Principal Commissioner Of Income Tax-4 v. Gaursons Realty Pvt. Ltd.through:mr. S. Krishnan, Advocate

$~3 *IN THE HIGH COURT OF DELHI AT NEW DELHI+ITA 1159/2018 PRINCIPAL COMMISSIONER OF INCOME TAX-4 ..... Appellant Through:Mr. Raghvendra Singh and Ms. EashaKadian, Advocates. versus GAURSONS REALTY PVT. LTD.Through:Mr. S. Krishnan, Advocate. ..... Respondents CORAM:HON'BLE MR. JUSTICE VIPIN SANGHIHON'BLE MR. JUSTICE SANJEEV NARULAO R D E R%13.02.2020 1. The present appeal is directed against the order dated 07.05.2018 passed bythe Income Tax Appellate Tribunal, Delhi Bench ‘C’ New Delhi in ITA No.753/De1/2018 and SA No. 107/De1/2018. The aforesaid appeal relates to theassessment year 2014-15. The Tribunal by the impugned order has allowed thesaid appeal preferred by the Respondent- assessee and deleted the disallowanceof interest made by the Assessing Officer of the amount of Rs. 5.68 crores. Thedisallowance was made by the Assessing Officer by holding that the assesseehad obtained interest bearing loans which had in turn been advanced to sisterconcerns and other associates without charging interest and that such interest-free advances were not made for business purposes.Consequently, theAssessing Officer has held that the assessee did not satisfy the condition laiddown in Section 36 (1) (iii) of the Income Tax Act. 2. Briefly stated, the facts of the case are that the assessee is engaged in thebusiness of real estate development. During the year under consideration, theassesseecompanywasdevelopingaresidentialprojectnamely 'GaurSaundaryam' at Greater Noida (West). The assessee had share holder fund ofRs. 16.70 Crore, share application money of Rs. 11.11 crore and 108.68 croreof advance received from customers. Since about 37% of the project was completed, following percentage completion method, assessee claimed 37% oftotal interest as its expenses during the year under consideration. The assesseecompany filed return of income on 28.09.2014 declaring a total income of-Rs.20,80,17,7801 for the A.Y. 2014-15. The return was selected for scrutinyand notice under section 143(2) was issued on 28.08.2015. The AO disallowedthe interest expense of Rs. 5,68,97,378/- being diversion of interest bearingfunds to its sister concern on the ground that these advances were made withoutany commercial expediency. The assessee preferred appeal before Ld. CIT(A).Ld. CIT(A) confirmed the addition made by the AO. Thereafter, appeal wasfiled before the ITAT. ITAT allowed the appeal of the assessee, rejecting thedisallowance made by the AO. Aggrieved by the said order, revenue has filedthe present appeal. 3. There are two different entities to which the amounts were either advancedas interest free loans, or wherein investment was made as share applicationmoney by the assessee. The first transaction relates to Gaursons Realtech Pvt.Ltd.. The assessee had invested Rs. 53.22 crores towards share applicationmoney and had also advanced a loan of Rs. 79.65 crores in Gaursons RealtechPvt. Ltd.The submission of learned counsel for the Appellant is that theAssessing Officer had undertaken a forensic examination of the money trail andfound that the loans received from the two Banks namely, Bank of Baroda andAndhra Bank aggregating to Rs. 158.50 crores, had been channeled by theassessee inter alia to Gaursons Realtech Pvt. Ltd. The Tribunal has found that,as a matter of fact, the assessee had paid the amount of Rs. 79.85 crores onbehalf of Gaursons Realtech Pvt. Ltd. to JP Infrastructure Ltd in respect of anagreement whereunder Gaursons Realtech Pvt. Ltd. had agreed to purchaseland ad measuring 300 acres from JP Infrastructure Ltd.At the same time,there was an underlying transaction between the assessee and GaursonsRealtech Pvt. Ltd. by way of a Memorandum of Understanding dated30.03.2013, whereunder the assessee was to get land ad measuring 88,500 sq.mtrs. (which translates to about 22 acres). That apart, by investing in the sharecapital of Gaursons Realtech Pvt. Ltd. with the deposit of share applicationmoney of Rs. 53.22 crores, the assessee was to acquire a controlling stake in Gaursons Realtech Pvt. Ltd. which was also engaged in the business of realestate development. Therefore, there is a direct nexus between the expenditureincurred and the purpose of business. It has been held in Hero Cycles (P) Ltd vCommissioner of Income Tax (Central) Ludhiana [2015] 63 taxmann.com308 (SC), that once it is established that there is nexus between expenditure andpurpose of business, revenue cannot justifiably claim to place itself in arm-chair of businessman, or in the position of the Board of Directors, and to decidehow much is reasonable expenditure having regard to circumstances of case. Inthis regard, we may also note the ratio of the decision of the Supreme Court inS.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Anr.(2007) 288 ITR 1 (SC), wherein the Supreme Court held that the decisionsrelating to Section 37 of the Act will also be applicable to Section 36 (1) (iii)because in Section 37 also, the expression used is “for the purpose of business”and that while interpreting Section 37, “for the purpose of business” includesexpenditure voluntarily incurred for commercial expediency, and it isimmaterial if a third party also benefits thereby. In our view the Tribunalrightly allowed the appeal of the assessee and restored the deduction claimedby the assessee under Section 36 (1) (iii) of the Act. 4. The other transaction that the assessee undertook was in respect of the loanof Rs. 52.36 crores advanced to M/s Gaursons India Ltd. M/s Gaursons IndiaLtd. is the holding company of the assessee.The submission of learnedcounsel for the Appellant is that since M/s Gaursons India Ltd. is neither asubsidiary, nor an associate company, the advancement of loan by the assesseeto Gaursons India, to the tune of Rs. 52.36 crores, did not make business senseand therefore, it cannot be considered to be made “for the purpose of business”.On this aspect, we find that the assessee had consistently contended that it hadexcess interest free fund available with it to make investments and therefore itcould not be concluded that the assessee had invested the interest-bearing loansby advancing an interest free loan to M/s Gaursons India Ltd. without businessexpediency. The Tribunal has considered this aspect and found that as per thebalance sheet of the assessee, it was having Rs. 16.7 crores in its shareholdersfund, Rs. 11.11 crores as share application money and Rs. 108.68 crores as advances received from the customers.Thus, the assessee had interest-freefunds available with it to the tune of Rs. 136.49 crores. The interest-free loangranted by the assessee to M/s Gaursons India Ltd. was only Rs. 52.36 crores.In Commissioner of Income Tax (Large Taxpayer Unit) v Reliance IndustriesLtd. [2019] 410 ITR 466 (SC), the Supreme Court upheld the view of theTribunal that where the interest-free fund is available to the assessee which issufficient to meet its investment, it can be presumed that investments weremade from interest-free funds available with the assessee. Similarly, this Courtin Commissioner of Income Tax v DD industries [2015] 57 taxmann.com 310(Delhi) observed that where adequate funds were available during theassessment years and, since in the past the Revenue had accepted the assessee’splea in this regard and not brought the amounts to tax under Section 36 (1)(iii),the Revenue could not have taken a different view for three years in question,particularly, without any conclusion that, in fact, general reserves, surplusesand other funds were not available. Reference may also be made to the decisionof this Court in Commissioner of Income Tax v Tin Box Co. (2003) 260 ITR637, wherein it was held that the finding of the Tribunal that the Departmenthad not been able to controvert or disprove the fact that the assessee hadsubstantial capital and interest-free funds available with it, not only in thepreceding years but also in the years under consideration, which far exceededthe interest-free advances to the sister concern, is not without any evidence ormaterial and therefore, disallowance of interest was deleted. Therefore, asalready noted, in the present case, it is clear that there were sufficient interest-free funds available with the assessee, allowing them to advance the loans inquestion. Thus, the Tribunal, in our view was correct in concluding that it couldnot be said that it was the interest-bearing loan obtained from Bank of Barodaand Andhra Bank which had been advanced as interest-free loan to M/sGaursons India Ltd. 5. We therefore find no infirmity in the impugned order passed by the Tribunal.No substantial question of law arises for our consideration in view of the abovefactual findings returned by it. 6. In view of the above, the appeal is dismissed. FEBRUARY 13, 2020nk VIPIN SANGHI, J SANJEEV NARULA, J