9911796707
TMI Blog2025 (1) TMI 1286X X X X Extracts X X X X X X X X Extracts X X X X ..... rastructure Projects Pvt. Ltd." w.e.f 15.09.2011. The name of this company was subsequently changed to the present name "T. Bhimjyani Realty Pvt. Ltd." 3. During the course of assessment proceedings, the AO noticed that the assessee has borrowed interest bearing loans and was paying interest thereon. However, the assessee has given interest free advances to various persons. Accordingly, the AO took the view that the interest expenditure attributable to interest free advances are not allowable as deduction. Accordingly, he disallowed a sum of Rs. 16,98,85,448/- out of interest expenditure. Besides the above, the AO also disallowed claim of "Provision for expenses" of Rs. 3,80,67,574/- and rent expenses of Rs. 1,56,00,583/-. The Ld CIT(A) partly allowed the appeal of the assessee. Hence the revenue has filed this appeal challenging the relief granted in respect of interest disallowance and "Provision for Expenses" disallowance. 4. We heard the parties and perused the record. We notice that the AO has taken the view that the assessee should have charged interest on advances given by it, since it had borrowed loans at interest. We notice that the Ld CIT(A) has followed two legal prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1, CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 etc. In our opinion, the High Court as well as the Tribunal and other Income Tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct. We agree with the view taken by the Delhi High Court in CIT vs. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) is that, if the assessee is having both interest free funds and interest bearing borrowed funds, then the presumption is that the investments have been made first out of interest free funds. In that case, the disallowance u/s 36(1)(iii) of the Act shall not arise. It has been so explained by Hon'ble Bombay High Court in the case of Reliance Utilities and Power (313 ITR 340)(Bom as under:- "10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the earlier years. We also notice that the Ld CIT(A) has considered that there was commercial expediency in giving this loan. The explanation given by the assessee in respect of this advance is extracted as under by Ld CIT(A):- "The appellant company is into the business of real estate and for further future prospects of the company, it has entered into Memorandum of Understanding (MOU) with Paramount Township Pvt. Ltd. on 30.06.2011 and as per the terms of the said MOU the appellant company has given advance of Rs. 4,90,00,000/-. As per the terms of the MOU the said advance given will be interest free, however in consideration Paramount Township Pvt. Ltd. will repay entire amount of advance given of Rs. 4,90,00,000/- alongwith 80% share in profits earned by Paramount Township Pvt. Ltd. upon resale of the said property. The present value of the said land is approximately Rs. 9,00,00,000/-. During the course of assessment proceedings the appellant has submitted MOU between Ravechi Property Developers and Paramount Township Pvt. Ltd., Purchase agreement entered by Paramount Township Pvt. Ltd. For Purchase of said Land at Village Boris from its original vendors dated 08/09/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance Rs. 5,18,93,699/- to Kishore Devani for business purpose for purchase of real estate property during FY 2015- 16, however due to some difference in opinion between the appellant and Kishore Devani the said business transaction did not go further, thereafter Kishore Devani has returned certain portion of the amount during FY 2016-17 and balance amount was returned during FY 2019-20. Further we would like to inform your good selves that interest bearing funds were not utilized for giving said advances and complete working showing interest bearing fund and noninterest bearing funds and utilization thereof was also submitted during the course of assessment proceedings. The assessing officer has erred in disallowing interest @ 12% i.e. Rs. 62,27,243/- on business advance given of Rs. 5,18,93,699/-." The Ld CIT(A) decided this issue as under:- "I observe that the AO has not given any reasoning for this addition. He simply concludes that the reply filed by the appellant was considered but not found acceptable as it had simply stated that the issue has already been examined in the earlier year's assessment years. The AO is directed to examine the accounts relating to AY 2016-17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce that all these balances have been brought forward from earlier years and no disallowance of interest was made in those years. Secondly, the interest free funds available with the assessee are in far excess of these outstanding amounts. Accordingly, we are of the view that there is no requirement of disallowing any interest expenses vis-à-vis these outstanding balances. Accordingly, we confirm the order passed by Ld CIT(A) on this issue. 5.4 The next item is interest disallowance of Rs. 15,16,236/- pertaining to advance given to M/s Suburbia Realtors P Ltd. Before Ld CIT(A), the assessee offered following explanations:- "The appellant company has advance Rs. 1,26,35,300/- to Suburbia Realtors Pvt. Ltd. for business purpose for purchase of real estate property during FY 2012-13, however due to some difference in opinion between the appellant and Suburbia Realtors Pvt. Ltd. the said business transaction did not go further, the balance amount is still outstanding to be received. Further we would like to inform your good selves that interest bearing funds were not utilized for giving said advances and complete working showing interest bearing fund and non-interest-bearing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to be received. Further we would like to inform your goodselves that interest bearing funds were not utilized for giving said advances and complete working showing interest bearing fund and non interest bearing funds and utilization thereof was also submitted during the course of assessment proceedings. The assessing officer has erred in disallowing interest on loan taken @ 12% i.e. Rs. 33,00,000/- on business advance given of Rs. 2,75,00,000/-. The Ld CIT(A) accepted the submission of the assessee that these advances have been given on commercial expediency during the course of carrying on of its real estate business. He also noticed that the sufficient interest free funds were also available with the assessee. Accordingly, he deleted interest disallowances made on both the advances. We also notice that these advances have been given in the earlier years and no disallowance of interest was made in those years. Since these advances have been given for business purposes, we are of the view that the Ld CIT(A) has rightly deleted the disallowance of proportionate interest in respect of both these advances. 5.6 The next item is interest disallowance of Rs. 3,14,45,722/- in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan taken @ 12% i.e. Rs. 8,77,25,460/- on business advance given of Rs. 73,10,45,500/-." The Ld CIT(A) accepted the submission of the assessee that these advances have been given on commercial expediency during the course of carrying on of its real estate business. He also noticed that the sufficient interest free funds were also available with the assessee. Accordingly, he deleted interest disallowances made on both the advances. We also notice that these advances have been given in the earlier years and no disallowance of interest was made in those years. Since these advances have been given for business purposes, we are of the view that the Ld CIT(A) has rightly deleted the disallowance of proportionate interest in respect of both these advances. 6 The next issue contested by the revenue relates to the relief granted by Ld CIT(A) in respect of the disallowance of claim of Provision for expenses of Rs. 3.80 crores. 6.1 The AO examined the Sundry creditors account and noticed that the assessee has created "Provision for various expenses" aggregating to Rs. 5,01,65,609/-. Out of the above provisions, the assessee had voluntarily disallowed a sum of Rs. 1,20,98,035/-. The AO too ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under section 37 of the 1961 Act." There is no dispute that the assessee is following mercantile system of accounting. Under that system, it is mandatory for the assessee to make provision for all known expenses and losses, even if the payments in respect of those expenses have not been made. Unless such kind of provision for expenses are made in the books as at the year end, the financial statements cannot be considered to reflect true and fair view of the company. The provision for expenses is usually made on some scientific basis at the year end, since the concerned bills would not have been received by the assessee at the time of finalization of accounts. Hence, the assessee would not be in a position to furnish relevant bills in respect of all items. The ld AR submitted that the provision for expenses are made every year in a routine manner in order to provide for all known expenses and losses in accordance with accounting principles. In the earlier years, the AO ..... 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