Is deduction under section 36 (1)(iii) for interest paid allowable when the relevant borrowed capital was given as interest free advance to sister concern for business expediency of the assessee. ITAT Jaipur passed the order on 11th Sept;2020 in the case of Kalya Awas Vikas (P). Ltd. v. ACIT
क्या उस ब्याज के खर्चे की छूट मिल सकती है जब वह उधार लिया गया फंड करदाता अपनी सिस्टर कंसर्न को बिना ब्याज इस आधार पर दे देता है की करदाता के व्यापार की आवश्यकता है?
Full order
IN THE ITAT, JAIPUR BENCH
RAMESH C. SHARMA, A.M. & SANDEEP GOSAIN, J.M.
Kalya Awas Vikas (P). Ltd. v. ACIT
ITA Nos. 327, 328 and 329/JP/2019 11 September, 2020
Assessee by: S.L. Poddar, Advocate
Revenue by: B.K. Gupta, CIT DR
ORDER
Ramesh C. Sharma, A.M.
These three appeals have been filed by the assessee against the common order of the learned Commissioner (Appeals)-4, Jaipur dated 27-2-2019 for the assessment year 2012-13 to 2014-15 in the matter of order passed under section 143(3) read with section 153 of the Income Tax Act (assessment year 2012-13 & 2013-14) and in the matter of section 143(3) read with section 153B(1)(b) of the Income Tax Act (assessment year 2014-15). The grounds of appeal raised by the assessee are as under :–
ITA No. 327/JP/2019 — Assessment Year 2012-13
(i) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in the passing the order under section 143(3)/153A of the Income Tax Act 1961 which is void ab-initio deserves to be quashed.
(ii) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in giving the findings that the development agreement was not filed before the assessing officer and shame was additional evidence.
(iii) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in not providing opportunity before rejecting the additional evidences filed in paper book.
(iv) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the disallowing of Rs. 13,26,273 (4888257-3561984) out of interest payment.”
(i) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in the passing the order under section 143(3)/153A of the Income Tax Act, 1961 which is void ab-initio deserves to be quashed.
(ii) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in giving the findings that the development agreement was not filed before the assessing officer and shame was additional evidence.
(iii) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in not providing opportunity before rejecting the additional evidences filed in paper book.
(iv) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the disallowing of Rs. 26,33,585 (11382824-8749239) out of interest payment.”
(i) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in the passing the order under section 143(3)/153A of the Income Tax Act, 1961 which is void ab-initio deserves to be quashed.
(ii) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in giving the findings that the development agreement was not filed before the assessing officer and shame was additional evidence.
(iii) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in not providing opportunity before rejecting the additional evidences filed in paper book.
(iv) In the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the disallowing of Rs. 30,24,273 (11595907-8571634) out of interest payment.”
- Due to prevailing COVID-19 pandemic condition, the hearing of the appeal is concluded through video conference. Rival contentions have been heard and record perused. Common grievance of assessee in all the years pertain to disallowance of interest expenditure. Facts in brief are that the assessee is private limited company and is engaged in the business of construction and real estate development. Return for the assessment year 2012-13 was filed on 29-9-2012 declaring total at Rs. 16,79,160. Subsequently a search was conducted in the group case of Rajendra Jain and other on 23-5-2013. Notice under section 153A of the Act issued on 30-9-2014, in response to notice under section 153A of the Act, the assessee furnished return of income declaring same income at Rs. 16,79,160 on 10-11-2014 as filed originally on 29-9-2012. The assessing officer has completed the assessment under section 143(3)/153A of the Act determining total income at Rs. 30,05,430 inter alia making the addition of Rs. 13,26,273 on account of disallowance of interest. Similarly, disallowance of Rs. 26,33,585 was made for the assessment year 2013-14 and Rs. 30,24,273 for the assessment year 2014-15.
- By the impugned order, the learned Commissioner (Appeals) has confirmed the disallowances, against which the assessee is in further appeals before the ITAT.
- It was argued by the learned AR of the assessee that the assessing officer has erred in passing the order under section 153(3) read with section 153A of the Act. It was argued that during the course of search no incriminating material was found which could justified the action of issuing notice under section 153A. The entire assessment order also does not disclose reference to any material found with the assessee during the course of search. The addition has been made exclusively on the basis that the assessee has made interest free advances to its sister concern whereas this money was advanced for business purposes. These transactions were also disclosed in the books of the account of the assessee. Therefore, the assessing officer erred in law in issuing notice under section 153A of the Act. For this purpose, reliance was placed on the following judicial pronouncements :–
(i) Anil Kumar Bhatia v. Assistant Commissioner of Income Tax (2010) 1 ITR (Trib) 484 (Del) : 2010 TaxPub(DT) 1258 (Del-Trib)
(ii) Singhad Technical Education Society v. ACIT (2011) 57 DTR 241 (Pune) : 2011 TaxPub(DT) 2191 (Pune-Trib)
(iii) LMJ International Ltd. v. DCIT (2008) 14 DTR 540 (Kol-Trib) : 2008 TaxPub(DT) 1401 (Kol-Trib)
(iv) ACIT v. Gambhir Silk Mills (2010) 6 ITR 376 (Ahm.-Trib) : 2010 TaxPub(DT) 1447 (Ahd-Trib)
- With regard to merit of disallowance, it was contended by the learned AR that the interest expenditure was incurred wholly and exclusively for the purpose of business and for the commercial expediency in so far as advances were given to the sister concerns, whose project was undertaken by the assessee for implementation.
- On the other hand, the learned DR has contended that no development agreement was filed before the assessing officer to justify commercial expediency, accordingly, the assessing officer was justified in declining the assessee’s claim of interest on the plea that the advance was given for non-business purposes.
- We have considered the rival contentions and carefully gone through the orders of the authorities below. From the record we found that during the course of assessment proceedings the assessing officer noticed that assessee has claimed expenditure on account of interest of Rs. 48,88,257 whereas the corresponding receipts on account of interest were only of Rs. 35,61,984. In the view of the assessing officer, the excess interest over and above the receipts of interest being of Rs. 13,26,273 was on account of interest free advances given the following sister concerns :–
(i) Shri Kalyan Realty Ltd. : Rs. 56,00,0000
(ii) Shri Kalyan Gem Exports Pvt. Ltd. : Rs. 2,21,00,000
During the course of assessment proceedings it was submitted before assessing officer that the loans advanced to these sister concerns were on account of business expediency. The assessee was having business stakes in these business concerns. A copy of the reply submitted before the assessing officer is available on paper book page no. 1 to 4. However, the assessing officer disallowed the interest paid over and above the interest received and thus made an addition of Rs. 13,26,973.
- After going through the development agreement, we found that the assessee concern has advanced loan to Shri Kalyan Realty Ltd. and Shri Kalyan Gem Exports Pvt. Ltd. for conducting business. The loans have been advanced under development agreements with both these concerns executed on 3-9-2011. Copies of these development agreements which are duly notarized are available on paper book page number 5 to 24. As per terms of agreement copy of which is available on paper book as cited supra the assessee agreed to develop a plot of land measuring 3319.27 sq.meter situated at K. No. 952 & 787, Village Sawai Gator Jaipur under the agreement that assessee was to act as a developer and was required to develop a project comprising of multi-storied commercial and residential complex. It was under this agreement that assessee paid a sum of Rs. 56 Lacs to Shri Kalyan Realty Ltd. on 3-9-2011 as a security deposit. This was done in compliance of para 4.1 of the development agreement. As per this para the assessee was required to pay interest free refundable security deposit of Rs. 56,00,000 to the owner of the land in lieu of the owner granting license for carrying out the development project. Thus, the advance made by the assessee was wholly and exclusively for the purposes of business. In view of these facts the assessing officer was not justified in making any disallowance out of interest payment.
- Development Agreement with Kalyan Gems Export Ltd. has been executed on 3-9-2011. As per terms of this agreement, copy of which is available on paper book as cited supra the assessee agreed to develop a plot of land measuring 2994.62 sq. meter situated at K. No. 184 & 185/685, Village Manoharpura, Tehsil Sanganer, Jaipur the agreement that assessee was to act as a developer and was required to develop a project comprising of multi-storied commercial and residential complex. It was under this agreement that assessee paid a sum of Rs. 2,21,00,000 Lacs to Shri Kalyan Realty Ltd. on 3-9-2011 as a security deposit. This was done in compliance of terms at para 4.1 of the development agreement. As per this para the assessee was required to pay interest free refundable security deposit of Rs. 2,21,00,000 to the owner of the land in lieu of the owner granting license for carrying out the development project. Thus, the advance made by the assessee was wholly and exclusively for the purposes of business. The development agreements establish beyond doubt that the amount advanced to both the concerns was under business agreements, therefore there is no occasion for making any disallowance of interest. For this purpose, reliance may be placed on the following judicial pronouncements :–
(a) CIT v. Shahibag Entrepreneurs (P) Ltd. (1995) 215 ITR 810 (Guj) : 1995 TaxPub(DT) 0228 (Guj-HC)
Purpose must be to keep the trade going – The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any capacity other than that of a trader.
(b) R.B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT (1971) 81 ITR 34 (Bom.) (FB) : 1971 TaxPub(DT) 0262 (Bom-HC), F.E. Dinshaw Ltd. v. CIT (1959) 36 ITR 114 (Bom.) : 1959 TaxPub(DT) 0204 (Bom-HC)/Delhi Cloth & General Mills Co. Ltd. v. CIT (1972) 85 ITR 261 (Delhi) : 1972 TaxPub(DT) 0251 (Del-HC)
Purpose need not be to increase profits or to directly benefit the business – The allowance contemplated is not necessarily an allowance for amounts expended to increase profits only, so long as it is for the purpose of the business. It is not also necessary that profits should be earned by such expenditure, nor is it necessary that it should be expended directly for the purposes of business so long as the business indirectly profits.
(c) Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) : 1979 TaxPub(DT) 1021 (SC)
Borrowing must be for the purpose of business: The expression “for the purpose of business” occurring in section 36(1)(iii) is wider in scope than the expression “for the purpose of making of earning income”
(d) CIT v. Sales Megnesite (P) Ltd. (1995) 214 ITR 1 (Bom) : (1995) 81 Taxman 33 (Bom.) : 1995 TaxPub(DT) 0796 (Bom-HC)
Commercial expediency must be decided from businessman’s point of view – Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary or commercially expedient or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue.
(e) S.A. Builders Ltd. v. CIT (2007) 158 Taxman 74 (SC) : (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 0833 (SC)
The decision relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of business”. It has been consistently held in decision relating to section 37 that the expression ‘for the purpose of business’ includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The expression ‘commercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. The ratio of the Supreme Court decision, in Madhav Prasad Jatia v. CIT AIR 1979 SC 1291 : 1979 TaxPub(DT) 1021 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency, if interest thereon is sought to be allowed under section 36(1)(iii).
The assessee borrowed funds from bank and advanced part of it to its sister concern (a subsidiary) as interest-free loan. The assessing officer disallowed interest under section 36(1)(iii) on the borrowings to the extent those were advanced to the subsidiary. The Tribunal as well as the High Court upheld the order of the assessing officer.
Held that in the instant case, neither the High Court nor the tribunal and other authorities had examined whether the amount advanced to the sister concern was by way of commercial expediently. The High Court and other authorities should have examined the purpose for which the assessee advanced the money to it’s sister concern, and what the sister concern did with the money, in order to decide whether it was for commercial expediency but that had not been done.
It is not in every case that interest on borrowed money has to be allowed if the assessee advanced it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances, where holding company has a deep interest in its subsidiary and the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans.
- Considering the proposition of law laid down in the above judicial pronouncements and applying the same to the facts of the instant case, we do not find any merit in the disallowance so made by the assessing officer in the assessment year 2012-13, 2013-14 and 2014-15. Hence, we direct the assessing officer to delete the same.
- In the result, all these three appeals of the assessee are allowed.