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TMI Blog2012 (8) TMI 1167X X X X Extracts X X X X X X X X Extracts X X X X ..... Income from house property Gross rent 10839000 Less: Deduction u/s 24(a) 3251700 Interest on term loan 7703312 10955012 - 116012 Income from business or profession 0 Short term capital gain 10135 The assessee had shown nil income under the head income from business or profession . After making suo moto disallowance of administrative and other expenses debited in the profit and loss account, the AO pointed out that investment in construction of building had been made upto 31-03-2006 and till then no secured loan had been obtained. The AO noted the position of secured loan utilized in construction of building as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O pointed out that out of total loan of ₹ 6,16,50,491/-, the assessee utilized in construction or repayment of unsecured loans an amount of ₹ 1,96,23,299/- and utilized the remaining amount in giving interest free advances to group companies and investment in shares. He worked out the proportionate amount of interest to be allowed u/s 24(b) of the Act as under:- 19623299 X 7703312 = ₹ 2451957 / 61650491 The AO was of the view that balance interest of ₹ 52,51,355/- relating to the investment in shares of group companies and giving interest free advances to group concerns was liable to be disallowed. The AO asked the assessee for explanation. In response, the ld. AR vide reply dated 15-12-2010 stated as under:- the assessee company M/s Jaipur Pvt. Ltd. is a company registered under The Companies Act, 1956 having registered office at K21, Sunny house, Malviya Marg, C-Scheme, Jaipur is engaged in the business of purchase or acquiring of immovable properties on lease and to turn the same to account as may seem expedient and in particular by preparing building sites and by constructing, reconstruction altering, improving, decoratin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g position in group companies, as the cost of repetition it is made clear that the profits, if any, in future will not be the taxable income of assessee company and hence no deduction can be allowed this year s taxable income to earn future tax free income. iii) The assessee has no business dealings with the parties/group concerns to whom interest free advances of ₹ 4,05,07,034/- have been given. Even otherwise, there is no business activity being undertaken by the assessee company. It is pertinent to mention that in computation of income, no income from business has been shown. Even the administrative expenses of ₹ 2,38,132/- debited in the Profit Loss account have been disallowed by the assessee suo moto which confirms the fact that no business activity was being pursued by the assessee during the relevant period. iv) Without prejudice to above, the interest expenses in respect of the amount of interest free loans given to group concerns cannot be allowed u/s 37 also as the same amounts to diversion of income. When interest is being paid on the loans, any prudent person would like to reduce his interest burden by repaying the loans with the surpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,95,19,869/- Secured Loans 6,47,51,981/- 6,16,50,491/- Advance given to Group Concern 26,92,010/- 5,15,01,424/- 4,30,08,456/- Investment in shares of Group Concerns 1,72,25,000/- 1,72,25,000/- It was pointed out that the assessee had declared the lease rent under the head Income from House Property against which it claimed expenditure on account of interest at ₹ 77,03,312/-. It was contended that two issues arose in assessee's case for consideration. Firstly, how much interest was allowable in computing the income from house property and secondly whether balance interest was allowable under the head Income from business or other sources . In respect of allowability of the interest under the head income from house property, it was submitted that the assessee made total investment of ₹ 2,95,19,869/- in construction of the building. The AO worked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness expediency and also invested in shares of group companies to acquire controlling interest. It was contended that for the expansion of the business, the assessee had invested funds out of the overdraft facility and unsecured loans in other potential group companies to pursue and to acquire controlling interest in the group companies. Therefore, the entire interest free loans taken in earlier years and interest free loans given in current year as well as in subsequent years were for the purpose of business. Hence, the interest expenditure was allowable under the head income from business . Reliance was placed on the following case laws :- 1. CIT vs. Phil. Corpn. Ltd. 202 Taxman 368 2. CIT vs. Tulip Star Hotels Ltd., 338 ITR 482 3. Shan India (P) Ltd. vs. ACIT, (ITA No. 416 417/JP/2008) 4. Shree Shyamkamal Finance Leasing Co (P) Ltd. vs. ITO, 21 SOT 42 (Mumbai). 5. Shiva Industries and Holding Ltd. vs. ACIT 59 DTR 182 (Chennai) 2.4 The ld. CIT(A) after considering the submissions of the assessee observed that the details filed by the assessee revealed that total investment in building constructed was at ₹ 2.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al building at Amer Road, Jaipur by incurring an expenditure of ₹ 2,95,19,869/- as on 31-03-2008 which was initially financed from interest free unsecured loans from the directors and group companies. Subsequently, the loan was obtained from the bank against security of this property on 09-02-2007 which was partly utilized in repayment of the borrowings taken for the purpose of construction and partly in giving advances to the group companies for development of the real estate business. The ld. Counsel for the assessee furnished a chart depicting the position of the amount spent on construction of the building, loan raised and investment by way of interest free advances/ shares in following manner Particulars As on 31-03-2006 As on 31-03-2007 As on 31-03-2008 Cost of the building given on lease 2,28,34,594/- 2,74,69,869/- 2,95,19,869/- Advance given to Group Concern 26,92,010/- 5,15,01,424/- 4,30,08, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (Dr) 1,16,10,000/- (Dr) Sunny Developers P. Ltd 46,50,700/- (Cr.) 59,25,700/- (Cr) 1,36,79,300/- (Dr) 1,68,74,300/- (Dr) Adinath Buildcon P. Ltd 1,50,000/- (Cr) 2,26,60,000/- (Dr) 1,04,07,200/- (Dr) From Directors, shareholders others 1,70,84,070/- (cr.) 1,67,66,570/- (cr.) 1,38,26,470/- (cr.) 98,96,570/- (Cr.) Total loan taken 2,17,34,770/- 2,28,42,270/- 1,38,26,470/- 98,96,570/- Total loan given 4,66,99,300/- 3,88,91,500/- Net Loan Given (2,17,34,770/-) (2,28,42,270/-) 3,28,72,830/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-2008 remained invested in shares. Therefore, question of disallowance u/s 14A of the Act referred by the ld. CIT(A) did not arise for consideration. As regards the observation of the ld. CIT(A) that the assessee had not claimed deduction of interest from business income , acquiring controlling interest in other companies and the business expediency of the investment in shares from other companies was not explained. The ld. Counsel for the assessee submitted that in making those observations, the ld. CIT(A) ignored the fact that since the assessee had claimed entire deduction of interest under the head House Property . Therefore, it had not claimed deduction under the head business and profession . Therefore, once the claim of the interest was disallowed in computing the income under the head House Property, its allowability needs to be considered by the AO under other heads of income. It was emphasized that borrowed funds were utilized in making advances to group concerns in commercial expediency as they were also engaged in the business of the real estate and also they had advanced interest free funds to the assessee. Thus, the commercial expediency in giving the interest fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also invested in their shares to acquire controlling interest for the expansion of the business. Regarding the said contentions, all the facts are not on record because it is not clear how much interest the assessee acquired by investing in those companies or as to whether there was commercial expediency which is one of the wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. In the present case, in the absence of the relevant facts available on record, we are unable to examine the extent of interest for which assessee advanced the money and what the sister concern did with the money given by the assessee. The ld. CIT(A) as well as the AO had also not thrown any light on this aspect. The Hon'ble Apex Court in the case of S.A. Builders Ltd. vs. CIT, (2007) 288 ITR 1 has held as under:- To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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