M/S. EVEREST INFRA ENERGY LTD.,NAHARLAGUN vs. JOINT COMMISSIONER OF INCOME TAX, RANGE - TEZPUR, TEZPUR

The ld. Counsel for the assessee submitted that, interest free loans have been given in due course of business and there was a commercial expediency to give such loan and, therefore, no disallowance of interest is called for. It was also submitted that, the main business of the assessee is construction. The amount given to M/s. Govinda Eastern Developers (P) Ltd. of Rs.4,87,36,847/- was to acquire the land for the company at Kolkata and a sum of Rs.9.8 Crores and Rs.1.13 Crores were given to Sigma Steel & Engineers Pvt. Ltd. & Horizon Hi Tech Engion Limited, for the outstanding against the bills raised for work executed for these two companies.

Per contra the ld. D/R vehemently argued supporting the findings of both the lower authorities.

We have heard rival contentions and perused the material available on record. The issue raised by the assessee is regarding disallowance of interest paid on borrowed funds which are given as interest free advances. Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (Appeals) [(2007) (SC) of 2006], has held as under:- “Interest deduction can be claimed even when the monies borrowed has been given to its sister concern an interest free loan if it was commercially expedient to do so. That the expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business of profession. It has been repeatedly held by the Apex Court that the expression “for the purpose of business” wider in scope than the expression “for the purpose of earning profits”.

On perusal of the finding of the Hon’ble Supreme Court, the important aspect is the term “commercial expediency”. It is not in dispute that the assessee has given interest free advances to certain related parties and it is also not in Assessment Year: 2012-13 M/s. Everest Infra Energy Limited 3 dispute that the assessee has utilized such borrowed funds for giving the advances. This fact has been rightly incorporated by the ld. Assessing Officer in the assessment order wherein, the total share capital, reserve & surplus and trade payables and other liabilities are of Rs.52,82,44,606/- and total assets are worth Rs.111,41,20,264/- and so, the difference are not borrowed funds. Even the assessee has not disputed this fact that the disallowance of interest expenditure made by the Assessing Officer is on account of giving interest bearing funds as interest free advance to the following concerns:-

We further notice that the ld. CIT(A) after going through the facts of the case, the interest free loans given by the assessee has confirmed the action of the Assessing Officer, observing as follows:- “I have gone through the above submissions of the Appellant and have considered the facts and evidences on record with regard to the disallowance of proportionate interest of Rs. 1,17,10,374/-, on loans & advances, given interest free to sister concerns by the Appellant. I would like to state that the Act permits deduction of interest on the loans borrowed by an assessee provided the amount is borrowed for the purpose of business. Thus, If the amount is borrowed for any purpose other than the business, the deduction of interest is not allowed. In the present case, the Appellant had borrowed funds from bank and paid interest on the same. The Ld. AO did not dispute the factum of borrowing of loan or the liability to pay interest. However, he refused to allow deduction on the ground that the Appellant has advanced substantial amount to related parties without levying interest. From that fact, the Assessing Officer inferred that the amount from the financial institution Assessment Year: 2012-13 M/s. Everest Infra Energy Limited 4 was not borrowed by the Appellant for its business and on the other hand, the real beneficiary were the related parties. I find that the AO's contention that advance was made out of the borrowed funds has credible basis and the Ld. AO had drawn up a detailed chart showing the utilization of the funds of the Appellant as well as availability of interest free funds with the Appellant and thus, the Ld. AO had brought out in detail, a clear-cut nexus between the borrowed funds and the funds advanced. The AO also duly recorded a finding that interest free advances were given to the sister concerns for non-business purpose. It would be pertinent to here judgment rendered in the case of S.A.Builders Ltd. Vs. CIT (Appeals) [(2007) (SC) of 2006) wherein the Hon'ble Supreme Court has held as follows: "Interest deduction can be claimed even when the monies borrowed has been given to its sister concern an interest free loan if it was commercially expedient to do so. That the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business of profession. It has been repeatedly held by the Apex Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". I further find that the Appellant had not been able to prove as to what was the commercial expediency for giving interest free advances to its subsidiary and sister concerns. It is not clearly established by the Appellant as to whether interest free advances were being made solely to the related parties or sister concerns OR also to other unrelated parties or other such concerns. From the above factual position based on the submission of the Appellant, it is noted that the Appellant had granted interest free advances to M/s Govinda Eastern Developers Pvt. Ltd. It is also noted that the Appellant had extended the advance to the said concern so in order to acquire the land of the Company located at Rajarhat, Kolkata and that the Appellant had taken possession of the said land. Thus, clearly interest has been paid w.r.t. acquisition of a capital asset prior to the said capital asset being put to use and therefore the interest cost in regard thereof is liable to be disallowed in view of Explanation to Section 36(1)(iii) of the Act. I further note that the Appellant had also granted interest free loans to two other parties namely, M/s. Sigma Steel Engineers Pvt. Ltd and M/s. Horizon Hitech Engicon Limited. However, it is noted that, the Appellant has not been able to prove conclusively on record the commercial expediency of extending interest free advances or long credit periods to sister concerns more-so, when as per a Comprehensive fund utilization chart provided by the Ld. AO, the owners' equity of the Appellant is already blocked in the fixed assets. The Appellant has, except for Assessment Year: 2012-13 M/s. Everest Infra Energy Limited 5 contending that the amounts were outstanding against the bill raised for the work executed for M/s. Sigma Steel Engineers Pvt. Ltd, had not placed on records any evidence or documents so as to put forth its contentions. Even presuming any such bills were there, it is not clearly brought out from the above narration as to what was the purported work which was carried out by the said sister concerns for M/s Sigma Steel Engineers Pvt. Ltd, what was the business purpose of getting the said work executed for M/s Sigma Steel Engineers Pvt. Ltd etc. Accordingly, it is held that the ratio of decisions relied upon by the Appellant are not applicable to its case and that the Appellant had failed to prove the commercial expediency of the advances made free of interest to its sister concerns. As such, the impugned disallowance of Rs.1,17,10,374/-made by the Ld. AO is, hereby, upheld and this ground of appeal of the Appellant is, accordingly, dismissed.

Now, going through the above findings as well as the observation of the Assessing Officer and the submissions of the assessee, we find that the assessee has not specified the commercial expediency part in all the above stated three advances. As far as the amount given to M/s. Govinda Eastern Developers Pvt. Ltd., is concerned, which is claimed to have been given for acquiring a land, nothing has been brought on record to show that whether this land was acquired as part of the project of the assessee company or was part of an investment in an immovable property. The onus is on the assessee to show that this deal was for commercial expediency purposes and the said sum was part of the stock in trade for the land so purchased. Even after being provided various opportunities by the lower authorities, the assessee failed to provide any details for the reason for such interest free advances. Similarly, for the amount paid to M/s. Sigma Steel Engineers Pvt. Ltd and M/s. Horizon Hitech Engicon Limited, the assessee has merely mentioned that outstanding amounts for work executed. We fail to understand that if it was an outstanding against the work executed then, it should be a part of the current liability which the assessee has to pay and in case it is not an outstanding and given as an interest free advance for a work contract then, where are such work contract agreements. Neither before the ld. Assessing Officer nor before the ld. CIT(A), the assessee has been able to furnish any such details. Even before us also, Assessment Year: 2012-13 M/s. Everest Infra Energy Limited 6 general submissions have been made that the amounts have been utilized for commercial expediency purposes. It is for the assessee to prove that it is a part of commercial expediency and such interest free advance are given for the purpose of business and profession and if the assessee fails to satisfy then, the assessee cannot escape from such disallowance of interest expenditure which are in the instant case where the assessee has borrowed funds, paid interest thereon claimed it as an expenditure and used the interest bearing funds for making interest free advances. We, therefore, fail to find any infirmity in the finding of the ld. CIT(A) and the same is confirmed.

In the result, appeal of the assessee is dismissed.

""यथ" / The Respondent 3. संबंिधत आयकर आयु" / Concerned Pr. CIT 4. आयकर आयु" अपील / The CIT(A)- ( ) 5. िवभागीय "ितिनिध अिधकरण अपीलीय आयकर कोलकाता/DR,ITAT, Kolkata, , , 6. गाड" फाईल /Guard file.