2018 (7) TMI 935 - AT - Income Tax

Disallowance of finance costs - proof of business expenses - Share in Joint Venture (JV) - as contended that any loan given to fund these SPVs is nothing but funding its own business operations and hence any interest incurred on such borrowed funds is totally allowable u/s. 36(1)(iii) - Held that - What assessee has done is only investment in sister concern. What assessee can earn is by way of dividend from sister concerns or by way of interest on the deposits made in the banks if any surplus funds are available or temporary funds are available as can be seen from the other income earned by assessee-company during the year. Thus assessee cannot be considered as an assessee carrying on business of construction and development of airports but only as investor sponsor promoter etc. Since assessee is not carrying on any business activity on its own the question of allowing the deduction u/s. 36(1)(iii) of the Act does not arise as there is no business activity and the investment itself cannot be considered as for the purpose of business as there is no business activity at all. Another argument raised by the Ld. Counsel was that the directors are the directors in the SPVs as well and so the business of SPV can be considered as business of assessee. This argument cannot be accepted for the reason that directors can be appointed in any company based on their qualification or association but not because of business connection. If the argument is to be accepted then independent directors who are not connected to the promoters but are in various companies such situation cannot be considered as having business connection with each company in which they are directors. The argument is rejected. Even though neither party raised the issue since assessee s main source of income is only in the nature of dividend the provisions of Section 14A of the Act may also apply to the facts of the case. Since there is evidence of nexus of borrowing funds being invested in sister concern and assessee sources of income can only be earning dividend income the entire interest income has to be considered for disallowance u/s. 14A under Rule 8D2(i)/(ii) for the impugned assessment year. Since the direct nexus is available for investment in share capital of sister concern or further investment in level-3 SPVs the direct nexus of the borrowed funds to that of investment certainly attract the provisions of Section 14A and on that reason also the deduction claimed by assessee cannot be allowed. For these reasons we agree with the orders of AO and CIT(A) on this issue. Ground is dismissed. Allowance of operating cost - Held that - Since assessee is not considered to be in the business of construction of airports per se on its own and is only investing as a promoter it cannot be considered as business activity of assessee. However necessary expenditure for running day to day activity of the company has to be allowed as a deduction accordingly either u/s. 37(1) or under the head other sources . Such expenditure cannot be outrightly disallowed and as the claim is only for operating expenditure of assessee-company AO is directed to examine and allow the expenditure. Accordingly this ground is considered allowed for statistical purposes. Set-off of losses is eligible for set-off against the interest income - Held that - The losses in earlier year if carried forward as business loss the same can only be set-off to the business income. Since there is no business income during the year the loss cannot be set-off to the other sources of income. However current year s operational expenditure is to be allowed as set-off as per the provisions of the Act. AO is directed to examine this aspect and whatever amount is allowable as operational cost of the company allowed in Ground No.2 can be set-off to the income from other sources i.e. interest income earned during the year. AO is directed to examine the provisions of law and facts of the case and directed to do accordingly. Ground is considered allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of finance costs.
2. Disallowance of other operating costs.
3. Non-allowance of set-off of business losses against interest income.

Detailed Analysis:

Ground No. 1: Disallowance of Finance Costs
The primary issue here is the disallowance of finance costs amounting to Rs. 164,08,45,837/- claimed by the assessee. The assessee, engaged in the development and operation of airports through its subsidiaries, had provided unsecured interest-free advances to these subsidiaries. The funds for these advances were partly sourced from unsecured interest-free loans from the holding company and partly from interest-bearing borrowings from banks. The AO disallowed the finance costs on the grounds that the borrowed money was not utilized in a commercially sensible manner and that the assessee was not directly involved in the construction and maintenance of airports. The AO also contended that the interest-bearing funds were diverted to SPVs, which were claiming tax holiday benefits. The CIT(A) upheld the AO's decision, stating that the assessee had not carried out any business activity directly to earn income and there was no commercial expediency in the overall activities of the assessee.

The assessee argued that the advances to SPVs were for the purpose of business and that the interest incurred on such borrowed funds should be allowable under Section 36(1)(iii) of the Act. The assessee relied on several judicial precedents to support its claim. However, the Tribunal found that the assessee was not engaged in the business of construction and development of airports but was merely an investor in other companies. The Tribunal concluded that since the assessee was not carrying on any business activity on its own, the deduction under Section 36(1)(iii) could not be allowed.

Ground No. 2: Disallowance of Other Operating Costs
This ground pertains to the disallowance of other operating costs amounting to Rs. 1,17,09,534/-. The Tribunal linked this issue to the first ground, stating that since the assessee was not considered to be in the business of construction of airports, the operating costs could not be allowed as business expenditure. However, the Tribunal acknowledged that necessary expenditure for running day-to-day activities of the company should be allowed under Section 37(1) or under the head 'other sources'. The AO was directed to examine and allow the expenditure accordingly.

Ground No. 3: Non-Allowance of Set-Off of Business Losses
The final issue is the non-allowance of set-off of business losses against interest income. The AO did not allow the set-off on the grounds that the assessee had not commenced its business operations and the expenses incurred were pre-operative in nature. The CIT(A) upheld this decision. The assessee argued that the business had commenced when it made the first investment or provided interest-free advances to its SPVs. The Tribunal noted that while the losses from earlier years could only be set-off against business income, the current year's operational expenditure should be allowed as set-off against the interest income. The AO was directed to examine the provisions of law and facts of the case and allow the set-off accordingly.

Conclusion:
The appeal was partly allowed for statistical purposes, directing the AO to re-examine the operational costs and allow the set-off of current year's operational expenditure against the interest income. The Tribunal upheld the disallowance of finance costs and other operating costs as business expenditure, concluding that the assessee was not engaged in any business activity on its own but was merely an investor in other companies.