Nikash Land Developers Pvt. Ltd.,, Pune vs Department Of Income Tax

Asstt. Commissioner of Income Tax, Circle-2, Pune. .... Appellant

Vs.

Nikash Land Developers Pvt. Ltd., 2, Vasant Apartments, Dr. Kelkar Road, 106/2, Erandwane, Pune. PAN : AAACN6416C .... Respondent

Department by : Shri Rajesh Damor Assessee by : Shri Nikhil Pathak Date of hearing : 09-03-2015 Date of pronouncement : 13-03-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal by the Revenue is directed against an order of

the Commissioner of Income Tax (Appeals)-II, Pune dated 27.02.2013 which,

in turn, has arisen from an order dated 29.03.2006 passed by the Assessing

Officer u/s 143(3) of the Income-tax Act, 1961 (in short "the Act") pertaining to

the assessment year 2003-04.

2. By way of the present appeal, Revenue has raised the following

Grounds of Appeal :-

"1) The learned Commissioner of Income-tax (Appeals) erred in allowing interest on interest free loans advanced to four sister concerns amounting to Rs.1,95,78,014/- holding that the loans were out of business needs & prompted by commercial expediency when the same were evidently diverted for non business purposes.

2) The learned Commissioner of Income-tax (Appeals) erred in not considering the fact that the assessee had not used the borrowed funds wholly & exclusively for its own business and there was no nexus between the borrowed funds and their utility and the assessee had not charged any interest on the advances given to its sister concerns."

2 ITA No.1484/PN/2013 3. In brief, the relevant facts are that in the course of assessment

proceedings, Assessing Officer disallowed interest expenditure of

Rs.71,28,963/- debited in the Profit & Loss Account on the ground that the

interest bearing funds borrowed by the assessee from bank and third parties

was diverted for non-business purposes by advancing interest-free loans to

the sister concerns. Subsequently, the CIT(A) by way of the impugned order

retained the disallowance to the extent of Rs.10,26,698/- and deleted the

balance of the addition. The Revenue is in appeal before us on a limited issue

whereby it has challenged the order of the CIT(A) in holding that the interest

expenditure relatable to the interest-free loans advanced to the following four

sister concerns amounting to Rs.1,95,78,014/- was an allowable expenditure

as such loans were advanced for commercial expediency. The details of such

advances are as follows :-

Name of the Concern Amount in Rs. 1) Bhosale Manas Developers 40,97,547/- 2) Everest Associates 10,00,000/- 3) Manas Constructions 1,29,80,467/- 4) Vishal Constructions 15,00,000/- Total 1,95,78,014/-

4. In so far as the loans advanced to (i) M/s Bhosale Manas Developers -

Rs.40,97,547/-; (ii) Everest Associates - Rs.10,00,000/-; and, (iii) Vishal

Constructions - Rs.15,00,000/- are concerned, the CIT(A) noted that such

advances have been made to the recipient concerns for acquisition of lands or

for a business venture and therefore expenditure of interest relatable to such

advances was an allowable deduction within the meaning of section 36(1)(iii)

of the Act.

5. At the time of hearing, the Ld. Departmental Representative pointed out

that the aforesaid finding of the CIT(A) was without any basis inasmuch as in

the Balance Sheet itself advances given for purchase of land, etc. have been 3 ITA No.1484/PN/2013

separately classified and the impugned advances to the sister concerns are

not classified as advances for purchase of land.

6. On the other hand, the Ld. Representative appearing for the

respondent-assessee has also quite fairly conceded that there was no material

on record which could support the finding of the CIT(A) that such advances

were given for the purposes of the assessee's business.

7. Ostensibly, section 36(1)(iii) of the Act permits deduction for interest

expenditure where the monies have been utilized for the purposes of

business. In the present case, so far as the advances made to the aforesaid

three sister concerns are concerned, factually, it is evident that the same are

not made for any business purpose and therefore the CIT(A) was wrong in

holding that interest expenditure relatable to such advances was an allowable

deduction in terms of section 36(1)(iii) of the Act. Thus, on this aspect, we

reverse the order of the CIT(A) and restore that of the Assessing Officer.

8. Now, in so far as the advance to M/s Manas Constructions of

Rs.1,29,80,467/- is concerned, the relevant facts are as follows. Assessee

has a running current account with the said concern and the aforesaid amount

of Rs.1,29,80,467/- is the closing balance as on 31.03.2003. In the course of

hearing, a reference has been made to the day-wise account extract with the

said sister concern, which has been placed in the Paper Book at pages 32 to

37. A perusal of the account extract reveals that assessee has indeed

borrowed money from the said concern and it has paid interest of

Rs.21,90,645/- to the said concern for the borrowing during the year under

consideration. It is evident that the closing debit balance of Rs.1,29,80,467/-

is comprised of payments of Rs.1,00,00,000/- and Rs.42,02,500/- made to the

said concern on 28.03.2003 and 31.03.2003 respectively. Apart from the

aforesaid debits, the yearly account extract has a credit balance meaning 4 ITA No.1484/PN/2013

thereby that assessee has indeed borrowed money from the said concern for

a pre-dominant part of the year. The interest paid to the said concern of

Rs.21,90,645/- was explained by the Ld. Representative as having been

calculated on the basis of day-wise position. The aforesaid factual matrix is

borne out of material on record and we find that the CIT(A) has also

appreciated the same and thereafter inferred that no disallowance out of

interest expenditure is justified in relation to the debit balance of

Rs.1,29,80,467/- appearing in the account of M/s Manas Constructions. The

aforesaid factual position has not been controverted by the Ld. Departmental

Representative before us and therefore we hereby affirm the order of the

CIT(A) to the aforesaid extent. Thus, with respect to the finding of the CIT(A)

in relation to the advance to M/s Manas Constructions, the same is hereby

affirmed and accordingly, Revenue has to fail on this aspect.

9. In the result, appeal of the Revenue is partly allowed.

Order pronounced on 13 th March, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 13 th March, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-II, Pune; 4) The CIT-II, Pune; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File.

By Order //True Copy//

Assistant Registrar I.T.A.T., Pune