Interest expenditure incurred by assessee is an allowable deduction under the provisions of section 36(1)(iii) (of Income Tax Act, 1961) if the amount of interest was paid in respect of capital borrowed for purposes of business or profession.

1. This appeal is filed by assessee against the order of The Commissioner of Income Tax (Appeals)-35, New Delhi (the Ld. CIT (A) dated 14/11/2017 for Assessment Year 2014–15 passed in appeal filed by the assessee against the order of the Additional Commissioner Of Income Tax, Special Range – 04, New Delhi (the Ld. AO) made U/s 143(3) (of Income Tax Act, 1961) (the Act) on 27/12/2016, where in interest disallowance made by the ld AO was confirmed.

2. Assessee has raised following grounds of appeal

“1. That the ld CIT(A) and the Assessing Officer have erred in holding that advances has not been utilized for business purposes as the appellant company borrowed the money from banks for business purposes and had utlised the same in its business only.

2. The ld CIT(Appeals) and the Assessing Officer have erred in holding that there is direct nexus of the borrowing made by the appellant to the interest free advances given to some of the parties.

3. The ld CIT(Appeals) as well as Assessing Officer failed to appreciate that there were also own funds and the other interest free deposits with the appellant which have been utlised for the purpose of granting interest free advances to the parties and most unjustifiably and arbitrarily rejecting the submissions made by the appellant that total amount of funds advanced by the appellant are Rs. 69.35 crores (excluding advance against plot of Rs. 133.01 crores) whereas the interest free funds, available with the appellant were Rs. 114.47 crores.

4. That in respect of the above grounds the orders of the ld CIT (Appeals) and Assessing “Officer are not justified on the facts of the case and are bad in law.

3. The only issue involved in this appeal is that Ld. AO made disallowance of interest expenditure of Rs. 5,68,97,378/– holding that the assessee has given interest free funds and advances and share capital to various sister concerns and therefore interest bearing funds have been diverted by the assessee towards non-interest-bearing loans and advances. Ld. CIT (A) confirmed the above disallowance. Hence, this appeal.

4. Brief facts of the case are that assessee is a company engaged in the business of real estate development. During the year, the assessee is developing a residential project at Greater Noida (West). The assessee is following percentage completion method for recognizing the revenue from the project. The assessee has incurred 37% of the estimated project expenditure in phased manner and accordingly the revenue and expenses are recognized from the project. This is the first project of the company.

5. The assessee filed its return of income on 28/9/2014 declaring total income of Rs. 208017780/–. During the assessment proceedings, the Ld. assessing officer noted that assessee has given loans to various parties and advance given for purchase of plots as well as share application money. He noted that assessee has paid interest of Rs. 7, 57, 71, 924/– to bank of Baroda and further sum of Rs. 78004772/– to Andhra Bank.

Therefore the Ld. assessing officer noted that assessee has incurred total interest expenditure of Rs. 15,37,76,696/– and as during the year only 37 percentage of this interest is being charged to profit and loss account by following the percentage completion method which amounts to Rs. 56897378/–. He noted that on many instances, the loans raised during the year were diverted to related concerns and no interest was charged from them. As according to the Ld. assessing officer interest-bearing funds were diverted to related concerns and no interest was charged from those parties therefore he asked the assessee to explain the reasons for which the interest corresponding to this interest free loans and advances should not be disallowed.

6. The assessee submitted its reply stating that Assessee Company is a construction company engaged in construction of flats and selling the same to the proposed buyers. Short-term loans and advances by the assessee to its sister concerns are part of business funds and the funds given to the sister concerns were not out of the loan such as interest bearing borrowed during the year but it is used for financing the construction project only. The assessee gives the above advances to its group companies as part of their overall business plan and no connection with the project loan taken from bank. Banks loan was stated to be used for projects and interest expenditure is incurred entirely for the project expenditure. Therefore, the assessee for the purpose of the business by the way of interest on project loan incurs the expenditure claimed and hence it should be allowed the deduction. He further stated that the loans provided to the sister concern is from the company’s own fund available, which is interest, free. It was further stated that the booking deposit from flat buyers and advances from customers amounting to Rs. 1144695481/– is available to the assessee company along with shareholders’ funds, interest free loans and internal accruals for the year. Therefore, he stated that the advances listed by the Ld. assessing officer in para No. 5 of the order are not given from the borrowed funds or interest-bearing funds. The assessee further relied upon the several decisions before the Ld. assessing officer stating that reasonableness of the expenditure has to be seen from the point of view of the businesspersons and that the revenue cannot seek to put itself in the armchair of the businessmen.

7. Based on the details furnished by the assessee the Ld. assessing officer noted that the share application money by the assessee given to Gaursons RealTech private limited was out of interest-bearing loan funds.

He further stated that the interest-bearing funds were diverted to the related companies to M/s SKA Realtech private limited and M/s UP Township private limited. He further held that a sum of Rs. 2 crores was transferred to Gaursons sports wood private limited is also out of the loan of bank of Baroda. The Ld. assessing officer further noted that the assessee has given the advances for purchase of land to three sister concerns where the assessee has claimed that it is for the purpose of the business of the assessee. The Ld. assessing officer further noted that the assessee has failed to show any business expediency or commercial expediency for the above advances made. Hence, he held that the interest corresponding to various loans, advances, and share application money as mentioned in paragraph No. 5 of the order is not allowable as deduction. The Ld. AO further relied upon the decision of the Hon’ble Punjab and Haryana High Court in CIT versus Abhishek industries Ltd 286 ITR 1 wherein it has been held that once it is borne out from the record that the assessee has borrowed certain funds on which it is liable to pay interest and on the other hand certain amounts have been advanced to sister concerns or others without carrying any interest, the interest to the extent of advances has been made without carrying any interest is to be disallowed under section 36 (of Income Tax Act, 1961). The Ld. AO further relied on several decisions of various high courts. On the basis of the above discussion the Ld. assessing officer stated that total advances given by the assessee is Rs. 202,35,80,993/– and the above amount exceeds the total amount outstanding against loan from various banks of Rs. 158,50,00,000/–. Therefore he disallowed the total sum of interest expenditure debited to the profit and loss account of Rs. 56897378/–. Consequently assessment under section 143(3) (of Income Tax Act, 1961) was passed determining the total income of the assessee at Rs. 264915158/– against the returned income of the assessee of Rs. 208017780/–.

8. The assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) held that the assessee has failed to counter the in-depth analysis made by the Ld. assessing officer in the assessment order where in the AO has successfully established a direct and immediate nexus between borrowings and the interest free loans and advances after having directed the movement of funds via different accounts. He held that the Ld. AO has clearly given a detailed analysis showing the nexus between the interest-bearing funds and the interest free advances. He further held that the contention of the assessee that the funds have been diverted in the ordinary course of business is not supported by strong evidences, as commercial expediency cannot be measured by simply taking a shield behind the ratio decidendi of case laws without appreciating the facts of the case. Therefore, he confirmed the disallowance. Therefore, assessee is in appeal before us.

9. The Ld. authorized representative vehemently submitted that all the advances are made by the assessee for the purposes of the business and therefore no interest disallowance should have been made by the Ld. assessing officer. He firstly referred to the memorandum of Association of the assessee company and showed the Main objects of the assessee company where in it have wide objects of real estate development. He submitted that from these aspects the whole issues of allowability of interest expenditure needs to be seen by the lower authorities. He explained each transaction of loan as under :-

i. He submitted that assessee is in the business of the real estate and therefore the advances have been given by the assessee for the purchase of plot of Rs. 523618780/– to M/s Gaursons India Ltd, assessee’s holding company. He submitted that the main purpose for advance is to acquire interest in the land. He submitted that the assessee has given these advances to its holding company against the Ghaziabad Development Authorities (GDA) capital project, which later went into the dispute with the farmers and did not eventually materialize. He further submitted the details of the communication from GDA to gaursons India and agreement to sell dated 31/1/2012 between GDA and the Gaursons India private limited. He therefore submitted that though transaction did not eventually fructify however the amount of loan of Rs. 523618780/– was given by the assessee for the purpose of acquisition of land, which is the main business of the assessee company. Therefore, no interest disallowance can be made on this sum.

ii. With respect to the advance of Rs. 1 crore given to UP Township private limited he submitted that the above advances were also given by the assessee for the purpose of purchase of the plot. He stated that this amount is paid by the assessee on 10/10/2013 and is out of the escrow account of the Bank of Baroda where in the business receipts are deposited contains the business receipts. He therefore submitted that the above sum is not given out of the interest-bearing funds by the assessee.

iii. He further submitted that Rs. 79.65 crores given as an advance to Gaursons Realtech private limited was of acquiring interest in the land. He referred to the memorandum of understanding dated 30/3/2013 between the assessee and the Gaursons Real Tech private limited. He further stated that the above amount of loan for the purchase of plot is not given out of the interest-bearing funds of the assessee. With respect to the amount of investment made by the assessee of Rs. 53.22 crores in M/s Gaursons Realtech private limited, He submitted that the above investment has been made by the assessee for acquiring interest in the real estate projects invested out of the business funds as well as the interest free funds available with the assessee. He submitted that the assessee has used no interest-bearing funds.

iv. He further referred to the various advances to sister concerns and submitted that these are in the nature of running account between the group companies and the assessee has not diverted interest- bearing funds.

v. He further stated that the assessee has Rs.16.68 crores of the shareholders funds and Rs. 11.11 crores and share application money. He further submitted that assessee has advances from customers of Rs. 108.68 crores that are also non-interest-bearing. He therefore submitted that assessee has interest free funds available with him of Rs. 135 crores. Therefore he submitted that even otherwise with respect to the other advances given other than against the plots and share application money the assessee has enough interest free funds available with it and therefore interest cannot be disallowed on the same. He further submitted a chart of the fund flow showing the availability of the interest free funds and advances given by the assessee for various projects and to other parties.

vi. He further submitted that during the year, the assessee has revenue from operation of Rs. 140 crores and therefore it generates enough cash flow for advancing to the sister concerns, even if it is assumed that advances are without business expediency.

vii. He further submitted that the advances of Rs. 8.59 crores given by the assessee to M/s Gaursons Realtech private limited is in fact interest-bearing and interest has been received by the assessee.

viii. He further submitted that the long-term borrowing on the interest of the assessee is Rs. 2234518469/– out of which the assessee has already invested in inventory of Rs. 197 crores. He further submitted that Rs. 9.5 crores are in the form of trade receivables and Rs. 12.47 crores are in the form of cash balances available with the assessee, therefore, out of the long-term borrowing of Rs. 223 crores the assessee has already invested Rs. 221 crore in the above projects. Therefore he submitted that the interest-bearing funds of the loan from banks have already been invested the projects for which the loan was taken and hence it are not available for advancing to the sister concerns. According to him, assessee has shown that the assessee has utilized interest-bearing funds from the banks for the purposes of the business and further assessee has enough non-interest-bearing funds available with it for advance. In any case, it is submitted that the assessee gives the advances for the purposes of the business of the assessee.

ix. In the end, he submitted that each advance given by the assessee is for the purposes of the business of the assessee to acquire the Real estate business, real estate projects, open lands as well as to gain control over the companies who are holding land banks. Interest bearing funds are invested in inventories and the business assets. Noninterest bearing funds available with the assessee exceeds the advances free of interest to the sister concerns.

x. Therefore, he submitted that the disallowance made by the Ld. assessing officer is not sustainable.

10. He further submitted a note referring to various pages of the balance sheet of the company as at 31.03.2014 to show the various interests amounts paid by the assessee as well as the amount of advances given to sister concern or related parties on which no interest has been charged. He further submitted the copies of various accounts of the parties to whom advances were given to hold the land. He further submitted the copy of account of Gaursons Realtech Pvt ltd from whom interest income of Rs. 944137/- has been received to show that it is not interest free advance.

11. As directed by the bench he also submitted a fund flow statement to show that assessee has more interest bearing funds available with it. He stated that assessee has huge advances from the customers of Rs. 108 crores and other interest noninterest bearing funds amounting to Rs in all of Rs. 132 crores. He submitted that out of the total advances given as alleged by the ld Assessing Officer of Rs. 133 crores are against the advance against the plot and Rs. 53 crores are for various strategic investment with real estate companies. He further stated that on advances of Rs. 9 crores, the assessee has received interest and therefore, it cannot be said that these are non-interest bearing advances. 12. To support his claims he relied on the following decisions of various courts:-

i. Pr. CIT Vs. Midday Multimedia Ltd (2018) 89 Taxmann.com 184 (Bom)

ii. Pr. CIT Vs. Sesa Resources Ltd (2017) 85 Taxmann.com 88 (Bom)

iii. Cit Vs. DD Industries Ltd (2015) 57 Taxmann.com 310 (Del)

iv. CIT Vs. Modi Rubber Ltd (217) 79 Taxmann.com 366 (Del)

v. Industrial Feeders Vs. ACIT (2016) 68 Taxmman.com 92 (Mad)

vi. CIT Vs. Kapsons Associates (2017) 79 Taxmann.com 364 (P&H)

vii. Embassy Development Corporation Vs. ACIT (2017) 78 Taxmman.com 91 (S.C)

viii. Hero Cycles P Ltd vs. CIT (2015) 63 Taxmann.com 308 (S.C).

13. With respect to the decision relied up on by the dl AO of Abhishek Industries Limited, he submitted issue is now squarely covered in favour of the assessee by the decision of honourable Delhi and Bombay high courts.

14. The ld Departmental Representative vehemently supported the order of the lower authorities. It was submitted by him that assessee has given huge advances to its sister concern, however, assessee has not built any real estate on the above property therefore, it cannot be said that assessee has used the above money for the purposes of business. He therefore, submitted that ld Assessing Officer has correctly disallowed the above sum. He further relied on various paragraphs of the order of the ld CIT (A) to show that ld AO has successfully established direct and immediate nexus between the borrowing and interest free loans and advances showing the movement of the funds. He further stated that ld CIT(A) has also held that the funds have been given by the assessee to the sister concern in the ordinary course of business is not supported by any strong evidence as commercial expediency cannot be measured by simply taking shelter under the various judicial precedents without appreciating the facts of the case. He further stated that ld CIT (A) has given a categorical finding that no portion of interest amount paid on loan of Andhra Bank and Bank of Baroda can be considered as cost of project. He therefore, submitted that the ld CIT (A) has correctly confirmed the disallowance of the amount of interest.

15. We have carefully considered the rival contentions and perused the orders of the lower authorities. Undisputedly the assessee is a company that is engaged in the business of real estate development and is part of Gaur Group. The assessee is developing a residential project at Greater Noida (west) and is following percentage completion method for revenue recognition. During the year, the assessee has incurred interest expenditure of Rs. 15.37 crores and debited the same to the project cost.

As 37 % of the project was found to be completed as per project completion method interest of Rs. 5.68 crores was charged to profit and loss account. During the course of assessment proceedings the ld Assessing Officer noted that assessee has borrowed Rs. 54 crores as a loan from Andhra Bank during the year whereas opening outstanding balance was Rs. 20.15 crores and the closing balance was 74.50 crores.

Further, borrowing from Bank of Baroda was taken of Rs. 59 crores whereas, the opening balance was Rs. 25 crores and closing balance was Rs. 84 crores. On examination of the balance sheet, the ld AO also noted that assessee has loans and advances of Rs. 210 crores as at the end of the year whereas at the beginning of the year it was only Rs. 114 crores. Therefore, the ld Assessing Officer examined claim of allowability of interest expenditure as under:-

“4. During the assessment proceedings, it was gathered that the assessee has raised substantial loans from banks and has debited substantial amount of interest in its P&L account. On the other hand, the assessee company has advanced substantial amounts as loan/advance to various parties.

Accordingly, the assessee company was requested to file the complete details of loans and advances given to different persons along with the interest charged on such loans. Though, the said details were asked vide questionnaire dated 1.8.2016 but the assessee filed these details only vide letter dated 26.10.2016. It was gathered from these details, that the assessee company has given following loans/advances to related parties:

Loan to Related Parties / KMP Opening balance as on 1.4.2013

Increase/decre ase during the year Balance as on 31.3.2014

Interest accrued 1 Gaursons Infratech Pvt Ltd 18,000 " 18,000

2 Banwari Lai Gaur 18,000,000 (3,000,000) 15,000,000 -

3 SKA Realtech Pvt Ltd - 30,000,000 30,000,000 . \

Ltd 796,500,000 (710,555,863) 85,944,137 - 6 Shri Shyam Buildcon Pvt

Ltd 10,000,000 10,000,000 s

Total C 814,518,000 (653,555,787) 16,0,962,213

Advance against Plots 1 Gaursons Related Pvt Ltd “ 796,500,000 796,500,000

2 Gaursons India Limited 285,554,291 238,064,489 523,618,780J- UP Township Pvt. Ltd. - 10,000,000 10,000,000 -

TOTAL E 285,554,291 1,044,564,489 1,330,118,780

Share Application Money 1 Gaursons Realtech Pvt

Ltd “ 532,500,000 532,500,000

5. The above details were filed on 26.10.2016. On this date, the case was fixed for 8.11.2016. Again, on 8.11.2016, only part details were filed and the case was fixed for 16.11.2016. No one attended the case on 16.11.2016, however, a request for adjournment was received on 18.11.2016 and the case was fixed for 21.11.2016. None attended on 21.11.2016. Thereafter, on 29.11.2016, a letter was issued to the assessee seeking following details:

(i) Copies of all bank accounts of the company

(ii) Ledger copies of interest expenses account regarding the interest paid during the year debited to project expenses.

(iii) Ledger copies of accounts in the books of company for following:

• Gaursons Realtech Private Limited (loan as well as Advance accounts)

• Gaursons India Limited

• UP township Private Limited

• Banwari Lai Gaur

• SKA Realtech Pvt Limited

• Gaursons Sportswood Pvt Ltd

• Shri Shy am Buildcon Pvt Ltd

(iv) Copies of agreement entered with related parties for advances against plots may be filed. Details of plots purchased from the related parties against the advances outstanding as on 31.3.2014 may be filed. If no plots were purchased against these advances, present status of these advances may be furnished.

(v) The company gave share application money to M/s Gaursons Realtech Private Limited amounting to Rs. 53.25 crores. Source of this investment may be explained with supporting documents. Also inform the present status of this share application money given to M/s Gaursons Realtech Private Limited”

6. On 6.12.2016, the AR of the assessee attended and filed the written submission.

From this submission, it was gathered:

(i) The assessee has paid interest amounting to Rs. 7,57,71,924/- to Bank of Baroda on loan. It was also gathered that fresh loan amounting to Rs. 87,50,00,000/- was taken from BoB during the year. (ii) The assessee paid interest amounting to Rs. 7,80,04,772/- to Andhra Bank. This interest was paid on loan amount of Rs. 78,00,00,000/- which was disbursed 30.3.2013 onwards.

(iii) Thus, a total amount of Rs. 15,37,76,696/- was debited to the project cost on these loans and during the year 37% of this interest has been charged to P&L account by following the percentage completion method‟ which comes to Rs. 5,68,97,378/-.

(iv) On many instances, these fresh loans raised during the year were diverted to related concerns and no interest was charged from them. The details of fresh funds given to related concerns are mentioned in para 5 above.

7. As interest bearing funds were diverted to related concerns and no interest was charged from the related concerns, therefore, vide order sheet entry dated 9.12.2016, following show cause was issued:

“From the details filed till date, it is gathered that the company has raised huge loans (interest bearing) from banks and on the other side have given interest free loans and advances to related companies/persons. As per the details filed, following are the major interest free loans & advances given to related persons:

Loans

Name Amount outstanding as on 31.3.2014 (Rs)

SKA Realtech (P) Ltd 3,00,00,000/-

Gaursons Sportswood (P) Ltd 2.00,00,076/-

Gaursons Realtech (P) Ltd 8,59,44,137/-

Shri Shyam Buildcon (P) Ltd 1,00,00,000/-

Banwari Lai Gaur 1,50,00,000/

Gaursons Infratech P Limited 18,000/-

Share Application money Name Amount outstanding as on 31.3.2014 (Rs) Gaursons Infratech (P) Ltd 53,25,00,000/- Advances:

Name Amount outstanding as on 31.3.2014 (Rs)

Gaursons Realtech (P) Ltd 79,65,00,000/-

Gaursons India Limited 2,36,18,780/-

UP Township (P) Ltd 10000000/-

As interest bearing loans have been diverted to related persons/companies for non business purposes, please explain the reasons for which the interest corresponding to these interest free loan/advances should not be disallowed.

Case is fixed for 13/12/2016.”

8. The date of compliance was fixed as 13.12.2016. However, none attended on the said date. Thereafter, vide letter dated 15.12.2016, one more opportunity was provided to the assessee. In response to this, the assessee vide letter dated 20.12.2016 has submitted as under:

“Assessee Company is a construction company engaged in construction of flats & selling the same to the proposed buyers. Short Term Loans & Advances by Gaursons Realty Pvt Ltd. to its sister concerns as a part to manage fund position of the Group. Short Term Loans & Advances has not been provided by the company from loan borrowed during the year by the company but it is used for financing the construction project only, these advances have been given by the assessee to its group companies as part of their overall business plan to manage the fund flows of the group and has no connection with the project loan taken from Bank which has been incurred entirely for the project expenditure and as such the expenditure claimed by the way of interest on project loan are incurred for the business purpose and are eligible as business expenditure under section 36(1)(Hi) (of Income Tax Act, 1961), 1961.

Short Term Loans & Advance is provided to its sister-concern mainly from companies own fund available with the enterprise. Booking deposit from flat buyers and Advances from customers (Rs. 1,144,695,481-) available also the assessee company received the amount from the maturity of Fixed Deposit.

This means that Advance was not given from the borrowed fund / interest bearing fund.

It is respectfully submitted that it is a settled position of law that it is not for the Revenue to dictate to the businessman how to carryon business. Various Courts have, repeatedly, held in the following cases that reasonableness of the expenditure has to be seen from the point of view of businessman and that the Revenue cannot seek to put itself in the armchair of the businessman:

i. CIT vs. Walchand & Co.: 65

ii. J.K. Woollen Manufactures vs. CIT: 72ITR 612(SC)

iii. CIT vs PanipatWoollen & General Mills co. Ltd.: 103 ITR 666(SC)

iv. S.A. Builders Ltd. vs. CIT: 288 ITR 1 (SC) approving v. Dalmia Cement (P) Ltd. : 254 ITR 377 (Del.)

v. CIT vs. Padmani Packaging (P) Ltd.: 155 Taxman 268 (Del.)

9. The submission of the assessee has been considered. The argument of the assessee is that no interest bearing fund has been diverted to its related/sister concerns and the money advanced was out of advance received from customers. The submission of the assessee is factually incorrect as demonstrated below:

(i) Examination of Bank accounts of the assessee revealed that a loan amount of Rs. 25,00,00,000/- was disbursed by Bank of Baroda on 29.06.2013 which was received by the assessee in its bank account No. 05860200001382 (BoB). On 1.07.2013, the whole of credit balance available in this account amounting to Rs. 25,38,98,918/- was transferred to another bank account no. 05860200001379 (BoB).

(ii) An amount of Rs. 30,00,00,000/- was disbursed by Andhra Bank on 29.6.2013 which was received in bank account no.

008411100002069 (Andhra Bank) and on 2.7.2013, Rs. 29,75,53,844/- was transferred to bank account No.

05860200001382 (BoB). On 3.7.2013, the whole of credit balance available in this account amounting to Rs. 30,13,05,669/- was transferred to another bank account no. 05860200001379 (BoB).

(iii) On receipt of these two amounts as mentioned at (i) and (ii) above, the total credit available in bank account no. 05860200001379 (BoB) as on 3.7.2013 was Rs. 56,65,01,414/- which was mostly out of the loan amount of Rs.55,00,00,000/-.

(iv) Thereafter, on 3.7.2013, an amount of Rs. 40,00,00,000/- (two installments of 20 crores each) were invested in Bank of Baroda Pioneer Mutual Fund. It is important to mention that the assessee‟s investment in this^Mutual fund just before the said investment was Nil. A further investment of Rs 10,00,00,000/- was made in Bank of Baroda Pioneer Mutual Fund on 4.7.2013. This investment was also made out of the credit balance as mentioned at (iii) above. In this way, an amount of Rs. 50 crores out of the loan amount of Rs 55 crores was invested in Mutual Funds.

(v) Out of this investment, the assessee received an amount of Rs 20 crores on 8.7.2013 on account of partial redemption of units in mutual funds. The said amount of Rs. 20 crores was received by the assessee on 9.7.2013 in its bank account No.

012784100000020 (Yes Bank) and on the same day it was transferred to the account of M/s Gaursons Realtech (P) Limited as Share Application Money.

(vi) Further out of the investment of Rs. 50 crores in mutual fund as discussed above, the assessee received an amount of Rs 15 crores on 16.7.2013 on account of partial redemption of units in mutual funds. The said amount of Rs. 15 crores was received by the assessee on 17.7.2013 in its bank^account No. 012784100000020 (Yes Bank) and on 18.7.2013, Rs 15 crores were transferred to the account of M/s Gaursons Realtech (P) Limited.

(vii) Further, the remaining units of mutual funds were redeemed by the assessee on 24.07.2013 and an amount of Rs 15,03,36,628/- was received on 25.7.2013 in its bank account No.

012784100000020 (Yes Bank) and on the same day it was transferred to its another account maintained with Andhra Bank A/c No. 2069) and then on 27/7/2013 to BoB A/c No. 1379. Out of this, on 31/7/2013, Rs. 12 crores were invested again in mutual fund which were redeemed on 1/8/2013 and amount of Rs. 12,00,54,035/- was received in No. 012784100000020 (Yes Bank) on 2.8.2013 and on 3.8.2013, Rs. were transferred to the account of M/s Gaursons Realtech (P) The above discussion clearly demonstrates that the share application money given to M/s Gaursons Realtech (P) Limited was out of interest bearing loan funds.

The above discussion clearly demonstrates that the share application money given to M/s Gaursons Realtech (P) Limited was out of interest bearing loan funds.

10. Further, on 30.9.2013, a loan disbursement of Rs. 12.5 crores was madeby Andhra Bank. This amount was received in bank A/c No 05860200001382 (BoB). On 4.10.2013, an amount of Rs. 13 crore was transferred from this account to account no. 05860200001379 (BoB) and thereafter out of this amount, Rs 3,00,00,000/- were transferred to M/s SKA Realtech Private Limited. Further, Rs 1,00,00,000/- were transferred to M/s U.P. Township Private Limted on 11.10.2013. This clearly indicates that interest bearing funds were diverted to related companies.

11. Also, an amount of Rs. 2,00,00,000/- was transferred to M/s Gaursons Sportswood Private Limited on 4.3.2014 and this amount was diverted out of the loan amount of Rs. 15,50,00,000/- disbursed by Bank of Baroda on 27.2.2014.

12. Out of the loan amount of Rs 15,50,00,000/- disbursed by Bank of Baroda on 27.2.2014, an amount of Rs. 9,50,00,000/- was invested in Mutual Funds. On redemption, Rs 4,50,00,000/- was received in account No. 012784100000020 (Yes Bank) on 12.3.2014. Thereafter, Rs 1,00,00,000/- each was transferred to M/s Gaursons India Limited and M/s Shri Shyam Buildcon (P) Ltd.

13. Similarly, on many other occasions, the interest bearing funds have been diverted to related companies as loan/advance as well as advance for plots and no interest has been charged.

14. The above discussion clearly suggests that the submission of the assessee that the whole of loan amounts were used only for project is factually incorrect as demonstrated above. Accordingly, the case laws relied upon by the assessee shall not be applicable to the facts of the present case.

15. It may also be stated that the assessee has submitted that following advances were given to related companies for purchase of land:

Name Amount outstanding as on 31.3.2014 (Rs)

Gaursons Realtech (P) Ltd 79,65,00,000/-

Gaursons India Limited 52,36,18,780/-

UP Township (P) Ltd 1,00,00,000/-

The assessee was specifically asked to file the copies of agreement for these advances. In response to this, the assessee has filed the copy of agreement with aursons Realtech (P) Ltd only which indicates that the advance was given towards some land at Yamuna Expressway. For other two advances, the assessee could not file any agreement to substantiate that the said advance was for business purposes.

16. In this connection, it may be mentioned that the assessee is following the „percentage completion method‟ and as per relevant accounting standard, costs that relate directly to the specific project and costs that are attributable to the project in general and can be allocated to the project, can only be recognised while determining the profit from the project.

Therefore, the interest costs relatable to other projects, even if the same are business expenses has to be attributed to those projects only and cannot be claimed against any other project. In the present case, during the current assessment year, the assessee was developing only one project, therefore, the interest relatable to this specific project can only be claimed as expenditure during the year. The interest cost relatable to other projects though may be for business purposes, cannot be claimed as deduction.

17. The above detailed discussion clearly suggests that the assessee has diverted interest bearing funds to its sister concerns and no interest has been charged from them. These funds are diverted as loans, advance for land and share application money. For loans given to related parties, the assessee has failed to substantiate the business purpose/commercial expediency. Regarding the advances against plots, as discussed above, the assessee has failed to substantiate that the amount advanced to M/s Gausrsons India Limited and M/s UP Township (P) Ltd was towards any plot. Further, even if it is assumed that the said money was advanced towards plots, in that case also the interest corresponding to such advance cannot be claimed as expenditure because such interest is not an expenditure for 'Gaur Saundaryam‟ project. Similarly, the interest corresponding to advance given to M/s Gaursons Realtech Private Limited for land cannot be claimed as expenditure because such interest is not an expenditure for „Gaur Saundaryam‟.

18. Regarding the share application money to M/s Gaursons Realtech Private Limited, the assessee has not substantiated the commercial expediency of this advance. Further, the said share application money was returned by M/s Gaursons Realtech Private Limited in the month of April, 2015. The interest corresponding to Share Application money given to M/s Gaursons Realtech Private Limited cannot be claimed as expenditure because such interest is neither an expenditure for „Gaur Saundaryam‟ project nor a business expense. Accordingly, the interest corresponding to various loans, advances and Share application money as mentioned in paragraph 5 is not allowable as deduction.

19. It may be mentioned that in the case of CIT vs. Abhishek Industries Limited 286 ITR 1, Hon‟ble Punjab and Haryana High Court held that once it is borne out from the record that the assessee has borrowed certain funds on which it is liable to pay interest and on the other hand certain amounts have been advanced to sister concern or others without carrying any interest, the interest to the extent of advance has been made without carrying any interest is to be disallowed u/s 36 (of Income Tax Act, 1961). In this case, the Hon‟ble High court observed as under:

" the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it pleaded to be out of sale proceeds or share capital or different account cannot be accepted. Entire money in a business entity comes in a common kitty.

Monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Source has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilized for the purpose of business or to invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying benefits thereof We do not subscribe to the theory of direct nexus of the funds and diversion thereof for non-business purposes ”

Reliance in this regard is also placed on following case laws:

(i) CIT vs H.R. Sugar Factory Pvt. Ltd. (1991) (2002) 187 ITR 363 (All.)

(ii) India Metals & Ferro Alloys Ltd. vs CIT (Orissa) 193 ITR 344

(iii) CIT vs V.l Baby and Co. (2002) 254 ITR 248 (Kerala)

(iv) C1T vs Motor General Finance Ltd.(2002) 254 1TR 449 (Del)

20. As per the details furnished by the assessee, the total outstanding amount as on 31.3.2014 against various related persons as mentioned in paragraph 5 comes to Rs. 202,35,80,993/-. This amount exceeds the total amount outstanding on 31.3.2014 against loans taken from Bank of Baroda and Andhra bank which is Rs. 158,50,00,000/. It has already been demonstrated in this order that the loan amounts raised from these banks have been diverted to the related concerns by routing the funds through different bank accounts. Therefore, no amount of interest paid to Andhra Bank and Bank of Baroda during the year shall be allowable as deduction as the loan funds were not utilised for the purposes of business. In any case, no portion of interest amounting to Rs. 15,37,76,696/- paid on loans to Andhra Bank and Bank of Baroda during the year can be considered as cost of „Gaur Saundaryam project‟ because the assessee has failed to demonstrate that the loan fund was used for this project.

The assessee has claimed 37% of Rs. 15,37,76,696/- as deduction during the year (based on percentage completion method) which comes to Rs, 5,68,97,378/-. Therefore, the disallowance for the present assessment year comes to Rs. 5,68,97,378/- and the same is being added back to the income of the assessee.

I am satisfied that the assessee has furnished inaccurate particulars of income and accordingly penalty proceedings u/s 271(1)(c) (of Income Tax Act, 1961) is being initiated separately.

(Addition: Rs. 5,68,97,378/-)”

16. The ld CIT(A) confirmed the above disallowance affirming the finding of the ld Assessing Officer. Therefore the issue before us is whether interest expenditure incurred the assessee is allowable as deduction to the assessee under the provisions of section 36(1)(iii) (of Income Tax Act, 1961). The provisions of section 36(1)(iii) (of Income Tax Act, 1961) provides that deduction shall be allowed in computing the income referred in section 28 (of Income Tax Act, 1961) of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. Therefore, the amount of interest paid by the assessee is required to be tested whether such interest has been paid on capital borrowed by the assessee for the purposes of the business. In case if the assessee has diverted the borrowed funds by providing advances to other parties without any business or commercial expediency or have not been used in the business assets, then in such cases the interest cannot be allowed as deduction to the assessee under the head business income. The various amount advanced by the assessee to the various parties is required to be tested on this ground. i. share application money of Rs. 53.22 crores and loan of Rs. 79.65 cores given to Gaursons Realtech Pvt. Ltd.

M/s. Gaursons Realtech Pvt. Ltd is a company of the Gaur Group. As the assessee is engaged in the business of the real estate according to the main object as mentioned in memorandum of association of the assessee company, this company found that one of the group companies M/s. Gaursons Realtech Pvt. Ltd has entered into an agreement with Jaypee Infratech Ltd for purchase of land admeasuring 300 acres. Therefore, assessee entered into a memorandum of understanding on 30.03.2013 with the sister concerns forming part of above land admeasuring 88500 sq meters, which was to be purchased out of the above land of 300 acres. The above plot was to be used for the purposes of residential cum commercial construction. The above plot of land, which was to be leased by the above party to the assessee, was free from all the charges and possession of the plot was to be given only after receipt of 100% consideration by the above party from assessee. The assessee has paid Rs. 79.65 cores as advance to the above party and same was shown as advance against plots and classified under Note No. 19 titled as “short term loans and advances” in the annual accounts. The total consideration was of Rs. 159.30 crores as per clause NO. 13 of the above agreement and out of which 50% payment was made by the assessee. The detail of the payments was directly made by the assessee to M/s. JP Infratech Ltd as an advance for land on behalf of Gaursons Realtech Pvt. Ltd. Due to the business circumstances, which resulted into dispute with the farmers , the JP Infratech Ltd could not purchase the above plot and also could not be sold to Gaursons Realtech Ltd and consequently lease of the land in favour of the assessee also could not be fructified. Therefore immediately, subsequently, in the next year as the transaction of land could not be fructified, total payment made by the assessee was refunded to the assessee. Therefore, it is apparent that the assessee originally made payment of Rs. 79.65 crores was for long lease of interest in land as per memorandum of understanding dated 30.03.2013. The ld Assessing Officer has not disputed the content of the memorandum of understanding for lease of land. It is not in dispute that assessee is also engaged in the real estate business and therefore, buying land or acquiring lease of the land would be the business of the company. Further the ld AO also could not show any infirmity in the facts that borrower of the funds from the assesses as to acquire the land of 300 acres from J P Infratech Ltd. It is also not denied that the whole transaction is related to the real estate business f the assessee company and the group. In view of this, it cannot be held that assessee has advanced the sum of Rs. 79.65 crores to the above company without any commercial purposes. In view it cannot be said that assessee has diverted the interest bearing funds for non-business purposes.

Further, the assessee has also invested Rs. 53.22 crores in the share application money of the above company. The main intention of making investment in the above company was for acquiring interest in real estate business of this company, which was to buy 300 acres of the plot of land in Sport City. It is further to the recalled that the Gaursons Realtech Pvt Ltd was to purchase land admeasuring 300 acres and assessee was purchasing was subscribing to the shares of this company. Out of the 300 acres the plot of 88500 sq mtr was agreed to be sold to the assessee for whom advances were given and in the balance land bank by making investment in the share capital of the company assessee was acquiring controlling interest. It is not the case of the revenue that the business of Gaursons Realtech Pvt. Ltd was not of real estate. It is always a case that a holding company would always have interest in the success or failure of a subsidiary company. It is also a fact that when the JP Infratech Ltd could not sale the land bank to the Gaursons Realtech Pvt. Ltd , all funds invested by the assessee which were shown by both the parties as share application money pending allotment were refunded by Gaursons Realtech Pvt. Ltd to the assessee company. The flow of the funds stated by the ld Assessing Officer is undeniably shows that the source of money invested in the above company is from various bank accounts as shown by the Assessing Officer. However, it cannot be said that the assessee has used money for non-business purposes because as both the companies were in the real estate business it cannot be said that investment made by the assessee in the above company is not for the purpose of the business.

Moreover, the assessee has also shown this sum as advance against plot of land in its balance sheet and share application money. Hence, we are of the opinion that sum of Rs. 79.65 crores given as advance to Gaursons Realtech Pvt Ltd for the purpose of the acquisition of the land and sum of Rs. 53.22 crores deposited as share application with Gaursons Realtech Pvt. Ltd is for the purpose of the business of the company and interest applicable to these advances cannot be disallowed in the hands of the assessee.

ii. Advance of Rs. 85944137/- to M/s. Gaursons Realtech Pvt. Ltd. The assessee has submitted that the above amount was given by the assessee as a mere loan without any purpose to that company on 27.02.2014 in two tranches of Rs. 5 crores and Rs. 3.5 crores totaling of Rs. 8.5 crores. The assessee has charged interest thereon, of Rs. 944137/- thereon, and shown as income. The total of the amount outstanding as mentioned by the AO of Rs. 85944137/- is comprising of the loan of Rs. 8.5 crores and interest thereon of Rs. 9.44 lacks as the assessee has charged interest on the above sum @12% for the appropriate period it cannot be said that above amount given by the assessee is interest free advance. In view of this the ld Assessing Officer is directed to delete the disallowance of interest proportionate to the above loan.

iii. Loan of Rs. 52.36 crores given to M/s. Gaursons India Ltd. The assessee has given the above sum to M/s. Gaursons India Ltd and it is shown in Note No. 19 to the balance sheet as advance against plot. The party to whom the loan is given is a holding company of the assessee and assessee is its subsidiary company.

The above company was allotted a plot of land of Rs. 16320 sq meter in Indirapuram Development Plan admeasuring 16320 sq mtr at a price of Rs. 40050/- per sq meter valued at Rs. 65.36 crores. That company was to deposit Rs. 16.34 crores as a bid price and further earnest of Rs. 9.20 crores and further sum of Rs. 7.14 crores within 7 days. The balance sum of 75% was to be paid later on. The assessee has also placed an agreement between Ghaziabad Development Authority and the Gaursons India Ltd dated 31.03.2012. Therefore, for purchase of the above land the assessee paid advance of Rs. 52.36 crores to the above company.

Later on there was a dispute between Ghaziabad Development Authority and the various farmers and due to that the above allotment letter could not fructify and hence agreement to sale dated 31.01.2012 been cancelled. As the assessee is the subsidiary of the company in the real estate business the above amount was given by assessee to the holding company. Therefore, the claim of the assessee is that it is advance for the purpose of the business of the assessee company but ultimately it could not be executed due to non-allotment of land by the Ghaziabad Development authority to the holding company. Subsequently, the money was refunded by the holding company on cancellation of the allotment. The ld Assessing Officer did not dispute the above fact. It was also not denied that the holding company was to be allotted the above plot of land for development and assessee had interest in the above land. Even otherwise as per the balance sheet of the company the assessee was having Rs. 16.70 crores of the share holders fund, Rs. 11.11 crores of share application money, Rs. 108.68 crores of the advances received from the customers. This gives the assessee interest free funds available with it of Rs. 136.49 crores. Therefore, as assessee is having mixed funds with it their part of the funds are interest bearing and part of the funds is non-interest bearing. The only presumption that arises in favour of the assessee is that the amount of advances given is out of non-interest bearing funds. Further, the Hon'ble Bombay High Court in 85 Taxmann. Com 88 in Pr CIT VS. Sesa Resources Ltd on identical facts and circumstances wherein the assessee borrowed funds and provided interest free funds to its sister concern where it cannot be shown that the advances was for the personal purposes then only possible other purposes as oppose to that it can be said that it is for business purposes or commercial expediency can be expected. The Hon'ble High Court in para No. 12 of that judgment has held so.

Furthermore, Hon'ble Delhi High Court in CIT Vs. DD Industries Ltd 57 Taxmann.com 310 has held that when assessee had sufficient adequate funds then the amount of loan given no disallowance can be made. Furthermore, as pointed out by the ld AR the assessee has also earned gross revenue from operations of Rs. 139 crores, which is also available for advance and same being interest free. In view of the above facts it cannot be said that there can be any interest disallowance on account of interest free advances provided to the holding company of the assessee of Rs. 52.36 crores.

iv. Other advances The ld AO has also considered the advances made to following parties for making disallowance.

i. Gaursons Infratech Pvt. Ltd Rs. 18000/-

ii. Banbari Lal Gaur Rs. 1.50 crores

iii. SKA Realtech Pvt. Ltd Rs. 3 crores

iv. Gaursons Sports wood Pvt. Ltd RS. 2 crores

v. Shyam Buildcon Pvt. Ltd Rs. 1 crore.

vi. UP Township Pvt. Ltd Rs. 1 crore

All the above advances even if it is presumed that they are not given by the assessee for the non-business purposes they do not exceed the funds available with the assessee without interest.

17. The above view also find support from the decision of Honourable Supreme court in [2015] 63 taxmann.com 308 (SC)/[2016] 236 Taxman 447 (SC)/[2015] 379 ITR 347 (SC)/[2015] 281 CTR 481 (SC) Hero Cycles P Ltd V CIT where in it is held that Once it is established that there is nexus between expenditure and purpose of business revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case.

Honourable supreme court los considered the decision of Hon Punjab & Haryana High court in case of Abhisek Industries (2006] 156 Taxman 257 (Punjab & Haryana)/[2006] 286 ITR 1 (Punjab & Haryana)/[2006] 205 CTR 304 (Punjab & Haryana) relied up on by the ld AO in para no 10. It has also approved the theory of interest free funds availability if more than non interest bearing advances no disallowance is called for was also propounded in para no 16 the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors . Further regarding interest on subdiary holding advances it has held in para no 14 that it is manifest that the advance to subsidiary company became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to subsidiary company to meet the working capital for meeting any cash loses. It is further required to be noted that the above decision relied up on by the ld AO has also been impliedly overruled by Hon Supreme court in case of Munjal Sales Coproration V CIT 2008] 168 Taxman 43 (SC)/[2008] 298 ITR 298 (SC)/[2008] 215 CTR 105 (SC).

18. Therefore, on the basis of our above finding we hold that investment made by the assessee in Gaursons Realtech Pvt Ltd of Rs. 53.22 crores and advance of Rs. 79.65 crores totaling to Rs. 132.87 crores is given by the assessee for the purpose of the business of the assessee and no disallowance of interest on these advances can be made. Further, the advance of Rs. 85944137/- is interest-bearing advance on which interest has been charged and therefore, it cannot be included in the interest free advances given by the assessee. Furthermore, a sum of Rs. 52.36 crores given to holding company of the assessee M/s. Gaursons India Ltd for acquiring plot of land from Ghaziabad Development Authority cannot also be included for the purpose of interest disallowance for the reasons given by us above. Even otherwise, the above amount of advance of Rs. 52.36 crores coupled with other advances of Rs. 8.5 crores are far less than the interest free funds available with the assessee. In view of this on this sums too, as held by Hon'ble Delhi High Court and Bombay High Court no disallowance of interest can be made.

19. In the result we direct the ld Assessing Officer to delete the disallowance of interest made by the ld Assessing Officer of Rs. 5.69 crores because of loans and advances given to sister concern and other associates without charging interest. Consequently, we reverse the finding of the lower authorities and allow the ground No. 1 to 3 of the appeal of the assessee.

20. In the result we allow the appeal of the assessee. The consequent stay petition of the assessee becomes infructous and hence dismissed.

Order pronounced in the open court on 07/05/2018.

-Sd/- -Sd/-

(AMIT SHUKLA) (PRASHANT MAHARISHI)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 07/05/2018