Bagadia Properties Private Limited Vs ITO (ITAT Bangalore)
It cannot be always presumed that the loans given to subsidiary companies are for business purposes. It is required to be proved that the subsidiary company has used the interest free loans for some business purposes.
Facts- The assessee is undertaking the business of real estate development and builders. The assessee filed its ROI for AY 2014-15 declaring a total income of Rs. 3,52,160. The AO disallowed part of interest expenses amounting to Rs. 1,50,73,571.
Notably, the assessee is following the “Project completion method” for disclosing income from the sale of flats. During the year under consideration, the assessee had completed three projects named Alta Vista, Soring Dale, and Villa Grande. One project named “Splendour” was under construction. The assessee had issued “Non-convertible Debentures” (NCD) amounting to Rs. 20.00 crores during the year under consideration. The said funds borrowed through the issue of NCDs have been utilized for general business purposes. The AO made out a disallowance to be made out of interest & professional charges on NCD at Rs. 1,50,73,751.
CIT(A) rejected all other contentions raised by the assessee. Aggrieved, the assessee filed appeal before the tribunal.
Conclusion- The Hon’ble Supreme Court has made it clear that it cannot be always presumed that the loans given to subsidiary companies are for business purposes. It is required to be proved that the subsidiary company has used the interest free loans for some business purposes. Then, as held in the case of S A builders, the test of commercial expediency/ business purposes would get satisfied. In the instant case, we notice that the assessee has not furnished the details of utilisation of impugned interest free loans by the respective subsidiary companies. Without those details, it will not be possible for anyone to find out whether there was commercial expediency or business purpose in giving these interest free loans. Accordingly, in our view, this aspect requires examination at the end of the AO. Accordingly, we restore this issue to the file of the AO.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed this appeal challenging the order dated 01-03-2019 passed by Ld CIT(A)-1, Bengaluru and it relates to the assessment year 2014-15. Though the assessee has raised many grounds, all of them are related to a single issue, viz., disallowance of interest expenses relating to Non-Convertible debentures.
2. The facts relating to the case are stated in brief. The assessee is undertaking the business of real estate development and builders. The assessee filed its return of income for AY 2014-15 declaring a total income of Rs.3,52,160/-. The AO disallowed part of interest expenses amounting to Rs.1,50,73,571/-. The Ld CIT(A) granted marginal relief. However, he treated the appeal as dismissed. Aggrieved, the assessee has filed this appeal before us.
3. The facts that relate to the interest disallowance are discussed in brief. The assessee is following “Project completion method” for disclosing income from sale of flats. During the year under consideration, the assessee had completed three projects named Alta Vista, Soring Dale and Villa Grande. Depending upon the sold area, the assessee had offered income from these projects. One project named “Splendour” was under construction and the assessee has just started another project named “Chandra layout”, wherein not much expenses have been incurred.
4. The AO noticed that the assessee had issued “Non-convertible Debentures” (NCD) amounting to Rs.20.00 crores on private placement basis to M/s Religare Finvest Limited during the year under consideration. The trustees for issue of NCDs was M/s IDBI Trusteeship Services Limited. The debentures carried interest rate of 18% p.a.. The interest expenditure booked for the year under consideration was Rs.1,51,89,032/-. The assessee had also incurred professional expenses on issue of NCD of Rs.70,50,887/-. Accordingly, the AO took the total expenses relating to NCD at Rs.2,22,39,919/- (Rs.1,51,89,032/- + Rs.70,50,887/-).
5. The AO asked the assessee to furnish the details of utilisation of funds and noticed that the assessee has, inter alia, used the funds for the following purposes:-
(a) Land advances and supplier advances – Rs.2,76,59,346/-
(b) Loans to Subsidiary Companies – Rs.9,20,76,774/-
Rs.11,97,36,120/-
The AO took the view that the interest relatable to “Land advances and supplier advances” cannot be claimed as general business expenditure and it should be allocated to the projects for which funds are used. In respect of Loans to subsidiary companies, the AO took the view that the interest-bearing advances have been diverted to give interest free loans to subsidiary companies. Accordingly, the AO took the view that the interest relatable to Rs.11.97 crores, referred above, is liable to disallowed. We have noticed earlier that the AO had taken the total expenses relating to NCD at Rs.2,22,39,919/-. Further, he has taken the view that the interest pertaining to Rs.11.97 crores is liable to be disallowed. Accordingly, the AO computed the proportionate disallowance of interest & professional charges as under:-
11,97,36,120
—————— x 2,22,39,919 = Rs. 1,33,14,608
20,00,00,000
6. Out of the remaining interest & professional charges relating to NCD, the AO took the view that the interest pertaining to uncompleted project, viz., “Splendour” should be included in the relevant work-in-progress. The AO worked out the same at Rs.17,58,963/-. Accordingly, the AO worked out the total disallowance to be made out of interest & professional charges on NCD at Rs.1,50,73,751/- (Rs.1,33,14,608/- + Rs.17,58,963/-) and disallowed the same. During the course of assessment proceedings, the assessee has furnished a statement titled as “Computation of Work in Progress after allocation of Finance Cost”. In that statement, the assessee has allocated the interest on NCD between the “completed projects (to the extent of flats sold)” and “unsold flats & incomplete projects”. The assessee has worked out the interest on NCD to be charged to P & L account at Rs.1,09,04,325/- and the remaining amount to be included in WIP at Rs.42,84,707/-. The AO has observed in the assessment order that the assessee has voluntarily offered for addition of the above said amount of Rs.42,84,707/-. However, the AO did not make any such addition, since he held that the disallowance of Rs.1,50,73,751/- made by him would encompass the above said amount of Rs.42,84,707/-.
7. In the appellate proceedings, the Ld CIT(A) examined the breakup details of Land advances and supplier advances. The land purchase advances was Rs.1,15,00,000/- and the remaining amount of advance pertaining to supplier advances was Rs.1,54,03,008/-. The Ld CIT(A) took the view that the supplier advances should be considered as pertaining to on-going project “Splendour”. Accordingly, the Ld CIT(A) directed the AO to disallow interest on NCDs pertaining to “Loans to subsidiaries amounting to Rs.9,30,76,776/- and land purchase advances of Rs.1,15,00,000/-. However, it is not clear as to whether the Ld CIT(A) has allowed interest expenditure pertaining so supplier advances of Rs.1,54,03,008/-, which is considered as relating to on-going project of Splendour. The Ld CIT(A) rejected all other contentions raised by the assessee.
8. We heard rival contentions and perused the record. The main contention of the assessee is that the loan funds borrowed by issuing NCDs, have been borrowed for general business purposes and hence interest expenditure is allowable u/s 36(1)(iii) of the Act, since the assessee has satisfied with the conditions mentioned in that section. However, the case of the revenue is that the assessee has diverted its interest-bearing funds to its subsidiary companies as interest free loans and also diverted funds for giving advances for purchase of lands and to other suppliers. According to the assessing officer, the about cited usage of loan funds cannot be considered as “for the purposes of business” of the assessee. Hence the proportionate interest pertaining to the above diverted amounts has been disallowed. Further, it was held that the interest pertaining to ongoing project ‘Splendour’ should be included in “Work in Progress”. Accordingly, the AO has disallowed the proportionate interest expenses on the above said principles only.
9. There cannot be any dispute that the intention of assessee in raising borrowed funds by issuing NCDs was for the purpose of business. The interest expenditure on borrowed funds is allowed under sec. 36(1)(iii) and it reads as under:-
“the amount of interest paid in respect of capital borrowed for the purposes of the business or profession”
The moot question, in the instant case, is whether the said borrowed funds were used for the purpose of business or not. As noticed earlier, the case of the tax authorities was that the borrowed funds have been diverted for non-business purposes. We notice that the AO, Ld CIT(A) have made detailed discussions and the replies given by the assessee are also lengthy. In our view too much of general discussions have been made by all. However, ultimately what is disallowed is the proportionate interest expenses pertaining to
(i) funds diverted to give advances;
(ii) funds diverted to sister concerns and
(iii) interest relatable to on-going projects.
Accordingly, we proceed to examine the various issues by carefully considering the facts and circumstances of the case. Accordingly, in our considered view, the issues that require to be adjudicated in this appeal are:-
(a) Whether the interest on NCD and Professional charges for issuing NCD are required to be aggregated for computing disallowance?
(b) Whether advances given for purchase of land and to the suppliers are for business or non-business purposes.
(c) Whether the interest free loans given to subsidiary companies are to be considered as for non-business purposes.
(d) Any interest expense is to be apportioned to the on-going project Splendour.
(e) Whether the assessee has agreed for voluntary disallowance of Rs.42,84,707/-.
10. The first issue relates to the quantum of expenditure that is required to be considered for computing disallowance. We noticed earlier, the AO has computed the aggregate amount of interest expenditure pertaining to NCD as Rs.2,22,39,919/-, which consisted of interest expenses of Rs.1,51,89,032/- and professional charges for issuing NCD of Rs.70,50,887/-. There cannot be any dispute that interest expenses are allowed u/s 36(1)(iii) and the professional charges are allowed as deduction u/s 37(1) of the Act. Hence, in our view, the AO was not correct in aggregating the professional charges incurred on issuing NCDs as part of interest expenditure and thus disallowing proportionate expenses thereof. There should not be any dispute that the professional charges have been incurred for issuing NCDs and hence these expenses have been incurred prior to the giving interest free loans to subsidiary companies. If the interest free loans were not given to the subsidiaries, then the AO shall have allowed professional charges fully in terms of sec. 37(1) of the Act. Since the professional charges has been incurred prior to the giving of loans to subsidiaries, in our view, it is allowable as deduction fully, there is no reason to disallow a portion of the same merely on account of the reason that the interest bearing funds have been used for giving interest free loans. Hence, what is relevant u/s 36(1)(iii) is the interest expenditure only and not any other expenditure. Accordingly, we are of the view that the professional charges of Rs.70,50,887/- is fully allowable as deduction u/s 37(1) of the Act. Accordingly, we direct the AO exclude the above said amount in computing proportionate disallowance of interest expenses, i.e., the amount of Rs.70,50,887/- should be allowed fully.
11. The next issue is whether advances given for purchase of land and to the suppliers are for business or non-business purposes?. The aggregate amount of ‘advances’ considered by the AO for computing interest disallowance is Rs.2,76,59,346/-. The break-up details of the above said amount are given by the assessee before Ld CIT(A) as under (page 199 of the paper book): –
