M/S. DAVANAM CONSTRUCTIONS PRIVATE LIMITED, BENGALURU V. DCIT, CIRCLE-2(1)(2), BENGALURU

ITA 314/BANG/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7270 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 27-08-2021
• Assessment Year: 2013-2014
• Appeal Filed On: 21-02-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: H KABILA CI T B ENGALURU
• Keywords: Business expenditure; Opportunity of being heard; Source of fund; Tax effect; Commercial expediency
• Section: 234B; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI , JUDICIAL MEMBER IT A NO. 3 14/ BANG / 2019 ASSESSMENT YEAR : 2013 - 14 M/S. DAVANAM CONSTRUCTIONS PRIVATE LIMITED, NO.148, SURVEYOR STREET, BASAVANAGUDI, BENGALURU 560 004. PAN: AABC D 3880H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI NITESH RANJAN, CA RESPONDENT BY : SHRI H. KABILA, ADDL .CI T (DR)(ITAT), B ENGALURU. DATE OF HEARING : 27. 08 .202 1 DATE OF PRONOUNCEMENT : 0 7 .0 9 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 17.12.2018 OF THE CIT(APPEALS)-2, BENGALURU FOR THE ASSESSMENT YEAR 2013-14 ON THE FOLLOWING GROUNDS :- GROUNDS OF APPEAL TAX EFFECT RE LATING TO EACH GROUND OF APPEAL 1. THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IS OPPOSED TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. - NA - ITA NO.314/BANG/2019 PAGE 2 OF 7 2. THE ORDER IS PASSED IN HASTE,WITHOUT PROVIDING SUFFICIENT AND REASONABLE OPPORTUNITY OF BEING HEARD. - NA - 3. THE ORDER IS PASSED AGAINST THE PRINCIPLE OF NATURA L JUSTICE AND THUS LIABLE TO BE QUASHED. _ NA - 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF LD. ASSESSING OFFICER IN RESPECT OF DISALLOWANCE OF RS.40,46,607/- UNDER SECTION 36(1)(III) OF THE ACT. RS. 12,50,402/- 5. THE LD. ASSESSING OFFICER HAS GROSSLY ERRED IN NOT APPRECIATING THE FACT THAT THE BORROWINGS WERE SPECIFICALLY UTILIZED FOR THE 'PURPOSE OF THE BUSINESS' AS REQUIRED BY SECTION 36(1)(III) OF THE ACT. 6. THE LD. CIT(A) AND THE LD. ASSESSING OFFICER HAS FAILED TO COMPREHEND THE FACT THAT THE APPELLANT HAD ADVANCED INTEREST FREE LOANS TO ITS SUBSIDIARY, AMETHYST HOSPITALITY (P) LTD, ON THE GROUNDS OF COMMERCIAL EXPEDIENCY AND THE SAME WAS UTILIZED BY AMETHYST HOSPITALITY (P) LTD FOR THEIR BUSINESS OPERATIONS. 7. THE LD. CIT(A) AND THE LD. ASSESSING OFFICER HAS FAILED TO APPRECIATE THE FACT THAT THE TRANSACTION WAS IN THE NATURE OF SHAREHOLDERS' ACTIVITY OR STEWARDSHIP ACTIVITIES. 8. THE LD. CIT(A) ERRED IN UPHOLDING THE LEVY OF INTEREST BY THE LD. AO UNDER SECTION 234B & 234C OF THE ACT. RS. 4,54,563/- TOTAL TAX EFFECT RS.17,04,965/- 2. THE FACTS OF THE CASE ARE THAT THERE WAS A DISA LLOWANCE OF RS. 40,46,607/- BY INVOKING THE PROVISIONS OF SECTION 3 6 (I) (III) R.W.S. 37 OF INCOME TAX ACT, 1961 [THE ACT]. THE ASSESSEE SUBMIT TED THAT AN AMOUNT OF RS. 7.1 CRORES WAS TRANSFERRED TO SUBSIDIARY AMETHY ST HOSPITALITY (P) LTD ITA NO.314/BANG/2019 PAGE 3 OF 7 AND RS.6.9 CRORES WAS USED FOR INVESTMENT IN ITS SU BSIDIARY DAVANAM CONSTRUCTIONS SDN BHD, MALAYSIA. OUT OF THE AMOUNTS ADVANCES TO AMETHYST HOSPITALITY (P) LTD., RS. 1.9 CRORES WAS F OR INVESTMENTS AND RS. 5.22 CRORES WAS GIVEN AS INTEREST FREE ADVANCE FOR ITS BUSINESS. THE PROPORTIONATE FINANCIAL COSTS ON INTEREST FREE ADVA NCES MADE TO THE SUBSIDIARY (AMETHYST HOSPITALITY PRIVATE LIMITED) O F RS. 5.22 CRORES WAS DISALLOWED WHICH WORKED OUT TO AN AMOUNT OF RS. 40, 46,607/- U/S 36(1)(III) R.W.S 37 OF THE ACT AND ADDED TO THE INCOME. THE AS SESSING OFFICER ON EXAMINATION HAS HELD THAT THE AMOUNT SPENT BY THE A SSESSEE ON ITS SUBSIDIARY IN MALAYSIA IS ALLOWABLE, AS IT IS IN TH E SAME LINE OF BUSINESS AND THERE IS SOME COMMERCIAL EXPEDIENCY IN ADVANCING TH E AMOUNT TO IT. BUT THE SUBSIDIARY, AMETHYST HOSPITALITY PRIVATE LIMITE D, IS IN HOSPITALITY BUSINESS AND THERE IS NO CONNECTION WHATSOEVER BETW EEN THE ASSESSEE'S BUSINESS OF 'LAND DEVELOPMENT AND CONSTRUCTION' AND HOSPITALITY DONE BY THE OTHER COMPANY. IN SUCH CIRCUMSTANCES, THE PAYMENT O F INTEREST BY THE ASSESSEE ON LOANS WHICH WERE UTILIZED BY ITS SUBSID IARIES FOR SOME OTHER UNRELATED FIELD OF BUSINESS IS NOT ALLOWABLE AS PER AO. 3. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT AS PER THE FACTS ON RECORD BY THE AO VIS--VIS THE PROPOSITION OF LAW L AID DOWN BY THE SUPREME COURT IN DALMIA'S CASE THAT SINCE THE SISTER CONCER N WAS A SUBSIDIARY AND THE ASSESSEE COMPANY BEING THE HOLDING COMPANY HAD INTEREST IN ITS SUBSIDIARY, HENCE THE LOAN ADVANCED TO SUBSIDIARY W AS OUT OF COMMERCIAL EXPEDIENCY. FROM THE PERUSAL OF THE BALANCE SHEET, HE FOUND THAT THERE WAS INCREASE IN LOANS AND FIXED ASSETS, THEREFORE I T COULD NOT BE SAID THAT ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT. MOREOVER THE SUBSIDIARY IS TOTALLY IN DIFFERENT LIN E OF BUSINESS WHICH IS LAND DEVELOPMENT AND CONSTRUCTION AND HOSPITALITY AND IT CANNOT BE SAID THAT THERE WAS COMMERCIAL EXPEDIENCY. THEREFORE KEEPING IN MIND THE PROPOSITION OF LAW LAID DOWN BY THE SUPREME COURT, THE CIT(A) HELD THAT THE ITA NO.314/BANG/2019 PAGE 4 OF 7 AO WAS JUSTIFIED IN DISALLOWING THE PROPORTIONATE F INANCIAL COSTS ON INTEREST FREE ADVANCES MADE TO THE SUBSIDIARY U/S.36(1)(III) R.W.S. 37 OF THE ACT. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. AR SUBMITTED THAT THE BORROWINGS WERE SP ECIFICALLY UTILIZED FOR THE PURPOSE OF BUSINESS AS REQUIRED U/S. 36(1)( III) OF THE ACT. THE ASSESSEE HAD ADVANCED INTEREST FREE LOANS TO ITS SU BSIDIARY, AMETHYST HOSPITALITY (P) LTD. ON THE COMMERCIAL EXPEDIENCY A ND THE SAME WAS UTILIZED BY THE SUBSIDIARY FOR ITS BUSINESS OPERATI ONS. THE TRANSACTION WAS IN THE NATURE OF SHAREHOLDERS ACTIVITY OR STEWARDSHIP ACTIVITIES. 5. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS ADVAN CED INTEREST-FREE LOAN TO ITS SUBSIDIARY OUT OF BORROWED FUNDS AND HA S NOT DERIVED ANY BUSINESS ADVANTAGE BY ADVANCING SUCH A HUGE AMOUNT AND THERE WAS NO COMMERCIAL EXPEDIENCY TO ADVANCE SUCH LOAN. BEING SO, IT IS NOT A BUSINESS EXPENDITURE TO ALLOW AS A DEDUCTION U/S. 3 6(1)(III) R.W.S. 37 OF THE ACT. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE ADVANCED AN AMOUNT OF RS .7.1 CRORES TO AMETHYST HOSPITALITY (P) LTD. AND RS.6.9 CRORES TO DAVANAM CONSTRUCTIONS SDN BHD, MALAYSIA. WITH REGARD TO AMOUNT ADVANCED TO THE SUBSIDIARY, DAVANAM CONSTRUCTIONS, THE AO ALLOWED THE INTEREST ON LOAN HOLDING THAT THERE WAS COMMERCIAL EXPEDIENCY. HOWEVER, WITH REG ARD TO THE AMOUNT ADVANCED TO AMETHYST HOSPITALITY (P) LTD. WHICH IS IN HOSPITALITY BUSINESS THE AO OBSERVED THAT THERE WAS NO CONNECTION BETWEE N ASSESSEES BUSINESS OF LAND DEVELOPMENT AND CONSTRUCTION AND T HE HOSPITALITY BUSINESS DONE BY THE SUBSIDIARY, AS SUCH PAYMENT OF INTEREST SUCH LOAN WAS DISALLOWED BY THE AO AND THE CIT(APPEALS). WE HAVE CAREFULLY GONE THROUGH THE FINANCIAL STATEMENTS OF M/S. AMETHYST H OSPITALITY (P) LTD. FOR THE YEAR ENDED 31.3.2013 AT PAGE 282 OF PB WHICH SH OWS AS UNDER:- ITA NO.314/BANG/2019 PAGE 5 OF 7 PARTICULARS AS ON 31.3.2013 AS ON 31.3.2012 NOTE 9 LONG-TERM LOANS AND ADVANCES UNSECURED, CONSIDERED GOOD LOANS AND ADVANCES TO RELATED PARTIES DEPOSITS CAPITAL ADVANCES 2,33,77.864 6,00,000 8,00,00,000 2,24,50,981 - 19,27,99,870 10,39,77,864 21,52,50,851 7. IT SHOWS THAT AFTER RECEIVING THE LOAN FROM THE ASSESSEE, THE SAID SUBSIDIARY AMETHYST HOSPITALITY (P) LTD. ADVANCED T O RELATED PARTIES, THE CUMULATIVE BALANCE IN THE YEAR WAS RS.2,33,77,864. THIS IS THE CLOSING BALANCE AS ON 31.3.2013. THE ASSESSEE HAS NOT FURN ISHED THE DETAILS OF DAY TO DAY BALANCE IN THAT ACCOUNT. EVEN CONSIDERI NG THIS BALANCE, IT IS CLEAR THAT THE AMOUNT OF LOAN RECEIVED FROM THE ASS ESSEE BY AMETHYST HOSPITALITY (P) LTD. WAS NOT AT ALL USED FOR BUSINE SS PURPOSES. IN OTHER WORDS, IT WAS IN TURN ADVANCED BY AMETHYST HOSPITAL ITY (P) LTD. TO RELATED PARTIES WITHOUT ANY INTEREST. 8. BEFORE US, THE ASSESSEE STRONGLY RELIED ON THE J UDGMENT OF SUPREME COURT IN S.A. BUILDERS V. CIT, 288 ITR 1 (SC) WHEREIN IT WAS HELD THAT THOUGH INTEREST EXPENDITURE MAY NOT HAVE BEEN INCUR RED UNDER ANY LEGAL OBLIGATION, BUT IT IS ALLOWABLE AS BUSINESS EXPENDI TURE, IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. THUS, WHETHER TH E BUSINESS FUNDS WAS DIVERTED FOR INTEREST FREE LOANS TO SUBSIDIARIES, T HE MAIN CRITERION FOR ALLOWABILITY OF THOSE FUNDS ARE BASED ON WHETHER IT WAS ON GROUNDS OF COMMERCIAL EXPEDIENCY OR NOT. THE PHRASE COMMERCIAL EXPEDIENCY HAS FOLLOWING IMPORTANT TRITES AS ESTABLISHED BY THIS C ASE LAW ( SUPRA) :- (1) SUCH PURPOSE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE FOR ITS BUSINESS PURPOSE. ITA NO.314/BANG/2019 PAGE 6 OF 7 (2) MEASURES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS EXPENDITURE. (3) TO BE DISTINCT FROM THE PERSONAL INTEREST OF IT S DIRECTORS OR PARTNERS, AS THE CASE MAY BE. (4) THERE HAS TO BE NEXUS BETWEEN THE ADVANCEMENT O F INTEREST FREE 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 COMP ANY IS ITSELF BORROWING FUNDS FOR RUNNING ITS BUSINESS. (5) UNDER SECTION 36(1)(III) OF THE ACT, THE ULTIMA TE USE OF FUNDS IS IMPORTANT. IT MAY NOT BE RELEVANT AS TO WHETHER TH E ADVANCES HAVE BEEN EXTENDED OUT OF BORROWED FUNDS OR INTEREST FRE E FUNDS OR MIXED FUNDS WHICH INCLUDES BORROWED FUNDS. THE TEST TO B E APPLIED IN SUCH CASES IS NOT THE SOURCE OF FUNDS, BUT THE PURPOSE F OR WHICH THE ADVANCES ARE EXTENDED. 9. IN THE PRESENT CASE, THOUGH THE ASSESSEE ADVANCE D INTEREST BEARING FUNDS TO AMETHYST HOSPITALITY (P) LTD., THE ASSESSE E HAS NOT BEEN ABLE TO ESTABLISH ANY COMMERCIAL EXPEDIENCY TO SUCH ADVANCI NG OF INTEREST FREE LOAN TO THIS COMPANY AND BOTH THE COMPANIES ARE IN DIFFERENT LINE OF BUSINESS. FURTHER, AFTER RECEIVING THE LOAN FROM A SSESSEE COMPANY, AMETHYST HOSPITALITY (P) LTD. USED THE SAME FUNDS T O ADVANCE TO THE RELATED PARTIES FROM YEAR TO YEAR AS SEEN FROM ITS ANNUAL ACCOUNTS REPRODUCED IN EARLIER PARA. BEING SO, THE CIT(APPE ALS) RIGHTLY HELD THAT THE ASSESSEE COMPANY AND SUBSIDIARY ARE IN TWO DIFFEREN T BUSINESS BEING LAND DEVELOPMENT & CONSTRUCTION AND HOSPITALITY AND THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH ANY BUSINESS ADVANTAGE DERIVED BY THE ASSESSEE BY ADVANCING SUCH LOAN TO AMETHYST HOSPITALITY (P) LTD . IN SUCH ITA NO.314/BANG/2019 PAGE 7 OF 7 CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE CIT(A PPEALS) IS JUSTIFIED IN SUSTAINING THE ADDITION MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 7 TH DAY OF SEPTEMBER, 2021. SD/- SD/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 7 TH SEPTEMBER, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.