Inturi Rama Rao, Accountant Member - This is an appeal filed by the assessee directed against the order of the CIT(A)-II, Bangalore, dated 23/09/2013 for the assessment year 2009-10.
2. The assessee raised the following grounds of appeal:
| 1. |
The impugned order passed by the learned Commissioner of Income tax (Appeals) II, Bangalore without signature is bad in law and liable to be quashed. |
2. |
The learned Commissioner of Income tax (Appeals) IT. Bangalore has erred in confirming the disallowance of Rs. 81,95,426/- made by the learned assessing officer while passing the order under section 143(3) of the Act for the assessment- year 2009-10. On facts and in the circumstances of the case and law applicable, no disallowance is to be made and the sum of Rs. 81,951426/- should be fully allowed as deduction in computing the total income. |
3. |
The learned assessing officer has erred in levying interest under section 23413 of the Act. On facts and in the circumstances of the case and law applicable, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B of the Act. |
4. |
In view of the above and other grounds to be adduced at the time of hearing, appellant prays that the order passed by the learned CIT(A)II, Bangalore be quashed |
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or in the alternative |
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(i) the disallowance of Rs.81,95,426/- be deleted. Interest levied under section 234B be deleted. |
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(ii)The appellant prays accordingly. |
3. Briefly facts of the case are as under: The assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of building. Return of income for the assessment year 2009-10 was filed on 29/09/2009 declaring income of Rs.5,34,23,338/-. After processing the return of income u/s 143(1) of the Income-tax Act, 1961 ['the Act' for short], the case was selected for scrutiny by issuing statutory notice u/s 143(2) of the Act and finally the assessment was completed u/s 143(3) vide order dated 30/11/2011 at a total income of Rs. 6,16,18,764/-. While doing so, the Assessing Officer [AO] disallowed a sum of Rs.81,95,42/6 being excess of interest expenditure over interest earned on the loans procured from Union Bank of India on the ground that interest bearing funds of the assessee-company were diverted for non-business purpose.
4. Being aggrieved, an appeal was filed before the ld. CIT(A), who vide impugned order, confirmed the addition. It was contended before the ld. CIT(A) that interest expenditure is allowable as deduction even if there was no income earned out of interest bearing expenditure. It was further contended that it is not open to the revenue to re-write the transaction. It was also contended that even otherwise since amounts have been borrowed from the bank for business purpose the same is allowable as deduction. The contentions of the assessee-company were rejected by the ld. CIT(A) in paragraphs.3.5 to 4 of his order as under:
'3.5 I have carefully considered the appellant's submissions and also perused the assessment order. Reference may be made to the relevant portions of the assessment order i.e. paragraphs 2.4 to 2.6 where the AO has analysed the issue threadbare and drawn appropriate inference. The relevant paragraphs are reproduced below:
"2.4 The assessee has diverted the loan funds to M/s Prestige Estate Projects Pvt. Ltd. (PEPPL), who is holding 30.69% of shares, during the period between 26/09/2008 and 29/10/2008. The details of the transaction between the assessee M/s PEPPL are as under:
|
Date |
Amount Advanced/Received |
Debit |
Credit |
|
01/10/2008 |
Paid to PEPPL |
18,50,00,000/- |
|
|
13/10/2008 |
Paid to PEPPL |
15,00,00,000/- |
|
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23/10/2008 |
Received from PEPPL |
- |
15.00,00 BOB - |
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29/10/2008 |
Received from PEPPL |
|
13,50,03333 - |
|
30/10/2008 |
Received from PEPPL |
|
2,50,00,000/- |
|
30/10/2008 |
Received from PEPPL |
|
2,50,00,000/- |
|
|
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33,50,00,000/- |
33,50,00,000/- |
2.5 As it can be seen from the above, the assessee claimed that it had paid a sum of Rs.33.50 crores to M/s PEPPL as advances for purchase of a property. The Authorised Representative was asked to furnish the agreement with M/s PEPPL in support of its claim that the above advances were given for purchase of the property only. In reply, the Authorised Representative stated that the assessee did not make any formal agreement with M/s PEPPL. He only furnished some correspondence between the assessee and M/s PEPPL. The same are reproduced as under:
Letter dtd: 30/09/2008 from West Palm Developments Pvt. Ltd., to Prestige Estates Projects Pvt. Ltd.
'Please refer to our discussions evincing interest in purchasing property bearing Sy.No.2/1D of whitefield village & Sy.Nos.160, 157/Ps and 42 of Pattandur Agrahara village, in all measuring 9 acres
We are enclosing herewith our cheque bearing nos.163251 & 163252, drawn on the Union Bank, dated 30/09/2008 and 13/10/2008, for Rs.18,50,00,000/- and Rs.15,00,00,000/-respectively, totalling to Rs.33,50,00,000/- as advance pending finalization of sale value and completing the due diligence with respect to the said property.
Once we mutually agree on the final sale value and after we are satisfied with your title to the same, the above amount may be treated as part payment of the sale consideration unti1 then it can be held as earnest money deposit carrying no interest.
Letter, dtd: 03/10/2008, from Prestige Group to M/s West Palm Developments Pvt. Ltd., Bangalore.
'This has reference to your letter dated 30/09/2008 and we hereby acknowledge receipt of payment of Rs.33,50,00,000/(Rupees Thirty Three Crores Fifty Lakhs only) from your side.
We have enclosed herewi'th a set of title deeds relating to property bearing Sy.No.2/1D of Whitefield village & Sy.Nos.160, 157/Ps and 42 of Pattandur Agrahara village and request you to commence due diligence on the same and let us know.'
Letter, dtd. 13/10/2008, from M/s West Palm Developments Pvt. Ltd. to Prestige Estates Pvt. Ltd.
We are in receipt of your letter dated 03/10/2008. Considering the present market conditions out (read 'our') board has decided not to go ahead with the transaction and we would like to therefore withdraw from the transaction. We request you to kindly refund the amount paid by us as advance paid by us. We have returned herewith the set of documents sent by you. we request you not to encash our cheque dated 13/10/2008 for Rs.13,50,00,000/0 issued earlier to your.'
Letter, dtd: 20/10/2008, from Prestige Group to M/s West palm Developments Pvt. Ltd., Bangalore
'We acknowledge receipt of your letter dated 13/10/2008 and we are herewith enclosing the following:
| (a) |
Cheque bearing No.779323 dated 23/10/2008 for Rs.15,00 00, 000/- |
(b) |
Cheque bearing No.779051 dated 29/10/2008 for Rs.13, 50,00,000/- |
(c) |
Cheque bearing No.779349 dated 29/10/2008 for Rs.2,50,00,000/-. |
(d) |
Cheque bearing No.779350 dated 29/10/2008 for Rs2,50,00,000/- |
all drawn on the ABN Amro Bank totaling to Rs. 33,50,00,000/- (Rupees Thirty Three crores Fifty Lakhs Only) towards refund of' amount paid by you in full settlement, the receipt of which may kindly be acknowledged.
It is seen from the letter, written by M/s PEPPL to the assessee, the advances were given even before finalization of the sale value and completion of due diligence with respect to a certain property at whitefield village, Bangalore. M/s PEPPL has written a letter dtd: 20/10/2008 to the assessee company by enclosing certain post dated cheques instead of returning back the whole money in response to the withdrawal communication sent by the assessee on 13/10/2008 itself.
2.6 This clearly shows that these letters were furnished only to cover up interest free loans given to the shareholder M/s PEPPL who has substantial interest in the assessee Company. The correspondence mentioned in para 2.5 is clearly an afterthought and the assessee has attempted to make a colourable device that the advances were given for the purchase of the property. when the assessee vehemently argued that the loss had arisen due (to) timing difference in the accrual of income and accrual of interest payment on bank loan, it is silent on the interest free loan given to M/s PEPPL; had the assessee charged interest on the said loan to M/s PEPPL, the loss situation would not have been incurred by the assessee. Hence, the claim of the assessee is rejected since the loss of Rs.81,95,426/- was arrived (at) only because of the interest free loan given to the substantial shareholder, M/s PEPPL. This amounts to diversion of funds and the payment of interest to the extent of Rs.81,95,426/-, which caused loss under the head income from other sources, is not for the purpose of business. Hence this sum is disallowed u/s 37 of IT Act and the same is added back to the total income.
(Addition: Rs.81,95,426/-)"
3.6 It is clear from the sequence of events marshalled by the AO that the whole exercise of advancing money to M/s PEPPL for the ostensible purpose of purchase of property and getting back the money on ie ground that it was not economical to acquire the property in view of the slump in the real estate market was to create a facade. As observed by the AO, what is noteworthy is that the advance to M/s PEPPL was given by the appellant even before finalizing the sale value of the property as borne out by the correspondence between the appellant and M/s PEPPL. This leads to the inference that the advance was given without interest to M/S PEPPL as rightly observed by the AO because the latter holds 30.69% interest, which means it has a substantial interest in the appellant-company.
3.7 In the circumstances, I am left with no option but to agree with the conclusions of the AO in this regard in that the whole exercise on the part of the appellant to depict the advance given to M/s PEPPL for the purpose of acquiring an immovable property was make-believe. The appellant has substantial interest in the company M/s PEPPL. The appellant's authorised representative, during his arguments before me, has also basically laid emphasis on the -Fact that it has later earned substantial interest and the loss was due to time lag and has argued that it has not given interest-free advance but made an investment for land. But the correspondences between the appellant and M/s PEPPL clearly indicate that it was cleverly devised to divert the - Funds -For the interest of the company in which it had substantial interest and, therefore, it was clearly diversion of funds and had been given the garb of investment to avoid payment of interest and to reduce the incidence of tax. The appellant's alternative plea that the loss arising on account of interest should be allowed as a business loss cannot be accepted in that the appellant has not produced any evidence in support of its contention that the loan taken by it and advance given to M/s.PEPPL was for the purpose of appellant's business. Hence, I have no hesitation in upholding the action of the AO and in confirming the disallowance of interest amounting to Rs.81,95,426/- attributable to the advance given to M/s.PEPPL as not relating to appellant's business.
4. In the result, the appeal is dismissed.'
4.1 Being aggrieved, assessee-company is before us in the present appeal.
4.2 The learned AR of the assessee-company submitted that borrowed funds were utilised only for the purpose of lending to shareholders at higher rate of interest than the rate of interest payable to banks. He submitted that initially borrowed funds were utilised for the purpose of giving advance to M/s. Prestige Estate Projects Pvt. Ltd.[' PEP' for short] for purchase of properties situated at Whitefield owned by it. However, the transaction did not materialise, the same was returned by PEP and this amount was then utilised for the purpose of lending to shareholders at higher rate of interest than the rate charged by the banks. He submitted that the AO has rejected the correspondence between the assessee-company and PEP on mere surmises and conjectures. He submitted that loss has arisen due to timing difference from the date of borrowal from the bank to the date of lending to shareholders. He submitted that interest liability is clearly allowable u/s 57(iii) of the Act.
4.3 On the other hand, learned Departmental Representative submitted that the whole transaction is a sham transaction. The amounts were borrowed for the purpose of advancing it to sister concern free of interest and therefore the purpose of borrowing is not for business purpose and therefore interest expenditure is not allowable. The correspondence between the assessee-company and PEP is only an after-thought and self-serving. Therefore, he placed reliance upon the orders of the lower authorities and prayed for sustenance of the disallowance.
5. We heard rival submissions and perused material on record. The issue in the present appeal is about allowability of interest expenditure incurred on amount of borrowings from the Union bank of India. The claim for deduction was made under the provisions of section 57(iii) of the Act. Initially, the purpose of borrowing, as per the version of the assessee-company, was to use it for the business purpose. However, on account of non- materialisation of the transaction of purchase of land from PPE, the advance was returned and the same was lent to shareholders who had substantial interest in the assessee-company at higher rate of interest than rate of interest charged by the bank. The AO merely disallowed the excess of interest incurred over interest earned only on the ground that the whole transaction between the assessee-company and PEP to whom this money was given as advance was a sham transaction and the correspondence produce in support of the theory canvassed by the assessee-company was disbelieved as afterthought and self-serving. The claim was made under the provisions of sec.57(iii). Alternatively, the claim was also made for deduction under the provisions of sec.36(1)(iii) of the Act. Therefore, at first instance, we shall adjudicate the claim under the provisions of sec.57(iii) of the Act. The relevant provisions of sec.57(iii) read as under:
'57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :-
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;'
From the above provisions it is clear that while computing income under the head 'income from other sources', deduction can be claimed in respect of expenditure incurred solely for the purpose of earning such income. The courts have also laid down that no expenditure under sub-clause (iii) of sec.57 can be allowed as deduction unless the following conditions are satisfied:
| i. |
Expenditure should be incurred wholly and exclusively for the purpose of making or earning income. |
ii. |
It should not be in the nature of capital expenditure. |
iii. |
It should not be in the nature of personal expenses of the assessee. |
iv. |
It should be incurred in the accounting year and not in any prior or subsequent year. |
There is no dispute about the fact that the assessee had satisfied condition Nos.(ii), (iii) and (iv). Satisfaction of the first conditions viz., whether incurred wholly and exclusively for the purpose of earning income has to be examined in the light of the facts surrounding the present case. According to the assessee- company, money was borrowed from Union bank of India only for the purpose of purchasing the land from its sister concern viz., PEP for its business purpose. Therefore, borrowings were made only for the purpose of business. Therefore, it is clear that the borrowings were not made for the purpose of earning interest income in the form of loans advanced to directors of the company. The Hon'ble Supreme Court in the case of Vijay Laxmi Sugar Mills Ltd. v. CIT [1991] 191 ITR 641/59 Taxman 22 had laid down that for allowance of an expenditure under the provisions of sec.57(iii), the expenditure should have been incurred for the purpose of earning such income. The Hon'ble Supreme Court also explained that the expenditure should have been incurred for the purpose of making or earning such income shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. In the light of legal provisions, the claim cannot be allowed under the provisions of sec.57(iii) of the Act. It is not only the excess of expenditure but entire interest expenditure incurred on borrowings made from Union bank of India is not allowable.
Now, we shall delve upon the alternative submissions that interest expenditure should be allowed as deduction u/s 36(1)(iii) of the Act. One of the requirements for allowance of interest paid on capital borrowed is that the amount should be borrowed for the purpose of business. It is no doubt that the law is quite settled to the extent that the taxing authorities cannot question the necessity of the borrowing but the onus lies on the assessee to prove that the borrowings have been made for the purpose of business. The contention of the assessee that the borrowings were made for the purpose of purchasing land for its business purpose from its sister concern i.e. PEP was disbelieved by the AO. The fact that the payments were made to sister concern and the amounts were advanced even before verification of the title deeds of the assessee-company raises eye-brows about veracity of the claim. The assessee-company had failed to controvert the suspicion entertained by the AO with evidence. Therefore, assessee had failed to discharge the onus of proving that the borrowings were made only for business purpose. Therefore, the claim cannot even be allowed as a deduction u/s 36(1)(iii) of the Act. We make it clear that this deduction is not allowable not only in respect of excess of interest over the interest expenditure but also the entire interest expenditure incurred on the borrowings made from Union bank of India, as it forms part of the same subject matter of appeal.
6. In the result, the appeal by the assessee is dismissed.