RNS Infrastructure Limited Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that proviso to Section 36(1)(iii) of the Income Tax Act is not applicable in the present case as sufficient internal cash accruals available during the impugned year are more that interest free funds advanced to the sister concern.
Facts- During the course of assessment proceedings, the AO noted that the assessee has given advances of Rs. 24,13,56,764 to its sister concern, M/s. Naveen Hotels Ltd. for purchase of land and the average interest at Rs. 2,14,35,676 has been paid on the OD facility by the assessee. The advance for land was made from the OD a/c/Current a/c/CC a/c. The AO observed that the advance paid to Naveen Hotels Ltd. (sister concern) was capital in nature, because the loan advanced to Naveen Hotels was for purchase of land and it was not put to use during the impugned assessment year. Therefore the interest expenditure should be capitalized instead of claiming it as revenue expenditure. Accordingly the same was added to the income of the assessee.
The CIT(Appeals) upheld the order of the AO in the second round of set aside proceedings before him also. Aggrieved, the assessee is in appeal before the Tribunal.
Conclusion- Since the internal cash accruals from operations are more than the interest free funds advanced to the sister concern for business purposes, it cannot be said that the interest bearing loan funds had been utilized by the assessee for the purpose of giving interest free advances over the years to its sister concern, Naveen Hotels Ltd.
We hold that proviso to section 36(1)(iii) is not applicable in the present case. Accordingly, we set aside the order of the CIT(Appeals) and delete the addition.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is the second round of appeal before the ITAT by the assessee against the order of the CIT(Appeals)-11, Bengaluru dated 27.10.2022 DIN: ITBA/APL/M/250/2022-23/ 1046481087(1) for the assessment year 2014-15.
2. The sole issue involved out of the grounds raised in this appeal is disallowance of interest expenditure of Rs.2,14,35,676 under proviso to section 36(1)(iii) of the Income-tax Act, 1961 [the Act].
3. Briefly stated facts are that the assessee filed return of income on 22.9.2014 declaring total income at Rs.8,80,66,421. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, the AO noted that the assessee has given advances of Rs. 24,13,56,764 to its sister concern, M/s. Naveen Hotels Ltd. for purchase of land and the average interest at Rs. 2,14,35,676 has been paid on the OD facility by the assessee. The advance for land was made from the OD a/c/Current a/c/CC a/c. The AO observed that the advance paid to Naveen Hotels Ltd. (sister concern) was capital in nature, because the loan advanced to Naveen Hotels was for purchase of land and it was not put to use during the impugned assessment year. Therefore the interest expenditure should be capitalized instead of claiming it as revenue expenditure. Accordingly the same was added to the income of the assessee.
4. The CIT(Appeals) upheld the order of the AO in the second round of set aside proceedings before him also. Aggrieved, the assessee is in appeal before the Tribunal.
5. The ld. AR reiterated the submissions made before the lower authorities and filed written synopsis which is as under:-
“GROUND — 3 : DISALLOWANCE OF INTEREST UNDER FIRST PROVISO TO SECTION 36(1)(iii)
“3. The learned CIT(A) has erred by holding that the learned Assessing Officer has rightly invoked the ‘proviso to sec.36(1)(iii)’ of the Act and thereby disallowing the interest expenditure of Rs.2,41,35,676 on the facts and circumstances of the case. Further, the learned CIT(A) failed to appreciate that the proviso to section 36(1) can be invoked only when the borrowed funds are utilized for acquisition of the capital asset on the facts and circumstances of the case.”
Facts of the case:
6. The learned Assessing Officer has disallowed interest expense of Rs. 2,41,35,676 relating to bank overdraft facilities claimed as revenue expenses. The Appellant had paid an advance of Rs.24,13,56,764 for land of M/s. Naveen Hotels Ltd. The Appellant has made these payments from overdraft and cash credit facilities obtained from the bank. The said advance will be receivable by the Appellant and such amount will not be capitalized in the books of account of the Appellant. The advance is not a capital expenditure in the books of the Appellant attracting the proviso to section 36(1)(iii) of the Act in the instant case. Thus, the said advance has not resulted in any capital assets or the Appellant has capitalized any asset in the books of accounts. The relevant portion of the proviso to section 36(1)(iii) of the Act has been provided below for Your Honors ease of reference:
“Other deductions.
36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28
(i) …………………
(ii) ……………………
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”
(Emphasis provided)
Treatment by learned Assessing Officer and learned Commissioner of Income Tax (Appeals):
7. The learned Assessing Officer was of the view that the Appellant has incurred interest expenses on the overdraft and cash credit facilities. He further held that, the interest expenses could have been allowed only if the asset (land) would have been put to use for the purpose of business. He disallowed the interest holding that the interest pertaining to this capital expenditure cannot be claimed as revenue expenditure and adopted the 10 percent as rate of interest and accordingly disallowed the proportionate interest amounting to Rs. 2,41,35,676. The learned Assessing Officer has added back such interest income to the total income of the Appellant.
8. The learned CIT(A) has confirmed the addition of interest holding that the proviso to section 36(1)(iii) are applicable to the Appellant. The Appellant most humbly submits that the advance has been given to the sister concern. The said advance will be receivable by the Appellant and such amount will not be capitalized in the books of account of the Appellant. The advance is not a capital expenditure in the books of the Appellant attracting the proviso to section 36(1)(iii) of the Act in the instant case. Thus, the proviso to section 36(1)(iii) is not applicable to the facts of the case.
9. In view of the above, the Appellant prays before Your Honors to hold that the proviso to section 36(1)(iii) is not applicable in the instant case and direct the lower authorities to delete the addition of Rs. 2,41,35,676 made under the provisions of section 36(1)(iii) of the Act.
GROUND — 5 : DISALLOWANCE OF PROPORTIONATE INTEREST
“5. The learned CIT(A) is not justified in upholding the extent to which the interest expenditure is disallowed by the learned assessing officer on proportionate on the facts and circumstances of the case.”
10. The Appellant most humbly states that the proviso to section 36(1)(iii) requires the interest paid in respect of capital borrowed for acquisition of an asset to be disallowed for any period beginning from the date of which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction.
11. In the instant case, the learned Assessing Officer has disallowed the interest on proportionate basis. The learned Assessing Officer failed to appreciate that the Appellant has not borrowed any form of facility from the Banks for advancing the amount to the sister concern. The borrowing of loan in relation to acquisition of asset is one of the primary condition for the applicability of Proviso to Section 36(1)(iii) of the Act. Further, the Proviso requires that portion of the interest to be disallowed incurred/paid from the date of borrowing till the asset is first put to use. There is no satisfaction of these conditions in the orders passed by the lower authorities.
12. The Appellant has obtained two cash credit facilities from Canara Bank and State Bank of India respectively which have been duly disclosed in Note No. 2.6 of the financial statements. Your Honors attention is drawn to Page No.128 of the paper book wherein the short term borrowings has been disclosed in the financial statements. Thus, on perusal of the financial statements, it is apparent that the Appellant has not taken any loan for making advance to the sister concern.
13. In view of the above, the Appellant most humbly prays before Your Honors to hold that the orders passed by the lower authorities are not tenable in law and to direct the lower authorities to delete the addition of interest of Rs. 2,14,35,676 made under the provisions of section 36(1)(iii) of the Act.
WITHOUT PREJUDICE,
GROUND — 4 : FREE FUNDS ADVANCED TO SISTER CONCERN:
“4. The learned CIT(A) has erred by not holding that the Appellant had advanced the free funds on the facts and circumstances of the case.”
14. The Appellant has made the payment to sister concern out of the interest free cash available with the Appellant. The Appellant most humbly states that the finding of the learned Assessing Officer that the payments has resulted in over drawals and negative balance increased from time to time leading to charging of OD/CC interest by the bank is factually incorrect. The Appellant has utilized the interest free funds available in making the advance to Naveen Hotels Ltd.
15. In case, the Appellant has utilized the overdraft and cash credit facility in making the land advance to Naveen Hotels, the cash outflow from financing activity should have been higher by such amount over and above the cash generated from operating activity. The Appellant has generated cash of Rs. 43,04,92,050.88 from the operating activities and cash outflow from financing activities amounted to Rs. 38,75,13,394.03 during the year under consideration. Your Honors reference is drawn to page number 145 of the paper book for the cash flow statement. Further, the position of the current assets and current liability at (page no. 122 of the paper book) has been provided below for Your Honors kind attention.
