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TMI Blog2020 (9) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... A) has grossly erred in law and in facts by alleging that the interest cost did not have any nexus with the interest income earned by the appellant. 3. That on the facts and in the circumstances of the case, the ld CIT (A) has grossly erred in law and in facts in upholding the disallowance of interest expenses u/s 36(1) (iii) of Rs. 257270727/- made by the AO in the assessment order u/s 143(3) in ignorance of the terms of amalgamation of erstwhile companies with the appellant company. 4. That on the facts and in the circumstances of the case, the ld CIT (A) has grossly erred in law and in facts by not providing sufficient opportunity to the appellant to establish the linkage of borrowing cost to the interest income earned by the appellant company." 2. Brief facts of the case shows that assessee is a private limited company which is engaged in the business of development of infrastructure, including the undertaking and/or purchase, sale, development, construction and hiring or otherwise acquiring of real estate for personal estate projects/properties. The assessee filed its return of income on 18th of September 2017 declaring income of Rs Nil. The case of the assessee was selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions with respect to the disallowance u/s 14 A of the income tax act. The learned assessing officer analyzed the balance sheet of the assessee and found that assessee has funds, out of which 45.94% forms part of shareholders funds, 53.96% shares are long-term borrowings, 0.10% is current liabilities. Out of this, noncurrent investments are 63.12%, long-term loans and advances are 36 percentage. Therefore, he reached at a conclusion that 45.94% of the total funds available of shareholders funds out of the total funds whereas the amount blocked in non-current investment are 63.12%; therefore, it is clear that funds of long-term borrowings are also blocked with non-current investments. Therefore, he reached at a conclusion that the contention of the assessee that borrowed funds were not used for non-current investment is not correct. 5. As per the computation of total income, the assessee has declared interest income earned of Rs. 37,69,51,117 and claimed against that interest income, the interest expenditure of Rs. 376,982,874. This expenditure was claimed by the assessee u/s 57 (iii) of the act. This claim of the assessee was examined by the learned AO. 6. On the basis of above fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the assessee was also computed at Rs. 254,737,238/-. 8. Therefore, the crux of the issue is disallowance of Rs. 257,270,727/- out of the finance cost of Rs. 376,982,874/-. 9. Thus, the impugned disallowance of Rs. 25.72 crores was made by the learned assessing officer. The reason for making this disallowance by the learned assessing officer was that on perusal of the audited accounts of the assessee for the year ended on 31st of March 2016 he noted that since long-term borrowings on which the interest expenses of Rs. 37.69 crores have been paid is appearing as Rs. 512 crores in the balance-sheet and therefore an entire interest income of Rs. 37.69 crores could not have been incurred by the appellant against the long-term borrowing since the loans and advances provided to sister concern and related parties by the appellant is only Rs. 334 crores. In nutshell, AO was of the view that when the interest is paid on Rs. 512 crores of the borrowed funds, it cannot be granted as deduction against the interest income earned by the assessee on investment of Rs. 334 crores. AO was also of the view that identical disallowance is also required to be made while computing the book profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning interest income under the head "other sources‟ on the ground that the interest income is earned out of loans and advances given to various concerns aggregate of which comes to Rs. 344 crores reflecting under the head long-term loans and advances in the balance-sheet, however, the long-term borrowings, on which the interest cost of Rs. 376,982,874/- was incurred by the assessee, is appearing at Rs. 512 crores in the balance-sheet of the appellant company. Accordingly, the AO observed that the entire interest cost of Rs. 376,982,874/- cannot be said to be incurred for the purpose of earning interest income on the loans and advances of Rs. 344 crores. In this regard, the AO has computed the proportionate disallowance of interest expenditure at Rs. 119,712,147/- and has disallowed the remaining finance cost u/s 36 (1) (iii) of the act. The appellant in its return submission has submitted that AO has used an erroneous and illegal approach to apportion Rs. 257,270,727/- out of total finance cost incurred by it has business expenditure and therefore disallowing the sum as per the provisions of Section 36 (1) (iii) of the act holding that the same was not incurred for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 2015 - 16. Accordingly, it cannot be said that the honourable ITAT/CIT (A) has already formed a view in favour of the assessee on the said aspect. Further, the facts of each year are different. It is not the case of the appellant where it has brought on record corroborative evidence in the form of fund flow etc. to substantiate its stand that borrowed funds were only utilised for giving loans and advances to the sister concerns. In absence of any such evidence/working, the AO was justified in presuming that the partial borrowed funds must have been utilised for making non-current investment and remaining borrowed funds would have been utilised for giving advances to the sister concerns. As far as the argument of the appellant that this disallowance u/s 36 (1) (iiii) cannot be made, I agree with the contentions of the appellant that since no such deduction was claimed by the appellant, however even if the facts of the case are appreciated correctly then also hard fact is that interest cost to the extent of Rs. 257,270,727/- claimed by the appellant u/s 57 of the act is untenable in law and cannot be allowed as deduction since, the interest cost to the extent of Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid during the year submitting that out of total interest paid of Rs. 376,982,874/-, interest of Rs. 246,999,996/- is interest paid on the amount borrowed in last year and Rs. 129,982,877/- has been paid on interest borrowed during the year. He therefore submitted that there is a complete nexus of Rs. 175 crores borrowed during the year and its utilisation during the year for giving loan to sister concerns, therefore his submission was that interest expenditure of Rs. 376,982,874 is allowable to the assessee as deduction u/s 57 (iii) of the act completely. He also supported the argument that interest income and interest expenses have rightly been claimed Under the head income from other sources and no fresh investments have been made by the assessee other than those described above during the year. He also submitted that assessment order for assessment year 2015 - 16 dated 30 December 2017 passed by the learned assessing officer was challenged before the learned CIT (A) which travelled up to the level of the coordinate bench and full relief was granted to the assessee. He extensively referred to the order of the coordinate bench dated 12 March 2019 in case of the assessee rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs. 147.37 crores is in the form of unsecured interest-free loans taken from directors and shareholders of the appellant company on which no interest is paid. Therefore, to that extent, the unsecured loan on which interest is paid taken by the lower authorities of Rs. 512 crores is required to be reduced by a sum of Rs. 147.37 crores. This fact is evident from note 5 of the balance sheet submitted before us at page number 119 of the paper book. This clearly is now to be seen with respect to interest-bearing funds of Rs. 364 crores ( Rs. 512 Cr- Rs. 147 Crs) and is required to be compared with interest-bearing advances of Rs. 344 crores. This leaves us with the difference of Rs. 20 crores. This is also answered at same note number 5 of the balance sheet which clearly shows that at the beginning of the year the unsecured loan which does not have any interest cost of Rs. 166 crores is reduced to Rs. 1 47 crores at the end of the year. Further there is in an increase of 20 crores in interest bearing advances. Therefore, it cannot be doubted that assessee has utilised the borrowings during the year in reutilizing above funds. It is further apparent that Rs. 190 crores is outstandin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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