2015 (3) TMI 895 - HC - Income Tax

Interpretation of Section 36 (1) (iii) - advance of borrowed funds, to its sister concern - ITAT held that the sum of ₹ 25,04,385/- brought to tax by the AO on the interest free deposit of ₹ 1,75,50,000/- was not sustainable - Held that - This court does not discern any rationale in the revenue s argument here. That the assessee needed the premises is not in dispute; equally it had a consistent and long standing arrangement with the sister concern, is undisputed. The rental arrangement was in the form of a commission payable according to the business of the owner of the premises, i.e the sister concern. It was not disputed that the security deposit had not been increased for a long time. That it was initially kept at the old level but increased during the year was a matter of fact. However, singling out that factor to hold against the assessee in the absence of any other material establishing dubiousness in the transaction, is not warranted. The court here recollects S. A. Builders v. CIT (Appeals) 2006 (12) TMI 82 - SUPREME COURT where the views of this Court in Commissioner of Income Tax v. Dalmia Cement (B.) Ltd. 2001 (9) TMI 48 - DELHI High Court that once it is established that there was nexus between the expenditure and the purpose of the 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 , and further that no businessman can be compelled to maximize his profit, were approved. 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.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 disallowance initially ordered by the AO and finally set aside by the ITAT for AY 2007-08 thus requires no interference. The impugned order does not suffer from any infirmity on this count. The views of ITAT are therefore, affirmed. - Decided in favour of assessee. In respect of AY 2008-09 and pertains to the finding of the ITAT that the acceptance of the second revised return, indicating revised income at ₹ 1.63 crores, originally accepted by the AO was in order. The Court notices that the CIT (Appeals) in this case issued notice for enhancement in the course of the assessee s appeal and rejected the AO s finding. This resulted in the first revised income being brought to tax at ₹ 4.08 crores. The counsel for the revenue urged that the ITAT s reasoning is not acceptable given that neither in the assessment proceedings nor before the CIT(Appeals) did the assessee specify the authorities as to the rationale for revising income downwards.Counsel for the assessee on the other hand urged that the closure of the books of accounts had to be made on 30.09.2008 and consequently certain transactions were reflected in the subsequent year s accounts. It was submitted that these facts were duly demonstrated before the ITAT and not disputed by the departmental representative. There is nothing in the order of the ITAT to indicate that the assessee had made the submissions that it claims to have done. It is quite possible that the material shown to this Court was in fact laid before the ITAT and considered by it. However, the impugned order does not reflect application of mind on this. It merely adverts to balance sheet and nothing else. Thus on this issue i.e. the acceptance of ₹ 1.63 crores (based on the second revised return), the ITAT must examine the matter afresh and return its findings on the basis of the materials made available to it during the course of hearing as well as the materials placed before the CIT(Appeals). The revenue s appeal succeeds to this extent. - Decided in favour of revenue.

Issues Involved:
1. Interpretation of Section 36(1)(iii) regarding the advance of borrowed funds to a sister concern.
2. Taxability of the interest-free deposit brought to tax by the AO.
3. Acceptance of the assessee's revised net taxable income for AY 2008-09.

Detailed Analysis:

Issue 1: Interpretation of Section 36(1)(iii) Regarding Advance of Borrowed Funds to Sister Concern
The primary issue was whether the ITAT erred in its interpretation of Section 36(1)(iii) concerning the advance of borrowed funds to a sister concern. The assessee had advanced interest-free funds to its associate company, M/s DD Properties (P) Ltd., which the AO disallowed as an admissible expenditure. The AO reasoned that the borrowed funds were used for booking a showroom, an asset to be used in the future, thus not establishing a nexus between borrowed funds and the business purpose.

The CIT (A) affirmed the lack of business connection but provided limited relief by applying a different average interest rate. The ITAT, however, concluded that the claim under Section 36(1)(iii) was admissible, noting that the advances were made from surplus funds and no borrowed funds were used. The ITAT cited the case of CIT vs. Sahara India Corpn Ltd. and held that disallowance under Section 36(1)(iii) cannot be extended to advances given in the assessment year which are opening balances during the year.

The court upheld ITAT's decision, emphasizing that the revenue could not take a different view for the assessment years in question, especially when advances were not made during these years, and sufficient general reserves and other funds were available.

Issue 2: Taxability of the Interest-Free Deposit
For AY 2007-08, the AO brought to tax the sum of Rs. 25,04,385/- on the interest-free deposit of Rs. 1,75,50,000/-. The revenue argued that the increase in the security deposit lacked a basis, given the earlier agreement which kept the deposit at Rs. 25 lakhs. The assessee contended that the increase was warranted due to rising rental values and was a commercial decision.

The court found no merit in the revenue's argument, noting that the long-standing arrangement and the need for premises were undisputed. It cited S.A. Builders v. CIT (Appeals) to emphasize that commercial expediency should be viewed from the perspective of a prudent businessman. The court affirmed the ITAT's decision, stating that the transaction was not dubious and the disallowance was unwarranted.

Issue 3: Acceptance of the Assessee's Revised Net Taxable Income for AY 2008-09
The third issue pertained to the acceptance of the second revised return indicating a revised income of Rs. 1.63 crores, which the AO originally accepted. The CIT (A) issued a notice for enhancement and rejected the AO's finding, resulting in the first revised income of Rs. 4.08 crores being brought to tax.

The revenue argued that the ITAT did not adequately consider the rationale for revising the income downwards. The assessee claimed that the closure of books on 30.09.2008 led to certain transactions being reflected in the subsequent year's accounts, which was demonstrated before the ITAT.

The court noted that the ITAT's order lacked a detailed application of mind on this issue, merely referring to the balance sheet. Consequently, it directed the ITAT to re-examine the matter afresh and return findings based on the materials available during the hearing and those placed before the CIT (A).

Conclusion:
1. The court upheld the ITAT's interpretation of Section 36(1)(iii) and the decision regarding the advance of borrowed funds to the sister concern.
2. The court affirmed the ITAT's decision on the taxability of the interest-free deposit.
3. The court directed the ITAT to re-examine the acceptance of the revised net taxable income for AY 2008-09, thus partially allowing the revenue's appeal on this issue.

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