Faith Real Estates Pvt. Ltd., New Delhi vs Department Of Income Tax

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No.5070 /Del/2011 Assessment year : 2006-07 ITO, Ward 11(2), Vs. M/s. Faith Real Estates P. Ltd., New Delhi C-66, NDSE, Part II, New Delhi-110 049 GIR / PAN:AAACF1927C

I.T.A. No. 5181/Del2011 (Assessment Year 2006-07)

M/s. Faith Real Estates P. Ltd., Vs. ITO, Ward 11(2), C-66, NDSE Part II, New Delhi New Delhi-110 049

(Appellant) (Respondent)

Appellant by : Shri Parwinder Kaur, Sr. DR Respondent by : Shri Gurmeet Singh Grewal, CA

Date of hearing : 05.06.2015 Date of pronouncement : 11.06.2015

ORDER

PER T.S. KAPOOR, AM:

These are cross appeals filed by Revenue as well as by Assessee against the order of Ld. CIT(A) dated 21.09.2011. The grounds of appeal taken by Revenue as well as by Assessee are reproduced below:

I. I.T.A.No. 5070/Del/2011: Revenue's appeal:

2 ITA No.5070, 5181/Del/2011 "1. On the facts and in the circumstances of the case, the CIT(A) has erred both on facts and in law in reducing the amount of addition u/s 24(b) on account of interest on borrowed funds from Rs. 39,4 1.374/- to Rs. 22.16.3701- and thereby granting relief of Rs. 17,25,004/- to the assessee.

2. The CIT(A) has erred in accepting the contention of the assessee that the entire amount of loan of Rs. 3.16 Crores in the FY 97-98 was utilized for the purpose of construction of the property.

3. The CITCA) has also erred in ignoring the fact that the value of building (gross block) as per the depreciation chart up to FY 02-03 was Rs.1.11 Crores only.

II. I.T.A.No. 5181/Del/2011: (Assessee's cross appeal): "The Ld. CIT(A) XIII, New Delhi has erred in not allowing interest u/s 24(b) of the I. T. Act, 1961 of Rs.22,16,370/- out of Rs.39,41,374/- being interest on borrowed capital."

2. The brief facts as noted in the assessment order are that the assessee declared a loss from house property at Rs.20.64 lacs after deduction of interest payment amounting to Rs.39.40 lacs. The case of the assessee was selected for scrutiny. During assessment proceedings the assessee company was asked to furnish details of interest expenses and to justify claim of interest made against rental income. In reply, vide letter dated 30.10.2008, the assessee stated that during financial year 1997-98, the assessee company had obtained a loan of Rs.18.80 lacs from M/s. D. S. Construction Ltd. which was increased to Rs.16456230/- up to financial year 2003-04. This loan amount was used for the purpose of construction of building. It was further submitted that during the year 2004-05, the assessee had obtained loan of Rs.3.76 crores from M/s. Lord Krishna Bank which was used for the 3 ITA No.5070, 5181/Del/2011

purpose of repayment of loan taken by the company. Thus, it was submitted that in fact, new loan was for the purpose of construction of building and obviously, the assessee company had claimed interest on borrowed capital as deduction u/s 24(b) of the I. T. Act, 1961. The A.O., however did not agree with the submissions of the assessee company and disallowed the interest by holding as under:

"I have considered the reply furnished by the assessee. However, the assessee had obtained interest free loans from its associated concern several years ago for the purpose of its business. These were not interest bearing loans and till the repayment of such loans, no interest had been paid on such loans. The bank loans obtained by the assessee company were utilized to retire the unsecured loans from its associated concern and the interest payments so incurred were primarily motivated by the desire to return the investment of funds of the associated concern which were, as mentioned, interest free. As per section 24(b) of I T Act, interest payable for the purpose of borrowing for acquiring the let out property is alone eligible to be set off against the rental receipts. Since, as pointed out above, the assessee had not borrowed funds from the bank for acquiring or constructing the let out premises, the claim of deduction on account of interest payment cannot be allowed under section 24 of I T Act. The said interest payment was also not incurred for the purpose of the business carried on by the assessee as no business interest of the assessee was served by retiring the interest free funds of the business by borrowing interest bearing funds from the bank. In view of this, the interest payment can also not be claimed as deduction u/s 36(I)(iii) of I T Act. Accordingly, the claim of interest payment amounting to Rs 39,41,374/- is disallowed under the head "Income from House Property" as well as a business expenses."

3. Aggrieved, the assessee field appeal before Ld. CIT(A). However, Ld. CIT(A), on the basis of submissions of assessee, partly allowed the claim by holding as under:

4 ITA No.5070, 5181/Del/2011 "6.5 From the above factual details it is evident that the out of the loan of Rs.31695184 taken from MIs. D.S. Construction, which was utilized for constructing the rental property, a sum of Rs.1,52,38,954/- has already been repaid by the appellant in F Yr 2003-04 by taking a loan of Rs.2 crores from group company Ebony Retail Holding Ltd.- the company to whom the rented premises were let out. Therefore as on 31.03.2004 only RS.1,64,56,2301- of the loan amount is outstanding. Subsequently in FY 2004-05 i.e. AY 2005-06 MIs. D.S. Construction gave Rs.2 crore to the appellant to repay the loan taken from MIs. ERHL. Apparently the appellant is treating this amount as part of the original construction loan. However the sum of Rs.2 crores received from MIs. D.S. Construction in F.Y. 2004-05 is not the loan utilized in the construction of the building. Neither is it in the nature of loan taken to repay the loan utilized in the construction of the building. Therefore the sum of Rs.2 crores cannot be added back to the loan amount of Rs.3,16,95,184/- taken from D.S. Constructions for construction of property. Nor can it be treated as a part of the original amount of Rs.3, 16,95,184/-. Furthermore as per Ld. Counsel's submissions, of the sum of Rs.2 crores taken from ERHL in F.Y. 2003-04 only Rs.1,52,38,954/- was utilized for repaying the construction loan taken from D.S. Construction- balance amount was put to some other use- which remains unstated so far.

6.6 The above details clearly indicate that out of the loan of RS.3,76,00,000/- taken from Lord Krishna Bank in actual terms only Rs.1,64,56,230/- was utilized for returning the remaining construction loan - as only Rs. 1,64,56,2301- pertaining to the original loan remained to be repaid (to MIs. D.S. Construction) during the P. Yr. relevant to A.Y. 2006- 07). No explanation has been provided as to how the loan repaid is being claimed at RS.3,76,00,000/-. Appellant's submissions as evidenced by the balance sheet for various years shows the loan amount form M/s. D.S. Constructions for the construction of building to be only Rs.3, 16,95,184/-. However the interest of Rs.39,41 ,374/- has been claimed on the entire sum of Rs.3,76,00,0001-. As is evident from the appellant's own record the loan taken from M/s. D.S. Constructions was only Rs.3, 16,95, 184/-

5 ITA No.5070, 5181/Del/2011 out of which Rs.1,52,38,954/- stood repaid in F. Yr. 2003-04. Therefore balance amount repayable was only Rs.1,64,56,2301-. The claim of utilization of the loan of Rs.3,76,00,000/- from the Lord Krishna Bank, exclusively for returning the outstanding loan used for construction is therefore incorrect.

6.7 . In view of the facts on record as discussed in preceding paras, it is .held that appellant is entitled to interest only on the loan amount of Rs.1 ,64,56,230/- and not Rs.3,76,00,000/- . Therefore Assessing Officer is directed to restrict the interest claim to interest payable on the repayment of loan of Rs.1,64,56,2301-, which works out to be Rs.17,25,004/-. The balance interest of Rs.22,16,3701- is held to be not eligible for deduction u/s 24(b). Thus out of the disallowance of Rs.39,41,374/- made by the AO, the disallowance of Rs.22163701- is confirmed. Appellant is allowed relief of Rs.17,25,004/- . The interest of Rs.22,16,3701- pertaining to the sum of Rs.2, 1143770/- (Rs.3,76,00,000 - Rs.16456230) is held to be not admissible for deduction u/s 36(1 )(iii) of the IT Act, as appellant has made the payment to M/s. D.S. Constructions without any justification and not based on commercial expediency."

4. Aggrieved with the order of Ld. CIT(A), both the parties are in appeal before us. The cases were earlier heard on 19.02.2015 however, during dictation, it was observed that certain clarifications were required to dispose of the cases, therefore the cases were fixed for clarification and finally the cases were heard on 05.06.2015.

5. Ld. A.R. first took up the assessee's appeal and submitted that entire loan of Rs.3.76 crores was obtained by assessee form Lord Krishna Bank to repay, the loan raised from M/s. D. S. Construction Company and M/s. ERHL which was a group company. To support his argument, Ld. A.R. took us to paper book pages 52-53 where a copy of annual accounts for financial year 2003-04 was placed. Ld. A.R. submitted that on page 52, an 6 ITA No.5070, 5181/Del/2011

amount of rs.1,64,56,230/- was outstanding under the head unsecured loan which was payable to M/s. D. S. Construction company. He submitted that immediately before the close of the year, amount outstanding to M/s. D. S. Construction Company was Rs.3,72,56,230/-/- out of which Rs.2.08 crores was repaid to the above loanee by borrowing an amount of Rs.2 crores form M/s. ERHL which is the company under the same management and in this respect, he invited our attention to paper book page 53 where the amount of Rs.2 crores was reflected as current liability. Ld. A.R. also invited our attention to paper book page 12 to demonstrate that as on 01.04.2003, the amount due to M/s. D.S. Construction Co. was Rs.3,72,56,230/- and during the year Rs.2,08,00,000/- was repaid. Ld. A.R. submitted that the findings of Ld. CIT(A) are not correct to the extent that he had held that amount due to M/s. D. S. Construction company as on 31.03.2004 was only Rs.1,64,56,230/- and he has ignored an important fact that an amount of Rs.2 crores was repaid to it by borrowing from a sister concern an amount of Rs.2 crores. He submitted that as per Circular 28 issued by the Department, if an assessee repays the non interest bearing loan by borrowing an interest bearing loan then he is eligible to claim deduction u/s 24(b). Ld. A.R. invited our attention to the fixed asset chart placed at paper book page 54 and submitted that only assets acquired by the assessee was land and building and fire extinguishers and lift fitted in the building and there was no other asset other than a small investment in car. Therefore, it was submitted that the entire loan was used for construction of land and building and income of which was assessable under the head income from house property and, therefore, interest paid to Lord Krishna Bank was fully allowable.

7 ITA No.5070, 5181/Del/2011 6. Ld. D.R. on the other hand submitted that Ld. CIT(A) has passed exhaustive and speaking order and has allowed relief to the assessee which was available and, therefore, the appeal of assessee needs to be dismissed as there are number of entries in the account of group companies and it cannot be ascertained as to whether the multiple entries by assessee really represent investment in land and building.

7. As regards revenue's appeal, Ld. D.R. heavily relied upon the order of A.O. whereas, Ld. A.R. heavily relied upon the order of Ld. CIT(A) to the extent relief allowed by him.

8. We have heard rival parties and have gone through the material placed on record. We find that up to financial year ending 31.03.2004, there was total investment in fixed assets amounting to Rs.9,24,08,822/- which is apparent from paper book page 54. The above fixed assets included land, building, lift, fire extinguishers and car. The amount of investment in car is small amount of Rs.5,79,926/-. Therefore, rest of the investment can be considered to be made in land and building. The above investment in fixed asset was made by assessee from its own funds as well as loan from M/s. D. S. Construction Company amount of which went up to Rs.3,72,56,230/-, which is apparent form paper book page 12 wherein as on 01.04.2003, the opening balance of M/s. D. S. Construction Company loan account has been reflected. During the year under consideration, an amount of Rs.2.08 crores was repaid to above said company which is also apparent from paper book page 12. Out of Rs.2.08 crores repaid by assessee to M/s. D. S. Construction company, Rs.2 crores was borrowed from M/s. ERHL which has been reflected as a current liability in the balance sheet as on 31.03.2004 which is 8 ITA No.5070, 5181/Del/2011

apparent from paper book page 53. Therefore, in all, the assessee had repaid to M/s. D.S. Construction Company an amount of Rs.3,72,56,230/-, which included Rs.2.08 crores repaid in financial year 2003-04 and Rs.1,63,99,000/- in financial year 2004-05. However, the fact remains that in financial year 2003-04, out of repayment of rs.2.08 crores, Rs.2 crores was borrowed as a short term loan from ERHL ( a group company of assessee). This short term loan of Rs.2 crores was repaid to ERHL in financial year 2004-05 by again borrowing Rs.2 crores from D. S. Construction Company. These facts are verifiable from paper book page 8, where these entries are recorded. There is one more entry of Rs.12.96 lacs as received from D. S. Construction Company and further, there is another entry of Rs.9,500/-, which was paid to D S Construction Company. Therefore, in all, the balance due to D S Construction Company was Rs.3,77,52,230/- out of which Rs.3,76,00,000/- was paid after borrowing from Lord Krishna Bank. The above facts are verifiable form the balance sheet of assessee for the year ending 31.03.2005 where an amount outstanding from bank loan is reflected at Rs.3.76 crores and unsecured loan from D.S. Construction Company has reduced from Rs.1,64,56,230/- to Rs.57,230/-. Therefore, in fact, the entire loan of Rs.3.76 crores has been utilized to repay the debts raised by assessee for construction of property the income of which was offered under the head 'income from house property'. Ld. CIT (A) while granting partial relief to the assessee only considered the amount of outstanding as on 31.03.2004 of Rs.1.64 crores due to M/s. D. S. Construction Company. However, he misdirected himself in not considering the amount of Rs.2 crores which was raised by assessee as a short term 9 ITA No.5070, 5181/Del/2011

liability to reduce the loan component of M/s. D.S. Construction Company and also ignored the other transactions entered during financial year 2004-

05. The transactions entered into by assessee in 2004-05 also relate to acquisition of property. Therefore in all, the entire interest on the term loan from bank should have been considered by Ld. CIT(A) for allowing relief to the assessee. Circular 28 as relied upon by Ld. A.R. and as noted by Ld. CIT(A), clearly state that if the interest free loan is repaid by interest bearing loan funds, the interest on such loan is allowable for deduction u/s 24(b) of the Act. In view of above, ground Nos.1 & 2 of appeal of Revenue are dismissed whereas appeal of assessee is allowed.

9. Vide 3rd ground of appeal the revenue has challenged that as on 31.03.2003, only an amount of 1.11 crores was invested in building therefore, interest on entire loan of Rs.3.76 crores cannot be considered. However, we find that besides building, there is an investment in land also which is at Rs.7,97,88,679/- and investment in property always includes investment in land also. In view of the above, ground NO.3 of Revenue's appeal is also dismissed.

10. In nutshell, the appeal filed by assessee is allowed whereas appeal filed by revenue is dismissed.

11. Order pronounced in the open court on 11th June, 2015.

Sd./- Sd./- ( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER Date: 11th June, 2015 Sp 10 ITA No.5070, 5181/Del/2011

Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.

True copy. By Order (ITAT, New Delhi). S.No. Details Date Initials Designation 1 Draft dictated on 9/6 Sr. PS/PS 2 Draft placed before author 10,11,11 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 11/6/2015 Sr. PS/PS 6 Kept for pronouncement 11/6 Sr. PS/PS 7 File sent to Bench Clerk 11/6 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order