Income Tax Appellate Tribunal - Mumbai
Trimax Datacenter Services Ltd, Mumbai vs Dcit Rg 10(2), Mumbai on 18 August, 2017
आयकर अपील
य अ धकरण "E" यायपीठ मंब
ु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A. No. 107 7/Mum/2015
( नधा रण वष / Assessment Year : 2011-12)
Trimax Datacente r Services बनाम/ Income Tax Officer - Ward
Limited, 14(3)(2),
v.
Universal Mill Building, (Erstwhile Range 10(2 )),
Asha Usha Comp ound, Room No. 458, 4 t h floor,
Me hra Estate, Aayakar Bhavan,
L.B.S. Marg, Vikhroli (W), M.K. Road,
Mumbai - 400 079. Mumbai - 400 020.
थायी ले खा सं . /P AN : AADCT0232 D
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Assesseeby : Shri Vimal Punmiya &
Shri Bharat Kumar
Revenue by : Shri V. Justin
ु वाई क तार ख / Date of Hearing
सन : 10-08-2017
घोषणा क तार ख /Date of Pronouncement : 18.08.2017
आदे श / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being ITA No. 1077/Mum/2015, is directed against the appellate order dated 30.01.2015 passed by learned Commissioner of Income Tax (Appeals)- 22, Mumbai (hereinafter called "the CIT(A)"), for assessment year 2011-12, appellate proceedings before learned CIT(A) had arisen from the assessment order dated 23.01.2014 passed by the learned Assessing Officer ( hereinafter called "the AO") u/s 143(3) of the Income-tax Act, 1961 (hereinafter called "the Act") passed by A.O. 2 ITA 1077/Mum/2015
2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the Tribunal") read as under:-
"1. The learned CIT Appeal has erred in confirming disallowances of interest Rs l,48,96,056/- by assessing officer in assessment order.
A. Disallowance of interest u/s 36(1)(iii) of
Rs.l,48,96,056/-
2. The learned CIT (appeal) has not considered submission of appellant
(a) That these advances were not for extension of business where 36(1)(iii) applicable.
(b) That notional interest of Rs.l,48,96,056/- is calculated without considering actual rate of interest and date of advance given.
(c) That there was a cash profit of Rs.5,75,27,704/- earned by the appellant during the year.
(d) That in practical market how it is difficult to cancel the order and recover the money.
3. The appellant pray that the Assessing officer may be directed to delete the disallowances of interest of Rs.l,48,96,056/-
3. The brief facts of the case are that the assessee is engaged in the business of setting up, running and maintaining data centers, IT enabled and maintenance services, IT consultancy services, dealing in networking items.
4. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act, the assessee was asked by the AO to provide the details of loans and advances given by the assessee company during the year, purpose for which it had been given and to state as to whether it was given interest free. It 3 ITA 1077/Mum/2015 was also show caused by the AO as to why equivalent interest at prevailing market rate should not be disallowed out of the gross interest expenses claimed as deduction on the ground of not having been incurred wholly and exclusively for the purpose of the business as required u/s 37(1) of the 1961 Act.
The assessee company submitted that total advances of Rs. 10,64,00,398/- was outstanding as at the end of the year, which was claimed by the assessee to be made by the assessee for the purposes of purchase of fixed asset.
The A.O. observed from the perusal of Balance Sheet of the assessee company that the assesseee has utilized the funds for various purposes during the year which were mainly borrowed funds as the share capital of the company was Rs.18 crores while it has total loan liability of Rs. 96.97 crores. It was observed by learned AO that the unsecured loan had increased to Rs. 44.31 crores as at 31st March, 2011 as against unsecured loan of Rs. 29.20 crores as at 31st March 2010 , and the assessee had debited total interest expenses of Rs. 11,15,68,076/- in the Profit & Loss account. It was also observed by the AO that the assessee company has accumulated loss of Rs. 6.73 crores as at 31.03.2011.
It was also observed by the AO that interest free advances were given by the assessee for purchase of fixed asset which assets were not put to use during the year.
The assessee explained that during the previous year relevant to the impugned assessment year, the assessee had given certain advances to purchase additional equipment for existing data centre project at Bangalore but in the next year the assessee decided not to put additional equipments and with great difficulty the assessee could recover the original amount of 4 ITA 1077/Mum/2015 advances. The assessee has produced copies of purchase orders, date wise and party wise detail of business advances given and received back and ledger account etc. before the AO.
The A.O., however, rejected the contention of the assessee whereby it was observed by the AO that the advances had been given during a long period of time starting from 17.10.2008 to 20.12.2010 while in none of the cases, purchase of fixed assets had been made during any of the intervening years.
It was observed by the AO that the assessee submitted self made copies of purchase order for purchase of fixed assets , wherein the AO observed that it has following discrepancies:-
"i. In all the cases of purchase order, the assessee company has merely referred to the telephonic discussion and there is no mention of any quotation or any other details of the product being ordered being supplied to the assesse before placing the order.
ii. In many of the cases, no specific details such as configuration, model, technological specifications are mentioned and instead vague & general details such as "Desktop PC-100 nos, high end server" are mentioned in the purchase orders. However, in the nature of the business activities of the assessee, it is highly important to specify in detail the exact configuration of the product being ordered so as to avoid any miscommunication as the products used in the business of the assessee are required to be of exact specifications.
iii. In none of the purchase order, the date of delivery is mentioned and it is simply stated that delivery date will be informed by letter.
iv. It is highly improbable on the test of human probabilities that such huge amounts of borrowed money would be advanced by the assessee company to the unknown vendors for such a long period of time ranging from few months to 5 years without there
5 ITA 1077/Mum/2015 being any security of the amount advanced or any actual purchase being made either in part or full.
v. There is no confirmation from the alleged supplier of having received such advance for the purpose of the so-called purchases. There is also no documentary evidence to establish the receipt by the alleged supplier of the so-called purchase order."
Thus, the A.O. concluded that interest on borrowed capital for the purposes of making advances for purchase of fixed assets cannot be allowed u/s 37(1) or 36(1){iii) of the Act as the assessee failed to establish that the said advances were given for legitimate business need of the assessee as the said interest on borrowed capital was not being incurred wholly and exclusively for the purpose of the business.
It was further held by the AO , without prejudice to the above conclusion that the proportionate interest expenses on the borrowed funds used by the assessee for making advances is not allowable under proviso to section 36(1)(iii) of the Act because the said fixed asset has not been put to use, for the following reason:-
"i. The assessee company has made advances of Rs. 10,64,00,398/- for the purpose of acquisition of fixed asset for extension of the existing business. The purpose of acquisition of these assets is to set up a new unit augmenting the existing capacity of the assessee company to extend the existing business of the assessee.
ii. The assessee company has used the borrowed funds for the purpose of making these advances, as there are no own funds available to the assessee company as discussed in the para 4.2 above.
iii. the assessee company has also not claimed at any time during the assessment proceedings that the source for making these advances is out of the internal accruals. The onus is on the
6 ITA 1077/Mum/2015 assessee company to establish with evidence that source of making advances is interest free funds, which has not been discharged by the assessee. Further, the assessee could not have been able to take such as stand as the only free funds available to the assessee is out of the loan liability.
iv. The proviso to section 36(1)(iii) clearly provides that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books or not) shall not be allowed as deduction for any period beginning from the date on which capital was borrowed for acquisition of the asset till the date on which such asset was first put to use.
v. In view of the above discussion, the case of the assessee is clearly covered by the proviso to section 36(1)(iii) of the Act as in the instant case, no asset has ever come into existence and hence, the question of it being ever put to use does not arise at all. Hence, the interest expenses in respect of the borrowed capital employed for making these advances are to liable to be disallowed as deduction for the entire period from the time of making advances to the end of the year i.e. 31.3.2011."
Thus, the A.O. worked out interest on advances amounting to Rs. 1,48,96,056/- which is relatable to the advances paid for acquisition of the said fixed assets and disallowed the same by adding to the income of the assessee , vide assessment order dated 23-1-2014 passed by the AO u/s 143(3) of the 1961 Act, as detailed hereunder:
Loans taken during the year(secured and 789740208 unsecured) Interest paid 111303728 Rate of interest paid 14% Interest free advance givern 106400398 Interest @ 14% on Rs. 106400398/- 1,48,96,056
5. Aggrieved by the assessment order dated 23-01-2014 passed by the A.O. u/s 143(3) of the 1961 Act, the assessee filed first appeal before the ld. CIT(A).
7 ITA 1077/Mum/2015
6. Before the ld. CIT(A), the assessee submitted that the assessee is engaged in the business of providing data center services to ITI Limited being a joint venture project set up at Bangalore with the capital cost of Rs.81.50 crores. It was submitted that it had given advances to the suppliers for replacement of equipment in the existing data centre without creating any additional capacity. It was submitted that no fresh loans were taken during the financial year. The assessee gave details of loan raised by it, for which the position is as under:-
S No. Name of the loan account Opening balance Closing balance as as on 01.04.2010 on 31.3.2011 (Rs in (Rs in crores) crores) 1 Trimax IT Infrastructure and 29.20 44.31 Services Limited 2 State Bank of Hyderabad 23.24 17.20 3 Bank of India 23.66 17.46 TOTAL 76.10 78.97 It was submitted that loan amount increased as the unpaid amount stood credited to loan account. It was submitted that the assessee had earned cash profit of Rs. 5.75 crores from operations during the year. It was submitted that because of shortage of funds, the assessee had dropped the idea to replace old equipment and cancelled all the orders and recovered the money with interest. It was submitted that these advances were not for the extension of assessee's business where Section 36(1)(iii) of the 1961 Act is applicable and borrowing was for the purpose of the business and the same should be allowed as revenue expense. It was submitted that to improve the quality of services, the assessee thought to replace certain equipment but due to shortage of fund the orders were cancelled. It was submitted that the AO charged interest for the full year without considering the dates of fund being utilized during the year.
8 ITA 1077/Mum/2015 The ld. CIT(A) considered the submission of the assessee and observed as under:-
"I have considered the appellant's submissions. The appellant had given advances were Rs. 10,64,00,398/- for purchase of new equipment on which AO disallowed notional interest for Rs. 1,48,96,056/- calculated @ 14% on the advances on the ground of applying proviso 1 of sec. 36(l)(iii) wherein it is held interest paid for capital borrowed for purpose of extending the existing business is to be disallowed till it was to be used for the first time. The appellant's main contention is during the year, this equipment required is not for the extension of business. The replacements of equipment in the existing data without creating any additional capacity. The appellant contends that during the year under consideration on opening balance as on 1.04.2010 the loans of appellant in the balance sheet are 76.10 crores. At the end of the year 31.03.2011 the loans as per balance sheet are Rs.78.97 crores and contends that this increase is also mainly on interest on these loans were credited to these accounts. These extra amounts which are shown in the accounts for Rs 2.87 crores is an outstanding loan as per the appellant. However, when we examined various loans, the appellant had given below the factual position of loan account which is as under:
S Name of the loan account Opening balance Closing balance as
No. as on 01.04.2010 on 31.3.2011 (Rs in
(Rs in crores) crores)
1 Trimax IT Infrastructure and 29.20 44.31
Services Limited
2 State Bank of Hyderabad 23.24 17.20
3 Bank of India 23.66 17.46
TOTAL 76.10 78.97
When we examined the above table, it is clear that the loans from State Bank of Hyderabad and Bank of India were reduced during the year. Loans from Trimax IT Infrastructure and Services Limited had increased from Rs. 29.20 crores to Rs.44.31 crores i.e .about Rs. 15 crores increase in loans during the year.
3.4 The appellant further states that there was a cash profit of 9 ITA 1077/Mum/2015 Rs.5,75,27,704/- from the operations which were utilized for the payment of advances of these equipment. The appellant also submitted details in which advances were given to various parties and in its submissions further states that this year itself advances were recovered and orders for new equipment were cancelled.
3.5 After considering the submissions of the appellant, it is clear that the appellant's loans from Trimax IT Infrastructure and Services Limited has increased by Rs. 15 crores for which appellant could not provide any evidence to show that these loans were not utilized for the purchase of equipment for extension of business.
3.6 The appellant's second contention is that amounts were recovered. Order was cancelled and amounts were recovered. However, when we examined the accounts of the appellant, it is seen that the amounts were recovered in the next year. Hence disallowance of interest has to be considered in this year only.
3.7 The appellant's third contention is that the loan is not for extension of the business but replacement of equipment for existing datacenter which appellant could not provide any evidence to prove this fact.
3.8 Hence I find there is any error in AO's disallowance of this expenditure applying proviso 1 to sec. 36(1)(iii) of the Act. Hence ground of appeal is dismissed."
Thus, the ld. CIT(A) dismissed the appeal of the assessee , vide appellate order dated 30.01.2015 passed by learned CIT(A).
7. Aggrieved by the appellate order dated 30.01.2015 passed by learned CIT(A), the assessee filed an appeal before the tribunal.
8. The ld. counsel for the assessee, at the outset, submitted that the assessee had submitted large number of documents before the authorities below which has not been appreciated in the proper context, hence, it was 10 ITA 1077/Mum/2015 prayed that the matter may be set aside to the file of the A.O. for de novo determination of the issue. The assessee has filed paper book before the tribunal running into 117 pages.The ld. counsel for the assessee drew our attention to paper book / page 29 to 35 wherein confirmation from various parties were placed. Our attention was also drawn to paper book / page 41 to 75 wherein the copy of commercial agreement for purchase of equipments with suppliers are placed. Our attention was also drawn to paper book page 76 to 85 wherein various submissions made by the assessee before learned CIT(A) and the A.O. is placed. Our attention was also drawn to paper book page 86 wherein the summary of accounts of these suppliers were placed on record and learned counsel for the assessee had contended that these amounts have been received back. It is submitted that these details were given before the authorities below whereas the A.O. erred in contending that information was not given. It is submitted that the matter can be set aside to the file of the A.O. for proper verification/ examination and de-novo determination of the issue on merits.
9. The ld. D.R. relied on the orders of authorities below and fairly submitted that the matter can be set aside to the file of the A.O. for verification/ examination and de-novo determination of the issue on merits . Thus, in nut-shell both the parties have fairly agreed that this matter need to be restored to AO for de-novo determination of the issue on merits.
10. We have heard rival contention and perused the material placed on record. We have observed that the assessee is engaged in providing data center services to ITI Limited being a joint venture project set up at Bangalore with the capital cost of Rs. 81.50 crores. ITI Limited is a Government of India Undertaking being a Public Sector Company. The assessee has a JV with the said ITI Limited and it is claimed that the assessee as part of its obligation under the said JV had given advances to the suppliers for replacement of 11 ITA 1077/Mum/2015 equipment in the existing data centre which was set up in JV with ITI Limited without creating any additional capacity in order to enhance quality of services. The assessee had claimed that it wanted to upgrade its machinery to enhance the quality of services by replacing certain equipments which was installed in JV with ITI Limited. The assessee had submitted that Rs. 10,64,00,398/- was advanced to various machinery/equipment suppliers for supply of equipments for the said upgradation of machinery to enhance quality of services by replacing certain equipments. It is claimed that the said proposal for upgradation of machinery for enhancement of quality of services was ultimately dropped due to paucity of funds and the amount was received back from suppliers with great difficulty in succeeding years. The AO has brought on record that these advances were given to equipment suppliers over a long period of time from 17.10.2008 to 20.12.2010 with no supplies of equipment forthcoming against these advances which ultimately ended with cancellation of purchase orders. The assessee has submitted that it submitted purchase orders entered into with machinery suppliers as well their confirmations , statement of accounts etc ,which are not been properly appreciated by authorities below while disallowing interest expenditure on borrowings which are attributable to these advances . One contention of the Revenue is that these so called fixed asset were not put to use and hence proviso to Section 36(1)(iii) is applicable and interest cannot be allowed as Revenue expenses. The issue also in our considered view boils down to whether these advances sought to be made to equipment suppliers were genuine or were these colorable devices adopted by the assessee to evade taxes and were part of sham transactions. Since the assessee has a JV with ITI Limited, Government of India Undertaking , all the expansion , enhancement of quality services scheme etc. as claimed by the assessee has to be in tandem ,concurrence and consent with said JV partner who is a Government of India undertaking which is subject to strict rules and regulations as are applicable to PSU and the assessee cannot unilaterally 12 ITA 1077/Mum/2015 undertake or cancel any such scheme of modernization or expansion . The assessee is directed to file all relevant communications , approvals,, copy of JV agreement and also any other agreement with ITI Limited including copies of project reports approved by ITI Limited for such enhancement of services , modernization etc , , tender documents etc with respect to the plan of upgradation/modernization/ enhancement of quality of services scheme w.r.t. data center which was approved/accepted by the said ITI Limited and the assessee being JV partners, for due consideration, examination and verification by the A.O.. The onus is on the assessee to prove the genuineness of the said transaction of granting advances to equipment suppliers . The assessee is also directed to produce the details/project report of various machinery/equipment required for the upgradation/improvement in quality of services as approved by ITI Limited, which ultimately did not materialized and got cancelled and the amount was refunded by the supplier parties. Thus, for proper verification and enquiry and establishing genuineness of the said transactions, the matter is set aside to the file of the A.O. and assessee is directed to produce all cogent evidences as detailed above before the A.O. to establish the genuineness of the transaction in context of the claim of the assessee for upgradation of the quality of service w.r.t. data center entered set up by the assessee in JV with ITI Limited. The onus is on the assessee to prove that these interest expenses are allowable in accordance with the provisions of the 1961 Act. The assessee shall be allowed by the AO to file all relevant evidences/ explanations in its defense ,which shall be admitted by the AO in the interest of justice. Needless to say that the A.O. shall provide adequate and sufficient opportunity to the assessee of being heard in accordance with principles of natural justice in accordance with law. We order accordingly.
11. In the result, appeal of the assessee in ITA No. 1077/Mum/2015 for A.Y. 2011-10 is allowed for statistical purpose.
13 ITA 1077/Mum/2015 Order pronounced in the open court on 18th August 2017. आदे श क घोषणा खुले #यायालय म% &दनांकः 18.08.2017 को क गई ।
Sd/- sd/-
(JOGINDER SINGH) (RAMIT KOCHAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मुंबई Mumbai; &दनांक Dated 18.08.2017
[
व.9न.स./ R.K., Ex. Sr. PS
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु:त(अपील) / The CIT(A)- concerned, Mumbai
4. आयकर आयु:त / CIT- Concerned, Mumbai
5. =वभागीय 9त9न?ध, आयकर अपील य अ?धकरण, मंब ु ई / DR, ITAT, Mumbai "E" Bench
6. गाडC फाईल / Guard file.
आदे शानुसार/ BY ORDER, स या=पत 9त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai