Income Tax Appellate Tribunal - Panji
Kumar Builders,, Pune vs Deputy Commissiner Of Income-Tax,, on 13 December, 2017
आयकर अपीलीय अिधकरण, पुणे ायपीठ "ए
ए" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
ी डी.
डी क णाकरा राव , लेखा सद य
एवं ी िवकास अव थी,
अव थी याियक सद य के सम
BEFORE SHRI D.KARUNAKARA RAO, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.2257/PUN/2014
िनधा रण वष / Assessment Year : 2010-11
Kumar Builders,
10th Floor,
Kumar Business Centre (KBC),
Opp. Bund Garden Road,
Pune - 411 001
PAN : AACFK1478L .... अपीलाथ /Appellant
Vs.
DCIT, Circle-4,
Pune .... यथ / Respondent
Assessee by : Shri Nikhil Pathak
Revenue by : Shri Ajay Modi, JCIT
सुनवाई क तारीख
/ घोषणा क तारीख /
Date of Hearing : 11.12.2017 Date of Pronouncement: 13.12.2017
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
This appeal is filed by the assessee against the order of CIT(A)-II, Pune dated 29-08-2014 for the Assessment Year 2010-
11.
2. Assessee raised 4 grounds. Before us, Ld. Counsel for the assessee submitted that Ground Nos. 2 to 4 should be dismissed either as 'not pressed' or as 'general'. Accordingly, we order. That leaves, Ground No.1 for adjudication and the same is extracted here as under :
"1. The Ld.CIT(A) grossly erred in not considering interest free funds available with the appellant for working out the proportionate disallowance of interest u/s.36(1)(iii) of the I.T. Act, 1961.2 ITA No.2257/PUN/2014
Kumar Builders
3. Briefly stated relevant facts of the case are that the assessee is a Promoter and Builder and filed the return of income declaring total income of Rs.10.05 crores (Rounded off). In the assessment made u/s.143 of the Act, AO determined the assessed income at Rs.11,60,61,126/-. Apart from other additions above, AO made an addition u/s.36(1)(iii) r.w.s. 14A of the Act. The same is subject matter of the present appeal and it relates to the disallowance made u/s.36(1)(iii) of the Act amounting to Rs.81,52,033/-. Relevant facts are discussed by the AO in Para No.4.3 and the same is summarized as under :
Assessee claimed financial expenses aggregating Rs.9,60,86,241/-. During the assessment proceedings, AO noticed granting of interest free advances/loans to the related concerns/ or partners of the firm-the assessee amounting to Rs.12.46 crores (Rounded off) as on 31-03-2010. Assessee was asked to explain as to why proportionate interest amount should not be disallowed out of the deduction claim made under financial expenses on account of diversion of interest bearing funds for the purpose of giving interest free loans and advances to the relates parties. In response, the assessee furnished the written submissions dated 22-02-2013. In the said reply, it is the claim of the assessee that entire funds have been utilized solely for the business purposes and therefore, no disallowance is warranted. Assessee's explanation was not accepted by the AO considering the fact that an amount of Rs.12.46 crores (Rounded off) was undisputedly given to the partner/sister concerns for non-business purposes. Accepting the fact that assessee maintains hybrid accounts containing both interest free as well as interest bearing funds, the AO applied the formula laid down in Rule 3 ITA No.2257/PUN/2014 Kumar Builders 8D of the I.T. Rules, 1962 and quantified the disallowance at Rs.81,52,033/-. The calculations are given in Para No.4.3.2 of the assessment order. AO disallowed the same u/s.14A r.w. Rule 8D and the CIT(A) dealt this issue u/s.36(1)(iii) of the Act.
4. Aggrieved with the same, assessee filed an appeal before the CIT(A) vide Ground No.2 of the appeal. CIT(A) adjudicated the said issue and the contents of Para Nos. 4 along with its sub paragraphs upto Para No.4.4 (Page Nos. 16 to 23 of the order) are relevant. During the proceedings before the CIT(A), assessee submitted interest free advances were given to the partners/group concerns. Assessee also submitted that out of the total interest free advances, an amount of Rs.10,82,97,853/- relates to the advance given to Shri Lalit Kumar Jain, the partner of the firm. Mr. Jain stood as guarantor for all the loans availed by the assessee firm from the banks and the same constitutes business purposed. Therefore, the loans given by the firm to Shri Lalit Kumar Jain cannot be considered having no business considerations. It is pleaded before the CIT(A) that the advances paid to Shri Lalit Kumar Jain should not be considered while working out the disallowance of interest expense, if any. He also made a prayer with regard to netting of an amount of Rs.56,25,000/- which was wrongly included by the assessee under the head "financial expenses". Further, assessee relied on various High Court/Supreme Court judgments viz. in the case of JCIT Vs. Beekay Engineering Corporation 325 ITR 384, Munjal Sales Corporation Vs. CIT and Another 298 ITR 298 (SC), CIT Vs. Hotel Savera 239 ITR 795 (Mad.) and CIT Vs. Prem Heavy Engineering Works Pvt. Ltd. 285 ITR 584 (All.). CIT(A) considered the same and dealt with this issue of interest disallowance of Rs.81,52,033/- on proportionate basis and also 4 ITA No.2257/PUN/2014 Kumar Builders considered the fact about granting of interest free funds to Shri Lalit Kumar Jain amounting to Rs.10,82,97,853/- and the same is evident in his order. Further, the CIT(A) considered various decisions relating to the principle of commercial expediency (S.A. Builders Ltd. Vs. CIT 288 ITR 1 (SC), CIT Vs. H.R. Sugar Factory Pvt. Ltd. 187 ITR 363 (All.)) etc. CIT(A) favourably considered the fact of reducing the amount of Rs.56,25,000/- from the total financial expenses of Rs.9,60,86,241/- and eventually, the AO was directed to rework the disallowance on proportionate basis taking into consideration the financial expenses of only Rs.9,04,61,241/- (netting of after reducing the said amount Rs.56,25,000/- wrongly booked). To that extent, the claim of the assessee was partly allowed by the CIT(A).
5. Aggrieved with the same, the assessee is in appeal before us. There is no appeal filed by the Revenue on the part relief granted by the CIT(A).
6. Before us, Ld. Counsel for the assessee narrated the above facts of the case and submitted that no disallowance is called for on account of interest disallowance on the reasoning of diversion of interest bearing funds towards interest free advances granted by the assessee firm to the related concerns or partner of the firm. Ld. counsel brought our attention to Page No.8 of the paper book (copy of balance sheet as on 31-03-2009 to 31-03-2010) and mentioned that the same evidences the availability of the own or interest free funds. Further, bringing our attention to the interest free advances to the concerns/Shri Lalit Kumar Jain, Ld. Counsel for the assessee submitted that an amount of Rs.12.40 crores (Rounded off) was the pay out. Therefore, it is the case where the funds diverted is much 5 ITA No.2257/PUN/2014 Kumar Builders less than the interest free funds available with the assessee in the form of partners capital. He also submitted that, during the year assessee earned the profit of Rs.5.24 crores (Rounded off). Contents of Page 17 of the paper book is relevant. According to Ld. Counsel for the assessee, sufficient funds are available for giving interest free advances to the partners/concerns and no disallowance on proportionate basis u/s.36(1)(iii) is warranted. Further, he brought our attention various to the following judgments/decisions of the Tribunal/High Court to support his case and submitted that when the assessee maintains hybrid accounts containing both interest bearing and interest free funds, the presumption would that the non interest bearing funds are diverted towards interest free advances and therefore no disallowance is warranted u/s.36(1)(iii) of the Act.
"1. ACIT Vs. Kumar Urban Development Pvt. Ltd. and vice versa - ITA Nos. 39 and 46/PUN/2015 for A.Y. 2010-11 order dated 31-10- 2017
2. Trinity India Limited Vs. DCIT - ITA No.666/PN/2012 for A.Y. 2009-10 order dated 28-08-2013
3. CIT Vs. Sharada Erectors Pvt. Ltd. dt. 03-10-2016 76 taxmann.com 107 (Bombay)
4. ACIT Vs. Sharada Erectors Pvt. Ltd. and vice versa - ITA Nos. 472, 566 and 906/PN/2010 for A.Yrs. 2004-05 and 2005-06 order dated 25-06-2013
5. Universal Construction Machinery and Equipments Ltd. Vs. ACIT - ITA Nos. 1465, 1466 and 975/PN/2013 for A.Y. 2009-10 order dated 10-04-2015"
7. In response to the above submission of the assessee, Ld. DR for the Revenue submitted dutifully stating that this is the case where funds are obviously diverted by the assessee firm to the extent of Rs.12.46 crores (rounded off) to the benefit of the partners/concerns. In the absence of establishing the commercial nexus, the disallowance is certainly warranted for diversion of these funds for 6 ITA No.2257/PUN/2014 Kumar Builders non-business purposes. Further, bringing our attention to page No.8 of the paper book (copy of balance sheet), Ld. DR for the Revenue submitted that the partners' capital normally constitutes an interest bearing fund. It always comes as a liability of the firm to pay interest by the firm. Further, bringing our attention to the breakup of Schedule 18 relating to financial expenses (page 9 of the paper book is relevant), Ld. DR submitted that Schedule 18 does not indicate any payment of interest by the firm to the partners capital or otherwise. He read out the financial expenses amount of Rs.9.60 crores (rounded off) and inferred for him that payment of Rs.61,281,445/- on account of 'interest paid to others' may relate to the said interest payment made to the partners capital. Considering the absence of commercial nexus of the said diverted loans and also considering the use of funds by the partner, Ld. DR submitted that the decision of the CIT(A) is fair and reasonable and the same should be confirmed. Ld. DR also was critical of the decisions cited by the Ld. Counsel for the assessee and submitted that they are all distinguishable on facts.
8. During the rebuttal time, Shri Nikhil Pathak, Ld. Counsel for the assessee clarified the details relating to the interest paid to others and submitted the same relates to unsecured loan creditors which is around Rs.20.88 crores (rounded off) as per Schedule 3 of the balance sheet. He also brought our attention to the facts relating to payment of interest to the partners of the firm. Mentioning that the assessee firm never paid interest to the partners, Ld. Counsel submitted that Rs.36.61 crores (rounded off) shown in the partners' capital constitutes interest free funds which form part of the total funds out of which only Rs.12.46 crores (rounded off) was diverted for the business purposes. Proportionately, the diverted funds are much 7 ITA No.2257/PUN/2014 Kumar Builders lower than the interest free funds. Therefore, the presumption would be that interest free funds were diverted for advancing loans to the persons/related concerns. Therefore, no disallowance u/s.36(1)(iii) of the Act is called for as per the binding of the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 and CIT Vs. HDFC Ltd. 366 ITR 505.
9. We heard both the parties on this limited issue of presumption based relief to be granted to the assessee with regard to the diversion of funds when excess interest free funds are available in the common kitty of the assessee firm. We have also considered the various arguments and written submissions made by both the parties as well as the decisions cited by them before us. We have also considered the objections of the Revenue with regard to establishing of business connection and absence of interest free funds.
10. Regarding the interest free funds, it is undisputed fact that the total partners' capital is Rs.36.61 crores (rounded off) and the reliance is based on contents of page 8 of the paper book (copy of balance sheet) for the relevant period. The funds diverted by the assessee are obviously lesser than the said amount of partners' capital. It is clarified adequately that said amount of partners' capital is not an interest bearing loans from the firms. Assessee never paid interest to the partners for all the years including the year under consideration. Therefore, it cannot be said that the partners' capital is not an interest free funds of the assessee. Considering this fact, we are of the view that availability of interest free funds is much higher than the funds diverted by the assessee. On this reasoning, we are of the opinion that the decisions of the jurisdictional High Court in the 8 ITA No.2257/PUN/2014 Kumar Builders cases of CIT Vs. Reliance Utilities and Power Ltd. and CIT Vs. HDFC Ltd. (supra) are rightly invoked and applied to the facts of the present case.
11. Regarding the business nexus and use of the said diverted funds for business purposes of the assessee, we are of the view that this issue now stands covered in favour of the assessee by various decisions including our decision in the case of ACIT Vs. Kumar Urban Development Limited for A.Y. 2010-11 vide order dated 31-10-2017. For the sake of completeness of this order, we proceed to extract the relevant paragraphs from the said order of the Tribunal. It is finding of the Tribunal in the said case that the provisions of section 36(1)(iii) cannot be invoked in respect of funds diverted when such diverted funds are much less than the interest free funds available in the common kitty of the assessee. Relevant operational paragraph is reproduced here as under :
"8.4 In respect of ground No. 4 relating to disallowance of interest expenditure u/s. 36(1)(iii), the ld. AR submitted that the Assessing Officer has made disallowance of interest Rs.3,34,62,116/-. This disallowance was made by Assessing Officer in respect of interest paid by the assessee to its sister concerns. In first appeal the Commissioner of Income Tax (Appeals) held that advances given to two concerns viz. Kumar Housing Corporation Ltd. and Kumar Sinew Developers Pvt. Ltd. are for non business purposes. The Commissioner of Income Tax (Appeals) in para 4.3.15 of the impugned order has computed total interest disallowance at Rs.5,34,01,201/-. In respect of amounts advanced to the above two concerns, the ld. AR submitted that after reducing interest disallowance made by Assessing Officer, the Commissioner of Income Tax (Appeals) enhanced the income of the assessee by Rs.1,99,39,084/-. The Commissioner of Income Tax (Appeals) has worked disallowance on daily basis. The maximum amount outstanding in respect of amounts advanced to the aforesaid two concerns is to the tune of Rs.108.82 crores. The ld. AR submitted that the assessee has its own interest free funds available in excess of peak amount advanced. The ld. AR referred to the balance sheet of the assessee company at page 13 of the paper book. The ld. AR contended that since the assessee has own funds much more than the amount advanced, no disallowance of interest is warranted. To further buttress his submissions the ld. AR submitted that in assessment year 2009-10 the assessee demonstrated before the Tribunal that own funds of the assessee were much more than the amount advanced. The Tribunal decided the issue in favour of the assessee holding no disallowance of interest is warranted."9 ITA No.2257/PUN/2014
Kumar Builders
12. Considering the same, we are of the view that in the facts of the present case, there is no requirement for the assessee to establish utility of the said diverted funds for business purposes when said diverted funds are from the interest free funds in the kitty of the assessee firm. Accordingly, Ground No.1 raised by the assessee is allowed.
13. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on this 13th day of December, 2017.
Sd/- Sd/-
(VIKAS AWASTHY) (D. KARUNAKARA RAO)
याियक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 13th December, 2017.
सतीश
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-II, Pune
4. CIT-II, Pune
5. िवभागीय %ितिनिध, आयकर अपीलीय अिधकरण, "A Bench"
Pune;
6. गाड फाईल / Guard file.
आदेशानुसार
/ BY ORDER,स
स यािपत ित //True Copy//
//True Copy// Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune