Vellanki Estates & Constructions Pvt., Ltd., Visakhapatnam V. THE ITO, WARD - 4(2), Visakhapatnam

ITA 11/VIZ/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2032 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 18-01-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: I SARISH KUMAR
• Assessee Lawyers: P BALA SRINIVAS
• Keywords: Capital asset
• Section: 142(1)

Judgement Text

ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.11/VIZAG/2014 ( / ASSESSMENT YEAR:2010-11) VELLANKI ESTATES AND CONSTRUCTIONS VISAKHAPATNAM VS. ITO , WARD - 4(2), RANGE - 4 VISAKHAPATNAM [PAN: AABCV 3871C ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI P. BALA SRINIVAS, AR / RESPONDENT BY : SHRI I. SARISH KUMAR, DR / DATE OF HEARING : 02.03.2016 / DATE OF PRONOUNCEMENT : 18.03.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF CIT(A), VISAKHAPATNAM DATED 31.10.2013 AND IT PERTA INS TO THE ASSESSMENT YEAR 2010-11. ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF RUNNING HOTELS, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-11 DECLARING TO TAL INCOME OF RS.21,82,840/-. THE RETURN WAS PROCESSED U/S 143(1 ) OF THE INCOME- TAX ACT, 1961 (HEREINAFTER CALLED AS THE ACT). T HE CASE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY, NOTICES U/S 143(2) & 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REP RESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED T HE BOOKS OF ACCOUNTS AND OTHER DETAILS CALLED FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS C LAIMED INTEREST OF RS.11,82,225/- ON TERM LOAN BORROWED FOR THE PURPOS E OF PURCHASE OF LAND TO BE USED FOR CONSTRUCTION OF HOTEL. THEREFO RE, ISSUED A SHOW CAUSE NOTICE AND ASKED TO EXPLAIN WHY INTEREST ON T ERM LOAN SHALL NOT BE DISALLOWED U/S 36(1)(III) OF THE ACT. IN RESPONSE TO NOTICE, THE ASSESSEE SUBMITTED THAT IT HAS BORROWED TERM LOAN FOR THE PU RPOSE OF PURCHASE OF LAND TO BE USED FOR CONSTRUCTION OF HOTELS FOR EXPA NSION OF ITS EXISTING BUSINESS. THEREFORE, THE INTEREST PAID ON TERM LOA N IS ELIGIBLE FOR DEDUCTION U/S 36(1)(III) OF THE ACT. THE A.O. HOWE VER AFTER CONSIDERING THE ASSESSEES EXPLANATIONS, DISALLOWED THE INTERES T PAID AMOUNTING TO RS.11,82,225/-. WHILE DOING SO, THE A.O. HELD THAT IN VIEW OF THE PROVISO TO SECTION 36(1)(III) OF THE ACT, ANY INTEREST PAID ON LOAN BORROWED FOR ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 3 THE PURPOSE OF ACQUISITION OF AN ASSET TO BE USED F OR EXPANSION OF ITS EXISTING BUSINESS, CANNOT BE ALLOWED AS DEDUCTION W HILE COMPUTING THE INCOME UNDER THE HEAD INCOME FROM BUSINESS. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AO. THE ASSESSEE F URTHER SUBMITTED THAT IT HAS ACQUIRED LAND FOR THE PURPOSE OF EXPANS ION OF ITS EXISTING BUSINESS, THEREFORE, INTEREST PAID ON TERM LOAN BOR ROWED FOR THE PURPOSE OF ACQUIRING CAPITAL ASSET SHOULD BE ALLOWED AS DED UCTION U/S 36(1)(III) OF THE ACT. THE ASSESSEE FURTHER SUBMITTED THAT THE P ROVISO PROVIDED TO SECTION 36(1)(III) SPEAKS ABOUT EXTENSION OF EXISTI NG BUSINESS OR PROFESSION. BUT, IT HAS USED THE TERM LOAN FOR THE PURPOSE OF EXPANSION OF ITS BUSINESS, THEREFORE, IT CANNOT BE CONSIDERED THAT EXPANSION OF EXISTING BUSINESS TO EXTENSION OF EXISTING BUSINESS AND APPLYING THE PROVISO TO SEC. 36(1)(III) INTEREST SHALL NOT BE DI SALLOWED. THE CIT(A), HOWEVER, AFTER CONSIDERING THE SUBMISSION OF ASSESS EE UPHELD THE ADDITION MADE BY THE A.O. WHILE DOING SO, THE CIT(A ) HELD THAT THE ASSESSEE HAS ACQUIRED THE LAND FOR THE PURPOSE OF E XPANSION OF ITS EXISTING BUSINESS. THEREFORE, AS PER THE PROVISO T O SECTION 36(1)(III) OF THE ACT, ANY AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF THE EXISTI NG BUSINESS SHALL NOT BE ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 4 ALLOWED AS DEDUCTION. AGGRIEVED BY THE CIT(A) ORDER , THE ASSESSEE IS IN APPEAL BEFORE US AND RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED AUTHORITIES ERRED IN LAW AND UNDER THE APPELLANT'S FACTS IN MAKING AND SUSTAINING THE IMPUGNED ADDITION OF RS. 11,82,225/-. 2. UNDER THE FACTS AND CIRCUMSTANCES OF THE APPELLANT' S EASE, THE LEARNED AUTHORITIES WERE NOT JUSTIFIED IN PRESUMING THAT IN TEREST PAID ON LOAN WAS NOT FOR THE PURPOSE OF BUSINESS. 3. THE LEARNED AUTHORITIES ERRED IN DISALLOWING INTERE ST ON TERM LOAN, THOUGH THE LOAN WAS DIRECTLY TAKEN FROM NATIONALIZED BANK TO T HE TUNE OF RS,7,02,315/- AND UTILIZED FOR PURCHASE OF LAND FOR THE PURPOSE OF BUSINESS DIRECTLY PAID TO LAND LORD AND WITHIN THE OBJECTS SPECIFIED IN THE M EMORANDUM OF ASSOCIATION. 4. THE LEARNED AUTHORITIES ERRED IN DISALLOWING INTERE ST ON OVERDRAFT RAISED FROM NATIONALIZED BANK TO REPAY THE LOAN ACCOUNT; TO THE TUNE OF RS.4,79,910/-. THE APPELLANT RAISED THIS OVERDRAFT ACCOUNT FOR THE PURPOSE OF BUSINESS LONG BACK FROM NATIONALIZED BANKS AND THEY WERE USING TH E OVERDRAFT ACCOUNT AS REGULAR CURRENT ACCOUNT FOR RUNNING THE BUSI N ESS. ALL THE BUSINESS TRANSACTIONS WERE ROUTED THROUGH THIS OVER DRAFT AC COUNT AND THE SAID ACCOUNT WAS ALSO UTILIZED TO REPAY THE LOAN INSTALL MENTS. 5. UNDER THE ABOVE FACTS AND CIRCUMSTANCES, AND OTHER FACTS AND CIRCUMSTANCES THAT MAY BE BROUGHT TO THE NOTICE OF THE HONBLE INC OME-TAX APPELLATE TRIBUNAL AT THE TIME OF HEARING OF THIS APPEAL, THE APPELLANT PRAYS THE HONBLE APPELLATE TRIBUNAL TO SET ASIDE THE IMPUGNED ORDERS . 4. THE LD. A.R. OF THE ASSESSEE SUBMITTED THAT THE CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE A.O., TOWARDS I NTEREST PAID ON BORROWED CAPITAL FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSET INTENDED TO BE USED FOR THE PURPOSE OF EXPANSION OF EXISTING BUSINESS. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE IS INTO THE BUS INESS OF RUNNING AND MAINTENANCE OF HOTELS. IN THE PROCESS, IT HAS PURCH ASED A LAND TO BE USED FOR CONSTRUCTION OF HOTEL FOR EXPANSION OF EXI STING BUSINESS, FOR ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 5 WHICH IT HAS OBTAINED TERM LOAN FROM THE BANK. THE REFORE, INTEREST PAID ON TERM LOAN TO BE USED FOR EXPANSION OF EXISTING B USINESS SHOULD BE ALLOWED AS A DEDUCTION U/S 36(1)(III) OF THE ACT. O N THE OTHER HAND, THE LD. D.R. STRONGLY SUPPORTED THE ORDER OF THE CIT(A) . 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MA TERIALS AVAILABLE ON RECORD. THE A.O. DISALLOWED INTEREST P AID ON TERM LOAN BORROWED FOR THE PURPOSE OF ACQUISITION OF LAND INT ENDED TO BE USED FOR CONSTRUCTION OF HOTEL. THE A.O. WAS OF THE OPINION THAT ANY INTEREST PAID ON TERM LOAN BORROWED FOR THE PURPOSE OF ACQUISITIO N OF THE CAPITAL ASSET, FOR THE PURPOSE OF EXPANSION OF EXISTING BUS INESS SHALL NOT BE ALLOWED AS DEDUCTION AS PER THE PROVISO PROVIDED TO SECTION 36(1)(III) OF THE ACT. IT WAS THE CONTENTION OF THE ASSESSEE THAT THE LOAN BORROWED WAS USED FOR THE PURPOSE OF PURCHASE OF LAND TO BE USED FOR CONSTRUCTION OF A HOTEL BUILDING. THE ASSESSEE FUR THER STATED THAT THE PROVISO PROVIDED TO SECTION 36(1)(III) OF THE ACT P ROVIDES FOR EXTENSION OF EXISTING BUSINESS. BUT, IT HAS USED THE TERM LOAN F OR THE PURPOSE OF EXPANSION OF ITS EXISTING BUSINESS. THE TERM EXTENS ION AND EXPANSION SHOULD NOT BE CONSIDERED ONE AND THE SAME FOR THE P URPOSE OF PROVISO PROVIDED TO SECTION 36(1)(III) OF THE ACT. 6. THE PROVISO PROVIDED TO SECTION 36(1)(III) OF TH E ACT, PROVIDES FOR DISALLOWANCE OF ANY INTEREST PAID IN RESPECT OF CAP ITAL BORROWED FOR ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 6 ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING B USINESS OR PROFESSION, WHERE CAPITALIZED IN THE BOOKS OF ACCOUNTS OR NOT, FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE TERM LOAN WAS BORROWED FOR ACQUISITION OF THE ASSET AND TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE. IN THE PRESENT CASE ON HAND, FROM THE FACTS, IT IS CLEAR THAT THE ASSESSEE HAS BORROWED THE LOAN FOR THE PURPOSE OF PURCHASE OF LAND INTENDED TO BE USED FOR EXPANSION OF ITS EXISTING B USINESS. THEREFORE, IN OUR OPINION, THE ASSESSEE IS NOT ELIGIBLE FOR DEDUC TION TOWARDS INTEREST PAID ON TERM LOAN BORROWED FOR THE PURPOSE OF ACQUI SITION OF CAPITAL ASSET INTENDED TO BE USED FOR EXPANSION OF EXISTING BUSINESS. THE CIT(A) HAS RIGHTLY CONFIRMED THE ADDITION MADE BY THE AO. WE DO NOT SEE ANY ERROR OR INFIRMITY IN THE ORDER PASSED BY THE CIT(A ). HENCE, WE INCLINED TO UPHOLD THE ORDER PASSED BY THE CIT(A) AND DISMIS S THE APPEAL FILED BY THE ASSESSEE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 18 TH MAR16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 18.03.2016 VG/SPS ITA NO.11/VIZAG/2014 VELLANKI ESTATES AND CONSTRUCTIONS, VSKP 7 )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT VELLANKI ESTATES & CONSTRUCTIONS PVT. LTD., C/O D.L.S.V. RAMANA BABU, FCA, POLINENI ASSOCIATES CHARTERED ACC OUNTANTS, FLAT NO.G-1, KONETI ENCLAVE, DWARAKANAGAR, VISAKHAPATNAM-530 016 2. / THE RESPONDENT THE ITO WARD-4(2), RANGE-4, VIS AKHAPATNAM 3. + / THE CIT-2, VISAKHAPATNAM 4. + ( ) / THE CIT (A), VISAKHAPATNAM 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM