VINCA DEVELOPERS P.LTD,MUMBAI vs. DCIT 8(3), MUMBAI

आदेश / O R D E R Per Sandeep Gosain, J. M.: The Present Appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)- 18, dated 25.07.2014 for A.Y. 2010-11 on the following grounds of appeal.

(A.Y. 2010-11) Vinca Developers Private Limited vs. DCIT rights in relation to land situated at Bhandup. In this regard, the assssee was asked to show cause as to why interest attributable to this interest free advance of Rs.13.56cr to Ackruti City Ltd should not be disallowed. In this context the assessee made submissions that the company has given advance of Rs.10,61,00,000/- to M/s. Ackruti City Ltd for acquiring development rights of property. In addition a sum of Rs. 2,94,85,000/- was also spend on stamp duty and registration charges for getting development agreement dated 31.12.09 registered between the assessee and M/s. Ackruti City Ltd . The assessee further submitted that the company has given advances to Ackruti City Ltd out of funds received from equity shareholders towards share allotted during the year. The explanation so offered was rejected by the AO and it was held that since there is no business during the relevant previous year and the only receipt declared by the assessee is interest on debentures of Rs.6,16,51,506/- and the assessee has debited interest of Rs.9,45,91,715/- to its P& L A/c in receipt of its borrowings, while on the other hand assessee has advanced interest free loan to Ackruti City Ltd. This being so, the AO held that interest charges @ 12% on the aggregate loan of Rs.13,55,88,000/- to Ackruti City Ltd was disallowed and added back to the total income of the assessee.

(A.Y. 2010-11) Vinca Developers Private Limited vs. DCIT 3. Aggrieved by the order of the AO, assessee filed appeal before the CIT(A) and the CIT(A) after considering the submissions made by the assessee and restricted the interest at the rate of 12% on Rs.1,06,68,050/- and the total of which works out to Rs.12,80,166/- and the detailed reasoning for coming to the conclusion has been mentioned by the CIT(A) at para no. 1.3 which is reproduced below:

“1.3, I have considered the submissions of the appellant order of the AO and facts of the case carefully it is noticed that the assessee has made Interest-free advance of Rs 13,55,85,000/ to MIs. 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 A0 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. 13,55.85.0001- to MIs. Ackruti City Ltd which cannot be claimed as advance made out of the share capital amounting to Rs. 12,51.24,390/-. In view of these facts, the A.O, has computed the interest @ 12% on the 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 he submitted that the interest- free loan to Group Company was made out of the share capital of Rs 12,51.24.3901- 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 interest-free loan W8S given out of its own funds therefore. The disallowance made by the A.O 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 assesses nas a snare capital 0 Rs. 12 51 24,390/- and unsecured loan of Rs 2.78.4992,560/-,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 M/s. Ackruti City Ltd

(A.Y. 2010-11) Vinca Developers Private Limited vs. DCIT of Rs 13,55,85,000/-. Thirdly, 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. To 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. 12,51,24,390/- the assessee has given advance to M/s. Ackruti City Ltd. of Rs. 1.3,55,85,000/- which means the assessee has made advances to the tune of Rs. 1,06,68,050/-~ of the borrowed fund91.04.60,610 + 2,07,440). From the perusal of the submissions and facts it is clear that the assessee has made advances to M/s. Ackruti City Ltd. of Rs. 13,55,85,000/- which was not entirely from the share capital of Rs. 12.51.24,390/- but the balance amount of Rs. 1,04,60,6101- was out of the unsecured loans or overdraft from the bank. The amount of Rs, 2,07,440/· 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. 1,04,60,6101- and Rs, 2,07,440/- totaling to Rs. 1,06,68,050/-, therefore, the interest @ 12% on Rs. 1,00,68,050/- works out to Rs. 12,80,166/-.

In support of this view, various hon'ble courts are held as under:- (a) Hamra) 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 interest 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 produce 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) CIT vs Bhart/ Televenture Ltd - The Revenue preferred appeals against the order of the CIT(A) In all the three cases before Tribunal

(A.Y. 2010-11) Vinca Developers Private Limited vs. DCIT 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; the: 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 assessee company Wrongly debited to its P&L account, the amount of interest towards acquisition of capital asset and that the expenditure incurred was not for the business purpose of the assessee. (d) CIT VS. Sridev Enterprises – Sec. 36(1)(iii) of the I.T. Act- interest on borrowed capital- Assessment year 1978-79- During relevant account 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 assessee and N were interrelated and held 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 AO is restricted to Rs.12,80,166/- and the balance addition is deleted, hence ground of appeal is partly allowed.”

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

(A.Y. 2010-11) Vinca Developers Private Limited vs. DCIT 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.