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TMI Blog2015 (3) TMI 895X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09-10, in cross appeals of the assessee and the revenue (in ITA No. 63-64/Del/2013; Nos. 264-266/Del/2013 and ITA No. 635/Del/2013). 2. The revenue urges the following substantial questions of law for the decision of this Court: (1) Did the ITAT fall into error in its interpretation of Section 36 (1) (iii) regarding advance of borrowed funds, to its sister concern?; (2) Did the ITAT fall into error in holding 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?; (3) Is the ITAT s order- that the assessee s revised net taxable income of ₹ 4,08,24,559/- held by the CIT (A) to be unsustainable - and its acceptance of ₹ 1,63,60,896 as net taxable income (for AY 2008-09) erroneous? 3. The assessee is engaged in manufacturing and trading of auto components and dealership business of Maruti vehicles. In addition, it is also engaged in leasing business, CNG conversion of vehicles and high security license plates. The objects of the company also include dealing in real estate. During assessment for AY 2007-20008, it was noticed from the return of income that the assessee paid interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ikewise, similar amounts were added back for other years: ₹ 3,21,09,750/- (for 2008-09) and ₹ 3,25,85,450/- (for 2009-10). 5. The assessee appealed against the additions for all the three assessment years. The Commissioner of Income Tax (Appeals) -hereafter CIT (A) by a common order, affirmed the finding of lack of business connection. However, he applied a different average rate of interest which resulted in limited relief to the assessee. The CIT (A) concluded that there was direct nexus between the interest bearing funds and interest free funds of ₹ 23,28,50,000 given to DD Properties (P) ltd. The Balance Sheet shows that the appellant has a working capital limit with Indian overseas Bank and it is appearing under the head Secured loans‟. Further from the perusal of copy of account of Indian Overseas Bank from which the appellant has issued cheqeus to DD Properties (P) ltd. as interest free funds, (being alleged as advance for properties), it is seen that on all the days when the payments were made to DD Properties (P) ltd., the balance as per bank statement had always been a debit balance i.e. overdraft. Hence beyond any iota of doubt, it is ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not dispute the CIT (Appeals ) findings that the claim was admissible u/s 36(1)(iii) of the Act and the reliance placed on the judgment of this Court in Commissioner of Income Tax vs. Sahara India Corpn Ltd. (2000) 296 ITR 285 (Delhi). Most crucially, it noted that the amount of ₹ 23,28,50,000/- was advanced in the F.Y, 2005-06 and F.Y. 2006-07 from out of surplus funds for purchase of show room and no borrowed funds were used for these advances and that no disallowance of interest expenditure was made during those years in orders made under Section 143(3) and no disallowance could be made in the assessment years in dispute, as facts were identical. It was also held that the disallowance under Section 36(1)(iii) cannot be extended to advances given in the AY which are opening balances during the year. 8. The ITAT recorded its conclusions as follows: 14. We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case, a perusal of the papers on record and the orders of the authorities below, we hold as follows. 15. The Ld.CIT(A) after considering the arguments of the assessee at para 7 states as follows: From the perusa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st have been borrowed for the purpose of business and thirdly, the assessee must have paid interest on borrowed capital. The expression for the purpose of business occurring in section 36(1)(iii) specifies that deduction under this section is admissible only when capital s borrowed directly for the purpose of business of the assessee. It is argued that ITAT fell into error in appreciating section 36(1)(iii) even otherwise, because the proportionate amount of interest is needed to be added back, as the assessee during the course of the assessment proceedings has itself submitted that it has advanced the loans to its associate company for the purpose of acquiring a show room. This clearly meant extension of existing business or profession . The revenue also disputes the factual findings of the ITAT regarding the actual advances having been made in previous years, pointing out that financial years 2005-06 and 2006-07 correspond to the assessment years in dispute. It is also urged that the finding regarding the acceptance- in scrutiny assessments- for previous years, having become final could not have been rendered. It is argued that the ITAT should not have followed the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 ITR 637 (Del.)) in support of the conclusion that when the assessee is possessed of mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn. 11. The next aspect is as regards the question whether the purpose for which the loan was given, i.e., to book 40,000 sq. ft. property for the assessee s use in an upcoming commercial complex was sufficient. We notice that the ITAT held against the Revenue on this aspect. The ITAT noted the terms of the Memorandum of Understanding (MOU) dated 28.05.2005 entered into with D.D. Properties where it had agreed to invest money in the project by way of advance. This document had not been rejected either by the AO or the CIT (A). The balance sheet of D.D. Properties Pvt. Ltd., a sister concern was also considered by the ITAT. This disclosed that as on 31.03.2006 it had inventories in the form of land to the extent of ₹ 32.4 crores. In these circumstances, given the nature of the MOU, the ITAT in our opinion rightly concluded that the Revenue s reasoning was unsound. The ITAT also relied upon Sassoon J. David Co. Pvt. Ltd. v. CIT, 118 ITR 261 (SC). Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, the onus that laid on it stood discharged. 12. The second question was whether for AY 2007-08, the assessee was right in contending that the interest free security deposit which was enhanced from ₹ 25 lakhs to ₹ 1.75 crores in respect of premises of DD (I) Motors Pvt. Ltd and Lease could be allowed. Here, the revenue s conclusions were based on the assumption that there was no basis for increasing the security deposit, given that in an earlier part of the said year, the assessee had entered into an agreement, which itself kept the security deposit amount @ ₹ 25 lakhs. The assessee contended that the arrangement had been originally settled nearly a decade ago and given the increase in rental values over the years, the increase in security deposit amount was warranted and in any case, it was a commercial decision which could not have been gone into unless the AO had concrete material to contend that the transaction was a sham or illusory. Whether that amount was used for business or not ultimately depended on the assessee and not anyone else. 13. This court does not discern any rationale in the revenue s argument here. That the assessee needed the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 15. 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. 16. 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. 17. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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