Davanam Constructions Private Limited Vs DCIT (ITAT Bangalore)
Summary: The appeal was filed by M/s. Davanam Constructions Private Limited against the order dated 17.12.2018 of the CIT(Appeals)-2, Bengaluru for Assessment Year 2013-14. The dispute principally concerned disallowance of ₹40,46,607 under section 36(1)(iii) read with section 37 of the Income-tax Act, 1961, arising from interest-free advances made to the assessee’s subsidiary, Amethyst Hospitality (P) Ltd. The assessee also challenged interest under sections 234B and 234C.
The assessee had transferred ₹7.1 crores to Amethyst Hospitality (P) Ltd. and ₹6.9 crores to its other subsidiary, Davanam Constructions Sdn Bhd, Malaysia. Of the amount advanced to Amethyst Hospitality, ₹1.9 crores was stated to be for investments and ₹5.22 crores was given as an interest-free advance for its business. The Assessing Officer allowed the interest attributable to the amount advanced to the Malaysian subsidiary, observing that it was in the same line of business and that there was commercial expediency. However, he disallowed proportionate financial costs attributable to the ₹5.22 crore interest-free advance to Amethyst Hospitality, which was engaged in hospitality business, on the ground that there was no connection between the assessee’s business of land development and construction and the subsidiary’s hospitality business.
The CIT(Appeals) considered the facts recorded by the Assessing Officer and the proposition stated to arise from the Supreme Court’s decision in Dalmia’s case. Although the assessee was the holding company and had an interest in its subsidiary, the CIT(Appeals) noted from the balance sheet that loans and fixed assets had increased and therefore held that the assessee could not be said to have sufficient interest-free funds. The CIT(Appeals) further observed that the assessee and Amethyst Hospitality were engaged in different lines of business and concluded that commercial expediency had not been established. The disallowance under section 36(1)(iii) read with section 37 was accordingly sustained.
