Mulay Construction Private Limited, Aurangabad V. Assistant Commissioner of Income tax, Aurangabad

ITA 1011/PUN/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8270 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 20-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Reasonable cause; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “B”, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER ITA No. 1011/PUN/2017 नधा रण वष / Assessment Year : 2013-14 Mulay Construction Private Limited, Ist Floor, Tapadiya Teraces, Adalat Road, Aurangabad – 431 001 PAN : AADCM1853B Vs. ACIT, Central Circle-1, Aurangabad Appellant Respondent आदेश / ORDER PER R.S.SYAL, VP : This appeal by the assessee is directed against the order passed by the ld. CIT(A) on 16-02-2017 in relation to the assessment year 2013-14. 2. The first ground is against the confirmation of disallowance of Rs.2,24,653/- u/s.14A of the Income-tax Act, 1961 (hereinafter also called `the Act’) read with Rule 8D of the Income-tax Act Rules, 1962 (hereinafter also called `the Rules’). 3. Briefly stated, the facts of the case are that the assessee is engaged in the business as Civil Contractor. Though certain Assessee by Shri Sunil Ganoo Revenue by Shri M.G. Jasnani Date of hearing 21-02-2022 Date of pronouncement 23-02-2022 ITA No.1011/PUN/2017 2 exempt income was earned, but the assessee did not offer any disallowance u/s.14A of the Act. Applying the provisions of section 14A read with Rule 8D, the AO computed the disallowance at Rs.31,75,492/- having two components, namely, interest part of Rs.29,50,839/- and other expenses at 0.50% of the average value of investments at Rs.2,24,653/-. The assessee challenged the addition before the ld. CIT(A), who, after considering the amount of Shareholders’ fund available with the assessee to the tune of Rs.8,63,46,749/- as against the investment in the securities amounting to Rs.4,41,68,794/-, deleted the disallowance of interest. The remaining amount of Rs.2,24,653/-, disallowed by the AO under clause (iii) of Rule 8D(2) computed 0.50% of the average value of the investments, was sustained. The assessee has come up in appeal before the Tribunal. 4. We have heard both the sides and perused the relevant material on record. It is seen that the ld. CIT(A) deleted the disallowance of interest under Rule 8D(2)(ii) by considering that the amount of Shareholders’ fund available with the assessee was in excess of the amount of investments made in the securities yielding exempt income. The other component ITA No.1011/PUN/2017 3 of disallowance u/s.14A read with Rule 8D(2)(iii) was sustained at 0.50% of the average value of the investments. Since the disallowance sustained by the ld. CIT(A) is strictly in accordance with the manner of computation of disallowance as enshrined in Rule 8D(2), we are satisfied that no further interference is warranted in the impugned order on this score. The reliance of the ld. AR on the judgment in the case of HDFC Bank Ltd. Vs. DCIT (2016) 383 ITR 529 (Bom.) is misplaced. The issue in that case was qua the disallowance of interest component on taxable securities that was held to be not maintainable because of the assessee having sufficient Shareholders’ fund vis-a-vis the amount of investment. As can be seen, the ld. CIT(A) in the impugned order, has itself applied the ratio decidendi laid down in the case of HDFC Bank Ltd. (supra) for deleting the disallowance of the component of interest expenditure which was disallowed by the AO under Rule 8D(2)(ii) read with section 14A of the Act. No proposition for not making disallowance at 0.5% of the average value of investments, which is otherwise in accordance with rule 8D(2)(iii) of the Rules, has been laid ITA No.1011/PUN/2017 4 down in the case. We, therefore, uphold the impugned order on this score. 5. The only other ground raised in this appeal is against the confirmation of Rs.48,66,709/-. The facts of this ground are that the assessee paid interest of Rs.1.50 crore to banks and Rs.4.53 lakhs to others, at the rates ranging between 11.05% to 19%. The AO observed that the assessee made certain loans/advances amounting to Rs.99,28,027/- without charging interest, detailed as under : Sl. No. Name of the party Loan/Advance Interest @12% p.a. i. Shri Vishram I. Jagtap Rs.11,11,669.00 Rs.1,33,400/- ii. Shri Sudhakar Mulay Rs.60,55,889.00 Rs.7,26,707/- iii. Shri Vikram S. Mulay Rs.1,15,39,413.00 Rs.13,84,730/- iv. Fortune Pharma Pvt. Ltd. – O/B Rs.1,70,00,393.00 Rs.20,40,047/- + given during the year Rs.4,40,38,354.00 Rs.52,84,602/- v. Hemant Constructions Rs.29,87,847.00 Rs.3,58,541/- Total Interest Rs.99,28,027/- 6. He computed the disallowance of interest at Rs.99,28,027/- by applying interest rate of 12% on such loans/advances. The ld. CIT(A) allowed part relief. The assessee is in appeal challenging the confirmation of disallowance to the tune of Rs.48,66,709/-. ITA No.1011/PUN/2017 5 7. The detailed facts concerning the confirmation of disallowance of interest at Rs.48.66 lakh are that the assessee advanced interest free advances to the above referred 5 persons. Item No.1 is advance of Rs.11,11,669/- to Vishram I. Jagtap. The assessee submitted that this interest free loan was given to Vishram I. Jagtap, who was an employee of the assessee company. The ld. CIT(A) observed that during the year under consideration salary of Rs.75,000/- was paid to him and in the next year he paid back advance of Rs.10.00 lakh. In view of the fact that the amount of salary was too less compared with the amount of advance, the ld. CIT(A) held that the advances were given for non-business purposes, against which the assessee has approached the Tribunal. 8. Having heard both the sides and gone through the relevant material on record, it is seen as an admitted position that Mr.Vishram I. Jagtap received salary from the assessee amounting to Rs.75,000/-. The ld. CIT(A) also referred to salary paid to him in earlier years as well although the amount of salary was less. In view of the fact that the advance was given to one of the employees of the assessee company, same cannot be considered for non-business purposes. We, ITA No.1011/PUN/2017 6 therefore reverse the impugned order on this score and hold that the advance of Rs.11,11,669/- given to Mr.Vishram I. Jagtap was for business purposes. 9. The second advance was given to Mr.Sudhakar Mulay and Mr.Vikram S. Mulay amounting to Rs.60,55,889/- and Rs.1,15,39,413/- respectively. The assessee company entered into an agreement for purchase of plot of land for which advances were given to the above parties and agreements were also executed. The ld. CIT(A) observed that no such agreements to sell were furnished before the AO and also no reasonable cause was given for not producing such agreements before him. He, therefore, did not accept the additional evidence because the assessee had not made any request under Rule 46A for admitting the same. Without taking any cognizance of such agreements, he held that the amounts were given for non-business purposes. 10. We find that the view point of the ld. CIT(A) that the agreements to sell were not furnished before the AO is not correct inasmuch as the assessee duly placed the same before the AO. Once it is observed that the amounts of advance were given to certain persons for purchase of land - be it capital or ITA No.1011/PUN/2017 7 stock in trade – such advances have to be taken as given for business purposes only. We, therefore, overturn the impugned order on this score. 11. The next advance was given to M/s. Hemant Constructions amounting to Rs.29,87,847/-. The assessee submitted that M/s. Hemant Constructions was the sub- contractor and the advance was given for executing the sub- contract. The ld. CIT(A) observed that during the year under consideration, M/s. Hemant Constructions carried out sub- contract work of Rs.33,44,807/- and the payment was made without adjusting the amount of outstanding advance of Rs.29.87 lakh. He, therefore, held the advance as having been given for non-business purposes. 12. Here again, we find the reasoning of the ld. CIT(A) as not sustainable because he himself recorded in his order that M/s. Hemant Constructions carried out sub-contract work for a sum of Rs.33.44 lakh, which amount was received. The mere fact that the advance given in the preceding year was not adjusted does not make the advancement of loan for non- business purposes. We need to see the substance of the transaction. Once a particular advance is found to have been ITA No.1011/PUN/2017 8 given in connection with the carrying on of business, the same cannot be considered as given for non-business purposes. We, therefore, reverse the view of the ld. CIT(A) on this score also. 13. The last advance was given by the assessee to Fortune Pharma Pvt. Ltd. with closing balance at Rs.6,10,38,747/-. In support of genuineness of the advance given for business purposes, the assessee submitted that it was given out of commercial expediency as the assessee and the debtor were controlled by same board of directors under same management. The ld. CIT(A) held that such advance to have been given for non-business purposes. 14. Having heard both the sides and gone through the relevant material on record, we find that the assessee failed to show any business purpose for advance of Rs.6.10 crore given to Fortune Pharma Pvt. Ltd. In the absence of the assessee making out a case of loan having been given for business purpose, we hold that the ld. CIT(A) was justified in treating such advance as given for non-business purposes. 15. From the above discussion, it is clear that the assessee failed to prove business purpose only in respect of advance given to Fortune Pharma Pvt. for a sum of Rs.6.10 crore. ITA No.1011/PUN/2017 9 16. The assessee’s contention before the ld. CIT(A) was that the amount of interest free funds available with the assessee should be considered to finance such advances in respect of which the AO disallowed interest. While disposing of the assessee’s ground u/s.14A read with Rule 8D(2)(ii), we noted that the interest free funds available with the assessee were to the tune of Rs.8.63 crore. Out of such interest free funds, the assessee attributed Rs.4.41 crore towards investment made in the form of shares/share application money of Fortune Pharma Pvt., and capital contribution in a Joint Venture giving rise to exempt income. Thus, a sum of Rs.4.41 crore got exhausted while dealing with the disallowance u/s.14A thereby leaving only a sum of Rs.4,21,77,655/- (Rs.8.63 crore – Rs.4.41 crore) available with the assessee as interest free funds. This amount of balance interest free funds available with the assessee at Rs.4.21 crore is less than the amount of Rs.6.10 crore as having been advanced to Fortune Pharma Pvt. Ltd. which we have held above to be given for non-business purposes. Considering this factual scenario, we hold that a sum of Rs.1.89 crore (Rs.6.10 crore – Rs.4.21 crore) was advanced for non-business purpose. We, therefore, direct to ITA No.1011/PUN/2017 10 restrict the addition on such amount of advance only given for non-business purpose. The AO is directed to compute the fresh amount of disallowance after affording an opportunity of hearing to the assessee. 17. In the result, the appeal is partly allowed for statistical purposes. Order pronounced in the Open Court on 23 rd February, 2022. Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT प ु णे Pune; दनांक Dated : 23 rd February, 2022 Satish आदेश क त ल प अ े षत/Copy of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. यथ / The Respondent; 3. 4. The CIT(A)-12, Pune The Pr.CIT (Central), Nagpur 5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे “B” / DR ‘B’, ITAT, Pune 6. गाड फाईल / Guard file आदेशान ु सार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune ITA No.1011/PUN/2017 11 Date 1. Draft dictated on 21-02-2022 Sr.PS 2. Draft placed before author 22-02-2022 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *