The DCIT-2(1), Indore V. M/s. Diaspark Infotech Pvt. Ltd., Indore

ITA 431/IND/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 9649 (ITAT-INDORE)
• Duration Of Justice: 4 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-01-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 06-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Commercial expediency; CHAPTER IV
• Section: 37; 28; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE (Convened through Virtual Court) BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR AND SHRI MANISH BORAD, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.431/Ind/2017 ( नधा रण वष /A s s e s s m e nt Y e a r : 2 0 1 2 - 1 3 ) The D y. CI T Ci rcl e-2( 1) Indore बनाम/ Vs . Dia spa rk Infote ch P. Lt d. Labh-Ganga 582, MG Roa d, Indore थायी लेखा सं./जीआइआर सं./PA N/ GI R No. : AACCS 7899 G (अपीलाथ /Appellant) . . ( यथ / Respondent) अपीलाथ ओर से/ Appellant by : Shri Amit Soni, DR यथ क ओर से/Respondent by: Shri K.C. Agrawal, AR स ु नवाई क तार ख/ D a t e o f H e a r i n g 12/01/2022 घोषणा क तार ख /D a t e o f P r o n o u n c e me n t 27 /01/2022 आदेश / O R D E R PER MAHAVIR PRASAD, JM: This is an appeal filed by the Revenue against the order passed in Appeal No.IT-45/16-17 dated 22/03/2017 by the Ld. Commissioner of Income Tax (Appeals)-III, Indore [‘CIT(A)’ in short] arising out of assessment order dated 28/03/2016 for AY 2012-13. 2. The solitary ground of appeal raised by the Revenue is as follows: 1. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in law by deleting the addition of Rs.1,78,85,647/- made by the AO on account of interest free loan advance out of ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 2 - interest bearing borrowed fund by considering the justification that the interest free loans were given for commercial expediency i.e. for the purpose of creating infrastructure facilities. 2.1. Thus, the solely disallowance of Rs.1,78,85,647/- made by the Assessing Officer on account of interest-free loan made for commercial expediency being under challenge before us. 3. The brief facts of the case is that the respondent-assessee is a company engaged in the activity of development of software for over two decades and has on its roll around 400 employees. The respondent assessee-company is running its operation on rented premises. Looking at the prospects and growth, being software company and increasing team size established infrastructure was an essential need of the assessee- company. Thus, the respondent assessee during the Financial Year has entered into agreements with M/s.Suvi Buildtech Pvt.Ltd. (SBPL) and M/s. Jewels Buildcon Pvt.Ltd. (JBPL) which was wholly owned subsidiary companies, who agreed to provide buildings as per the requirements of the assessee-company. The assessee-company had advanced funds to SBPL and JBPL against acquisition of land and development of infrastructure building by providing collateral security through EXIM Bank. In the AY 2012-13 advances were given by the respondent to the aforesaid companies amounting to Rs.2747.38 lakhs as against interest-free funds available with the respondent including share capital and reserves amounting to Rs.1471.39 lakhs. These are accepted facts by the learned Assessing Officer. As per agreements entered into for obtaining infrastructure facility with premises on rent, advances have been made to SBPL and JBPL and in turn, the said companies utilized the said funds for ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 3 - procurement of land from IDA (Indore Development Authority) by entering into agreements. 3.1. In furtherance of the agreements, the lessors have acquired lands from IDA with the understanding that permission may be available for high rise buildings as per assessee’s requirement. But subsequently the Government as a matter of policy, delayed such permissions. Thus the said lessor companies who had to commence the construction after performing Bhoomi Poojan, but respondent-company was confronted with the challenges as to creation of high rise structure as IDA did not clarify fully on this issue. Therefore, the respondent-company decided not to put its resources at risk, and shelved the plan to obtain infrastructure facility through SBPL & JBPL in the AY 2014-15. It is on record the funds to the companies, term loan got sanctioned and obtained from the EXIM Bank and the officials of the EXIM bank did visit the site before they disbursed the sum. Subsequently, as the respondent-company shelved its plan, the bank was duly notified and no further disbursement was availed by the assessee-company. 3.2. During the course of assessment proceedings before the Assessing Officer, the respondent has contended that the advances so made to SBPL, JBPL, SHBPL and MPDSPL were for the business of the respondent- company and therefore on the ground of “business expediency” the same are allowable. Whereas the Assessing Officer had made disallowance of interest presuming that interest bearing funds have been advanced without charging of interest and raised a tax demand of Rs.81,63,650/- which is inclusive of Interest. ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 4 - 4. Aggrieved against the assessment order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) after going through various records passed a detailed order which read as under:- "4.2. I have gone through the assessment order and the appellant's contentions. The appellant's main contention is that the interest of Rs.1,78,85,647/- and Rs.1,43,75,977/- disallowed on proportionate basis represents a business expenditure incurred wholly for business purposes. The appellant company incorporated M/s Suvi Buildtech Pvt. Ltd, (SBPL) as a wholly owned subsidiary in December 2010 for acquiring land and creation of infrastructure facilities. Another group company M/s Jewels Buildcon Pvt. Ltd. (JBPL) incorporated in November 2009 was already engaged in the business of construction and development of infrastructure. Both SBPL and JBPL applied to Indore Development Authority (IDA) on 27/12/2010 for allotment of land. The land was allotted to both SBPL and JBPL in January 2011 and July 2011 respectively and these allotted lands were adjacent to each other. 4.2.1 The appellant company entered into an agreement to lease with SBPL and JBPL on 28/03/2011. In the agreement to /ease with SBPL in clause 2.3 it is stated that the appellant company, the lessee will pay to SBPL, the lessor an interest free advance amount upto Rs.15,00,00,ODD/- for development of infrastructure. It is stated that this amount given by the lessee will be specifically used for building infrastructure purpose on the terms as mutually agreed upon. As per the agreement with JBPL the interest free advances is Rs.8,00,00,000/- for the purpose of building infrastructure. 4.2.2 The assessing officer has emphasized that the interest free advance was to be utilized for building infrastructure and not for the purchase of land. During the assessment proceedings the Assessing Officer called for information u/s 133(6) from IDA and it was revealed that the plot allotted to SBPL has been sold as a vacant plot on 09/10/2013 and the plot allotted to JBPL is vacant and having only a boundary wall. The appellant did not disclose these fact to the Assessing Officer and it was only when the enquiries were conducted from IDA that it came clean with the facts. 4.2.3 The appellant has submitted that it arranged for a term loan of Rs.26,00,00,000/- from Ms EXIM Bank to finance expansion program involving setting up of new software development and service centre at Indore. Perusal of the Annexure-I forming part of the sanction letter No.SME/Suvi/EOU/87/273 dated 14/03/2011 shows that as security (point 13 of broad terms and conditions of sanction) the bank was to have exclusive charge by way of mortgage over immovable properties of SBPL i.e. immovable property to be acquired under the project from Indore Development Authority, more particularly land situated at Plot No. 3, Scheme 159, Indore and building/structure thereon. Further, M/s ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 5 - Shradha Buildcon Pvt. Ltd. another associate concern of the appellant was to give irrevocable and unconditional corporate guarantee and exclusive charge by way of mortgage over immovable properties of Shradha Bulldcon Pvt. Ltd. having current market value of Rs.10,00,00,000/-. The interim disbursement at the absolute discretion of EXIM Bank could be "upto 50% of the loan amount pending completion of formalities on property to be acquired under the project. In clause 8 General Conditions it is stated that Suvi shall not use EXIM Bank's loan for the purposes other than, for which it has been sanctioned. It is seen from the fund flow statement that the loan from EXIM Bank has been utilized for payment to SBPL and JBPL to IDA. 4.2.4 The appellant company has placed on record the photographs of Bhoomi Poojan done at both the plot. However, the appellant company shelved the plans of construction due to confusion regarding high rise structure on the said plots. After the project was kept on hold SBPL and JBPL were asked to refund the money by liquidating the assets. SBPL sold the plot and JBPL refund the money to the appellant company in the financial year 2013-14. The appellant has placed on record the copy of Resolution passed at the meeting of Board of Directors of the appellant company, SBPL and JBPL. It has also submitted the e-mails exchanged with EXIM Bank officials in this regard. 4.2.5 It is seen that the commercial decision on which the investments were made for purchase of plots from IDA by SBPL and JBPL is supported by the fact that the appellant company after shelving the project of construction on IDA plots allotted to SBPL and JBPL, acquired another property situated at 60/1, Babulabhchand Chhajlani Marg and created a state of art infrastructure facility required for its software business. Towards this acquisition, a fresh loan of Rs.40 Crores was sanctioned by EXIM Bank and the earlier disbursed loan of Rs.13 Crores (sanctioned amount Rs.26 Cr.) was repaid to the lender. 4.3 The various judicial decisions cited by the appellant are also in its favour. The Hon'ble Supreme Court in the case of S.A. Builders Ltd. (2007) 288 ITR 001 (SC) has held that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman 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. The Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. vs. CIT (2015) 379 ITR 0347 (SC) have relied on the judgment In the case of S A Builders Limited and also agreed with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (B.) Ltd. (2002) 254 ITR 377 (Del) wherein the High Court had held that:- “once it is established that there is nexus between the expenditure and the purpose of 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 of decide how much is reasonable expenditure having regard to the circumstances ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 6 - of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.” 4.4. In view of the above, it is held that the interest free loans were advance given to SBPL and JBPL for commercial expediency i.e. for the purpose of creating infrastructure facilities for the appellant company. Therefore, the disallowance of interest of Rs.1,78,85,647/- is deleted. Ground No. 2 is allowed. As ground no. 2 is allowed, ground no.5 becomes in fructuous and is dismissed." 5. Aggrieved against the Ld.CIT(A)’s order, the Revenue is in appeal before us. 6. We have heard the Ld.DR who supported the order of Assessing Officer, and pleaded that during the course of assessment proceedings, enquiries made by the Assessing Officer from IDA (Indore Development Authority), has revealed that SBPL had sold its plot on 09/10/2013. The respondent-assessee has not disclosed the fact before the Assessing Officer and no construction activity was done in two years time and the interest- free funds so provided by the respondent-assessee were not utilized by that SBPL and JBPL. Therefore, the disallowance of Rs.1,78,85,647/- made by the Assessing Officer is correct in law and requested to uphold the disallowance made by the Assessing Officer. 6.1. In rebuttal, the Ld.AR filed two paper-books containing page Nos.1 to 170 & 171 to 188 which carry replies filed by the assessee before the Ld.CIT(A) [page Nos.1 to 41] which contain the copy of tender forms, (page Nos.42 to 100) allotment agreement and registered sale-deed with IDA as well as the copies of sale-deed made between respondent-assessee and SBPL and JBPL and sanction letter of term loan of Rs.26 crores issued ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 7 - by EXIM Bank (page Nos.115 to 126) . Copies of ledger account of SBPL and JBPL in the books of the assessee-company for the AYs 2010-11 to 2014-15 (page Nos.133 to 1346) and submitted that after going through all these documents, the CIT(A) deleted the addition made by the Assessing Officer and therefore pleaded that the Ld.CIT(A)’s order does not require any disturbance being factual in nature. 7. We have heard both the sides and perused the material available on record, as well the paper-book compilation filed by the assessee. The only question that arises for our consideration is whether the disallowance of Rs.1,78,85,647/- made by the Assessing Officer on account of interest-free loan is in nature of “commercial expediency” or not. It is a fact that initially the respondent-assessee wanted to develop infrastructural facilities for its growing software business. However, due to restrictions from the Development Authorities, the same could not be done through SBPL and JBPL. It is the commercial expediency that forced the respondent- assessee to drop the arrangements as evident from the paper-books with SBPL and JBPL and acquired another property situated at 60/1 BabuLabh Chand Chhajlani Marg and created a state of art infrastructural facility which is timely required for its software business. Towards this acquisition, a fresh loan of Rs.40 crores was sanctioned by the same EXIM Bank which earlier disbursed a loan of Rs.13 crores (sanction amount of Rs.26 crores). 8. In this connection we may refer to section 36(1)(iii) in Chapter IV ‘D’ of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') which contemplates that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the Income-tax under section 28 of the Act. ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 8 - 9. Similarly, section 37 of the Act will also be applicable to section 36(1)(iii), because in section 37 also the use expression "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 10. It has been repeatedly held by the Hon’ble Supreme Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 11. It is held by Hon’ble Apex Court in the case of S.A. Builders vs. CIT reported in 288 ITR 1 (SC) that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. 11.1. The Hon’ble Supreme Court in the above judgement relied on Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, where it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 9 - 11.2. The above test in Atherton's case, (supra) has been approved by the Hon’ble Apex Court in several decisions i.e. Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 etc. 12. In the case of Madhav Prasad Jatia's reported in AIR 1979 SC 1291, the Hon’ble Supreme Court held that if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. The borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by the Hon’ble Supreme Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 13. Further, the Hon’ble Supreme Court in the case of Hero Cycles (P.) Ltd. vs. CIT(A) reported in 379 ITR 347 held as follows: “13. In the process, the Court also agreed that the view taken by the Delhi High Court in CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377/121 Taxman 706 wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of 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. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. ITA No. 431/Ind/2017 DCIT vs. M/s.Diaspark Infotech Pvt.Ltd. AY 2012-13 - 10 - 14. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became 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 M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses.” 15. In the light of the above rulings by the Hon’ble Supreme Court and respectfully following the ratio laid down therein, we have no hesitation in our mind that the addition made by the Assessing Officer without looking into the “commercial expediency” is not sustainable in law. The appellate order passed by the Ld.CIT(A) being well considered and detailed order does not require any interference and the same is hereby upheld. Therefore, looking to the facts and circumstances of the present case, the addition is required to be deleted and the ground raised by the Revenue is rejected. 16. In the result, appeal filed by the Revenue is dismissed. Sd/- Sd/- ( MANIS H BORAD) (MAHAVIR PRASAD) ACCOUN TANT MEM BER JUDICIAL MEMBER Ahmedabad: Dated 27 /01/2022 TC Nair, Sr.PS आदेश क त ल प अ े षत / Copy of Order Forwarded to:-. 1. राज व / Revenue. 2. आवेदक / Assessee. 3. संबं*धत आयकर आय ु ,त / Concerned CIT 4. आयकर आय ु ,त- अपील / CIT (A)-III, Indore 5. 0वभागीय 3त3न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT Indore/Ahmedabad. 6. गाड9 फाइल / Guard file. By order/आदेश से, A s si s st a n t R e g i st r a r , I . T . A . T . , I n d o r e This Order pronounced in Open Court on 27 /01/2022