IN HIGH COURT OF DELHI AT NEW DELHI Decided On: 13.03.2015 ITA No.512/2013 COMMISSIONER OF INCOME TAX (C) -III Appellant Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. Versus M/s DD INDUSTRIES LTD. Respondent Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. AND ITA No.516/2013 COMMISSIONER OF INCOME TAX (C) -III Appellant Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. Versus M/s DD INDUSTRIES LTD. Respondent Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. AND ITA No.517/2013 COMMISSIONER OF INCOME TAX (C) -III Appellant ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 1 Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. Versus M/s DD INDUSTRIES LTD. Respondent Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. AND ITA No.518/2013 COMMISSIONER OF INCOME TAX (C) -III Appellant Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. Versus M/s DD INDUSTRIES LTD. Respondent Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. AND ITA No.519/2013 COMMISSIONER OF INCOME TAX (C) -III Appellant Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. Versus M/s DD INDUSTRIES LTD. Respondent ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 2 Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. AND + ITA No.526/2013 COMMISSIONER OF INCOME TAX (C) -III ..... Appellant Through: Mr. N.P. Sahni, Sr. Standing Counsel, Advocate. Versus M/s DD INDUSTRIES LTD. ..... Respondent Through: Mr. Salil Aggarwal with Mr. Ravin Pratap, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % 1. appeals are admitted. Mr. Salil Aggarwal, learned counsel for assessee accepted notice of appeals. With consent of counsel for parties, appeals were finally heard for disposal. These appeals are directed against common order of Income Tax Appellate Tribunal (ITAT) dated 17-05-2013, for AY 2007-08; 2008-09 and 2009-10, in cross appeals of assessee and revenue ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 3 (in ITA No. 63-64/Del/2013; Nos. 264-266/Del/2013 and ITA No. 635/Del/2013). 2. revenue urges following substantial questions of law for decision of this Court: (1) Did ITAT fall into error in its interpretation of Section 36 (1) (iii) regarding advance of borrowed funds, to its sister concern?; (2) Did ITAT fall into error in holding that sum of `25,04,385/- brought to tax by AO on interest free deposit of ` 1,75,50,000/- was not sustainable?; (3) Is ITAT s order- that assessee s revised net taxable income of ` 4,08,24,559/- held by CIT (A) to be unsustainable - and its acceptance of Rs. 1,63,60,896 as net taxable income (for AY 2008-09) erroneous? 3. assessee is engaged in manufacturing and trading of auto components and dealership business of Maruti vehicles. In addition, it is also engaged in leasing business, CNG conversion of vehicles and high security license plates. objects of company also include dealing in real estate. During assessment for AY 2007-20008, it was noticed from return of income that assessee paid interest on borrowed capitals amounting to `7,54,44,421/-. At same time, assessee gave interest free advances to its associate company, M/s DD Properties (P) Ltd to tune of `23,28,50,000/-. assessee, in its return of income stated that said advance was given to M/s DD Township Ltd, company under same management in terms of Memorandum of Understanding against future township project. As advance has been made for purpose other than business, assessee was asked to explain why proportionate interest on this ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 4 amount be not disallowed. In reply to this, assessee has stated that during year under assessment working capital limit has been increased and short-term funds have been utilized for booking show room with DD Properties. In addition, to assessee also responded in writing, to following effect: advance to DD Properties (P) Ltd has been made for booking of space for additional showroom for expanding business of assessee company. allotment has not yet been made by said company, and thus it cannot be said to have crystallized and as such interest cannot be capitalized. capitalization of interest will be from date of actual allotment made by said company up to date of delivery of possession. Thus till allotment is made, interest paid is of revenue nature and as such has to be allowed as expenditure of business. 4. AO was of opinion, in all these assessment years, (AY 2007-08, 2008-09, and 2009-10) that borrowed funds had been used for booking of property which was to be used as show room of company in future years and it could not establish nexus between money borrowed and sum advanced and that only borrowed funds were utilized to buy show room i.e., asset to be used by company for its future business. It was consequently held that interest on sum expended by assessee as advance for purchase of show room amounting to `23,28,50,000/- was not admissible expenditure. Noting that interest paid on borrowed capital was `7,54,44,421/- which, divided by total borrowed sum disclosed average interest rate of 14.27%, which on application of same average rate on fund diverted to associate companies, worked ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 5 out to `3,32,27,695/-, AO added back that sum and brought it to tax. Likewise, similar amounts were added back for other years: `3,21,09,750/- (for 2008-09) and `3,25,85,450/- (for 2009-10). 5. assessee appealed against additions for all three assessment years. Commissioner of Income Tax (Appeals) hereafter CIT (A) by common order, affirmed finding of lack of business connection. However, he applied different average rate of interest which resulted in limited relief to assessee. CIT (A) concluded that there was direct nexus between interest bearing funds and interest free funds of Rs. 23,28,50,000 given to DD Properties (P) ltd. Balance Sheet shows that appellant has working capital limit with Indian overseas Bank and it is appearing under head Secured loans . Further from perusal of copy of account of Indian Overseas Bank from which appellant has issued cheqeus to DD Properties (P) ltd. as interest free funds, (being alleged as advance for properties), it is seen that on all days when payments were made to DD Properties (P) ltd., balance as per bank statement had always been debit balance i.e. overdraft. Hence beyond any iota of doubt, it is evident that interest bearing funds from Indian Overseas Bank have been given to DD Properties (P) Ltd .. In such event when there is direct payment from Indian Overseas Bank on which interest is being paid by appellant, I fail to understand how appellant claims that payment made to DD Properties (P) ltd is from his own funds and from interest free funds, when facts and evidences show that appellant has paid Rs.2,94,62,056 as interest to Indian Overseas Bank on enjoying working capital facility. Hence in view of above, I hold that there is direct nexus between payments made to DD Properties (P) ltd. out of interest, ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 6 bearing funds taken from Indian Overseas Bank and thus appellant is wrong in claiming that payment to DD Properties (P) ltd. has been made from interest free funds. 6. CIT (A) examined whether DD Properties (P) ltd. had credit worthiness and financial strength to examine its capacity and capability to carry venture of constructing proposed shopping complex in which assessee had booked 40,000 sq. feet of area for its business. Despite opportunities, assessee did not disclose evidence about financial capacity, capability of DD Properties (P) Ltd. to carry on such venture and relied only on Memorandum of Understanding entered into between it and that concern, which revealed only schedule of payments to be made by to said DD Properties (P) Ltd. for purchase of 40,000 sq. feet area in proposed shopping complex. Other evidence about total cost of DD Properties project; its financial status; from where it proposed to fund project; whether `13,500/ per sq. feet (which assessee agreed to pay to its sister company i.e. DD Properties (P) Ltd.) was reasonable; status of project on date of entering into agreement was lacking. CIT (A), therefore, held that there was no business nexus between advance and purpose sought to be achieved. 7. Both parties, i.e revenue and assessee were aggrieved by CIT (A s) order. revenue was aggrieved by limited relief (based on rate of interest arrived at, while calculating disallowance of interest free advance to DD Properties); assessee was aggrieved by disallowance itself. ITAT noted contentions, particularly that of assessee that revenue did not dispute CIT (Appeals ) ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 7 findings that claim was admissible u/s 36(1)(iii) of Act and reliance placed on judgment of this Court in Commissioner of Income Tax vs. Sahara India Corpn Ltd. (2000) 296 ITR 285 (Delhi). Most crucially, it noted that amount of `23,28,50,000/- was advanced in F.Y, 2005-06 and F.Y. 2006-07 from out of surplus funds for purchase of show room and no borrowed funds were used for these advances and that no disallowance of interest expenditure was made during those years in orders made under Section 143(3) and no disallowance could be made in assessment years in dispute, as facts were identical. It was also held that disallowance under Section 36(1)(iii) cannot be extended to advances given in AY which are opening balances during year. 8. ITAT recorded its conclusions as follows: 14. We have heard rival contentions. On careful consideration of facts and circumstances of case, perusal of papers on record and orders of authorities below, we hold as follows. 15. Ld.CIT(A) after considering arguments of assessee at para 7 states as follows: From perusal of appellant s submissions, I am in agreement with appellant s claim that in their case disallowance u/s 36(1)(i ) cannot be made because no property/capital assets have been acquired by them. 16. This specific finding of Ld.CIT(A) has not been challenged by Revenue either in grounds of appeal or by way of argument during course of appeal proceedings. When it is not in dispute that claim of assessee is allowable u/s 36(1)(iii), we do not find any reason to go to ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 8 general provisions of S.37( 1) for purpose of allowance or disallowance. Jurisdictional High Court in case of CIT vs. Sahara India Corp. Ltd. (supra) reported in 296 ITR 285 held that Tribunal is not bound to answer question not raised before it. Hence when question whether deduction is allowable or not u/s 36(1)(iii) not before us or even disputed, we need not go into this aspect. 17. Under these circumstances we have to necessarily hold that claim of assessee in question has to be allowed u/s 36(1)(iii) as it is special provision, as compared with S.37(1), which is general provision. general provision i.e. Sec. 37(1) would come into play where claim cannot be allowed under any of specific provision of Act. Sec.37 is only residuary provision. ITAT cited Dy. CIT vs. Core Health Care Ltd. (SC) (2008) 298 ITR 194 for proposition that dichotomy inherent in use of borrowed funds, i.e borrowing itself does not create asset, but use of that borrowing to create asset, which results in it. Having regard to authorities, it was held that Section 37 could not be resorted to, because of applicability of Section 36 (1) (iii). ITAT also held that: In fact said were amounts were advanced during FY 2005-06 and 2006-07. Orders were passed by AO u/s 143(3) for both these years in which scrutiny assessments have taken place, and no disallowance was made either u/s 36(1)(iii) or u/s 37(1). advance to sister concerns in question in case on hand are opening balance carried forward from Previous Year and when so no disallowance can be made. 9. It is argued by revenue that ITAT has failed to appreciate that for claim of interest, it is necessary that, firstly, money ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 9 must have been borrowed by assessee, secondly, it must have been borrowed for purpose of business and thirdly, assessee must have paid interest on borrowed capital. expression for purpose of business occurring in section 36(1)(iii) specifies that deduction under this section is admissible only when capital s borrowed directly for purpose of business of assessee. It is argued that ITAT fell into error in appreciating section 36(1)(iii) even otherwise, because proportionate amount of interest is needed to be added back, as assessee during course of assessment proceedings has itself submitted that it has advanced loans to its associate company for purpose of acquiring show room. This clearly meant extension of existing business or profession . revenue also disputes factual findings of ITAT regarding actual advances having been made in previous years, pointing out that financial years 2005-06 and 2006-07 correspond to assessment years in dispute. It is also urged that finding regarding acceptance- in scrutiny assessments- for previous years, having become final could not have been rendered. It is argued that ITAT should not have followed previous year s decisions, given that each assessment year constitutes fresh cause, affording revenue new look at materials placed before it. assessee, on other hand, contends that ITAT s decision is entirely fact based, as it had benefit of looking into records. It is urged that in fact, for assessment years in question, no advances were made to assessee s sister concern. Having accepted amounts lent during previous ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 10 years, it was not open for revenue to now change its opinion when there was no material in that regard. 10. record before ITAT showed that paid up equity of assessee was `8,00,00,000/- for all years, i.e., as on 31.03.2006; 31.03.2007, 31.03.2008 and 31.03.2009. general reserves and surplus as on 31.03.2006 was `14,68,82,450; as on 31.03.2007, it was `16,36,68,384/-; as on 31.03.2008, it was `17,10,43,019/- and as on 31.03.2009 it was `15,28,48,354/-. Sundry debtors as on 31.03.2006 was `22,82,38,320/-; as on 31.03.2007 it was `28,58,66,349/-; as on 31.3.2008 it was `22,53,78,479/-; as on 31.03.2009 stood at `11,61,95,359/-. Thus, there is material to show that amounts were not in fact advanced for assessment years in question, i.e., 2007-08, 2008-09 and 2009-10. assessee had provided further material disclosing that loans taken were for specific purposes from different financial institutions such as purchase of cars, stocks, raw materials etc. These supported its contentions that adequate funds were available during assessment years and that since in past Revenue had accepted assessee s plea in this regard and not brought amounts to tax under Section 36 (1) (iii), there was no question of its being brought to tax for three assessment years in question. Applying ratio in CIT v. Sahara India Corporation Ltd, (2000) 296 ITR 295 (Del), it is held that Revenue could not have taken different view for these three years, particularly, when advances were not made at this time without any conclusion that in fact general reserves, surpluses and other funds were not available. Court here also notices that several decisions were relied upon by ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 11 ITAT (Reliance Utility and Power Ltd. v. CIT, 313 ITR 340 (Bom.), CIT v. Hotel Savera, 239 ITR 795 (Mad), CIT v. Tin Box Company, 260 ITR 637 (Del.)) in support of conclusion that when assessee is possessed of mixed funds which include its own funds in sufficient quantity, presumption that its own funds were utilized for advances is to be drawn. 11. next aspect is as regards question whether purpose for which loan was given, i.e., to book 40,000 sq. ft. property for assessee s use in upcoming commercial complex was sufficient. We notice that ITAT held against Revenue on this aspect. ITAT noted terms of Memorandum of Understanding (MOU) dated 28.05.2005 entered into with D.D. Properties where it had agreed to invest money in project by way of advance. This document had not been rejected either by AO or CIT (A). balance sheet of D.D. Properties Pvt. Ltd., sister concern was also considered by ITAT. This disclosed that as on 31.03.2006 it had inventories in form of land to extent of `32.4 crores. In these circumstances, given nature of MOU, ITAT in our opinion rightly concluded that Revenue s reasoning was unsound. ITAT also relied upon Sassoon J. David & Co. Pvt. Ltd. v. CIT, 118 ITR 261 (SC). This Court had in similar context, held in Commissioner of Income Tax v Bharti Televenture [2011] 331 ITR 502 (Del) that: 11. Hon'ble Supreme Court further held that though, borrowed amount was not utilized by assessee in its own business and had been advanced as interest-free loan to ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 12 sister concern, but that is not relevant. What is relevant is whether assessee advanced such amount to its sister concern as measure of commercial expediency? law laid down by Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 was overruled whereas that of Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 was approved. It was further held that it all depends on facts and circumstance of case as to whether directors of sister concern utilized amount advanced to it by assessee for their personal benefit, which obviously could not be said to be advance as measure of commercial expediency. 12. In instant case, from order of Commissioner of Income-tax (Appeals) and that of Income-tax Appellate Tribunal, as reproduced above, in paragraphs 3 and 6, we note that assessee was maintaining bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by Assessing Officer in respect of any direct nexus between borrowed fund and said advances made to subsidiaries. Assessing Officer had made general observations without going into depth of matter and without pointing out any specific instance where interest bearing borrowing was advanced to subsidiaries or establishing that borrowings made by appellant were not for business purposes. Both appellate authorities below were of view that assessee had explained sources of advances and investments made to subsidiaries, which could not be linked to borrowed funds and that advances were made out of assessee's own capital. At relevant time assessee was found to be having adequate non-interest bearing fund by way of share capital and reserves. Even otherwise, advances were found to be made to subsidiaries for business considerations which is nothing but commercial expediency of assessee. That being factual position reflected from record of assessee, onus that laid on it stood discharged. ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 13 12. second question was whether for AY 2007-08, assessee was right in contending that interest free security deposit which was enhanced from `25 lakhs to `1.75 crores in respect of premises of DD (I) Motors Pvt. Ltd and Lease could be allowed. Here, revenue s conclusions were based on assumption that there was no basis for increasing security deposit, given that in earlier part of said year, assessee had entered into agreement, which itself kept security deposit amount @ `25 lakhs. assessee contended that arrangement had been originally settled nearly decade ago and given increase in rental values over years, increase in security deposit amount was warranted and in any case, it was commercial decision which could not have been gone into unless AO had concrete material to contend that transaction was sham or illusory. Whether that amount was used for business or not ultimately depended on assessee and not anyone else. 13. This court does not discern any rationale in revenue s argument here. That assessee needed premises is not in dispute; equally it had consistent and long standing arrangement with sister concern, is undisputed. rental arrangement was in form of commission payable according to business of owner of premises, i.e sister concern. It was not disputed that security deposit had not been increased for long time. That it was initially kept at old level but increased during year was matter of fact. However, singling out that factor to hold against assessee in absence of any other material establishing dubiousness in transaction, is not warranted. court here recollects S. A. Builders ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 14 v. CIT (Appeals) [2007] 288 ITR 1 (SC) where views of this Court in Commissioner of Income Tax v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), Revenue cannot justifiably claim to put itself in arm-chair of businessman , and further that no businessman can be compelled to maximize his profit, were approved. Supreme Court also held that: Income-tax authorities must put themselves in shoes of assessee and see how prudent businessman would act. authorities must not look at matter from their own view point but that of prudent businessman. As already stated above, we have to see transfer of borrowed funds to sister concern from point of view of commercial expediency and not from point of view whether amount was advanced for earning profits. ********************* ******************* 26. expression " commercial expediency" is expression of wide import and includes such expenditure as prudent businessman incurs for purpose of business. expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency disallowance initially ordered by AO and finally set aside by ITAT for AY 2007-08 thus requires no interference. impugned order does not suffer from any infirmity on this count. views of ITAT are therefore, affirmed. ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 15 14. third question of law arises in respect of AY 2008-09 and pertains to finding of ITAT that acceptance of second revised return, indicating revised income at `1.63 crores, originally accepted by AO was in order. Court notices that CIT (Appeals) in this case issued notice for enhancement in course of assessee s appeal and rejected AO s finding. This resulted in first revised income being brought to tax at Rs.4.08 crores. 15. counsel for revenue urged that ITAT s reasoning is not acceptable given that neither in assessment proceedings nor before CIT(Appeals) did assessee specify authorities as to rationale for revising income downwards. 16. Counsel for assessee on other hand urged that closure of books of accounts had to be made on 30.09.2008 and consequently certain transactions were reflected in subsequent year s accounts. It was submitted that these facts were duly demonstrated before ITAT and not disputed by departmental representative. 17. There is nothing in order of ITAT to indicate that assessee had made submissions that it claims to have done. It is quite possible that material shown to this Court was in fact laid before ITAT and considered by it. However, impugned order does not reflect application of mind on this. It merely adverts to balance sheet and nothing else. ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 16 18. In these circumstances we are of opinion that on this issue i.e. acceptance of `1.63 crores (based on second revised return), ITAT must examine matter afresh and return its findings on basis of materials made available to it during course of hearing as well as materials placed before CIT(Appeals). revenue s appeal succeeds to this extent. 19. Thus, questions 1 and 2 are answered in favour of assessee and against revenue. Question 3, arising in respect of assessment year 2008-09, is answered to extent above in favour of revenue. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) MARCH 13, 2015 ITA Nos.512/2013, 516/2013, 517/2013, 518/2013, 519/2013 & 526/2013 Page 17 Commissioner of Income-tax (C)-III v. M/s. DD Industries Ltd