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M/s Embassy Development Corporation Versus The Assistant Commissioner of Income-Tax

2015 (9) TMI 1055 - KARNATAKA HIGH COURT

Disallowance of interest on borrowed loan - Held that:- In the instant case, though the borrowed money was advanced in favour of the sister concern of the assessee in the year 1999-2000, the sister concern has also not utilized the said amount for the said purpose. Even after three years, the said project has not been commenced, however the sister concern has diverted the said amount for some other project.The Tribunal, after examining the contention taken by the assessee, confirmed the order pa .....

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the assessee - ITA Nos. 465 & 720-721 of 2009 (IT) - Dated:- 8-9-2015 - Vineet Saran And B. Manohar, JJ. For the Petitioner : Sri A Shankar & M Lava, Advs For the Respondents : Sri K V Aravind & Sri G Kamaladhar, Advs JUDGMENT The assessee has preferred these appeals under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) being aggrieved by the common order dated 08-05-2009 made in ITA No.738- 740/BNG/2008 passed by the Income Tax appella .....

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commercial and residential complexes. It has filed its return of income for the assessment years 2000-01 to 2002-03. The Assessing Officer processed the return under Section 143(1) of the Act. Subsequently, return of income was selected for scrutiny and notices under Section 143(2) and under Section 142(1) were also issued calling upon the assessee to furnish the necessary particulars. The authorized representative of the assessee appeared before the Assessing Officer and produced necessary docu .....

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various commercial and residential projects. The authorized representative of the assessee contended that the borrowed amount advanced to its sister concern was in the nature of sale consideration that was being paid to the sister concern for the purpose of acquiring a portion of the property in the project proposed to be developed in the name and style "Embassy Meadows". As per the agreement, the assessee was allotted a portion of the proposed building measuring 30000 sq.ft. along wit .....

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ted to its sister concern, the amount received was not utilized for the business of the assessee and no income has been accrued to the assessee. The sister concern of the assessee has also not utilized the said amount for the purpose of the project. Hence, the assessee is not entitled for deduction of interest. Further, the Assessing Officer also denied some of the other deductions under Section 43D towards the expenditure incurred for registration of documents, the expenditure claimed towards r .....

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ty, after considering the matter in detail and taking into consideration the judgments of various High Courts, while partly allowing the appeals, denied the expenditure on interest for the three assessment years by its order dated 18-03-2008. The assessee being aggrieved by the order passed by the First Appellate Authority preferred three appeals before the Tribunal. The Tribunal after considering the matter in detail held that though the assessee availed loan for its business, the said amount w .....

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ny deduction towards interest paid on the loan availed and dismissed the appeals. However, some relief was given insofar as other expenditure is concerned. The assessee being aggrieved by the order passed by the Tribunal, has preferred these appeals. 3. These appeals were admitted on 11-11-2009 to consider the following substantial questions of law: (i) Whether the Tribunal was justified in law in disallowing interest on borrowed loan on the facts and circumstances of the case? (ii) Whether the .....

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TR 519 andCIT Vs Indian Bank Limited reported in 56 ITR 77 on the facts and circumstances of the case? 4. Sri.A.Shankar, learned counsel appearing for the assessee contended that the order passed by the Tribunal confirming the orders passed by the First Appellate Authority and Assessing Authority insofar as disallowing the expenditure with regard to interest for the assessment years referred to above is contrary to law. The assessee is in the real estate business and construction of commercial a .....

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e developed by the sister concern admeasuring 30000 sq. ft. and 25 covered car park area. The amount being advanced to its sister concern was in the nature of sale consideration that was being paid to the sister concern for the purpose of acquisition of a portion of the property in the proposed project of its sister concern in the name and style, "Embassy Meadows". The advance was not in the nature of assets. The loan amount was invested in its sister concern as a measure of commercial .....

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sq.ft. and 25 covered car parking area in the project of "Embassy Meadows" for a consideration of ₹ 3.25 crores. In the above said judgment, the Hon'ble Supreme Court, while examining Section 36(1)(iii) and Section 37 of the Act, held that interest on money borrowed from the Bank and lent to the sister concern without charging interest for the purpose of its business is an allowable deduction under Section 36(1)(iii) of the Act. The finding recorded by the Tribunal, First Ap .....

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ER OF INCOME-TAX, BOMBAY CITY II v/s BOMBAY SAMACHAR LTD., BOMBAY); (3) (1979) 118 ITR 200 (MADHAV PRASAD JATIA v/s COMMISSIONER OF INCOME-TAX, U.P.); (4) (2008) 298 ITR 194 (SC) (DEPUTY COMMISSIONER OF INCOME-TAX v/s CORE HEALTH CARE LTD.); and (5) (1965) 56 ITR 77 (SC) (COMMISSIONER OF INCOME-TAX, MADRAS v/s INDIAN BANK LIMITED.) 5. On the other hand, Sri. K. V. Aravind, learned counsel appearing for the Revenue argued in support of the order passed by the Tribunal confirming the orders passed .....

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see availed loan from KSIIDC, the said amount has not been utilized by the assessee, however it was diverted to its sister concern, for which one of the partners of the assessee, is also one of the Directors. Huge amount has been advanced for the alleged purchase of the properties, for which the approval and building plan has not been obtained from the competent authorities. Further, no formal agreement was also entered into between the assessee and its sister concern. In fact, the "Embassy .....

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interest. The judgments relied upon by the assessee are not applicable to the facts of the present case and sought for dismissal of the appeals. 6. Heard the learned counsel appearing for the parties and perused the orders passed by the Tribunal, First Appellate Authority and the Assessing Authority. 7. The records clearly disclose that the assessee-Firm is engaged in the business of real estate and construction of commercial and residential complexes. During the assessment year 2000-01, the ass .....

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taken up for scrutiny and notice under Section 143(2) was issued for appearance before the Assessing Authority. Also notice under Section 142(1) was issued calling for necessary particulars. In pursuance of the same, an authorized representative of the assessee appeared and produced necessary documents. The Assessing Authority, after examining the matter, disallowed the expenditure towards interest and other expenditures on the ground that though the assessee availed loan of ₹ 2.50 crores .....

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ee claimed deduction of interest on the loan availed. However, the Assessing Officer disallowed the said deduction on the ground that the assessee has not utilized the loan availed whereas it was diverted to its sister concern for which, one of the partners of the assessee is also one of the Directors. The records produced by the assessee clearly disclose that the DDPL has also not utilized said loan amount for the purpose of "Embassy Meadows" project. The balance sheet of the DDPL as .....

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n initial moratorium of six months from the date of disbursement of the loan. As per the terms and conditions, the assessee has to repay the loan by June 2001. It is impossible to believe availing loan with interest at the rate of 18.5% p.a. to book a flat, in a project for which the plan has not yet been sanctioned by the competent authorities and construction has not yet been started. The authorities below, after taking into consideration all these aspects of the matter, clearly held that the .....

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area in the project "Embassy Meadows", no concrete material has been produced before the authorities concerned. Initially, the assessee itself wanted to put up "Embassy Meadows", however, the responsibility of construction has been given to its sister concern DDPL. The land belongs to another sister concern. Even after three years, the Project has not yet been commenced. Whether ₹ 65,00,000/- paid for the assessment year 2003-04 is with respect to the profit or the loan .....

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A.Builders case can be applied, only if commercial expediency is established with facts. Unless interest free loan goes to business interest of the assessee, there cannot be any commercial expediency. For example, if the Company or a Firm supplying raw materials for construction of the building help the assessee to carry on the business more successfully, certainly commercial expediency can be canvassed. However, in the instant case, loan amount advanced to the assessee's sister concern has .....

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ing recorded by the authorities is purely a question of fact. The decision of the Hon'ble Supreme Court in S.A.Builders case could be applied only, if on facts, the assessee establishes commercial expediency in advancing interest free loan to its sister concern. 9. The judgments relied upon by the assessee is not applicable to the facts of the present case. The Hon'ble Supreme Court in a judgment reported in (2007) 288 ITR 1 (SC) (supra), has clearly held as under: "We wish to make .....

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