TaxTMI 
TaxTMI 
2024 (11) TMI 74
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....n of income during the year declaring total income of Rs. 46,89,36,410/-. The case of the assessee was selected for complete scrutiny through CASS and statutory notices were duly issued and served upon the assessee. The AO observed from the details furnished by the assessee that the assessee was paying interest on money borrowed whereas it had advanced interest free loans to AAIPL and accordingly called upon the assessee to explain as to why proportionate interest paid on such loans advanced to AAIPL should not be disallowed. In response, the assessee had submitted that, in the course of its real estate business, it had formed a special purpose vehicle by way of subsidiary M/s AAIPL through which it was conducting real estate projects overseas. The said subsidiary AAIPL had undertaken real estate projects in Sri Lanka & Dubai through step-down subsidiaries, M/s Indocean Developers Pvt. Ltd. ["IDPL"] and M/s AA Infra (Middle East) Ltd '["AAIML"]. These subsidiaries had raised external finances from Banks/FIs, who had required the promoters to also infuse their capital into these projects. The assessee being the principal promoter had accordingly advanced loans aggregating to Rs. 492....
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....eo hearing granted by the AO, the assessee explained that AAIPL had only shown interest income in books by way of an entry and it had created equivalent amount of provision for its non-recovery in the books of accounts since the interest was un-serviceable by the subsidiaries due to their financial distress. The AO is noted to have taken due cognizance of this factual position, but observed that, like AAIPL, the assessee could have also provided for the interest income from AAIPL and correspondingly debited provision for loss but rather it chose to waive interest forever. This according to AO was done so that the assessee is not required to pay taxes on the interest income. With these observations, the AO quantified the proportionate interest being paid on loans given to AAIPL at 11% and accordingly disallowed proportionate interest expenditure of Rs. 46,27,18,547/- out of the total interest expense of Rs. 82,47,18,547/-. Besides, the AO also made other disallowances / additions in the assessment framed u/s 143(3) read with Section 144B of the Act dated 26.09.2022. 5. The assessee challenged the said order before the Ld. CIT(A) who allowed the appeal of the assessee and inter al....
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....nd the one of the worst affected sectors was the real estate sector leading to a siump in the prices as well as in the sales. To add to the woes, IDPL was also saddled with financial liabilities related to the loans availed from banks which had also become unserviceable. In view of the aforesaid financial crisis and having regard to the extra ordinary COVID situation, and taking note of the fact that IDPL did not have revenues to service the loan availed from AAIPL, the management of the appellant considered it prudent to not charge interest from AAIPL until the financial health and situation of IDPL improved. I, therefore, note that the appellant had indeed substantiated the financial hardship and disputes being faced by AAIPL & IDPL which lead the appellant, being the parent company, to offer financial support in the form of waiver of interest payable on the loan so advanced. 6.15 With regard to the observation of the AO that, since AAIPL had received interest income from IDPL, there was no commercial rationale for the appellant to have waived the interest, it is noted from the facts that this observation was factually erroneous. From the financials of AAIPL placed on record, it ....
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....te concerns. The Tribunal as well as the High Court held that part of the interest paid was liable for disallowance since the assessee had diverted its borrowed capital to the subsidiary and associate concerns from which no income was realized. On appeal by way of Special Leave Petition, the Supreme Court however held that the authorities below had approached the matter from an erroneous angle. According to the Apex Court, both for the purposes of section 37 as well as 36(1)(ii) of the Act, the expression "for the purposes of business" had to be considered and interpreted from the view point of "commercial expediency" and for that purpose it was wholly immaterial if a third party also benefitted. The relevant findings of the Supreme Court are reproduced below: "That the borrowed money is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether 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 purpo....
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....but that of a prudent businessman. 14. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. 15. It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its shareholding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax. 16. Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the....
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....business segments." 6.3.10 Similar issue came up for consideration before the Hon'ble Gujarat High Court in the case of B Nanji & Co. Vs DCIT (124 taxmann.com 357). In the decided case also the assessee which was engaged in the business of real estate had acquired a housing finance company viz., IFHC, by way of acquisition of equity stake. The said acquisition was funded by interest bearing borrowings. The AO disallowed the interest paid thereon holding it to be in the capital field. On appeal, the Hon'ble High Court noted that the assessee had acquired the said finance company so as to make funds readily available when required for development of a housing project or to fund any acquisition of real estate, and therefore it held that the investments were for expansion of the assessee's existing real estate business. The Hon'ble Gujarat High Court thus upheld the orders of the lower authorities, allowing the deduction for interest u/s 36(1)(iii) of the Act. 6.3.11 It is noted that similar facts and circumstances were also involved in the decision rendered by the Hon'ble ITAT, Kolkata in the case of S.P. Jaiswal Estates (P.) Ltd. (140 lTD 19). In....
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.... Hon'ble ITAT, Kolkata in the case of Divakar Solar System Ltd. (88 taxmann.com 770) wherein also the assessee had borrowed which was forwarded to its subsidiary interest-free, keeping in view the strategic business purposes to strengthen and promote its existing business. The interest paid on such loan was disallowed by the AO u/s 36(1)(iii) of the Act. On appeal, the Hon'ble Tribunal, while relying on the Supreme Court decisions in the case of S.A. Builders Ltd vs CIT(A) (supra) and Hero Cycles (P.) Ltd vs CIT (supra), and the decision of the Hon'ble Madras High Court in the case of RPG Transmissions Ltd (supra), held that the test of commercial expediency was proven in the instant case beyond doubt and, hence, the interest paid on borrowed capital was to be allowed. 6.3.13 In the given facts of the present case also, it is observed that the appellant had advanced loans to AAIPL in the course of and for the purposes of business and it has demonstrated that the loans so advanced and the interest waiver given were based on commercial prudence. Hence, following the judicial precedents (supra), it is held that the interest expense incurred on the borrowings which wer....
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.... considerations and therefore interest paid on loans advanced to AAIPL were deployed for business purpose and hence allowable u/s 36(1)(iii) of the Act. The Ld. A.R strongly opposed the contentions put forth by Ld. DR and made multi-fold arguments. The first plea put forward was that, the issue in appeal was disallowance of interest paid on borrowings in relation to loans advanced to AAIPL and that it was never the case of the AO that notional interest income ought to be taxed on the non-interest bearing loans given to AAIPL. He thus submitted that, the Ld. DR cannot make out an altogether new case now before us, which does not emanate from the assessment order. To buttress his contention, he pointed out that, the AO had also made an addition on account of notional guarantee commission income as well in relation to the guarantees extended to foreign subsidiaries from AAIPL. It was shown that, earlier the assessee was actually charging guarantee commission but due to the financial distress faced by foreign subsidiary, it had stopped charging it from AAIPL from this AY 2020-21. This addition was deleted by Ld. CIT(A) and the Revenue did not prefer an appeal on this issue before us. A....
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....al liabilities of IDPL. The ld AR submitted that tor these reasons, the assessee did not charge interest on the loans advanced to AAIPL in the course of its business as a measure of commercial expediency to protect the interests in the subsidiaries as well as its principal investment by way of loans. The ld AR, while referring to the appellate order of Ld. CIT(A) at Para 6.3.6, submitted that ld CIT(A) also held that, the money advanced by the assessee to its subsidiary, AAIPL engaged in the same line of business was prompted on the principle of commercial expediency because the assessee had both strategic and economic interest in relation to the same in Sri Lanka & Dubai and thus held that the loan was advanced to AAIPL for business purposes. Accordingly the interest incurred on loans borrowed for the purpose of advancing such loan to AAIPL was allowable as business expenditure u/s 36(1)(iii) of the Act. 10. The Ld. A.R while referring to para 6.3.6 submitted that the Ld. CIT(A) has recorded a clear-cut finding that the money advanced by the assessee to subsidiary engaged in the same line of business was based on the principle of commercial expediency because the assessee had b....
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....which according to AO, were for non-business purposes. From the facts on record, we observe that, the assessee is engaged in the business of real estate development and in furtherance of its business, it had set-up an Indian subsidiary in the name of AAIPL in which it held 87.5% along with one Mr. JH who held 12.5% for undertaking real estate projects abroad. It is further observed that AAIPL had accordingly set-up subsidiaries in Sri Lanka & Dubai which were undertaking real estate projects in the respective countries. We further note that the monies advanced by the assessee to AAIPL to further fund the step-down subsidiaries abroad was in the course and for the purposes of its business. 13.1. We note that, IDPL in Sri Lanka had undertaken a project worth Rs. 2000 crores for which the assessee and AAIPL had obtained approvals from RBI & President of Sri Lanka. In order to undertake the project, IDPL had obtained loans from Banks/FIs, which were guaranteed by the assessee. Further, as a part of assessee's agreed commitment to the Banks/FIs to bring in promoter's contribution, the assessee had infused funds in IDPL through AAIPL by way of loan. The assessee accordingly advanced l....
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....es available in public domain, copies of which are available at Pages 274 to 284 of paper book, from which we note that, the project was stalled due to cost overruns and that the President of Sri Lanka had to intervene to restart the project. It is also undisputed that there was a global economic downturn on account of Covid situation at the fag-end of FY 2019-20 which further aggravated the stringent financial situation of IDPL. The Ld. AR also showed us that, the monies which were being advanced by the assessee to IDPL during the later years was to meet its financial repayment obligations to Banks/FIs and prevent the account from being NPA. It is only due to these factors, the board of directors of the assessee have passed a board resolution deciding not to charge any interest from AAIPL in financial year 2019-20 until the situation becomes better. Having regard to these facts, we find that the Ld. CIT(A) had rightly observed that, the assessee's decision not to charge the interest from AAIPL on the loans advanced was out of business consideration and commercial expediency. 15. Coming to the argument of Ld. DR that AAIPL was solvent and since the AAIPL had received interest in....
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....o the case of SA Builders Ltd. Vs CIT (supra) wherein the AO had disallowed portion of the interest paid on the premise that the assessee had diverted to its borrowed capital to the subsidiary and associate concerns from which no income was realized, which was confirmed by the High Court. On appeal by way of Special Leave Petition, the Hon'ble Apex Court however held that, the authorities below had approached the matter from an erroneous angle. The Hon'ble Apex Court held that, for both the purposes for Section 37 as well as Section 36(1)(iii) of the Act the expression 'for the purpose of business' had to be considered and interpreted from the view point of commercial expediency and for that purpose it was wholly immaterial if a third party also benefitted from the same. The Hon'ble Apex Court held that, what is relevant is whether 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. The Hon'ble Apex Court held that 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 can....