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TMI Blog2018 (5) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... ld CIT(Appeals) and the Assessing Officer have erred in holding that there is direct nexus of the borrowing made by the appellant to the interest free advances given to some of the parties. 3. The ld CIT(Appeals) as well as Assessing Officer failed to appreciate that there were also own funds and the other interest free deposits with the appellant which have been utlised for the purpose of granting interest free advances to the parties and most unjustifiably and arbitrarily rejecting the submissions made by the appellant that total amount of funds advanced by the appellant are Rs. 69.35 crores (excluding advance against plot of Rs. 133.01 crores) whereas the interest free funds, available with the appellant were Rs. 114.47 crores. 4. That in respect of the above grounds the orders of the ld CIT(Appeals) and Assessing "Officer are not justified on the facts of the case and are bad in law. 3. That the CIT (appeals) and the assessing officer and erred in holding that the advances have not been utilised for business purposes as the appellant company borrowed the money from banks for business purposes and has utilised the same in its business only. 4. The Ld. CIT (appeals) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 1 5, 37, 76, 696/- and as during the year only 37 percentage of this interest is being charged to profit and loss account by following the percentage completion method is which amounts to Rs. 5 689 7378/-. It was further noted by him that on many instances the loans raised during the year were diverted to related concerns and no interest was charged from them. As according to the Ld. assessing officer interest-bearing funds were diverted to related concerns and no interest was charged from those parties therefore the Ld. assessing officer asked the assessee to explain the reasons for which the interest corresponding to this interest free loans and advances should not be disallowed. The assessee submitted its reply stating that assessee company is a construction company engaged in construction of flats and selling the same to the proposed buyers. Short-term loans and advances by the assessee to its sister concerns are part of minutes fund position and the funds given to the sister concerns were not out of the loan borrowed during the year but it is used for financing the construction project only. The above advances are been given by the assessee to its group companies as part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds on which it is liable to pay interest and on the other hand certain amounts a been advanced to sister concerns or others without carrying any interest, the interest to the extent of advances has been made without carrying any interest is to be disallowed under section 36 of the income tax act. The Ld. assessing officer further relied on several decisions of various high courts. On the basis of the above discussion the Ld. assessing officer stated that total advances given by the assessee is Rs. 2 02, 35, 80, 993/- and the above amount exceeds the total amount outstanding against loan from various banks of Rs. 1 58, 50, 00, 000/-. Therefore the Ld. assessing officer disallowed the total sum of interest expenditure debited to the profit and loss account of Rs. 5 689 7378/-. Consequently assessment under section 143 (3) of the act was passed by the Ld. AO determining the total income of the assessee at Rs. 2 6491 5158/- against the returned income of the assessee of Rs. 2 0801 7780/-. 10. The assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) that the assessee has failed to counter the in-depth analysis made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that Rs. 79.65 crores even as an advance to Gaursons RealTech private limited was of requiring interest if the land. He referred to the memorandum of understanding dated 30/3/2013 between the assessee and the course is Real Tech private limited. He further stated that the above amount of loan for the purchase of plot is not given out of the interest-bearing funds of the assessee. With respect to the amount of investment made by the assessee of Rs. 5 3.22 crores in M/s gaursons RealTech private limited. He submitted that the above investment has been made by the assessee for acquiring interesting the real estate projects the phone 7 advanced out of the business funds as well as the interest free funds available with the assessee . he submitted that no interest-bearing funds have been provided. He further referred to the various advances was sister concerns and submitted that these are in the nature of running account between the group companies and interest-bearing funds have not been diverted by the assessee. He further stated that the assessee has 16.68 crores of the shareholders funds and rupees in 11.11 crores and share application money. He further submitted that assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce made by the Ld. assessing officer is not sustainable. 12. He further submitted a note referring to various pages of the balance sheet of the company as at 31.03.2014 to show the various interests amounts paid by the assessee as well as the amount of advances given to sister concern or related parties on which no interest has been charged. He further submitted the copies of various accounts of the parties to whom advances were given to hold the land. He further submitted the copy of account of Gaursons REaltech Pvt ltd from whom interest income of Rs. 944137/- has been received to show that it is not interest bearing advance. As directed by the bench he also submitted a fund flow statement to show that assessee has known interest bearing funds available with it also. He stated that assessee has huge advances from the customers of Rs. 108 crores and also other interest non interest bearing funds amounting to Rs in all of Rs. 132 crores. He submitted that out of the total advances given as alleged by the ld Assessing Officer of Rs. 133 crores are against the advance against the plot and Rs. 53 crores are for various strategic investment with real estate companies. He further stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing percentage completion method for revenue recognition. During the year the assessee has incurred interest expenditure of Rs. 15.37 crores and debited the same to the project cost. As 37 of the project was found to be completed as per project completion method interest of Rs. 5.68 crores was charged to profit and loss account. During the course of assessment proceedings the ld Assessing Officer noted that assessee has borrowed Rs. 54 crores as a loan from Andhra Bank during the year whereas opening outstanding balance was Rs. 20.15 crores and the closing balance was 74.50 crores. Further, borrowing from Bank of Baroda was taken of Rs. 59 crores whereas, the opening balance was Rs. 25 crores and closing balance was Rs. 84 crores. On examination of the balance sheet the ld AO also noted that assessee has loans and advances of Rs. 210 crores as at the end of the year whereas at the beginning of the year it was only Rs. 114 crores. Therefore, the ld Assessing Officer examined the interest claim of the assessee as under:- "4. During the assessment proceedings, it was gathered that the assessee has raised substantial loans from banks and has debited substantial amount of interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursons Realtech Private Limited (loan as well as Advance accounts) * Gaursons India Limited * UP township Private Limited * Banwari Lai Gaur * SKA Realtech Pvt Limited * Gaursons Sportswood Pvt Ltd * Shri Shy am Buildcon Pvt Ltd (iv) Copies of agreement entered with related parties for advances against plots may be filed. Details of plots purchased from the related parties against the advances outstanding as on 31.3.2014 may be filed. If no plots were purchased against these advances, present status of these advances may be furnished. (v) The company gave share application money to M/s Gaursons Realtech Private Limited amounting to Rs. 53.25 crores. Source of this investment may be explained with supporting documents. Also inform the present status of this share application money given to M/s Gaursons Realtech Private Limited" 6. On 6.12.2016, the AR of the assessee attended and filed the written submission. From this submission, it was gathered: (i) The assessee has paid interest amounting to Rs. 7,57,71,924/- to Bank of Baroda on loan. It was also gathered that fresh loan amounting to Rs. 87,50,00,000/- was taken from BoB during the year. (ii) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Short Term Loans & Advances by Gaursons Realty Pvt Ltd. to its sister concerns as a part to manage fund position of the Group. Short Term Loans & Advances has not been provided by the company from loan borrowed during the year by the company but it is used for financing the construction project only, these advances have been given by the assessee to its group companies as part of their overall business plan to manage the fund flows of the group and has no connection with the project loan taken from Bank which has been incurred entirely for the project expenditure and as such the expenditure claimed by the way of interest on project loan are incurred for the business purpose and are eligible as business expenditure under section 36(1) (Hi) of the Income Tax Act, 1961. Short Term Loans & Advance is provided to its sister-concern mainly from companies own fund available with the enterprise. Booking deposit from flat buyers and Advances from customers (Rs. 1,144,695,481-) available also the assessee company received the amount from the maturity of Fixed Deposit. This means that Advance was not given from the borrowed fund / interest bearing fund. It is respectfully submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pioneer Mutual Fund on 4.7.2013. This investment was also made out of the credit balance as mentioned at (iii) above. In this way, an amount of Rs. 50 crores out of the loan amount of Rs. 55 crores was invested in Mutual Funds. (v) Out of this investment, the assessee received an amount of Rs. 20 crores on 8.7.2013 on account of partial redemption of units in mutual funds. The said amount of Rs. 20 crores was received by the assessee on 9.7.2013 in its bank account No. 012784100000020 (Yes Bank) and on the same day it was transferred to the account of M/s Gaursons Realtech (P) Limited as Share Application Money. (vi) Further out of the investment of Rs. 50 crores in mutual fund as discussed above, the assessee received an amount of Rs. 15 crores on 16.7.2013 on account of partial redemption of units in mutual funds. The said amount of Rs. 15 crores was received by the assessee on 17.7.2013 in its bank^account No. 012784100000020 (Yes Bank) and on 18.7.2013, Rs. 15 crores were transferred to the account of M/s Gaursons Realtech (P) Limited. (vii) Further, the remaining units of mutual funds were redeemed by the assessee on 24.07.2013 and an amount of Rs. 15,03,36,628/- was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee shall not be applicable to the facts of the present case. 15. It may also be stated that the assessee has submitted that following advances were given to related companies for purchase of land: Name Amount outstanding as on 31.3.2014 (Rs) Gaursons Realtech (P) Ltd 79,65,00,000/- Gaursons India Limited 52,36,18,780/- UP Township (P) Ltd 1,00,00,000/- The assessee was specifically asked to file the copies of agreement for these advances. In response to this, the assessee has filed the copy of agreement with aursons Realtech (P) Ltd only which indicates that the advance was given towards some land at Yamuna Expressway. For other two advances, the assessee could not file any agreement to substantiate that the said advance was for business purposes. 16. In this connection, it may be mentioned that the assessee is following the 'percentage completion method' and as per relevant accounting standard, costs that relate directly to the specific project and costs that are attributable to the project in general and can be allocated to the project, can only be recognised while determining the profit from the project. Therefore, the interest costs relatable to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain funds on which it is liable to pay interest and on the other hand certain amounts have been advanced to sister concern or others without carrying any interest, the interest to the extent of advance has been made without carrying any interest is to be disallowed u/s 36 of the Act. In this case, the Hon'ble High court observed as under: " the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it pleaded to be out of sale proceeds or share capital or different account cannot be accepted. Entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Source has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71(1)(c) is being initiated separately. (Addition: Rs. 5,68,97,378/-)" 16. The ld CIT(A) confirmed the above disallowance affirming the finding of the ld Assessing Officer. Therefore the issue before us is whether interest expenditure incurred the assessee is allowable as deduction to the assessee under the provisions of section 36(1)(iii) of the Act. The provisions of section 36(1)(iii) provides that deduction shall be allowed in computing the income referred in section 28 of the Act the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. Therefore, the amount of interest paid by the assessee is required to be tested whether such interest has been paid on capital borrowed by the assessee for the purposes of the business. In case if the assessee is diverted the borrowed funds in advances to other parties without any business or commercial expediency or have not been used in the business assets then in such cases the interest cannot be allowed as deduction to the assessee under the head business income. The amount advanced by the assessee to the various parties is required to be tested on this ground. a. Amount of share appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot be held that assessee has advanced the sum of Rs. 79.65 crores to the above company without any commercial purposes. In view it cannot be said that assessee has diverted the interest bearing funds for non business purposes. Further, the assessee has also invested Rs. 153.22 crores in the share application money of the above company. The main intention of making investment in the above company was for acquiring interest in real estate business of this company which was to buy 300 acres of the plot of land in Sport City. It is further to the recalled that the Gaursons Realtech Pvt Ltd was to purchase land admeasuring 300 acres and assessee was purchasing was subscribing to the shares of this company. Out of the 300 acres the plot of 88500 sq mtr was agreed to be sold to the assessee for which advances were given and in the balance land bank by making investment in the share capital of the company assessee was acquiring controlling interest. It is not the case of the assessee that the business of Gaursons Realtech Pvt. Ltd was not of real estate. It is always a case that a holding company would always have interest in the success of failure of a subsidiary company. It is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary company. The above company was allotted a plot of land of Rs. 16320 sq meter in Indirapuram Development Plan admeasuring 16320 sq mtr at a price of Rs. 40050/- per sq meter valued at Rs. 65.36 crores. That company was to deposit Rs. 16.34 crores as a bid price and further earnest of Rs. 9.20 crores and further sum of Rs. 7.14 crores within 7 days. The balance sum of 75% was to be paid later on. The assessee has also placed an agreement between Ghaziabad Development Authority and the Gaursons India Ltd dated 31.03.2012. Therefore, for purchase of the above land the assessee paid advance of Rs. 52.36 crores to the above company. Later on there was a dispute between Ghaziabad Development Authority and the various farmers and due to that the above allotment letter could not fructified and hence agreement to sale dated 31.01.2012 got cancelled. As the assessee is the subsidiary of the company in the real estate business the above amount was given by assessee to the holding company. Therefore, the claim of the assessee is that it is advance for the purpose of the business of the assessee company but ultimately same could not be executed due to non allotment of land by the Ghaziab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1 crore All the above advances even if it is presumed that they are not given by the assessee for the business purposes they do not exceed the funds available with the assessee without interest. 17. Therefore, on the basis of our above finding we hold that investment made by the assessee in Gaursons Realtech Pvt Ltd of Rs. 53.22 crores and advance of Rs. 79.65 crores totaling to Rs. 132.87 crores is given by the assessee for the purpose of the business of the assessee and no disallowance of interest on these advances can be made. Further, the advance of Rs. 85944137/- is interest beaing advance on which interest has been charged and therefore, it cannot be included in the interest free advances given by the assessee. Furthermore, a sum of Rs. 52.36 crores given to holding company of the assessee M/s. Gausons India Ltd for acquiring plot of land from Ghaziabad Development Authority cannot also be included for the purpose of interest disallowance for the reasons given by us above. Even otherwise the above amount of advance of Rs. 52.36 crores coupled with other advances of Rs. 8.5 crores are far less than the interest free funds available with the assessee. In view of this on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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