Kumar Housing Corporation Private Limited(Previously Kunown as Kul Urban Development Pvt. Ltd), Pune V. The Income Tax Officer, Ward-14(2), Pune

ITA 539/PUN/2024

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 0823 (ITAT-PUNE)
• Duration Of Justice: 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 02-07-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 18-03-2024
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Question of law; Wholly owned subsidiary
• Section: 143(3); 246A; 73; 153; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE “A” BENCH : PUNE BEFORE SHRI RAMA KANTA PANDA, VICE PRESIDENT AND MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA.No.539/PUN/2024 Assessment Year 2016-17 Kumar Housing Corporation Pvt. Ltd.,(Previously known as Kul Urban Development Pvt. Ltd.) 2409, East Street, Camp, Pune 411001 Maharashtra PAN : AABCL4692F vs. ITO, Ward-14(2), Pune (Appellant) (Respondent) For Assessee : Shri Nikhil S. Pathak For Revenue : Shri Ramnath P. Murkunde Date of Hearing : 03.07.2024 Date of Pronouncement : 23.07.2024 ORDER PER RAMA KANTA PANDA, V.P. : This appeal filed by the assessee is directed against the order dated 25.01.2024 of the CIT(A)/NFAC relating to the Assessment Year 2016-17. 2. Although a number of grounds have been raised by the assessee, however, these all relate to the order of the ld. CIT(A)/NFAC in confirming the disallowance of interest of Rs.80,21,369/- made by the Assessing Officer (AO) being the difference between the rate of interest paid on borrowed capital and 2 ITA No.539/PUN/2024 the rate at which the amount was advanced to the wholly owned subsidiary. 3. Facts of the case, in brief, are that the assessee is a Private Limited company engaged in the business of Real Estate Development & Sales. It filed its return of income on 19.10.2016 declaring total income of Rs.7,86,070/-. During the course of assessment proceedings, the AO noted from the profit and loss account that the Revenue from operations is shown at Rs.44,27,44,823/-, The above said Revenue from operations was shown as “Other Income”. After considering the expenses debited to the profit and loss account, the net result disclosed is a profit of Rs.5,17,626/-. From the total expenses debited of Rs.44,22,27,197/-, he noted that the major expenditure claimed is on account of the Finance Cost which is claimed at Rs.44,22,03,215/- . From the various details furnished by the assessee, he observed that assessee has borrowed Long Term fund amounting to Rs.135,27,00,000/- in the F.Y. 2010-11 on interest @12.16% per annum for the purpose of its project. Since the project did not materialize till now, therefore, the borrowed funds were given as Loans and Advances to its sister concern M/s. Kumar Snew Developers Pvt. Ltd. for interest @12%. He noted that the assessee during the year under consideration has restructured the loan scheme and repaid the entire amount borrowed for which the 3 ITA No.539/PUN/2024 assessee had also paid restructuring charges of Rs.4,44,92,090/-. Thus, the assessee has paid a total amount of Rs.44,19,28,462/- which includes the interest amount of Rs.39,74,36,372/- and restructuring charges of Rs.4,44,92,090/-. As against this, the assessee has received only Rs.43,39,07,093/-. Thus, the assessee has paid interest and restructuring charges amounting to Rs.80,21,369/- which is more than the interest received. Since the amount borrowed by the assessee has been given to sister concern as it is and the assessee has charged less interest, therefore, he asked the assessee to explain as to why such excess interest paid should not be disallowed. Since the assessee could not give any valid reason and the AR of the assessee agreed for the disallowance, the AO made addition of Rs.80,21,369/- to the total income of the assessee. 4. Before the CIT(A), the assessee argued that merely because the addition was agreed by the AR, no addition can be made since there is no estoppel against law. The assessee relied upon the decisions of Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT reported in 158 Taxman 74, Hero Cycles Pvt. Ltd. Vs. CIT reported in 379 ITR 347 and various other decisions in order to justify its case that the disallowance of interest was not warranted. It was further submitted that the rate of interest charged by the 4 ITA No.539/PUN/2024 assessee from its sister concern and the rate at which the amount was borrowed is same and, therefore, there was no reason on the part of the AO to make the disallowance. The assessee further submitted that it had interest free funds to advance the funds to its sister concern and therefore, there was also no reason to make any disallowance of interest expenditure while computing the income of the assessee. 5. However, the ld. CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the addition made by the AO by observing as under : “5. Decision: 5.1 It is apposite to refer to para 5 of the impugned order wherein the following has been recorded- “. . . . . .therefore, there is no cause for the assessee to charge less interest. Therefore, during the course of assessment proceedings, the AR was asked to explain the reason for giving loans and advances at lesser rate of interest then the rate of interest paid on funds borrowed. However, the AR could not give any valid reason and therefore, vide order sheet entry dt. 17.12.2018, it was conveyed to the AR that in absence of proper explanation for the difference in the rate of interest, the difference between interest paid and interest received requires to be disallowed. The AR also agreed to this disallowance. Accordingly, an amount of Rs. 80,21,369/- is disallowed and added to the total income of the assessee.” 5.2 As per provisions of sections 246A an appeal can be instituted only if the appellant is aggrieved by the order mentioned in that section. Order u/s 143(3) is one such order against which appeal can be filed. However, in case of an addition which has been agreed by the AR of the appellant at the time of assessment proceedings, it cannot be successfully argued that assessee is agreed by the order. In other words, no cause of action arises out of the impugned order. In deciding so, apart from the plain words of the Act itself, I rely upon the authority of Allahabad High Court in the case of Sterling Machine Tools vs. CIT 123 ITR 181 (All.), Madras High Court in the case of Ramanlal Kamdar vs. CIT 108 ITR 73 (Mad) and that of jurisdictional High Court of Bombay in the case of Rameshchandra & Co. vs. CIT 168 ITR 375 (Bom.). In view of the above the present appeal is rejected at its threshold. 5 ITA No.539/PUN/2024 5.3 As the appeal has been rejected decision on individual grounds of appeal is not required.” 6. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal. 7. The ld. Counsel for the assessee submitted that merely because the AR of the assessee had agreed for the addition, the CIT(A) was not justified in dismissing the appeal since there is no estoppel against law. Referring to the decision of Hon’ble Bombay High Court in the case of Balmukund Acharya Vs. DCIT reported in 176 Taxman 316 (Bombay) he submitted that the Hon’ble High Court has held that there is no estoppel against the statute. It has further been held that Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. In the case on hand, it was obligatory on the part of the Assessing Officer to apply his mind to the facts disclosed in the return and assess the assessee keeping in mind the law holding the field. 7.1 Referring to the decision of Pune Bench of the Tribunal in the case of DCIT Vs. M/s. Phadnis Clinic Pvt. Ltd. in ITA No.1666/PUN/2018, order dt. 21.09.2022 for the A.Y. 2011-12, he 6 ITA No.539/PUN/2024 submitted that in this case also the addition was agreed by the AR of the assessee. The Tribunal, referring to the decision in the case of Bharat Heavy Electricals Ltd. Vs. Mahendra Prasad Jakhmola & Ors in Civil Appeal Nos. 1799 to 1800 of 2019 wherein the Hon’ble Supreme Court has held that concessions on mixed questions of fact and law cannot decide cases as the evidence, as a whole has to be weighed and inferences drawn therefrom, deleted the addition made by the AO on the ground that AO cannot preclude the assessee to agitate the same issue in appeal. 8. So far as the decision relied on by the ld. CIT(A) in the case of Rameshchandra & Co. Vs. CIT reported in 35 Taxman 153 (Bombay) is concerned, he submitted that in that case the AO had asked the assessee to explain the discrepancy in respect of certain purchases which were not recorded in the books. One of the partners expressed in writing its inability to explain the said discrepancy and requested to add the same. Under these circumstances, the Hon’ble Bombay High Court held that where an assessee has made a statement in assessment and unless the assessee points out that it was under mistaken belief of law, no appeal can be filed. However, in the instant case, the issue is purely legal and since the assessee can demonstrate that the 7 ITA No.539/PUN/2024 addition was agreed under mistaken belief of fact or law, the said decision cannot be applicable to the facts of the present case. 9. The ld. Counsel for the assessee submitted that the assessee in the instant case has raised the funds which were advanced to its 100% wholly owned subsidiary. The assessee had charged interest and restructuring charges but there was short recovery of Rs.80,21,369/-, the reasons of which were also explained as per page 61 of the paper book which is due to the number of days, i.e. while making the payment of interest to FMO as 360 days which is as per the agreement whereas the assessee while recovering the same from the subsidiary company has considered the total interest period of 366 days as the F.Y. 2015-16 was a leap year. 10. Referring to the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. reported in 288 ITR 1, he submitted that the Hon’ble Supreme Court has held that where funds are advanced by the holding company to its subsidiary and even if interest was not charged, advancement of such funds to the wholly owned subsidiary company would be for commercial expediency and no disallowance of interest is warranted. Referring to various other decisions, the ld. Counsel for the assessee submitted that under identical circumstances such disallowance of interest was held to be not in accordance with law. He accordingly submitted that the 8 ITA No.539/PUN/2024 order of the ld. CIT(A) be set-aside and the addition made by the AO be deleted. 11. The ld. DR on the other hand heavily relied on the order of the AO and the CIT(A). 12. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs.80,21,369/- being the difference between the amount of interest paid on borrowed capital and the amount of interest charged from the sister concern on account of loans advanced out of the borrowed capital. We find the ld. CIT(A) sustained the addition made by the AO, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that merely because the assessee had agreed for the addition before the AO there is no estoppel against law. It is also his submission that the assessee had sufficient funds of its own. Further, the amount was advanced to a wholly owned subsidiary and therefore, such advancement would amount to commercial expediency and therefore, no disallowance of interest is warranted. It is also his submission that the case law 9 ITA No.539/PUN/2024 relied on by the ld. CIT(A) is distinguishable and not applicable to the facts of the present case. 13. We find some force in the above arguments of the ld. Counsel for the assessee. So far as the case of the Revenue that the assessee had agreed for the addition before the AO and therefore cannot agitate the matter before the CIT(A) is concerned, we find the Hon’ble Supreme Court in the case of Bharat Heavy Electricals Ltd. Vs. Mahendra Prasad Jakhmola & Ors in Civil Appeal Nos. 1799 to 1800 of 2019 has held that concessions on mixed questions of fact and law cannot decide cases as the evidence, as a whole has to be weighed and inferences drawn therefrom. 14. We find the Hon’ble Supreme Court in the case of Swami Krishnanand Govindanand Vs. Managing Director, Oswal Hosiery reported in (2002) 3 SCC 39 has held that even a concession on facts disputed by a respondent in its written statement cannot bind the respondent, on an occasion, that the statement made by the counsel cannot be accepted as an admission so as to bind the respondent. 15. We find the Hon’ble Supreme Court in the case of C.M. Arumugam Vs. S. Rajgopal reported in (1976) 1 SCC 863 has held that a question involving mixed question of law and fact and a 10 ITA No.539/PUN/2024 concession made by the party on such a question at the stage of argument before the High Court, cannot preclude him from re- agitating it in the appeal before the Supreme Court. 16. We find following the above decisions, the Coordinate Bench of the Tribunal in the case of DCIT Vs. M/s.Phadnis Clinic Pvt. Ltd. (supra) while deciding an identical issue at para 8 and 9 of the order has observed as under : “8. Heard both the parties and perused the material available on record. The ld. DR vehemently contended that the assessee has no right to agitate before the CIT(A) as well as this Tribunal regarding the disallowance made by the AO on account of interest payment. We note that according to ld. DR that the assessee itself agreed for the disallowance before the AO and is precluded from contesting the issue before the authorities challenging the same. The ld. AR placed on record the decision of Hon’ble Supreme Court in the case of Bharat Heavy Electricals Ltd. (supra) wherein the Hon’ble Supreme Court observed that concessions on mixed questions of fact and law cannot decide cases as the evidence as a whole has to be weighed and inferences drawn therefrom. We note, further, the Hon’ble Supreme Court referred to a decision in the case of Swami Krishnanand Govindananad Vs. Managing Director, Oswal Hosiery (Regd.) reported in (2002) 3 SCC 39 which held, even a concession on facts disputed by a respondent in its written statement cannot bind the respondent, on an occasion, that the statement made by the counsel cannot be accepted as an admission so as to bind the respondent. Further, the Hon’ble Supreme Court referred to a decision in the case of C.M. Arumugam Vs. S. Rajgopal reported in (1976) 1 SCC 863 which held that a question involving mixed question of law and fact and a concession made by the party on such a question at the stage of argument before the High Court, cannot preclude him from reagitating it in the appeal before the Supreme Court. The relevant portion of the findings of the Hon’ble Supreme Court reads as under: “What is clear from the evidence that was led by the parties is that the aforesaid gate passes were issued, as has been stated by the appellant’s witness, only at the request of the contractor for the sake of safety and also from the administrative point of view. The idea was security, as otherwise any person could enter the precincts of the factory. This evidence was missed by the Labour Court when it arrived at a conclusion that a direct relationship ought to be inferred from this fact alone. Further, as has been correctly pointed out by Shri Sudhir Chandra, the appellant has, not only in the first review, but also in the writ petition filed, taken the plea that no such concession was ever 11 ITA No.539/PUN/2024 made. Moreover, quite apart from this plea and the counter plea of Ms. Jain that the person who has made such concession should have stated that he did not do so, concessions on mixed questions of fact and law cannot decide cases as the evidence as a whole has to be weighed and inferences drawn therefrom. Even a concession on facts disputed by a respondent in its written statement cannot bind the respondent. Thus, in Swami Krishnanand Govindananad v. Managing Director, Oswal Hosiery (Regd.) [(2002) 3 SCC 39, this Court held: “2. ....... It appears that when the case was posted for trial, the learned counsel appearing for the respondent conceded the facts disputed by the respondent in his written statement before the Court. That statement of the advocate was recorded by the Additional Rent Controller thus: “The respondent’s learned counsel has admitted the ground of eviction and also the fact that the applicant is a public charitable institution and for that purpose it required the premises.” .......... 3. .......... Whether the appellant is an institution within the meaning of Section 22 of the Act and whether it required bona fide the premises for furtherance of its activities, are questions touching the jurisdiction of the Additional Rent Controller. He can record his satisfaction only when he holds on these questions in favour of the appellant. For so holding there must be material on record to support his satisfaction otherwise the satisfaction not based on any material or based on irrelevant material, would be vitiated and any order passed on such a satisfaction will be without jurisdiction. There can be no doubt that admission of a party is a relevant material. But can the statement made by the learned counsel of a party across the Bar be treated as admission of the party? Having regard to the requirements of Section 18 of the Evidence Act, on the facts of this case, in our view, the aforementioned statement of the counsel for the respondent cannot be accepted as an admission so as to bind the respondent. Excluding that statement from consideration, there was thus no material before the Additional Rent Controller to record his satisfaction within the meaning of clause (d) of Section 22 of the Act. It follows that the order of eviction was without jurisdiction.” Equally, where a question is a mixed question of fact and law, a concession made by a lawyer or his authorised representative at the stage of arguments cannot preclude the party for whom such person appears from re-agitating the point in appeal. In ‘C.M. Arumugam v. S. Rajgopal ’ [(1976) 1 SCC 863], this Court held: “8. .......... That question is a mixed question of law and fact and we do not think that a concession made by the 12 ITA No.539/PUN/2024 first respondent on such a question at the stage of argument before the High Court, can preclude him from reagitating it in the appeal before this Court, when it formed the subject-matter of an issue before the High Court and full and complete evidence in regard to such issue was led by both parties..........” It would be perverse to decide based only on a concession, without more, that a direct relationship exists between the employer and the workmen. Equally perverse is finding that the extended definition of ‘employer’ contained in the Act would automatically apply. The extended definition contained in section 2(i)(iv) of the Uttar Pradesh Industrial Disputes Act reads as follows: “2. Definitions. ........................................................................... ........................................................................... .............................. (i)’Employer’ includes- ........................................................................... ........................................................................... .............................. (iv) where the owner of any industry in the course of or for the purpose of conducting the industry contracts with any person for the execution by or under such person of the whole or any part of any work which is ordinarily part of the industry, the owner of such industry;” 9. Therefore, the finding rendered by the Hon’ble Supreme Court in the case of Bharat Heavy Electricals Ltd. (supra) by referring to decisions in the cases of Swami Krishnanand Govindananad (supra) and C.M. Arumugam (supra) is applicable to the facts on hand and we hold a concession made by the authorized representative before the AO in the assessment proceedings cannot preclude the assessee in reagitating the same point in the appeal. Therefore, we are unable to accept the contention of ld. DR in submitting that the assessee has no role to challenge the disallowance made on the admission of assessee before the CIT(A).” 17. In view of the above decisions of the Hon’ble Supreme Court cited (supra) and the decision of the Coordinate Bench of the Tribunal cited (supra), the decision relied on by the ld. CIT(A) in 13 ITA No.539/PUN/2024 our opinion is distinguishable and not applicable to the facts of the present case. 18. So far as the disallowance of interest on loan given to the sister concern is concerned, we find the assessee in the instant case has advanced the amount to its wholly owned subsidiary which is not in dispute. The Hon’ble Supreme Court in the case of S.A. Builders (supra) has held that where the funds are advanced by the holding company to its subsidiary and even if interest was not charged, advancing of funds to the wholly owned subsidiary would be for commercial expediency and no disallowance of interest is warranted. 19. We find the Delhi Bench of the Tribunal in the case of Moonrock Hospitality Pvt. Ltd. Vs. ACIT reported in 139 taxmann.com 378 (Delhi) while deciding an identical issue has held that where assessee had advanced the funds to its wholly owned subsidiary company for the purpose of business, no interest paid on borrowed funds could have been disallowed u/s.36(1)(iii) of the I.T. Act. The relevant observation of the Tribunal from para 12 to 14 reads as under : “12. 1 have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.10,88,438/- u/s 36(1)(iii) of the Act on the ground that the assessee has diverted its interest bearing funds towards non- 14 ITA No.539/PUN/2024 interest bearing advances to a related concern. I find, the ld.CIT(A) upheld the action of the AO disregarding the argument of the assessee that loan had been advanced on account of commercial expediency and, therefore, no disallowance could be made in the light of the decision of the Hon'ble Supreme Court in the case of SA Builders Ltd. (supra). It is the submission of the Id. Counsel that when the assessee has borrowed money and invested the same in its subsidiary companies with a view to acquire control of a new asset, such interest paid on borrowed capital has to be allowed u/s 36(l)(iii) of the Act. 13. I find merit in the above arguments of the Id. Counsel for the assessee. The Hon'ble Delhi High Court in the case of Tulip Star Hotels Ltd. {supra) has held that where assessee is engaged in the business of owning, renting and managing hotels, borrowed money and invested the same in iis subsidiary company with a view to acquire control of a new hotel, such interest paid on borrowed capital is allowable u/s 36(1)(iii) of the IT Act, 1961. 14. 1 find, the Hon'ble Bombay High Court in the case of Reliance Communications Infrastructure Ltd. (supra) has held that where the assessee, for furthering its business had utilized borrowed funds for making investments in its subsidiary company and for making interest free advances to a related company, no disallowance of interest paid on borrowed funds could be made. I find, the Hon'ble Supreme Court in the case of Hero Cycles (P.) Ltd. (supra) has held that once it is established that there is nexus between expenditure and purpose of business, Revenue cannot justifiably claim to put itself in the arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The various other decisions relied on by the Id. Counsel for the assessee in the case law compilation also supports the case of the assessee to the proposition that where interest free advances made to a wholly owned subsidiary company, no disallowance of interest paid on borrowed fund could be made. Since, in the instant case, admittedly, the assessee has extended funds to its wholly owned subsidiary company for the purpose of business, therefore, in view of the decisions cited supra, I hold that no interest paid on borrowed funds could have been disallowed u/s 36(1)(iii) of the IT Act, 1961. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 10,88,438/- . The grounds raised by the assessee are accordingly allowed”. 20. Since the assessee in the instant case has admittedly advanced the loan to its wholly owned subsidiary company, therefore, in view of the decision of Hon’ble Supreme Court in the case of S.A. Builders (supra) and the decision of Delhi Bench of the Tribunal in the case of Moonrock Hospitality (P) Ltd. Vs. ACIT (supra) we are of the opinion that no disallowance of interest paid on borrowed 15 ITA No.539/PUN/2024 funds could have been disallowed. We, therefore, set-aside the order of the CIT(A) and direct the AO to delete the addition. Grounds raised by the assessee are accordingly allowed. 21. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 23.07.2024. Sd/- Sd/- [MS. ASTHA CHANDRA] [RAMA KANTA PANDA] JUDICIAL MEMBER VICE PRESIDENT Pune, Dated : 23 rd July, 2024 satish Copy to : 1. The applicant 2. The respondent 3. The Pr. CIT, Pune concerned 4. D.R. ITAT, A-Bench, Pune 5. Guard File. By Order //True Copy // Sr. Private Secretary, ITAT, Pune Benches, Pune.