Case Law Details
IN THE ITAT CHENNAI BENCH ‘A’
Assistant Commissioner of Income-tax
v/s.
Apollo Hospitals Enterprises Ltd.
IT APPEAL NO. 605 (MDS.) OF 2012
[ASSESSMENT YEAR 2004-05]
MAY 18, 2012
ORDER
N.S. Saini, Accountant Member
This is an appeal filed by the Revenue against the order of Commissioner of Income Tax(A)-III, Chennai dated 07.12.2011 by taking the following grounds:-
“1. The order of the learned Commissioner of Income Tax(A) is contrary to law and facts and circumstances of the case.
2.1 The CTI(A) erred in deleting the disallowance of interest on borrowed capital amounting to Rs. 15,22,917/-.
2.2 The Commissioner of Income Tax(A) failed to appreciate that M/s. Apex Builders and Kalpatharu Enterprises Ltd. are engaged in the business activity of construction and deriving income from House property from the immovable assets owned by them, whereas the assessee is in the field of providing medical and surgical services and therefore, the loan given by the assessee to these entities cannot be on account of business exigency.
2.3 The Commissioner of Income Tax(A) ought to have appreciated that there is no business connection and further the assessee company has not benefited directly or indirectly through such loan given to these entities.
2.4 The Commissioner of Income Tax(A) ought to have appreciated that in the absence of any benefit and lack of business exigency, the decision of Madras High Court in the case of Hotel Savera 239 ITR 795 is not applicable to the facts of the case.
2.5 The Commissioner of Income Tax(A) failed to appreciated that the decision of the Punjab and Haryana High Court in the case of Abishek Industries 286 ITR 1 is more applicable to the facts of the case and ought to have been followed.
2.6 Without prejudice to the contentions raised in grounds 2.1. to 2.5 above it is submitted that even if the decision of Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 is found applicable, the CIT(A) ought to have recommended disallowance on a proportionate basis and ought not to have allowed the entire expenditure when the same is found not relatable to the assessee’s business activities.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the ld. Commissioner of Income Tax(A) may be set aside and that of the Assessing Officer restored.”
2. The sole issue involved in the above grounds of appeal of Revenue is that the Commissioner of Income Tax(A) erred in deleting the disallowance of interest on borrowed capital amounting to Rs. 15,22,917/-.
3. The brief facts of the case are that the Assessing Officer disallowed interest on borrowed capital amounting to Rs. 15,22,917/- on the ground that the assessee advanced Rs. 1.70 crores to M/s. Apex Builders and M/s. Kalpathanu Enterprises Ltd. Both these concerns are controlled either by the promoters or their relatives. The said transaction took placed on 31.05.2003 and it was squared up on 31.03.2004. No interest was received on such advance. The assessee had paid interest during the corresponding period of Rs. 17,60,28,111/- and the average amount of loan taken by the assessee was Rs. 163,68,68,586/- on which the average interest rate paid by the assessee was @ 10.75% . Applying the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1/156 Taxman 257, the Assessing Officer made an estimated disallowance of interest of Rs. 15,22,917/- on Rs. 1.70 crores @ 10.75% per annum for 10 months.
4. Being aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income Tax(A).
5. The assessee submitted before the Commissioner of Income Tax(A) that as per provisions of Section 36(1)(iii) , any interest paid on borrowed capital for the purpose of business was allowable deduction to the assessee. The assessee submitted that the loans were specifically taken for working capital or specific projects. It was further submitted that the above advances were given out of assessee’s own funds and therefore, no disallowance was warranted. The assessee placed reliance on the decision of CIT v. Reliance Utilisites & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) and CIT v. Hotel Savera [1999] 239 ITR 795/102 Taxman 247 (Mad.). The Commissioner of Income Tax(A) allowed the appeal of the assessee observing as under:-
“6.2. I have carefully considered the facts of the case and the submission of the ld. Authorised Representative of the assessee I have also gone through the decisions relied on by the Assessing Officer and Authorized Representative of the assessee. The Hon’ble Madras High Court in the case of Hotel Savera (supra) has held as under:-
In the facts of the case the Tribunal has found that the money borrowed has been inextricably mixed up with the own funds of the assessee and it was impossible to delineate whichever funds were advanced to Savera Hotels (P) Ltd, free of interest, and in that factual situation, we are of the opinion that the finding of the Appellate Tribunal that no disallowance is called for is a finding of fact and the finding of the Tribunal that it can be inferred that Savera Hotels made the advance out of its own funds and not the borrowed capital is sustainable in law.
Further there is no finding by the income-tax Officer or the Appellate Assistant Commissioner that the money borrowed has been spent for non-business purposes. The addition made by the Income-tax Officer was on the basis that the money advanced to Savera Hotels (P) Ltd., should carry notional interest of 10%. And in that view he disallowed the amount of Rs. 72,769. The Appellant Assistant Commissioner held that the advance to Savera Hotels (P) Ltd. would have come proportionately out of the own funds as well as borrowed funds is not based on any principle of law. There is no finding even by the Appellate Assistant Commissioner that the money borrowed by the assessee was actually diverted for non-business purposes. In the absence of any clear finding both by the assessing authority and the appellate authority and in the absence of any such finding by the Appellate Tribunal we have to hold that the Income-tax Officer was not justified in disallowing the sum of Rs. 72,769/- or by the Appellant Assistant Commissioner a sum of Rs. 30,063.
We hold that the Appellate Tribunal was correct in deleting the sum of Rs. 30,063/- and it is also right in holding that no part of the interest should be disallowed especially in the absence of any finding that the money borrowed was advanced to Savera Hotels (P) Ltd. free of interest.
The facts of the appellant’s case are similar to the above case. The appellant has substantial own funds and as submitted by the ld. Authorised Representative of the assessee the average cash and bank balances are closed to Rs. 12 crores whereas the amount advanced was only Rs. 1.70 crores. The Assessing Officer had also not specifically identified the source from which the amounts have been advanced. He had only considered the average cost of borrowing and applied the same on the above amounts advanced. The Hon’ble Madras High Court has held that such a disallowance could not be made. Further, the Hon’ble Bombay High Court in the case of Commissioner of Income Tax v. Reliance Utilities and Power Ltd. 313 ITR 340 has held that if there be interest free funds available to assessee sufficient to meet its investments and at the same time the assessee had raised a loan, it can be presumed that investments were made from interest free funds available and no disallowance can be made. Respectfully following the above decisions, the addition is deleted and the ground is allowed.”
6. The Departmental Representative submitted that there was no commercial expediency and therefore, the Assessing Officer was justified in making the disallowance of interest. For his contention, he placed reliance on the decision of Hon’ble Kearala High Court in the case of CIT v. Accelerated Freeze Drying Co. Ltd [2010] 324 ITR 316/[2011] 199 Taxman 263 (Mag.)/10 taxmann.com 108. He also argued that if the assessee had surplus funds available with it, then the same should have been utilized towards repayment of loan taken by the assessee on which the assessee was paying interest instead of giving interest-free advance to its associated concerns. For this he relied on the decision of Hon’ble Madras High Court in the case of K. Somasundaram & Bros. v. CIT [1999] 238 ITR 939. He also relied on the decision of Hon’ble Delhi High Court in the case of Punjab Stainless Steel Industries v. CIT [2010] 324 ITR 396/[2011] 196 Taxman 404 (Delhi) and submitted that it was held by the Hon’ble High Court that when the payments were made out of Cash Credit Account shows that advances were extended out of borrowed funds and not out of the credit balance with the assessee firm and as the advances were not used for the business purpose of the assessee, the disallowance interest expenditure on those advances was justified.
7. On the other hand, Authorised Representative of the assessee submitted that the Commissioner of Income Tax(A) has given a categorical finding that the assessee had substantial own funds and that the average cash and bank balances were of Rs. 12 crores and the amount advanced was only 11.70 crores and therefore, the assessee had substantial own funds to give the advance to the concerns. Further, the CTI(A) has also observed that Assessing Officer has not specifically identified the source from which the amounts have been advanced. He has considered the average cost of borrowing and applied the same on the above amounts advanced. He submitted that the decision of Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (supra) was over-ruled by the Hon’ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT, 298 ITR 298. Therefore, the decision in the case of Abhishek Industries Ltd. (supra) relied on by the Assessing Officer was no longer a good law.
8. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. In the instant case, the assessee advanced Rs. 1.70 crores as interest free advance to its sister concerns namely, M/s. Apex Builders and M/s. Kalpathanu Enterprises Ltd. Further, it is also not in dispute that the assessee has incurred interest expenditure of Rs. 17,60,28,111/- during the year under consideration. On the above facts, the Assessing Officer observed that interest paid by the assessee on borrowed capital works out to 10.75% of the borrowed funds. Therefore, the Assessing Officer disallowed Rs. 15,22,917/- out of interest expenditure claimed by the assessee.
9. On appeal, the CIT(A) deleted the addition by observing that the interest free advance was given out of interest free own funds available with the assessee. Departmental Representative supported the order of the Assessing Officer and relied upon the decisions in the case of Accelerated Freeze Drying Co. Ltd. (supra), K. Somasundaram & Bros. (supra) and the decision of Hon’ble Delhi High Court in the case of Punjab Stainless Steel Industries (supra).
10. On the other hand, Authorised Representative of the assessee supported the order of the Commissioner of Income Tax(A), which was passed following the decision of Hon’ble jurisdictional High Court in the case of Hotel Savera (supra).
11. We find that the Assessing Officer has deleted the interest on borrowed capital without recording any finding to the effect that the borrowed capital on which interest was paid by the assessee was diverted by the assessee for providing interest free advances to its sister concerns. It is not the case of the Revenue that the interest free funds available with the assessee were not sufficient to advance interest free money in question to its sister concerns. In our considered view, the onus, which was on the department for making the disallowance by bringing on record some material to show nexus between interest free advance and interest bearing borrowed capital was not at all discharged by the Revenue. Therefore, in our considered opinion, the disallowance was made by the Assessing Officer was on a wrong footing and unsustainable. The finding of the Commissioner of Income Tax (A) that that borrowed funds were utilized for the specific projects for which they were borrowed and interest free advances were given out of own interest free funds were not disputed before us by the Revenue. We therefore, do not find any good and justifiable reason to interfere with the order of the Commissioner of Income Tax(A).
12. The decision relied upon by the Departmental Representative do not support the case of the Revenue. In the case of Accelerated Freeze Drying Co. Ltd. (supra), Hon’ble Kerala High Court held that decision of Supreme Court in the case of S.A. Builders Ltd. v. CIT [2007] 158 Taxman 74 could be applied only if commercial expediency is established with facts. In the instant case, it is not the case of the assessee that interest expenditure should be allowed for interest free advance to its sister concerns were out of commercial expediency. Rather the case of the assessee is that the entire borrowed capital funds on which the expenditure of interest was incurred, were used in business and interest free advance was given out of own interest free funds.
13. Further, in the case of in the case of Punjab Stainless Steel Industries (supra) the Hon’ble Delhi High Court held that the fact that payments were made out of Cash Credit account show that advances were extended out of borrowed funds and not out of credit balance available with the assessee firm. In the instant case, the Revenue has not brought any material to show that interest free advance were out of borrowed funds. Therefore, the said decision is not applicable to the facts of the present case.
14. Further, in the decision of the Hon’ble Madras High Court in the case of K. Somasundaram & Bros. (supra), it was held that the fact that the funds were used in business for some point of time and later diverted would not entitle the assessee to claim interest paid on the borrowing as a deduction. In the present appeal, it is not the case of the Revenue that interest bearing fund were diverted by the assessee for non-business purposes. Hence, this decision is also not applicable to the facts of the present appeal of the assessee. We, therefore, dismiss the grounds of appeal of Revenue.
15. In the result, the appeal of Revenue is dismissed.
