XINDIA Steels Ltd. Vs ACIT (ITAT Bangalore)
CSR expenditure, for the benefit of public towards education expenses to the schools/villages surrounding the factory of children of the villages where the factory of the assessee is situated, is business expenditure allowable as deduction u/s 37
Facts- The assessee filed return of income declaring Rs.45,62,36,080 as per the normal provisions of the Act. While completing the assessment u/s. 143 (3), the AO made the following additions by way of interest disallowed of Rs.2,37,76,873 and Corporate Social Responsibility expenditure of Rs.70,52,990. On appeal, the CIT(Appeals) confirmed the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.
Conclusion- In the instant case also, we find that the own funds were available with the assessee to the extent of Rs.463 crores as against the interest free advances of Rs.100.54 crores to Mr. V.P. Yakob and others. Accordingly, we are of the view that the revenue authorities were not justified in making the disallowance. We delete the addition in this regard.
In the present case, the assessee has spent the amount towards expenditure for the benefit of public towards education expenses by way of providing books, uniforms and constriction of drinking water facilities etc., to the schools/villages surrounding the factory of children of the villages where the factory of the assessee is situated to earn the goodwill and the long term benefit that may yield in future to earn profits. Therefore, following the coordinate Bench decision in the case of M/s. The Sandur Manganese & Iron Ores Ltd. in identical facts and circumstances, we are of the view that the expenditure incurred is wholly and exclusively for the purpose of business and the same is to be allowed as a deduction u/s. 37 of the Act.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Per Padmavathy S., Accountant Member
This appeal is at the instance of the asse directed against the order of the CIT(Appeals), Kalaburagi dated 30.12.2018 for the assessment year 2014-15.
2. Out of the various grounds raised, the main issues that arises for consideration are (i) interest on borrowed funds, and (ii) Corporate Social Responsibility [CSR] expenses.
3. The brief facts of the case are that the assessee is a company carrying on the business of manufacture of Iron Ore Pellets. The majority shareholding of the company is held by non-resident Chinese corporations and roughly 55% held by Chinese Government Companies and about 12 % held by an American Corporate.
4. The assessee filed return of income declaring Rs.45,62,36,080 as per the normal provisions of the Act. While completing the assessment u/s. 143 (3) of the Income-tax Act, 1961 [the Act], the AO made the following additions by way of iinterest disallowed of Rs.2,37,76,873 and Corporate Social Responsibility expenditure of Rs.70,52,990. On appeal, the CIT(Appeals) confirmed the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.
Interest on borrowed funds
5. The assessee company advanced certain interest-free short term loans of Rs.17,21,00,000 to Shri V P Yakob and others for purchase of agricultural land and the total advances as on 31.03.2014 amounted to Rs.100,54,00,000. The AO was of the view that the company is not allowed to purchase agricultural land and asked the assessee as to why the proportionate interest should not be disallowed regarding interest free advances/loans given to Mr. V P Yakob and also to establish the nexus between the loan offered to him for business purposes.
6. The assessee submitted that as per the ledger extract opening Balance of advances as on 1.4.2013 was Rs.83.33 crores and during the year an additional advance ofRs.17.21 crores has been given and the total advances as on 31.3. 2014 is Rs.100.54 crores. It was further submitted that the assessee company has Share Capital and Reserves to the tune of Rs.416.54 crores and has earned profit after tax of Rs.46.51 crores during the FY 2013-14. It is therefore evident that the advances are made out of capital and reserves available with the company as also from the profits earned during the FY 2013-14. Further, the borrowals from Banks outstanding as on 31/03/2014 of Rs.77.77 crores are for the working capital and the same are invested in the inventories of Rs.121.81 crores and Trade debtors of Rs.3.85 crores. The outstanding working capital loans are less than the cost of inventories for which bank have funded the assessee. Hence, no working capital has been diverted to pay toward capital advances.
7. It was further submitted that the assessee company could not purchase the agricultural lands and hence the advances were paid to Mr. V P Yacob, an agriculturist, who would purchase the agricultural lands and transfer the same to the company after the conversion from agricultural to non-agricultural land. After conversion and transfer to the company, the lands are to be used for the industrial expansion of the assessee company. The assessee company cannot carry on any agricultural activities since it is formed for the purpose of manufacture of steel pellets.
8. Since the assessee has borrowed and paid the interest on working capital loan of Rs.2.37 crores on its stock of inventories, no part of the working Capital loans has been used for the purpose of advances for Land. The assessee company has enough reserves and share capital to grant capital advances towards land. Hence no part of interest paid to bank is liable for disallowance.
9. The AO was of the view that the assessee company has given interest free loan to Shri V P Jakob for purchase of agricultural land bearing huge interest expenses of Rs.2,37,76,873 for borrowings from banks. The interest bearing borrowed funds were diverted as interest free loans to individual persons. Considering the decision of the Hon’ble Supreme Court in S.A. Builders (288 ITR 1) wherein it was held that disallowance of interest can be made on borrowed capital when the commercial expediency of utilization of such loans was not specified and proved by the assessee, and other judicial pronouncements, the AO disallowed the proportionate interest @ 14.50% and added Rs.2,37,76,873 claimed as interest cost to the income of the assessee u/s. 36(1)(iii) of the Act. He also noted that similar addition was made in the previous assessment year.
10. Before the CIT(Appeals), the assessee submitted that the assessee had net worth of Rs.463.05 crores as on 31st March 2014 and the Opening net worth as on 31st March 2013 was Rs.416. 54 crores.
This is evidenced by the Shareholders Fund as per the Audited Balance Sheet. The shareholders fund contained Share Capital and Reserves and Surplus (Comprising Securities Premium and Surplus from Profit and Loss Account). The addition to the Net Surplus from Profit and Loss Account for the F. Y. 2013-14 itself was Rs.46.51 crores. The assessee has not borrowed any interest bearing loan other than the working capital loan from Banks. The working capital loan from banks of Rs.77.78 crores is fully secured by hypothecation of Inventories, Receivables and other current assets. The total Current Assets of Inventories itself is Rs.121.82 crores as per Note 14 to the Balance Sheet. Even if it is assumed that Trade Payables of Rs.26.21 crores (as per Note No.7 to the Balance Sheet) could have been used to fund the Inventories the Net Inventory would be Rs.95.61 crores. This amount is much more than the Working Capital Loan availed by the assessee. The assessee submitted before the CIT(A) that the AO has erroneously misconstrued that the Working Capital Loan has been used to fund the Loan for purchase of agricultural land and hence has disallowed the entire interest on working capital loan during the year.
11. The CIT(Appeals) observed that the assessee had advance loan for procurement of the agricultural lands which is not part of business activity of the assessee. Thus, it cannot be said that the advance of – interest free loans are business related and it has direct observed that the assessee had advance loan for procurement of the agricultural lands which is not part of business activity of the assessee. Thus, it cannot be said that the advance of interest free loans are business related and it has direct nexus with its activity. If the assessee has business expansion plans or diversification plans it has to be separately booked as capital expenditure and cannot be claimed as revenue expenditure in the existing business. He observed that the assessee could have well utilized the Reserves & Surplus and avoided heavy amount of interest cost. The CIT(Appeals) therefore sustained the addition made by the AO.
12. Aggrieved, the assessee is in appeal before us.
13. The ld. AR submitted that assessee which is controlled by Foreign Investors, was expecting a significant market in respect of the products dealt by it during the relevant previous year. It had world class manufacturing unit located in the interior part of Karnataka at Koppal, a backward district. It had a Raw Material advantage for sourcing as it could obtain raw materials easily from the mines located in and around Bellary. With a view to expand its business, the assessee wanted to set up an additional unit on a larger scale. Accordingly it commissioned a person to identify lands which could be converted with the consent of the government agencies for industrial purposes. In line with the above, the assessee gave interest free advances to Mr. V.P. Yacob, an influentiaI agriculturist and asked him to procure land in and around the area for its expansion.
14. During the year, additionally a sum of Rs.17.21 crores was advanced out of the own funds for this purpose. The net worth position of the Assessee for the two years are as follows:-
