SHREEPATI BUILD INFRA INVESTMENT LTD, MUMBAI V. DCIT CEN CIR 2(3), MUMBAI

ITA 257/MUM/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 0591 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 12-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: CHOUDHARY ARUNKUMAR SINGH
• Keywords: Business income; Business expenditure; Commercial expediency
• Section: 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL G , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI RAM LAL NEGI , JM ITA NO. 257 / MUM/20 1 17 ( ASSESSMENT YEAR : 2010 - 11 ) M/S. SHREEPATI BUILD INFRA INVESTMENT LIMITED (FORMERLY KNOWN AS SHREEPATI INVESTMENT) 4 TH FLOOR, SHREEPATI ARCADE A.K. MARG, NANA CHOWK MUMBAI 400 036 VS. THE DY. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 2(3) (FORMERLY CENTRAL CIRCLE - 9) OLD CGO BUILDING MUMBAI 400 020 PAN/GIR NO. AARCS4284N ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY SHRI ANIL SATHE REVENUE BY SHRI CHOUDHARY ARUN KUMAR SINGH DATE OF HEARING 25 / 10 /201 8 DATE OF PRONOUNCEMENT 30 / 11 /201 8 / O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) - 52, MUMBAI DATED 03/10/2018 FOR A.Y.2010 - 11 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT. 2. FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE: - GROUND NO.L: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT(A) GROSSL Y ERRED IN UPHOLDING THE ORDER OF THE LEARNED A.O TREATING INTEREST RECEIVED OF RS. 23,89,543/ - AS INCOME FROM OTHER SOURCES AS AGAINST THE APPELLANT'S CLAIM THAT THIS WAS A BUSINESS ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 2 INCOME. THE APPELLANT PRAYS THAT THE SAME MAY BE TREATED AS BUSINESS INCO ME ALLOWED TO BE ADJUSTED AGAINST THE INTEREST EXPENDITURE. GROUND NO.2: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT(A) GROSSLY ERRED IN UPHOLDING THE ORDER OF THE LEARNED A.O DISALLOWING INTEREST RS. 4,00,94,913/ - CAPITAL IZED TO THE PROJECT WIP ON THE GROUND THAT THE BORROWED FUNDS WERE NOT UTILIZED FOR BUSINESS OF THE APPELLANT. THE APPELLANT PRAYS THAT THE SAID DISALLOWANCE MAY BE DELETED AND SHOULD BE ALLOWED TO BE CAPITALIZED TO THE CAPITAL WIP. GROUND NO.3: ON THE FAC TS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT(A) GROSSLY ERRED IN UPHOLDING THE ORDER OF THE LEARNED A.O DISALLOWING DONATION OF RS.31,68,012/ - WHICH WAS IN THE NATURE OF SALES PROMOTION. THE APPELLANT PRAYS THT THE ADDITION OF DONATI ON OF RS.31,68,012/ - MAY BE DELETED. THE APPELLANT RESERVES ITS RIGHT TO ADD, ALTER, AMEND OR DELETE THE GROUNDS OF APPEAL. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGE D IN THE BUSINESS OF FINANCER, REAL ESTATE DEVELOPER AND INVESTOR IN REAL ESTATE, SHARES AND SECURITIES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 15/10/2010 DECLARING CURRENT YEAR BUSINESS LOSS OF RS.71,07,824/ - . THE CASE WAS SELECTED FOR SCRUTINY THROUG H CASS AND ACCORDINGLY, NOTICE U/S. 1 43(2) WAS ISSUED ON 16/09/2011 WHICH WAS DULY SERVED UPON THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO OBSERVED THAT ASSESSEE HAD RECEIVED INTEREST FROM VARIOUS PARTIES TO THE TUNE OF RS.23,89,543/ - WHICH HAD BEEN ADJUSTED AGAINST THE INTEREST PAID ON LOANS BY THE ASSESSEE AND AS SUCH, THE NET AMOUNT HAS BEEN CAPITALIZED IN THE WIP OF THE PROJECT. THE AO ASKED THE ASSESSEE TO SHOW ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 3 C AUSE AS TO WHY THE INTEREST INCOME RECEIVED FROM LOANS AND ADVANCES GIVEN S HOULD NOT BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES . 5. TOTAL OF INTEREST RECEIVED WAS RS.23,89,543/ - . THE ASSESSEE REDUCED THIS INTEREST INCOME FROM INTEREST EXPENDITURE AND FINALLY CAPITALIZED THE NET INTEREST EXPENDITURE OF RS.4,00 ,94,913/ - TO T HE CLOSING WORK IN PROGRESS. WHILE COMPLETING THE ASSESSMENT THE AO HELD THAT INTEREST INCOME OF RS.23,53,461/ - HAD TO BE TREATED AS INCOME FROM OTHER SOURCES AND NOT UNDER THE HEAD BUSINESS . DURING THE YEAR THE ASSESSEE HAS DEBITED RS. 4,0 0 ,94,913/ - TO THE WORK - IN - PROGRESS WHICH IS NET OF INTEREST RECEIVED OF RS. 33,89,543/ - . 6. FROM THE RECORD WE FOUND THAT T HE ASSESSEE HAD KEPT IDLE FUNDS IN THE FD WI TH BA NK ON WHICH INTEREST OF RS. 10,43,163/ - WAS RECEIVED. SINCE FIXED DEPOSITS WERE KEPT OUT OF BUSIN ESS FUNDS ON WHICH ASSESSEE WAS PAYING INTEREST, INTEREST RECEIVED FROM SUCH FDS WAS ADJUSTED AGAINST THE INTEREST PAID TO PARTIES. SIMILARLY THE ASSESSEE HAD GIVEN ADVANCES TO CARRY OUT ACTIVITIES IN RELATION TO THE PROJECT. SINCE THE ASSESSEE RECOVERED I NTEREST OF RS. 13,10,29 8 / - FROM THOSE PARTIES, THE SAID INTEREST RECEIVED WAS ALSO ADJUSTED AGAINST THE INTEREST PAID ON FUNDS BORROWED FOR THE PROJECTS. 7 . AO DID NOT AGREE WITH THE ASSESSEES CONTENTION AND TREATED THE INTEREST INCOME AS INCOME FROM OT HER SOURCES IN PLACE OF ASSESSEES CONTENTION THAT IT WAS INCOME FROM BUSINESS. AO ALSO DISALLOWED INTEREST CAPITALIZED TO THE WORK IN PROGRESS AMOUNTING TO RS.4,00 ,94,913/ - ON THE ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 4 PLEA THAT SAME IS NOT ALLOWABLE U/S.36(1)(III) OF THE IT ACT. AO ALSO DISA LLOWED DONATION OF RS.31,68,012/ - . 8 . BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE ACTION OF AO AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 9 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY LEARNED AR AND DR DURING THE COURSE OF HEARING BEFORE US IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. FROM THE RECORD, WE FOU ND THAT THE ASSESSEE FIRM IS IN THE BUSINESS OF FINANCER, REAL ESTATE DEVELOPER AND INVESTOR IN REAL ESTATE, SHARES AND SECURITIES. DURING THE YEAR, THE ASSESSEE HAD RECEIVED AMOUNT ADVANCE TOWARDS BOOKING OF FLATS AND THE SAME WAS SHOWN IN THE BALANCE SHE ET AS LIABILITY. THE COST INCURRED TOWARDS INCOMPLETE PROJECT IS SHOWN AS PROJECT WIP IN THE BALANCE SHEET. DURING THE YEAR THE ASSESSEE HAS DEBITED RS. 4,00 ,94,913/ - WHICH IS NET OF INTEREST RECEIVED OF RS. 23,89,543/ - . THE ASSESSEE HAD KEPT IDEAL FUNDS I N THE FD WITH BANK ON WHICH INTEREST OF RS. 10,43,163/ - WAS RECEIVED. SINCE FIXED DEPOSITS WERE KEPT OUT OF BUSINESS FUNDS ON WHICH ASSESSEE WAS PAYING INTEREST, INTEREST RECEIVED FROM SUCH FDS WAS ADJUSTED AGAINST THE INTEREST PAID TO PARTIES. SIMILARLY T HE ASSESSEE HAD GIVEN ADVANCES TO CARRY OUT ACTIVITIES IN RELATION TO THE PROJECT. SINCE THE ASSESSEE RECOVERED INTEREST OF RS. 13,10,298/ - FROM THOSE PARTIES, THE SAID INTEREST RECEIVED WAS ALSO ADJUSTED AGAINST THE ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 5 INTEREST PAID ON FUNDS BORROWED FOR THE PROJECTS. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD SUBMITTED THE ABOVE EXPLANATION TO THE AO VIDE LETTER DATED 21.03.2013. THE AO UNSATISFIED WITH THE SUBMISSION TREATED THE INTEREST RECEIVED OF RS. 23,89,543/ - AS INCOME FROM OTHER SOURCES. 10. SO FAR AS INTEREST INCOME RECEIVED BY THE ASSESSEE IN ITS BUSINESS OF REAL ESTATE IS CONCERNED, WE FOUND THAT T HE ADVANCES HAVE BEEN GIVEN TO CERTAIN PARTIES IN ANTICIPATION OF F ACILITATIVE ACTIVITIES TO BE CONDUCTED BY THE PARTIES IN RELATION TO THE PROJ ECT SINCE THE ASSESSEE WAS ABLE TO NEGOTIATE INTEREST FROM THE PARTY AND ASSESSEE WAS PAYING INTEREST ON THE FUNDS UTILISED IN THE PROJECT, THE RECOVERY OF INTEREST WAS ADJUSTED CORRECTLY AGAINST INTEREST EXPENSES. THE ASSESSEE HAD CERTAIN SURPLUS FUNDS AV AILABLE WITH IT. THESE FUNDS WERE LAYING IDLE AND HENCE THE PARTNERS WANTED TO INVEST THEM IN SUCH A WAY THAT THE FIRM COULD EARN INTEREST INCOME, THEREBY REDUCE TO AN EXTENT THE ULTIMATE BORROWING COST OF THE PROJECT AND ALSO USE THOSE FUNDS AS AND WHEN T HE NEED ARISES IN THE FUTURE FOR BUSINESS PURPOSES. HENCE, THE ASSESSEE INVESTED THE SAME IN THE FIXED DEPOSIT WITH UNION BANK, OF INDIA, IN THE ASSESSMENT YEAR 2009 - 10, THE ASSESSEE HAD AN E XISTING FIXED DEPOSIT WITH BANK , FURTHER IN AY 2010 - 11, ACCRUED I NTEREST OF WAS REINVESTED DUE TO WHICH THERE WAS INCREASE IN THE FIXED DEPOSITS . ON THIS FIXED DEPOSIT KEPT WITH THE BANK, THE ASSESSEE HAS EARNED INTEREST OF RS.10,43,163/ - . FROM FIXED DEPOSITS IN UNION BANK OF INDIA. THE BANK HELPS THE ASSESSEE BY PROVID ING ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 6 TEMPORARY OVERDRAFTS AS AND WHEN REQUIRED BY THE ASSESSEE TO HONOR PROJECT RELATED COMMITMENTS EVEN IN THE CONDITIONS OF FUND SHORTAGES . SINCE T HE FIXED DEPOSITS WERE KEPT OUT OF BUSINESS FUNDS, ON WHICH ASSESSEE WAS PAYING INTEREST AND OVERDRAFT FACIL ITY WAS OBTAINED AGAINST BANK FDS. THE ASSESSEE HAD REDUCED INTEREST RECEIVED ON BANK FD FROM THE INTEREST PAID. UNDER THESE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY JUSTIFICATION FOR TREATING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES. THE ISSU E IS ALSO COVERED BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF PARAMOUNT PREMISES PVT. LTD., 190 ITR 259 WHEREIN IT WAS HELD AS UNDER: - BUSINESS INCOME INTEREST INCOME INTEREST FROM PROSPECTIVE PURCHASERS OF BUILDINGS / FLATS FOR DELAYE D PAYMENT ALSO, INTEREST EARNED ON DEPOSITS FOR SHORT PERIOD WITH BANKS OR GIVEN AS LOANS ENTIRE INTEREST RECEIPTS AROSE OUT OF BUSINESS ACTIVITY ONLY SAME WAS THEREFORE ASSESSABLE AS BUSINESS INCOME. 11. THE ISSUE IS ALSO COVERED BY THE DECISION O F BOMBAY HIGH COURT IN CASE OF LOK HOLDINGS 308 ITR 0356 WHEREIN HONBLE HIGH COURT HELD THAT INTEREST BEING EARNED BY ASSESSEE A PROPERTY DEVELOPER, BY MAKING TEMPORARY DEPOSITS IN BANK OF SURPLUS MONEY OUT OF ADVANCES RECEIVED BY IT FROM INTENDING PURCHA SES IS BUSINESS INCOME AND CANNOT BE ASSESSED AS INCOME FROM OTHER SOURCES. 12. IN VIEW OF THE ABOVE DISCUSSION AND RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT, WE DIRECT THE AO TO TREAT INTEREST INCOME AS INCOME FROM BUSINESS. ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 7 13 . DURING THE ASSESSMENT PROCEEDINGS, ON GOING THROUGH THE DETAILS, AO OBSERVED THAT ASSESSEE HAS RECEIVED ADVANCE AGAINST BOOKING OF FLAT TO THE TUNE OF RS. 57,51,98,261/ - , HOWEVER PROJECT WIP AND LAND COST AMOUNTS TO RS. 32,86,18,740/ - ONLY. THE AO AL SO OBSERVED THAT THE ASSESSEE HAD CAPITALIZED INTEREST PAID OF RS. 4,00,94,913/ - TO THE PROJECT WIP. SINCE ADVANCE RECEIVED AGAINST BOOKING OF FLATS WERE MORE THAN THE PROJECT WIP AND LAND COST, ACCORDING TO THE AO NO BORROWED FUND WOULD HAVE BEEN UTILIZED FOR THE PROJECT. IN VIEW OF THE ABOVE, THE AO REDUCED THE PROJECT WIP BY THE INTEREST AMOUNT CAPITALIZED BY THE ASSESSEE . 14. IN SO FAR AS INCURRING OF INTEREST EXPENDITURE IS CONCERNED WHICH HAS BEEN CAPITALIZED AS WORK IN PROGRESS, WE FOUND THAT DURING THE YEAR ASSESSEE HAD PAID INTEREST ON LOAN FROM BANK AND LOAN FROM PARTIES. DURING THE ASSESSMENT PROCEEDINGS, ONGOING THROUGH THE DETAILS AND BALANCE SHEET, THE AO OBSERVED THAT ASSESSEE HAS RECEIVED ADVANCE AGAINST BOOKING OF FLAT TO THE TUNE OF RS.57, 51,98,261/ - , HOWEVER PROJECT WIP AND LAND COST AMOUNTS TO RS.32,86,18,740/ - ONLY. THE AO ALSO OBSERVED THAT THE ASSESSEE HAD CAPITALIZED INTEREST PAID OF RS. 4,00,94,913/ - TO THE PROJECT WIP . SINCE ADVANCE RECEIVED AGAINST BOOKING OF FLATS WERE MORE THAN T HE PROJECT WIP AND LAND COST, ACCORDING TO THE AO NO BORROWED FUND WOULD HAVE BEEN UTILIZED FOR THE PROJECT IN VIEW OF ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 8 THE ABOVE, THE AO REDUCED THE PROJECT WIP BY THE INTEREST AMOUNT CAPITALIZED BY THE ASSESSEE . 15. AS PER THE DETAILS AVAILABLE ON RECORD WE O BSERVE THAT THE ASSESSEE HAD RECEIVED ADVANCES FOR THE FLATS, WHICH ARE YET PENDING ALLOTMENT. THESE ADVANCES HAVE BEEN RECEIVED FOR THE FUTURE PROJECTS. HENCE, THESE FUNDS HAD NO NEXUS WITH THE CURRENT ON - GOING PROJECTS. DETAILED BREAKUP OF THE ADVANC ES RECEIVED WAS FURNISHED BEFORE THE LOWER AUTHORITIES. THE FUNDS WERE RECEIVED FOR THE FUTURE PROJECTS WHICH WERE YET IN CONCEPTUALIZATION PHASE AND NOT YET COMMENCED. HENCE, THE ASSESSEE WAS OBLIGATED NOT TO USE THESE FUNDS FOR ITS ONGOING PROJECTS, THE REASON BEING, SHOULD THESE CONCEPTUALIZED PROJECTS NOT START UP OR COMMENCE, THE ASSESSEE WOULD HAVE TO REFUND THE ENTIRE ADVANCE RECEIVED. IF THE ASSESSEE HAD UTILIZED THESE IN ITS CURRENTLY ONGOING PROJECTS, WOULD HAVE BEEN DIFFICULT TO RECOVER IN A SHOR T NOTICE, SINCE, THE ENTIRE SALE PROCEEDS FOR THE FLATS ARE NOT RECEIVED IN LUMP AT ON GO, INSTEAD THEY ARE RECEIVED IN INSTALLMENTS AND WOULD HAVE BEEN DIFFICULT FOR T H E ASSESSEE TO ACCUMULATE SO MANY INSTALLMENTS TO COVER - UP THE REFUND OF THE ADVANCES RE CEIVED FOR BOOKING OF FLATS. ALSO, IT WOULD HAVE BEEN DIFFICULT TO PROCURE LOANS FROM THE LENDERS TO COVER UP THE PROBABLE REFUND AMOUNT, SINCE THERE WOULD HAVE BEEN NO SECURITY AVAILABLE WITH THE ASSESSEE FOR SUCH A PURPOSE. FURTHER, IT WAS EASIER FOR THE ASSESSEE TO PROCURE LOANS FROM THE BANKERS AND OTHER LENDING INSTITUTIONS AGAINST THE SECURITY OF THE ONGOING PROJECT. AGAINST THIS BACKDROP, THE MEMBERS OF THE ASSESSEE FIRM, DECIDED ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 9 THAT IT WOULD BE PRUDENT TO INCUR A LITTLE MORE COST, IN THE NATURE OF BORROWING COST, INSTEAD OF TAKING A RISK OF GOING BANKRUPT AND THEREBY TARNISHING THE IMAGE AND REPUTATION THE ASSESSEE FIRM AND ITS SISTER CONCERNS HAVE BUILT OVER THE YEARS. 16. NOW, IN ORDER TO UTILIZE THE ADVANCES FOR THE BOOKING OF FLATS RECEIVED AND TO KEEP THE BORROWING COST TO THE MINIMAL , ASSESSEE DECIDED TO UTILIZE THE SAME FOR MEETING THE SHORT TERM REQUIREMENTS ARISING IN THE ONGOING PROJECTS, THUS ONLY LONG TERM REQUIREMENT OF FUNDS WOULD HAVE TO BE BORROWED. ALSO , THE SAME FUNDS WERE UTILIZED TO ASSIST OTHER SISTER CONCERNS IN THEIR TIMES OF LIQUIDITY CRUNCH AND OTHER SHORT TERM REQUIREMENTS, BY WAY OF SHORT TERM LOANS AND ADVANCES, FURTHER, THE ASSESSEE WAS NOT PAYING ANY INTEREST ON THE ADVANCES, HENCE, IT DID NOT CHARGE ANY INTEREST ON THE AMOUNTS ADVANCED. MERELY BECAUSE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE HAS BEEN DIVERTED FOR NON - BUSINESS PURPOSES, ASSESSEES CLAIM OF INTEREST ON THE LOAN TAKEN FOR THE PURPOSE OF BUSINESS AND WHICH HAS BEEN UTILIZED FOR THE PURPOSE OF BUSINESS CANNOT BE DECLINED. 1 7 . THE BARE READING OF SECTION 36(L)(III) IS AS FOLLOWS: - '36(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 (I) AND (IT) ****** (III) THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION : - . PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED IN THE BOOKS OF ACCOUNT ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 10 OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NO T BE ALLOWED AS DEDUCTION. EXPLANATION. - RECURRING SUBSCRIPTIONS PAID PERIODICALLY BY SHAREHOLDERS, OR SUBSCRIBERS IN MUTUAL BENEFIT SOCIETIES WHICH FULFILL SUCH CONDITIONS AS MAY BE PRESCRIBED, SHALL BE DEEMED TO BE CAPITAL BORROWED WITHIN THE MEANING O F THIS CLAUSE.' THE SUB SECTION HAS THREE IMPORTANT WORDS OR PHRASES THAT ARE CORE TO UNDERSTANDING OF THIS SECTION I.E. (I) INTEREST, (II) BORROWED AND, (II I) FOR THE PURPOSE OF BUSINESS OR PROFESSION. (I) MEANING OF 'INTEREST' - THE DEFINITION OF 'INTE REST* IN SECTION 2(28A) MEANS 'INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED'.. BUT FOR SECTION 36(L)(III), 'INTEREST 1 ' IS RESTRICTED TO THAT ON MONEY BORROWED AND NOT ON DEBT INCURRED. IN SIMPLE WORDS, THE ESSENCE OF IN TEREST IS THAT IT IS A PAYMENT WHICH BECOMES DUE BECAUSE THE CREDITOR HAS NOT HAD HIS MONEY AT HIS DISPOSAL. IT MAY BE REGARDED EITHER AS REPRESENTING THE PROFIT HE MIGHT HAVE MADE IF HE HAD HAD THE USE OF HIS MONEY T OR CONVERSELY, THE LOSS HE SUFFERED BEC AUSE HE HAD NOT THAT USE. THE GENERAL IDEA IS THAT HE IS ENTITLED TO COMPENSATION FOR THE DEPRIVATION, (II) CONCEPT OF 'BORROWED' - PRECISIONS OF SECTION 36(L){III) CONCERN CAPITAL BORROWED AND NOT OTHER DEBTS OR LIABILITY. A LOAN OF MONEY UNDOUBTE DLY RESULTS IN A DEBT, BUT EVERY DEBT DOES NOT INVOLVE A LOAN. LIABILITY TO PAY A DEBT MAY ARISE FROM DIVERSE SOURCES AND A LOAN IS ONE OF SUCH SOURCES. THE LEGISLATURE HAS, UNDER THIS CLAUSE, PERMITTED AS AN ALLOWANCE INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS; AND THE CAPITAL, IN THIS CONTEXT, MEANS MONEY AND NOT ANY OTHER ASSET PURCHASED ON CREDIT [BOMBAY STEAM NAVIGATION CO. PR. LTD. V. CIT, 561TR 52 (SC). (III) THE PHRASE 'FOR THE PURPOSE OF BUSINESS' - THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURS IN SECTION 36(L)(III) AND ALSO IN SECTION 37(1). A SIMILAR EXPRESSION WITH DIFFERENT WORDING ALSO OCCURS IN SECTION 57(III) WHICH READS AS 'FOR THE PURPOSE OF MAKING OR EARNING INCOME'. THIS ISSUE CAME UP FOR CONSIDERATION BEFOR E THE SUPREME COURT AND THE HON'BLE SUPREME COURT WHILE GIVING JUD GMENT IN THE CASE O/MADHAV PRASA D JATIA V. C/T, (SC) 118 JTR 200 HAS ESTABLISHED THAT THE EXPRESSION OCCURRING IN SECTION 36(L)(III) IS WIDER IN SCOPE THAN THE EXPRESSION OCCURRING IN SECTIO N 57(III), THUS, MEANING THEREBY THAT THE SCOPE FOR ALLOWING A ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 11 DEDUCTION UNDER SECTION 36(L)(III) WOULD BE MUCH WIDER THAN THE ONE AVAILABLE UNDER SECTION 57(III). THIS PHRASE, AS HELD BY MANY LEGAL PRONOUNCEMENT, IS THE MOST IMPORTANT YARDSTICK FOR THE A LLOWABILITY OF DEDUCTION UNDER SECTION 36(L)(III) OF THE ACT, WHILE EXPLAINING THE MEANING OF THIS PHRASE THE HON'BLE SUPREME COURT IN THE CASE OF S. A. BUILDERS LTD. VS. CIT(A), CHANDIGARH REPORTED IN 288 ITR 1 HAS USED THE WORD 'COMMERCIAL EXPEDIENCY'. B Y USING THIS PHRASE HON'BLE SUPREME COURT HAS GIVEN A NEW DIMENSION AND CLARIFIED THE, CONCEPT FURTHER. IN THE JUDGMENT THE SUPREME COURT HAS DEFINED COMMERCIAL EXPEDIENCY AS 'AN EXPRESSION OF WIDE IMPORTS AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINES SMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE, IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY'. FURTHER, FOLLOWING THIS JUDGMENT THE HIGH COURT OF DELHI, IN THE CASE OF PUNJAB STAINLESS STEEL INDS. VS. CIT 324 JTR 396, HAS FURTHER ELABORATED 'THE COMMERCIAL EXPEDIENCY WOULD INCLUDE SUCH PURPOSE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST AND MAY INCLUDE MEASURES TAK EN FOR .PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS, WHICH HAS TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF ITS DIRECTORS OR PARTNERS AS THE CASE MAY BE. IN OTHER WORDS, THERE HAS TO BE A NEXUS BETWEEN THE ADVANCING OF FUNDS AND BUSINESS INTEREST OF THE ASSESSEE - FIRM. THE APPROPRIATE TEST IN SUCH A CASE WOULD BE AS TO WHETHER A REASONABLE PERSON STEPPING INTO THE SHOES OF THE DIRECTORS/PARTNERS OF THE ASSESSEE - FIRM AND WORKING SOLELY IN THE INTEREST OF THE ASSESSEE - FIRM/ COMPANY, WOULD HAVE EXTENDED SUCH INTEREST FREE ADVANCES. SOME BUSINESS OBJECTIVE SHOULD BE SOUGHT TO HAVE BEEN ACHIEVED BY EXTENDING SUCH INTEREST FREE ADVANCES WHEN THE ASSESSEE - FIRM/COMPANY ITSELF IS BORROWING FUNDS FOR RUNNING ITS BUSINESS'. THUS, WHERE THE F UNDS OF THE BUSINESS ARE DIVERTED FOR INTEREST FREE LOANS THE MAIN CRITERIA FOR PERMISSIBILITY OF INTEREST ON THOSE FUNDS ARE BASED ON WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY OR NOT THE PHRASE 'COMMERCIAL EXPEDIENCY' HAS FOLLOWING IMPORTANT TRAITS AS ESTA BLISHED BY CASE LAWS CITED SUPRA: (I) SUCH PURPOSE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST. ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 12 (II) MAY INCLUDE MEASURES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS. (III) TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF ITS DIRECTORS OR PARTNERS, AS THE CASE MAY BE. (IV) THERE HAS TO BE A NEXUS BETWEEN THE ADVANCING OF FUNDS AND BUSINESS INTEREST OF THE ASSESSEE. SOME BUSINESS OBJECTIVE SHOULD BE SOUGHT TO HAVE BEEN ACHIEVED BY EXTENDING SUCH INTEREST FREE ADVANCES WHEN THE ASSESSEE FIRM/COMPANY ITSELF IS BORROWING FUNDS FOR RUNNING ITS BUSINESS. THE HON'BLE SUPREME COURT HAS ALSO DELVED INTO THE CASE WHERE THERE WOULD BE MIXED FUND AT THE DISPOSAL OF THE ASSESSEE. IT FURTHER CLARIFIES THAT UNDER SECTION 36(L)(III} THE ULTIMATE USE OF THE FUND IS IMPORTANT. IT MAY NOT BE RELEVANT AS TO WHETHER THE ADVANCES HAVE BEEN EXTENDED OUT OF THE BORROWED FUNDS OR OUT OF MIXED FUNDS WHICH INCLUDE BORROWED FUNDS. THE TEST TO BE APPLIED IN SUCH CASES IS NOT THE SOURCE OF THE FU NDS BUT THE PURPOSE FOR WHICH THE ADVANCES ARE EXTENDED. THUS, FOR ALLOWANCE OF A CLAIM FOR DEDUCTION OF INTEREST UNDER THIS PROVISION FOLLOWING THREE CONDITIONS ARE THERE: I THE MONEY, THAT IS CAPITAL, MUST HAVE BEEN BORROWED BY THE ASSESSEE - II. IT M UST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS. III. THE ASSESSEE MUST HAVE PAID INTEREST ON THE BORROWED AMOUNT I.E. HE HAS SHOWN THE SAME AS AN ITEM OF EXPENDITURE. THE ABOVE MENTIONED THREE CONDITIONS HAVE BEEN ESTABLISHED LEGALLY BY SUPREME C OURT JUDGMENT IN THE CASE OF MADHAV PRASAD JATIA VS. CJT, (1979) 118 ITR 200 (SC). 18 . IN VIEW OF THE DOCUMENTS PLACED ON RECORD, WE FOUND THAT ASSESSEE HAS SUCCESSFULLY SATISFIED WITH THE REQUISITE CONDITIONS FOR CLAIM OF EXPENDITURE OF INTEREST U/S.36( 1)( III). WE ALSO FOUND THAT INTEREST BEARING FUNDS BORROWED FOR THE PURPOSE OF BUSINESS AND ONLY INTEREST FREE FUNDS WERE DIVERTED FOR NON - BUSINESS PURPOSES. SUCH DIVERSION OF INTEREST FREE FUNDS WILL NOT DIS ENTITLE THE ASSESSEE TO CLAIM INTEREST ON THE LOANS ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 13 BORROWED USED FOR THE PURPOSE OF BUSINESS AND ACTUALLY UTILIZED FOR THE PURPOSE OF BUSINESS. A CCORDINGLY, AO WAS NOT JUSTIFIED IN DECLINING CAPITALIZATION OF SUCH INTEREST EXPENDITURE. ACCORDINGLY, AO IS DIRECTED TO DELETE THE SAME. 1 9 . ASSESSEE IS ALSO AGGRI EVED FOR DISALLOWANCE OF DONATION OF RS.31,68,012/ - . DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PAID RS. 31,68,012/ - TOWARDS DONATION WHICH WAS IN THE NATURE OF SALES PROMOTION EXPENSES. DURING THE ASSESSMENT PROCEEDINGS, THE AO NEVER CALLED FOR THE DETAILS OF THE DONATION PAID NOR ANY EXPLANATION WAS SOUGHT FOR A LLOW ABILITY OF THE SAME. THE AO DISALLOWED THE DONATION OF RS.31,68,012/ - SINCE IN HIS OPINION THE SAME ARE NOT ALLOWABLE AS EXPENDITURE U/S.30 TO 37 OF THE ACT. 20 . RIVAL CON TENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FROM THE RECORD, WE FOUND THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PAID RS. 31,68,0 12/ - TOWARDS DONATION WHICH WAS IN THE NATURE OF SALES PROMOTION EXPENSES. DURING THE ASSESSMENT PROCEEDINGS, THE AO NEVER CALLED FOR THE DETAILS OF THE DONATION PAID NOR ANY EXPLANATION WAS SOUGHT FOR ALLOWABILITY OF THE SAME. WITHOUT GIVING OPPORTUNITY, THE AO DISALLOWED THE DONATION OF RS. 31 ,68,012/ - ON PLEA THAT THE SAME ARE NOT ALLOWABLE AS EXPENSES UNDER SEC TION 30 TO 37 OF THE ACT . 2 1 . THE DISALLOWANCE SO MADE BY THE AO WAS CONFIRMED BY CIT(A) AFTER OBSERVING THAT NO DETAILS OF PAYMENT OR NAME AND ADDRESS OF THE PARTIES ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 14 HAVE BEEN FURNISHED BY THE ASSESSEE, THEREFORE, IT IS NOT CLEAR AS TO WHOM THESE PAYMENT S HAVE BEEN MADE AND FOR WHAT PURPOSE? 22 . IT WAS CONTENTION OF LD. AR THAT DONATIONS GIVEN BY THE ASSESSEE WERE NOT VOLUNTARY, BUT WERE GIVEN TO VARIOUS ORGANIZATIONS IN RELATION TO WHERE THE ASSESSE E IS INTO REDEVELOPMENT FOR THE PURPOSE OF PROMOTING THE PROJECT. THE ACCOUNTING POLICY OF COMPANY IS TO CHARGE DONATION IN THE NATURE OF ADVERTISEMENT TO PROFIT & LOSS ACCOUNT . IT WAS FURTHER ARGUED THAT AS PER SECTION 37 OF THE ACT, ANY EXPENSES INCURRED IN RELATION TO BUSINESS WHICH IS NOT COVERED UNDER SECT ION 30 TO 36 IS ALLOWED AS A DEDUCTION UNDER SECTION 37 OF THE ACT . 2 3 . LD. AR DRAWN OUR ATTENTION TO THE DETAILS FILED BEFORE THE CIT(A) AS PLACED AT PAGE 14 & 15 AND PAGE 20 OF THE PAPER BOOK. IT APPEARS THAT DETAILS SO FILED HAVE NOT BEEN CONSIDERED BY LOWER AUTHORITIES. KEEPING IN VIEW THE SUBSTANTIAL INTEREST OF JUSTICE, WE RESTORE THIS ISSUE BACK TO THE FILE OF THE AO FOR DECIDING AFRESH AFTER CONSIDERING THE DETAILS SO FILED BY ASSESSEE . NEEDLESS TO SAY THAT ASSESSEE SHOULD BE GIVEN DUE OPPORTUNITY B EFORE DECIDING THE ISSUE. WE DIRECT ACCORDINGLY. 2 4 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 / 11 /201 8 SD/ - ( RAM LAL NEGI ) SD/ - (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 30 / 11 /201 8 KARUNA SR. PS ITA NO. 257/MUM/2017 M/S. SHREEPATI BUILD INFRA INVESTMENT LTD., 15 COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUA RD FILE. //TRUE COPY//