9911796707
TMI Blog2012 (8) TMI 1167X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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:- Cost of building incurred upto 31-03-2006 22834594/- Less: Secured loans as on 31-03-2006 Nil Unsecured loans used for construction of building 22842270/- Cost of building incurred upto 31-03-2007 27469869/- Less: Unsecured loans as on 31-03-2007 13826470/- Secured loans used in repayment of U/L and meeting out additional const. Exp. 13643399/- Cost of building incurred upto 31-03-2008 29519869/- Less: Unsecured loans as on 31-03-2008 9896570/- Secured loans used in repayment of U/L and meeting out additional const. Exp. 19623299/- From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn the same to account as may seem expedient and in particular by preparing building sites and by constructing, reconstruction altering, improving, decorating the commercial building offices, flats, houses, shops and showrooms. The assessee company has constructed a commercial building at Amer Road, Jaipur. The same was leased to M/s Cottage Industries Exposition Limited for a period of 19 years. The project was financed through borrowings from market, as the bank finance was not available at the time of construction. Later on, Company availed an overdraft facility of ₹ 650.00 lacs from Punjab National Bank, Everest Colony, Lal Kothi, Jaipur Branch to repay the loans borrowed from market and to finance expansion activities of the company. The total construction cost of the building came to ₹ 2,95,19,869/- which was met out from unsecured loans and overdraft facilities. The management of the company decided to expand and develop its real estates and hotel business and to achieve this goal, the company has invested balance fund out of overdraft facility to other potential group companies. The purpose of this investment was to pursue and to expand the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson would like to reduce his interest burden by repaying the loans with the surplus funds instead of giving interest free advances. v) In the case of CIT Vs. Baby and Company (254 ITR 248) (KER), CIT Vs. Indian Shaving Products (265 ITR 250) (RAJ), 238 ITR 939 (MAD), 187 ITR 363, disallowance out of interest expenses on account of interest free advances given out of interest bearing loans, has been held justified. The AO held that the interest expenses relating to the secured loans not used in construction of building could not be allowed u/s 24(b) of the Act under the head 'Income from House Property'' and also could not be allowed under the head 'Income from Business' since the assessee was not pursuing any business activity and used the loan in making investment in shares of group companies and giving interest free advances. Accordingly, the disallowance of ₹ 52,51,355/- was made by the AO. 2.3 The assessee carried the matter to the ld. CIT(A) and submitted that the assessee company was engaged in the business of purchase and acquiring immovable properties on lease and preparing it into building sites by constructing, reconstructing, altering, improving, decorating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire unsecured interest free loans of ₹ 98,96,570/- outstanding as on 31-03-2008 as per balance sheet were utilized in investment in the building. It was stated that secured loan was obtained on 09-02-2007 and prior to that the assessee had invested an amount of ₹ 98,25,000/- on 24-04-2006 in the shares of M/s. Adinath Buildcon (P) Ltd. out of the interest free unsecured loans raised which remained outstanding as on 3103.2008. Thus no part of unsecured interest free loan remained invested in construction of the building as on 31-03-2008. It was stated that interest bearing secured loans which remained utilized in the investment of the building by way of repayment of interest free unsecured loans or otherwise were at ₹ 2,95,19,869/-. Therefore, the proportionate interest expenditure allowable u/s 24(b) worked out to ₹ 36,88,547/- as against ₹ 24,51,957/- allowed by the AO. The assessee requested that AO be directed to allow the claim u/s 24(b) at ₹ 36,88,547/- (77,03,312/ 6,16,50,491)x 2,95,19,869 as against ₹ 24,51,957/- allowed by him. So far as the allowability of remaining interest of ₹ 40,14,765/- (₹ 77,03,312 minus ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said investment was made out of interest free loans. Thereafter there did not remain any interest free funds which could have been invested in the building. He, therefore, held that observation of the AO that interest free unsecured loan of ₹ 98.96 lacs were utilized in construction of the building was incorrect. According to the ld. CIT(A), the total investment in the building was at ₹ 2.95 crores which was funded out of the borrowed funds. Therefore, at the most interest u/s 24(b) could be allowed to the assessee on borrowed capital of ₹ 2.95 crores which worked out to ₹ 36,88,547/- as against ₹ 24,51,957/- allowed by the AO. In respect of alternate claim of the assessee that balance interest should be allowed under the head 'business income' or 'income from other sources', the ld. CIT(A) observed that the assessee had partly invested funds in shares and partly advances were given without interest, as the dividend was not taxable and therefore, corresponding interest expenditure on that amount was not allowable in light of provisions of Section 14A of the Act. The ld. CIT(A) pointed out that assessee had not charged any interest on advances given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, reconstructing, altering, improving, decorating the commercial buildings offices, flats, houses, shops and showrooms. (ii) The assessee is also having the following group companies wherein similar activities are carried out:- • Shan Colonizers Private Limited • Sunny Developers Private Limited • Adinath Buildcon private Limited (iii) The assessee company initially received interest free loans from the group companies and directors which were utilized for investment in building/investment in shares. Subsequently it has also given the loans to group companies for business expediency. The position of the outstanding balances of group companies/shareholders/directors at the end of the different years is as under:- Name of the Company Position of the outstanding balance as on 31-03-2005 31.3.2006 31.3.2007 31.3.2008 Shan Colonizers P. Ltd - 1,03,60,000/- (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.) 1,67,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquiring 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 free advances was fully established. As such, the ld. CIT(A) was not justified in confirming the disallowance of interest to the extent of ₹ 40,14,765/-. 2.7 In her rival submissions, the ld. DR reiterated the observations made by the ld. CIT(A) and strongly supported th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earnin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
