Income Tax Appellate Tribunal - Bangalore
M/S Bagmane Developers P. Ltd.,, ... vs Department Of Income Tax on 1 October, 2013
ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
Bangalore 'B'Bench, Bangalore
Before Shri N. Barthvajasankar, Vice President and
Shri George George K. Judicial Member
ITA Nos.346/Bang/2012 & 1126/Bang/2011
(Assessment years: 2007-08 & 2008-09)
Asstt. Commissioner of Vs. M/s. Bagmane Developers
Income Tax, Pvt. Ltd
Central Circle 2(3) Bangalore No.6/1-4, A Block, 8th
Floor, Bagmane Tech
Park, Lake View Building
C.V. Raman Nagar,
Bangalore 560093
PAN: AACCB 1178 M
(Appellant) (Respondent)
Department by: Shri Farhat Hussain Qureshi, DR
Assessee by: Shri B.P. Sachin Kumar, CA
Date of Hearing: 01/10/2013
Date of Pronouncement: 07/11/2013
ORDER
Per George George K. J.M. These two appeals, instituted at the instance of the Revenue, are directed against the orders of the CIT (A)-VI, Bangalore, dated:
30.12.2011 and 8.9.2011 for the assessment years 2007-08 and 2008-09 respectively.
I. ITA No.346/B/12 - AY 2007-08:
2. The Revenue has, in its Memorandum of appeals, raised eleven grounds. However, all the grounds are confined to two issues, namely:Page 1 of 23
ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore (1) that the CIT (A) erred in deleting a sum of Rs.15.5 lakhs being the amounts withdrawn from the cash book; & (2) that the CIT (A) was not justified in deleting a sum of Rs.51,87,552/- on the disallowance of interest made by the AO.
II. ITA No.1126/B/11 - AY 2008-09:
2.1. A solitary issue raised by the Revenue for this AY is that 'the CIT (A) was not justified in deleting Rs.16,56,73,063/- on the disallowance of interest made by the AO.'
3. As the issues raised in these appeals are common and pertain to the same assessee, for the sake of convenience, they were heard and disposed of by this consolidated order.
4. Briefly stated, the facts of the issues are as under:
The assessee company is carrying on its business as real estate developer and builder. A search operation u/s 132 of the Act was conducted in the case of the assessee on 14.9.2006. During the course of search proceedings for the AY under consideration, the assessee was required to explain certain cash book entries relating to the period 1.4.2005 to 3.9.2006. It appears that the MD of the assessee vide his letter dated 9.11.2006, among others, stated that the payments of Rs.15.5 lakhs made part of the year 2006-07 being inadmissible expenditure which shall not be claimed as admissible expenditure while arriving at taxable income for the said year. However, it was the case of AO that in the computation of income for the AY 2007-08, the assessee had not offered the said amount of Rs.15.5 lakhs for taxation. Being queried by the AO during the course of assessment proceedings, the assessee vide its Page 2 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore letter dated 25.11.2008 had explained that "It is written under the head 'Miscellaneous expenditure' and the same is disallowed in the computation". However, the AO had disallowed the said sum on the premise that no such disallowance was made by the assessee in its computation of income annexed to the return of income furnished. The AO had, further, noticed that the assessee debited a sum of Rs.18,30,90,206/- towards financial cost which comprised of interest on bank loans, loan processing charges, interest on rental discount and bank guarantee commission etc. He had also noticed that the break-up of the total funds available with the assessee was:
Paid up capital Rs. 3,77,42,000
Reserves & surpluses 74,65,69,508
Deferred tax liability 8,02,14,424
Secured loans 412,90,49,131
Unsecured loans 3,11,90,000
Total Rs.502,47,65,063
Accordingly, the AO held that the own funds were to the extent of Rs.86.45 crores [paid up capital + reserves and surpluses + deferred tax liability] and the remaining were borrowed funds. It was, further, noticed that the total advances and loans given to the group companies and directors of the company was Rs.98,23,99,291/- and the details of which were recorded in the assessment order. It was the stand of the AO that since the assessee had diverted the interest bearing advances to its group concerns and directors; he proposed to disallow the proportionate interest on the above advances. Accordingly, rejecting the assessee's contentions and for the reasons recorded in the assessment order, the AO held that the assessee had debited interest of Rs.18.30 crores on borrowed sum of Rs.416.02 crores, but, a sum of Rs.11,78,73,359/- out of the borrowed funds was diverted to its Page 3 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore sister concerns and, therefore, worked out the proportionate interest disallowance at Rs.51,87,552/- for the assessment year 2007-08.
4.1. Likewise for the assessment year 2008-09 also, the assessee had claimed in its P & L account 'financial cost' of Rs.39,80,73,293/- which comprised of interest on bank loans, loan processing charges, interest on rental discount, bank guarantee commission etc., As per the details furnished, the total funds available with the assessee was amounting to Rs.725.61 crores, the details of which are as under:
Paid up capital Rs. 3,77,42,000
Reserves & surpluses 77,56,74,051
Deferred tax liability 21,79,07,595
Secured loans 619,36,02,446
Unsecured loans 3,11,90,000
Total Rs.725,61,16,092
4.2. Thus, it was the view of the AO that the total funds available with the assessee including deferred tax liability other than borrowed funds was only Rs.103.13 crores whereas the assessee had advanced loans to the group of companies and directors was Rs.259.06 crores. After taking into account the assessee's lengthy submissions as well as his reasoning as recorded in the order under dispute, the AO had concluded thus:
"3.6. The assessee has not charged any interest on the loans and advances given to its sister concerns also. The assessee claims that the advances were given to the sister concerns on arms' length basis with an intention to make or earn profits from the venture and on total commercial understanding. The assessee claimed that the advances are made in the course of business and for the purposes of Page 4 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore business and for commercial reasons. However, it can be inferred that the funds advanced by the assessee were not for its business exigencies. The funds required for those companies could have been borrowed in the name of those companies itself. But instead the assessee company preferred to borrow the money in its own name and give it to those companies. It is a planning of the assessee to reduce its tax liability by claiming more interest. It is also worth mentioning that none of the companies other than Bagmane Leasing & Finance Pvt Ltd., the other companies are having no business during the year.
3.7. In view of the above, the interest relatable to the borrowed funds given by the company to its directors and its sister concerns is not allowable. On the total borrowed funds of Rs.622,47,92,446/-/-, the assessee has paid interest of Rs.39,80,73,293/- during the year. The total amount of funds given by the assessee to the directors and the sister concerns,(amounts) amounting to Rs.259,06,79,783/-. The proportionate interest relatable to this borrowed fund amounts to Rs.16,56,73,063/-. Therefore, out of the total interest of Rs.39,80,73,293/- claimed by the assessee, interest of Rs.16,56,73,063/- is disallowed..."
5. Aggrieved, the assessee took up the issues, among others, for both the assessment years before the CIT (A). After taking into account the assessee's contentions and for the reasons recorded therein, the CIT (A) had decided the issues in favour of the assessee. For appreciation of facts, the relevant portions of the reasons recorded by the CIT (A) are extracted hereunder:
A.Y. 2007-08:
(i) Cash drawings of Rs.15.5 lakhs:
"4.3. Based on the cash withdrawals made for the period from 1.4.2006 to 3.9.2006, it was presumed that the appellant wanted to use these cash withdrawals for the purposes of items covered under Explanation to sec. 37(1) of the I.T. Act. At that time, when the MD was asked, he stated that any Page 5 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore expenditure which is in the nature of items mentioned in Explanation to sec. 37(1), would be offered to tax. It is seen from the profit and loss account that the appellant has claimed miscellaneous expenditure only to the extent of Rs.52,932/- and they have not used the cash withdrawals of Rs.15,50,000/- for any purposes which are mentioned in Explanation to sec. 37(1). Apparently, when the entire miscellaneous expenditure claimed itself was only Rs.52,932/- on a total turnover of Rs.52,78,53,632/- which does not even constitute a miniscule of the total turnover and since Rs.52,932/- does not have any items mentioned in Explanation to sec. 37(1), it is held that the disallowance of Rs.15,50,000/- is not proper and the same is deleted.
(ii) Disallowance of interest on borrowed capital:
Extensively quoting and also extracting the findings of the earlier Bench of this Tribunal in ITA No.183 for the AY 2003-04 and in ITA No.382 for the AY 2004-05, dated 3.12.2010 in the assessee's own case, the CIT (A) had concluded as under:
"3.3. (On page 23) In view of the facts as stated above and also in view of the judgment of the Hon'ble Supreme Court reported in 288 ITR 1 in the case of S.A. Builders v.
CIT which is quoted by the jurisdictional Tribunal in the appellant's own case for AYs 2003-04 and 2004-05 and has held the issue in favour of the appellant, following the jurisdictional Tribunal's order on the same issue in the same assessee's case for earlier years, it is held that AO was not correct in disallowing proportionate interest debited in the accounts on advances made to its sister concerns and the directors. Hence, the addition of Rs.51,87,552/- is deleted.
A.Y. 2008-09:
(i) Disallowance of interest on borrowed capital:
Comprehensively quoting and also reproducing the findings of the earlier Bench of this Tribunal in the assessee's own case (supra), the CIT (A) had concluded that:Page 6 of 23
ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore "3.3. (On page 20) In view of the facts as stated above and also in view of the judgment of the Hon'ble Supreme Court reported in 288 ITR 1 in the case of S.A. Builders v. CIT which is quoted by the Hon'ble Jurisdictional Tribunal in the appellant's own case for AYs 2003-04 and 2004-05 and has held the issue in favour of the appellant, following the jurisdictional Tribunal's Order on the same issue in the same assessee's case for earlier years, it is held that AO was not correct in disallowing proportionate interest debited in the accounts on advances made to its sister concerns and the directors. Hence, the addition is deleted."
6. Aggrieved, the Revenue has come up before us with the present appeals. During the course of hearing, the learned DR submitted that the CIT (A) had erred in deleting the sum of Rs.15.5 lakhs being the amount withdrawn from the cash book towards payments of alleged bribes which have been agreed by the assessee during the course of assessment proceedings for disallowance of the same. It was, further, submitted that the CIT (A) ought to have appreciated the ground realities, namely:
(a) that the assessee had debited huge expenditure in its P & L account;
(b) that the expenditure of Rs.15.5 lakhs entered in its cash book and paid as alleged bribes was required to be disallowed in its computation as agreed upon;
(c) the during the scrutiny proceedings, the assessee had misled by stating that the expenditure of Rs.15.5 lakhs was debited under the head 'Misc. expenditure' under which the total amount debited was only Rs.52,932/-;
and also misrepresented that the expenditure of Rs.15.5 lakhs was added back in its computation;
6.1. With regard to the deletion of Rs.51.87 lakhs on the disallowance of interest made by the AO, the learned D R submitted that -
Page 7 of 23ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore
(a) that the CIT (A) had failed to appreciate that the directors and sister concerns of the assessee to whom loans and advances given were separate legal entities; and that the businesses of the directors and sister concerns cannot be attributed as business of the assessee's;
(b) that the CIT (A) also failed to appreciate the fact that under the facts and circumstances of the case, the assessee cannot claim interest on the loans / advances made on the premise of commercial expediency;
(c) that the CIT (A) failed to observe that in S A Builders' case, the Hon'ble Supreme Court had remanded the issue back to the Tribunal for fresh consideration;
(d) the CIT (A) also failed to distinguish the fact that in the case of S A Builders, interest free advances relate only to advances from a holding company to a subsidiary company and, hence, the judgment of the Hon'ble Supreme Court has no relevance to the issue on hand;
6.2. In respect of similar deletion of interest disallowance of Rs.16.56 crores for the AY 2008-09, the learned DR took the same line of argument as in the AY 2007-08 and urged that there was no plausible reason for the CIT (A) to resort to delete the disallowances of interest made by the AO for both the AYs under dispute. In conclusion, it was pleaded that the stand of the AO requires to be restored.
6.3. On the other hand, the submissions made by the learned AR are summarized as under:
Cash drawings of Rs.15.5 lakhs:
- that during the course of search, it was observed by the AO that expenses of Rs.42.15 lakhs and Rs.15.5 lakhs incurred Page 8 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore for the AY 2006-07 and for the period from 1.4.06 to 3.9.06 were not admissible as per the Act and, accordingly, agreed not to claim the aforesaid amount while arriving at taxable income of those two years;
- that as agreed upon, for the current year even while preparing the P & L account, the assessee did not take into consideration the sum of Rs.15.5 lakhs;
- that the AO had, however, added the sum of Rs.15.5 lakhs to the returned income. Since, the said sum was not taken into account for computing the income, the question of adding back does not arise.
Interest on borrowed capitals of Rs.51,87,552/- & Rs.16,56,73,063/-:
- that comparing the balance-sheets of this year with the earlier years, the AO came to the conclusion that the money had been lent out of the borrowed funds and that the interest referable to that require to be disallowed;
- that in and around Bangalore, some of the lands were categorized as agricultural lands and that the assessee being a company, cannot acquire agricultural lands. Only individuals were permitted to acquire agricultural lands and then seek for conversion of such lands. When the assessee decided to acquire properties, it had advanced money to an individual who acquires the property, applies for conversion and after obtaining the same develops the property. In an event of conversion being denied, the subject property was sold and the assessee had got back its money advanced to the individual;
- that whenever the assessee decided to advance money, it entered into an agreement with such individual(s). In such an agreement entered into by the assessee to whom the money had been advanced, the purpose intended and the commitment by the other concern / individual to the assessee had been clearly mentioned. Thus, the assessee had entered into few 'procurement agreement' / joint venture agreements' with certain companies/ firms and advanced monies for acquiring the properties. However, the AO treated the said advances also as not relating to the business and proceeded to disallow the interest referable to such advances;Page 9 of 23
ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore
- that it is settled law that it is not for the authority to prescribe as to how an assessee should conduct his/its business;
- relies on the following case laws:
(a) S.A. Builders v. CIT - 288 ITR 1 (SC);
(b) CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del)
- that for example, Rs.18.36 crores was advanced to Shri Veerappa, an individual, for acquiring property at Nellurhalli village and the subject property was sold by the assessee and the surplus arising thereon was shared between the assessee and the said Veerappa, the details of which are as under:
(a) total cost on purchases Rs.18.36 crores;
(b) total sale consideration Rs.30.70 crores;
(c) net profit Rs.12.50 crores The assessee's share of profit of Rs.11.88 crores from the above transaction was offered in the AYs 2008-09 and 2009-10 in the ratio of Rs.6.07 crores and Rs.5.8 crores respectively.
- that the main object of the assessee was to carry on the real estate operations. In the process of acquiring and dealing with the properties, it extended certain advances to its sister concerns for acquiring properties in the course of business and for the purpose of business only;
- that the advances were made on arm's length basis with an intention to make profits from the venture and complete commercial understanding and, thus, such advances were made in the course of business and for the purposes of business;
- that merely because borrowed funds were advanced to the subsidiary companies without charging interest, the interest on borrowed funds cannot be disallowed and such interest was deductible if the advances were given out of commercial expediency;
- that as observed by the Hon'ble Supreme Court, if the advances given to the subsidiary company are used by that company for the purpose of its business, then the interest on the borrowed funds utilized for giving such advances should be allowed as deduction u/s 36(1)(iii) of the Act.' Page 10 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore
- relies on the following case laws:
(a) C.T. Desai v. CIT 120 ITR 240 (Kar);
(b) Madhav Prasad Jatia v. CIT 118 ITR 200 (SC);
(c) CIT v. Insotex Private Limited 150 ITR 195 (Kar);
(d) CIT v. Chandulal Keshavlal & Co 30 ITR 601(SC);
(e) ITA Nos. 182,183,382 & 383/BNG/2010 in the case of
the assessee
6.3.1. In support of its submission, the assessee had also furnished the following documents/MOUs with its sister concerns:
(a) M/s Bagmane Builders Pvt. Ltd (11-12-2002) - to acquire and develop land and return to the assessee at cost + 4%;
(b) M/s Bagmane Constructions Pvt. Ltd (23.9.2005) - to acquire and develop land and return to the assessee at cost + 5%;
(c) M/s. Bagmane Leasing & Finance Pvt. Ltd (16.4.2003)-
purchase and install fittings in the premises of the assessee's premises since its articles did not permit it to do so; &
(d) M/s. Chandra Developers Pvt. Ltd (13-11-2002) - to acquire and develop land and return to the assessee at cost + 4%
- that the Agreement for sale dt 3.5.2002 between Shri Raja Bagmane, Shri V Veerappa and Mrs.Vasundhra Raja and the assessee wherein the individuals have agreed to sell the land(s) to the assessee for a consideration of Rs.20 crores;
- that on 3.3.2006, the assessee applied to the Government of India for setting up a SEZ over 15.5. hectares of land at CV Raman Nagar and subject to the accumulation of the said land, approval for SEZ was transferred from the assessee to Bagmane Builders Pvt. Ltd and that the application was filed before the date of search of the assessee's premises;
- that the lands purchased by Vasundhra Raja and Shri
Veerappa were transferred to M/s. Bagmane Builders Pvt. Ltd
to set up SEZ - copies of sale deeds have been furnished in
the Paper Book;
Page 11 of 23
ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore
- profit of Rs.20.37 crores earned on transfer of land to Bagmane Builders Pvt ltd was offered to tax for the AY 2010- 11;
- that Shri Raja Bagmane had purchased various plots of agricultural lands which were transferred to the assessee;
- that M/s. Chandra Developers Pvt. Ltd was primarily established for the purpose of acquisition of lands by way of auctions and development of properties over a period of time. The agreement entered into between Chandra Developers Pvt. Ltd and the assessee subscribe that -
"Whereas pursuant to the above, the first party (Chandra Developers Pvt. Ltd) shall assemble the properties in the peripheries of Old madras Road and other areas and construct commercial/residential complex on the lands so acquired as per the designs approved by the second party (assessee)"
- that the intention of the agreements was to acquire the property being auctioned by NGEF Ltd located on the peripheries of Old Madras Road for which amount was advanced to Chandra Developers Pvt. Ltd. Though Chandra Developers Pvt. Ltd won in the bidding, claims of NGEF's bankers and employees have been upheld by the Hon'ble Supreme Court. However, Chandra Developers Pvt. Ltd was successful in its bidding for a land ad-measuring 63.32 acres from M/s Coduras Exports Private Limited.
6.3.2. In conclusion, it was the plea of the assessee that it had made advances to its directors and sister concerns during the normal course of business. It was, further, submitted that the present issue is squarely covered by the order of the earlier Bench of this Hon'ble Tribunal in ITA Nos. 182, 183, 382 & 383(BNG)/2010 dated 3.12.2010 for the AYs 2002-03 to 2005-06 in the assessee's own case. In view of the above submissions, it was prayed that the findings of the CIT (A) for both the assessment years under dispute require to be sustained.
Page 12 of 23ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore
7. We have carefully considered the rival submissions of either of the party, perused the relevant case records, case laws and other documentary evidences such as various agreements entered into by the assessee etc., produced by the learned AR in the form of paper books. The issues raised by the revenue in its appeals under dispute are dealt with issue-wise as under:
(i) Cash drawings of Rs.15.5 lakhs:
7.1. During the course of hearing, the learned AR asserted that the assessee had, in fact, agreed during the course of search proceedings that the expenses of Rs.42.15 lakhs and Rs.15.5 lakhs allegedly incurred during the AYs 2006 -07 and 2007-08 were not admissible as per the I T Act. Accordingly, it was vouched by the learned AR that while preparing P & L account for the AY 2007-08 under consideration, the sum of Rs.15.5. lakhs was not taken into consideration and, thus, the question of adding back to the total income doesn't arise. However, while concluding the assessment, the AO added the said sum to the returned income on the premise that no such disallowance has been made by the assessee in its computation of total. However, the CIT (A), while considering the issue, has stated that '(on page 25) It is seen from the profit and loss account that the appellant has claimed miscellaneous expenditure only to the extent of Rs.52,932/- and they have not used the cash withdrawals of Rs.15,50,000/- for any purposes which are mentioned in Explanation to sec. 37(1). Apparently, when the entire miscellaneous expenditure claimed itself was only Rs.52,932/- on a total turnover of Rs.52,78,53,632/- which does not even constitute a miniscule of the total turnover and since Rs.52,932/- does not have any items mentioned in Explanation to sec. 37(1), it is held that the Page 13 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore disallowance of Rs.15,50,000/- is not proper and the same is deleted.' 7.1.1. The Revenue being aggrieved, it is in appeal before us. The learned DR relied on the order of the AO. On the other hand, the learned AR reiterated the submission made before the Income- tax authorities and also relied on the reasoning of the CIT (A).
7.1.2. We have heard rival submissions and perused the materials on record. In the course of search, it was noticed by the Department that the expenses of Rs.42,15,000 incurred for the AY 2006-07 and a sum of Rs.15.5. lakhs for the period from 1.4.2006 to 3.9.2006 are not admissible as per the Income-tax Act. The assessee had agreed not to claim the aforesaid sum while arriving at the taxable income for these two assessment years. For the A.Y. 2006-07, since the P & L account was already finalised, the assessee filed a computation statement whereby a sum of Rs.42,15,000 was added back and offered as inadmissible expenses. For the current year, the P &L account was not completed as on the date of search and the assessee did not take into consideration the said sum of Rs.15.5. lakhs as deduction while computing the taxable income. On a perusal of various expenses, it is very evident that the said sum has not been claimed as a deduction and was not debited in the P & L account. Under the head 'Misc. expenses', the amount debited in P & L account was only a sum of Rs.52,932/- on a total turnover of Rs.52,78,53,632/- and, therefore, the impugned amount of Rs.15.5 lakhs was not an expenditure that was claimed as an expenditure.
Page 14 of 23ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore Thus, the disallowance of Rs.15.5 lakhs will not arise while computing the assessee's taxable income. Therefore, the order of the CIT (A) is correct and in accordance with law and, hence, the same doesn't warrant any interference. It is ordered accordingly.
(ii) Interest on borrowed capitals of Rs.51,87,552/- & Rs.16,56,73,063/- for the AYs 2007-08 & 2008-09 respectively:
7.2. The AO, comparing the balance sheets of the assessment years under consideration with that of the previous years, came to a conclusion that the monies have been advanced out of the borrowed funds and, therefore, interest requires to be disallowed proportionately. According to the AO, the assessee had failed to bring on record any substance to justify that the amounts were diverted for commercial expediency.
7.2.1. It is an undisputed fact that the assessee had carried on the business as a developer and builder. It was also a fact that most of the lands situated in and surrounding areas of Bangalore at that relevant period of time were categorized as agricultural lands and the assessee being a company could not acquire such lands on its own. To overcome this hurdle, the assessee had advanced monies to certain individuals to procure such agricultural lands on its behalf and once the properties were converted for non-
agricultural use, the same were acquired from such individuals by the assessee. While advancing monies to the individuals, the assessee had entered into agreements with them, setting-forth the purpose(s) for which monies were advanced, the commitments of such individuals/concerns etc. Likewise, the assessee had also entered into procurement/joint venture agreements with its sister Page 15 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore concerns and, accordingly, advanced monies for acquiring the lands for development by the assessee.
7.2.2. We have duly perused the agreements entered into by the assessee with individuals/sister concerns. The main purpose of the assessee's business was to carry on real estate operations. In the process of acquiring and dealing with properties, monies were advanced to its sister concerns and individuals for acquiring properties which at that relevant time were categorised as agricultural lands. The assessee being a company was prevented by the State law to buy any agricultural lands for exploitation of the same for non-agricultural purposes. To outsmart such restrictions imposed by the State Government, the assessee had indulged by roping in the individuals by advancing monies to buy agricultural lands on its behalf and get them converted into non-agricultural purposes etc. As a matter of fact, the assessee had entered into agreement on 3.5.2002 with Shri Raja Bagmane, Managing Director of the assessee, his wife Smt Vasundhara Raja and Shri V Veerappa [father-in-law of Shri Raja Bagmane] to purchase the agricultural lands in their names, convert them for non-agricultural use and subsequently transfer them to the assessee [Courtesy: P 21 to 33 of PB AR]. As far as the advancing of monies to the assessee's sister concerns without charging interest are concerned, it is noticed, by examining the agreements/MOU entered into with its sister concerns, that the monies advanced for example to (i) Bagmane Builders Pvt. Ltd.,(ii) Chandra Developers Pvt. Ltd and (iii) Bagmane Constructions Pvt. Ltd were to acquire and develop lands and also finance the construction till such a time the sister concern was able to secure finance from the bank(s) for the project or find an investor Page 16 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore for the project and that on completion of construction on the properties so acquired, the sister concern(s) shall assign the area on the basis of the cost + 4% or 5% [as the case may be] margin to the assessee for the amounts paid by the assessee in pursuant of the arrangement entered into. Likewise, the assessee had advanced money to its sister concern, namely, Bagmane Leasing & Finance Pvt. Ltd [as per agreement dated 16.4.2003 - courtesy: Pages 11 to 15 of PB AR] to purchase and provide fittings and office equipment to its premises let out to Motorola. It is also noticed that the above mentioned agreements contained a clause that 'the assessee would advance funds to its sister concerns to meet the cost of acquisition of land and fittings, installation of the same, construction of buildings etc.', It is also significant to note that the assessee being a renowned developer in developing technical park(s), in view of the fact that per client exposure from bank(s) likely to exceed for its present projects and the assessee may not be able to get financial assistance from banks and investors for the project envisaged, Bagmane Constructions Pvt. Limited was established as a Special Purpose Vehicle to overcome the hurdle which may be imposed by the banks for extending financial assistance to the assessee.
7.2.3. As mentioned above, the assessee, while advancing monies, had entered into agreements, duly incorporating the intention of advancing such monies. On a careful examination of such agreements, it is observed that the purpose of monies advanced, terms and conditions have been duly spelt out. It is obvious that the advances were made in the course of business and for the purposes of the assessee's business only. For example, the assessee had made an advance of Rs.11.56 crores to Shri Veerappa Page 17 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore for acquiring lands as the assessee could not purchase the lands in its name in view of the Karnataka Land Reforms Act, 1974. However, Shri Veerappa had sold those lands to a third party on their conversion and the profit of Rs.11.88 crores received by the assessee was offered by the assessee for taxation during the AYs 2008-09 & 2009-10. This belies the AO's observation that the advances were given for the personal requirements of the directors/sister concerns. It is also observed that by making such advances, the assessee had earned a significant profit and also got registration of few lands. As per the details furnished, the advances given to a few sister concerns were in the process of constructing the buildings and as such, the transactions are still incomplete. One of the reasons given by the AO for rejecting the agreements was that they were not found at the time of search. This observation of the AO is irrelevant since the search party was not expected to record or seize every paper. In other words, non-seizure of agreement copies by the search party is not an indication about the existence/genuineness of the agreements. Yet another reason given by the AO for rejecting the agreements is that they were time- barred. It is to be mentioned that the limitation starts from the date of default and not earlier. Moreover, even if the remedy under specific Relief Act is not available, the aggrieved party can seek relief under CPC.
7.2.4 It is, further, observed that the assessee had made an application on 3.3.2006 with the Competent Authority for setting up a Special Economic Zone [SEZ]. As certain conditions were to be fulfilled for establishing SEZ, one of which was to establish Electronic Hardware and Software or Information Technology Page 18 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore enabled services, a minimum area requirement of 10 Hectares of land with minimum built up area of one lakh square meters. It is noticed that since Bagmane Builders Pvt. Ltd [BBPL] was already in possession of certain piece of land and to develop SEZ in existing special purpose vehicle, the assessee assigned the rights of the agreement of certain lands to BBPL as provided in clause 7 of the sale deed dated 4.11.2009 [Refer: P 36 of PB AR]. Accordingly, Shri Raja Bagmane, Smt. Vasundhara Raja and Shri Veerappa have registered the lands in the name of BBPL and also the assessee being a confirming party to all those sale deeds. The application for transfer of approval of SEZ from BDPL to BBPL was made and the same was approved by the Ministry of Commerce & Industry (SEZ), Government of India vide their letter dated 4.10.2010. It is also noticed from the details furnished at page 83 of the Paper Book [schedule to profit & loss account] that by virtue of the above transaction, the assessee had earned assignment income of nearly Rs.20.37 crores which was duly disclosed in the assessee's return of income for the AY 2010-11.
7.2.5. The above narration makes it explicit that the agreement with Shri Raja Rajmane, Smt. Vasundhara Raja and Shri Veerappa and also application for setting up of SEZ dated 3.3.2006 were prior to the search of the assessee's premises which took place on 14.9.2006. It was, further, observed that the survey numbers mentioned in the SEZ application were identical to that of the survey numbers finding a place in the agreement dated 3.5.2002. Ostensibly, this belies the AO's observation that ''the 'procurement agreement' and the 'agreement for sale' are only 'afterthought's of the assessee and a camouflage for the actual nature of transaction Page 19 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore with the company.'' [Source: Para 4.6 of the asst. order for AY 2007- 08].
7.2.6. On a careful perusal of various details as contained on pages 96 to 133 of the paper book, it is noticed that the activities of purchase and conversion of agricultural lands were continued much before the date of search of the assessee's premises which augment the assessee's assertion that the funds were transferred for furtherance of the assessee's business only.
7.2.7. It is also brought to the reference of this Bench by the learned AR that while concluding the assessments in the case of the sister concerns and directors of the assessee for the previous assessment years, the AO had invoked the provisions of s. 2 (22)(e) of the Act for having received advances from the assessee. When the issue went before the earlier Bench of this Tribunal, it was decided that the advances given were business advances out of commercial expediency and not a loan/advance coming within the purview of the provisions of s. 2 (22)(e) of the Act. Accordingly, the entire additions made in the hands of the assessee's sister concerns and directors as 'deemed dividend' u/s 2(22) (e) of the Act were deleted. Following are the orders passed by the Tribunal in respect of the sister concerns and director Shri Raja Bagmane:
> M/s. Vagai Investments Pvt. Ltd v. ACIT - ITA NO.453/Bang/2010;
> Bagamane Builders Pvt. Ltd v. ACIT - ITA No.447 to 450/Bang/2010;
> Bagamane Realtors Pvt. Ltd v. ACIT - ITA No.445/Bang/2010;Page 20 of 23
ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore > Chandra Developers Pvt. Ltd v. ACIT - ITA No.458 to 461/Bang/2010;
> Bagamane Constructions Pvt. Ltd v. ACIT - ITA No.446/Bang/2010;
> Bagamane Leasing & Fin. Pvt. Ltd v. ACIT - ITA Nos.442 to 444/B/2010; & > Raja Bagamane v. ACIT - ITA Nos. 484 to 490/Bang/2010 7.2.8. As rightly pointed out by the learned AR, the earlier Bench of this Tribunal had an occasion to consider an identical issue to that of the present one in the assessee's own case in ITA Nos.182, 183, 382 & 383 (Bang)/2010 dated 3.12.2010 for the assessment year 2003-04. After careful consideration of rival submissions and for the elaborate reasons recorded therein, the Hon'ble Bench had concluded as under:
"16.4.In a nut-shell, the documentary proofs produced by the assessee as well as ruling of the Hon'ble Supreme Court cited supra [S.A. Builders v. CIT 288 ITR 1 (SC)] belie the stand of the Revenue on this point. The authorities below were not justified in disallowing the interest of Rs.1,47,548/- as claimed by the assessee as a deduction... ...."
7.2.9. The stand of AO was that the advances were not related to its business and, therefore, the interest claimed requires to be disallowed. In this connection, we refer to the judgment of the Hon'ble Supreme Court in the case of S.A. Builders v. CIT reported in 288 ITR 1 (SC). The Hon'ble Court has held that "the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The expression "commercial expediency"
is an expression of wide import and includes such expenditure as a Page 21 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency."
While arriving at such a conclusion, the Hon'ble Court had ratified the ratio laid by the Delhi High Court in the case of CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del). The relevant portion of the Hon'ble Apex Court's observation is extracted as under:
"31. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits."
7.2.10. Taking into account all the facts and circumstances of the issue as discussed in the fore-going paragraphs, in conformity with the judgment of the Hon'ble Supreme Court and also the findings of the earlier Bench of this Tribunal (supra), we are of the considered view that the CIT (A) was justified in deleting the Page 22 of 23 ITA Nos.346 of 2012 and 1126 of 2011 Bagmane Developers Pvt Ltd Bangalore additions of Rs.51,87,552/- and Rs.16,56,73,063/- for the assessment years 2007-08 and 2008-09 respectively. It is ordered accordingly.
8. In the result, the Revenue's appeals for the AYs 2007-08 and 2008-09 are dismissed.
Order pronounced in the Open Court on 07th November, 2013.
Sd/- Sd/
(N. Barthvajasankar) (George George K)
Vice President Judicial Member
Bangalore dated 07th November, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, ITAT, Bangalore
6. Guard File
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Bangalore Benches, Bangalore
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