TaxTMI 
TaxTMI 
2018 (5) TMI 799
X X X X Extracts X X X X
X X X X Extracts X X X X
.... utlised the same in its business only. 2. The ld CIT(Appeals) and the Assessing Officer have erred in holding that there is direct nexus of the borrowing made by the appellant to the interest free advances given to some of the parties. 3. The ld CIT(Appeals) as well as Assessing Officer failed to appreciate that there were also own funds and the other interest free deposits with the appellant which have been utlised for the purpose of granting interest free advances to the parties and most unjustifiably and arbitrarily rejecting the submissions made by the appellant that total amount of funds advanced by the appellant are Rs. 69.35 crores (excluding advance against plot of Rs. 133.01 crores) whereas the interest free funds, available with the appellant were Rs. 114.47 crores. 4. That in respect of the above grounds the orders of the ld CIT(Appeals) and Assessing "Officer are not justified on the facts of the case and are bad in law. 3. That the CIT (appeals) and the assessing officer and erred in holding that the advances have not been utilised for business purposes as the appellant company borrowed the money from banks for business purposes and has u....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... assessing officer noted that assessee is incurred total interest expenditure of Rs. 1 5, 37, 76, 696/- and as during the year only 37 percentage of this interest is being charged to profit and loss account by following the percentage completion method is which amounts to Rs. 5 689 7378/-. It was further noted by him that on many instances the loans raised during the year were diverted to related concerns and no interest was charged from them. As according to the Ld. assessing officer interest-bearing funds were diverted to related concerns and no interest was charged from those parties therefore the Ld. assessing officer asked the assessee to explain the reasons for which the interest corresponding to this interest free loans and advances should not be disallowed. The assessee submitted its reply stating that assessee company is a construction company engaged in construction of flats and selling the same to the proposed buyers. Short-term loans and advances by the assessee to its sister concerns are part of minutes fund position and the funds given to the sister concerns were not out of the loan borrowed during the year but it is used for financing the construction project only. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... once it is borne out from the record that the assessee has borrowed certain funds on which it is liable to pay interest and on the other hand certain amounts a been advanced to sister concerns or others without carrying any interest, the interest to the extent of advances has been made without carrying any interest is to be disallowed under section 36 of the income tax act. The Ld. assessing officer further relied on several decisions of various high courts. On the basis of the above discussion the Ld. assessing officer stated that total advances given by the assessee is Rs. 2 02, 35, 80, 993/- and the above amount exceeds the total amount outstanding against loan from various banks of Rs. 1 58, 50, 00, 000/-. Therefore the Ld. assessing officer disallowed the total sum of interest expenditure debited to the profit and loss account of Rs. 5 689 7378/-. Consequently assessment under section 143 (3) of the act was passed by the Ld. AO determining the total income of the assessee at Rs. 2 6491 5158/- against the returned income of the assessee of Rs. 2 0801 7780/-. 10. The assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. CIT (A). Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....um is not given out of the interest-bearing funds by the assessee. He further submitted that Rs. 79.65 crores even as an advance to Gaursons RealTech private limited was of requiring interest if the land. He referred to the memorandum of understanding dated 30/3/2013 between the assessee and the course is Real Tech private limited. He further stated that the above amount of loan for the purchase of plot is not given out of the interest-bearing funds of the assessee. With respect to the amount of investment made by the assessee of Rs. 5 3.22 crores in M/s gaursons RealTech private limited. He submitted that the above investment has been made by the assessee for acquiring interesting the real estate projects the phone 7 advanced out of the business funds as well as the interest free funds available with the assessee . he submitted that no interest-bearing funds have been provided. He further referred to the various advances was sister concerns and submitted that these are in the nature of running account between the group companies and interest-bearing funds have not been diverted by the assessee. He further stated that the assessee has 16.68 crores of the shareholders funds and rupe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... purposes of the business of the assessee. Therefore he submitted that the disallowance made by the Ld. assessing officer is not sustainable. 12. He further submitted a note referring to various pages of the balance sheet of the company as at 31.03.2014 to show the various interests amounts paid by the assessee as well as the amount of advances given to sister concern or related parties on which no interest has been charged. He further submitted the copies of various accounts of the parties to whom advances were given to hold the land. He further submitted the copy of account of Gaursons REaltech Pvt ltd from whom interest income of Rs. 944137/- has been received to show that it is not interest bearing advance. As directed by the bench he also submitted a fund flow statement to show that assessee has known interest bearing funds available with it also. He stated that assessee has huge advances from the customers of Rs. 108 crores and also other interest non interest bearing funds amounting to Rs in all of Rs. 132 crores. He submitted that out of the total advances given as alleged by the ld Assessing Officer of Rs. 133 crores are against the advance against the plot and Rs. 53 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business of real estate development and is part of Gaur Group. The assessee is developing a residential project at Greater Noida (west) and is following percentage completion method for revenue recognition. During the year the assessee has incurred interest expenditure of Rs. 15.37 crores and debited the same to the project cost. As 37 of the project was found to be completed as per project completion method interest of Rs. 5.68 crores was charged to profit and loss account. During the course of assessment proceedings the ld Assessing Officer noted that assessee has borrowed Rs. 54 crores as a loan from Andhra Bank during the year whereas opening outstanding balance was Rs. 20.15 crores and the closing balance was 74.50 crores. Further, borrowing from Bank of Baroda was taken of Rs. 59 crores whereas, the opening balance was Rs. 25 crores and closing balance was Rs. 84 crores. On examination of the balance sheet the ld AO also noted that assessee has loans and advances of Rs. 210 crores as at the end of the year whereas at the beginning of the year it was only Rs. 114 crores. Therefore, the ld Assessing Officer examined the interest claim of the assessee as under:- "4. Dur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing following details: (i) Copies of all bank accounts of the company (ii) Ledger copies of interest expenses account regarding the interest paid during the year debited to project expenses. (iii) Ledger copies of accounts in the books of company for following: * Gaursons Realtech Private Limited (loan as well as Advance accounts) * Gaursons India Limited * UP township Private Limited * Banwari Lai Gaur * SKA Realtech Pvt Limited * Gaursons Sportswood Pvt Ltd * Shri Shy am Buildcon Pvt Ltd (iv) Copies of agreement entered with related parties for advances against plots may be filed. Details of plots purchased from the related parties against the advances outstanding as on 31.3.2014 may be filed. If no plots were purchased against these advances, present status of these advances may be furnished. (v) The company gave share application money to M/s Gaursons Realtech Private Limited amounting to Rs. 53.25 crores. Source of this investment may be explained with supporting documents. Also inform the present status of this share application money given to M/s Gaursons Realtech Priv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sallowed. Case is fixed for 13/12/2016." 8. The date of compliance was fixed as 13.12.2016. However, none attended on the said date. Thereafter, vide letter dated 15.12.2016, one more opportunity was provided to the assessee. In response to this, the assessee vide letter dated 20.12.2016 has submitted as under: "Assessee Company is a construction company engaged in construction of flats & selling the same to the proposed buyers. Short Term Loans & Advances by Gaursons Realty Pvt Ltd. to its sister concerns as a part to manage fund position of the Group. Short Term Loans & Advances has not been provided by the company from loan borrowed during the year by the company but it is used for financing the construction project only, these advances have been given by the assessee to its group companies as part of their overall business plan to manage the fund flows of the group and has no connection with the project loan taken from Bank which has been incurred entirely for the project expenditure and as such the expenditure claimed by the way of interest on project loan are incurred for the business purpose and are eligible as business expenditure under section 36....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and (ii) above, the total credit available in bank account no. 05860200001379 (BoB) as on 3.7.2013 was Rs. 56,65,01,414/- which was mostly out of the loan amount of Rs. 55,00,00,000/-. (iv) Thereafter, on 3.7.2013, an amount of Rs. 40,00,00,000/- (two installments of 20 crores each) were invested in Bank of Baroda Pioneer Mutual Fund. It is important to mention that the assessee's investment in this^Mutual fund just before the said investment was Nil. A further investment of Rs. 10,00,00,000/- was made in Bank of Baroda Pioneer Mutual Fund on 4.7.2013. This investment was also made out of the credit balance as mentioned at (iii) above. In this way, an amount of Rs. 50 crores out of the loan amount of Rs. 55 crores was invested in Mutual Funds. (v) Out of this investment, the assessee received an amount of Rs. 20 crores on 8.7.2013 on account of partial redemption of units in mutual funds. The said amount of Rs. 20 crores was received by the assessee on 9.7.2013 in its bank account No. 012784100000020 (Yes Bank) and on the same day it was transferred to the account of M/s Gaursons Realtech (P) Limited as Share Application Money. (vi) Further out of the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 012784100000020 (Yes Bank) on 12.3.2014. Thereafter, Rs. 1,00,00,000/- each was transferred to M/s Gaursons India Limited and M/s Shri Shyam Buildcon (P) Ltd. 13. Similarly, on many other occasions, the interest bearing funds have been diverted to related companies as loan/advance as well as advance for plots and no interest has been charged. 14. The above discussion clearly suggests that the submission of the assessee that the whole of loan amounts were used only for project is factually incorrect as demonstrated above. Accordingly, the case laws relied upon by the assessee shall not be applicable to the facts of the present case. 15. It may also be stated that the assessee has submitted that following advances were given to related companies for purchase of land: Name Amount outstanding as on 31.3.2014 (Rs) Gaursons Realtech (P) Ltd 79,65,00,000/- Gaursons India Limited 52,36,18,780/- UP Township (P) Ltd 1,00,00,000/- The assessee was specifically asked to file the copies of agreement for these advances. In response to this, the assessee has filed the copy of agreement with aursons Realtech (P) Ltd only which indicates ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in the month of April, 2015. The interest corresponding to Share Application money given to M/s Gaursons Realtech Private Limited cannot be claimed as expenditure because such interest is neither an expenditure for 'Gaur Saundaryam' project nor a business expense. Accordingly, the interest corresponding to various loans, advances and Share application money as mentioned in paragraph 5 is not allowable as deduction. 19. It may be mentioned that in the case of CIT vs. Abhishek Industries Limited 286 ITR 1, Hon'ble Punjab and Haryana High Court held that once it is borne out from the record that the assessee has borrowed certain funds on which it is liable to pay interest and on the other hand certain amounts have been advanced to sister concern or others without carrying any interest, the interest to the extent of advance has been made without carrying any interest is to be disallowed u/s 36 of the Act. In this case, the Hon'ble High court observed as under: " the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it pleaded to be out of sale proceeds or share capital or different account ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterest amounting to Rs. 15,37,76,696/- paid on loans to Andhra Bank and Bank of Baroda during the year can be considered as cost of 'Gaur Saundaryam project' because the assessee has failed to demonstrate that the loan fund was used for this project. The assessee has claimed 37% of Rs. 15,37,76,696/- as deduction during the year (based on percentage completion method) which comes to Rs, 5,68,97,378/-. Therefore, the disallowance for the present assessment year comes to Rs. 5,68,97,378/- and the same is being added back to the income of the assessee. I am satisfied that the assessee has furnished inaccurate particulars of income and accordingly penalty proceedings u/s 271(1)(c) is being initiated separately. (Addition: Rs. 5,68,97,378/-)" 16. The ld CIT(A) confirmed the above disallowance affirming the finding of the ld Assessing Officer. Therefore the issue before us is whether interest expenditure incurred the assessee is allowable as deduction to the assessee under the provisions of section 36(1)(iii) of the Act. The provisions of section 36(1)(iii) provides that deduction shall be allowed in computing the income referred in section 28 of the Act the amount ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the above plot of land could not be purchased by Gaursons Realtech Ltd and subsequently, in the next year as the transaction of land could not be fructified. The total payment made by the assessee was refunded to the assessee. Therefore, it is apparent that the assessee originally made payment of Rs. 79.65 crores was for loan lease of interest in land as per memorandum of understanding dated 30.03.2013. The ld Assessing Officer has not disputed the content of the memorandum of understanding for lease of land. It is not in dispute that assessee is also engaged in the real estate business and therefore, buying land or acquiring lease of the land would be the business of the company. In view of this it cannot be held that assessee has advanced the sum of Rs. 79.65 crores to the above company without any commercial purposes. In view it cannot be said that assessee has diverted the interest bearing funds for non business purposes. Further, the assessee has also invested Rs. 153.22 crores in the share application money of the above company. The main intention of making investment in the above company was for acquiring interest in real estate business of this company which was to buy 300....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the AO of Rs. 85944137/- is comprising of the loan of Rs. 8.5 crores and interest thereon of Rs. 9.44 lacks as the assessee has charged interest on the above sum @12% for the appropriate period it cannot be said that above amount given by the assessee is interest free advance. In view of this the ld Assessing Officer is directed to delete the disallowance of interest proportionate to the above loan. c. The loan of Rs. 52.36 crores given to M/s. Gaursons India Ltd. The assessee has given the above sum to M/s. Gaursons India Ltd and same is shown in Note No. 19 to the balance sheet as advance against plot. The party to whom the loan is given is a holding company of the assessee and assessee is its subsidiary company. The above company was allotted a plot of land of Rs. 16320 sq meter in Indirapuram Development Plan admeasuring 16320 sq mtr at a price of Rs. 40050/- per sq meter valued at Rs. 65.36 crores. That company was to deposit Rs. 16.34 crores as a bid price and further earnest of Rs. 9.20 crores and further sum of Rs. 7.14 crores within 7 days. The balance sum of 75% was to be paid later on. The assessee has also placed an agreement between Ghaziabad Development ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee has also earned gross revenue from operations of Rs. 139 crores which is also available for advance and same being interest free. In view of the above facts it cannot be said that there can be any interest disallowance on account of interest free advances provided to the holding company of the assessee of Rs. 52.36 crores. d. The other advances The ld AO has also considered the advances made to following parties for the purpose of making disallowance. i. Gaursons Infratech Pvt. Ltd Rs. 18000/- ii. Banbari Lal Gaur Rs. 1.50 crores iii. SKA REaltech Pvt. Ltd Rs. 3 crores iv. Gaursons Sportswood Pvt. Ltd RS. 2 crores v. Shyam Builcon Pvt. Ltd Rs. 1 crore. vi. UP Township Pvt. Ltd Rs. 1 crore All the above advances even if it is presumed that they are not given by the assessee for the business purposes they do not exceed the funds available with the assessee without interest. 17. Therefore, on the basis of our above finding we hold that investment made by the assessee in Gaursons Realtech Pvt Ltd of Rs. 53.22 crores and advance of Rs. 79.65 crores totaling to Rs. 132.87 crores is given by the assess....