THE COMMISSIONER OF INCOME TAX V. M/S K RAHEJA DEVELOPMENT CORPORATION

ITA/661/2007

AI Insights

The case involves the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax as appellants, against M/s.K. Raheja Development Corporation as the respondent. The core issue was the disallowance of interest on borrowed funds by the assessee, which was initially disallowed by the Assessing Authority and the Appellate Commissioner but later allowed by the Tribunal based on the judgment of the Apex Court in the case of S.A.Builders Ltd. vs. Commissioner of Income Tax (Appeals). The High Court, however, found that the Tribunal's interpretation and application of the Apex Court's judgment were incorrect and that the assessee's circumstances did not warrant the deduction of interest on borrowed funds used for non-business purposes.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728983 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 18-08-2014
• Assessment Year: misc
• Other Referred Cases: S.A.Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and Another (2007) 288 ITR 1 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: K V ARAVIND
• Keywords: Arbitration award; Income tax appeal; Interest on borrowed funds; Non-business expenditure; Real Estate Development
• Section: 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 18TH DAY OF AUGUST, 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MRS.JUSTICE RATHNAKALA INCOME TAX APPEAL NO.661 OF 2007 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, C.R. BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE – 1(4), C.R. BUILDING, QUEENS ROAD, BANGALORE. …APPELLANTS (BY SRI K.V.ARAVIND, ADV.) AND: M/S.K.RAHEJA DEVELOPMENT CORPORATION, NO.26/27, 13TH FLOOR, RAHEJA TOWERS, M.G.ROAD, BANGALORE. ...RESPONDENT THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 20-04-2007 PASSED IN ITA NO.1458/BNG/2005, FOR THE ASSESSMENT YEAR 2002- 2003, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: - 2 - I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.1458/BNG/2005, DATED 20-04-2007 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(4), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR HEARING THIS DAY, N.KUMAR J., DELIVERED THE FOLLOWING: J U D G M E N T This appeal is preferred by the Revenue, challenging the order passed by the Tribunal, by deleting the disallowance of interest on borrowed funds. 2. The assessee is a firm engaged in the business of real estate development. While examining the details of various business expenditure and other overheads, it was noticed that the assessee has received money by way of capital introduction by partner and loan given by various other parties. The assessee has given interest on most of these funds and charged to profit and loss account. The assessee has also advanced funds to various parties including its sister concern and in many cases of such lending, no interest has been collected. In order to ascertain, whether the assessee has made expenditure by - 3 - paying interest, related details were called for. The assessee furnished general ledger extracts and monthly summary account of M/s.K Raheja Hotels and Estates Private Limited. An analysis of the said accounts reveals that on the amount received from M/s.Ivory Properties Pvt. Ltd., the assessee has paid interest at 18% p.a. and charged to profit and loss account. On the amount given as loan to M/s.K Raheja Hotels and Estates Private Limited, the assessee has not charged and collected any interest. The assessing authority was of the view that the assessee has diverted the borrowed funds in which interest is incurred to non-business purposes, where the assessee has not earned any interest. Therefore, interest charged to profit and loss account on the amount diverted for such non-business purposes could be treated as non-business expenditure and therefore, the said amount was disallowed. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who affirmed the said order. Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals), the assessee preferred the second appeal before the Tribunal. The Tribunal held that the dispute existed between the partners namely, M/s.K Raheja Development Corporation, M/s.Unique Estates Development - 4 - Corporation, M/s.Sea-Crust Properties Pvt. Ltd. and other company and the same is clearly proved by evidence. It further held that as per the judgment of the Apex Court in the case of S.A.Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and Another reported in (2007) 288 ITR 1 (SC), comes to the rescue of the assessee. Therefore, the compelling reasons of dispute followed by the requirement of arbitration, interest is not being chargeable and therefore, it cannot be said that the assessee diverted the funds. Therefore, it set aside the order passed by the lower authorities and upheld the claim of the assessee for disallowance. Aggrieved by the said order, the Revenue is in appeal. 3. The appeal was admitted on 23.07.2009, to consider the following substantial question of law: “Whether the Tribunal was correct in holding that due to an award passed in Arbitration Proceedings between M/s.K. Raheja Development Corporation and M/s.Unique Estates Development Corporation and M/s.Sea-Crust Properties Pvt. Ltd. where the Assessee was not a party, interest was paid due to compelling reasons and therefore allowable deduction?” - 5 - 4. We have head the learned Counsel for the Revenue. 5. The material on record shows that the assessee was engaged in the business of real estate development and a dealer. M/s.K Raheja Hotels & Estates Pvt. Ltd. were also on similar line of business. The assessee firm wanted certain collaboration with the said company for its own business interests. The assessee borrowed a sum of Rs.9,45,26,000/- from M/s.Ivory Properties Pvt. Ltd. but they did not utilize the said amount for business. They lent that amount to their sister concern i.e., M/s.K. Raheja Hotels and Estates Pvt. Ltd. It is not the case of the assessee that the amount was lent without interest. In fact, the said sister concern also has repaid a portion of the said amount. The said sister concern had some transaction with M/s.Unique Estate Development Company Limited. A suit was filed in Suit No.2047/2001 before the Bombay High Court. The assessee was not a party to the said suit. Subsequently, the matter was referred to the arbitration and the arbitrator passed an award. Assessee was not the party to the arbitration proceedings also. It is in this background, the assessee did not claim any interest for the amount lent to the sister concern. The explanation offered by the assessee is that, the interest could not be charged due to certain disputes among - 6 - certain members of Raheja Group Concern. The said explanation was not accepted by the assessing authority as well as the Appellate Commissioner. However the Tribunal was of the view that the judgment of the Apex Court in S.A.Builders case comes to the rescue of the assessee. In the aforesaid judgment, the Apex Court, has made it clear that it is not their opinion that in every case interest on borrowed loan has to be allowed if a assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective cases. In the said case, the assessee received payment from its clients and it deposited the same in the account and subsequently, the said amount were paid to the sister concern. No interest was charged for the amounts so advanced to the sister concern. In that context, it was held that the assessee borrowed the fund from the bank and lent it to the sister concern as interest free loan. The test in such a case is really whether this was done as a measure of commercial expediency. If the interest free loan was given to the sister company as a commercial expediency, then such interest paid on such capital could have to be allowed. As the Authorities as well as the High Court has not considered from the said angle, the Apex - 7 - Court remanded the matter back to the Tribunal to consider the case afresh. 6. Therefore, it is clear that interest on borrowed loan advanced to its sister concern cannot be claimed as deduction automatically. In the instant case, it is not the case of the assessee that the amount was advanced to the sister concern free of interest. Their specific case is that they did not charge interest because of the dispute that arose subsequent to the lending. The assessee was not a party to the said dispute. The assessee was not the party to the suit and also to the arbitration proceedings in which an award was passed. The sister concern has returned a substantial portion of the amount borrowed. Merely because they got into litigation and suffered arbitration award is not a justification for not paying the interest for the amount borrowed. The sister concern getting into litigation or involving itself in a arbitration proceedings to which the holding company is nowhere responsible, cannot be made a ground for allowing deduction. The understanding of the Tribunal on the judgment of the Apex Court is incorrect and the reason assigned by the Tribunal is not satisfactory. It was not justified in interfering with the well considered order passed by the Assessing Authority and the Appellate - 8 - Authority. Therefore, we answer the substantial question of law in favour of the Revenue and against the assessee. The impugned order is set aside and the orders passed by the Assessing Authority and the Appellate Commissioner are restored. Accordingly, the appeal is allowed. Parties to bear their own costs. Sd/- JUDGE Sd/- JUDGE nvj "