purpose?" v. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the A.O. be restored."

After serving statutory notices and seeking the assessee’s reply, the assessment order u/s 143(3) of the I.T. Act, 1961 was passed by AO. Disallowing proportionate interest of Rs.1,62,70,200/- @12% attributable to interest free advances of Rs.13,55,85,000/- advanced to the Ackruti City Ltd was disallowed and added back to the total income of the assessee. Aggrieved by the order of the AO, assessee filed an appeal before the CIT(A) and the CIT(A) partly allowed the appeal of the assesee.

Aggrieved by the order of the CIT(A) the assessee filed the present appeal before us on the grounds mentioned herein above.

Ground Nos. 1to 4

Since all the grounds raised by the assessee are inter-connected and inter- related therefore we thought it fit to dispose off the same through the present common order.

(A.Y. 2010-11) ACIT vs. M/s. Vinca Developers Pvt. Ltd. Before we come on the merits of the case it is necessary to analyze and evaluate the order passed in for AY 2010-11 passed in assessee’s own case and the operative portion is as under :

“We have heard the counsels for both the parties and we have also perused the material on record as well as the orders passed by the lower authorities and after considering the arguments as well as the orders passed by the revenue authorities we are of the considered opinion that the disallowance of interest, if any, is to be restricted to the amount of advance actually given by the assessee and should not be in reference to the expenditure incurred for the registration and stamp duty charges for registration of development agreement. We further found that since the advance was granted on 31.12.2009 as per the ‘development agreement’ therefore, the period covered during the year under consideration is only w.e.f 31.12.09 i.e. for 3 months accordingly, the AO is directed to compute the disallowance of interest only on the actual amount of advance and only for the period of three months w.e.f. 31.12.09 to 31.03.10. AO is directed accordingly.”

We have also analyzed the orders passed by CIT(A) wherein the said issue has been dealt by CIT(A) and the same is reproduced herein below:

“I have considered the submissions of the appellant, order of the A.O. and facts of the case carefully, ~it is noticed that the assessee has made interest-free advance of Rs. 13,55,85,000/- to M/s. Ackruti City Ltd . Accordingly, the A.O. has given show cause notice to the assessee to explain why the interest on interest-free advances may not be disallowed. In response to this, the AR of the~ appellant has submitted its reply. After considering the same, the AO has held that the share-capital of Rs.12,51,24,390/- and the unsecured loan of Rs. 2·,78,49,92,560/- were in the common pool out of which the assessee has made advance of Rs. 13,.55,85,000/- to MIs. Ackruti City. Ltd. which cannot be claimed as advance made out of the share capital amounting to Rs. 12,51,24,3901-. In view of these facts, the AO. has computed the interest @ 12% on the (A.Y. 2010-11) ACIT vs. M/s. Vinca Developers Pvt. Ltd. interest-free loan of Rs. 13,55,85,000/- and added back a sum of Rs. 1,62,70,200/-. On the other hand, the AR of the appellant ha submitted that the interest- free loan to Group Company was made out of the share capital of Rs. 12,51,24,390/- because the unsecured loans of Rs. 2,78,49,92,560/- were invested in debentures of Rs.2,78,52,00,000/-. Thus, it was argued that since the the interest-free loan was given out of its .own funds, therefore, the disallowance made by the AO. On account of interest on interest-free loan is not called for. To strengthen its view, the AR of the appellant has also relied on decisions of hon'ble courts (supra).

From the perusal of the submissions and facts of the case, it is noticed that the assessee has a share capital of Rs. 12,51,24,390/- and unsecured loan of Rs. 2,78,49,92,560/- which is an undisputed fact. Secondly, it is also undisputed that the assessee has made investment of Rs. 2,78,52,00,000/- in the purchase of debentures and made advance to MIs. Ackruti City Ltd. of Rs. 13,55,85,000/-.The assessee has shown interest income from debentures at Rs. 6,16,51,506/- and debited the interest amount of Rs. 9,45,91,715/- to the profit & loss account on account of borrowings. Now, question arises whether the assessee has made the interest-free advance of Rs. 13,55,85,000/- out of the share capital or out of unsecured loans. T answer this question, it is clear that out of the unsecured loans of Rs 2,78,49,92,560/-, the assessee has made investment of Rs. 2,78,52,00,000/- i.e. Rs. 2,07,440/- (Rs. 2,78,52,00,000 - 2,78,49,92,560) this is more than the unsecured loan. Secondly, out of the share capital of Rs. 12,51,24,3901- the assessee has given advance to MIs. Ackruti City Ltd. of Rs. 13,55,85,000/-which means the assessee has made advances to the tune of Rs. 1,06,68,050/- out of the borrowed funds (1,04,60,610 + 2,07,440). From the perusal of the submissions and facts, it is clear that the assessee has made advances to MIs. Ackruti City Ltd. of Rs. 13,55,85,000/- which was not entirely, from the share capital of Rs. 12,51,24,3901- but the balance amount of Rs. 1,04,60,610/- was out of the unsecured loans or overdraft from the bank. The amount of Rs. 2,07,4401- was also excess of the unsecured loan of Rs. 2,78,4992,560/- because the aSsessee has purchased debentures to the tune of Rs. 2,78,52,00,000/-. From the analysis of these figures, it is worked out that the assessee has not its own funds to the tune of Rs.1 04,60,610/- and Rs.2,07,440/- totaling to Rs. 1,06,68,050/-, therefore, the interest @12% on Rs. 1,06,68,0501- works out to Rs. 12,80,1661- .

In support of this view, the various hon’ble courts are held as under:-

(A.Y. 2010-11) ACIT vs. M/s. Vinca Developers Pvt. Ltd. (a) Hemraj Canji Vs. ITO - Whether if assessee was able to establish direct nexus between interest-bearing borrowed funds and investments in shares, which had been sold during the year, said interest should be added to cost of acquisition - Held, yes - Whether submission of the assessee that interes: as well as other expenses should be allowed in its entirety on the ground that in earlier years no such disallowance was made, could not be accepted - Held, yes.

(b) ACIT Vs. Eicher Ltd. - Whether assessing officer can estimate a part of expenditure incurred by assessee as expenditure incurred to , reduce non- taxable income on assumption that a part of expenditure must have necessarily been incurred to produce non taxable income and disallow said part of expenditure u/s 14A -Held, . no,

" (c) ClT Vs. Bharti Televenture Ltd: - The Revenue preferred appeals., against the order of the CIT(A) in al/ the three cases before Tribunal. The contentions of the Revenue before the Tribunal and also before us were that it was not the assessee's business to invest the· shares of the subsidiary companies; that while the assessee 'had' borrowed money and had paid interest thereon, the amount borrowed had been diverted interest-free to the subsidiary'" companies which no prudent businessman would do so; that the aessessee company wrongly debited to its P&L account, the of intere.st towards acquisition of capital asset and that the expenditure incurred was not for the business purpose of the assessee.

(d) ClT Vs. Sridev Enterprises - Sec. 36(1)(iii) of the I. T. Act -:- Interest on borrowed capita/- Assessment year 1978-79 –During relevant account year accounting year assessee firm advanced a sum to a firm N – there was certain opening balance of advances made to N during earlier years - Partners of aesseseee and N were interrelated and had., . business connections - No interest was charged from N -'- However, assessee borrowed funds from third parties and claimed deduction Of interest paid on such borrowings -Whether, since no addition had been made in earlier years, opening debit balance of N could not be considered during year in question and enquiry had to be limited to increase in current year only- Held Yes.

In totality of facts & circumstances, it is held that the assessee has given advances to its sister concern out of unsecured loans and overdraft from the bank on Which interest has been debited to the profit & loss account, therefore, the addition made by the A.O. is restricted to Rs. 12,80,166/- and the balance addition is deleted, hence ground of appeal is partly allowed.”

(A.Y. 2010-11) ACIT vs. M/s. Vinca Developers Pvt. Ltd. After co-joint reading of both afore mentioned orders we are of the considered view that the ld. CIT(A) while dealing with the said issue has taken into consideration the entire facts of the case and has rightly noticed that the assesee has a share capital of Rs.12,51,24,390/- and unsecured loan of Rs.2,78,49,92,560/- and the CIT(A) has rightly concluded that it is clear that the assessee had made advance of Rs.13,55,85,000/- to Ackruti city Ltd which was not entirely from the share capital of Rs.12,51,24,390/- but the balance amount of Rs.1,04,60,610/- was out of unsecured loans or overdraft from the bank and the amount of Rs.2,07,440/- was also excess of the unsecured loan of Rs.2,78,4992,560/-. Assessee has purchased debentures to the tune of Rs.2,78,52,00,000/-. The ld. CIT(A) after analyzing the entire facts and figures has rightly worked out that assessee has not its own funds to the tune of Rs.1,06,68,050/- (Rs. 1,04,60,610/-+Rs.2,07,440/-).

Therefore, the ld. CIT(A) has rightly restricted the additions by holding that the interest @12% on 1,06,68,050/- which works out to Rs.12,80,166/-. The said findings recorded by CIT(A) is based on various judgments rendered by Hon’ble Courts.

Considering the totality of the facts and circumstances of the present case, we are of the considered view that the learned CIT (A) has passed a reasonable and judicious order. Therefore, we find no reason to deviate from or interfere with the (A.Y. 2010-11) ACIT vs. M/s. Vinca Developers Pvt. Ltd. findings of the learned CIT (A). Accordingly, we uphold his order. These grounds of appeal of the revenue stand rejected.

5. Ground No.5 & 6 of the Revenue’s appeal is general in nature and hence, requires no specific adjudication.

6. In the result, the revenue’s appeal is dismissed. Order pronounced in the open court on 25th May, 2016. Sd/- Sd/- (Jason P. Boaz) (Sandeep Gosain) लेखा सद�य / Accountant Member �या�यक सद�य / Judicial Member मुंबई Mumbai; �दनांक Dated : 25.05.2016 Ps. Ashwini आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. आयकर आयु�त(अपील) / The CIT(A) 4. आयकर आयु�त / CIT - concerned 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard File