Pragati Vanijya Ltd., New Delhi vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'F', NEW DELHI Before Sh. N. K. Saini, AM And Sh. I. C. Sudhir, JM ITA No. 193/Del/2011 : Asstt. Year : 2007-08 M/s Pragati Vanijya Ltd., Vs Asstt. Commissioner of Income Tax, 129, Transport Centre, New Circle-14(1), Rohtak Road, Punjabi Bagh, New Delhi New Delhi (APPELLANT) (RESPONDENT) PAN No. AAACP1685P Assessee by : Sh. Salil Kapoor & Vikas Jain, Adv. Revenue by : Sh. Vikram Sahay, Sr. DR

Date of Hearing : 18.11.2014 Date of Pronouncement : 16.01.2015

ORDER Per N. K. Saini, AM:

This is an appeal by the assessee against the order dated 01.11.2010 of ld. CIT(A)-XVII, New Delhi.

2. Following grounds have been raised in this appeal:

"1. On the facts and circumstances the CIT(A) has erred on facts and in law in holding that share application money by company is not for the purposes of business and hence upheld the interest disallowance by AO of Rs. 42,50,000/- despite observing that company was authorized to conduct the business in the activities of financing, lending & investment activities.

2. That, without prejudice to the above in view of the facts and circumstances of the case the CIT(A) has 2 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

erred on facts and in law in not appreciating that the most of the amount invested in the share application was in the earlier years and no fresh loan is raised during the year to give share application money and the disallowance of interest is uncalled for.

3. The additions made are illegal and bad in law and it are based on surmises and conjectures. The addition made cannot be justified by any material on record.

4. That the explanations given, evidence produced and material available on record has not been properly considered and judicially interpreted.

5. That the interest u/s 234B has been wrongly and illegally charged as the appellant could not have foreseen the additions and as such there is no default of advance tax. In any case the interest charged u/s 234B is also excessive."

3. Vide Ground Nos. 1 to 4 the grievance of the assessee relates to the confirmation of disallowance amounting to Rs. 42,52,000/- made by the AO on account of interest.

4. Facts of the case in brief are that the assessee filed the return of income on 16.10.2007 showing Nil income which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 08.09.2008. Later on, the case was selected for scrutiny.

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5. During the course of assessment proceedings the AO noticed that the assessee had debited interest expenses of Rs. 49,97,341/- in its profit and loss account. He asked the assessee to furnish the detail of interest paid and to explain how the interest paid was related to various income or receipt shown by it. The assessee submitted the detail of interest paid to various parties and also stated as under:

"The assessee company is a NBFC engaged in the business of providing loan and advances and inter corporate deposits. During the year under assessment the assessee company has paid inter corporate deposit for business purpose as per least attached. Which is fully allowable u/s 36(1)(iii) of the Income Tax Act, 1961."

6. The AO after considering the submissions of the assessee observed that the balance sheet of the revealed that it had given loans and advances of Rs. 4,34,54,162/- to various parties which included an amount of Rs. 4,25,00,000/- given to M/s Sarvesh Coal Tech Pvt. Ltd. as share application money. He further observed that the assessee had not explained how this amount, given or invested as share application money related to assessee's business and how interest paid on this amount qualified as deduction under the Act. According to him the assessee had borrowed fund from various parties and had paid huge amount of interest on those loans. However, the 4 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

money was invested as share application money in M/s Sarvesh Coal Tech Pvt. Ltd. without any business need and without producing any return. The AO reproduced the source of fund and utilization of the funds as under:

Source of Fund Amount (Rs.) Utilization of Amount (Rs.) Fund Share Capital 2,25,00,000 Investment in 5,71,00,000 Shares Reserve and 3,65,39,195 Share Application 4,25,00,000 surplus money given Unsecured loan 5,00,00,000 Total 10,90,39,195 9,96,00,000

7. From the above chart the AO concluded that the assessee was having Rs. 5,00,00,000/- interest bearing borrowed funds and had given Rs. 4,25,00,000/- as share application money which was not connected to the business of the assessee and not earning any income. He was of the view that the assessee had diverted borrowed money to the extent of Rs. 4,25,00,000/-. The AO worked out the interest @ 10% on the aforesaid amount at Rs. 4,25,00,000/- and added the same to the income of the assessee. The reliance was placed on the following case laws:

Ø Madhav Prasad Jatia Vs CIT (1979) 118 ITR 200 (SC) Ø Marolia and Sons (1981) 129 ITR 475 (All.) Ø Milapchand Rs. Shah Vs CIT (1965) 58 ITR 525 (Mad.) Ø Roopchand Chabildass and Sons Vs CIT (1967) 63 ITR 166 (Mad.) 5 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

Ø H. R. Sugar Factory (P.) Ltd. (1991) 187 ITR 363(All) Ø CIT Vs Saraya Sugar Mills (P.) Ltd. (1992) 193 ITR 575(All) Ø Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom.) Ø Ram Kishan Oil Mills Vs CIT (1965) 56 ITR 186 (MP) Ø Amna Bai Hajee Issa Vs CIT (1964) 51 ITR 835 (Mad.) Ø H. P. Lohia (1993) 203 ITR 928 (Cal.) Ø Sridev Enterprises (1991) 192 ITR 165 (Kar.)

8. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the assessee company was engaged in the business of financing and investment activities which were very well within the main object defined by its Memorandum of Association and Article of Association. It was further stated that the assessee was authorized to conduct the activities of financing, lending and investment which had been conducted by the assessee during the year as was apparent from the balance sheet and also from the chart as prepared by the AO in the assessment order with regard to the source and application of funds. It was contended that advancement of share application money was very well within the purpose of business which had been defined and executed by the assessee company during the year. It was further contended that the assessee company had received unsecured loan of Rs. 5,50,00,000/- during October & November 2005 falling in last assessment year i.e. assessment year 2006-07. The said amount was initially utilized for giving Inter Corporate Deposits of Rs.

6 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

4,60,00,000/- to M/s Aryan Coal Benefication Pvt. Ltd. (ACBPL), Rs. 50,00,000/- of M/s Aryan Energy Pvt. Ltd. (AEPL) and Rs. 15,00,000/- to M/s Aryan Ispat and Power Pvt. Ltd. (AIPPL), which clearly showed that the funds were borrowed and utilized for advancing loans in the shape of Inter Corporate Deposits which was in the nature of finance activities carried on by the assessee. It was also contended that the assessee had given another Inter Corporate Deposits of Rs. 70,00,000/- in January 2006 to M/s ACBPL out of refund of M/s AEPL for Rs. 50,00,000/- and the assessee earned interest income of Rs. 27,92,023/- on Inter Corporate Deposits given during the Financial Year 2005-06 and paid interest of Rs. 15,81,288/- on unsecured loan taken.

9. It was stated that the assessee company was pursuing its finance and investment activities by giving loans and advances/inter corporate deposits and investing in share capital/capital application money. It was further stated that the assessee company received back Inter Corporate Deposits of Rs. 5,90,00,000/- from M/s ACBPL during February and March 2006 and invested Rs. 4,00,00,000/- in share application money of M/s Sarvesh Coal Tech Pvt. Ltd. as per following details:

7 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

Ø 28.02.2006 - Rs. 1,00,00,000/-

Ø 27.03.2006 - Rs. 1,00,00,000/-

Ø 29.03.2006 - Rs. 1,00,00,000/-

Ø 31.03.2006 - Rs. 1,00,00,000/-

Total: Rs.4,00,00,000/-(Outstanding as on 31.03.2006)

It was also stated that the assessee company had invested Rs. 25,00,000/- in share application money of M/s Sarvesh Coal Tech Pvt. Ltd. earlier also from the refund of Inter Corporate Deposits given in Financial Year 2004-05 to M/s Aryan Energy Pvt. Ltd., the details of the same was as under:

Ø 03.06.2005 - Rs. 5,00,000/- Ø 25.06.2005 - Rs. 40,00,000/-

Less: Rs. 20,00,000/- (refund of share application money on 04.08.2005) Total: Rs. 25,00,000/-

10. It was submitted that allegation of the AO that the assessee company had taken unsecured loan specifically for diverting the same to give share application money was not correct. The assessee also submitted to the ld. CIT(A) as under:

"Further kindly note that the Assessee Company has received unsecured loan of Rs. 5,50,00,000/- and paid Share Application Money of Rs. 4,25,00,000/- in AY 2006-07 and not in AY 2007-08 which is under consideration.

The Assessee Company continued to pursue the above Finance and Investment activities in assessment year 8 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

under Appeal which is evident from Fund Flow Statement for AY 07-08 attached herewith. From the Fund Flow statement, your honor will also appreciate that Assessee Company has given Inter Corporate Deposits of Rs. 1,53,00,000/- to M/s ACBPL and earned Interest Income of Rs. 12,87,124/-. Further the Assessee Company has received new loan of Rs. 2,50,00,000/- from M/s ACBPL & M/s Bhandari Consultancy & Finance Pvt. Ltd. and repaid the old loan of Rs. 3,00,00,000/- out of Rs. 5,50,00,000/- of Unsecured Loans taken during last year. The detailed chart of Unsecured Loan taken/repaid during the year and interest paid is enclosed herewith. The interest paid for Rs. 49,97,341/- during the year under appeal is also attributed towards fresh loan taken to repay back the old loans is fully allowable u/s 36(1)(iii) of the Income Tax Act, 1961. Therefore the allegation of the Ld. AO that the borrowed money is diverted to Share Application Money is held to be not incurred wholly and exclusively for the purposes of assessee's business is totally baseless, incorrect and far from the facts of case.

Since the Assessee Company is into the business of Financing, lending & investment activities, we find that the Ld. AO has erred in holding that "money was invested as Share Application Money in M/s Sarvesh Coal Tech Pvt. Ltd. without any business need".

It is not open to the Ld. AO to assess what the business need of the Assessee Company is? It is a decision which is normally entrusted by the shareholders of the Company to its faithful management who take the decisions depending upon the financial needs, aspirations, goals or objects set for the company.

9 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

Hence, we find that the Ld. AO has erred in holding that "money was invested as Share Application Money in M/s Sarvesh Coal Tech Pvt. Ltd. without any business need and without producing any return". It is general practice in the industry that in some cases interest is paid by the receiver of Share Application Money in case there is any specific clause in an agreement (if entered) between payer and receiver of funds in this regard. Hence if any such interest would have accrued to the Assessee Company during the year that would have been chargeable as Business Income and interest expenditure made for borrowed capital in this regard will be allowed as business income. So if no income has accrued, is that mean that transaction was for non business purposes?

It seems to be that returned Loss for the year under assessment has tempted the Ld. AO to think about this aspect from the angle of yield. The Ld. AO has failed to appreciate the purpose and language worded for Section 36(1)(iii) of the Income Tax Act, 1961:

36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession."

11. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee had shown total income of Rs. 26,93,374/- consisting of Rs. 12,87,124/- from interest income and Rs. 14,06,250/- as dividend income but the 10 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

assessee had failed to establish that the share application money was paid for the purpose of business. He further observed that the amount had been shown by the assessee as share application money just for the name sake, as no shares were allotted and the amount was received back just after the year end i.e. in April, 2007. The ld. CIT(A) observed that merely because a company was authorized by its Memorandum to invest in shares, it would not imply that any amount paid which was stated or shown by the assessee as share application money was for the purpose of the business. Therefore, the interest amount could not be allowed as deduction to the assessee either u/s 37 or 36(1)(iii) of the Act and even otherwise, under all circumstances, the amount would be hit by provisions of Section 14A of the Act and would therefore be not allowable to the assessee. The ld. CIT(A) also observed that the assessee was claiming entire expenditure of Rs. 53,86,403/- including interest expenses of Rs. 49,97,341/- as business expenses on the ground that object clause in the Memorandum of Association of the assessee authorized it to apply in shares of the various companies as its main business. The ld. CIT(A) observed that the assessee on the one hand, was debiting entire expenses as business expenses and excluded the dividend income of Rs. 14,06,250/- from the tax 11 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

net, therefore, the AO had rightly mentioned that if shares were allotted to the assessee, income from them i.e. dividend shall not form part of total income and accordingly interest expenditure incurred in relation to that would not be allowable to the assessee. The ld. CIT(A) confirmed the disallowance of Rs. 42,50,000/- made by the AO.

12. Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee company is a Non-Banking Financial Institute and the interest bearing loans were received in the preceding year which were also used in the earlier year but no disallowance was made while framing the assessment u/s 143(3) of the Act. The ld. Counsel for the assessee drew our attention towards copy of assessment order dated 28.11.2008 for the assessment year 2006-07 wherein the returned income of the assessee was accepted. The reliance was also placed on the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs Sridev Enterprises (1991) 192 ITR 165 (KAR). It was further stated that since the assessee was in the business of Financing so giving of loan was its business activity and the ld. CIT(A) had given a wrong finding that the provisions of section 14A of the Act were applicable. It was also stated that the provisions contained in 12 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

Rule 8D of the I.T. Rules, 1962 were not applicable because those have been inserted w.e.f assessment year 2008-09 while the case under consideration relates to the assessment year 2007-08. It was further stated that the AO himself admitted in the details of source of funds available with the assessee and their utilization that the assessee's "capital and reserves & surplus" were more than the share application money. Therefore, there was no nexus between the interest bearing funds and the share application money particularly when the unsecured loans of Rs. 5,00,00,000/- were utilized for making the investment of shares amounting to Rs. 5,71,00,000/-. For the aforesaid contention our attention was drawn towards para 5 of the assessment order dated 30.11.2009. The reliance was also placed on the following case laws:

Ø CIT Vs Holcim India P. Ltd. in ITA No. 486/2014 & 299/2014. Judgment dated 05.09.2014 of Hon'ble Delhi High Court Ø CIT Vs Reliance Utilities & Power Ltd. (2009) 313 ITR 340(Bom.) Ø CIT Vs Sridev Enterprises (1991) 192 ITR 165 (KAR)

13. In his rival submissions the ld. DR reiterated the observations made by the AO and strongly supported the orders of the authorities below. He further submitted that the assessee utilized the interest bearing funds for non-business purpose, therefore, the disallowance was rightly made by the 13 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

AO and the ld. CIT(A) was fully justified in confirming the addition made by the AO.

14. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case it is an admitted fact that the assessee was a Non-Banking Financial Company and its Memorandum of Association and Articles of Association authorized it to do the business of Financing and Investment. The assessee in the preceding year received unsecured loans of Rs. 5,50,00,000/- which were initially utilized for giving Inter Corporate Deposits. The assessee earned the interest income of Rs. 27,92,223/- on Inter Corporate Deposits and paid interest of Rs. 15,81,288/- in the said year relevant to the assessment year 2006-07 and the AO accepted the interest paid on the unsecured loan for the said assessment year while framing the assessment u/s 143(3) of the Act. In the present case the AO himself reproduced a chart of Sources of Funds & utilization of Funds at para 5 of page no. 2 of the assessment order which read as under:

Source of Fund Amount (Rs.) Utilization of Fund Amount (Rs.) Share Capital 2,25,00,000 Investment in 5,71,00,000 Shares Reserve and 3,65,39,195 Share Application 4,25,00,000 surplus money given Unsecured loan 5,00,00,000 Total 10,90,39,195 9,96,00,000 14 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

15. From the above chart it is clear that the assessee was having Share Capital and Reserves & Surplus amounting to Rs. 5,90,39,195/- and the share application money given was of Rs. 4,25,00,000/- which clearly shows that the interest free funds available with the assessee were more than the amount given for share application money. In the present case it is an admitted fact that the assessee was a Non-Banking Finance Company and was engaged in the business of providing loans and advances and Inter Corporate Deposits. This fact has been admitted by the AO in para 2 of the assessment order dated 30.11.2009. In the year under consideration the assessee received interest bearing unsecured loans of Rs. 5,00,00,000/- while the investment in shares was of Rs. 5,71,00,000/-. In other words the amount received through unsecured loan was utilized in making the investment in shares which is a part of the business activity of the assessee as provided in its Memorandum of Association and Articles of Association. In the instant case the assessee received the unsecured loans in the preceding year and not in the year under consideration. The AO nowhere established a nexus between the interest bearing loans and the investment made for non-business purpose, share application money paid to M/s Sarvesh Coal Tech Pvt. Ltd. was received back when the shares were not allotted. The 15 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

assessee made the investment in share application money which is part of its business activity. In the present case, the assessee received a new loan of Rs. 2,50,00,000/- during the year under consideration from M/s ACBPL and M/s Bhandari Consultancy & Finance Pvt. Ltd., the said amount was utilized for making the repayment of the old loan therefore the interest paid amounting to Rs. 49,97,341/- was allowable u/s 36(1)(iii) of the Act and the AO was not justified in making the disallowance on account of notional interest @ 10% on the share application money of Rs. 4,25,00,000/-. In the instant case it is an admitted fact that the AO allowed the claim of the assessee regarding interest on borrowed capital in the preceding year i.e. the assessment year 2006-07 and there is no change in the facts for the year under consideration vis-à-vis the preceding year, moreover, the loan received in the year under consideration was utilized for making the repayment of the old loans. Therefore, no disallowance was called for in the year under consideration even by keeping view the principles of consistency. In this regard, the Lordships of the Hon'ble Karnataka High Court in the case of CIT Vs Sridev Enterprises (1991) 192 ITR 165 (supra) has observed in para 7 as under:

"7. We are in agreement with the view expressed by the Appellate Tribunal. The status of the amount outstanding from Nalanda on the first day of the 16 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years' assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot subsequently be held by it to have become bad prior to that year."

16. Therefore, by keeping in view the ratio laid down in the aforesaid referred to case no disallowance was called for in the hands of the assessee for the year under consideration.

17 ITA No. 193/Del/2011 Pragati Vanijya Ltd.

17. On a similar issue the Hon'ble Bombay High Court in the case of CIT Vs Reliance Utilities & Power Ltd. (2009) 313 ITR 340 has held that:

"If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee raised a loan it can be presumed that the investments were from the interest- free funds available."

In the present case also the assessee made the investment in share application money for a sum of Rs. 4,25,00,000/- whereas the Share Capital alongwith Reserve & Surplus was amounting to Rs. 5,60,39,195/-(Rs. 2,25,00,000/- + Rs. 3,65,39,195/-) which clearly established that interest-free funds available with the assessee were more than the investments made in share application money. Therefore, the disallowance made by the AO on account of notional interest was not justified and the ld. CIT(A) arbitrarily confirmed the same. We, therefore, delete the disallowance made by the AO and sustained by the ld. CIT(A).

18. The next issue vide Ground No. 5 relates to the charging of interest u/s 234B of the Act. As regards to this issue, it was the common contention of both the parties that it is consequential in nature. We, order accordingly.

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19. In the result, the appeal of the assessee is allowed. (Order Pronounced in the Court on 16/01/2015)

Sd/- Sd/-

(I. C. Sudhir) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 16/01/2015 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR

Date Initial 1. Draft dictated on 09.01.2015 PS 2. Draft placed before author 12.01.2015 PS 3. Draft proposed & placed before the second JM/AM member 4. Draft discussed/approved by Second Member. JM/AM 5. Approved Draft comes to the Sr.PS/PS PS/PS 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk PS 8. Date on which file goes to the AR

9. Date on which file goes to the Head Clerk.

10. Date of dispatch of Order.