Manipal Education and Medical Group India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that disallowance of interest u/s. 36(1)(iii) of the Income Tax Act unjustified as interest bearing funds not utilized towards purchase of capital assets (i.e. land).
Facts- The assessee is engaged in the business of providing engineering asset management and maintenance service. The case was selected for scrutiny and statutory notices were issued to the assessee.
AO further noted that the assessee has debited a sum into P&L account towards loan processing charges. On perusal of details submitted by the assessee, he observed that the loan processing charges were paid for loan for acquiring of capital assets and therefore not allowed as revenue expenditure and added to total income of the assessee.
CIT(A) upholds the disallowance of interest expenses u/s. 36(1)(iii). Being aggrieved, the present appeal is filed.
Conclusion- Held that interest bearing funds have not been utilized for the purchase of land and the assessee had sufficient interest free funds and also observed by the coordinate bench in the assessee’s own case for earlier AYs 2013-14 & 2014-15. The case law relied by the ld. AR of the assessee in his written synopsis supports the case of the assessee. After analysis of the above, we hold that the assessee has not utilized the borrowed fund for the purchase of land. The assessee has also sufficient opening cash balance as per cash flow statement. Further, the assessee’s submission that no interest bearing funds have been utilized is supported by the case laws referred by the assessee. Considering the entire facts and submissions, we hold that the land purchase by the assessee is out of non-interest bearing funds. Therefore the disallowance of interest of Rs.4.85 crores u/s 36(1)(iii) is not warranted and the same is deleted.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by the assessee is against the DIN & Order No. ITBA/NFAC/S/250/2022-23/1048076649(1) dated 19.12.2022 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC] for the AY 2015-16.
2. The issues raised in this appeal are with regard to disallowance u/s. 14A and disallowance u/s. 36(1)(iii) of the Act. The brief facts of the case are that the assessee is engaged in the business of providing engineering asset management and maintenance service. The assessee filed return of income on 30.09.2015 declaring loss of Rs.16,03,67,750. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee had specified domestic transactions but no adjustment was suggested by the TPO u/s. 92 of the Act. The AO noted that the company has made non-current investments of Rs.40,48,46,386 in equity shares and current investments of Rs.7,41,52,285. The company received dividend income on current investments of Rs.1,25,63,095 which is exempt income under the Act. Hence the AO applied section 14A and observed that the assessee has not reported any expenditure attributable to investment made to earn such exempt income. In this regard, the assessee was asked to provide note on applicability of section 14A along with computation of disallwonace u/s. 14A r.w. Rule 8D. In response the assessee furnished working of disallowance u/s. 14A @ 0.5% of average investment amounting to Rs.27,36,547 and submitted that the dividend income was earned on shares & mutual funds claimed as exempt u/s. 10(34) & 10(35) of the Act and these investments were made out of own funds, therefore no disallowance was warranted u/s. 14A. The AO noted that the assessee has made fresh investments during the year and the assessee must have employed manpower either own or consultant. He examined the issue in the light of section 14A and found that the assessee has not satisfied correctness of expenditure relating to earning of exempt income. The AO proceeded to calculate disallowance & considered the entire average value investments i.e., current & non-current investments and accordingly calculated the disallwonace as per Rule 8(2)(iii) at Rs.27,36,547.
3. The AO further noted that the assessee has debited a sum of Rs.2,86,38,749 into P&L account towards loan processing charges. On perusal of details submitted by the assessee, he observed that the loan processing charges were paid for loan for acquiring of capital assets and therefore not allowed as revenue expenditure and added to total income of the assessee.
4. The Addl. CIT after examining the records issued directions u/s. 144A of the Act to complete the assessment on the issues mentioned therein which are reproduced as under:
“1. Disallowance of interest u/s 36(1)(111):-
The following issue has been raised in the letter dtd: 04.12.2018 issued from this office on above issue.
“it is seen from the depreciation chart that you have shown addition of Rs. 14,44,37,222/-under the head building and Rs. 541, 76,651/- under the head Furniture Fixture and Electrical Fixture and Rs. 454,96,412/- under the head plant, Machinery etc. Thus the total addition of fixed asset during the year which was used for more than 180 days, is Rs. 24,59,28,739/- and which was used less than 180 days is Rs. 145,96,971/-. It is seen from the detail submitted before the AO that you have taken term loan from IDFC Ltd of Rs. 274 Crore and Rs. 37.16 Crore from Aditya Birla Finance Ltd. on which interest of Rs. 26,81,46,091/-and Rs. 459,88,666/- has been debit in account respectively. The copy of Loan sanction document of IDFC Ltd. has been filed which shows that the amended agreement was signed on 24.03.2014. Similarly, the agreement with the Aditya Birla Finance Ltd. is found to be signed on 09.05.2015 for the increase in term loan from Rs. 30 Crore to Rs. 58.3 Crore.
It is seen from the balance sheet that there is increase in the Long Term Borrowing by Rs. 125 Cr in comparison to last year and increase in reserve and surplus by Rs. 2.76 Cr. This increase is represented in asset side by increase in capitol work in progress by Rs. 90 Cr and tangible assets by Rs. 59 Cr and some investments have been sold. The increase in fixed assets includes Rs. 45 Cr of land which was purchased by the Company by taking term loan from Aditya Birla Finance Ltd. and interest of Rs. 2.76 Cr hos been debited in this account towards the term loan which is used for purchase of land. The interest of Rs. 2.76 Cr on this loan is not an allowable revenue expenditure u/s 36(1)(iii) and necessary direction will be given to the AO to capitalize it in cost of the !and.
You have debited Rs. 26.18 Cr as interest payable by the Company on IDFC rupee loan U/s 36(1)(iii). AS explained above the 90 Cr out of loan of Rs. 274 Cr has been shown as capitol work in progress. Hence, the proportionate amount of interest amounting to Rs. 8.8 Cr [Rs. 90Cr x Rs. 26.81/Rs. 274Cr] is to be disallowed as capital in nature as the addition is still in capital work in progress stage. Necessary direction will be given to the AO to disallow the above interest Rs. 8.8 Cr u/s 36(1)(iii) of the IT Act as treating it as capital in nature.
It is seen from the account that the opening WDV towards fixed assets is Rs. 208 Cr in the fixed asset schedule. You have taken loan of Rs. 274 Cr. from the IDFC Ltd. for the hostel project in Jaipur and other places. You ore given on opportunity to explain where the amount of loan taken by the Company, sanctioned on 24.03.2014 has been utilized for the business purpose. You are given an opportunity to explain the utilization of loan from IDFC Ltd for business purpose.”
The assessee has submitted the objection vide his letter dtd:10.12.2018 which is as under:
“As you are aware the company was engaged in the business of construction of hostels for the students who are studying in various Educational Institutions. Once the building is constructed the hostel room rent is collected by M/s. Manipal Integrated Services Private Limited. Thus the surplus for M/s. Manipal Integrated Services Private Limited is the amount remaining after paying the interest on loan and other expenses of the project.
(i) One of the conditions of the Financial Institution is the hostels that are being provided should be ready and only after demonstrating that their revenue is assured with hostel building and students being filled in the financial Institutions provided loon to the company. Thus the financial Institutions insist on capital being brought in by the management of M/s. Manipal Integrated Services Private Limited to be used for constructions of hostel building.
During 2013-14, Compulsory Convertible Debentures of Rs. 100 crores were issued by the Company. Thus capital contribution is the form of CCD was brought in by the management before loans are given.
Two projects were constructed by M/s. Manipal Integrated Services Private limited is Jaipur phase 1 and Jaipur phase 2. The details are given below.
Thus from the above it is very apparent that only Rs. 9 crores was used towards Capital Work in Progress of phase-1, which was funded from CCD. The initial loan taken along with CCD was used for Building which was capitalized Phase 1. The amount was replaced by the loan which was sanctioned. The amount of Rs. 100 crore of CCD was further used to construct the capital work in progress of phase 2 along with Internal accruals.
Thus we would like to inform that the total loan taken from banks are fully used for projects that are completed and the Interest that is paid should be allowed as Revenue Expenditure.
(i) As regard Interest paid on the land purchase of Rs. 2.76 crore, we would like to inform that the land is already purchased/asset put to use and the interest paid on such loan as per various High Court decisions laws con be claimed as deduction. Hence, we feel the same should not be disallowed.
(ii) With regard to your query on disallowance of Interest of Rs. 8.8 crores, please refer to our replies in point 1, and hence we feel the Interest paid should be allowed as a deduction.”
The assessee has filed further subincision on 12.12.2018 which is as under:
‘This is further to the Income Tax scrutiny of one of our clients M/s. Manipal Integrated Services Private Limited and show cause notice received from your office vide letter dated 04-12-2018 We submit herewith additional clarifications further to our letter: submitted on 10-12-201.With regard to your query on how the loan sanctioned from financial institutions are utilized, we submit the following:
Amounts in Cr.
