M/S.hansa Estates P. Ltd v. The Assistant Commissioner Of Income Tax Company Circle-Ii (2) Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASRESERVED ON : 14.07.2020PRONOUNCED ON: 30.07.2020 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN T.C.A.NO.399 OF 2019 M/s.Hansa Estates P. Ltd.,No.605-606, Anna Salai,South Indian Film Chamber Building,II Floor, Indian Film Chamber Building,Chennai 600 006.PAN AAACH 1879B.. AppellantVersus The Assistant Commissioner of Income TaxCompany Circle-II (2)Chennai... Respondent Prayer:- Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961, against the order of the Income Tax AppellateTribunal, Madras 'C' Bench, dated 18.02.2019 made inI.T.A.No.543/Chny/2013 relating to the Asst Year 2009-2010. against the Commissioner of Income Tax (Appeals)-III, dated17.01.2013 and made in ITA.No.646/11-12 A-III and against theorder of the Assistant Commissioner of Income Tax, CompanyCircle III(2), Chennai-34, dated 30.12.2011 for the AssessmentYear 2009-10. For Appellant : Mr.A.S.SriramanFor Respondent: Mr.Karthik RanganathanJUDGMENT[Judgment of the Court was made by T.S.SIVAGNANAM, J.] This appeal by the assessee filed under Section 260A of theIncome Tax Act, 1961 ('the Act' for brevity) is directed againstthe order dated 18.02.2019 passed by the Income Tax AppellateTribunal, Madras 'C' Bench, for the assessment year 2009-10. https://hcservices.ecourts.gov.in/hcservices/ 2. The appeal was admitted on 27.06.2019 on the followingSubstantial Questions of Law: i. Whether the provisions of Section 36(1)(iii) ofthe Income Tax Act, 1961 permit the claim fordeduction of interest paid for the borrowed amountused for business purpose? ii. Whether the Appellate Tribunal was correct inignoring the purpose and utilization of the borrowedmoney by recording perverse finding of fact of nonexistence of business purpose despite the execution ofJoint Development Agreement entered into between theappellant and holding company? iii.Whether the Appellate Tribunal is correct inholding that unregistered of the Joint DevelopmentAgreement would lead to the presumption of diversionof borrowed funds for non business purpose despite theundisputed fact of deployment of borrowed money in thejoint development of housing project executed inreality and accepted by the Revenue in the subsequentassessment years in taxing the profits in the hands ofthe respective entities? And iv.Whether the Appellate Tribunal is correct inignoring the decision of the First Appellate Authorityin granting the deduction of interest payment underSection 36(1)(iii) of the Act for the assessment year2010-11, which decision was accepted by the Revenue bynot filing second appeal while further establishingthe conflict of decision / treatment to the interestoutgo and while further negating the rule ofconsistency? 3. The assessee is a private limited Company incorporatedunder the provisions of the Companies Act, 1956. It filed itsReturn of Income for the assessment year 2009-10 on 30.09.2009,disclosing a total income of Rs.1,44,89,527/-. The assessmentwas completed under Section 143(3) of the Act on 30.12.2011 at atotal income of Rs.6,94,76,277/-, after making certaindisallowances. One among them was disallowance of interestclaimed under Section 36(1)(iii) of the Act to the tune ofRs.2,09,24,549/-. This disallowance was made by the AssessingOfficer on the ground that the assessee has given interest freeadvances to M/s.Tiruvengadam Investments Pvt. Ltd., which is aholding Company of the assessee. The assessee contented that thetransaction is in the nature of current account and the advanceswere made for acquiring land on behalf of the assessee forconstruction of a project called 'Hansa Chitra Project'. In this regard, the assessee had referred to a Joint DevelopmentAgreement with the holding Company and the assessee. Challengingthe disallowance, the assessee preferred appeal to theCommissioner of Income Tax (Appeal)-III, Chennai, (hereinafterreferred as 'the CIT(A)' for brevity), which was dismissed by anorder dated 17.01.2013. The assessee preferred appeal to theTribunal which had rejected the assessee's appeal by theimpugned order. This is how, the assessee is before us by way ofthis Tax Case Appeal, raising the above mentioned SubstantialQuestions of law. 4. It is submitted by the learned counsel appearing for theappellant /assessee that the disallowance of interest paid whichamount was claimed by the assessee as a deduction under Section36(1)(iii) of the Act by presuming that it is diversion ofborrowed funds for non business purposes, is an erroneousconclusion arrived at by the Tribunal. The Tribunal failed tonote the factual position and did not properly appreciate theterms and conditions of the Joint Development Agreement dated11.04.2007 between the assessee and the holding Company, whereunder the land acquired by the holding Company was to bedeveloped by the assessee as a joint development project andtherefore, the Tribunal committed an error in presuming that itamounted to diversion of borrowed funds for non businesspurposes. It is further submitted that the Assessing Officererred in concluding that there was no commercial expediency inthe contract, without appreciating the inextricable link causedby the Joint Development Agreement entered into between theassesee and the holding Company. 5. Further by referring to the conditions in the JointDevelopment Agreement, it is submitted that the Agreemententered for payment of Rs.11,25,00,000/- plus 50% of the grossprofit earned in the project as a consideration for developmentof the land owned by the Company, it is submitted that thetreatment of the advances paid by the assessee to its holdingCompany would squarely fall within the ambit of Section 36(1)(iii) of the Act and therefore, the Assessing officer committedan error in disallowing the claim for deduction. It is furthersubmitted that the Assessing officer as well as the CIT(A) andthe Tribunal failed to appreciate the basic fabric of the simplebusiness transaction between the assessee and its holdingCompany and if it had been properly construed, the claim fordeduction would have been allowed. Further it is submitted thatthe order of the CIT(A) for the assessment year 2010-11 dated17.01.2013 was noticed by the Tribunal, wherein the disallowanceof the interest paid on the presumption of diversion of borrowedfunds was rejected by the CIT(A) in granting deduction of suchinterest payment as in accepting the business purpose of the utilization of the borrowed funds namely deployment of borrowedfunds in the joint venture projects, the sustenance ofdisallowance of interest paid, claimed as deduction in thecomputation of taxable total income on wrong presumption offacts for the immediate preceding assessment year namely 2009-10was erroneous and not sustainable in law. On the above ground,the learned counsel for the assessee sought for setting asidethe impugned order. utilization of the borrowed funds namely deployment of borrowedfunds in the joint venture projects, the sustenance ofdisallowance of interest paid, claimed as deduction in thecomputation of taxable total income on wrong presumption offacts for the immediate preceding assessment year namely 2009-10was erroneous and not sustainable in law. On the above ground,the learned counsel for the assessee sought for setting asidethe impugned order. 6. The learned senior standing counsel appearing for theRevenue sought to sustain the impugned order by contenting thatthe Assessing Officer, the CIT (A) as well as the Tribunal onfacts held that the assessee could not substantiate their claim.The terms and conditions of the Joint Development Agreement wereconsidered and it has been found that the assessee could notestablish the business expediency in advancing money to theholding Company. Further on facts, the CIT (A) found that theassessee had failed to discharge the onus of proving that thelands were used only for business purpose and therefore, heldthat the decision of the Hon'ble Supreme Court of India inM/s.S.A.Builders Vs. CIT [288 ITR 01 (SC)] is not applicable tothe case of the assessee. 7. Heard Mr.A.S.Sriraman, learned counsel appearing for theappellant/assessee and Mr.Karthik Ranganathan, learned Seniorstanding counsel appearing for the respondent Revenue. 8. We carefully considered the submissions on either sideand perused the materials placed on record, more particularly,the Joint Development Agreement dated 11.04.2007. The petitioneris the Developer in the said Agreement. The Holding Company hasbeen termed as an Investor, who had secured development rightsof a project called 'Hansa Chitra' in the land situate in ZaminPallavaram Village. The Investor/holding Company has approachedthe assessee/developer to develop the said property byconstructing 67 flats. The assessee/ developer agreed to put upbuilt up area of 84,860 sq.ft at its cost and expenses,according to the recital in the Agreement. This was because, theInvestor/holding Company investing Rs.11,25,00,000/- andassigning the development rights to the assessee/developer andthe developer agreed to pay the investor/holding CompanyRs.11,25,00,000/- as also 50% of the gross profit earned in theproject. Subsequently, the investor/holding Company is stated tohave addressed a letter to the assessee/developer dated03.04.2009, requesting for increase in the profit share from 50%to 75%. The assessee/developer readily agreed and Addendum toJoint Development Agreement was entered into on 11.06.2009 andthe relevant clauses in the agreement were modified where under,the investor/holding Company was entitled to 75% of the grossprofit. 9. When these facts and documents were placed before theAssessing Officer, wherein, the assessee claimed interestpayment as a deduction, the Assessing Officer issued show causenotice dated 14.12.2011 calling upon the assessee to explain asto why the interest payment to the said advance should not bedisallowed. The assessee's explanation was that the advance wasgiven to the holding Company during the financial year 2008-09and the advance is in the nature of current account transactionand therefore, the assessee had not provided any interest duringthe year. It has further stated that the said advance is paid tothe holding Company for the investments made by them on behalfof the assessee for the 'Hansa Chitra Project' for acquiringland, for which, the assessee had not claimed deduction underSection 80 I B of the Act. The terms and conditions of the JointDevelopment Agreement was also referred to. The AssessingOfficer did not accept the said contention raised by theassessee and noted that at no point of time, the holding Companywhich itself is a Investor had an occasion to take advance fromthe assessee's Company as they have borrowed loans from Banks.Further on considering the return of income and the materialsplaced, the Assessing Officer found that the assessee is payingRs.42,85,869/- towards operational expenses of the holdingCompany and this amount is shown in the Ledger Account as thejoint venture share of the holding Company and therefore, it isnot necessary for the assessee to give any advance to theholding Company. Thus, the Assessing Officer concluded that theassessee had failed to establish commercial expediency. 10. Taking note of the requirement of business services, theAssessing Officer concluded that the expenditure wasunwarranted, unreasonable and unnecessary for the business ofthe assessee as it is not laid out or expended wholly andexclusively for the purpose of business or profession of theassessee and therefore, the interest corresponding to the amountlent interest free needs to be disallowed under Section 36(1)(iii). With this finding the quantum of disallowance wasrecomputed. The assessee preferred appeal before the CIT (A) andreiterated the stand taken before the Assessing Officer,explained about the terms and conditions of the Agreemententered and decisions of the Tribunal. 11. The CIT (A) after considering the factual position,submissions made on behalf of the assessee before him, thefindings rendered by the Assessing Officer, pointed out that theHon'ble Supreme Court in the case of M/s.S.A.Builders Vs. CIT(cited supra) has made it clear that the allowability orotherwise of interest payment under Section 36(1)(iii) dependson the facts and circumstances of the case and the assessee onfacts failed to establish any commercial expediency for advancing interest free amount to the holding Company. Furthertaking note of the stand of the assessee that the advance amounthas to be treated as deemed dividend in the hands of the holdingCompany, further strengthens the belief that the assessee isunable to establish the element of commercial expediency in theimpugned transaction between itself and the holding Company. 12. Further CIT(A) found that the assessee has failed toestablish that interest free advances were for the purpose ofbusiness and therefore, the decision in M/s.S.A.Builders VS. CITdoes not come to the rescue of the assessee. Accordingly, theappeal was dismissed. The Tribunal independently considered thefacts recorded by the Assessing Officer as well as the CIT(A)and confirmed their orders. advancing interest free amount to the holding Company. Furthertaking note of the stand of the assessee that the advance amounthas to be treated as deemed dividend in the hands of the holdingCompany, further strengthens the belief that the assessee isunable to establish the element of commercial expediency in theimpugned transaction between itself and the holding Company. 12. Further CIT(A) found that the assessee has failed toestablish that interest free advances were for the purpose ofbusiness and therefore, the decision in M/s.S.A.Builders VS. CITdoes not come to the rescue of the assessee. Accordingly, theappeal was dismissed. The Tribunal independently considered thefacts recorded by the Assessing Officer as well as the CIT(A)and confirmed their orders. 13. We find no perversity in the approach, observation andconclusion arrived at by the Tribunal. To our mind, the natureof transaction makes it clear that there is no element ofcommercial expediency. The holding Company holds 99.99% sharesin the assessee. The assessee has given a loan ofRs.18,30,19,927/- to the holding Company during the financialyear 2008-09 stating that the said advance is in the nature ofcurrent transaction and no interest was charged during the year.Thus, the assessee's case that this advance is paid to theholding Company for the investments made by them for securingland to be developed by the assessee. Further there is a JointDevelopment Agreement in which the assessee and the holdingCompany agreed to share profits at the rate of 50% each. Withinabout two months another Agreement dated 09.06.2009 is enteredinto by modifying certain clauses in the Joint DevelopmentAgreement, where under, the holding Company gets 75% of the Bookprofits. The Assessing Officer found that the holding Companyhad borrowed loans from Banks and there was no occasion ratherneed for the holding Company to take advances from the assesseefor the purpose of purchase of the land. Apart from that theAssessing Officer found that the assessee was payingRs.42,85,869/- toward operational expenses and in the LedgerAccount, this was shown as Joint Venture Share of the holdingCompany. This fact also led the Assessing Officer to concludethat there was no necessity for the assessee Company to give anyadvance to the holding Company. 14. As held by the Hon'ble Supreme Court of India inM/s.S.A.Builders vs. CIT, the allowability or otherwise ofinterest payment under Section 36(1)(iii) depends on the factsand circumstances of the case. Currently, the Assessing Officer,the CIT (A) and the Tribunal, on facts held against theassessee. 15. We find no reason to dislodge the factual finding andthere are no questions of law, much less, substantial questionsof law arising for consideration in this appeal. Accordingly,the Tax Case Appeal stands dismissed. No costs. Sd/- Assistant Registrar(CS VII)//True Copy// Sub Assistant RegistrarskTo1.The Commissioner of Income Tax (Appeals)-III,121, Mahatma Gandhi Road,Chennai-600 034.2.The Assistant Commissioner of Income TaxCompany Circle-II (2)Chennai.T.C.A.No.399 of 2019MP(CO)CS/10/11/2020CS/24/11/2020