$ 3 * IN HIGH COURT OF DELHI AT NEW DELHI + ITA 1159/2018 PRINCIPAL COMMISSIONER OF INCOME TAX-4 Appellant Through: Mr. Raghvendra Singh and Ms. Easha Kadian, Advocates. versus GAURSONS REALTY PVT. LTD. Respondents Through: Mr. S. Krishnan, Advocate. CORAM: HON'BLE MR. JUSTICE VIPIN SANGHI HON'BLE MR. JUSTICE SANJEEV NARULA ORDER % 13.02.2020 1. present appeal is directed against order dated 07.05.2018 passed by Income Tax Appellate Tribunal, Delhi Bench C New Delhi in ITA No. 753/De1/2018 and SA No. 107/De1/2018. aforesaid appeal relates to assessment year 2014-15. Tribunal by impugned order has allowed said appeal preferred by Respondent- assessee and deleted disallowance of interest made by Assessing Officer of amount of Rs. 5.68 crores. disallowance was made by Assessing Officer by holding that assessee had obtained interest bearing loans which had in turn been advanced to sister concerns and other associates without charging interest and that such interest- free advances were not made for business purposes. Consequently, Assessing Officer has held that assessee did not satisfy condition laid down in Section 36 (1) (iii) of Income Tax Act. 2. Briefly stated, facts of case are that assessee is engaged in business of real estate development. During year under consideration, assessee company was developing residential project namely 'Gaur Saundaryam' at Greater Noida (West). assessee had share holder fund of Rs. 16.70 Crore, share application money of Rs. 11.11 crore and 108.68 crore of advance received from customers. Since about 37% of project was ITA 1159/2018 Page 1 of 5 completed, following percentage completion method, assessee claimed 37% of total interest as its expenses during year under consideration. assessee company filed return of income on 28.09.2014 declaring total income of Rs.20,80,17,7801- for A.Y. 2014-15. return was selected for scrutiny and notice under section 143(2) was issued on 28.08.2015. AO disallowed interest expense of Rs. 5,68,97,378/- being diversion of interest bearing funds to its sister concern on ground that these advances were made without any commercial expediency. assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) confirmed addition made by AO. Thereafter, appeal was filed before ITAT. ITAT allowed appeal of assessee, rejecting disallowance made by AO. Aggrieved by said order, revenue has filed present appeal. 3. There are two different entities to which amounts were either advanced as interest free loans, or wherein investment was made as share application money by assessee. first transaction relates to Gaursons Realtech Pvt. Ltd.. assessee had invested Rs. 53.22 crores towards share application money and had also advanced loan of Rs. 79.65 crores in Gaursons Realtech Pvt. Ltd. submission of learned counsel for Appellant is that Assessing Officer had undertaken forensic examination of money trail and found that loans received from two Banks namely, Bank of Baroda and Andhra Bank aggregating to Rs. 158.50 crores, had been channeled by assessee inter alia to Gaursons Realtech Pvt. Ltd. Tribunal has found that, as matter of fact, assessee had paid amount of Rs. 79.85 crores on behalf of Gaursons Realtech Pvt. Ltd. to JP Infrastructure Ltd in respect of agreement whereunder Gaursons Realtech Pvt. Ltd. had agreed to purchase land ad measuring 300 acres from JP Infrastructure Ltd. At same time, there was underlying transaction between assessee and Gaursons Realtech Pvt. Ltd. by way of Memorandum of Understanding dated 30.03.2013, whereunder assessee was to get land ad measuring 88,500 sq. mtrs. (which translates to about 22 acres). That apart, by investing in share capital of Gaursons Realtech Pvt. Ltd. with deposit of share application money of Rs. 53.22 crores, assessee was to acquire controlling stake in ITA 1159/2018 Page 2 of 5 Gaursons Realtech Pvt. Ltd. which was also engaged in business of real estate development. Therefore, there is direct nexus between expenditure incurred and purpose of business. It has been held in Hero Cycles (P) Ltd v Commissioner of Income Tax (Central) Ludhiana [2015] 63 taxmann.com 308 (SC), that once it is established that there is nexus between expenditure and purpose of business, revenue cannot justifiably claim to place itself in arm- chair of businessman, or in position of Board of Directors, and to decide how much is reasonable expenditure having regard to circumstances of case. In this regard, we may also note ratio of decision of Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Anr. (2007) 288 ITR 1 (SC), wherein Supreme Court held that decisions relating to Section 37 of Act will also be applicable to Section 36 (1) (iii) because in Section 37 also, expression used is for purpose of business and that while interpreting Section 37, for purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if third party also benefits thereby. In our view Tribunal rightly allowed appeal of assessee and restored deduction claimed by assessee under Section 36 (1) (iii) of Act. 4. other transaction that assessee undertook was in respect of loan of Rs. 52.36 crores advanced to M/s Gaursons India Ltd. M/s Gaursons India Ltd. is holding company of assessee. submission of learned counsel for Appellant is that since M/s Gaursons India Ltd. is neither subsidiary, nor associate company, advancement of loan by assessee to Gaursons India, to tune of Rs. 52.36 crores, did not make business sense and therefore, it cannot be considered to be made for purpose of business . On this aspect, we find that assessee had consistently contended that it had excess interest free fund available with it to make investments and therefore it could not be concluded that assessee had invested interest-bearing loans by advancing interest free loan to M/s Gaursons India Ltd. without business expediency. Tribunal has considered this aspect and found that as per balance sheet of assessee, it was having Rs. 16.7 crores in its shareholders fund, Rs. 11.11 crores as share application money and Rs. 108.68 crores as ITA 1159/2018 Page 3 of 5 advances received from customers. Thus, assessee had interest-free funds available with it to tune of Rs. 136.49 crores. interest-free loan granted by assessee to M/s Gaursons India Ltd. was only Rs. 52.36 crores. In Commissioner of Income Tax (Large Taxpayer Unit) v Reliance Industries Ltd. [2019] 410 ITR 466 (SC), Supreme Court upheld view of Tribunal that where interest-free fund is available to assessee which is sufficient to meet its investment, it can be presumed that investments were made from interest-free funds available with assessee. Similarly, this Court in Commissioner of Income Tax v DD industries [2015] 57 taxmann.com 310 (Delhi) observed that where adequate funds were available during assessment years and, since in past Revenue had accepted assessee s plea in this regard and not brought amounts to tax under Section 36 (1)(iii), Revenue could not have taken different view for three years in question, particularly, without any conclusion that, in fact, general reserves, surpluses and other funds were not available. Reference may also be made to decision of this Court in Commissioner of Income Tax v Tin Box Co. (2003) 260 ITR 637, wherein it was held that finding of Tribunal that Department had not been able to controvert or disprove fact that assessee had substantial capital and interest-free funds available with it, not only in preceding years but also in years under consideration, which far exceeded interest-free advances to sister concern, is not without any evidence or material and therefore, disallowance of interest was deleted. Therefore, as already noted, in present case, it is clear that there were sufficient interest- free funds available with assessee, allowing them to advance loans in question. Thus, Tribunal, in our view was correct in concluding that it could not be said that it was interest-bearing loan obtained from Bank of Baroda and Andhra Bank which had been advanced as interest-free loan to M/s Gaursons India Ltd. 5. We therefore find no infirmity in impugned order passed by Tribunal. No substantial question of law arises for our consideration in view of above factual findings returned by it. ITA 1159/2018 Page 4 of 5 6. In view of above, appeal is dismissed. VIPIN SANGHI, J SANJEEV NARULA, J FEBRUARY 13, 2020 nk ITA 1159/2018 Page 5 of 5 Principal Commissioner of Income-tax-4 v. Gaursons Realty Pvt. Ltd