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M/s Paliwal Infrastructure (P) Ltd Versus Deputy Commissioner of Income Tax, Circle-12 (2) , Bangalore

2016 (3) TMI 365 - ITAT DELHI

Disallowance of interest - nexus between the expenditure and the purpose of business - Held that:- As the assessee company made the contribution in the partnership firm M/s Abhitex International wherein it was having 12% share. The amount was invested keeping in view the business expediency as the group to which the assessee belonged acquire the entire share holdings of RMZ Corporation Holdings Pvt. Ltd., so it was not a case of divertion of borrowed fund, rather it was investment as a capital i .....

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smita Jha, Sr. DR ORDER Per N. K. Saini, AM: These two appeals by the assessee are directed against the order dated 30.03.2011 and 31.03.2011 of ld. CIT(A)- XVII, New Delhi for the assessment years 2007-08 and 2008-09 respectively. 2. Since the issue involved is common and the appeals were heard together so these are being disposed off by this common order for the sake of convenience and brevity. 3. First we will deal with the appeal for the assessment year 2007-08 in ITA No. 1978/Del/2011. The .....

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se in brief are that the assessee was engaged in the business of operation and maintenance of Industrial Park which had been built by M/s RMZ Corp Holdings Pvt. Ltd. and was acquired by the assessee in the year 2005. The assessee had been deriving income from the units located in the Industrial Park. During the year under consideration the assessee had received gross receipt of ₹ 28,59,81,773/- after including other incomes, the assessee arrived at gross total income of ₹ 6,81,02,483 .....

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deduction. The assessee furnished copies of approval taken from Ministry of Commerce & Industry, CBDT Notification and lease agreements with tenants etc. The AO observed that the assessee had invested ₹ 40,87,02,301/- as on 31.03.2007 in one of its partnership firm, namely, M/s Abhitex International and the details revealed that those funds were directly advanced from ABN Amro loan account as under: Sl. No. Particulars Debit Credit 1. ABN Amro Bank Account Twds transfer of funds - Loan .....

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05 18,00,000 7. ABN Amro Bank Account Twds tfr of funds - Ch. No.787710 dated 03.11.2005 15,00,000 8. ABN Amro Bank Account Twds tfr of funds - Ch. No.135610 dated 25.11.2005 1,00,00,000 9. ABN Amro Bank Account Twds tfr of funds - Ch. No.298434 dated 31.12.2005 5,00,000 10. ABN Amro Bank Account Twds tfr of funds - Ch. No.135613 dated 31.12.2005 35,00,000 11. ABN Amro Bank Account Twds tfr of funds - Ch. No.301647 dated 27.02.2006 35,00,000 12. ABN Amro Bank Account Twds tfr of funds - Ch. No.1 .....

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ear to the tune of ₹ 6,45,24,346/-. Thus, total outstanding balance as on 31.03.2007 came to ₹ 40,87,02,301/-. According to the AO there was clear nexus for diversion of funds to the associate concern of the assessee. He further observed that the partnership deed of M/s Abhitex International revealed that no interest was payable to the assessee for the capital contributed by it. Whereas the assessee had fully borne the interest and finance charges on its own account which was clearly .....

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as the same was not based on proper appreciation of facts and was in violation of legal position on the issue. It was further submitted that the borrowings from the bank got reduced from ₹ 136 crores as on 31.03.2006 to ₹ 124 crores as on 31.03.2007 and the assessee had non-interest bearing funds of ₹ 34,67,15,55/- during the financial years 2005-06 and ₹ 31,68,35,357/- during the financial year 2006-07. It was stated that the assessee had also cash flow funds available w .....

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iation of facts and was in violation of legal position on the issue. It was submitted that the borrowing from the bank got reduced from ₹ 136 crores as on 31.03.2006 to 124 crores as on 31.03.2007. It was further submitted that the appellant had non interest bearing funds of ₹ 34,67,15,557/- during the F. Y. 2005-06 and non interest bearing funds of ₹ 31,68,35,3577/- during F. Y. 2006-07 as under: S.N. Particulars F.Y. 2005-06 F.Y. 2006-07 1. Share Capital 45,00,000 45,00,000 2 .....

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: "That the AO's observations on the disallowance of Bank Interest amounting to ₹ 3,63,73,505 stand reproduced at Pages 9-10 of the Paper Book. The learned AO has proceeded to disallow the said amount while calculating the same at an average interest rate of 8.9% on the closing outstanding of ₹ 40,87,02,301 without considering the dates and period of the amounts going as debit and the credits during the year. The learned AO while making this addition/disallowance has neither .....

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for: A) Brief Facts That M/s RMZ Corp. Holdings Private Ltd. The Millenia, Tower B, Level 12-14, No. 1&2, Murphy Road, Ulsoor, were the owners of- (i) Land, building and other facilities at Plot Nos.14 and 15, Road No #2 HITEC City Layout, Survey No.64 (Part), Madhapur Village, Serilingampali Mandal, Ranga Reddy District Hyderabad(AP) 500081 (ii) The above property was approved by Andhra Pradesh Industrial Infrastructure Corporation Ltd. for commercial purposes(IT PARK). For the purpose/obje .....

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ithdrawals mainly from M/s. Abhitex International, Panipat, a partnership firm in which all three were partners. (iii) That the total investment in acquiring the shares was to the tune of ₹ 86,99,85,000/-. Details w.r.t. the said investment and respective withdrawals are contained in the copies of accounts produced. The Paidup capital of M/s. RMZ Futura(now present name as M/s. Paliwal Infrastructure) was ₹ 45 lakhs only as against which the above mentioned five persons of Paliwal Gr .....

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ng to same group of family members only and the investment was withdrawn at one stage from said firm only as mentioned in Para(i) above by three partners. (B) Commercial Expediency Your honour, having stated the relevant facts in brief as above and from the statement of relevant accounts it would be amply clear that at one stage amount was withdrawn for acquiring shares by three Individuals i.e. Partners of M/s. Abhitex International, Panipat which was a commercial expediency to expand and later .....

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ble Pb. & Hr. High Court in ITR No.169 & 170 of 1996 order dt.1.2.2011 (copy attached). The most relevant para for reference to the context and consideration is Para 11 of this judgement which is reproduced hereunder:- "11. Learned counsel further submitted that the opinion of different persona with regard to the fact as to whether a particular transaction is to be entered into or not would be subjective and differs from each other. The Assessing Officer may look at the facts from a .....

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d Company Limited v. Commercial Tax Officer, (1985) 154 ITR 148 and Union of India v. Azadi Bachao Andotan(2003) 263 ITR 706." Besides the above relevant para in the judgement there are two Paras extracted from Apex Court decision in- SA Builders Limited V. Commissioner of Income Tax(Appeals) and another (2007) 288 ITR 1, wherein the Hon'ble S.C. had agreed per decision of jurisdictional Delhi H.Court(CIT V. Dalmia Cement(Bharat) Limited 254 ITR 377. Sir, Para 31 & Para 32 SA Builde .....

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fiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT 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 alr .....

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disallowance of interest out of Bank Intt. deserves to be deleted in the facts and circumstances stated and explained." 7. It was further submitted before the ld. CIT(A) that the investment was made in M/s Abhitex International, Panipat, for the commercial expediency and that the assessee had received share profits of ₹ 39,24,346/- as on 31.03.2007. The relevant submissions of the assessee were as under: 7.1 The ld. AR further submitted that the investment was made in Abhitex Internat .....

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34,79,94,000/- M/s Paliwal Overseas (P) Ltd. 9000 17,39,97,000/- Avinash Chander Sharma 6750 13,04,97,750/- Rani Paliwal W/o 6750 13,04,97,750/- Shri Avinash Chander Sharma Abhishek Paliwal S/o Shri Avinash Chander Sharma 4500 8,69,98,500/- 45000 86,99,85,000 That the above investment in shares was done as per details & copies produced before your honour on 28.03.2011. Your honour, having acquired the entire shareholding of RMZ Corp. Holdings (P) Ltd. by the above persons, the same company .....

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meet the desired compliance by the appellant. 8. The ld. CIT(A) after considering the submissions of the assessee confirmed the disallowance made by the AO by observing in para 8 of the impugned order as under: 8. I have carefully considered the submissions of the appellant and perused the assessment order. My observations on this issue are as under: (i) I find that the appellant company became partner in Abhitex International during the year to the extent of 12% share in profit. It contributed .....

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f diversion of borrowed funds but it was investment as capital in the firm M/s Abhitex International in which the appellant company was partner of share profit to the extent of 12%. He further emphasized that the said investment was made for business purpose and in the light of commercial expediency. It was also submitted that contrary to the AO's observations, the borrowing from the bank got reduced from ₹ 136 crores as on 31.03.2006 to 124 crores as on 31.03.2007. Hence, the disallow .....

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ounting to ₹ 39,24,346/- was a tax free income in the hand of the appellant. In this situation, the provision of section 14A of the I.T. Act, 1961 is applicable in this case. (iv) I further find that the appellant has earned the share profit of ₹ 39,24,346/-from the said firm of M/s Abhitex International being partner and such profit is exempt from tax in the hand of the appellant. Thus, the AO was justified to disallow the interest of amounting to ₹ 3,63,73,505/- which was an .....

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ion after considering the disallowance of interest of ₹ 3,63,73,505/- as upheld in this order in preceding para and allow the same on revised income after giving the appeal effect. (vi) I further find that the provision of section 115JB is also applicable in this case. The AO is directed to re-compute the book profit as per law after giving the appeal effect to this order. This ground of appeal is disposed off in the manner indicated above. 9. Now the assessee is in appeal. The ld. Counsel .....

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Abhitex International and the balance 12% had been held by the daughters of the Promoters of the assessee company, hence, the assessee company and the firm are under the same management. It was contended that the intention of the assessee was not to reduce incidence of Income Tax by doing so, because the profits of the Industrial Park are eligible for 100% deduction under clause (iii) of sub-section (4) of Section 80IA of the Act, whereas its associate concern s profits are fully taxable. It was .....

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unds from the assessee, the returned loss had been ₹ 96,28,134/- instead of returned income of ₹ 3,35,98,390/- declared by the firm as per following calculation: Secured Loans from bank for working capital As on 31.03.2007 Rs.84,03,24,249/- Investment by P. Infra in Partners Capital As per order of P.Infra Asstt. Year 2007-08 Rs.48,40,77,480/- Returned Income of the Firm Asstt. Year 2007-08 Rs.3,35,98,390/- Interest on above Investment as per order I/tax Asstt. Order of P. Infra. (pr .....

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stment was not made by P.Infra in Abhitex International it had to pay less interest to Bank) Rs.4,32,26,524/- Net Business Income Rs.10,53,32,535/- Exemption u/s 80IA(4)(iii) Rs.10,53,32,535/- Returned Income from other sources Rs.5,88,57,074/ 11. It was stated that the assessee was having the surplus funds on account of depreciation, rent receipts and net profit which were sufficient for making the investment in the partnership firm as a partner. It was contended that the investment in the part .....

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mphasized that interest free funds were available with the assessee company which were used as a contribution of capital in the partnership firm. Therefore, the disallowance made by the AO and sustained by the ld. CIT(A) on account of notional interest was not justified. The reliance was placed on the following case laws: CIT (Central), Ludhiana Vs Rockman Cycle Industries (P.) Ltd. 238 CTR 363 Commissioner of Income-tax vs. Excel Industries Ltd. 358 ITR 295 13. In her rival submissions the ld. .....

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and that the AO did not mention the provisions of Section 14A of the Act yet, the provisions of said Section were clearly applicable as has been held by the ld. CIT(A). 14. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that the assessee had entered as a partner in M/s Abhitex International, Panipat w.e.f. 01.04.2006 having 12% share in profit and contributed ₹ 45,81,77,955/- as share capital in th .....

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ssee, therefore, the provisions of Section 14A of the Act were applicable. In our opinion, the provisions of Section 14A of the Act were not applicable to the facts of this case because the profit earned, was taxed in the hands of the partnership firm in which the assessee is a partner, so, it could not be said that no tax was paid on the above said share profit earned by the assessee. The AO made the disallowance of ₹ 3,63,73,505/- by presuming that said interest was to be paid @ 8.9% on .....

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ration, the assessee was having internal accrual in the form of depreciation amounting to ₹ 11.60 crores and also having a surplus fund amounting to ₹ 31.68 crores, so, it cannot be said that whole of the investment amounting to ₹ 40,87,02,301/- was out of the borrowed funds. Therefore, the ld. CIT(A) was not justified in confirming the action of the AO for making the disallowance by presuming that the interest @ 8.9% amounting to ₹ 3,63,73,505/- was to be paid by the ass .....

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e funds raised for business purpose was allowable u/s 36(1)(iii) of the Act. On a similar issue the Hon ble Jurisdictional High Court in the case of CIT Vs Dalmia Cement (B.) Ltd. (supra) held as under: Under Section 37(1) of the Income-tax Act, 1961, the jurisdiction of the Revenue is confined to deciding the reality of the business expenditure, viz., whether the amount claimed as deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of the busin .....

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able expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. It has been further been held: That if all the requisite conditions in section 36(1)(iii) for allowance of interest were fulfilled, it was not possible and open for the Revenue to make a part disallowance, unless there was a positive finding recorded that a part of the amount borrowed was not used for the purposes of the assessee s business. 15. Recently their Lordships of th .....

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commercial expediency, the Court summed up the legal position in the following manner:- 26. 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, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 .....

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in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of .....

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rt had held that once it is established that there is nexus between the expenditure and the purpose of 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 or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profi .....

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the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. It would also be significant to mention at this stage that, subsequently, the assessee company had offloaded its share holding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. .....

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