Wednesday 23 September 2015

Whether loan taken at higher rate of interest from sister concern can be allowed even if residential project for which such loan was taken has not been sanctioned by competent authorities - NO: HC

THE issue before the Bench is - Whether loan taken at a higher rate of interest from a sister concern can be allowed even if the residential project for the purpose of which such loan was taken has not been sanctioned by the competent authorities. NO is the answer.
Facts of the case
The assessee is a partnership firm which is in the business of real estate and construction of commercial and residential complexes. It had filed the return for A.Ys 2000-01 to 2002-03 and the same was processed u/s 143(1). Subsequently, the said return was selected for scrutiny and notices u/s 143(2) & 142(1) were also issued calling upon the assessee to furnish the necessary particulars. The assessee submitted that it had availed a sum of Rs.2.50 crores from M/s. Karnataka State Industrial Investment and Development Corporation (KSIIDC) as medium term corporate loan. Immediately thereafter, an amount of Rs.248.10 lakhs was advanced to Dynasty Developers Private Ltd, which is a sister concern of the assessee, carrying on construction of various commercial and residential projects. The assessee contended that the borrowed amount advanced to its sister concern was in the nature of sale consideration that was being paid to the sister concern for the purpose of acquiring a portion of the property in the project proposed to be developed in the name and style "Embassy Meadows". The whole amount of Rs. 3.25 Crores being paid for the purpose of acquisition of the said property was sought for deduction of interest paid on the loan availed by the assessee for A.Ys 2000-01 to 2002-03. However, the AO disallowed the same on the ground that though the assessee availed loan from KSIIDC, the same was diverted to its sister concern and was neither utilized for the business of the assessee nor any income was accrued to the assessee. Hence, the assessee was not entitled for deduction of interest. On appeal, the CIT(A) while partly allowing the appeals, denied the expenditure on interest for the three A.Ys. On further appeal, the Tribunal held that though the assessee availed loan for its business, the said amount was not utilized for its business whereas the same was diverted to its sister concern, Dynasty Developers Private Limited Company (DDPL). The veracity of exchange of letter between the assessee and its sister concern to treat the loan as an advance payment for the area to be purchased in the so called project "Embassy Meadows", was not above board. The said DDPL has not yet started the Project. Hence, the assessee was not entitled for any deduction towards interest paid on the loan availed.
Having heard the parties, the High Court held that,
++ the records produced by the assessee clearly disclose that neither the assessee nor the DDPL has also utilized the loan amount for purpose of "Embassy Meadows" project. The balance sheet of the DDPL clearly discloses that no work in progress or no advance to the material suppliers had been made for the said project. Before conception of the said project, the question of provisionally allotting 30000 sq.ft. of built up area and 25 covered car parking area, is impossible to believe. As per the terms and conditions of availing loan from KSIIDC, the assessee has to repay the said corporate loan in five quarterly installments. It is also impossible to believe availing of loan with interest at the rate of 18.5% p.a. to book a flat, in a project for which the plan has not yet been sanctioned by the competent authorities and construction has not yet been started. The authorities below, after taking into consideration all these aspects of the matter, clearly held that the transaction between the assessee and its sister concern is purely a loan transaction. There is no agreement entered into between the parties. The intention behind the advance is only to book interest expenditure in the assessee's case to reduce the taxable income. The finding recorded by the authorities below is purely a question of fact. Hence, the assessee is not entitled for any deduction towards the interest paid for availing the loan;
++ the principle of commercial expediency has to be applied on the basis of analysis of the facts of each case. The decision of the Supreme Court in S.A.Builders case can be applied, only if commercial expediency is established with facts. Unless interest free loan goes to business interest of the assessee, there cannot be any commercial expediency. In the instant case, loan amount advanced to the assessee's sister concern has not been used for construction of the "Embassy Meadows" building, but it was used for some other Project. No prudent businessman would invest in a project which has not yet been commenced. What the assessee would get from the investment he made is not clear, and no formal agreement has been entered into between the parties. The Tribunal, the CIT(A) and the AO have concurrently held that the assessee has failed to establish commercial expediency. In the instant case, though the borrowed money was advanced in favour of the sister concern of the assessee in the year 1999-2000, the sister concern has also not utilized the said amount for the said purpose. Even after three years, the said project has not been commenced, however the sister concern has diverted the said amount for some other project. We find that there is no infirmity or irregularity in the finding of the Tribunal.

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