M/s Homeland City Projects Ltd., Delhi V. ITO Ward-11(4), Delhi

ITA 491/CHANDI/2022

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5759 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2016-2017
• Appeal Filed On: 25-05-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRIYANKA DHAR
• Keywords: Capital asset

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ, च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH, “SMC”, CHANDIGARH BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER आयकर अपील सं./ ITA No. 491/CHD/2022 नधा रणवष / Assessment Year :2 0 1 6 - 1 7 M/s Homeland City Projects Ltd., 18, Chandaer Lok Enclave, Pitampura, Delhi 110034 बना म The ITO, Ward-11(4), Delhi थायी लेखा सं./PAN NO: AABCH4362E अपीलाथ /Appellant यथ /Respondent नधा रती क ओर से/Assessee by : Sh. Sudhir Sehgal, Advocate राज व क ओर से/ Revenue by : Smt. Priyanka Dhar, Sr. DR स ु नवाई क तार$ख/Date of Hearing : 08.09.2022 उदघोषणा क तार$ख/Date of Pronouncement : 19.09.2022 आदेश/Order Per Sudhanshu Srivastava, Judicial Member: This appeal has been preferred by the assessee against the order dated 13.04.2022 passed by the Ld. Commissioner of Income Tax (Appeals)-5, Ludhiana [herein referred to as ‘CIT(A)’] for assessment year 2016-17. 2. The brief facts of the case are that during the year under consideration the assessee company was engaged in the business of Real Estate development at Sri Ganganagar, Rajasthan. The return of income was filed declaring income of Rs. 3,13,890/-. The case was selected for limited scrutiny under the CASS guidelines to examine the following issues:- ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 2 1. High interest expenditure and low turnover (Part A – P&L of ITR) whether deduction claimed on account of interest expenses is admissible. 2. High Interest expenses relatable to exempt income (u/s 14A) (Investment in Balance sheet, Interest Expense in P&L Account and Exempt income in Schedule EI of ITR. 3. Low income in comparison to very high investments appearing in / balance sheet (Part A-BS, Income in part B-TI and Schedule EI of ITR) 4. Large current liability in comparison to total asset in Balance sheet (Part – BS of ITR) 2.1 During the course of assessment proceedings, various queries were raised by the AO. The assessee was specifically required to explain that since the assessee had shown interest expenses of Rs. 27,59,600/- in assessment year 2016-17 and of Rs. 35,25,441/- in assessment year 2015-16, the assessee should explain the utilization of loan for which interest had been paid and its relevance with the business activities of the assessee company. The assessee submitted that no fresh investment had been made by the assessee company during the year under consideration and that the non-current investment as on 31.03.2016 stood at Rs. 9,24,86,388/- which was old investment. It was submitted that these investments were made as strategic investments in related group companies and that the unsecured loans had been taken for making such investments. However, the AO was of the view that in terms of provisions of section 36(1)(iii) of the Income Tax Act, 1961 [in short 'the Act'], the deduction ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 3 for interest was admissible only when the capital is borrowed directly for the purpose of business whereas, the investment in unquoted shares was not relating to the business of the assessee. The AO proceeded to make a disallowance of Rs. 27,59,600/- u/s 36(1)(iii) of the Act and completed the assessment at the taxable income of Rs. 30,73,490/-. 2.2 Aggrieved, the assessee preferred an appeal before the Ld. Ld. First Appellate Authority. However, the Ld. CIT(A) also dismissed the appeal of the assessee by holding that the interest expenditure incurred by the assessee for acquiring the shares of the sister concern cannot be said to have been utilized for the purpose of business and that the AO had rightly disallowed the interest claimed by the assessee. 2.3 Aggrieved, the assessee has now approached this Tribunal challenging the order of the Ld. CIT(A) by raising the following grounds of appeal:- 1. That the Ld. CIT(A) has erred in confirming the addition of Rs. 27,59,600/- in respect of disallowance of interest u/s 36 (1)(iii). 2. That the disallowance have been made, though, it was explained to the Ld. CIT(A) that sufficient interest free funds were available with the assessee for investment and which have not been considered by the Assessing Officer 3. That the Ld. CIT(A) has failed to appreciate the fact that the assessee has discharged its burden of establishing that the sufficient interest free funds ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 4 were available and disallowance u/s 36(1)(iii) was called for. 4. That the addition has been upheld against the facts and circumstances of the case. 5. That the appellant craves leave to add, amend, or alter any of the above ground or grounds of appeal during the course of appellate proceedings. 3.0 The Ld. Authorised Representative (AR) submitted that it was a matter of record that no new investment had been made in shares during the year under consideration and that all the investments in shares had been made during assessment years 2014-15 and 2015-16 only. It was further submitted that it was also a matter of record that no disallowance of interest had been made in assessment years 2014- 15 and 2015-16. The Ld. AR further submitted that the impugned disallowance of interest has been made by the AO and confirmed by the Ld. CIT(A) without considering the essential fact that the assessee had interest free funds to the extent of Rs. 1,94,20,422/- as on 31.03.2015 and to the extent of Rs. 19,36,01,855/- as on 31.03.2016 whereas, the unsecured loan raised was to the tune of Rs. 3,91,49,000/ only. Our attention was drawn to the following chart depicting the interest free funds available with the assessee:- Sr.No. Particulars Amount as at the end of 31.03.2016 Amount as at the end of 31.03.2015 1 Share Capital 4,95,05,000/- 4,95,05,000/- 2 Reserve & Surplus 43,87,535/- 43,87,525/- 3 Advances from 13,97,09,330/- 1,40,56,400/ ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 5 Customers Total 19,36,01,855/- 19,42,04,229/- 3.1 Referring to the above chart, the Ld. AR submitted that the settled principle of law is that if there are interest free funds available, a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. The Ld. AR placed reliance on numerous judicial precedents in support of this contention which have been compiled in the form of the paper book and have been taken on record. 3.2 The Ld. AR further argued that the conclusion drawn by the lower authorities that the investments in the group concerns were not related to the business activities of the assessee company was also wrong in as much as it is for the businessman to decide as to what investments would be furthering the ends of its business and the Department cannot direct and decide on the issue of investments which can be said to be related or unrelated to the business of the assessee. 4.0 Per contra, the Ld. Sr. DR placed heavy reliance on the concurrent findings of both the lower authorities and submitted that the AO has given a very categorical finding that the assessee could not substantiate that the investment in the sister concern was a strategic business investment. It was further submitted that the Funds Flow ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 6 Statement of the earlier assessment years clearly establishes that the borrowed funds were used for purchasing unquoted equity shares and, thus, the assessee had only advanced the borrowed funds to its sister concern in the garb of share capital having no connection with the business of the assessee. The Ld. Sr. DR, referring to the findings of the AO, submitted that the AO had rightly observed that the qualifying factor would be the establishment of fact as to whether the borrowing for purchase of shares was an integral part of the business of the assessee which the assessee could not prove. The Ld. Sr. DR further submitted that the assessee also could not prove that the said investment was made out of business expediency. The Ld. Sr. DR prayed that the assessee’s appeal be dismissed. 5.0 I have heard the rival submissions and have also perused the material on record. The facts are not in dispute. In the present case, the AO has made a disallowance of Rs. 27,59,600/- pertaining to the interest credited to the account of M/s A.B. Continental Commodities Pvt. Ltd (presently known as M/s Diamond Traexion Pvt. Ltd) . The assessee had taken an unsecured loan of Rs. 3,91,49,000/- in assessment year 2015-16 which has been undisputedly invested in purchasing the shares of group companies. The AO was of the view that in view of the amendment by way of insertion of proviso to section 36(1)(iii) of the Act, interest on moneys borrowed for acquiring a capital asset would be disallowed till such capital asset is put to use. ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 7 The AO further noted that for the purpose of allowability of interest u/s 36(1)(iii) of the Act, the borrowing should be related to the purpose of business, whereas, the investment in shares of a sister concern were not related to the business of the assessee. On the other hand, it is contention of the Ld. AR that these investments were in the nature of strategic investments and further the assessee had sufficient interest free funds available with it at the time of making the investment, which should by general inference and settled law be held that the investments were made out of the free reserves of and not out of the borrowed funds. The Ld. AR had also argued that the investments pertained to earlier assessment years and that no fresh investment had been made during the year under consideration. As far as the contention of the Ld. AR that no fresh investments have been made during the year under consideration is concerned, I fully agree with such contention. The Balance Sheet of the assessee shows non-current investments as on 31.03.2015 as well as 31.03.2016 at Rs. 9,24,86,388/-. However, the Ld. CIT(A), while referring to the assessment order, in para 4.1 of the impugned order at page 9 has mentioned that the amount of unsecured loan of Rs. 3,91,49,000/- taken during the Financial Year 2014-15 from M/s A.B. Continental Commodities was invested in purchasing the equity shares of group companies on the same day on which the loan amount is credited in the assessee’s bank account. Thus, the basic contention of the Ld. AR that interest free funds were not utilised for the purpose of investing ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 8 in shares of the sister concern does not stand proved. Taking the logic further, the inference that if the assessee has sufficient surplus funds, then it is to be assumed that the investments were made from surplus funds would also hold not true. 5.1 I also note that on one hand it is the assessee’s contention that the borrowings were made for the purpose of investing in shares coupled with the arguments that these investments were strategic in nature and on the other hand, it has been contended that the inference should be that the investments were made out of surplus funds. Thus, there is an apparent contradiction in the stand taken by the assessee. Moreover, it is not clearly brought out either from the assessment order or from the Ld. CIT (A)’s order as to whether there is a direct nexus or link between the borrowed funds and the investments. In my considered view, a clear and direct nexus has to be established between the loan funds and the investments before a disallowance u/s 56(1)(iii) of the Act is made. If there is a direct nexus between the loan funds and such investments, then the proposition that if the assessee had surplus funds with it, then the investment would be presumed to have been made from such surplus funds would not hold good and then the disallowance u/s 36(1)(iii) of the Act would be fully justified. However, if there is no direct link between the borrowed funds and the investments, then the presumption would were in favour of the assessee. Therefore, on an overall view of the ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 9 facts and circumstances, I deed it fit and proper to restore this issue to the file of the AO with a direction to verify as to whether there is any direct link or nexus between the borrowed funds and investment in shares. If it is so found, then the impugned disallowance shall hold good. However, if, on verification by the AO, it is seen that there is no direct linkage or nexus between the two, then the assessee’s preposition that it should be presumed that the investments in shares were made from surplus funds would hold good and no disallowance can be made in this regard. The AO will also give adequate opportunity to the assessee before adjudicating this issue. 6.0 In the final result, the appeal of the assessee stands allowed for statistical purposes. Order pronounced on 19.09.2022. Sd/- (SUDHANSHU SRIVASTAVA) Judicial Member Dated : 19.09.2022 “आर.के.” आदेशक त+ल,पअ-े,षत/ Copy of the order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकरआय ु .त/ CIT 4. आयकरआय ु .त (अपील)/ The CIT(A) 5. ,वभागीय त न1ध, आयकरअपील$यआ1धकरण, च3डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड फाईल/ Guard File आदेशान ु सार/ By order, सहायकपंजीकार/ Assistant Registrar ITA No.491-Chd-2022 (AY 2016-17) - M/s Homeland City Projects Ltd., Ludhiana 10