Interest on Loans for Investment in Agricultural Land not allowable

ACIT Vs Ms. Mini Muthoottu Credit India (P) Ltd. (ITAT Cochin)

It is established clearly that the assessee used the borrowed funds for the purchase of agricultural land. The Assessing Officer has considered the proportionate interest funds used for the purchase of agricultural land and considered only Rs.90,73,279/- out of the total interest paid of Rs.1,39,31,775/-. Being so, there cannot be further allowance of any relief to the assessee. In other words, merely because the assessee did not earn agricultural income to the extent of disallowance of interest, disallowance cannot be reduced. It is not hard and fast rule that on each and every investment in exempted yielding asset, the assessee would earn income equivalent to the interest income. Earning of exempted income is not certain because it depends on various factors. The established facts are that the assessee used the borrowed funds for the purpose of acquisition of agricultural land and not for the purpose of business. Therefore, once the income is exempted u/s. 10(1) of the I.T. Act, the said income is directly related to the investment made in the agricultural land, it is not possible to accept the alternative contention of the Ld. AR that part of the interest may be disallowed out of the total disallowance made by the Assessing Officer. This contention of the Ld. AR is also rejected.

 Further, there is no merit in the findings of the CIT(A) that the provisions of section 36(1)(iii) of the Act does not have clause of “put to use”. As per this section, interest expenditure could be allowed only if the loan was borrowed for the purpose of the business of the assessee and if it is used for the purchase of an asset which yielded exempted income, that interest expenditure cannot be allowed u/s. 36(1)(iii) of the Act.

FULL TEXT OF THE ITAT ORDER

This appeal filed by the Revenue is directed against the order passed u/s. 250 of the Act by the CIT(A), Kottayam dated 12/03/2018 and pertains to the assessment year 2012-13.

2. The facts of the issue are that the Assessing Officer disallowed interest expenditure disallowance of Rs.90,73,279/-by observing that as per the balance sheet, liability towards long term borrowings is Rs.9,09,56,368/- as on 31/03/2012 and the corresponding figure as on 31/03/2011 was Rs.8,25,10,213/-. The Assessing Officer observed that an amount of Rs.1,40,49,375/- was debited towards interest on loans and interest bearing funds were utilized for purchasing land valuing Rs.5,91,52,500/-. According to the Assessing Officer, the asset was not put to use for the purpose of the business, as such, it was not clear as to how the business of providing asset management solutions to individuals and financial institutions would require investment in land to the extent of Rs.5.91 crore. The Assessing Officer observed that funds for investment in land were channled from the business and the costs of the same was debited to the P&L which would justify a proportional disallowance of interest expenses to account for purchase of land.

3. On appeal, the CIT(A) observed that u/s. 36(1)(iii) of the Act, interest on capital borrowed for the purpose of business is an allowable deduction and there is no clause of put to use u/s. 36(1)(iii) of the Act. The CIT(A) observed that the land was shown as a business asset under balance sheet and therefore, there was no diversion of funds by the assessee which calls for proportionate disallowance. According to the CIT(A), it is not for the Assessing Officer to determine how much investment the assessee should make in land for the purpose of assessee’s business. It was stated that business interest was well understood by the assessee and the Assessing Officer cannot step into the shoes of the businessman so as to determine how the business is to be conducted. In view of the above, the CIT(A) held that there was no merit in the addition of Rs.90,73,279/- made by the Assessing Officer and deleted the same.

4. Against this, the Revenue is in appeal before us. The Ld. DR submitted that objective and actual business of assessee over the years was to provide asset management service to various customers directly from customer’s data available in various branches of Muthuttu Mini Group of Companies and the purchase of land from interest bearing funds was not for the purpose of business of the assessee but for the purposes of cultivation of tapioca, which is exempt being agricultural income. It was submitted that once the income from cultivation of tapioca was claimed as agricultural income and exempt from income-tax, any expenditure attributable to such exempt income was not allowable/deductible from the taxable income of the assessee. It was submitted that the land had no role to play in the business of the company, i.e., providing asset management solution to individuals and institutions and the total cost of land covered 71% of the interest bearing long term borrowing funds.

5. On the other hand, the Ld. AR submitted that the assessee acquired land for business purpose and Revenue was increased by Rs. 2,14,67,528/- (321%). It was submitted that increase in income was achieved by deploying of land, manpower, introduction of more working capital, strategic plans, better efforts, hard work etc. and it was not a gift received, which is achieved by utilization of resources in an efficient manner. According to the Ld. AR, interest expenses were incurred to earn the incremental revenue and the assessee had not used any borrowed funds for earning exempt income. It was submitted that the total investment in Land was amounting to Rs. 5,91,52,500/- and revenue Generated from these land was Rs. 2,81,64,759/- and percentage of Revenue to land was 48%. It was submitted that during the current financial year itself half of the investment was recovered through revenue and the assessee had earned Net Profit of Rs. 70,93,922.27/- even after incurring finance cost of Rs. 1,41,66,974.93/-. It was submitted that the assessee had achieved a better Net Profit Ratio of 25% during the current year against 10% in the preceding financial year and tax Expenses increased by Rs. 39,75,887/- during the current financial year which clearly proves that the assessee had paid more Income Tax during the year. It was submitted that there was no defraud revenue and Income Tax Department got more tax during the financial year. It was submitted that it was clearly evident from the above records that the Borrowings funds were used for earning business income.

5.1 The Ld. AR tabulated the financial results as follows:

Thus the Ld. AR stated that there was no addition of any fixed assets during the year. Further the Ld. AR gave the details of Fixed Assets and Long Term borrowings as follows:

Thus it was submitted that the borrowed fund was exclusively used for the purpose of business.

5.2 It was submitted that during the assessment year, the assessee had incurred interest on loan amounting to Rs. 1,40,49,375/- and earned agriculture income of Rs. 1,93,540/- and interest was mainly incurred for this working capital. According to the Ld AR in order to expand the business more funds were required and the funds were kept as working capital only by paying interest. The assessee did not have any working capital loan from any banks.

5.3 It was stated that there was no addition of any fixed assets during the financial year 2011-12 and the interest on loan was mainly incurred for earning revenue. Further, the assessee did not claim any expenditure to earn exempt income and the land was acquired solely and exclusively for the purpose of business as part of its business strategy and not for earning agriculture income.

5.4 It was submitted that section 36(l)(iii) is attracted when the assessee borrows the capital for the purpose of his business and it does not matter whether the capital is borrowed for revenue expenditure or capital expenditure and as far as deduction of interest is concerned the key consideration is borrowing for the purpose of business. According to the Ld. AR, the land already existed for last several years and was used for business purpose and yielding income from such assets. The assessee had expanded business by investing more funds in various sectors to earn revenue. It was submitted that the assessee paid interest to the following Parties:

5.5 It was submitted that the assessee claimed the interest expenses after deducting TDS in compliance with the provision of Income Tax Act and the recipients of interest have included the income in their filed returns of income tax and have already paid tax. According to the Ld. AR, the assessee accounted the interest expenses in previous assessment years and the Assessing Officer allowed such expenses as a business expenses. The Ld. AR relied on the judgment of the Supreme Court in the case of CIT vs. M/s. Chettinad Logistics Pvt. Ltd. 2018 (7) TMI 567 wherein it was held that “in the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14A of the Act, was completely contrary to the provisions of the said Section. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. Rule 8D, in our view, cannot go beyond what is provided in Section 14A of the Act. – Decided in favour of assesse”. Thus the Ld. AR submitted that the amount of disallowance cannot exceed exempt income. The assessee had earned exempt income of Rs. 1,93,540/-, whereas the assessing officer disallowed an amount of Rs. 91,49,868/. In the circumstance, it was requested that the appeal filed by the department may be dismissed.

6. We have heard the rival parties and perused the record. The question for our consideration is whether the interest bearing funds have been utilized by the assessee-company for acquiring agricultural land which have yielded agricultural income and as to whether disallowance is required to be made in respect of such interest paid. The facts noted above show that interest bearing loans were used undisputedly for purchase of land for agricultural purpose which yielded agricultural income. The contention of the assessee is that the said land was shown as business asset in the balance sheet and the land was also used for the purpose of the business of the assessee. However, there was no iota of evidence to show that the land was used for the purpose of the business of the assessee. On the contrary, it was used for agricultural purpose which yielded agricultural income which is exempt from income tax under section 10(1) of the I.T. Act. The assessee has not placed any evidence to show that the land had been used for the purpose of business. The assessee might have shown the agricultural land in its balance sheet as business asset but nothing has been proven on record to show that the assessee was at all using the said land for business activities and as such merely showing the agricultural land in the balance sheet as business asset is not enough to prove the contention of the assessee. The contention of the assessee was that it had used the agricultural land for the purpose of business. That itself shows that investment in agricultural land cannot be held to be business asset because it should have been shown as agricultural land only. Being so, interest incurred on borrowings used for purchase of agricultural land cannot be allowed a deduction in terms of section 36(1)(iii) of the I.T. Act as the condition laid down under section 36(1)(iii) has not been fulfilled. In other words, interest paid in respect of loan is not borrowed for the purpose of the business of the assessee but it has been borrowed for the acquisition of agricultural land which yielded exempted income not liable to tax. In our opinion, there is direct nexus between the interest bearing loans taken by the assessee and the investment made in agricultural land. The income generated from such land acquired by way of borrowings is exempt from tax u/s. 10(1) of the Act. The assessee incurred expenditure on such borrowings and therefore is not entitled for deduction of interest u/s. 36(1)(iii) of the Act which was rightly disallowed by the Assessing Officer.

7.1. The Ld. AR made an alternative claim that the assessee earned agricultural income on the said land to the tune of Rs. 1,93,540/- and therefore, interest should be disallowed to that extent only and the total interest cannot be disallowed. We do not agree with the alternative contention of the Ld. AR. It is established clearly that the assessee used the borrowed funds for the purchase of agricultural land. The Assessing Officer has considered the proportionate interest funds used for the purchase of agricultural land and considered only Rs.90,73,279/- out of the total interest paid of Rs.1,39,31,775/-. Being so, there cannot be further allowance of any relief to the assessee. In other words, merely because the assessee did not earn agricultural income to the extent of disallowance of interest, disallowance cannot be reduced. It is not hard and fast rule that on each and every investment in exempted yielding asset, the assessee would earn income equivalent to the interest income. Earning of exempted income is not certain because it depends on various factors. The established facts are that the assessee used the borrowed funds for the purpose of acquisition of agricultural land and not for the purpose of business. Therefore, once the income is exempted u/s. 10(1) of the I.T. Act, the said income is directly related to the investment made in the agricultural land, it is not possible to accept the alternative contention of the Ld. AR that part of the interest may be disallowed out of the total disallowance made by the Assessing Officer. This contention of the Ld. AR is also rejected.

7.3 Further, there is no merit in the findings of the CIT(A) that the provisions of section 36(1)(iii) of the Act does not have clause of “put to use”. As per this section, interest expenditure could be allowed only if the loan was borrowed for the purpose of the business of the assessee and if it is used for the purchase of an asset which yielded exempted income, that interest expenditure cannot be allowed u/s. 36(1)(iii) of the Act. Accordingly, we reject all the contentions of the assessee. Thus, the grounds of appeal of the Revenue are allowed.

7. In the result, the appeal filed by the Revenue is allowed.

Order pronounced in the open Court on this 4^thSeptember, 2018.

Source- ACIT Vs M/s. Mini Muthoottu Credit India (P) Ltd. (ITAT Cochin); I.T.A. No.237/Coch/2018; 04/09/2018; 2012/13