M/s Ambience Properties Limited, Hyderabad V. DCIT, Central Circle-2, Hyderabad

ITA 58/HYD/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5525 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 17-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKARA RAO
• Assessee Lawyers: K C DEVADAS
• Keywords: Search and seizure; Proportionate interest; Commercial expediency; Revenue expenditure
• Section: 153A; 234B; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 58/HYD/2012 ASSESSMENT YEAR 2008)09 M/S. AMBIENCE PROPERTIES LTD., HYDERABAD PAN: AABCA7248N VS. THE DY. CIT CENTRAL CIRCLE)2 HYDERABAD [APPELLANT] [RESPONDENT] APPELLANT BY: SRI K.C. DEVADAS RESPONDENT BY: SRI D. SUDHAKARA RAO DATE OF HEARING: 30.12.2013 DATE OF PRONOUNCEMENT: 22.01.2014 ORDER ORDER ORDER ORDER PER CHANDRA POOJARI, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A))I, HYDERABAD DATED 25 TH NOVEMBER, 2011 FOR THE ASSESSMENT YEAR 2008)09. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS))I IS ERRONEOUS IN LAW, AGAINST THE WEIGHT OF EVIDENCE AND OPPOSED TO THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT COMPANY AND IS ACCORDINGLY OBJECTED TO. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT NOT TO HAVE CONFIRMED THE DISALLOWANCE OF PROPORTIONATE INTEREST EXPENDITURE OF RS. ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 2 55,11,275/) ON THE PREMISE THAT IT DOES NOT QUALIFY FOR DEDUCTION U/S. 36(1)(III) OF THE I.T. A CT, 1961. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) HAVING HELD THAT THE DISALLOWANCE IN AN AMOUNT OF RS. 55,11,275/) IS JUSTIFIED WHICH HAS SINCE BEE N OBJECTED TO, OUGHT NOT TO HAVE DIRECTED THE ASSESSING OFFICER TO ENHANCE THE DISALLOWANCE OF INTEREST BY FURTHER AMOUNT OF RS. 37,75,392/) THEREBY DETERMINING THE DISALLOWANCE OF INTEREST EXPENDITURE OF THE APPELLANT AT AN AMOUNT OF RS. 92,96,667/). 4. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFIED IN CONCLUDING THAT THE APPELLANT'S CASE WAS NOT THAT THE INVESTMENT IN THE SHARES IN THE SUBSIDIARY COMPANIES WAS OUT OF THE APPELLANT'S INTERNAL ACCRUALS AVAILABLE FOR INVESTMENT, WHILE I T IS NOT SO AS BORNE OUT FROM THE RECORDS OF THE APPELLANT. 5. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE INVESTMENT IN SUBSIDIARY WAS IN THE COURSE OF APPELLANT'S BUSINESS ACTIVITY AND ARISING OUT OF THE OBJECTS ENUNCIATED IN THE MEMORANDUM OF ASSOCIATION. 6. THE APPELLANT DENIES ITS LIABILITY TO BE ASSESSED T O THE LEVY OF INTEREST U/S. 234B IN AN AMOUNT OF RS. 3,19,397/). 3. BRIEF FACTS OF THE CASE ARE THAT A SEARCH AND SEIZURE OPERATION U/S. 132 OF THE INCOME)TAX ACT, 1961 WAS CONDUCTED IN THE BUSINESS PREMISES OF THE ASSESSEE. CONSEQUENTLY, N OTICE U/S. 153A WAS ISSUED. IN RESPONSE TO THE SAME, THE ASSESSEE FILE D THE RETURN OF INCOME ADMITTING TOTAL INCOME OF RS. 22,00,574. IN COURSE OF THE ASSESSMENT PROCEEDING, THE AO FOUND THAT THE ASSESS EE HAD DEBITED ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 3 A SUM OF RS. 2,28,60,868 TO THE PROFIT AND LOSS A/C BEING INTEREST ON UNSECURED LOAN WHEREAS IN THE CORRESPONDING PREVIOU S YEAR THE INTEREST CLAIMED WAS ONLY RS. 1,24,92,485. THIS WA S APART FROM THE INTEREST DEBITED UNDER THE SCHEDULE 14 OF RS. 61,11 ,478. SINCE THE INTEREST DEBITED WAS SUBSTANTIAL, THE AO ASKED THE ASSESSEE TO EXPLAIN THE SAME. THE ASSESSEE SUBMITTED THAT THE COMPANY HAD OBTAINED HUGE BORROWALS FROM BODY CORPORATES AND HENCE THE I NTEREST PAYMENT ON THE BORROWAL WAS MORE IN THE YEAR UNDER CONSIDERATION AS COMPARED TO EARLIER YEARS. THE ASSESSEE STATED T HAT THE TOTAL BORROWALS WERE TO THE TUNE OF RS. 47,09,64,140 AS A GAINST RS. 34,92,05,336 IN THE EARLIER YEAR. THE AO OBSERVED THAT THE ASSESSEE COMPANY HAD OBTAINED FRESH LOANS TO THE TUNE OF RS. 12,17,58,804. HOWEVER, THE ENTIRE BORROWALS WERE NOT UTILIZED WHO LLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS OWN BUSINESS. A PART OF THE BORROWED FUND WAS DIVERTED FOR ACQUIRING EQUITY SHARES OF SISTER CONC ERNS OF THE ASSESSEE COMPANY. REFERRING TO SCHEDULE OF INVESTMENTS, THE AO OBSERVED THAT THE ASSESSEE HAD DIVERTED ITS BORROWALS TO THE TUNE OF RS. 20,77,63,500 FOR ACQUIRING THE EQUITY SHARES OF A N UMBER OF SISTER CONCERNS. THE NAMES OF THE SISTER CONCERNS AND THE AMOUNT INVESTED HAS BEEN GIVEN IN PAGE)3 OF THE ASSESSMENT ORDER. AFTER ANALYZING THE TOTAL INVESTMENT, THE AO CAME TO THE CONCLUSION THAT THE ASSESSEE COMPANY HAD UTILIZED RS. 11,24,75,000 FROM OUT OF THE BORROWED FUND TOWARDS INVESTMENT IN THE EQUITY SHAR ES OF THE SISTER CONCERNS AND SUBSIDIARY. HE WAS, THEREFORE, OF THE VIEW THAT PROPORTIONATE INTEREST CHARGED ON THE BORROWALS WOU LD NOT QUALIFY FOR DEDUCTION U/S. 36(I)(III) OF THE ACT. THE AO WORKE D OUT THE PROPORTIONATE INTEREST AT RS. 55,11,275 AND DISALLO WED THE SAME WHILE COMPLETING THE ASSESSMENT. BEING AGGRIEVED AGAINST THE ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 4 DISALLOWANCE SO MADE, THE ASSESSEE PREFERRED AN APP EAL BEFORE THE CIT(A). 4. ON APPEAL THE CIT(A) OBSERVED THAT THE ASSESSEE IS NOT JUSTIFIED IN DIVERTING THE INTEREST BEARING BORROWED FUNDS FO R THE PURPOSE OF INVESTMENT IN THE COMPANIES WHICH ARE RELATED TO IT . THEREBY THE NET INTEREST OUTGO OF RS. 92,86,667 IS TO BE DISALLOWED AS NOT INCURRED FOR THE PURPOSE OF THE BUSINESS. PROVISIONS OF SEC. 36 (1)(III) ALLOW THE ASSESSEE TO CLAIM ANY INTEREST WHICH IS INCURRED FO R THE PURPOSE OF BUSINESS ONLY. IN THE INSTANT CASE, THERE IS NO BU SINESS INTEREST OF THE ASSESSEE IS ESTABLISHED TO INCUR SUCH A HUGE AMOUNT OF INTEREST WITHOUT ANY YIELD ON SUCH INVESTMENT. ALTERNATIVEL Y, EVEN IF IT IS ASSUMED THAT THESE INVESTMENTS ARE PART OF THE BUSI NESS, STILL THE SAME CANNOT BE ALLOWED AS REVENUE EXPENDITURE AND THE EN TIRE INTEREST ALONG WITH INCIDENTAL EXPENSES ARE TO BE CAPITALIZE D. HOWEVER, THERE NO SUCH CASE HAS BEEN ESTABLISHED BY THE ASSESSEE. THEREFORE, THE ENTIRE INTEREST PAYMENT OF RS. 92,86,667 (WHICH REP RESENTS NET OF INTEREST RECEIPTS AND INTEREST PAYMENTS I.E. 2,28,6 0,868)1,35,74,201) IS REQUIRED TO BE DISALLOWED. HOWEVER, THE AO HAS DISA LLOWED ONLY A SUM OF RS. 55,11,275. THEREFORE, THE BALANCE OF RS . 37,75,392/) IS ALSO TO BE DISALLOWED AS NOT INCURRED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, THE CIT(A) DIRECTED THE AO TO ENHANCE THE DISALLOWANCE BY RS. 37,75,392 TO THE DISALLOWANCE ALREADY MADE O F RS. 55,11,275 AND COMPUTE THE TOTAL INCOME. AGAINST THIS, THE AS SESSEE IS IN APPEAL BEFORE US. 5. THE LEARNED AR SUBMITTED THAT NO INCRIMINATING MATE RIAL WAS SEIZED FROM THE COMPANY AND THE ADDITIONS MADE IN T HE ASSESSMENT ORDER HAVE ARISEN ON ACCOUNT OF DISALLOWANCE OF PAR T OF THE INTEREST ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 5 PAID ON UNSECURED LOAN AS CALCULATED BY THE AO ON T HE PRETEXT THAT THE LOAN AMOUNT WAS NOT WHOLLY AND EXCLUSIVELY UTIL ISED FOR THE PURPOSE OF BUSINESS BUT A PART OF IT WAS APPLIED FO R THE PURPOSE OF ACQUIRING THE SHARES IN SISTER COMPANIES. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY HAD SU BMITTED TO THE AO THAT INVESTMENTS MADE IN EQUITY / PREFERENCE SHA RES OF THE SISTER COMPANIES, WERE OUT OF COMMERCIAL EXPEDIENCY. THE INVESTMENTS MADE IN COMPANIES WHICH ARE ALSO ENGAGED IN THE SAM E BUSINESS OF REAL ESTATE DEVELOPMENT AS IS THE BUSINESS OF THE A SSESSEE COMPANY. THE AO HAS NOT CORRELATED THE AMOUNT OF INVESTMENTS MADE IN THE COMPANIES WITH THE SOURCES OF FUNDS. THE AO TOOK T HE FINANCIAL POSITION OF THE COMPANY AS A PARTICULAR DATE, I.E. 31.3.2008 TO SUBSTANTIATE HIS CONTENTION THAT UNSECURED LOANS OB TAINED BY THE ASSESSEE COMPANY WAS UTILIZED FOR INVESTING IN EQUI TY SHARES OF SISTER CONCERNS. THE FINANCIAL POSITION OF THE COMPANY CH ANGES EACH DAY OF THE YEAR IN THE LIGHT OF TRANSACTIONS WHICH ARE TAKEN PLACE THROUGHOUT THE YEAR. A BALANCE SHEET IS ONLY A STA TEMENT OF THE FINANCIAL POSITION OF THE COMPANY ON A GIVEN DATE. THE IMPORTANT ASPECT TO BE CONSIDERED IN THIS CASE IS LIMITED TO WHETHER THE UNSECURED LOANS ON WHICH INTEREST WAS PAID WERE UTI LIZED FOR INVESTING IN THE SHARES OF GROUP COMPANY BY THE ASSESSEE. 6. THE AR FURTHER SUBMITTED THAT IN THE AY 2008)09, TH E COMPANY MADE INVESTMENT OF RS. 15 CRORES IN THE SHARE CAPIT AL OF ANOTHER ASSOCIATE COMPANY M/S. GLOBAL SHELTERS PVT. LTD. (M /S. GSPL). IT WAS ALSO EXPLAINED DURING THE COURSE OF ASSESSMENT PROC EEDING THAT THIS WAS NOT A FRESH INVESTMENT MADE BUT ONLY THE AMOUNT GIVEN TO THE SAID COMPANY AS LOAN DURING THE PREVIOUS ASSESSMENT YEAR 2007)08 WHICH WAS INITIALLY TRANSFERRED AS SHARE APPLICATIO N AND FINALLY AS ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 6 INVESTMENT IN THE COMPANY. THEREFORE, THERE WAS NO INTEREST BEARING UNSECURED LOAN DIRECTLY UTILIZED FOR THE INVESTMENT . THE TRANSACTIONS WHICH WERE AFFECTED IN THE BOOKS OF THE COMPANY REL ATING TO INVESTMENT MADE IN M/S. GSPL OF RS. 15 CRORES DURIN G THE AY 2008)09 ARE AS FOLLOWS: (I) THE COMPANY HAS RECEIVED 3 CHEQUES OF RS. 5 CRORE EACH FROM M/S. PLATINUM PROPERTIES PVT. LTD. (M/S. PPPL) ON 29)3)2007 WHICH WAS RECEIVED AS UNSECURED LOAN AND THE SAME AMOUNT WAS GIVEN M/S. GSPL ON 29)3) 2007 THROUGH STATE BANK OF HYDERABAD (SBH). (II) THE COMPANY HAD EARNED INTEREST FROM M/S. PPPL OF RS. 10,27,974 DURING THE FY RELEVANT TO AY 2007)08. THU S, IN EFFECT, THERE WAS NO INTEREST PAYMENT. (III) ON 1)4)2007, THE COMPANY TRANSFERRED AN AMOUNT OF R S. 15 CRORE GIVEN AS LOAN TO M/S. GSPL AS SHARE APPLICATION MONEY MADE IN M/S. GSPL AND ON 20)3) 2008 THE SHARES WERE ALLOTTED TO THE COMPANY . SUBSEQUENTLY, AN AMOUNT OF RS. 3,75,00,000 OUT OF T HE INVESTMENT MADE OF M/S. GSPL WAS SOLD ON 31)3)2008 TO M/S. RELIANCE TRADING ENTERPRISES. THEREFORE, TH E COMPANY'S INVESTMENT MADE IN THE SHARES OF M/S. GSPL AS ON 31)3)2008 WAS RS. 11.25 CRORE ONLY. (IV) IN THE AY 2008)09, THE COMPANY HAD NOT PAID INTERES T TO M/S. PPPL 7. THE DISALLOWANCE OF INTEREST WILL ARISE ONLY IN CAS E IT CAN BE ASCERTAINED THAT THE UNSECURED LOAN ON WHICH INTERE ST HAS BEEN PAID ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 7 WERE UTILIZED FOR INVESTMENT IN SHARES. THE AO HAS IGNORED THE FACTS AND RECORDS PRODUCED BUT ON HIS OWN CALCULATION AS MENTIONED IN THE ORDER, DISALLOWED INTEREST AGGREGATING TO RS. 5 5,11,275. THE CASE OF THE ASSESSEE COMPANY IS SQUARELY COVERED BY THE RATIO OF THE DECISION OF THE HON'BLE SUPREME COURT IN S.A. BUILD ERS VS CIT, 288 ITR 1 WHEREIN IT WAS CLEARLY HELD THAT IF THE ASSESSEE OU T OF COMMERCIAL EXPEDIENCY HAS GIVEN INTEREST FREE ADVANCE TO ITS S UBSIDIARY/SISTER CONCERNS THE INTEREST PAID ON UNSECURED LOAN CANNOT BE DISALLOWED. THE FACT AND CIRCUMSTANCES IN THE CASE CLEARLY REVE ALED THAT IT IS COMMERCIAL EXPEDIENCY FOR THE COMPANY TO INVEST IN THE ASSOCIATE COMPANY AS ALL OF THEM ARE ALSO ENGAGED IN THE BUSI NESS OF REAL ESTATE. THE AO IN HIS ORDER HAS QUESTIONED THE MOT IVES OF THE ASSESSEE COMPANY TO MAKE INVESTMENTS IN THE ASSOCIA TED COMPANIES. IT IS NOT THE CASE OF THE INCOME)TAX DEPARTMENT TO COMPEL A BUSINESSMAN TO MANAGE HIS AFFAIRS OF BUSINESS. THE FACT THAT THE INVESTMENTS MADE WERE NOT FOR NON)BUSINESS PURPOSE, CAN BE CLEARLY ESTABLISHED ON THE FACTS AND CIRCUMSTANCES OF THE C ASE. 8. THE AR FURTHER SUBMITTED THAT NO BORROWED FUNDS WER E USED FOR THE PURPOSE OF ADVANCING MONEY TO M/S. GSPL AND, ON THE OTHER HAND, THE ASSESSEE USED THE FUNDS RECEIVED FROM M/S . PPPL TO ADVANCE THE SAME TO M/S. GSPL. FURTHER, HE SUBMITT ED THAT INVESTMENT IN SISTER CONCERN CANNOT BE SAID TO BE A N INVESTMENT IN NON)BUSINESS PURPOSES. ACCORDING TO HIM, MAKING INVESTMENT IN SHARES OF THE OTHER COMPANIES IS ONE O THE OBJEC TS OF THE ASSESSEE)COMPANY AND TO ACHIEVE THE OBJECT OF THE A SSESSEE) COMPANY, THE INVESTMENT HAD BEEN MADE IN M/S. GSPL WHICH WAS RECEIVED FROM M/S. PPPL. FURTHER HE DREW OUR A TTENTION TO ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 8 THE CASH)FLOW STATEMENT AND ALSO TO THE BALANCE SHE ET OF THE ASSESSEE)COMPANY SPECIFICALLY TO SCHEDULE VI OF THE BALANCE SHEET, TO SUGGEST THAT THE MONEY ADVANCED TO M/S. G SPL FROM THE UNSECURED LOAN RECEIVED FROM THE OTHER SISTER C ONCERN. FURTHER HE RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF SA BUILDERS VS. CIT (288 ITR 1) WHEREIN THE APEX COURT HELD AS UNDER: 'TO CONSIDER WHETHER ONE SHOULD ALLOW DEDUCTION UNDER SECTION 36(1)(ILI) OF INTEREST PAID BY THE ASSESSEE ON AMOUNTS BORROWED BY IT FOR ADVANCING TO A SISTER CONCERN, THE AUTHORITIES AND THE COURTS SHOULD EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY AND WHAT THE SISTER CONCERN DID WITH THE MONEY. THAT THE BORROWED AMOUNT IS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS BU T HAD BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SIST ER CONCERN IS NOT RELEVANT. WHAT IS RELEVANT IS WHETHE R THE AMOUNT WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF THE REVENUE CANNOT JUSTIFIABLY CLAI M TO PUT ITSELF IN THE ARM)CHAIR OF THE BUSINESSMAN O R IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUM E THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFITS.' 9. THE AR RELIED ON THE CIT V. WALCHAND AND CO. (R) LT D. (1967) 65 ITR 381 (SC), FOR THE PROPOSITION THAT WH EN THE ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 9 EXPENDITURE IS WHOLLY INCURRED FOR THE PURPOSE OF B USINESS OF THE ASSESSEE, THERE WAS NO REASON TO DISALLOW ANY PORTI ON OF THE INTEREST EXPENDITURE ON IMAGINARY REASONS. THE AR ALSO RELIED ON THE DECISION OF TRIBUNAL IN THE CASE OF SSPDL LT D. VS. DCIT (24 ITR (TRIB) 290) WHEREIN HELD THAT UNLESS AND UNTIL BORROWED FUNDS ARE USED AS INVESTMENT IN SISTER CONCERN, DISALLOWA NCE OF INTEREST IS NOT POSSIBLE. 10. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT TH E ASSESSEE HAS CLAIMED INTEREST OF RS. 61,11,478/) ON ACCOUNT OF SECURED LOANS OBTAINED FROM BANKS AND FINANCIAL INS TITUTIONS TOWARDS PROJECT COST INCURRED DURING THE YEAR UNDER CONSIDERATION. IN ADDITION TO THE ABOVE CLAIM UNDE R THE HEAD INTEREST, THE ASSESSEE ALSO DEBITED SUM OF RS. 2,28 ,60,868/) IN THE PROFIT AND LOSS A/C AS EXPENDITURE OF THE BUSINESS. THIS INTEREST IS ON ACCOUNT OF UNSECURED LOANS OBTAINED FROM ITS SIS TER CONCERNS. ON THE OTHER HAND, THE ASSESSEE ALSO DEC LARED INTEREST INCOME OF RS. 1,35,74,201 ON UNSECURED LOA NS GIVEN TO VARIOUS SISTER CONCERNS. HOWEVER, THE AO DISALLOWED A SUM OF RS. 55,11,275/) AS INTEREST ON BORROWED FUNDS DIVERTED TOWARDS ACQUIRING EQUITY SHARES AND PREFERENCE SHARES OF SI STER CONCERNS. BUT, THE ABOVE FACTS OF THE INTEREST RECE IPT AND CLAIM SHOWS THAT THE DIFFERENCE IS COMING TO RS. 92,86,66 7. 11. THE DR FURTHER SUBMITTED THAT IT IS A FACT THAT THE ASSESSEE COMPANY INVESTED IN THE SHARES OF ITS SISTER CONCER NS AS INVESTMENT AND THE VALUE OF THE SAME STOOD AT THE E ND OF THE ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 10 CURRENT YEAR AT RS. 20,77,63,500. DURING THE YEAR U NDER CONSIDERATION, THE ASSESSEE'S NET INVESTMENT IN M/S . GSPL IS RS. 11.25 CRORES AFTER SALE OF SHARES WORTH RS. 3,75,00 ,000 OF THIS COMPANY. INITIALLY, THE ASSESSEE HAD GIVEN A SUM OF RS. 15 CRORES AS LOAN TO M/S. GSPL AND SUBSEQUENTLY THE LOAN HAS BEEN CONVERTED AS INVESTMENT IN THE FORM OF SHARES. OUT OF THE SAME, SHARES WORTH RS. 3.75 CRORES WERE SOLD TO M/S. RELI ANCE TRADING ENTERPRISES ON 31)3)2008. THEREFORE, THE NET INVEST MENT IN THE ABOVE COMPANY FOR THE YEAR STANDS AT RS. 11.25 CROR ES. THESE INVESTMENTS IN VARIOUS SISTER CONCERNS HAVE BEEN MA DE OUT OF THE UNSECURED LOANS OBTAINED FROM VARIOUS CONCERNS BY INCURRING INTEREST EXPENDITURE OF RS. 2,28,60,868. AT THE SAME TIME, UNSECURED LOANS WERE GIVEN TO VARIOUS SISTER CONCERNS AND RECEIVED INTEREST OF RS. 1,35,74,201/). THIS PART OF THE UNSECURED LOAN AND INTEREST ON THE SAME HAS NOT BEEN CARRIED TO THE PROJECT COST BY THE ASSESSEE COMPANY ON THE GROUND THAT IT HAS NO BEARING ON THE COST OF THE PROJECT. HOWEVER, AC CORDING TO THE ASSESSEE, THE SAME CONSTITUTES ITS BUSINESS AS IT HAS INTEREST IN THE OVER ALL PROJECTS CARRIED ON BY ITS SISTER CONC ERNS. THIS EXPLANATION OF THE ASSESSEE SANS LOGIC AND BEYOND COMPREHENSION OF ANYONE. THE ASSESSEE CANNOT ACT A S A GODFATHER OF ITS SISTER CONCERNS AND TAKE ALL LIABI LITIES TO ITS HANDS THEREBY DILUTING THE PROFITS OF THE COMPANY. THE A SSESSEE COULD NOT DEMONSTRATE WITH ANY REASONABLE EVIDENCES HOW T HE INTEREST OF THE ASSESSEE IS PROTECTED BY INVESTING IN THOSE COMPANIES AND BY LENDING LOANS TO SUCH COMPANIES. MANY OF ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 11 SUCH CONCERNS ARE RECENTLY FLOATED COMPANIES WITH N O BUSINESS AT ALL. IT IS NOT KNOWN HOW SUCH COMPANIES CAN BEN EFIT AND HELP THE BUSINESS OF THE ASSESSEE COMPANY. 12. THE DR SUBMITTED THAT ANY ACT OF HAVING CONTROLLING INTEREST IN OTHER COMPANIES CANNOT CONSTITUTE BUSIN ESS OF THE ASSESSEE BY ANY STRETCH OF IMAGINATION. IN THIS CA SE, THE ASSESSEE FAILED TO ESTABLISH THE INTERWOVEN CONNECT ION AND THE BENEFITS ACCRUED TO THE ASSESSEE BY VIRTUE OF SUCH INTEREST IN THOSE COMPANIES. ON THE OTHER HAND, IT IS ESTABLIS HED THAT THE ASSESSEE IS TRYING TO HELP THOSE COMPANIES FINANCIA LLY TO ESTABLISH THEMSELVES BY FOREGOING THE PROFITS GENER ATED YEAR AFTER YEAR. AS A CONSEQUENCE OF THE CLAIM OF INTER EST ON SUCH UNSECURED LOANS WHICH HAVE NOT BEEN UTILIZED FOR AN Y BUSINESS, THE ASSESSEE IS REDUCING ITS NET PROFIT AND AVOIDIN G TAXES DULY PAYABLE ON THOSE PROFITS. IF SUCH LOANS ARE TAKEN FOR THE PURPOSE OF THE ASSESSEE, THE INTEREST ON SUCH UNSEC URED LOANS WOULD HAVE FOUND PLACE IN THE COST OF THE PROJECT A S HAS BEEN DONE IN RESPECT OF THE INTEREST ON SECURED LOAN OF RS. 61,11,478. THE CONDUCT OF THE ASSESSEE EXPLAINS THAT THE BUSIN ESS OF UNSECURED LOANS FOR INTEREST IS OUTSIDE THE ARENA O F ITS MAIN BUSINESS INTEREST. THERE IS NO COMPELLING REASON O R A COMMERCIAL EXPEDIENCY TO BAILOUT SISTER COMPANIES B Y GIVING UNSECURED LOANS AND TO INVEST IN THEIR COMPANIES. IT IS ONLY EXPLAINED IN WRITING THAT IT HAS DEEP INTEREST IN T HE BUSINESS OF ITS SISTER COMPANIES BUT NOTHING PROVED TO SUGGEST THAT THE BUSINESS INTEREST OF THE ASSESSEE IS CLOSELY INTERL INKED BUSINESS OF ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 12 SUCH CONCERNS. INTEREST ON BORROWED FUNDS IS ALLOW ED AS A DEDUCTION WHILE COMPUTING THE INCOME OF THE ASSESSE E, PROVIDED THE SAME IS INCURRED FOR THE PURPOSE OF IT S BUSINESS. THE ASSESSEE EXTEND THIS LOGIC TO THE BUSINESS OF S ISTER CONCERNS AS WELL. NOT ONLY THE ASSESSEE HAS DIVERTED THE IN TEREST BEARING BORROWED FUNDS TO ITS SISTER CONCERNS BUT ALSO OFFE RED AN UNCONDITIONAL GUARANTEE FOR THE LOAN OF RS. 6.75 CR ORES OBTAINED FROM HDFC BANK TO ONE OF ITS SISTER CONCERN. BUT N OTHING HAS BEEN ESTABLISHED TO PROVE THAT THE BUSINESS INTERES T OF THE ASSESSEE IS PROTECTED OR ENHANCED BY VIRTUE OF SUCH GUARANTEE OFFERED TO ONE OF ITS SISTER CONCERNS. FURTHER, TH ESE COMPANIES DO NOT HAVE THE POTENTIAL OF DECLARING ANY DIVIDEND TO THE ASSESSEE COMPANY IN NEAR FUTURE. HENCE IT IS UNBEC OMING ON THE PART OF ANY BUSINESS MAN TO INVEST IN SUCH CONC ERNS WITHOUT ANY RETURN ON HUGE INVESTMENTS WHEN THE ASSESSEE IS CARRYING ON CAPITAL INTENSIVE PROJECTS ON BORROWED FUNDS AND INCURRING HUGE EXPENDITURE. NOTHING WRONG ON THE PART OF THE ASSESSEE TO OBTAIN UNSECURED LOANS FROM RELATED PARTIES AND GIVEN UNSECURED LOANS TO SISTER CONCERNS BEARING INTEREST ON SUCH LOANS. SUCH CONDUCT OF THE ASSESSEE SHOULD BE AT A RM'S LENGTH LEVEL WITH NO BENEFIT OR FAVOUR CONFERRED ON THOSE SISTER ENTITIES. THERE IS NO NECESSITY FOR THE ASSESSEE TO INVEST IN THE SHARES OF OTHER COMPANIES BY DIVERTING INTEREST BEARING LOANS RECEIVED FROM ITS CLOSE RELATED ENTITIES. HAD THESE FUNDS B EEN NOT INVESTED IN THE RELATED CONCERNS, THESE FUNDS WOULD HAVE FETCHED HUGE INTEREST TO THE ASSESSEE. BY SUCH DIV ERSION, THE ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 13 ASSESSEE HAD FOREGONE THE INCOME ON THE FUNDS. WHE REAS THERE IS NO COMMERCIAL EXPEDIENCY OR INCOME OPPORTU NITY EXISTS WITH SUCH INVESTMENT IN THE SHARES OF OTHER COMPANI ES. PURELY THIS ACT OF THE ASSESSEE IS NOT IN CONSONANCE OF TH E BUSINESS NEEDS BUT WITH INTENTION TO HELP ITS SISTER CONCERN S BY DILUTING ITS PROFITS THEREBY AVOIDING PAYMENT OF TAXES ON TRUE P ROFITS. 13. THE DR SUBMITTED THAT IT IS NOT THE CASE OF THE ASS ESSEE THAT THE INVESTMENT IN THE SHARES OF THE SISTER CON CERNS IS OUT OF ITS OWN IDLE FUNDS. ON THE OTHER HAND, THE FUNDS H AVE BEEN DIVERTED TO INVEST IN SHARES OUT OF BORROWED FUNDS, WHEREAS THE ASSESSEE COMPANY IS NOT AN INVESTMENT COMPANY TO DE AL WITH SHARES IN SUCH A MANNER. ASSESSEE ALSO CANNOT TAKE THE PLEA THAT IT HAD INVESTED OUT OF ACCUMULATED PROFITS AND RESERVES, SINCE THE ACCUMULATED PROFITS HAVE BEEN GENERATED A FTER A PROLONGED ACT OF BUSINESS, TAKING RISKS AND UTILIZI NG BORROWED FUNDS ETC. HENCE, THESE RESERVES AND PROFITS HAVE COST ATTACHED TO THEM. THEREFORE, THE SAME CANNOT BE TE RMED AS IDLE FUNDS. THEY ARE MEANT FOR UTILIZATION FOR BUS INESS INTEREST ONLY. THEY CANNOT BE UTILIZED TO THE WHIMS AND FAN CIES OF THE MANAGEMENT BY BENEFITTING THEIR OWN CONCERNS AT THE COST OF THE ASSESSEE COMPANY WHICH HAD ACCUMULATED PROFITS OVER THE YEARS AFTER CONDUCTING THE TASK OF BUSINESS DESPITE VARIOUS HURDLES CAME IN THE WAY. THESE RESERVES ARE TO BE C LASSIFIED AS BUSINESS FUNDS AND ARE TO BE UTILISED FOR THE PURPO SE OF THE BUSINESS OF THE ASSESSEE ONLY. 14. WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATERIAL ON RECORD. THE CIT(A) DISALLOWED THE NET INTEREST OUT GO OF RS. 92,86,667 AS AGAINST RS. 37,75,392 DISALLOWED BY TH E AO ON THE REASON THAT THE ASSESSEE HAS PAID N (INTEREST PAID OF RS. 2,28,60,868 MINUS INTEREST RE CEIVED OF RS. 1,35,74,201). ACCORDING TO THE REVENUE AUTHORITIES , THERE IS NO NECESSITY OF USING BORROWED FUNDS TO MAKE INVESTMEN T IN SISTER CONCERN. HOWEVER, THE ASSESSEE MA THE ASSESSEE GOT INTEREST FREE FUNDS OF RS. 15 CROR ES FROM M/S. PPPL BY WAY OF THREE CHEQUES OF RS. 5 CRORES EACH O N 29.3.2007 AS UNSECURED LOAN AND THE SAME AMOUNT WAS GIVEN TO M/S. GSPL ON 29.3.2007 THROUGH SBH MAHABOOB GUNJ BRAN SIDDIAMBAR BAZAR, HYDERABAD AND AS A PROOF OF THIS, THE ASSESSEE HAS FURNISHED A COPY OF THE BANK STATEMENT (PLACED AT PAGE NO. 19 IN THE PAPER BOOK) WHICH IS A FOLLOWS: ITA NO. 58 M/S. AMBIENCE PROPERTIES ================ === 14 WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATERIAL ON RECORD. THE CIT(A) DISALLOWED THE NET INTEREST OUT GO OF RS. 92,86,667 AS AGAINST RS. 37,75,392 DISALLOWED BY TH E AO ON THE REASON THAT THE ASSESSEE HAS PAID N ET INTEREST OF RS. 92,86,667 (INTEREST PAID OF RS. 2,28,60,868 MINUS INTEREST RE CEIVED OF RS. 1,35,74,201). ACCORDING TO THE REVENUE AUTHORITIES , THERE IS NO NECESSITY OF USING BORROWED FUNDS TO MAKE INVESTMEN T IN SISTER CONCERN. HOWEVER, THE ASSESSEE MA DE A PLEA BEFORE US THAT THE ASSESSEE GOT INTEREST FREE FUNDS OF RS. 15 CROR ES FROM M/S. PPPL BY WAY OF THREE CHEQUES OF RS. 5 CRORES EACH O N 29.3.2007 AS UNSECURED LOAN AND THE SAME AMOUNT WAS GIVEN TO M/S. GSPL ON 29.3.2007 THROUGH SBH MAHABOOB GUNJ BRAN SIDDIAMBAR BAZAR, HYDERABAD AND AS A PROOF OF THIS, THE ASSESSEE HAS FURNISHED A COPY OF THE BANK STATEMENT (PLACED AT PAGE NO. 19 IN THE PAPER BOOK) WHICH IS A FOLLOWS: 58 /HYD/2012 AMBIENCE PROPERTIES LTD . === ========= WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATERIAL ON RECORD. THE CIT(A) DISALLOWED THE NET INTEREST OUT GO OF RS. 92,86,667 AS AGAINST RS. 37,75,392 DISALLOWED BY TH E AO ON THE ET INTEREST OF RS. 92,86,667 (INTEREST PAID OF RS. 2,28,60,868 MINUS INTEREST RE CEIVED OF RS. 1,35,74,201). ACCORDING TO THE REVENUE AUTHORITIES , THERE IS NO NECESSITY OF USING BORROWED FUNDS TO MAKE INVESTMEN T IN SISTER DE A PLEA BEFORE US THAT THE ASSESSEE GOT INTEREST FREE FUNDS OF RS. 15 CROR ES FROM M/S. PPPL BY WAY OF THREE CHEQUES OF RS. 5 CRORES EACH O N 29.3.2007 AS UNSECURED LOAN AND THE SAME AMOUNT WAS GIVEN TO M/S. GSPL ON 29.3.2007 THROUGH SBH MAHABOOB GUNJ BRAN CH, SIDDIAMBAR BAZAR, HYDERABAD AND AS A PROOF OF THIS, THE ASSESSEE HAS FURNISHED A COPY OF THE BANK STATEMENT (PLACED AT ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 15 15. BEING SO, AS SEEN FROM THE ABOVE, IT CANNOT BE SAID THAT THE ASSESSEE USED BORROWED FUNDS FOR NON BUSINESS P URPOSES. THE PLEA OF THE DEPARTMENT IS THAT INSTEAD OF MAKIN G INTEREST FREE INVESTMENT IN M/S. GSPL, THE ASSESSEE SHOULD H AVE USED THE SAME FOR THE PURPOSE OF CLEARING LOANS AND IT COULD HAVE VERY WELL SAVED THE INTEREST PAYMENT. WHEN THE ASSES SEE NOT USED BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT, THE D EPARTMENT CANNOT SAY THAT INTEREST FREE FUNDS AVAILED BY THE ASSESSEE SHOULD HAVE BEEN USED FOR THE PURPOSE OF CLEARING T HE EXISTING LOANS. IT IS THE PREROGATIVE OF THE ASSESSEE TO TA KE A BUSINESS DECISION IN WHAT MANNER THE ASSESSEE HAS TO DEPLOY ITS FUNDS. THE REVENUE CANNOT DECIDE WHAT THE ASSESSEE HAS TO DO AND CANNOT COMPEL THE ASSESSEE TO MAXIMISE THE PROFIT S O AS TO PAY HIGHER INCOME TAX. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE. SAME IS THE POSITION WITH THE SISTER CONCERN, M/S. GSPL. THERE ARE COMMON INTERESTS AMONG THE COMPANI ES. IN VIEW OF THE COMMERCIAL EXPEDIENCY THE ASSESSEE ADVA NCED THE INTEREST FREE FUNDS TO THE SISTER CONCERN WHICH IS RECEIVED FROM M/S. PPPL. BEING SO, THE INTEREST BEARING FUN DS WERE NOT AT ALL DIVERTED BY THE ASSESSEE TO MAKE INVESTMENT IN THE SISTER CONCERN. THEREFORE, NO DISALLOWANCE COULD BE MADE ON NOTIONAL BASIS AND IT CANNOT BE DISALLOWED EVEN IF IT HAS NOT RESULTED IN ANY INCOME TO THE ASSESSEE. 16. ACCORDINGLY, BY PLACING RELIANCE ON OUR EARLIER DEC ISION IN THE CASE OF SSPDL (SUPRA), WE ARE INCLINED TO DECID E THE ISSUE IN FAVOUR OF THE ASSESSEE. ITA NO. 58/HYD/2012 M/S. AMBIENCE PROPERTIES LTD . ============================ 16 17. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JANUARY, 2014. SD/) (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/) (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 22 ND JANUARY, 2014 TPRAO COPY FORWARDED TO: 1. M/S. AMBIENCE PROPERTIES LTD., PLOT NO. 1023, 1 ST FLOOR, INRHYTHM BUILDING, GURUKUL SOCIETY, NEAR MERIDIAN S CHOOL, MADHAPUR, HYDERABAD)500 081. 2. THE DY. CIT, CENTRAL CIRCLE)2, HYDERABAD. 3. THE CIT(A))I, HYDERABAD. 4. THE CIT (CENTRAL), HYDERABAD. 4. THE DR BENCH 'B', ITAT, HYDERABAD