KUMAR HOUSING CORPORATION PRIVATE LIMITED(PREVIOUSLY KUNOWN AS KUL URBAN DEVELOPMENT PVT. LTD),PUNE vs. THE INCOME TAX OFFICER, WARD-14(2), PUNE

It was further submitted that the rate of interest charged by the assessee from its sister concern and the rate at which the amount was borrowed is same and, therefore, there was no reason on the part of the AO to make the disallowance. The assessee further submitted that it had interest free funds to advance the funds to its sister concern and therefore, there was also no reason to make any disallowance of interest expenditure while computing the income of the assessee.

“5. Decision: 5.1 It is apposite to refer to para 5 of the impugned order wherein the following has been recorded- “. . . . . .therefore, there is no cause for the assessee to charge less interest. Therefore, during the course of assessment proceedings, the AR was asked to explain the reason for giving loans and advances at lesser rate of interest then the rate of interest paid on funds borrowed. However, the AR could not give any valid reason and therefore, vide order sheet entry dt. 17.12.2018, it was conveyed to the AR that in absence of proper explanation for the difference in the rate of interest, the difference between interest paid and interest received requires to be disallowed. The AR also agreed to this disallowance. Accordingly, an amount of Rs. 80,21,369/- is disallowed and added to the total income of the assessee.” 5.2 As per provisions of sections 246A an appeal can be instituted only if the appellant is aggrieved by the order mentioned in that section. Order u/s 143(3) is one such order against which appeal can be filed. However, in case of an addition which has been agreed by the AR of the appellant at the time of assessment proceedings, it cannot be successfully argued that assessee is agreed by the order. In other words, no cause of action arises out of the impugned order. In deciding so, apart from the plain words of the Act itself, I rely upon the authority of Allahabad High Court in the case of Sterling Machine Tools vs. CIT 123 ITR 181 (All.), Madras High Court in the case of Ramanlal Kamdar vs. CIT 108 ITR 73 (Mad) and that of jurisdictional High Court of Bombay in the case of Rameshchandra & Co. vs. CIT 168 ITR 375 (Bom.). In view of the above the present appeal is rejected at its threshold.

5.3 As the appeal has been rejected decision on individual grounds of appeal is not required.”

6. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

7.1 Referring to the decision of Pune Bench of the Tribunal in the case of DCIT Vs. M/s. Phadnis Clinic Pvt. Ltd. in order dt. 21.09.2022 for the A.Y. 2011-12, he submitted that in this case also the addition was agreed by the AR of the assessee. The Tribunal, referring to the decision in the case of Bharat Heavy Electricals Ltd. Vs. Mahendra Prasad Jakhmola & Ors in Civil Appeal Nos. 1799 to 1800 of 2019 wherein the Hon’ble Supreme Court has held that concessions on mixed questions of fact and law cannot decide cases as the evidence, as a whole has to be weighed and inferences drawn therefrom, deleted the addition made by the AO on the ground that AO cannot preclude the assessee to agitate the same issue in appeal.

1799 to 1800 of 2019 has held that concessions on mixed questions of fact and law cannot decide cases as the evidence, as a whole has to be weighed and inferences drawn therefrom.

Arumugam Vs. S. Rajgopal reported in (1976) 1 SCC 863 has held that a question involving mixed question of law and fact and a concession made by the party on such a question at the stage of argument before the High Court, cannot preclude him from re- agitating it in the appeal before the Supreme Court.

“8. Heard both the parties and perused the material available on record. The ld. DR vehemently contended that the assessee has no right to agitate before the CIT(A) as well as this Tribunal regarding the disallowance made by the AO on account of interest payment. We note that according to ld. DR that the assessee itself agreed for the disallowance before the AO and is precluded from contesting the issue before the authorities challenging the same. The ld. AR placed on record the decision of Hon’ble Supreme Court in the case of Bharat Heavy Electricals Ltd. (supra) wherein the Hon’ble Supreme Court observed that concessions on mixed questions of fact and law cannot decide cases as the evidence as a whole has to be weighed and inferences drawn therefrom. We note, further, the Hon’ble Supreme Court referred to a decision in the case of Swami Krishnanand Govindananad Vs. Managing Director, Oswal Hosiery (Regd.) reported in (2002) 3 SCC 39 which held, even a concession on facts disputed by a respondent in its written statement cannot bind the respondent, on an occasion, that the statement made by the counsel cannot be accepted as an admission so as to bind the respondent. Further, the Hon’ble Supreme Court referred to a decision in the case of C.M. Arumugam Vs. S. Rajgopal reported in (1976) 1 SCC 863 which held that a question involving mixed question of law and fact and a concession made by the party on such a question at the stage of argument before the High Court, cannot preclude him from reagitating it in the appeal before the Supreme Court. The relevant portion of the findings of the Hon’ble Supreme Court reads as under: “What is clear from the evidence that was led by the parties is that the aforesaid gate passes were issued, as has been stated by the appellant’s witness, only at the request of the contractor for the sake of safety and also from the administrative point of view. The idea was security, as otherwise any person could enter the precincts of the factory. This evidence was missed by the Labour Court when it arrived at a conclusion that a direct relationship ought to be inferred from this fact alone. Further, as has been correctly pointed out by Shri Sudhir Chandra, the appellant has, not only in the first review, but also in the writ petition filed, taken the plea that no such concession was ever made. Moreover, quite apart from this plea and the counter plea of Ms. Jain that the person who has made such concession should have stated that he did not do so, concessions on mixed questions of fact and law cannot decide cases as the evidence as a whole has to be weighed and inferences drawn therefrom.

Even a concession on facts disputed by a respondent in its written statement cannot bind the respondent. Thus, in Swami Krishnanand Govindananad v. Managing Director, Oswal Hosiery (Regd.) [(2002) 3 SCC 39, this Court held:

“2. ……. It appears that when the case was posted for trial, the learned counsel appearing for the respondent conceded the facts disputed by the respondent in his written statement before the Court. That statement of the advocate was recorded by the Additional Rent Controller thus: “The respondent’s learned counsel has admitted the ground of eviction and also the fact that the applicant is a public charitable institution and for that purpose it required the premises.” ……….

3. ………. Whether the appellant is an institution within the meaning of Section 22 of the Act and whether it required bona fide the premises for furtherance of its activities, are questions touching the jurisdiction of the Additional Rent Controller. He can record his satisfaction only when he holds on these questions in favour of the appellant. For so holding there must be material on record to support his satisfaction otherwise the satisfaction not based on any material or based on irrelevant material, would be vitiated and any order passed on such a satisfaction will be without jurisdiction. There can be no doubt that admission of a party is a relevant material. But can the statement made by the learned counsel of a party across the Bar be treated as admission of the party? Having regard to the requirements of Section 18 of the Evidence Act, on the facts of this case, in our view, the aforementioned statement of the counsel for the respondent cannot be accepted as an admission so as to bind the respondent. Excluding that statement from consideration, there was thus no material before the Additional Rent Controller to record his satisfaction within the meaning of clause (d) of Section 22 of the Act. It follows that the order of eviction was without jurisdiction.”

Equally, where a question is a mixed question of fact and law, a concession made by a lawyer or his authorised representative at the stage of arguments cannot preclude the party for whom such person appears from re-agitating the point in appeal. In ‘C.M. Arumugam v. S. Rajgopal’ [(1976) 1 SCC 863], this Court held:

“8. ………. That question is a mixed question of law and fact and we do not think that a concession made by the first respondent on such a question at the stage of argument before the High Court, can preclude him from reagitating it in the appeal before this Court, when it formed the subject-matter of an issue before the High Court and full and complete evidence in regard to such issue was led by both parties……….” It would be perverse to decide based only on a concession, without more, that a direct relationship exists between the employer and the workmen. Equally perverse is finding that the extended definition of ‘employer’ contained in the Act would automatically apply. The extended definition contained in section 2(i)(iv) of the Uttar Pradesh Industrial Disputes Act reads as follows: “2. Definitions. ………………………………………………………………… ………………………………………………………………… …………………………

(i)’Employer’ includes- ………………………………………………………………… ………………………………………………………………… ………………………… (iv) where the owner of any industry in the course of or for the purpose of conducting the industry contracts with any person for the execution by or under such person of the whole or any part of any work which is ordinarily part of the industry, the owner of such industry;”

9. Therefore, the finding rendered by the Hon’ble Supreme Court in the case of Bharat Heavy Electricals Ltd. (supra) by referring to decisions in the cases of Swami Krishnanand Govindananad (supra) and C.M. Arumugam (supra) is applicable to the facts on hand and we hold a concession made by the authorized representative before the AO in the assessment proceedings cannot preclude the assessee in reagitating the same point in the appeal. Therefore, we are unable to accept the contention of ld. DR in submitting that the assessee has no role to challenge the disallowance made on the admission of assessee before the CIT(A).”

Builders (supra) has held that where the funds are advanced by the holding company to its subsidiary and even if interest was not charged, advancing of funds to the wholly owned subsidiary would be for commercial expediency and no disallowance of interest is warranted.

“12. 1 have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.10,88,438/- u/s 36(1)(iii) of the Act on the ground that the assessee has diverted its interest bearing funds towards non- interest bearing advances to a related concern. I find, the ld.CIT(A) upheld the action of the AO disregarding the argument of the assessee that loan had been advanced on account of commercial expediency and, therefore, no disallowance could be made in the light of the decision of the Hon'ble Supreme Court in the case of SA Builders Ltd. (supra). It is the submission of the Id. Counsel that when the assessee has borrowed money and invested the same in its subsidiary companies with a view to acquire control of a new asset, such interest paid on borrowed capital has to be allowed u/s 36(l)(iii) of the Act.

13. I find merit in the above arguments of the Id. Counsel for the assessee. The Hon'ble Delhi High Court in the case of Tulip Star Hotels Ltd. {supra) has held that where assessee is engaged in the business of owning, renting and managing hotels, borrowed money and invested the same in iis subsidiary company with a view to acquire control of a new hotel, such interest paid on borrowed capital is allowable u/s 36(1)(iii) of the IT Act, 1961. 14. 1 find, the Hon'ble Bombay High Court in the case of Reliance Communications Infrastructure Ltd. (supra) has held that where the assessee, for furthering its business had utilized borrowed funds for making investments in its subsidiary company and for making interest free advances to a related company, no disallowance of interest paid on borrowed funds could be made. I find, the Hon'ble Supreme Court in the case of Hero Cycles (P.) Ltd. (supra) has held that once it is established that there is nexus between expenditure and purpose of business, Revenue cannot justifiably claim to put itself in the arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The various other decisions relied on by the Id. Counsel for the assessee in the case law compilation also supports the case of the assessee to the proposition that where interest free advances made to a wholly owned subsidiary company, no disallowance of interest paid on borrowed fund could be made. Since, in the instant case, admittedly, the assessee has extended funds to its wholly owned subsidiary company for the purpose of business, therefore, in view of the decisions cited supra, I hold that no interest paid on borrowed funds could have been disallowed u/s 36(1)(iii) of the IT Act, 1961. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 10,88,438/- . The grounds raised by the assessee are accordingly allowed”.

Builders (supra) and the decision of Delhi Bench of the Tribunal in the case of Moonrock Hospitality (P) Ltd. Vs. ACIT (supra) we are of the opinion that no disallowance of interest paid on borrowed funds could have been disallowed. We, therefore, set-aside the order of the CIT(A) and direct the AO to delete the addition.

Grounds raised by the assessee are accordingly allowed.

Order pronounced in the open Court on 23.07.2024.