Disallowance u/s 36(1)(iii) unsustainable as interest bearing funds not utilized for non-business purpose

DCIT Vs Om Land Reality P. Ltd (ITAT Ahmedabad)

ITAT Ahmedabad held that disallowance of interest under section 36(1)(iii) unsustainable as interest bearing funds were not utilized for non-business purpose and interest free advances were made in the course of business.

Facts- Only two issues are the addition made related to advances received from prospective buyers treated as unexplained credits and added to the income of the assessee under section 68 of the Act and of interest paid by the assessee disallowed in terms of provisions of section 36(1)(iii) of the Act. It was pointed out that the ld.CIT(A) had granted substantial relief to the assessee on both the issues, aggrieved by which, the Revenue has come up in appeal before us.

Conclusion- Held that we see no reason to interfere in the order of the ld. CIT(A) who has deleted the disallowance of interest under section 36(1)(iii) of the Act giving factual finding, which have remained uncontroverted by the Revenue before us i.e. Interest bearing funds were not found by the AO to be utilized for non-business purpose and Interest free advances given by the assessee were made in the course of business of the assessee. In view of the above, order of the ld. CIT(A) deleting the addition of interest under section 36(1)(iii) of the Act is upheld.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appealshave been filed by the Revenue against separate orders passed by the ld.Commissioner of Income Tax(Appeals)-9, Ahmedabad [hereinafter referred to as “Ld.CIT(A)”] under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) for the assessment years mentioned in the cause title. The impugned orders of the ld.CIT(A) are dated 6.8.2019, 7.8.2019, 8.8.2019 and 9.8.2019 respectively.

2. At the outset itself, it was pointed out that there are only two issues arising ineach year in the backdrop of identical facts of the case. It was pointed out that in all the years impugned before us, the addition made related to advances received from prospective buyers treated as unexplained credits and added to the income of the assessee under section 68 of the Act and of interest paid by the assessee disallowed in terms of provisions of section 36(1)(iii) of the Act. It was pointed out that the ld.CIT(A) had granted substantial relief to the assessee on both the issues, aggrieved by which, the Revenue has come up in appeal before us.

The assessee has filed cross-objections. At the outset, the ld.counsel for the assessee stated that he was not pressing the COs filed by the assessee in the Revenue’s appeals. In view of this submission of the ld.counsel for the assessee, all the COs. filed by the assessee are dismissed as not pressed.

3. Adverting now to the Department’s appeal, the facts as emerge from orders of the authorities below and as also pointed out during the course of hearing before us, was that assessee is a private limited company primarily engaged in the business of development of land and residential plots. That the assessee had commenced scheme of development of plots in two projects, known as “Nalsarovar City” (“NSC”), Nr. Nalsarovar, Sanand-Nalsarovar Road, Ahmedabad and “Ahmedabad Film City” (“AFC”), Nr. NDK Show Pan, Balva Bagodara Highway, Ahmedabad.

4. First issue, which arises in all the appeals before us and which we shall deal with together for all the years before us is with regard to advance received by the assessee from alleged prospective buyers of plots in both these projects of the assessee, which were treated by the Assessing Officer (AO) as unexplained and added to the income of the assessee under section 68 of the Act.

5. The facts leading to the addition being that on being asked to prove genuineness of all the advances received by the assessee during various years impugned before us, the assessee had explained that these advances had been received from prospective allottees of land which were being developed by the assessee in two schemes as mentioned above i.e. NSC and AFC. The assessee had explained that the schemes were spread over five to six years and the prospective allottees were paying instalments monthly as per the scheme of payment opted by them. These amounts were, therefore, shown as instalments given by the assessee and were transferred to income account as and when entire amount of sale consideration was received and sale deed was made along with handing over of the possession of the booked plots to the prospective buyers. In all the years involved, the AO asked the assessee to file details of all advances received. With respect to advances where no PAN details of the investor was provided, he added the same as unexplained credits u/s 68 of the Act.

6. The matter was carried in appeal before the ld.CIT(A). In A.Y 2010-11, it was brought to his notice that identical issue had arisen in Asst. Year 2008-09 in the case of the assessee and the matter had travelled upto ITAT, who had given certain directions, according to which, the additions were to made in the facts of the case. The ld.CIT(A) directed the AO to determine the amount of addition sustainable in terms of direction of the ITAT in the preceding year i.e.Asst.Year2008-09. The AO in his remand report noted that the ITAT had directed the entire advances to be classified in three categories i.e. (i) those advances in which sale deed were executed during the year, (ii) advances whose bookings were cancelled and the amounts refunded, and (iii) simple advance received during the year. All these categories of advances received from the buyers were further directed to be sub-categorised into with PAN and without PAN details, and further, the ITAT directed, addition to be confined to only the category of simple advance where no PAN details were furnished, directing deletion in the other categories of advances. The AO, thereafter, worked out the disallowance to be sustained in all the years asper the direction of the ITAT. Subsequently, report of the AO in this regard was forwarded to the assessee, who with respect to the additions stated by the AO to be sustainable in terms of the direction of the ITAT in the preceding year on account of advances received during the year without PAN; furnished further details of PAN with respect to those advances where available with him. Taking note of the same, and also noting the fact that the ITAT decision in A.Y 2008-09 was upheld by the Hon’ble High court dismissing the appeal filed by the Revenue against the same, the ld.CIT(A) further reduced the quantum of disallowance sustainable restricting it to the advances with respect to which, he noted that the PAN details were not available. This decision for A.Y 2010-11,was applied by him in the subsequent years also, wherein based on the PAN details submitted by the assessee with respect to the category of advances relating to simple advances received during the year, he deleted the disallowance made by the AO. The entire sequence of events, right from addition made by the AO in A.Y 2010­11, to the amounts quantified by the AO as sustainable in view of the order of the ITAT in Asst.Year 2008-09 to ultimately the amount confirmed by the ld.CIT(A) taking note of the submissions of the assessee and following which order additions were deleted in subsequent years is tabulated as under:

7. Aggrieved by this order of the ld. CIT(A), the department has come up in appeal before us.

8. Since identical grounds are raised by the Revenue in all that the years, for the sake of convenience, the grounds raised in Asst. Year 2010-11 are as under:

1. Whether the ld. CIT(A) was correct in partly deleting the addition under section 68 of Act to the extent of Rs.13,08,18,519/- out of Rs.13,63,63,266/- as the credit worthiness of the persons involved in transactions remains unverified.

9. We have heard both the parties and gone through orders of the authorities below. The grievance of the Revenue is with respect to the deletion made by the ld. CIT(A) of the addition made by the AO under section 68 of the Act on account of advances received .

10. As transpires from the order of the authorities below and as noted by us in the facts above, the addition made by the AO was on account of advances received by the assessee where PAN details were not available of the alleged prospective buyers, who the assessee stated, had given the amount as instalment for investment in plots which the assessee was developing in two projects named above. Undisputedly, identical issue was adjudicated by the ITAT in Asst. Year 2008-09 in the case of the assessee and this fact was brought to the notice of the ld. CIT(A) during the appellate proceedings, who had directed the AO to determine the effect of the order passed by the ITAT in the year. The AO had furnished a remand report on the same and had stated that as per the direction of the ITAT all the advances received by the assessee were to be categorized in three categories as –

• advances which had culminated into sale deed being executed.
• advances which were refunded on account of booking being cancelled and
• ultimately some buyers who simply had given advances which did not fall in either of the categories.

11. The AO had stated in the remand report that with respect to first two categories of advances which culminated into sale deed being executed and those which were refunded on account of booking being cancelled, the Tribunal had held that there was no case for making any addition on account of advances whose PANs were not available. The AO had stated that it was only with respect to buyers who amounts qualified as advance which did not fall either in two categories as stated earlier, that addition was directed to be sustained with respect to those advances where PAN details were not available. The AO accordingly had himself recomputed the quantum of addition to be sustained in A.Y 2010-11.

Therefore, with respect to the restriction of addition under section 68 as admitted by the AO himself in his remand report and as tabulated above by us, for A.Y 2010-11, we hold that there could be no grievance of the Revenue, since AO himself had accepted the same to be the addition sustainable in view of the directions of the ITAT in the case of the assessee for Asst. Year 2008-09.

12. With respect to further reduction in the quantum of addition by the ld. CIT(A) as tabulated by us above in A.Y 2010-11 , we have noted from the orders authorities below that the assessee had furnished PAN details in a few more cases of advances received, to the ld.CIT(A) and taking note of the same, he had deleted the addition made with respect to these advances following the directions of the ITAT. This method was followed by the Ld. CIT(A) in subsequent years also ,wherein following the direction of the ITAT in A.Y 2008-09 and based on details furnished by the assessee of available PAN numbers of advances, he deleted the addition made by the AO to the said extent.

13. The ld. DR before us admittedly had no case with respect to the restrictions of the addition as admitted by the AO in his remand report, but with respect to the additionas further restricted by the ld. CIT(A),he pleaded that the ld. CIT(A) ought not to have suo moto taken cognizance of the PAN details furnished by the assessee and ought to have given the AO an opportunity to examine the same; that he should have confronted the AO with PAN details further furnished by the assessee and after seeking his comments on the same he ought to have taken action accordingly. The solitary grievance of the Revenue, therefore is, vis-à-vis the AO not being provided an opportunity to go through the details furnished by the assessee, which the ld. CIT(A) had suo moto taken cognizance of and further reduced the addition under section 68 of the Act.

14. We do not find merit in this contention of the ld. DR. The Ld. CIT(A) has allowed relief to the assessee following the directions of the ITAT. In the process he has himself verified the fulfilment of condition directed by the ITAT. We see no infirmity in the same. Ultimately what the ld. CIT(A) has done is undisputedly in the light and in accordance with the direction of the ITAT in Asst. Year 2008­09. Therefore, we do not find any merit in the grounds raised by the Revenue vi-a-vis restriction of addition made by the ld .CIT(A) under section 68 of the Act.

The ground raised by the Revenue with respect to the issue of deletion of addition made u/s 68 of the Act in all the years involved before us, numbered as Ground No.1,is dismissed.

15. The only other ground of the Revenue relates to the disallowance of interest expenses made by the AO under section 36(1)(iii) of the Act which was deleted by the ld. CIT(A). This issue has arisen in A.Y. 2010-11, 2011-12 & 2013-14.

For the sake of convenience, we are reproducing the ground raised in A.Y 2010-11.

1. Whether the Ld. CIT(A) was correct in deleting the addition made u/s 36(l)(iii) of tie Act on account of interest expenses amounting to Rs.19,56,504/-

16. The facts relating to the issue as derived from the assessment order pertaining to Asst. Year 2010-11 is that the AO found huge advances made by the assessee, on which no interest was charged, and at the same time, he found that the assessee had incurred interest expenses also on loans taken. Accordingly, he disallowed interest paid by the assessee. The ld. CIT(A) deleted the same noting that the AO has not appreciated the contention of the assessee that all the advances were made for business purpose for purchase of land in the business of land development carried out by the assessee, and further that, there was no finding by the AO that loans on which interests were paid were not utilized for the business purpose of the assessee. The finding in this regard at para 9.3 of his order are as under:

“9.3 I have carefully considered the facts of the case, observation of the A.O as well as the submission filed by the appellant. The A.O. has observed that the appellant had claimed interest of Rs.19,56,504/- in the Profit & Loss account. It had also been observed by him that the appellant had made advances of Rs.3,57,23,097/- on which no interest had been charged except for the advance given to M/s Roopa Associates and M/s Shivam Enterprises to whom the loans of Rs.50.00 lakhs and Rs.10.00 lakhs respectively were given. The explanation for the same is that the loans were provided out of the advances received from the prospective buyers who booked the plots of land and no interest bearing fund has been utilized for such advances. The appellant had also contended that the loans/overdraft facilities were taken from M/s Kotak Mahindra Prime Ltd. & Corporation Bank and the interest of Rs.83,239/- and Rs.18,73.265/-respectively was paid. On careful perusal of the assessment order, it is noticed that the A.O. did not point out the factual position that the loans and advances were not given for the business purposes and they were out of interest bearing funds. The A.O. had already copies of bank accounts of Corporation Bank and M/s Kotak Mahindra Prime Ltd. and it could have been ascertained as to whether the interest bearing funds were used for advancing the money and if so, what was the quantum of interest so involved with reference to retaining of the borrowed funds during the year under consideration by such persons receiving advances. The A.O. has not rebutted with sufficient evidences that the advances were not given to the persons for purchase of the lands and no lands were purchased out of such advances. Considering these lacuna in the assessment order, the disallowance of interest expenses of Rs.19,56,504/- by invoking the provisions of section 36(1)(iii) of the Act is directed to be deleted. Accordingly ground no.6 of the appeal is allowed.”

17. Before us, the ld. counsel for the assessee pointed out that, besides the above findings of the ld. CIT(A) that there was no merit in the disallowance in the absence of any evidence with the AO that interest bearing funds had been utilized for business purpose and that the interest free advances had been made in the course of business of the assessee, he pointed out that the assessee had also submitted that all these interest free advances had been given by the assessee from interest free funds with it in the form of instalments received from the prospective buyers of the plots.

18. With respect to the interest bearing funds taken by the assessee, he pointed out that it has been submitted to the ld. CIT(A) that the entire interest expenditure was incurred in relation to overdraft facility obtained by the company and it was further explained that overdraft facility is to meet working capital requirement of the business and in no case it can be said that the funds were utilized for non-business purpose.

Our attention was also drawn to the submissions made by the assessee before the ld. CIT(A) that all the advances were given for purchase of land for the said business of the assessee, and therefore also there was no occasion to make any addition of interest expenditure on making such interest free advances.

The contention of the assessee as above before the ld. CIT(A) has been reproduced at page no.56 of the order and was pointed to us during the course of hearing.

The ld. DR was unable to controvert the contentions of the assessee on the above finding of the ld. CIT(A) as noted above by us. He merely relied on the order of the AO.

19. Having heard both the parties, we see no reason to interfere in the order of the ld. CIT(A) who has deleted the disallowance of interest under section 36(1)(iii) of the Act giving factual finding, which have remained uncontroverted by the Revenue before us as under:

i) Interest bearing funds were not found by the AO to be utilized for non-business purpose;

ii) Interest free advances given by the assessee were made in the course of business of the assessee.

In view of the above, order of the ld. CIT(A) deleting the addition of interest under section 36(1)(iii) of the Act is upheld. This ground of appeal of the Revenue raised as Ground No.2 in A.Y. 2010-11, 2011-12 & 2013-14 is dismissed.

20. In the result, all the appeals of the Revenue are dismissed, all the cross objections filed by the assessee are also dismissed.

Order pronounced in the Court on 21st July, 2023 at Ahmedabad.