2018 (5) TMI 799 - AT - Income Tax

Disallowance of interest expenditure - assessee has given interest free funds and advances and share capital to various sister concerns - interest bearing funds have been diverted by the assessee towards non-interest-bearing loans and advances - Advances not utilized for business purposes - direct nexus of the borrowing made by the appellant to the interest free advances given to some of the parties - Held that - 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. Investment made by the assessee in Gaursons Realtech Pvt Ltd of ₹ 53.22 crores and advance of ₹ 79.65 crores totaling to ₹ 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. The advance of ₹ 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. A sum of ₹ 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 ₹ 52.36 crores coupled with other advances of ₹ 8.5 crores are far less than the interest free funds available with the assessee. Thus no disallowance of interest could be made - Decided in favour of assessee

Issues Involved:
1. Utilization of advances for business purposes.
2. Nexus between borrowing and interest-free advances.
3. Availability of own funds and interest-free deposits.
4. Disallowance of interest expenditure.

Issue-wise Detailed Analysis:

1. Utilization of Advances for Business Purposes:
The assessee, a real estate development company, contended that advances given to related parties were for business purposes. The assessee argued that the advances were made to manage the fund position of the group and were not from borrowed funds but from its own funds and customer advances. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, holding that the advances were not utilized for business purposes. The Tribunal found that the advances to Gaursons Realtech Pvt. Ltd. and Gaursons India Ltd. were indeed for business purposes, specifically for acquiring land for real estate projects. The Tribunal concluded that these advances were part of the assessee's business operations and not a diversion of funds for non-business purposes.

2. Nexus Between Borrowing and Interest-Free Advances:
The AO and CIT(A) held that there was a direct nexus between the borrowed funds and the interest-free advances given to related parties. The AO demonstrated through bank account analysis that borrowed funds were transferred to related parties as loans, advances, and share application money without charging interest. The Tribunal, however, found that the advances were for business purposes and thus, the interest on borrowed funds used for these advances should be allowed as a deduction. The Tribunal also noted that the assessee had sufficient interest-free funds to cover the advances, further weakening the argument of a direct nexus between borrowings and interest-free advances.

3. Availability of Own Funds and Interest-Free Deposits:
The assessee claimed that it had sufficient own funds and interest-free deposits to cover the advances made to related parties. The AO and CIT(A) rejected this claim, stating that the assessee failed to provide strong evidence of commercial expediency. The Tribunal, however, accepted the assessee's argument, noting that the assessee had substantial interest-free funds, including shareholder funds, share application money, and customer advances, totaling ?136.49 crores. The Tribunal concluded that these funds were sufficient to cover the advances, and thus, the interest on borrowed funds should not be disallowed.

4. Disallowance of Interest Expenditure:
The AO disallowed ?5,68,97,378/- of interest expenditure, arguing that the borrowed funds were diverted to related parties without charging interest. The CIT(A) upheld this disallowance. The Tribunal, however, reversed this decision, finding that the advances were for business purposes and that the assessee had sufficient interest-free funds to cover the advances. The Tribunal directed the AO to delete the disallowance of interest expenditure, concluding that the interest on borrowed funds used for business purposes should be allowed as a deduction.

Conclusion:
The Tribunal allowed the appeal of the assessee, reversing the findings of the lower authorities. The Tribunal held that the advances were for business purposes, there was no direct nexus between borrowings and interest-free advances, and the assessee had sufficient interest-free funds to cover the advances. Consequently, the disallowance of interest expenditure was deleted.

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