DCIT, Central Circle-3(2), Hyd, Hyderabad V. Pavitravati Greenfields Private Limited, Hyd, Hyderabad

ITA 708/Hyd/2016

• Counselvise Citation: [NaN] 107 COUNSELVISE.COM (IT) 1870 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: DB-B
• Assessment Year: 2008-2009
• Appeal Filed On: 16-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y.V.S.T. SAI
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 142(1); 143(1); 250; 143(2); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) B EFORE SH RI SA TBEER SING H GODA RA, JU DI CIA L MEM BER AND SHR I L AXMI PR AS A D SAHU , AC COUNT ANT MEMBE R ITA No. 708/H/2016 Assessment Year: 2008-09 Dy. Commissioner of Income-tax, Central Circle – 3(2), Hyderabad. Vs. Pavitravati Greenfields P. Ltd., Hyderabad. PAN – AAECP0216E (Appellant) (Respondent) Revenue by: Shri Y.V.S.T. Sai Assessee by: Shri K.C. Devdas Date of hearing: 06/10/2021 Date of pronouncement: 04/01/2022 O R D E R PER L.P. SAHU, A.M.: This appeal filed by the assessee is directed against CIT(A) – 12, Hyderabad’s order dated 18/01/2016 for AY 2008-09 involving proceedings u/s 143(3)r.w.s. 147 of the Income Tax Act, 1961 ; in short “the Act”, on the following grounds of appeal: “1. The order of C1T(A} is erroneous on both facts and law. ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 2 -: 2. The CIT(A} has erred in relying on the decision of the Hon'ble Mumbai High Court in the case of I CIT Vs Jet Airways (P) Ltd.(331 ITR 236}, as in the instant case the addition was made on the same reason for which the case was reopened. 3. The CIT(A} has erred in deleting the interest expenditure by relying on the decision of in the case of M/s Aahar Greenfields Pvt Ltd and others wherein the issue involved was of taxing notional interest, whereas in the instant case the addition is made on account of disallowance of interest u/s36(1)(iii} of the I.T. Act, 1961. 4. The appellant craves leave to amend or alter any grounds or add a new ground, which may be necessary.” 2. Briefly the facts of the case are that the assessee a company involved in agricultural activities had e-filed its return of income for the AY 2008-09 on 29/09/2008 declaring a total loss of Rs. 12,97,30,061/-, which was processed u/s 143(1) of the Income Tax Act 1961 by accepting income returned. Subsequently, the regular scrutiny u/s 143(3) of the Act was completed on 30/12/2010 by reducing the loss to Rs. 3,03,34,177/-. 2.1 The AO reopened the above assessment u/s 147/148 of the Act after recording the reasons and notice u/s 148 issued on 31/05/2012 and served on the assessee. In response to the said notice, the assessee had filed the return of income and requested for the reasons for ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 3 -: reopening and the same was supplied to the assessee, which are as under: “The assessee availed secured loans of Rs. 136.77 Crore and unsecured loan of Rs. 13.42 Crore both aggregating to Rs. 150.19 Crore for tire purpose of business. Assessee is having creditors for Rs. / 52.96 Crore. The Assessee advanced an amount of Rs. 80.78 Crore to SCSL on which interest of Rs. 14.54 crore was charged @ 18 percent and same was treated as income accrued under the head business of profession. 1. As per section 36(1)(iii) borrowed funds should be availed for the purpose of business or profession for claiming interest on borrowed fund. In this instant case assessee availed total loan fund amounting to Rs. 150.19 Crore and creditors fund of Rs. 52.96 for giving the advances amounting to Rs.185.68 Crore to several companies/sister concern and remaining Rs. 17.47 crore for meeting the revenue expenditure. Hence assessee did not utilize to the tune of the borrowed funds for the purpose of business profession. 2. In the assessment order assessing officer charged interest of Rs: 14.54 Crore @18% on tire advances amounting to Rs. 80.78 crore extended to SCSL. But same was not charged on the balance advances of Rs. 104.90 crore to several companies (Rs. 185.68 - Rs.80.78 crore) . Assessee debited interest of Rs. 11.03 crore in the profit and loss account on the borrowed funds. Since assessing officer has charged interest of Rs. 14.54 crore on the advances of Rs. 80.78 Crore extended to SCSL, the expenditure thereon of interest on borrowed funds is admissible U/s 36(1)(iii) proportionately which was worked out to be Rs. 4.81 Crore and the balance debited interest amounting to Rs. 6.21 Crore should be disallowed (Rs. 11.03 - Rs. 4.81 Crore). ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 4 -: 3. After setting off the balance carried forward loss of Rs. 3.03 crore against tire enhanced income of Rs. 6.21 crore which arises due to disallowance of interest as discussed in item 2. above, the taxable income works out to be Rs. 3.18 crore (Rs. 6.21 - Rs.3.03 Crore). The short demand worked out to Rs. 1.44 crore including interest U/s 234 B with potential tax effect of Rs. 1.02 crore.” 2.2. Against the Notices u/s 143(2) and 142(1) issued to the assessee calling for information, the AR of the assessee furnished the information called for. After examining the information filed by the assessee and material available on record, the AO finalized the assessment by disallowing an amount of Rs. 11,11,15,463/- u/s 36(1)(iii) by observing as under: “5 Disallowance of Interest on Borrowed Fund: During the year the assessee has received term loan of Rs. 30 crores from the SICOM Ltd, interest payable @ 13.60 % P/a and Rs. 70 crores from the GE Capital Services India Ltd, interest payable @ 10.20% P/a and the assessee also received an amount of Rs. 13,42,66,872/ - from M/s Vamadeva Greenlands Pvt Ltd as an interest free unsecured loan, it has repaid an amount of Rs.3,22,88,870/ - to the GE Capital Services India Ltd, hence the balance term loan is Rs. 66,77,11,130/ -. At the end of the year the total loan outstanding including both term loan and unsecured loan is of Rs. 1,10,19,78,002/ -. As seen from the record, during the year the assessee has advanced Rs. 1,03,23,81,864/ - (1858883414 - 826501550) as an unsecured loan to others, while it has paid the interest of Rs. 11,11,15,463/- on term loan, further it is seen from its bank accounts that as and when it has received the amount of term loan from either SICOM or GE ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 5 -: immediately the amounts were disbursed as an unsecured loans to the others. As the assessee has not done any business activity during the year and it has not offered any income from business and profession, but it has taken term loan for the purpose of business but disbursed it as an unsecured interest free loan, but the interest paid of Rs. 11,11,15,463/ - on term loan has been claimed as expenditure in its P&L a/c which is not permitted u/s 36 (1)(iii) of the I.T. Act. Hence, the total interest paid of Rs. 11,11,15,463/- has been disallowed as the assessee has advance the total term loan of Rs. 96,77,11,130/ - as unsecured interest free loan.” 3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and objected for the addition by contending as under before the CIT(A). “6.2 i) The addition is totally contrary to the facts and the reasons recorded for reopening the assessment. In the Course of assessment proceedings assessing officer issued a show cause notice dtd.20-12-2010 with reference to the amount of Rs.80,78,OO,OOO/_ advanced to M/s. SCSL on which no interest was shown to have accrued or received. It was therefore proposed to estimate interest 18% of the said amount (This show cause notice was on page 51 of the paper books). ii) Appellant's reply to the show notice was submitted on 24-12-2010 which is self explanatory. The copy of the reply was at page 62 to 66 of the paper book. iii) A perusal of the assessment order reveals that the addition was made by the assessing officer by way of disallowance on a notional basis invoking the provision of section 36(1)(iii) of the Act. This was on the premise that appellant availed loan fund of Rs.150.19 crores as mentioned in the reasons recorded. iv) As a point of fact the loan funds of 136.77 crores consist of 70 crores representing borrowals during the ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 6 -: year under consideration. Once this is excluded the balance is Rs.66.77 crores is old balance. The amount advanced to SCSL of 80,78,00,000/- is the reopening balance which explains that none of the borrowals of the current year were availed for advances to SCSL and it is the old balance (vide page 39 of the paper book). v) The borrowals of the current year were availed as advances to other group companies which in turn have been advanced to SCSL (vide page 39 of paper book). Vi) In respect of all such advances to SCSL in respect of appeals preferred, CIT(A) and ITAT, Hyderabad bench in the case of group companies have held in favour of appellant. In terms of a common order it has been held that "unless and until there is a contract between the parties for charging of interest on the funds advanced the notional interest cannot be brought to tax". Vii) On the above finding ITAT directed for the deletion of interest added in all the group companies. The decision has become final as the revenue did not go in further appeal. viii) The order of CIT(A) dated 30-09-2013 which is enclosed at page 4 of the order mentioned the names of all the group companies. The names of the companies highlighted at page.22 ill paper book find their place in the order of CIT(A). ix) In this back drop of such facts on record, the show cause notice issued by the assessing officer was resting on the amount of Rs.80,78,00,000/- on which the assessing officer proposed to charge interest @ 18% on estimate basis. The amount proposed to be added works out to RS.14,54,40,OOO/- ( as recorded in the reasons). However, the assessing officer disallowed Rs.11,11,15,463/- on the premise that the total term loan of Rs.96,77,11,130/- was the unsecured loans. This Is totally wrong as it has no bearing at all to the facts ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 7 -: as unexplained in details as above. Thus, the very basis or foundation for the disallowance is totally wrong.” 4. After considering the submissions of the assessee, the CIT(A) deleted the addition of Rs. 11,11,15,463/- made by the AO u/s 36(1)(iii) by observing as under: “6.3 Perused the submissions of the appellant and the observations of the AO In assessment order, along with the decision of ITAT, on the similar Issues. As could be seen from the facts, the appellant company Is one of the group companies of M/s. Satyam computer Services Ltd (SCSL In snort), that had advanced certain amounts to M/s. SCSL and such principal amounts receivable for the year were quantified at Rs.80.78 crores, which were provided as advances. As against this the loans availed by the company were put at Rs.150.19 crores. As the funds borrowed held to have not utilized for the business, the entire claim of Interest expenses to the tune of Rs.11,11,15,463/was disallowed to be added back to the total income/reduced from loss, However, In this regard, it may be relevant to mention that the total advances borrowed during A.Y.2008-09 was put at Rs.70.00 crores, with total borrowed funds were shown at Rs.136.77 crores, with the opening balances being shown at Rs.66.77 crores. It was contended by the assessee that assessment was reopened on the premises that the assessee has not shown any interest on the advances given to Sat yam computer Services Ltd and interest was proposed to be computed at 18% P.A., where as the assessment was completed by disallowing the Interest claim under section 36(1)(iii) on the ground that funds borrowed for business purpose were not utilized for business. In this regard, it may be relevant to refer to the fact that the amount of Rs.80.78 crores receivable from SCSL as on 31-03-2008 was an opening balance and no fresh loans were given to SCSL. ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 8 -: 6.4 Coming to the issue of the case from the point of validity of reopening of assessment, it may be relevant to observe that the addition made by the AO has not been made on the issue for which the reasons were recorded for reopening. Addition on account of any other matter cannot be made by the AO without making addition on the issue of reopening of assessment and the judicial decision of Mumbai High Court in the case of CIT vs Jet Airways (P) Ltd (331 ITR 236) apart from other judicial decisions as relied upon by the assessee, support their cause. Further, the decision of Hon'ble ITAT -'B' Bench, Hyderabad, in the case of swarnadhara IJM, support the cause of the assessee, where in it has been held 'reassessment order passed is not valid in law, if income other than the income which the basis for reopening was considered for assessment'. 6.5 Further on the alternate submissions of the appellant on issue of charging of interest on the amounts given to SCSL, the decision of ITAT in the case of M/s. Aahar Greenfields Farms Pvt ltd and others is very much relevant considering the fact that the facts of above cases are similar to the facts of case under reference, where in the Hon'ble ITAT decided the issue in favour of assessee, where in the considered decision was that one cannot conclude that interest income has definitely accrued and arisen to assessee at the specific rates to the assessee as opined by the AO, more so where there is no contract and it there is an uncertainty. In the said case, it was held that matter was pending before the court and based on the same it may be reasonable to conclude that as and when the court finalise the suit, the interest rate mentioned therein can be reckoned and income may be taxed for the year, as per the implications of the said court order, on the suit filed by parties. Hence, in alternative way also the income has not accrued to the assessee. Accordingly, the addition of Rs. 11,11,15A63/_ made by the AO held to be unsustainable on this basis as well.” ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 9 -: 5. Aggrieved by the order of the CIT(A), the revenue is in appeal before the ITAT. 6. Before us, the ld. DR relied on the order of the AO and submitted that the CIT(A) has wrongly relied on the judgments which are not applicable to the facts of the assessee’s case. He submitted that there is a direct nexus between the reasons recorded by the AO for reopening of the assessee and the addition made. He submitted that the assessee had taken loan on which interest has been claimed as business expenditure, but the borrowed funds were advanced to others on interest free, which shows that the assessee had not utilized the borrowed funds for the purpose of its business. He submitted that the AO has disallowed the interest on borrowed funds, but, not on the notional income computed on the interest free advances as considered by the CIT (A). He submitted that the entire submissions made by the ld. AR is only on the basis of no accrual of interest on interest free advances. He has filed paper book containing page nos. 01 to 74 which is compilation of case law and the same are as under: 1. Usha International Ltd., 56 Taxmann.com 157 2. Tivoli Investment and Trading Co. Pvt. Ltd., 49 taxmann.com 479 3. OPG Metals & Finsec Ltd., 41 taxmann.com 21 4. Instant Holdings Ltd., 44 taxmann.com 386 5. Union of India, 96 taxmann.com 250 6. Greater Mohali Area Development Authority, 93 taxmann.com 441. ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 10 -: 7. The ld. AR, on the other hand, besides relying on the order of CIT(A) reiterated the submissions made before the CIT(A). He further submitted that the AO has wrongly disallowed the notional interest @ 18% on the advances given to M/s Satyam Computer Services Ltd. (SCSL). He further submitted that there was no direct nexus between the loan taken and the advances given. He also referred to the copy of the ledgers containing in the paper books. He further referred to the paper books containing pages No. 92 to 120, which are copy of ledger accounts of the loans and advances taken and given and interest paid on loans taken. Further, he referred to page 93 of the paper book, which is a copy of ledger account of M/s SCSL and submitted that these amounts were given in the preceding FY, i.e., FY 2006-07, in the current year, there was no fresh loans and advances given to M/s SCSL. Also, the ld. AR referred to other ledger accounts to submit that most of the advances given in the earlier years also. He also referred to paper book page No. 116 and submitted that the loan taken from GE Capital of Rs. 70 crores were utilized for the payments made to Netravati Greenfields Pvt. Ltd. of Rs. 23.33 crores, Malaprabha Greenfields Pvt. Ltd. of Rs. 23.34 crores and Teepa Agro Pvt. Ltd. of Rs. 22.03 crores. He submitted though the group company M/s SCSL has involved in scandal and the assessee company has not given any loan to M/s SCSL during the impugned AY. He invited the bench ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 11 -: attention to paper books submitted in two volumes containing pages 1 to 137, 1 to 184 and 01 to 44 containing orders in case of group company case respectively to submit that arguments advanced by him are support the documents furnished in the paper book. In support of revenue’s case, the ld. DR relied on the following case law: 8. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The AO has disallowed the interest on advances u/s 36(1)(iii) of the Act on the ground that the assessee has not utilized the borrowed funds for the purpose of its business. The Ld. AR has relied on the decision of the coordinate bench of ITAT, Hyderabad in the group case i.e. M/s SCSL to submit that notional interest cannot be charged in the absence of any agreements between the lenders and borrowers is also not correct because in the case of the assessee, the AO has disallowed the interest u/s 36(1)(iii). The assessee had taken interest bearing loans, but, the same were given to others on interest free. In such circumstances, section 36(1)(iii) is applicable to the case of the assessee and the AO has applied the same and disallowed interest. In this connection, we refer to the paper book at page 111, which is the details of financial charges, which has been disallowed by the AO, as under: 1. Interest paid to GE Capital Rs. 4,48,94,073 2. Interest paid to DSP Merrillynch Rs. 3,41,58,463 ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 12 -: 3. Interest paid to Sicom Ltd. Rs. 3,13,04,905 4. Bank charges Rs. 3,361 5. Demat Charges Rs. 7,54,661 Total Rs. 11,11,15,463 ============= 8.1 On going through the above details, the Assessee has paid interest to GE Capital, DSP Merrillynch and to Sicom Ltd. comes to Rs. 11,03,57,441/- ( Rs. 4,48,94,073 + Rs. 3,41,58,463 + Rs. 3,13,04,905) and rest are other financial expenditure. The argument of the ld. AR is that no loans were given to M/s SCSL during the year is not acceptable for the reason that the assessee had taken loans from the companies in earlier years and the same were given to M/s SCSL in the earlier years and made the repayments to the companies from interest bearing loan funds taken during the year. On perusal of the financial statements at page No. 22 of the paper book at Schedule – 2 – “secured loans”, there was an outstanding loan as on 31 st March, 2007 against from DSP Merrilynch Capital Ltd. of Rs. 87,73,42,000/-, which has been fully repaid in the current year. Further, on perusal of copy of ledger accounts placed by the assessee in the paper book at page No. 93, there was an outstanding balance of loans and advances of Rs. 80,78,00,000/-. It really shows that the above loan taken from DSP Merrilynch Capital Ltd. was given to M/s SCSL, to which, the assessee has fully repaid in the current AY out of interest bearing loan funds and the assessee has also taken ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 13 -: interest bearing loans during the current AY, which is evident from GE Capital Services India Ltd., and SICOM Ltd. During the impugned AY, the assessee has also given loans and advances to other companies which is outstanding as on 31/03/2008 is Rs. 185.88 crores including advances given to M/s SCSL. During the impugned AY, the assessee has received interest only Rs. 2,80,616/-. It clearly shows that interest bearing funds had been given to the others/group companies/M/s SCSL on interest free. Therefore, the AO has rightly disallowed interest paid on borrowed funds to the above noted companies U/S 36(1)(iii) . The Section 36(1)(iii) is clear that if the interest paid by the assessee is to be allowed only in respect of capital borrowed for the purpose of business or profession only, whereas, in the case on hand, the assessee has utilized the above interest bearing loans for other purposes by giving loans on interest free. The facts in the cases relied on by the assessee are that notional interest which was not charged by the assessee, but, the issue in the case under consideration is different that the AO has disallowed interest paid on borrowed funds but not on the notional interest income, which was to be received by the assessee. 8.2 The assessee company is one of the group companies of M/s SCSL and the assessee had advanced to the tune of Rs. 80.78 crores to M/s SCSL. We find that M/s SCSL was involved in a big financial scandal by way of inflating the ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 14 -: figures in the balance sheet due to which M/s SCSL involved in various court cases, which are pending. Therefore, the genuineness of the amounts advanced to such group company by the assessee is doubtful. Therefore, the arguments advanced by the ld. AR of the assessee are not tenable or acceptable and, therefore, we set aside the order of the CIT(A) and restore that of the AO. Accordingly, the addition made by the AO is restricted to Rs. 11,03,57,441/- towards interest only as against the addition of Rs. 11,11,15,463/- made by the AO u/s 36(1)(iii) of the Act and other addition made by the AO towards bank charges and Demat charges are not covered u/s 36(1)(iii). Thus, the ground raised by the revenue are partly allowed. 9. In the result, appeal of the revenue is treated as partly allowed in above terms. Pronounced in the open court on 4 th January, 2022. Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 4 th January,2022. kv ITA No. 708/Hyd/2016 M / s P a v i t r a G r e e n f i e l d s P v t . L t d . , H y d . :- 15 -: Copy to : 1 ACIT, Central Circle – 3(2), 7 th floor, Aayakar Bhavan, Basheerbagh, Hyderabad – 500 004. 2 M/s Pavitra Greenfields Pvt. Ltd., Fortune Monarch Mall, 3 rd Floor, No. 306, Plot No. 707-709, Jubilee Hills, Road No. 36, Hyderabad. 3 CIT(A) – 12, Hyderabad. 4. Pr. CIT (Central), Hyderabad. 5 ITAT, DR, Hyderabad. 6 Guard File.