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TMI Blog2024 (11) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... the given facts, it was commercial prudence that, the AAIPL would not be able to realize interest from the foreign subsidiaries and thus the assessee will also not be able to realize interest due on the loans advanced to AAIPL. The assessee is in the real estate business and so was its subsidiary AAIPL and step down foreign subsidiaries. The loans were infused into the step down foreign subsidiaries through the aegis of AAIPL for the reason that the Banks required the promoter to infuse funds as their commitment to the real estate project, which sufficiently proved that the funds were advanced for the business purposes. These loans originally carried interest which were serviced as well. For the reasons discussed above viz., serious litigation between partners and financial distress in foreign subsidiary, the assessee decided not to charge interest from this year in order to protect its overall business interests as well as principal loan amount. As has been discussed above, it is not necessary to show that the said deployment of borrowing always results in income to the assessee. The assessee have sufficiently established that the loans were advanced to AAIPL for the business purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoter had accordingly advanced loans aggregating to Rs. 492.72 crores to AAIPL, which in turn, had advanced loans to these foreign entities viz., Rs. 376.94 crores to IDPL and Rs. 113.58 crores to AAIML. The funds were advanced after making due compliance with RBI/FEMA guidelines. The loan were advanced by the assessee mainly over a period coming from F.Y. 2014-15 to F.Y. 2018-19 and the assessee had charged interest on these loans ranging between 11% - 13.5%, which had been serviced by AAIPL until FY 2018-19. During the impugned financial year, the financial position of IDPL had significantly deteriorated due to (a) significant increase in the cost of the project, (b) increase in timing for completion of the project, (c) revenues of IDPL declining on account of slump in the real estate prices in Sri Lanka, (d) global economic downturn on account of COVID situation through multiple factors (e) adverse impact to the brand due to litigation between the directors of IDPL and AAIPL and (f) significant increase in the financial liabilities of IDPL on account of interest levied on other loans obtained from third parties / bankers. Likewise, even the real estate project at Dubai was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) who allowed the appeal of the assessee and inter alia directed the AO to delete the disallowance of interest of Rs. 46,27,18,547/-. The relevant portion read as under: 6.3.4. I have considered the facts of the case and the submissions placed on record. It is noted that the assessee is engaged in the business of development of real estate. The facts show that in order to expand its footprint in the real estate business overseas, the appellant had formed a Special Purpose Vehicle (SPV) by way of a subsidiary, AAIPL. In turn, AAIPL had undertaken real estate project in Sri Lanka, under the aegis of its subsidiary, IDPL. The facts on record show that IDPL was undertaking a substantially large real estate project in Sri Lanka. Being a foreign investment project, the Banks/financial Institutions had required the Indian Promoters of IDPL to also infuse funds in order to finance this real estate project. The appellant being the parent company had therefore sourced monies from both own surplus funds and borrowed funds to advance loan to AAIPL which was specifically meant for the project being undertaken in Sri Lanka. AAIPL, had in turn advanced loans to IDPL, in compliance with the RB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financials of AAIPL placed on record, it is noted that AAIPL had simply credited interest income on the loan advanced to AAIPL by way of book entry against which an equivalent amount of provision for bad and doubtful debt was also created in the books of accounts. AAIPL is noted to have not actually received any interest from IDPL and, therefore, the observation of the AO that AAIPL was in receipt of interest income on the loan it had advanced to IDPL is found to be untenable. As far as the tax treatment meted out to these entries in the books of AAIPL is concerned. I am in agreement with the appellant that the same is independent of the appellant and whether or not the same is brought to tax or not in the hands of AAIPL, is irrelevant to decide the issue impugned before me. 6.3.6 In order to claim deduction u/s 36(1)(iii) of the Act, it is well settled in law that it is not necessary for an assessee to prove that the deployment of borrowed capital has produced matching or corresponding income. The interest paid is to be allowed, irrespective of whether the assessee has been able to generate or produce any income or not, by utilizing borrowed capital. It is now a settled judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose 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 or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. 6.3.8 Similar issue is noted to have been examined again by the Hon'ble Apex Court in the case of Hero Cycles (P) Ltd Vs CIT (236 Taxman 447). In the instant case, the assessee had advanced a sum of Rs. 116 lacs to its subsidiary company known as M/s. Hero Fibers Limited and this advance did not carry any interest. According to the AO, the assessee had borrowed the money from banks and paid interest thereupon which was utilized to advance interest free monies to subsidiary, and therefore the AO disallowed the interest holding that it was not for business purposes. On appeal, the Hon'ble Supreme Court taking note of its above judgment (supra) held that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lmost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. 17. On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Income Tax Appellate Tribunal. 6.3.9 Following the judgment of the Hon'ble Apex Court in the case of S.A. Builders Ltd (supra), it is noted that similar view has been expressed by the Hon'ble Madras High Court in the case of CIT Vs RPG Transmissions Ltd (359 ITR 673). In the decided case also the assessee had raised borrowings to acquire stake in electricity business by purchase of shares of CESC Limited. The AO, had disallowed the expenditure on account of interest relatable to the borrowings holding that it was in the capital field as it was invested for purchase of shares of CESC Ltd. On appeal the Hon'ble High Court upheld the orders of the lower appellate authorities wherein it was held that there was a nexus between the nature of business carried out, i.e., generation and distribution of electricity, power transmission, etc., and, therefore, it was held that the investments were made for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was to undertake real estate project in Goa. According to the assessee, the loan was advanced in furtherance of existing business of real estate and therefore, on the principles of commercial expediency, the interest paid on the loans borrowed to fund the subsidiary was allowable u/s 36(l)(ii) of the Act. The AO, however, rejected the contention on the premise that the subsidiary was only holding the plot of land at Goa but then, since no construction on this plot was possible, it could not be said that advance given to the said subsidiary was commercially expedient On appeal, however, the Hon'ble Tribunal following the decision of the Hon'ble Apex Court in the case of S.A.Builders (supra) deleted the disallowance. The relevant findings of the Tribunal are noted to be as follows: The approach adopted by the Assessing Officer, however, overlooks the factual aspect that the restrictions on constructions were placed by the directions of Goa Costa! Zone Management Authority which were under legal challenge by the assessee, and thus these restrictions had not achieved finality. What is material is that the assessee being one hundred per cent holding company of 'H' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 36(1)(iii) of the Act. The disallowance of Rs. 46,27,18,547/- made by the AO is, therefore, held to be unsustainable, both on facts and in law, and is thus deleted. Ground Nos. 2 to 7 are therefore allowed. Aggrieved by the above order of the Ld. CIT(A), the Revenue is now in appeal before us. 6. The Ld. D.R while defending the order of AO submitted that, the assessee had not charged interest on the loans advanced to AAIPL without any justification. The Ld. DR submitted that, the assessee ought to have accrued the interest on the loans and that the AO ought to be directed to tax notional interest income on such loans given to AAIPL. He reiterated the AO s findings that, AAIPL had earned interest income from the loans to foreign subsidiaries and therefore there was no valid reason for the assessee to not charge interest from AAIPL. He further submitted that, the assessee had borrowed monies from banks to advance loans to AAIPL and had been charging interest until AY 2019-20 and therefore, there was no justification not to charge interest in the impugned financial year. According to the DR, the inability of IDPL to service interest to AAIPL, due to financial distress, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r ever es earned by the assessee, then the Ld. DR cannot urge that notional interest income on loans to AAIPL be taxed. 8. The Ld. AR thereafter opposed the contention of the Ld. DR that, AAIPL was solvent and that it had derived interest from the foreign subsidiaries. Taking us through the documents which were placed before the lower authorities, he showed us that, AAIPL had only passed a book entry for interest income against which provision for credit loss and that no interest was serviced by the foreign subsidiaries to AAIPL. The Ld. AR thus submitted that the argument of Ld. DR that, AAIPL was in receipt of interest income on the loan was factually incorrect. 9. The Ld. AR presented before the bench at length the background of the loans advanced to AAIPL and the non-charging of interest on the same. The ld. AR submitted that the assessee was the flagship company which had promoted AAIPL as its subsidiary to undertake foreign real estate ventures in collaboration with one Mr. JH who had 12.5% stake in AAIPL. From FYs 2014-15 to F.Y. 2018-19, loans were extended to AAIPL on which interest was charged and duly served by AAIPL. During AY 2020-21, serious litigations had cropped be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. A.R in defense of his arguments relied on the following decisions: i) Madhav prasad Jatia vs. CIT (1 Taxman 477)(SC) ii) S A Builders Ltd. vs. CIT (158 Taxman 74)(SC) iii) Hero Cycles Pvt. Ltd. vs. CIT (63 taxmann.com 308)(SC) iv) CIT vs. RPG Transmissions Ltd. (48 taxmann.com 57)(Mad HC) v) B. Nanji Co vs. DCIT (124 taxmann.com 357) (Guj HC) vi) S. P. Jaiswal Estates Pvt. Ltd. vs. ACIT (29 taxmann.com 221)(ITAT Kol) vii) Vaman Prestressing Co. Pvt. Ltd. vs. Addl. CIT (154 taxmann.com 325)(Bom HC) viii) CIT vs. Golf View Homes Ltd. (88 taxmann.com 497)(Kar HC) ix) PCIT vs. Reebok India Company (98 taxmann.com 413)(Del HC) x) PCIT vs. Gaursons Realty Pvt. Ltd. (120 taxmann.com 259) (Del HC) 11. While arguing the alternate, the Ld. AR further submitted that, the assessee s own funds available was in excess of the monies advanced to AAIPL and therefore, it was to be presumed that the loans were given out of the own interest free funds available with the assessee and hence, even otherwise, no disallowance can be made on account of interest. For this, the Ld. A.R relied on the following decisions: i) South Indian Bank Ltd. vs. CIT [130 taxmann.com 178] (SC) ii) CIT vs. R L. Kathia En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , during the relevant AY 2019-20 the assessee did not charge any interest on loans advanced to AAIPL due to which the AO disallowed corresponding proportionate interest paid on borrowings in relation to such loans. We observe from the facts and material placed before us that the principal reason for not charging interest from AAIPL was cropping up of serious litigation between the assessee which held 87.5% in AAIPL with the other shareholder Mr. JH who held 12.5%. The assessee is noted to have taken legal steps to protect its interest in its subsidiaries and the details of litigation are available at Pages 187 to 271 of the paper book. Having gone through the same, it is noted that, during the financial year 2019- 20, the litigations had not been resolved which continued till financial year 2021-22 and during the intervening period Mr. JH was in control of both the foreign subsidiaries as on 31.03.2020 due to which neither the assessee nor AAIPL had access to their books of accounts or control over them. We also note that appropriate disclosures in this regard were also made by the assessee in its Note Nos. 38 to 41 of the audited financial statements a copy of which is available a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not actually received any interest from subsidiaries and that it had accounted for and credited interest income by way of book entry against which the equivalent amount of provision for bad and doubtful debts was also created in the books of accounts. 16. On the next argument of Ld. DR proposing to tax interest income receivable from AAIPL, if the deletion of interest disallowance is upheld, we agree with the Ld. AR that, this was not the case of the AO himself. The undisputed facts, as discussed above, are that, the assessee did not charge interest from AAIPL. The AO had accordingly disallowed proportionate interest corresponding to such non-interest bearing loans given to AAIPL and no addition was made on account of interest income. Hence, we do not find any merit in the Ld. DR s contention in trying to make out a completely new case which is not the issue before us. For the above reasons, we thus uphold the Ld. CIT(A) s finding that, the loan was advanced by assessee to AAIPL for business purpose and that the action of not charging interest during the relevant year was driven by commercial and business considerations. In light of these findings, the next issue to be answered is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon by the Ld. CIT(A) for deleting the interest disallowance impugned before us. In this case also, the assessee had borrowed money from the banks out of which loans were advanced by the assessee to its subsidiary company on which no interest was charged. The AO had disallowed the corresponding interest expenditure u/s 36(1)(iii) of the Act. On appeal, the Hon ble Apex Court observed that, the advance to subsidiary company had become imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to subsidiary company to meet the working capital for meeting any cash losses. The Hon ble Apex Court accordingly held that, once it is established that there is nexus between the expenditure incurred and the purpose of business (which need not necessarily be the business of the assessee itself), the tax authorities cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The Hon ble Court further held th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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