TMI Blog2018 (5) TMI 1010X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the advances granted by the assessee in the course of its business was due to commercial expediency, therefore, the funds advanced by assessee to SPVs and JVs were in fact used for the business purposes of the assessee and, therefore, the condition prescribed for allowing deduction u/s. 36(1)(iii) were fulfilled by the assessee. Disallowance of expenses on account of legal and professional fees relating to long term lease - Held that:- The specific instance of long term leases executed during the year and the corresponding legal and professional expenses incurred which aggregated to ₹ 6,03,500/- (the same which was already disallowed suo moto by the assessee in the computation of income). Having regard to these facts and considering the inability of the department to point out the specific items of legal expenses totaling ₹ 6,01,800/-, we are inclined to uphold the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. Disallowance of prior period expenditure - Held that:- Since in the present case the decision to abandon the public issue of shares was taken during the year, the loss got crystallized in the relevant year and, therefore, righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee preferred an appeal before the Ld. CIT(A), who was pleased to delete the addition. Against the impugned action of the Ld. CIT(A), the revenue is before us. 4. We have heard both the sides and perused the records. We note that the AO has made disallowance u/s. 14A of the Act with the aid of Rule 8D(2)(ii) and 8D(2)(iii) of the Rules. The Ld. CIT(A) has taken note that AO has not brought on record any material to show that the borrowed funds were utilized by the assessee for making investments in subsidiaries and associate companies. The Ld. CIT(A) has taken note that the assessee s own fund in the form of capital and reserve as on 31.03.2009 were to the tune of ₹ 2298.04 lacs, whereas the investment in shares was only at ₹ 893 lacs as on 31.03.2009. The Ld. CIT(A) has taken note that in the past years there was no disallowance in this respect. We take note that the Ld. CIT(A) rightly noted that the assessee is possessed of mixed funds which include its own funds in sufficient quantity and, therefore, presumption is that its own funds were utilized in the investments can be drawn by relying on the decision of the Hon ble Bombay High Court in the case of Relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to its subsidiaries for project execution and also for executing projects on the principles of business expediency. However, according to AO, advance was an expense which was capital in nature and, therefore, the interest paid on advance given should be capitalized. Accordingly, the AO ascertained pro rata interest of ₹ 81,15,597/- in relation to average amount of advance outstanding during the year and disallowed the same as not allowable as business expenditure. On appeal, the Ld. CIT(A) has deleted the disallowance by observing as under: 12. I have carefully considered the reasons m the impugned order supporting the disallowances of interest and the A/R's submissions objecting thereto. From the impugned order it appeared that while justifying the disallowance of interest the AO opined that advances granted by the assessee was an expense which was capital in nature and therefore interest paid should have been capitalized. With these observations the AO estimated interest disallowable on proportionate basis. The reasons adopted by the AO for making the disallowance out of interest paid on borrowed funds; were not supported by the provisions of Sec 36(1)(iii) no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal Undertaking for undertaking development of IT project in Salt Lake, Kolkata. ₹ 200 lacs were similarly advanced to Proximity Real Estate Pvt. Ltd for participating in the land auction at Kalyani for which the bid was presented through the said company and with whom the assessee had written understanding to participate in the development upon auction bid being successful. With reference to these specific instances the AIR was able to establish; in each case that interest free advances were granted pursuant to agreements or arrangements with the concerned parties for promoting or undertaking development of Real Estate or I T infrastructure projects and the advances were not loans simplicitor. After considering the AIR's explanations; I am satisfied that the assessee had granted interest free advances in the course of or for the purposes of its business of real estate development. In each case the assessee had deep economic, financial and commercial interest in the functioning and commercial operations of the payee companies. The amounts advanced did not represent assessee's capital outlay or capital expense of the assessee as alleged by the AO. The advances were gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) had an occasion to consider the issue of allowability of interest on borrowed capital where interest free loans or advances were granted to subsidiary or associate companies while allowing the claim of the assessee the Hon ble Apex Court had recorded the following findings having bearing in the present case. 19. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 20. In this connection we may refer to section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) which states that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed as a deduction in computing the income under section 28 of the Act. 21. In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC) ; AIR 1979 SC 1291, this court held that the expression for the purpose of business occurring under the provision is wider in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 (SC), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad' s case [1979] 118 ITR 200 (SC), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee' s deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund 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 commercial expediency. 30. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed 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. No businessman can be compelled to maximize his profit. The Income-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. 36. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m capital leases and, therefore, he disallowed the same and added back to the total income. The AO taking note that the assessee had suo moto disallowed a sum of ₹ 6,03,500/- in the computation of total income, therefore, added back the balance sum of ₹ 6,01,800/- (Rs.12,05,300 ₹ 6,03,500) to the total income of the assessee. On appeal, the Ld. CIT(A) deleted the addition by holding as under: 19. I have examined the submissions of the A/R. Before me the assessee furnished complete break up of the legal and professional fees of ₹ 50,13,152/-; as filed before the AO. From the details furnished I have not been able to comprehend as to on what basis the AO came to conclusion that the assessee paid legal fees of ₹ 12,05,300/- in connection with execution of long term leases. No cogent basis or working of the said figure is specified in the assessment order. On the contrary the A/R pointed out six specific instances of long terms leases which were executed by the assessee during the relevant year. Corresponding legal expenses paid in connection with preparation and execution of these six lease deeds were identified by the A/R and copies of relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andon the plan for public issue and not proceeded further. Accordingly, the expenses to the tune of ₹ 1,07,70,503/- brought forward from the earlier years together with expenses of ₹ 12,85,291/- for the year, was written off in the P L Account. The AO although allowed deduction for current year s expenses of ₹ 12,85,291/- he disallowed the claim of ₹ 1,07,70,503/- treating it as prior period expenditure. On appeal, the Ld. CIT(A) deleted the disallowance made by the AO. Aggrieved by the action of the Ld. CIT(A), revenue is before us. 12. We have heard both the sides and perused the details placed on record. We note that the AO did not dispute the allowability of the expenditure incurred by the assessee on the proposed public issue which was later abandoned in view of the decision of the Hon ble Bombay High Court in the case of CIT Vs. Nimbus Communication Ltd. in ITA No. 4244 of 2010. However, according to AO, since the expenditure the assessee had incurred was on the proposed public issue was prior to 31.03.2008 it was not allowable in assessing the total income for AY 2009-10 because the expenditure did not pertain to the relevant previous year. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was received in a particular year of assessment. 11. Following the judgment in the case of A. Gajapathi Naidu (supra) the question to be asked is when did the expenditure claimed by way of deduction arise? There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Because the project was abandoned work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year. 12. Reference in this regard may be made to the decision in the case of CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20 (SC) wherein the Supreme Court in considering a claim for deduction on arrear lease rents, ascertained subsequently consequent to a compromise arrived in the suit and paid in the relevant assessment year held, inter alia, as under: The Tribunal, in the present case, had clearly found that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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