M/s. Devona Constructions Limited vs DCIT, Circle-10(1), New Delhi

ITA No.6597/Del/2025 [Assessment Year 2021-22]

[Assessee’s appeal]

“The appellant's argument that future recognition would lead to double taxation is misconceived. If proper revenue was not recognized in earlier years, and profit was added by the AO, the appellant can claim appropriate exclusion in the later year under the principles of tax neutrality and matching. Deferral of income recognition cannot be allowed simply on the ground that it would be recognized in future years. Tax is imposed on real income arising during the relevant previous year, and not based on when the appellant chooses to invoice it.”

ITA No.8463/Del/2025 [Assessment Year 2021-22]

Revenue’s appeal

1.

The appellant had submitted a detailed tabulated summary in its reply which provides a comprehensive overview of the funds allocated to subsidiaries, detailing both the utilization of these funds by the subsidiaries and the commercial rationale behind such allocations. This summary highlights how the funds were employed and the business justifications supporting the expenditure, offering a clearer understanding of the financial decisions made within the group. It reveals that the advances were made to subsidiaries and associates engaged in the real estate business, with whom the appellant has long-standing business relations and from whom it has derived and expects to derive substantial construction contracts.

1.

The AO in the assessment order had relied upon the case of CIT v. H.R. Sugar Factory Pvt. Ltd. (Allahabad HC) in which the assessee borrowed secured loans from banks at 8% interest and advanced them to its directors at 2.25%. The Court held that since the assessee was not in the business of lending, such an arrangement was detrimental to its interest, as borrowed funds were diverted for non-business purposes. The fact of the present case is different. In the appellant's case, funds were advanced to subsidiaries out of interest-free funds, not out of borrowed funds. Moreover, such subsidiaries are engaged in the same line of business (real estate), and the advances were commercially expedient. In contrast, the cited case involved diversion of interest-bearing loans to directors at concessional rates, without any nexus to business. Thus, this case laws relied by the AO is not applicable.

1.

The AO in the assessment order had relied upon the case Patel Filters Ltd. v. CIT (Gujarat HC) in which the issue was whether expenses incurred for obtaining a loan should be treated as capital or revenue in nature. The Court held that such expenses are revenue as they relate to securing loans, not acquiring assets. Other incidental issues (foreign travel expenses, Section 43B) were also decided. The fact of the present case is different. The case relates to treatment of loan acquisition expenses (capital vs. revenue), which is wholly unrelated to the appellant's matter. No parity of facts exists with the issue of interest disallowance on advances to group concerns. Thus, this case laws relied by the AO is not applicable.

1.

The AO in the assessment order had relied upon the case CIT v. Vallabh Glass Works Ltd. (Gujarat HC) in which the assessee incurred bank guarantee commission, letter of credit charges, and survey fees while importing machinery. The Court held guarantee commission and LC charges to be capital in nature, forming part of asset cost, whereas survey fees were revenue. The fact of the present case is different. This case pertains to the capitalization of incidental costs of machinery acquisition, which is entirely different from the appellant's case involving disallowance of interest under Section 36(1)(iii). Hence, it has no relevance here. Thus, this case laws relied by the AO is not applicable.

2.

The AO in the assessment order had relied upon the case Indian Shavings Products Ltd. v. CIT (Rajasthan HC) in which the assessee borrowed funds and advanced them to subsidiaries for acquiring control in another company by way of investment in shares. The Tribunal and Court held that such advances were not for business purposes. The fact of the present case is different. In the appellant's case, advances were made to subsidiaries from interest-free funds and were used in the same line of real estate business, strengthening commercial ties. In contrast, in the cited case, borrowed funds were advanced to subsidiaries which diverted them for acquisition of control in an unrelated entity, without any business nexus. Thus, this case laws relied by the AO is not applicable.

3.

The AO in the assessment order had relied upon the case Caldern Pharmaceuticals Pvt. Ltd. v. CIT (Calcutta HC) in which the assessee borrowed funds and appointed a sister concern as a marketing agent. Disallowance of interest was made, but the Court held that Section 36(1)(iii) only requires that borrowings are for business purposes and interest is paid. Since borrowings were used in business, interest was deductible. The fact of the present case is different. This judgment was actually in favour of the assessee, allowing deduction under Section 36(1)(iii). Hence, the AO's reliance is misplaced as it strengthens, rather than weakens, the appellant's position.

4.

The AO in the assessment order had relied upon the case CIT v. Bombay Samachar Ltd. (Bombay HC) in which the assessee shared expenses with sister concerns, resulting in debit balances. The AO disallowed part of interest, alleging diversion. The Court held that debit balances were mere adjustments, not loans, and since borrowings were used in business, full interest deduction was allowable. The fact of the present case is different. This case also supports the assessee's position. The AO has wrongly relied on it, as the Court upheld full deduction under Section 36(1)(iii) in favor of the assessee.

5.

The AO in the assessment order had relied upon the case K. Somasundaram & Bros. v. CIT (Madras HC) in which the Court held that where borrowed funds are diverted for non-business purposes, interest thereon cannot be allowed as deduction. The fact of the present case is different. In the appellant's case, advances were made from own interest-free funds, not borrowed funds. Therefore, there is no diversion of borrowed funds and the ratio of this case does not apply. Thus, this case laws relied by the AO is not applicable.

6.

The AO in the assessment order had relied upon the case Elmer Havells Electrics v. CIT (Delhi HC) in which The assessee borrowed funds and simultaneously advanced large interest-free loans to sister concerns. The Tribunal found a direct nexus between borrowings and such advances, and the High Court upheld the disallowance, holding that commercial expediency was not established. The appellant's case is different because (i) there is a clear availability of ample interest-free funds exceeding the amount advanced, and (ii) advances to subsidiaries were commercially expedient as they are in the same line of business. Hence, unlike the cited case, no nexus between borrowed funds and advances exists. Thus, this case laws relied by the AO is not applicable.

1.

In the case of S.A. Builders Ltd. v. CIT (288 ITR 1), the Hon'ble Supreme Court dealt with the disallowance of interest under Section 36(1)(iii), where borrowed funds were advanced as interest-free loans to a sister concern. The Assessing Officer had disallowed proportionate interest, holding that funds were diverted without any business benefit. This was upheld by the Tribunal and the High Court. The Supreme Court, however, held that the correct test is whether such advances were made on grounds of commercial expediency, and not merely for earning profits. It clarified that "for the purpose of business" is a much wider expression than "for earning income" and includes expenditure voluntarily incurred to facilitate business indirectly. Advances to group companies can therefore qualify as being for the purpose of business, provided they serve business interests and are not driven by personal or non-business considerations. In the present case, the Ld. AO has similarly questioned the commercial expediency of interest expenditure claimed by the appellant and disallowed the same on the ground that funds were advanced to sister concerns without charging interest. However, the AO has ignored the fact that the appellant's sister concerns are engaged in the same line of real estate development business and the advances facilitated their acquisition of land/projects from which the appellant has derived and expects to derive substantial construction contracts. Thus, the ratio laid down by the Hon'ble Supreme Court directly supports the appellant's case.

1.

In the case of CIT v. Dalmia Cement (Bharat) Ltd. (Delhi High Court, 254 ITR 377), the Delhi High Court held that under Section 37(1), the Revenue's role is limited to verifying whether expenditure is real and wholly for business, and it cannot question the reasonableness of such expenditure. Once a nexus with business is established, the Revenue cannot substitute its judgment for that of the businessman. On interest disallowance under Section 36(1)(iii), the Court held that deduction cannot be denied merely because the assessee also had alternative non-interest bearing funds available. So long as borrowings were for business purposes and interest was paid, the deduction must be allowed. The Court clarified that "for the purpose of business" is wider than "for earning income" and includes commercial expediency. In the instant case, Section 36(1)(iii) has been invoked by the AO to disallow interest. The appellant has duly satisfied the conditions of allowability — borrowings are for business, interest is actually paid, and advances are commercially expedient. The AO's approach of questioning the reasonableness or necessity of advancing funds to group concerns is contrary to the principle laid down in Dalmia Cement. This case reinforces that once the nexus with business is demonstrated; the AO cannot step into the shoes of the businessman. Hence, the judgment is squarely applicable in favor of the appellant.

1.

In the case of Hero Cycles (P) Ltd. v. CIT (379 ITR 347, SC), the Supreme Court dealt with disallowance of interest under Section 36(1)(iii) where advances were made to group concerns. The AO had disallowed interest alleging lack of commercial expediency. The Apex Court held that once it is established that there was a nexus between advancing of funds and business purpose, the disallowance cannot be sustained. The Court observed that commercial expediency is a matter to be judged from the point of view of the businessman and not of the Revenue authorities. In the appellant's case too, the advances to subsidiaries and associates were made to strengthen long-term business interest, as these entities are in real estate development and have awarded construction contracts to the appellant in the past and are expected to continue doing so in future. Following the ratio in Hero Cycles, such advances are clearly guided by commercial expediency and are wholly for the purpose of business. Hence, the judgment is squarely applicable in favor of the appellant.

"6.

It is a well-established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under section 361 is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly."

"On the basis of above discussion a proposition / Formula can be laid down that if an assessee having sufficient interest free funds, in the form of capital reserves and other funds without interest bearing from relatives and friends not related to business, to cover funds given interest free or utilized other than for business purposes, no disallowance are warranted. If the own funds are not sufficient to cover interest free advances, a proportionate disallowance is warranted. While examining interest free funds available with assessee and interest free? given a care is required to be taken that these funds were not related to business of the assessee. Capital and Reserves are certainly assessee's own interest funds. This proportion is fortified by the decision of ITAT in the case of Torrent Financiers V. ACIT, 73 TTJ 624 (Ahd), judgment of Allahabad High Court in the case of CIT V. Prem Heavy Engineering Works P. Ltd., 285 ITR 554 (All.), and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corporation V. CIT, 298 ITR 298 (SC).

Where there is a finding of fact that interest free funds available to the assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds and, hence, on this ground alone the deletion of disallowance of interest claimed under section 36(1)(iii) was upheld. In the case of South Indian Bank Ltd. (2021) 438 ITR 1 (SC) had to consider the issue as where interest free own funds available with the assessee exceeded the investments in tax free securities, could the investments be presumed to be made out of assessee's own funds and, hence, a proportionate disallowance is not warranted under section 14A of the Act. Thus applying the ratio of both the judgments, we direct that no disallowance of interest be made in respect of amount invested in subsidiaries either under section 36(1)(iii) or section 14A. The ground of the revenue is dismissed and the ground of the assessee is allowed.

"36.

Other deductions.-(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...

(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 for extension of existing business or profession (whether capitalized 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 out to use, shall not be allowed as deduction." (emphasis supplied)

"The aforesaid discussion leads to the following result: The expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business." (Emphasis supplied)

9.

A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent.

10.

On the other hand, the High Court has simply quoted from its own judgment in the case of CIT v. Abhishek Industries [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.). On that basis, it has held that when loans were taken from the banks at which interest was paid for the purposes of business, the interest thereon could not be claimed as business expenditure.

11.

We are of the opinion that such an approach is clearly faulty in law and cannot be countenanced.

12.

Insofar as loans to the sister concern/subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of S.A. Builders Ltd. v. CIT (Appeals) (2007 (288) ITR 1/158 Taxman 74].

26.

The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.

27.

No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 (SC)], if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency.

28.

Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1) (iii) of the Act.

29.

In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.

30.

It has been repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. (1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. (1971 82 ITR 166 (SC)), etc.'

29.

In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.

30.

It has been repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. (1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. (1971 82 ITR 166 (SC)), etc.'

"2.

A perusal of the orders passed by the Tribunal would reveal that it is noted by the Income-tax Appellate Tribunal that the assessee is in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management it had invested in a wholly owned subsidiary, namely, M/s. Tulip Star Hospitality Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 268 ITR 1 / 158 Taxman 74 the Tribunal has held that the assessee was entitled to the deduction of interest on the borrowed funds. The observations made by the Supreme Court in S. A. Builders Ltd.'s case (supra) were quoted by the Tribunal as under (page 10):

"... where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."

3.

In these circumstances holding it to be expenditure incurred for business the same was allowed under section 36(1)(ii) of the Income-tax Act by the Tribunal. The Tribunal has also held that this expenditure would be allowed even under section 57(iii) of the Act. Though there may be some controversy as to whether the aforesaid expenditure is allowable under section 57(iii) of the Act or not, we have no doubt, in our mind, that the expenditure incurred under the aforesaid circumstances would be treated as expenditure incurred for business purposes and was thus allowable under section 36 of the Act. Mr. O. S. Bajpai, learned senior advocate appearing for the assessee, has produced a copy of the memorandum of association of the assessee which, inter alia, specifies the following objects:...

4.

We are, thus, of the opinion that no question of law arises. These appeals are accordingly dismissed. "(emphasis supplied)

"We are in agreement with the submissions made by learned counsel for the appellant because the factual position as submitted before us by learned counsel for the appellant has not been controverted by the learned Departmental Representative. The admitted facts are that the appellant firm has been enjoying overdraft facilities from the State Bank of India, Chandni Chowk Delhi, since long time past against the hypothecation of goods, etc., and pledge of land, building, plant and machinery and the interest paid on such overdraft account has been allowed by the Revenue year after year. Even in the assessment year 1982-83, no such disallowance had been made when admittedly substantial interest-free funds had been advanced to the sister concern. The appellant has not paid any interest to any other party either in the past or during the year under appeal. Further in the years under appeal, either the fresh advances to PNSMPL have been quite insignificant or there have been absolutely no fresh advances made by the appellant, rather during the assessment years 1990-91 to 1992-93 the appellant had received back from the sister concern more than Rs. 10 lakhs. The capital of the firm and interest-free unsecured loans with the appellant far exceed the amounts advanced to the sister concern in all the years under appeal a fact neither controverted nor disproved by the learned Departmental Representative also." (emphasis supplied).

Decision:-

5.3

I have carefully gone through the assessment order, the written submission along with the paper book and relevant case laws relied by the appellant. The point wise analysis and conclusion are as under:

1.

The Assessing Officer has made an addition of Rs 2,31,02,037/- u/s 41(1) of the Act in respect of certain creditors on the ground that the balances were outstanding for more than three years and hence allegedly represented cessation of liability. From the material placed on record, it is seen that out of the total creditors of Rs 2,31,02,037/- , an amount of Rs1,13,29,338 has been subsequently paid, Rs 80,55,341 has been voluntarily written back and offered to tax in FY 2022-23, and the balance of Rs37,12,638 continues to remain outstanding, primarily on account of retention money or commercial disputes. These facts were also brought to the notice of the Assessing Officer during assessment proceedings but were disregarded.

1.

1. It is a settled position of law, as held by the Hon'ble Supreme Court in CIT v. Sugauli Sugar Works Pvt. Ltd. (236 ITR 518) and CIT v. SI Group India Ltd., that the sine qua non for application of section 41(1) is that the assessee must obtain a benefit by way of remission or cessation of liability. Mere longevity of an outstanding balance, or its being time-barred under limitation law, does not by itself constitute remission or cessation. The Hon'ble Bombay High Court in Kohinoor Mills Co. Ltd. v. CIT (49 ITR 578) and PCIT v. Batliboi Environmental Engineering Ltd. has further clarified that a liability subsists unless there is positive evidence of remission or cessation, and cannot be taxed merely on presumption. In the present case, there is no evidence of any remission or cessation of liability during the relevant previous year. On the contrary, the appellant has demonstrated that the liabilities were discharged subsequently, voluntarily written back and offered to tax, or continue to subsist as enforceable obligations. Thus, the basic condition of section 41(1) is not fulfilled.

2.

2. The Hon'ble Supreme Court in case of CIT v/s SI Group India Ltd upheld the decision of high court that one of the requirement of section 41 is that the assessee receives benefit in respect of trading liability by way of remission or cessation thereof. In instant case, balances of nine creditors outstanding as on 31/03/2021 are either paid in subsequent years or are outstanding due to some dispute. Nevertheless the appellant had not received any benefit by way of remission or cessation of trading liability. Also there is no occurrence of remission or cessation of liability and hence the first and foremost requirement of section 41 is not invoked

1.

The Hon'ble Supreme Court in case of CIT v/s Sugauli Sugar Works Pvt Ltd upheld the decision of high court that one of the requirement of section 41 is that the assessee receives benefit in respect of trading liability by way of remission or cessation thereof. In instant case, balances of nine creditors outstanding as on 31/03/2021 are either paid in subsequent years or are outstanding due to some dispute. Nevertheless, the appellant had not received any benefit by way of remission or cessation of trading liability. Also there is no occurrence of remission or cessation of liability and hence the first and foremost requirement of section 41 is not invoked

1.

The Hon'ble High Court of Bombay in case of Kohinoor Mills Co. Ltd v/s CIT held that liability exists even if its recovery is barred by limitation. It held that revenue authorities had erred in adding liability of payment to laborers and workers beyond a expiry of three years. In the instant case the Ld. AO inferred that balances of certain creditors were carried forward from previous year without having any transaction. However the decision of high court has a better footing in the instant case as the liability dose subsists even if is outstanding from previous years and the appellant has not received any benefit.

1.

The Hon'ble High Court of Bombay in case of PCIT v/s Batliboi Environmental Engineering Ltd upheld the decision of tribunal and stated that although the liability was barred by time it does not mean debt ceases to exists. Placing reliance on the decision of Bombay High Court it can be inferred that although the liability was outstanding it was still a debt and thus no benefit was received by the appellant.

1.

The Hon'ble High Court of Delhi in case of PCIT v/s New World Synthetics Ltd held that the outstanding liability which is payable does not indicate remission or cessation of liability. High court also held that even if the AO thinks likelihood of payment is remote as business has stopped the same would not mean that liability has ceased. In the instant case the Ld. AO inferred that balances of certain creditors were carried forward from previous year without having any transaction. However the decision of high court has a better footing in the instant case as the liability dose subsists even if is outstanding from previous years and the appellant has not received any benefit.

2.

Vide reply dated 05.09.2025, the appellant had also replied that no such disallowance has ever been made by the AO in any earlier assessment year.

3.

Thus to sum up, out of the total creditors of Rs 2,31,02,037/-, an amount of Rs 1,13,29,338 has been subsequently paid, Rs 80,55,341 has been voluntarily written back and offered to tax in FY 2022-23. Therefore the only balance left is Rs 37,12,638 for which the appellant had given a logical reasoning to remain outstanding, primarily on account of retention money or commercial disputes. These facts were also brought to the notice of the Assessing Officer during assessment proceedings but were disregarded.

Accordingly, the addition of Rs 2,31,02,037/- made by the Assessing Officer under section 41(1) is unsustainable in law and on facts and is directed to be deleted. The ground of appeal is allowed.