M/s Milroc Good Earth Property & Developers LLP., Bangalore V. The Assistant Commissioner of Income Tax, Circle- 1 (1), Panaji., Panaji

CO 113/PAN/2016

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 2569 (ITAT-PANAJI)
• Duration Of Justice: 2 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 22-11-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 22-11-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 07-09-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAVIRAJ Y V
• Assessee Lawyers: A A KULKARNI
• Keywords: Business income; Depreciation; Notional interest; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI GEORGE MATHAN, HONBLE JUDICIAL MEMBER & SHRI RAMIT KOCHAR , HONBLE ACCOUNTANT MEMBER ITA NO. 166 /P A N/201 6 (ASST. YEAR: 20 1 2 - 1 3 ) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE - 1(1) PANAJI, GOA . V . M/S MILROC GOOD EARTH PROPERTY AND DEVELOPERS LLP 501,5 TH FLOOR, MILROC MENEZES, PANAJI - GOA . PAN NO. AAACG 7222M (APPELLANT) (RESPONDENT) C.O.NO. 113/PAN/2016 ARISING OUT OF ITA NO. 166 /PAN/2016 (ASST. YEAR: 2012 - 13) M/S MILROC GOOD EARTH PROPERTY AND DEVELOPERS LLP, 501,5 TH FLOOR, MILROC MENEZES, PANAJI - GOA. V. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE - 1(1) PANAJI, GOA. PAN NO. AAACG 7222 M (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI A.A.KULKARNI - ADVOCATE DEPARTMENT BY : SHRI RAVIRAJ Y.V - DR DATE OF HEARING : 2 2 / 11 /201 6 . DATE OF PRONOUNCEMENT : 2 2 / 11 /201 6 . O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AGAINST THE APPELLATE O RDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS), PANAJI - 1 (CIT(A) FOR SHORT) , DATED 19/05/ 2016 FOR THE ASSESSMENT YEAR 2012 - 13, THE APPELLATE PROCEEDINGS BEFORE THE LD.CIT(A) ARISING FROM THE ASSESSMENT ORDER DATED 27/03/ 2015 PASSED BY THE L EARNED A SSESSING 2 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 O FFICER (IN SHORT THE AO) U/S 143 (3) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED THE ACT). 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL IN THE MEMO OF APPEAL FILED WITH THE INCOME - TAX APPELLATE TRIBUNAL, PANAJI (HEREINAFTER CALLED THE TRIBUNAL) : - 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE L D. CIT(A) HAS ERRED IN ALLOWING ASSESSEES APPEAL AND IGNORING THE FACT THAT THE ASSESSEE HAS TAKEN LOAN FOR THE BUSINESS PURPOSE I.E. DEVELOPMENT AND CONSTRUCTION OF RESIDENTIAL BUILDINGS WHICH HAS RESULTED IN SALEABLE PRODUCT OR UNSOLD STOCK LYING AS W.I.P DURING THE YEAR. THE CIT(A)S DECISION THAT LOAN TAKEN WAS FOR WORKING CAPITAL REQUIREMENTS AND CANNOT BE DIRECTLY ATTRIBUTED TO WORK IN PROGRESS IS NOT ACCEPTABLE. 3. THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF EXCESS EXPENDITURE ON ACCOUN T OF HIGHER RATE OF INTEREST PAID EVEN AFTER DELETING THE ENTIRE ADDITION OF RS.1,59,27,795/ - AS THE ADVANCES TO SEPARATE ENTITY IS AGAINST THE BASIC PRINCIPLE OF THE BUSINESS OF EARNING PROFIT. 3 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPERS. A T THE OUTSET , LEARNED COUNSEL FOR THE ASSESSEE SHRI A.A. KULKARNI, ADVOCATE SUBMITTED THAT HE IS NOT PRESSING HIS C.O AND THE SAME MAY BE DISMISSED AS WITHDRAWN. SHRI R A VIRAJ Y.V. L EARNED DR SUBMITTED THAT HE HAS NO OBJECTION IF C.O IS DISMISSED AS WITHDRAWN. 3 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 4. AFTER HEARING BOTH THE PAR TIES, WE HEREBY ORDER DISMI SSAL OF THE C.O NO.113/PAN/2016 ARISING OUT OF THE APPEAL ITA NO.166/PAN/2016 AS WITHDRAWN. WE ORDER ACCORDINGLY. 5 . DURING THE COURSE O F THE AS SESSMENT PROCEEDINGS U/S.143(3) R.W.S. 143(2) OF THE ACT , THE ASSESSEE SUBMITTED PROFIT AND LOSS ACCOUNT ALONG WITH THE SCHEDULE WHICH INCLUDE D ADMINISTRATIVE EXPENSES. ON PERUSAL OF THE ADMINISTRATIVE EXPENSES , IT WAS OBSERVED BY THE AO THAT ASSESSEE HAS CLAIMED INTEREST OF RS. 1,59,27,795/ - PAID TO ANDHRA BANK FOR AVAILING OVERDRAFT FACILITIES AND IT WAS CLAIMED THAT THE SAID AMOUNT HAS BEEN UTILIZED FOR THE PURPOSE OF WORKING CAPITAL REQUIREMENTS. IT WAS OBSERVED BY THE AO THAT ASSESSEE HAS SHOWN VARIOUS ITEMS IN CLOSING STOCK OF W.I.P , BUT DID NOT INCLUDE D THE INTEREST EXPENSES IN THE COMPUTA TION OF CLOSING WORK IN PROGRESS. ON BEING ASKED BY TH E AO THAT WHY THE INTEREST IS N OT INCLUDED IN THE CLOSING WORK IN PROGRESS AS THE LOAN WAS UTILIZED FOR THE BUSINESS PURPOSE, ASSESSEE SUBMITTED THAT LOAN OF RS. 10 CRORE TAKEN FROM THE ANDHRA BANK WAS FOR THE PURPOSE OF WORKING CAPITAL REQUIREMENTS AS PER SANCTION LETTER FROM THE BANK AND THE SAID LOAN H AS NOT BEEN TAKEN FOR THE PURPOSE OF BUYING THE PROPERTY AND HENCE INTEREST PAID TO THE BANK IS INDIRECT EXPENSES AND NOT DIRECT EXPENSE. THE AO REJECTED THE CONTENTION OF THE ASSESSEE AND OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELO PMENT AND CONSTRUCTION OF RESIDENTIAL BUILDING, THE LOAN TAKEN FROM THE BANK IS UTILISED PURELY FOR CONSTRUCTION ACTIVITIES WHICH INCLUDE PURCHASE OF RAW MATERIALS FOR CONSTRUCTION, OTHER CONTRACTOR PAYMENT S AND LABOUR PAYMENT S RELATING TO THE BUILDING CON STRUCTION ACTIVITIES. THUS , IT WAS OBSERVED BY THE AO THAT THE INTEREST PAID WAS UTILIZED DIRECTLY FOR THE CONSTRUCTION ACTIVITIES WHICH HAS EITHER RESULTED IN SALE PRODUCT OR UNSOLD STOCK LYING AS WORK IN 4 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 PROGRESS DURING THE YEAR AND THE SAME SHOULD HAVE BEEN INCLUDED IN THE CLOSING WORK IN PROGRESS OF THE STOCK. THE AO RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. BRITISH PAINT INDIA PVT. LTD. 188 ITR 44 (SC) AND OBSERVED THAT IN TEREST EXPENSES PAID ON LOAN WHICH IS UTILISED FOR CONSTRUCTION RELATED ACTIVITIES SHOULD BE INCLUDED IN THE CLOSING WORK IN PROGRESS OF STOCK TO THE TUNE OF RS.1,59,27,795/ - , WHICH WAS ADDED BY THE AO TO THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION AND THE SAME WAS CORRESPONDINGLY ADDED TO THE CLOSING WORK IN PROGRESS (WIP) OF THE ASSESSEE BY THE AO VIDE ASSESSMENT ORDER DATED 27/3/ 20 15 PASSED BY AO U/S 143(3) OF THE ACT. SECONDLY, WITHOUT PREJUDICE TO THE ABOVE ADDITION , THE AO OBSERVED THAT ASSESSEE HAD PAID AN INTEREST OF RS.1,59,27,795/ - @18.25% P.A. TO THE BANK AND ASSESSEE ADVANCED LOAN TO THE SISTER CONCERN M/S. MILR OC DEVELOPMENT COMPANY LLP (HEREINAFTER CALLED MDC) @ 12% P.A. . THE ASSESSEE WAS ASKED TO EXPLAIN THAT WHY EXCESS INTEREST WAS PAID TO THE BANK FOR THE BORROWED FUND AS AGAINST LOWER INTEREST CHARGED FROM THE SISTER CONCERN MDC. THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD PAID INTEREST TO THE BANK AMOUNTING TO RS.1,59,27,795/ - @18.25% P.A, HOWEVER IT HAS EARNED INTEREST INCOME OF RS.3,37,40,072/ - FROM ITS ASSOCIATE CONCERN MDC ON THE ADVANCE GIVEN TO M DC . IT WAS SUBMITTED THAT DUE TO BUSINESS LINK WITH THE SISTER CONCERN M DC, T HE ASSESSEE HAS CHARGED INTEREST @12% P.A. WHICH HAS BEEN CHARGED BY ASSESSEE FROM MDC ON A TOTAL LOAN OF APPROXIMATELY RS.30 CRORE S ADVANCED BY ASSESSEE. THE AO REJECTED THE CONTENTION S OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE IS RUNNING BUSINESS ACTIVITIES WITH A MOTIVE TO EARN PROFIT OUT OF BUSINESS ACTIVITIES . THE ASSESSEE HAS PAID HIGHER RATE OF INTEREST TO BANK AND LOWER RATE OF INTEREST IS CHARGED FROM THE SISTER CONCERN MDC WHICH IS AGAINST BASIC PRINCIPLES OF THE BUSINESS OF EARNING PROFITS AND 5 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 HENCE AO MADE ADDITION OF EXCESS INTEREST OF RS.54,54,724 BEING DIFF ERENTIAL INTEREST WHICH ADDITION WAS MADE BY THE ASSESSING OFFICER TO THE INCOME OF THE ASSESSEE WITHOUT PREJUDICE TO THE DISALLOWANCE OF INTEREST PAID TO BANK OF RS.1,59,27,795/ - WHICH WAS ALSO DIRECTED TO BE ADDED TO THE CLOSING WORK IN PROGRESS FOR THE PREVIOUS YEAR , VIDE ASSESSMENT ORDER DATED 27/03/2015 PASSED BY THE AO U/S.143(3) OF THE ACT. 6 . AGGRIEVED BY THE ASSESSMENT ORDER DATED 27/03/ 20 15 PASSED BY THE AO, THE ASSESSEE FILE D FIRST APPEAL BEFORE THE LD.CIT (A) WHEREIN THE ASSESSEE SUBMITTED THAT BANK OVERDRAFT WAS TAKEN FOR THE PURPOSE OF WORKING CAPITAL REQUIREMENTS AND UTILISED NOT ONLY FOR CONSTRUCTION RELATED PAYMENTS BUT ALSO FOR PAYMENTS SUCH AS ADMINISTRATIVE EXPENSES INCLUDING ADVERTISEMENT AND PUBL ICITY, BUSINESS PROMOTION, BROKERAGE / COMMISSIONS (SALES) ETC ., AND ALSO FOR ADVANCES TO A UNIT WHERE THE ASSESSEE HAS BUSINESS INTEREST AND HENCE IT WAS SUBMITTED THAT IT IS NOT CORRECT TO SA Y THAT ENTIRE OVERDRAFT FACILITIES OF THE BANK IS ONLY USED FOR CONSTRUCTION RELATED PAYMENTS AGAINST CONSTRUCTION W O RK S SUCH AS MA TERIALS, CONTRACTORS, LABOUR ETC., AS HELD BY THE AO. IT WAS SUBMITTED THAT OVERDRAFT ACCOUNT OF ANDHRA BANK IS A MIXTURE OF TRANSACTIONS SUCH AS RECEIPT FROM CUSTOMERS AGAINST BOOKIN G OF FLATS AND PAYMENTS AGAINST CONSTRUCTION WORK SUCH AS MA TERIAL CONTRACTOR, LABOUR ETC., PAYMENT OF ADVANCE TO MDC AND REPAYMENT FROM MDC WHERE ASSESSEE HAS BUSINESS INTEREST AND OTHER PAYMENTS SUCH AS ADMINISTRATIVE EXPENSES. THE A SSESSEE SUBMITTED THAT WIP INCLUDE MA TERIAL COST, SALARIES AND WAGES, JOB EXPENSES, PROFESSIONAL FEES, DUTIES AND FEES, PROJECT DEPRECIATION, OTHER EXPENSES ETC., WHICH ARE DISCLOSED IN THE SCHEDULE 11 OF FINANCIAL STATEMENTS . IT WAS SUBMITTED THAT VALUA TION OF STOCK / W . I . P IS DONE AS PER ACCOUNTING STANDARDS ISSUED BY ICA I AND IT WAS 6 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 SUBMITTED THAT AS PER AS - 2 ISSUED BY ICAI , V ALUATION OF INVENTORIES IS TO BE COMPUTED AS PER PARA 12 , WHICH IS REPRODUCED AS UNDER: - INTEREST AND OTHER BORROWING COSTS ARE USUALLY CONSIDERED AS NOT RELATING TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION AND ARE, THEREFORE, USUALLY NOT INCLUDED IN THE COST OF INVENTORIES. THE ASSESSEE ALSO SUBMITTED THAT AS PER PARA 10 OF ACCO UNT ING STANDARD (AS 16) ISSUED BY ICAI , THE BORROWING COST IS TO BE DE ALT AS UNDER: - TO THE EXTENT THAT FUNDS ARE BORROWED SPECIFICALLY FOR THE PURPOSE OF OBTAINING A QUALIFYING ASSET, THE AMOUNT OF BORROWING COSTS E LIGIBLE FOR CAPITALISATION ON THA T ASSET SHOULD BE DETERMINED AS THE ACTUAL BORROWING COSTS INCURRED ON THAT BORROWING DURING THE P E RIOD LESS ANY INCOME ON THE TEMPORARY INVESTMENT OF THOSE BORROWINGS. THE A SSESSEE A LSO SUBMITTED THAT IT HAS RECEIVED INTEREST INCOME FROM THE SISTER CONCERN MDC OF RS. 3,37,40,072/ - DURING THE PREVIOUS YEAR WHICH IS SHOWN UNDER THE HEAD OTHER INCOME IN THE PROFIT AND LOSS ACCOUNT AND OFFERED FOR TAXATION , WHILE PAYMENT OF INTEREST W AS MADE TO THE BANK OF RS. 1,59,27,795/ - AND HENCE THE NET AMOUNT IS NEGATIVE AND HENCE NOTHING IS REQUIRED TO BE ADDED TO W .I.P . IT WAS SUBMITTED THAT ASSESSEE AVAILED LOAN FROM ANDHRA BANK IN THE FINANCIAL YEAR 2010 - 20 11 OF RS. 10 CRORE S AND A DVANCE OF RS. 8 CRORE WAS GIVEN DIRECT LY OUT OF THE OD ACCOUNT MAINTAINED WITH ANDHRA BANK BY THE ASSESSEE TO MDC , A PARTNERSHIP FIRM ENGAGED IN CONSTRUCTION AND REAL ESTATE BUSINESS , WHERE IN THE ASSESSEE HOLD 50% SHARE IN THE PROFIT S OF THE FIRM AS PARTNER , THE TOTAL ADVANCE GIVEN TO MDC DURING THE FINANCIAL YEAR 20 10 - 20 11 WAS RS. 20.70 CRORES AND IT WAS SUBMITTED THAT ADVANCE TO MDC WAS BEING GIVEN OUT OF T HE COMMER CIAL EXPEDIENCY AND HENCE THE 7 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 ASSESSEE SUBMITTED THAT KEEPING IN VIEW THE L AW AND JUDICIAL PRECEDENTS , ADDITION S MADE BY THE AO SHOULD BE DELETED. THE LD. CIT(A) CONSIDERED THE CONTENTION S OF THE ASSESSEE WHEREBY LD.CIT(A) HELD THAT ASSESSEE HAD RECEIVED INTEREST INCOME OF RS.3,37,40,072/ - FROM MDC ON ADVANCES GRANTED T O MDC , AS WELL THE ASSESSEE PAID INTEREST OF RS.1,59,27,795/ - TO THE ANDHRA BANK ON OVERDRAFT ACCOUNT , THE NET INTEREST IS POSITIVE INCOME , WHICH INTEREST INCOME OF RS. 3,37,40,072/ - HAS BEEN DISCLOSED AS BUSINESS INCOME AND OFFERED FOR TAXATION . THE L OAN WAS TAKEN FOR WORKING CAPITAL REQUIREMENTS WH ICH IS EVIDENT FROM THE SANCTION LETTER OF THE BANK . THE LOAN AVAILED FROM ANDHRA BANK OF RS . 10 CRORE WAS UTILISED FOR MAKING PAYMENT OF RS . 8 CRORES TO SISTER CONCERN MDC AND HENCE IT CANNOT BE DIRECTLY ATTRIBUTABLE T O WORK IN PROGRESS HELD BY THE ASSESSEE AND HENCE ADDITION OF RS.1,59,27,795/ - MADE BY THE ASSESSING OFFICER TO CLOSING W.I.P . AND DISALLOWANCE OF INTEREST TO THE TUNE OF RS.1,59,27,795/ - WAS ORDERED TO BE DELETED BY THE LD.CIT(A) VIDE APPELLATE ORDER DATED 19 - 05 - 2016 PASSED BY LEARNED CIT(A) . WITH RESPECT TO THE ADDITION OF THE EXCESS INTEREST PAID AMOUNT ING TO RS.54,54,724/ - , THE LD.CIT(A) OBSERVED THAT AO IS NOT FAIR IN MAKING THE DISALLOWANCES BECAUSE ASSESSEE HAD ITS OWN FUNDS AVAILABLE TO THE EXTENT OF RS.20 CRORES AND HAD TAKEN A LOAN OF R S.10 CRORES . IT WAS OBSERVED BY LEARNED CIT(A) THAT RS. 30 CRORES WERE ADVANCED TO MDC, THE SISTER CONCERN OF THE ASSESSEE FOR BUSINESS CONSIDERATION. THE LD CIT(A) OBSERVED THAT ASS ESSEE HAS NO CONTROL OVER THE INTEREST CHARGED BY THE BANK AND IT IS NOT SHOWN BY THE AO THAT THE ASSESSEE RECEIVED ANY INTEREST WHICH IS NOT DISCLOSED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND ADDITION ON ACCOUNT OF NOTIONAL INTEREST CANNOT BE MADE BY THE AO . THE LD.CIT(A) ALLOWED TH IS GROUND ON STATISTICAL PURPOSE S AS NO ADDITION OF RS. 54,54,724 / - WAS MADE SEPARATELY BY THE AO WHICH WAS 8 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 INCLUDED IN THE FIGURE OF RS.1,59,27,795/ - , VIDE APPELLATE ORDER DATED 19 - 05 - 2016 PASSED BY LEARNED CIT(A). 7 . AGGRIEVED BY THE APPELLATE ORDE R DATED 19/05/2016 PASSED BY THE LD.CIT(A) , REVENUE HAS FILED AN APPEAL B EFORE THE TRIBUNAL. THE LD.DR SUBMITTED THAT TWO ADDITIONS HAVE BEEN MADE BY THE ASSESSING OFFICER W.R.T INTEREST PAID BY THE ASSESS EE , FIRSTLY BY ADDING TO THE CLOSING WORK IN PROGRESS TO THE TUNE OF RS.1,59,27,795/ - WHICH AMOUNT WAS DISALLOWED AS EXPENSES BY THE AO BY ADDING TO THE INCOME OF THE ASSESSEE, AND SECONDLY THERE WAS A DISALLOWANCE OF INTEREST O N LOAN TO SISTER CONCERN OF MDC WHICH WA S ADVANCED BY THE ASSESSEE ON INTEREST @12% P.A. AS AGAINST BORROWINGS FROM ANDHRA BANK ON OD ACCOUNT ON INTEREST @18.25% P.A., WHEREIN DIFFERENTIAL AMOUNT OF RS.54,54 , 724/ - WAS ADDED TO THE INCOME WITHOUT PREJUDICE TO THE ADDITION OF RS.1,59,27,795/ - MADE BY THE ASSESSING OFFICER AND HENCE NO SEPARATE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER. IT WAS SUBM ITTED TH AT CREDIT FACILITIES (OD) WERE AVAILED B Y ASSESSE E FROM ANDHRA BANK @ 18.2 5 % P.A. INTEREST ON OVERDRAFT AND OUT OF THE SAME , RS 8 CRORES WAS ADVANCED TO MDC ON INTEREST @12% P.A . WHICH LED TO THE LOSS OF RS. 54,54,724/ - TO THE ASSESSEE AS THE AMOUNT WAS LENT TO THE SISTER CONCERN BY THE ASSESSEE AT LOWER RATE THAN THE BORROWING COST. IT WAS SUBMITTED THAT THE ASSESSEE HAD ADVANCED RS. 20.7 CRORE IN THE FINANCIAL YEAR 2010 - 11 AND THE TOTAL LENDING WAS RS . 30 CRORE TILL 31 - 03 - 2012. THE LD DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE A O HAS RIGHTLY DISALLOWED THE SAME. HE DREW OUR A TTENTION TO THE ASSESSMENT ORDER OF THE ASSESSING OFFICER AND IT WAS SUBMITTED THAT INTEREST EXPENSES OF RS. 1,59,27,795/ - WAS ALSO NOT INCLUDED IN CLOSING W.I.P AND INTEREST EXPENSE SHOULD HAVE BEEN ADDED TO W.I.P. AS THE OD WAS AVAILED FOR CONSTRUCTION ACTIVITIES ON WHICH INTEREST PAID BY THE ASSESSEE WAS RS.1,59,27,795/ - . W ITH RESPECT TO THE SECOND ISSUE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS PAID INTEREST OF RS.1,59,27,795/ - TO ANDHRA BANK 9 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 @ 18.25% P.A . AND SISTER CONCERN MDC HAS BEEN CHARGED INTEREST @ 12% P.A. BY THE ASSESSE. THE LD.CIT(A) HAS GIVEN RELIEF ON THE GROUND THAT THE TOTAL INTEREST RECEIVED BY THE ASSESSEE FROM MDC WHICH WAS TO THE TUNE OF RS.3,37,40,072/ - ON TOTAL LENDING OF RS. 30 CRORE @ 12% P.A. TO MDC WAS HIGHER THAN THE INTEREST OF RS.1,59,27,795/ - WHICH WAS PAID BY THE ASSESSEE TO ANDHRA BANK ON BORROWINGS OF RS 10 CRORES ON OD @18.25% I.E. AT HIGHER RATE WHICH IN - FACT LEAD TO THE LOSS TO THE ASSESSEE. THE LD. DEPARTMENTAL REPRESE NTATIVE DREW OUR ATTENTION TO THE ORDER OF THE LD.CIT(A) . WITH RESPECT TO THE FIRST ISSUE WHEREIN THE RELIEF WAS GRANTED BY LEARNED CITA) WHEREIN THE ASSESSEE HAS RELIED UPON THE ACCOUNTING STANDARD 2 (AS 2) , THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE AMOUNT OF INTEREST PAID TO ANDHRA BANK OUGHT TO HAVE BEEN CAPITALISED TO WIP AS THE AMOUNT WAS BORROWED FOR WORKING CAPITAL . LEARNED COUNSEL FOR THE APPELLANT ON THE OTHER HAND MADE STATEMENT BEFORE US THAT NO DISALLOWANCE WAS MADE BY T HE REVENUE IN THE EARLIER YEAR WHEREIN THE INTEREST WAS ALSO PAID BY THE ASSESSEE TO ANDHRA BANK ON THE OVERDRA FT ACCOUNT TO THE TUNE OF RS. 94 ,95,392/ - IN THE IMMEDIATELY PRECEDING YEAR WHICH WAS ALLOWED BY THE REVENUE IN THE ASSESSMENT FRAMED U/S 143(3) OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SRIDEV ENTERPRISES REPORT ED IN (1991) 192 ITR 165 AND ALSO RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF J.K. INDUSTRIES LTD AND ANOTHER V. UNION OF INDIA AND OTHER S REPORTED IN [2008] 297 ITR 176 (SC) . IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSES SEE THAT ACCOUNT ING STANDARDS ISSUED BY THE ICAI ARE TO BE FOLLOWED UNLESS IT IS SHOWN THAT THEY ARE INCONSISTENT WITH THE PROVISIONS OF THE ACT AND AS PER THE ACCOUNT ING STANDARDS 2 (AS - 2) ISSUED BY ICAI, INTEREST CANNOT BE ADDED TO THE W.I.P. IT WAS FURTHER SUBMITTED THAT NET INTEREST INCOME IS POSITIVE AS INTEREST RECEIVED FROM MDC IS OF RS.3,37,40,072/ - WHILE INTEREST PAID TO ANDHRA BANK ON OD ACCOUNT BY THE ASSESSEE WAS ONLY RS.1,59,27,795/ - AND HENCE NO DISALLOWANCE IS 10 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 WARRANTED. IT IS SUBMITTED THAT THE ASSESSEE IS PARTNER IN MDC AND ENTITLED FOR SHARE OF PROFIT TO THE TUNE OF 50% AND HENCE THE AMOUNT WAS GRANTED OUT OF COMMERCIAL EXPEDIENCY. RELIANCE IS PLACED ON DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LIMITED V. CIT(A) (2007) 288 ITR 1(SC) . THE LD. DEPARTMENTAL REPRESENTATIVE IN REJOINDER CONCEDED THAT NO ADDITIONS HAVE BEEN MADE TOWARDS DISALLOWANCE OF INTEREST PAID BY THE ASSESSEE TO ANDHRA BANK ON OD ACCOUNT IN THE PRECEDI NG YEAR BY THE REVENUE IN THE ASSESSMENT FRAMED U/S 143(3) OF THE ACT. 8 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS, WE HAVE PERUSED THE MATERIAL ON RECORD INCLUDING CASE LAWS RELIED UPON BY THE RIVAL PARTIES. W E HAVE OBSERVED THAT ASSESSEE IS ENGAGED IN T HE REAL ESTATE AND CONSTRUCTION BUSINESS . THE ASSESSEE HAD BORROWED AN AMOUNT OF RS.10 CRORES FROM THE ANDHRA BANK IN THE FINANCIAL YEAR 2010 - 11 ON INTEREST @18.25 P.A. , OUT OF WHICH RS.8 CRORES WAS ADVANCED BY THE ASSESSEE TO SISTER CONCERN MDC @12% P.A. . THE SAID PARTNERSHIP FIRM IS ALSO ENGAGED IN REAL ESTATE AND CONSTRUCTION AND THE ASSESSEE IS PARTNER IN THE SAID FIRM MDC HAVING 50% SHARE IN PROFITS. THE ASSESSEE PAID INTEREST OF RS. 1,59,27,795/ - TO THE ANDHRA BANK ON OD OF RS. 10 CRORES WHICH IS STATED BY THE ASSESSEE TO BE SANCTIONED FOR WORKING CAPITAL PURPOSES. THE ASSESSEE HAS IN ALL ADVANCED RS. 30 CRORES TO ITS SISTER CONCERN MDC AS AT 31 - 03 - 2012 ON WHICH INTEREST INCOME OF RS. 3,37,40,072/ - @12% P.A. WAS EARNED BY THE ASSESSEE WHI CH WAS OFFERED FOR TAXATION BY THE ASSESSEE. THE STATEMENT HAS BEEN MADE BEFORE US BY LEARNED COUNSEL FOR THE A SSESSEE THAT THE ASSESSEE HAD PAID INTEREST IN THE PRECEDING YEAR TO THE ANDHRA BANK OF RS. 94,95,392/ - ON OD ACCOUNT WHICH WAS ALLOWED BY THE R EVENUE IN THE ASSESSMENT FRAMED U/S 143(3) OF THE ACT AND NO ADDITIONS HAVE BEEN MADE IN THE WIP, WHICH IS NOT CONTROVERTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE AND RATHER CONCEDED BY LD DR . WE HAVE FURTHER OBSERVED THAT AS PER ACCOUNT ING STANDARD A S - 2 RELATING TO 11 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 THE INVENTORIES ISSUED BY ICAI , IT HAS BEEN STIPULATED IN ACCOUNT ING STANDARD AS - 2 THAT INTEREST COST WILL NOT BE ADDED TO THE INVENTORIES, AS UNDER: - INTEREST AND OTHER BORROWING COSTS ARE USUALLY CONSIDERED AS NOT RELATING TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION AND A RE, THEREFORE, USUALLY NOT INCLU DED IN THE COST OF INVENTORIES. FURTHER, WE HAVE OBSERVED THAT ASSESSEE HAS BORROWED THE SAID AMOUNT FROM ANDHRA BANK FOR THE PURPOSE OF WORKING CAPITAL FACILITIES WHICH IS USED FOR MAKING ADVANCE OF RS 8 CRORES TO MDC AND ALSO FOR OTHER PURPOSES FOR MEETING ADMINISTRATIVE EXPENSES . IT IS STATED THAT ASSESSEE HAS ADVANCE D THE SAID AMOUNT TO MDC FOR COMMERCIAL EXPEDIENCY AND PLA CED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S A BUILDERS LIMITED V. CIT (2007) 28 8 ITR 1(SC) .THE ASSESSEE IS PARTNER IN MDC ENTITLED FOR 50% SHARE IN PROFITS AND THE SAID CONCERN IS ALSO ENGAGED IN REAL ESTATE AND CONSTRUCTION. THE REVENUE COULD NOT CONTROVERT THE SAID CONTENTION OF THE ASSESSEE THAT THE SAID AMOUNT WAS ADVANCED KEEPING IN VIEW COMMERCIAL EXPEDIENCY AS STATED ABOVE , THUS KEEPING IN VIEW OUR ABOVE DET AILED REASONING , WE ARE OF THE CONSIDERED VIEW THAT THE ADDITION OF RS.1,59,27,795/ - MADE BY THE ASSESSING OFFICER BY DISALLOWING THE INTEREST EXPENSES AND ADDING THE SAME TO WIP IS NOT SUSTAINABLE KEEPING IN VIEW PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE. THE REVENUE IS ALSO NOT ABLE TO SHOW THAT INVENTORIES ARE ACQUIRED OUT OF BORROWINGS AND INTEREST IS TO BE CAPITALISED KEEPING IN VIEW AS - 16 ISSUED BY ICAI. T HE AS - 2 ISSUED BY ICAI CLEARLY STIPULATES THAT GENERALLY THE INTEREST SHALL NOT BE ADDED TO THE INVENTORIES AS THE SA ME DOES NOT USUALLY BRING THE INVENTORIES TO THE PRESENT LOCATION AND CONDITION THE ASSESSEE HAS EARNED INTEREST INCOME FROM MDC OF RS.3,37 ,40,072/ - WHICH IS OFFERED FOR TAXATION , WHILE INTEREST PAID FOR ANDHRA BANK ON OD IS RS.1,59,27,795/ - AND HENCE THE RE IS NET INTEREST 12 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 INCOME WHICH HAD BEEN E ARNED BY THE ASSESSEE . WE HAVE ALSO NOTED A PECULIAR FACT THAT ADVANCES RECEIVED FROM CUSTOMER BY THE ASSESSEE AS AT 31 - 03 - 2012 IS RS. 68.57 CRORES , WHILE CLOSING WIP IS RS. 45.04 CRORES , THUS ADVANCES FROM CUSTOMER RECEIVED BY THE ASSESSEE ARE HIGHER THAN CL OSING WIP AS AT 31 - 03 - 2012 . THUS , KEEPING IN VIEW OUR DETAILED DISCUSSIONS AND REASONING AS SET OUT ABOVE, WE DONOT FIND ANY INFIRMITY IN THE APPELLATE ORDER OF THE LEARNED CIT(A) , WHICH WE CONFIRM AND REFUSE TO INTERFERE. WE ORDER ACCORDINGLY. 9 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALSO DISMISSED AS WITHDRAWN . ORDER PRONOUNCED IN THE COURT AT THE CLOSE OF THE HEARING ON TUESDAY , THE 2 2 ND DAY OF NOVEMBER , 201 6 AT GOA . SD/ - SD/ - (GEORGE MATHAN) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 2 2 ND NOVEMBER , 201 6 . V.S.S.G BABU / - 13 ITA NO. 166/PAN/2016 & C.O.NO. 113/PAN/2016 COPY TO: 1. THE ASSESSEE . M/S MILROC GOOD EARTH PROPERTY AND DEVELOPERS LLP 501,5 TH FLOOR, MILROC MENEZES, PANAJI - GOA. 2. THE REVENUE. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE - 1(1) PANAJI, GOA. 3. THE PR. CIT , PANAJI . 4. THE CIT(A) , PANAJI - 1, GOA . 5. THE D.R . 6. GUARD FILE. BY ORDER ASSISTANT REGISTRAR I.T.A.T., PANAJI