INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "C": NEW DELHI
BEFORE SHRI J.S.REDDY, ACCOUNTANT MEMBER
AND
SHRI A. T. VARKEY, JUDICIAL MEMBER
ITA No. 4617/Del/2011
(Assessment Year: 2002-03)
HB Estate DCIT,
Developers ltd, Circle-12(1),
H-72, Connaught Vs. New Delhi
Circus, New Delhi.
(Appellant) (Respondent)
Appellant by : Sh.Amit Goel, Adv
Respondent by : Sh. Satpal Singh, Sr. DR
Date of Hearing 30.12.2014
Date of pronouncement 26.03.2015
ORDER
PER A. T. VARKEY, JUDICIAL MEMBER
This is an appeal filed by the Assessee is directed against the Order of
the Ld. CIT(A)-VIII, New Delhi dated 04/8/2011 pertaining to assessment year
2002-03.
2. The Assessee has raised the sole ground in its Appeal:-
"On the facts and circumstances of the case and in law, the
CIT(A)erred in confirming the action of AO of making the disallowance
of Rs. 175,51,634/- on account of interest. On the facts and
circumstance of the case and in law, the CIT(A) should have deleted
the addition / disallowance made by the AO. "
3. The facts in brief are that in this case return of income was filed by the
assessee on 30.10.2002 declaring loss of Rs. 50713667/-. The case was
selected and order dated 30.3.2015 under section 143(3) was passed
completing the assessment at an assessed loss of Rs. 26804110/-. Thereafter,
an order dated 22.3.2007 was passed under section 263 of the Income Tax
Act, 1961 (herein after the `Act') by the Commissioner of Income, Delhi-IV,
New Delhi vide which the assessment was set aside on the issue of allowability
of deduction for interest amounting to Rs. 175.27 lakhs paid on borrowed
ITA NO. 4617/Del/2011
funds utilized in advancing interest free loans to a sister concern. In view of
the order passed under section 263 setting aside the assessment on the
aforesaid issue, a notice dated 12.10.2007 was issued to the assessee giving it
an opportunity to place evidence and arguments in support of its claim in
respect of the aforesaid issue. In response thereto, Ld. Counsel of the
assessee appeared before the AO from time to time. Assessing Officer on
perusing the balance sheet and the P&L A/c of the assessee was of the
opinion that the assessee had taken loans amounting to Rs. 180089042/- as
on 31.3.2002 on which interest amounting to Rs.17551634/- had been paid. It
was further seen that the assessee had advanced loans amounting to Rs.
518123177/- on which no interest had been earned. So according to AO, It
was a clear cut case wherein interest bearing loan had been diverted as
interest free loans given. Thus AO was of the opinion that the assessee had
used the interest bearing loans funds for non business purposes. Therefore,
AO observed that prima facie the interest paid in respect of the loans taken
was not allowable. In this regard, assessee filed its reply and submitted the
requisite details, before the AO. The AO after going through the reply and
submissions has observed that it is seen that the assessee has also given
interest free loans of Rs. 518123177/- These loans have been given to the
sister concerns of the assessee.So the AO was of the opinion that It is clear
from the above that the assessee on one hand has raised interest bearing
funds and bearing interest cost on it and on the other hand it is advancing
funds to its sister concerns on which no interest is being charged by it. Thus
he observed that the interest bearing loans taken have been diverted as
interest free loans and held that the interest cost pertaining to these loans /
advances, which are not for the business purpose of the assessee is not
allowable to it. And since the assessee is not maintaining segregate accounts
of its funds invested in the business and those given for the non business
purpose therefore, the interest expenses pertaining to loan and advances
given by the assessee for non business purpose are to be disallowed. The
interest expenses pertaining to interest bearing loans diverted as non interest
bearing loans and advances comes to Rs. 17551634/-. Therefore, the AO
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ITA NO. 4617/Del/2011
concluded that these expenses claimed by the assessee were disallowed
and added to its income.
4. Against the aforesaid order of the Ld. CIT(A), assessee appealed
before the Ld. CIT(A), who vide his order dated 4.8.2011 has upheld the order
of the Assessing Officer and sustained the addition in dispute.
5. Now the Assessee assessee is aggrieved against the Ld. CIT(A)'s order
and filed the present appeal before us.
6. At the threshold, Ld. Counsel of the assessee submitted that similar
disallowance has been dealt with by the AO in assessee's own case for the
assessment year 2003-04 wherein the AO has disallowed the interest of 40%
on estimate basis and in Appeal Ld. CIT(A) has entirely deleted the addition
on this account. And subsequently, the Department was in appeal before
the Tribunal for the asstt. year 2003-04, and Tribunal has upheld the order of
the Ld. CIT(A) on the deletion of the addition of interest. Hence, the Ld.
Counsel of the assessee stated that the similar issue has been dealt by the Ld.
CIT(A) as well as by the ITAT in assessee's own case in its favor, therefore, the
same may be followed in the present asstt. year 2002-03 and the additions
made by the AO and upheld by the CIT(A) may be deleted accordingly. In
support of his contention he submitted that the Assessing Officer has
disallowed the Interest & Finance Charges of RS.17551634/- on the ground
that on the one hand, the assessee company has paid interest on the loans
taken by it and on the other hand, the assessee company has given interest
free advances on which no interest has been charged. The Assessing Officer
has held that since the assessee is not maintaining seperate accounts of its
funds invested in business and those given for non-business purpose,
disallowance of interest is to be made. According to him the action of Ld.
A.O. in disallowance of interest is totally erroneous and the assessing officer
has failed to give consideration to actual position of the balance sheet of the
company. The Ld.A.O. has jumped to the conclusion without verifying the
non-interest bearing funds available with the company. The advances were
on account of commercial expediency and were out of owned funds of
company. Merely because no interest income has been received on
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ITA NO. 4617/Del/2011
advances given relating to real estate business, it will not make than for non-
business purposes so as to disallow the interest. Moreover, under any
eventuality the interest free funds available with the company are much
more than the interest free advances as per the balance sheet of company,
the financial position is as follows:-
Non-interest bearing funds available with the company i.e. owned
funds :-
Particulars As on 31.03.2002
Share Capital 123083123
Reserve & Surplus 59042225
Total inter fee fund 713505648
Interest bearing loan taken (Loan taken was 180089042
business loan against Mortgage of Real
Estate Properties held as Stock-in-Trade)
Loan & Advances given 518123177
7. From the above, according to the ld AR it is apparent that the
networth / non-interest bearing funds available with the company were
much more than the Loan & Advances given. In the last year no such
disallowance of interest was made and we find that the Inventories held by
the assessee company has reduced from Rs.47.79 cores to Rs.36.79 cores i.e.
by Rs.11 cores. The cash and bank balances have reduced from Rs.1.29
cores to Rs.0.40 cores i.e. by Rs.0.89 cores. And that the funds of Rs.11.89
cores released from the current assets became available as assessee own
interest free funds as submitted by them. So according to the ld AR, the loan
and advances given by the assessee were in usual course of business the
same were for business purposes. Therefore the assessee company is entitled
for deduction of entire interest paid. The ld AR further contended that even if
for argument sake it is presumed that some of the loan amount was used for
giving interest free advances, even then no disallowance of interest can be
made. In such as situation it is to be noted that the assessee could have
given advances by disposing of majority stock (part of which has actually
been disposed off). However as a prudent business man would do, the
assessee company in its business interest, did not opt for disposal of stock and
arranged funds from bank. The decision of not disposing off the stock was
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ITA NO. 4617/Del/2011
considered prudent as at that time the assessee company was not getting
the desired price and also. it would have resulted into the end of earning of
rental income on stock. It may be seen that during the year the assessee
company has earned rental income of Rs. 1,17,84,686/- which has been
offered as business income and also assessed as such and in the subsequent
years also, the assessee company has earned the rental income. In view of
the above the ld AR submitted that granting of interest free advances was on
account of commercial expediency.
8. The ld counsel relied on in the case of DCIT vs U.K. Paints (India) Ltd
(2010) 4 ITR (Trib) 455 (Del) disallowance of interest was made on the ground
that the assessee had advanced interest free advances. It was held that
Hon'ble Bench of jurisdictional tribunal that interest free funds available with
the assessee for exceeded the amount advanced by it as interest free loans
arid therefore disallowance of interest was to be deleted.
9. According to the ld counsel in the case of Commissioner of Income Tax
vs Reliance Utilities & Power Ltd. (2009) 178 Taxman 135 (Born) disallowance of
interest was made by the Assessing officer on the ground that the assessee
has utilized the borrowed funds for making investments. The contention of the
assessee was that it had sufficient interest free funds to cover the investments
made and therefore no disallowance was warranted. The CIT(A) as well as
ITAT allowed the claim of assessee and deleted the disallowance made by
A.O. The Hon'ble Bombay High Court upheld the order of tribunal by holding
that the principle therefore would be that if there are funds available both
interest free and overdraft and / or loans taken, then a presumption would
arise that investment would be out of interest free funds generated or
available with the company, if the interest free funds were sufficient to meet
the investments.
10. The counsel stated that in the case of Commissioner of Income Tax vs
Tin Box Co (2004) 135 Taxman 145 (Del) disallowance of interest was made on
the ground that the assessee has diverted the interest bearing funds for giving
interest free advances to sister concerns. The disallowance made was
confirmed by CIT(A). The matter went to tribunal which allowed the claim of
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ITA NO. 4617/Del/2011
the assessee. The department went into appeal before High Court. The
Hon'ble High Court dismissed the appeal of revenue and upheld the order of
tribunal on the ground that the interest free funds available with the assessee
much more than the interest free advances given by it. The Hon'ble Court
supplied specific emphasis on the following :-
"The capital of the firm and interest free unsecured loans with the
appellant far exceeds the amounts advanced to the sister
concerns in all the years under appeal a fact neither
controverted nor disproved by the learned departmental
representative also."
11. In the case of CIT vs Hotel Savera (J 997) 239 ITR 795, the assessee, a
partnership firm has advanced loan of Rs.l0,34,656/- to a sister concern. The
firm has borrowed funds on which interest was paid In addition to borrowed
funds, the assessee firm has credit balance of Rs. 10,95,010/- in Capital
Account of Partners. The Assessing Officer made the disallowance of interest
on the ground that since on the one hand, it had borrowed funds on interest
and on the other hand, it had given interest free advances. The matter was
carried to CIT(A), who held that interest free advances should be considered
as being given proportionally in the ratio of interest bearing and non-interest
bearing funds available with the company. Accordingly the appeal was
partly allowed and disallowance of interest was partly sustained and partly
deleted Thereafter matter was carried to tribunal. The tribunal held that since
the interest free funds available with assessee i.e. Rs.10,95,010/- (being credit
balance in capital and current account of partners) were more than interest
free advance of Rs.10,34, 656/- given to sister concern, no disallowance of
interest was warranted The Hon'ble Madras High Court upheld the view of
Tribunal.
12. Ld counsel further pointed out that the Learned author, Sampath
Iyenger in his book Sampath Iyengar's Law of Income Tax, 9th edition, at
Page No. 2349 observed as under :-
"For the same reason, a presumption appears to be permissible
that where the assessee has his own capital as also the borrowed
funds, the former rather than later to have been utilized for the
non-business or personal expenses".
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ITA NO. 4617/Del/2011
13. According to the ld counsel, in the case of Bishamber Dayal Badri
Prasad vs Inspecting Assistant Commissioner (1986) 18 ITD 279 (Delhi) TM, it
was held that since non-interest bearing funds with the assessee were far
more than interest bearing loans, there were no question of disallowance of
any part of the interest.
14. Ld counsel submitted that in the case of Herald Advertising Agency vs
ITO (1991) 39 TTJ (Del) 34, it was held that where there was no material to
show that there was any nexus between the advances made by the
assessee to a party without charging any interest and the borrowed funds of
the assessee on which interest was payable no disallowance could be made
on that account.
15. In view of the above, Ld. Counsel of the assessee submitted that the
appeal in dispute filed by the assessee may be allowed by following the
order of the ITAT passed in assessee's own case in the assessment year 2003-
04 on the identical and similar issue.
16. On the other hand, Ld. DR relied upon the order of the Revenue
authorities and requested that the same may be upheld.
17. We have heard both the parties and perused the records. In the
background of the aforesaid discussions and precedents relied upon the by
the assessee, we find considerable cogency in the submission of the assessee
that the ITAT 'C' Bench, New Delhi in assessee's own case for the assessment
year 2003-04 vide ITA No. 4211/Del/2010 vide order dated 13.7.2012 in
Revenue's appeal, has decided the issue of disallowance of Rs.81,65,658/-
on account of interest payee in favor of the assessee and against the
Revenue.
18. A perusal of the balance sheet of company, reveals the financial
position of the assessee company is as follows:-
Non-interest bearing funds available with the company i.e. owned funds :-
Particulars As on 31.03.2002
Share Capital 123083123
Reserve & Surplus 59042225
Total inter fee fund 713505648
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ITA NO. 4617/Del/2011
Interest bearing loan taken (Loan taken was 180089042
business loan against Mortgage of Real
Estate Properties held as Stock-in-Trade)
Loan & Advances given 518123177
19. From the above, we find that it is apparent the networth / non-interest
bearing funds available with the company were much more than the Loan &
Advances given. We find that the Inventories held by the assessee company
has reduced from Rs.47.79 cores to Rs.36.79 cores i.e. by Rs.11 cores. The cash
and bank balances have reduced from Rs.1.29 cores to Rs.0.40 cores i.e. by
Rs.0.89 cores.
20. Thus we find that the funds of Rs.11.89 cores released from the current
assets became available as assessee own interest free funds as submitted by
them.
21. The Hon'ble Supreme court in the case of S A Builders Ltd. vs CIT (158
Taxman 74) has held that if the borrowed funds are lent to a sister concern
interest free as a measure of commercial expediency, the interest paid on
the borrowed fund is for the purpose and the same should be allowed as
deduction. Therefore, even if it is presumed that the interest advances were
given out of borrowed funds, it will be considered as prudent business
decision and to protect the earning of business income and the interest will
be allowable as deduction not only under section 36 but also under section
37 of the Act.
22. We find that the assessee had sufficient amount of money towards
Share Capital, Reserve & Surplus and the Interest Free Advances given were
fully covered by amount of Share Capital, Reserve & Surplus, disallowance of
Interest need to be deleted and taking into consideration of the Coordinate
Bench of the ITAT 'C' Bench, New Delhi in assessee's own case for the
assessment year 2003-04 passed in ITA No. 4211/Del/2010 vide order dated
13.7.2012 in Revenue's appeal, we decide the issue against the Revenue by
deleting the addition of 1,75,51,634/- on account of interest.
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ITA NO. 4617/Del/2011
23. In the result, Assessee's appeal is allowed.
Order pronounced in the Open Court on 26/03/2015.
-Sd/- -Sd/-
(J.S.REDDY) (A. T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: /03/2015
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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