2013 (11) TMI 676 - AT - Income Tax

Allowability of interest relatable to the borrowed funds given by the company to its directors and its sister concerns - On the total borrowed funds of Rs.622,47,92,446/-/-, the assessee has paid interest of Rs.39,80,73,293/- during the year. The total amount of funds given by the assessee to the directors and the sister concerns,(amounts) amounting to Rs.259,06,79,783/-. The proportionate interest relatable to this borrowed fund amounts to Rs.16,56,73,063/-. Therefore, out of the total interest of Rs.39,80,73,293/- claimed by the assessee, interest of Rs.16,56,73,063/- is disallowed Held that - The main purpose of the assessee s business was to carry on real estate operations. In the process of acquiring and dealing with properties, monies were advanced to its sister concerns and individuals for acquiring properties which at that relevant time were categorised as agricultural lands. The assessee being a company was prevented by the State law to buy any agricultural lands for exploitation of the same for non-agricultural purposes. To outsmart such restrictions imposed by the State Government, the assessee had indulged by roping in the individuals by advancing monies to buy agricultural lands on its behalf and get them converted into non-agricultural purposes etc. Assessee had entered into agreement on 3.5.2002 with Shri Raja Bagmane, Managing Director of the assessee, his wife Smt Vasundhara Raja and Shri V Veerappa father-in-law of Shri Raja Bagmane to purchase the agricultural lands in their names, convert them for non-agricultural use and subsequently transfer them to the assessee Reliance has been placed on the judgment of the Hon ble Supreme Court in the case of S.A. Builders v. CIT reported in 2006 (12) TMI 82 - SUPREME COURT , wherein it was held that 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 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 business expenditure if it was incurred on grounds of commercial expediency Also, reliance has been placed on the Delhi High Court judgment in the case of CIT vs. Dalmia Cement (Bharat) Ltd. 2001 (9) TMI 48 - DELHI High Court Decided against the Revenue. Allowability of deduction of bribes - Expenditure of Rs.15.5 lakhs entered in its cash book and paid as alleged bribes Held that - For the current year, the P &L account was not completed as on the date of search and the assessee did not take into consideration the said sum of Rs.15.5. lakhs as deduction while computing the taxable income. On a perusal of various expenses, it is very evident that the said sum has not been claimed as a deduction and was not debited in the P & L account. Under the head Misc. expenses , the amount debited in P & L account was only a sum of Rs.52,932/- on a total turnover of Rs.52,78,53,632/- and, therefore, the impugned amount of Rs.15.5 lakhs was not an expenditure that was claimed as an expenditure - Thus, the disallowance of Rs.15.5 lakhs will not arise while computing the assessee s taxable income

Summary

Issues Involved:
1. Deletion of Rs.15.5 lakhs withdrawn from the cash book.
2. Deletion of Rs.51,87,552/- on the disallowance of interest for AY 2007-08.
3. Deletion of Rs.16,56,73,063/- on the disallowance of interest for AY 2008-09.

Issue-wise Detailed Analysis:

1. Deletion of Rs.15.5 lakhs withdrawn from the cash book:

The Revenue contended that the CIT (A) erred in deleting Rs.15.5 lakhs, which were withdrawn from the cash book and allegedly used for inadmissible expenditures. During the search operation, the MD of the assessee had agreed that the payments of Rs.15.5 lakhs would not be claimed as admissible expenditure. However, the AO disallowed the amount, asserting that it was not added back in the computation of income. The CIT (A) found that the entire miscellaneous expenditure claimed was only Rs.52,932/- and did not include the Rs.15.5 lakhs. Therefore, the disallowance was deemed improper and deleted.

The Tribunal upheld CIT (A)'s decision, noting that the sum of Rs.15.5 lakhs was not debited in the P & L account and thus, the question of adding it back did not arise. The disallowance of Rs.15.5 lakhs was not warranted as it was not claimed as an expenditure.

2. Deletion of Rs.51,87,552/- on the disallowance of interest for AY 2007-08:

The AO disallowed Rs.51,87,552/- of interest on borrowed funds, asserting that the assessee had diverted borrowed funds to its sister concerns and directors without charging interest, which was not for business exigencies. The CIT (A) referenced the judgment of the Supreme Court in S.A. Builders v. CIT and previous Tribunal decisions in the assessee's favor, concluding that the advances were made out of commercial expediency and deleted the disallowance.

The Tribunal concurred with CIT (A), emphasizing that the advances were made for the purpose of business and commercial reasons. The Tribunal noted that the assessee had entered into agreements with individuals and sister concerns to acquire agricultural lands, which the company could not purchase directly due to legal restrictions. The advances were thus for business purposes and commercial expediency, justifying the deletion of the disallowance.

3. Deletion of Rs.16,56,73,063/- on the disallowance of interest for AY 2008-09:

For AY 2008-09, the AO disallowed Rs.16,56,73,063/- of interest on borrowed funds, arguing that the advances to sister concerns and directors were not for business purposes. The CIT (A) again referenced the Supreme Court's judgment in S.A. Builders v. CIT and previous Tribunal decisions, concluding that the advances were made out of commercial expediency and deleted the disallowance.

The Tribunal upheld CIT (A)'s decision, noting that the advances were made for business purposes and commercial reasons. The Tribunal highlighted that the advances were used to acquire and develop lands, which were later transferred to the assessee or its sister concerns for business purposes. The Tribunal found that the advances were made in the course of business and for commercial expediency, justifying the deletion of the disallowance.

Conclusion:

The Tribunal dismissed the Revenue's appeals for both assessment years, upholding CIT (A)'s decisions to delete the disallowances of Rs.15.5 lakhs, Rs.51,87,552/-, and Rs.16,56,73,063/-. The Tribunal emphasized that the advances were made for business purposes and commercial expediency, aligning with the Supreme Court's judgment in S.A. Builders v. CIT.