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2015 (3) TMI 895 - DELHI HIGH COURT

2015 (3) TMI 895 - DELHI HIGH COURT - TMI - Interpretation of Section 36 (1) (iii) - advance of borrowed funds, to its sister concern - ITAT held that the sum of ₹ 25,04,385/- brought to tax by the AO on the interest free deposit of ₹ 1,75,50,000/- was not sustainable - Held that:- This court does not discern any rationale in the revenue’s argument here. That the assessee needed the premises is not in dispute; equally it had a consistent and long standing arrangement with the sister .....

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warranted. The court here recollects S. A. Builders v. CIT (Appeals) [2006 (12) TMI 82 - SUPREME COURT ] where the views of this Court in Commissioner of Income Tax v. Dalmia Cement (B.) Ltd. [2001 (9) TMI 48 - DELHI High Court] that “once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman”, and fu .....

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dered by the AO and finally set aside by the ITAT for AY 2007-08 thus requires no interference. The impugned order does not suffer from any infirmity on this count. The views of ITAT are therefore, affirmed. - Decided in favour of assessee.

In respect of AY 2008-09 and pertains to the finding of the ITAT that the acceptance of the second revised return, indicating revised income at ₹ 1.63 crores, originally accepted by the AO was in order. The Court notices that the CIT (Appeals .....

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t the closure of the books of accounts had to be made on 30.09.2008 and consequently certain transactions were reflected in the subsequent year’s accounts. It was submitted that these facts were duly demonstrated before the ITAT and not disputed by the departmental representative. There is nothing in the order of the ITAT to indicate that the assessee had made the submissions that it claims to have done. It is quite possible that the material shown to this Court was in fact laid before the ITAT .....

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cided in favour of revenue. - ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 - Dated:- 13-3-2015 - S. Ravindra Bhat And R.K. Gauba JJ. For the Appellant : Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. For the Respondent : Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. Mr. Justice S. Ravindra Bhat (OPEN COURT) 1. The appeals are admitted. Mr. Salil Aggarwal, learned counsel for the assessee accepted notice of the appeals. With consent of counsel for the parties, the a .....

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g advance of borrowed funds, to its sister concern?; (2) Did the ITAT fall into error in holding that the sum of ₹ 25,04,385/- brought to tax by the AO on the interest free deposit of 1,75,50,000/- was not sustainable?; (3) Is the ITAT s order- that the assessee s revised net taxable income of ₹ 4,08,24,559/- held by the CIT (A) to be unsustainable - and its acceptance of ₹ 1,63,60,896 as net taxable income (for AY 2008-09) erroneous? 3. The assessee is engaged in manufacturing .....

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pany, M/s DD Properties (P) Ltd to the tune of ₹ 23,28,50,000/-. The assessee, in its return of income stated that the said advance was given to M/s DD Township Ltd, a company under same management in terms of Memorandum of Understanding against future township project. As advance has been made for the purpose other than the business, the assessee was asked to explain why the proportionate interest on this amount be not disallowed. In reply to this, the assessee has stated that during the .....

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interest cannot be capitalized. The capitalization of interest will be from the date of actual allotment made by the said company up to the date of delivery of possession. Thus till the allotment is made, the interest paid is of revenue nature and as such has to be allowed as expenditure of business. 4. The AO was of the opinion, in all these assessment years, (AY 2007-08, 2008-09, and 2009-10) that borrowed funds had been used for booking of a property which was to be used as a show room of the .....

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ded by the total borrowed sum disclosed average interest rate of 14.27%, which on application of the same average rate on the fund diverted to the associate companies, worked out to ₹ 3,32,27,695/-, the AO added back that sum and brought it to tax. Likewise, similar amounts were added back for other years: ₹ 3,21,09,750/- (for 2008-09) and ₹ 3,25,85,450/- (for 2009-10). 5. The assessee appealed against the additions for all the three assessment years. The Commissioner of Income .....

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the head Secured loans‟. Further from the perusal of copy of account of Indian Overseas Bank from which the appellant has issued cheqeus to DD Properties (P) ltd. as interest free funds, (being alleged as advance for properties), it is seen that on all the days when the payments were made to DD Properties (P) ltd., the balance as per bank statement had always been a debit balance i.e. overdraft. Hence beyond any iota of doubt, it is evident that interest bearing funds from Indian Overseas .....

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iew of the above, I hold that there is a direct nexus between the payments made to DD Properties (P) ltd. out of the interest, bearing funds taken from Indian Overseas Bank and thus the appellant is wrong in claiming that the payment to DD Properties (P) ltd. has been made from interest free funds. 6. The CIT (A) examined whether DD Properties (P) ltd. had credit worthiness and financial strength to examine its capacity and capability to carry the venture of constructing the proposed shopping co .....

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vidence about the total cost of DD Properties project; its financial status; from where it proposed to fund the project; whether ₹ 13,500/ per sq. feet (which the assessee agreed to pay to its sister company i.e. DD Properties (P) Ltd.) was reasonable; status of the project on the date of entering into agreement was lacking. The CIT (A), therefore, held that there was no business nexus between the advance and the purpose sought to be achieved. 7. Both parties, i.e the revenue and the asses .....

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Commissioner of Income Tax vs. Sahara India Corpn Ltd. (2000) 296 ITR 285 (Delhi). Most crucially, it noted that the amount of ₹ 23,28,50,000/- was advanced in the F.Y, 2005-06 and F.Y. 2006-07 from out of surplus funds for purchase of show room and no borrowed funds were used for these advances and that no disallowance of interest expenditure was made during those years in orders made under Section 143(3) and no disallowance could be made in the assessment years in dispute, as facts were .....

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ates as follows: From the perusal of the appellant‟s submissions, I am in agreement with the appellant‟s claim that in their case the disallowance u/s 36(1)(iü) cannot be made because no property/capital assets have been acquired by them. 16. This specific finding of the Ld.CIT(A) has not been challenged by the Revenue either in the grounds of appeal or by way of an argument during the course of appeal proceedings. When it is not in dispute that the claim of the assessee is allo .....

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s we have to necessarily hold that the claim of the assessee in question has to be allowed u/s 36(1)(iii) as it is a special provision, as compared with S.37(1), which is a general provision. The general provision i.e. Sec. 37(1) would come into play where the claim cannot be allowed under any of the specific provision of the Act. Sec.37 is only a residuary provision. The ITAT cited Dy. CIT vs. Core Health Care Ltd. (SC) (2008) 298 ITR 194 for the proposition that the dichotomy inherent in the u .....

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o disallowance was made either u/s 36(1)(iii) or u/s 37(1). The advance to sister concerns in question in the case on hand are opening balance carried forward from the Previous Year and when so no disallowance can be made. 9. It is argued by the revenue that ITAT has failed to appreciate that for the claim of interest, it is necessary that, firstly, the money must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and thirdly, the assessee must h .....

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submitted that it has advanced the loans to its associate company for the purpose of acquiring a show room. This clearly meant extension of existing business or profession . The revenue also disputes the factual findings of the ITAT regarding the actual advances having been made in previous years, pointing out that financial years 2005-06 and 2006-07 correspond to the assessment years in dispute. It is also urged that the finding regarding the acceptance- in scrutiny assessments- for previous ye .....

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assessee s sister concern. Having accepted the amounts lent during previous years, it was not open for the revenue to now change its opinion when there was no material in that regard. 10. The record before the ITAT showed that the paid up equity of the assessee was ₹ 8,00,00,000/- for all the years, i.e., as on 31.03.2006; 31.03.2007, 31.03.2008 and 31.03.2009. The general reserves and surplus as on 31.03.2006 was ₹ 14,68,82,450; as on 31.03.2007, it was ₹ 16,36,68,384/-; as on .....

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ng that the loans taken were for specific purposes from different financial institutions such as purchase of cars, stocks, raw materials etc. These supported its contentions that adequate funds were available during the assessment years and that since in the past the Revenue had accepted the assessee s plea in this regard and not brought the amounts to tax under Section 36 (1) (iii), there was no question of its being brought to tax for the three assessment years in question. Applying the ratio .....

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n Box Company, 260 ITR 637 (Del.)) in support of the conclusion that when the assessee is possessed of mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn. 11. The next aspect is as regards the question whether the purpose for which the loan was given, i.e., to book 40,000 sq. ft. property for the assessee s use in an upcoming commercial complex was sufficient. We notice that the ITAT held against the Reve .....

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cumstances, given the nature of the MOU, the ITAT in our opinion rightly concluded that the Revenue s reasoning was unsound. The ITAT also relied upon Sassoon J. David & Co. Pvt. Ltd. v. CIT, 118 ITR 261 (SC). This Court had in a similar context, held in Commissioner of Income Tax v Bharti Televenture [2011] 331 ITR 502 (Del) that: 11. The Hon'ble Supreme Court further held that though, the borrowed amount was not utilized by the assessee in its own business and had been advanced as an i .....

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the directors of the sister concern utilized the amount advanced to it by the assessee for their personal benefit, which obviously could not be said to be an advance as a measure of commercial expediency. 12. In the instant case, from the order of the Commissioner of Income-tax (Appeals) and that of the Income-tax Appellate Tribunal, as reproduced above, in paragraphs 3 and 6, we note that the assessee was maintaining a bank account with mixed common funds in which all the deposits and withdraw .....

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thorities below were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee's own capital. At the relevant time the assessee was found to be having an adequate non-interest bearing fund by way of share capital and reserves. Even otherwise, the advances were found to be made to the subsidiaries for business considerations which is nothi .....

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hat there was no basis for increasing the security deposit, given that in an earlier part of the said year, the assessee had entered into an agreement, which itself kept the security deposit amount @ ₹ 25 lakhs. The assessee contended that the arrangement had been originally settled nearly a decade ago and given the increase in rental values over the years, the increase in security deposit amount was warranted and in any case, it was a commercial decision which could not have been gone int .....

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rding to the business of the owner of the premises, i.e the sister concern. It was not disputed that the security deposit had not been increased for a long time. That it was initially kept at the old level but increased during the year was a matter of fact. However, singling out that factor to hold against the assessee in the absence of any other material establishing dubiousness in the transaction, is not warranted. The court here recollects S. A. Builders v. CIT (Appeals) [2007] 288 ITR 1 (SC) .....

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me-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. ********************* ******************* 26. The expre .....

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suffer from any infirmity on this count. The views of ITAT are therefore, affirmed. 14. The third question of law arises in respect of AY 2008-09 and pertains to the finding of the ITAT that the acceptance of the second revised return, indicating revised income at ₹ 1.63 crores, originally accepted by the AO was in order. The Court notices that the CIT (Appeals) in this case issued notice for enhancement in the course of the assessee s appeal and rejected the AO s finding. This resulted i .....

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