DCIT, Bangalore V. M/s Bafmane Developers Pvt. Ltd., Bangalore

ITA 1126/BANG/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68348 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-06-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 21-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI
• Assessee Lawyers: B P SACHIN KUMAR
• Keywords: Capital asset; Business expenditure; Proportionate interest; Deemed dividend; Commercial expediency
• Section: 37(1); 132

Judgement Text

ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 1 OF 23 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BBENCH, BANGALORE BEFORE SHRI N. BARTHVAJASANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K. JUDICIAL MEMBER ITA NOS.346/BANG/2012 & 1126/BANG/2011 (ASSESSMENT YEARS: 2007-08 & 2008-09) ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(3) BANGALORE VS. M/S. BAGMANE DEVELOPERS PVT. LTD NO.6/1-4, A BLOCK, 8 TH FLOOR, BAGMANE TECH PARK, LAKE VIEW BUILDING C.V. RAMAN NAGAR, BANGALORE 560093 PAN: AACCB 1178 M (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI FARHAT HUSSAIN QURESHI, DR ASSESSEE BY: SHRI B.P. SACHIN KUMAR, CA DATE OF HEARING: 01/10/2013 DATE OF PRONOUNCEMENT: 07/11/2013 O R D E R PER GEORGE GEORGE K. J.M. THESE TWO APPEALS, INSTITUTED AT THE INSTANCE OF TH E REVENUE, ARE DIRECTED AGAINST THE ORDERS OF THE CIT (A)-VI, BANGALORE, DATED: 30.12.2011 AND 8.9.2011 FOR THE ASSESSMENT YEARS 20 07-08 AND 2008-09 RESPECTIVELY. I. ITA NO.346/B/12 AY 2007-08 : 2. THE REVENUE HAS, IN ITS MEMORANDUM OF APPEALS, RAISED ELEVEN GROUNDS. HOWEVER, ALL THE GROUNDS ARE CONFIN ED TO TWO ISSUES, NAMELY: ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 2 OF 23 (1) THAT THE CIT (A) ERRED IN DELETING A SUM OF RS.15.5 LAKHS BEING THE AMOUNTS WITHDRAWN FROM THE CASH BOOK; & (2) THAT THE CIT (A) WAS NOT JUSTIFIED IN DELETING A SU M OF RS.51,87,552/- ON THE DISALLOWANCE OF INTEREST MADE BY THE AO. II. ITA NO.1126/B/11 AY 2008-09 : 2.1. A SOLITARY ISSUE RAISED BY THE REVEN UE FOR THIS AY IS THAT THE CIT (A) WAS NOT JUSTIFIED IN DELETING RS.16,56 ,73,063/- ON THE DISALLOWANCE OF INTEREST MADE BY THE AO. 3. AS THE ISSUES RAISED IN THESE APPEALS A RE COMMON AND PERTAIN TO THE SAME ASSESSEE, FOR THE SAKE OF CONVE NIENCE, THEY WERE HEARD AND DISPOSED OF BY THIS CONSOLIDATED ORDER. 4. BRIEFLY STATED, THE FACTS OF THE ISSUES ARE AS UNDER: THE ASSESSEE COMPANY IS CARRYING O N ITS BUSINESS AS REAL ESTATE DEVELOPER AND BUILDER. A SEARCH OPERATION U /S 132 OF THE ACT WAS CONDUCTED IN THE CASE OF THE ASSESSEE ON 14.9.2 006. DURING THE COURSE OF SEARCH PROCEEDINGS FOR THE AY UNDER C ONSIDERATION, THE ASSESSEE WAS REQUIRED TO EXPLAIN CERTAIN CASH B OOK ENTRIES RELATING TO THE PERIOD 1.4.2005 TO 3.9.2006. IT AP PEARS THAT THE MD OF THE ASSESSEE VIDE HIS LETTER DATED 9.11.2006, AM ONG OTHERS, STATED THAT THE PAYMENTS OF RS.15.5 LAKHS MADE PART OF THE YEAR 2006-07 BEING INADMISSIBLE EXPENDITURE WHICH SHALL NOT BE CLAIMED AS ADMISSIBLE EXPENDITURE WHILE ARRIVING AT TAXABLE INCOME FOR THE SAID YEAR. HOWEVER, IT WAS THE CASE OF AO THAT IN THE COMPUTATION OF INCOME FOR THE AY 2007-08, THE ASSESSEE HAD NOT OFFERED THE SAID AMOUNT OF RS.15.5 LAKHS FOR TAXATION. BEING QUERIE D BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE VIDE ITS ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 3 OF 23 LETTER DATED 25.11.2008 HAD EXPLAINED THAT IT IS WRITTEN UNDER THE HEAD MISCELLANEOUS EXPENDITURE AND THE SAME IS DI SALLOWED IN THE COMPUTATION. HOWEVER, THE AO HAD DISALLOWED THE SAID SUM ON THE PREMISE THAT NO SUCH DISALLOWANCE WAS MADE BY THE A SSESSEE IN ITS COMPUTATION OF INCOME ANNEXED TO THE RETURN OF INCO ME FURNISHED. THE AO HAD, FURTHER, NOTICED THAT THE ASSESSEE DEBI TED A SUM OF RS.18,30,90,206/- TOWARDS FINANCIAL COST WHICH COMP RISED OF INTEREST ON BANK LOANS, LOAN PROCESSING CHARGES, IN TEREST ON RENTAL DISCOUNT AND BANK GUARANTEE COMMISSION ETC. HE HAD ALSO NOTICED THAT THE BREAK-UP OF THE TOTAL FUNDS AVAILABLE WITH THE ASSESSEE WAS: PAID UP CAPITAL RS. 3,77,42,000 RESERVES & SURPLUSES 74,65,69,508 DEFERRED TAX LIABILITY 8,02,14,4 24 SECURED LOANS 412,90,49,131 UNSECURED LOANS 3,11,90,000 TOTAL RS.502,47,65,063 ACCORDINGLY, THE AO HELD THAT THE OWN FUNDS WERE TO THE EXTENT OF RS.86.45 CRORES [PAID UP CAPITAL + RESERVES AND SUR PLUSES + DEFERRED TAX LIABILITY] AND THE REMAINING WERE BORROWED FUND S. IT WAS, FURTHER, NOTICED THAT THE TOTAL ADVANCES AND LOANS GIVEN TO THE GROUP COMPANIES AND DIRECTORS OF THE COMPANY WAS RS.98,23,99,291/- AND THE DETAILS OF WHICH WERE REC ORDED IN THE ASSESSMENT ORDER. IT WAS THE STAND OF THE AO THAT SINCE THE ASSESSEE HAD DIVERTED THE INTEREST BEARING ADVANCES TO ITS GROUP CONCERNS AND DIRECTORS; HE PROPOSED TO DISALLOW THE PROPORTIONATE INTEREST ON THE ABOVE ADVANCES. ACCORDINGLY, REJECT ING THE ASSESSEES CONTENTIONS AND FOR THE REASONS RECORDED IN THE ASS ESSMENT ORDER, THE AO HELD THAT THE ASSESSEE HAD DEBITED INTEREST OF RS.18.30 CRORES ON BORROWED SUM OF RS.416.02 CRORES, BUT, A SUM OF RS.11,78,73,359/- OUT OF THE BORROWED FUNDS WAS DIV ERTED TO ITS ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 4 OF 23 SISTER CONCERNS AND, THEREFORE, WORKED OUT THE PROP ORTIONATE INTEREST DISALLOWANCE AT RS.51,87,552/- FOR THE ASS ESSMENT YEAR 2007-08. 4.1. LIKEWISE FOR THE ASSESSMENT YEAR 2008-09 ALSO, THE ASSESSEE HAD CLAIMED IN ITS P & L ACCOUNT FINANCIA L COST OF RS.39,80,73,293/- WHICH COMPRISED OF INTEREST ON BA NK LOANS, LOAN PROCESSING CHARGES, INTEREST ON RENTAL DISCOUNT, BA NK GUARANTEE COMMISSION ETC., AS PER THE DETAILS FURNISHED, THE TOTAL FUNDS AVAILABLE WITH THE ASSESSEE WAS AMOUNTING TO RS.725 .61 CRORES, THE DETAILS OF WHICH ARE AS UNDER: PAID UP CAPITAL RS. 3,77,42,000 RESERVES & SURPLUSES 77,56,74,051 DEFERRED TAX LIABILITY 21,7 9,07,595 SECURED LOANS 619,3 6,02,446 UNSECURED LOANS 3,11,90,000 TOTAL RS.725,61,16,092 4.2. THUS, IT WAS THE VIEW OF THE AO THAT THE TOTA L FUNDS AVAILABLE WITH THE ASSESSEE INCLUDING DEFERRED TAX LIABILITY OTHER THAN BORROWED FUNDS WAS ONLY RS.103.13 CRORES WHERE AS THE ASSESSEE HAD ADVANCED LOANS TO THE GROUP OF COMPANI ES AND DIRECTORS WAS RS.259.06 CRORES. AFTER TAKING INTO ACCOUNT THE ASSESSEES LENGTHY SUBMISSIONS AS WELL AS HIS REASO NING AS RECORDED IN THE ORDER UNDER DISPUTE, THE AO HAD CONCLUDED TH US: 3.6. THE ASSESSEE HAS NOT CHARGED ANY INTEREST ON THE LOANS AND ADVANCES GIVEN TO ITS SISTER CONCERNS ALS O. THE ASSESSEE CLAIMS THAT THE ADVANCES WERE GIVEN TO THE SISTER CONCERNS ON ARMS LENGTH BASIS WITH AN INTENTION TO MAKE OR EARN PROFITS FROM THE VENTURE AND ON TOTAL COMMERCI AL UNDERSTANDING. THE ASSESSEE CLAIMED THAT THE ADVAN CES ARE MADE IN THE COURSE OF BUSINESS AND FOR THE PURP OSES OF ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 5 OF 23 BUSINESS AND FOR COMMERCIAL REASONS. HOWEVER, IT C AN BE INFERRED THAT THE FUNDS ADVANCED BY THE ASSESSEE WE RE NOT FOR ITS BUSINESS EXIGENCIES. THE FUNDS REQUIRED FO R THOSE COMPANIES COULD HAVE BEEN BORROWED IN THE NAME OF T HOSE COMPANIES ITSELF. BUT INSTEAD THE ASSESSEE COMPANY PREFERRED TO BORROW THE MONEY IN ITS OWN NAME AND G IVE IT TO THOSE COMPANIES. IT IS A PLANNING OF THE ASSESSEE TO REDUCE ITS TAX LIABILITY BY CLAIMING MORE INTEREST. IT IS ALSO WORTH MENTIONING THAT NONE OF THE COMPANIES OTHER THAN BA GMANE LEASING & FINANCE PVT LTD., THE OTHER COMPANIES ARE HAVING NO BUSINESS DURING THE YEAR. 3.7. IN VIEW OF THE ABOVE, THE INTEREST RELATABLE TO THE BORROWED FUNDS GIVEN BY THE COMPANY TO ITS DIRECTOR S AND ITS SISTER CONCERNS IS NOT ALLOWABLE. ON THE TOTAL BORROWED FUNDS OF RS.622,47,92,446/-/-, THE ASSESSEE HAS PAI D INTEREST OF RS.39,80,73,293/- DURING THE YEAR. THE TOTAL AMOUNT OF FUNDS GIVEN BY THE ASSESSEE TO THE DIRECT ORS AND THE SISTER CONCERNS,(AMOUNTS) AMOUNTING TO RS.259,06,79,783/-. THE PROPORTIONATE INTEREST REL ATABLE TO THIS BORROWED FUND AMOUNTS TO RS.16,56,73,063/-. THEREFORE, OUT OF THE TOTAL INTEREST OF RS.39,80,73 ,293/- CLAIMED BY THE ASSESSEE, INTEREST OF RS.16,56,73,06 3/- IS DISALLOWED 5. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUES, AMO NG OTHERS, FOR BOTH THE ASSESSMENT YEARS BEFORE THE CI T (A). AFTER TAKING INTO ACCOUNT THE ASSESSEES CONTENTIONS AND FOR THE REASONS RECORDED THEREIN, THE CIT (A) HAD DECIDED THE ISSUE S IN FAVOUR OF THE ASSESSEE. FOR APPRECIATION OF FACTS, THE RELEVANT PORTIONS OF THE REASONS RECORDED BY THE CIT (A) ARE EXTRACTED HEREU NDER: A.Y. 2007-08: (I) CASH DRAWINGS OF RS.15.5 LAKHS : 4.3. BASED ON THE CASH WITHDRAWALS MADE FOR THE PE RIOD FROM 1.4.2006 TO 3.9.2006, IT WAS PRESUMED THAT THE APPE LLANT WANTED TO USE THESE CASH WITHDRAWALS FOR THE PURPOS ES OF ITEMS COVERED UNDER EXPLANATION TO SEC. 37(1) OF TH E I.T. ACT. AT THAT TIME, WHEN THE MD WAS ASKED, HE STATED THAT AN Y ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 6 OF 23 EXPENDITURE WHICH IS IN THE NATURE OF ITEMS MENTION ED IN EXPLANATION TO SEC. 37(1), WOULD BE OFFERED TO TAX. IT IS SEEN FROM THE PROFIT AND LOSS ACCOUNT THAT THE APPELLANT HAS CLAIMED MISCELLANEOUS EXPENDITURE ONLY TO THE EXTENT OF RS. 52,932/- AND THEY HAVE NOT USED THE CASH WITHDRAWALS OF RS.15,50,000/- FOR ANY PURPOSES WHICH ARE MENTIONED IN EXPLANATION TO SEC. 37(1). APPARENTLY, WHEN THE EN TIRE MISCELLANEOUS EXPENDITURE CLAIMED ITSELF WAS ONLY R S.52,932/- ON A TOTAL TURNOVER OF RS.52,78,53,632/- WHICH DOES NOT EVEN CONSTITUTE A MINISCULE OF THE TOTAL TURNOVER AND SI NCE RS.52,932/- DOES NOT HAVE ANY ITEMS MENTIONED IN EX PLANATION TO SEC. 37(1), IT IS HELD THAT THE DISALLOWANCE OF RS.15,50,000/- IS NOT PROPER AND THE SAME IS DELETED. (II) DISALLOWANCE OF INTEREST ON BORROW ED CAPITAL: EXTENSIVELY QUOTING AND ALSO EXTRACTIN G THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL IN ITA NO.183 FO R THE AY 2003-04 AND IN ITA NO.382 FOR THE AY 2004-05, DATED 3.12.2010 IN THE ASSESSEES OWN CASE, THE CIT (A) H AD CONCLUDED AS UNDER: 3.3. (ON PAGE 23) IN VIEW OF THE FACTS AS STATED A BOVE AND ALSO IN VIEW OF THE JUDGMENT OF THE HONBLE SUP REME COURT REPORTED IN 288 ITR 1 IN THE CASE OF S.A. BUI LDERS V. CIT WHICH IS QUOTED BY THE JURISDICTIONAL TRIBUNAL IN THE APPELLANTS OWN CASE FOR AYS 2003-04 AND 2004-05 AN D HAS HELD THE ISSUE IN FAVOUR OF THE APPELLANT, FOLL OWING THE JURISDICTIONAL TRIBUNALS ORDER ON THE SAME ISS UE IN THE SAME ASSESSEES CASE FOR EARLIER YEARS, IT IS H ELD THAT AO WAS NOT CORRECT IN DISALLOWING PROPORTIONATE INT EREST DEBITED IN THE ACCOUNTS ON ADVANCES MADE TO ITS SIS TER CONCERNS AND THE DIRECTORS. HENCE, THE ADDITION OF RS.51,87,552/- IS DELETED. A.Y. 2008-09: (I) DISALLOWANCE OF INTEREST ON BORROWE D CAPITAL: COMPREHENSIVELY QUOTING AND ALSO RE PRODUCING THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL IN T HE ASSESSEES OWN CASE (SUPRA), THE CIT (A) HAD CONCLUDED THAT: ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 7 OF 23 3.3. (ON PAGE 20) IN VIEW OF THE FACTS AS STATED A BOVE AND ALSO IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT REPORTED IN 288 ITR 1 IN THE CASE OF S.A. BUILDERS V. CIT WHICH IS QUOTED BY THE HONBLE JURISDICTIONAL TRIBUNAL IN THE APPELLANTS OWN CASE FOR AYS 2003-04 AND 2004-05 AN D HAS HELD THE ISSUE IN FAVOUR OF THE APPELLANT, FOLLOWIN G THE JURISDICTIONAL TRIBUNALS ORDER ON THE SAME ISSUE I N THE SAME ASSESSEES CASE FOR EARLIER YEARS, IT IS HELD THAT AO WAS NOT CORRECT IN DISALLOWING PROPORTIONATE INTEREST DEBIT ED IN THE ACCOUNTS ON ADVANCES MADE TO ITS SISTER CONCERNS AN D THE DIRECTORS. HENCE, THE ADDITION IS DELETED. 6. AGGRIEVED, THE REVENUE HAS COME UP BEFORE US WI TH THE PRESENT APPEALS. DURING THE COURSE OF HEARING, THE LEARNED DR SUBMITTED THAT THE CIT (A) HAD ERRED IN DELETING TH E SUM OF RS.15.5 LAKHS BEING THE AMOUNT WITHDRAWN FROM THE CASH BOOK TOWARDS PAYMENTS OF ALLEGED BRIBES WHICH HAVE BEEN AGREED B Y THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR DIS ALLOWANCE OF THE SAME. IT WAS, FURTHER, SUBMITTED THAT THE CIT (A) OUGHT TO HAVE APPRECIATED THE GROUND REALITIES, NAMELY: (A) THAT THE ASSESSEE HAD DEBITED HUGE EXPENDITURE IN I TS P & L ACCOUNT; (B) THAT THE EXPENDITURE OF RS.15.5 LAKHS ENTERED IN IT S CASH BOOK AND PAID AS ALLEGED BRIBES WAS REQUIRED TO BE DISALLOWED IN ITS COMPUTATION AS AGREED UPON; (C) THE DURING THE SCRUTINY PROCEEDINGS, THE ASSESSEE H AD MISLED BY STATING THAT THE EXPENDITURE OF RS.15.5 L AKHS WAS DEBITED UNDER THE HEAD MISC. EXPENDITURE UNDE R WHICH THE TOTAL AMOUNT DEBITED WAS ONLY RS.52,932/- ; AND ALSO MISREPRESENTED THAT THE EXPENDITURE OF RS. 15.5 LAKHS WAS ADDED BACK IN ITS COMPUTATION; 6.1. WITH REGARD TO THE DELETION OF RS .51.87 LAKHS ON THE DISALLOWANCE OF INTEREST MADE BY THE AO, THE LEARNE D D R SUBMITTED THAT ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 8 OF 23 (A) THAT THE CIT (A) HAD FAILED TO APPRECIATE THAT THE DIRECTORS AND SISTER CONCERNS OF THE ASSESSEE TO WH OM LOANS AND ADVANCES GIVEN WERE SEPARATE LEGAL ENTITI ES; AND THAT THE BUSINESSES OF THE DIRECTORS AND SISTER CONCERNS CANNOT BE ATTRIBUTED AS BUSINESS OF THE ASSESSEES; (B) THAT THE CIT (A) ALSO FAILED TO APPRECIATE THE FACT THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSEE CANNOT CLAIM INTEREST ON THE LOANS / ADVAN CES MADE ON THE PREMISE OF COMMERCIAL EXPEDIENCY; (C) THAT THE CIT (A) FAILED TO OBSERVE THAT IN S A BUI LDERS CASE, THE HONBLE SUPREME COURT HAD REMANDED THE ISSUE BACK TO THE TRIBUNAL FOR FRESH CONSIDERATION; (D) THE CIT (A) ALSO FAILED TO DISTINGUISH THE FACT THA T IN THE CASE OF S A BUILDERS, INTEREST FREE ADVANCES RELATE ONLY TO ADVANCES FROM A HOLDING COMPANY TO A SUBSIDIARY COMPANY AND, HENCE, THE JUDGMENT OF THE HONBLE SUPREME COURT HAS NO RELEVANCE TO THE ISSUE ON HAND ; 6.2. IN RESPECT OF SIMILAR DELETION OF INTEREST DI SALLOWANCE OF RS.16.56 CRORES FOR THE AY 2008-09, THE LEARNED DR TOOK THE SAME LINE OF ARGUMENT AS IN THE AY 2007-08 AND URGED THA T THERE WAS NO PLAUSIBLE REASON FOR THE CIT (A) TO RESORT TO DELET E THE DISALLOWANCES OF INTEREST MADE BY THE AO FOR BOTH THE AYS UNDER D ISPUTE. IN CONCLUSION, IT WAS PLEADED THAT THE STAND OF THE AO REQUIRES TO BE RESTORED. 6.3. ON THE OTHER HAND, THE SUBMISSIONS MADE BY THE LEARNED AR ARE SUMMARIZED AS UNDER: CASH DRAWINGS OF RS.15.5 LAKHS: - THAT DURING THE COURSE OF SEARCH, IT WAS OBSERVE D BY THE AO THAT EXPENSES OF RS.42.15 LAKHS AND RS.15.5 LAKHS I NCURRED ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 9 OF 23 FOR THE AY 2006-07 AND FOR THE PERIOD FROM 1.4.06 T O 3.9.06 WERE NOT ADMISSIBLE AS PER THE ACT AND, ACCORDINGLY , AGREED NOT TO CLAIM THE AFORESAID AMOUNT WHILE ARRIVING AT TAXABLE INCOME OF THOSE TWO YEARS; - THAT AS AGREED UPON, FOR THE CURRENT YEAR EVEN W HILE PREPARING THE P & L ACCOUNT, THE ASSESSEE DID NOT TAKE INTO CONSIDERATION THE SUM OF RS.15.5 LAKHS; - THAT THE AO HAD, HOWEVER, ADDED THE SUM OF RS.15.5 LAKHS TO THE RETURNED INCOME. SINCE, THE SAID SUM WAS NOT T AKEN INTO ACCOUNT FOR COMPUTING THE INCOME, THE QUESTION OF A DDING BACK DOES NOT ARISE. INTEREST ON BORROWED CAPITALS OF RS.51,87,552/- & RS.16,56,73,063/-: - THAT COMPARING THE BALANCE-SHEETS OF THIS YEAR W ITH THE EARLIER YEARS, THE AO CAME TO THE CONCLUSION THAT THE MONEY HAD BEEN LENT OUT OF THE BORROWED FUNDS AND THAT THE IN TEREST REFERABLE TO THAT REQUIRE TO BE DISALLOWED; - THAT IN AND AROUND BANGALORE, SOME OF THE LANDS WERE CATEGORIZED AS AGRICULTURAL LANDS AND THAT THE ASSE SSEE BEING A COMPANY, CANNOT ACQUIRE AGRICULTURAL LANDS. ONLY INDIVIDUALS WERE PERMITTED TO ACQUIRE AGRICULTURAL LANDS AND THEN SEEK FOR CONVERSION OF SUCH LANDS. WHEN THE AS SESSEE DECIDED TO ACQUIRE PROPERTIES, IT HAD ADVANCED MONE Y TO AN INDIVIDUAL WHO ACQUIRES THE PROPERTY, APPLIES FOR C ONVERSION AND AFTER OBTAINING THE SAME DEVELOPS THE PROPERTY. IN AN EVENT OF CONVERSION BEING DENIED, THE SUBJECT PROPE RTY WAS SOLD AND THE ASSESSEE HAD GOT BACK ITS MONEY ADVANC ED TO THE INDIVIDUAL; - THAT WHENEVER THE ASSESSEE DECIDED TO ADVANCE MO NEY, IT ENTERED INTO AN AGREEMENT WITH SUCH INDIVIDUAL(S). IN SUCH AN AGREEMENT ENTERED INTO BY THE ASSESSEE TO WHOM THE MONEY HAD BEEN ADVANCED, THE PURPOSE INTENDED AND THE COMMITMENT BY THE OTHER CONCERN / INDIVIDUAL TO THE ASSESSEE HAD BEEN CLEARLY MENTIONED. THUS, THE ASSESSEE HAD ENTERED INTO FEW PROCUREMENT AGREEMENT / JOINT VENTURE AG REEMENTS WITH CERTAIN COMPANIES/ FIRMS AND ADVANCED MONIES F OR ACQUIRING THE PROPERTIES. HOWEVER, THE AO TREATED THE SAID ADVANCES ALSO AS NOT RELATING TO THE BUSINESS AND P ROCEEDED TO DISALLOW THE INTEREST REFERABLE TO SUCH ADVANCES; ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 10 OF 23 - THAT IT IS SETTLED LAW THAT IT IS NOT FOR THE AU THORITY TO PRESCRIBE AS TO HOW AN ASSESSEE SHOULD CONDUCT HIS/ITS BUSINE SS; - RELIES ON THE FOLLOWING CASE LAWS: (A) S.A. BUILDERS V. CIT - 288 ITR 1 (SC); (B) CIT V. DALMIA CEMENT (BHARAT) LTD. (2002) 254 I TR 377 (DEL) - THAT FOR EXAMPLE, RS.18.36 CRORES WAS ADVANCED T O SHRI VEERAPPA, AN INDIVIDUAL, FOR ACQUIRING PROPERTY AT NELLURHALLI VILLAGE AND THE SUBJECT PROPERTY WAS SOLD BY THE AS SESSEE AND THE SURPLUS ARISING THEREON WAS SHARED BETWEEN THE ASSESSEE AND THE SAID VEERAPPA, THE DETAILS OF WHICH ARE AS UNDER: (A) TOTAL COST ON PURCHASES RS.18.36 CRORES; (B) TOTAL SALE CONSIDERATION RS.30. 70 CRORES; (C) NET PROFIT RS.12.50 CRORES THE ASSESSEES SHARE OF PROFIT OF RS.11.88 CRORES F ROM THE ABOVE TRANSACTION WAS OFFERED IN THE AYS 2008-09 AND 2009 -10 IN THE RATIO OF RS.6.07 CRORES AND RS.5.8 CRORES RESPECTIV ELY. - THAT THE MAIN OBJECT OF THE ASSESSEE WAS TO CARR Y ON THE REAL ESTATE OPERATIONS. IN THE PROCESS OF ACQUIRING AND DEALING WITH THE PROPERTIES, IT EXTENDED CERTAIN ADVANCES T O ITS SISTER CONCERNS FOR ACQUIRING PROPERTIES IN THE COURSE OF BUSINESS AND FOR THE PURPOSE OF BUSINESS ONLY; - THAT THE ADVANCES WERE MADE ON ARMS LENGTH BASI S WITH AN INTENTION TO MAKE PROFITS FROM THE VENTURE AND COMP LETE COMMERCIAL UNDERSTANDING AND, THUS, SUCH ADVANCES W ERE MADE IN THE COURSE OF BUSINESS AND FOR THE PURPOSES OF BUSINESS; - THAT MERELY BECAUSE BORROWED FUNDS WERE ADVANCED TO THE SUBSIDIARY COMPANIES WITHOUT CHARGING INTEREST, THE INTEREST ON BORROWED FUNDS CANNOT BE DISALLOWED AND SUCH INT EREST WAS DEDUCTIBLE IF THE ADVANCES WERE GIVEN OUT OF C OMMERCIAL EXPEDIENCY; - THAT AS OBSERVED BY THE HONBLE SUPREME COURT, IF THE ADVANCES GIVEN TO THE SUBSIDIARY COMPANY ARE USED B Y THAT COMPANY FOR THE PURPOSE OF ITS BUSINESS, THEN THE I NTEREST ON THE BORROWED FUNDS UTILIZED FOR GIVING SUCH ADVANCE S SHOULD BE ALLOWED AS DEDUCTION U/S 36(1)(III) OF THE ACT. ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 11 OF 23 - RELIES ON THE FOLLOWING CASE LAWS: (A) C.T. DESAI V. CIT 120 ITR 240 (KAR); (B) MADHAV PRASAD JATIA V. CIT 118 ITR 200 (SC); (C) CIT V. INSOTEX PRIVATE LIMITED 150 ITR 195 (KA R); (D) CIT V. CHANDULAL KESHAVLAL & CO 30 ITR 601(SC) ; (E) ITA NOS. 182,183,382 & 383/BNG/2010 IN THE CAS E OF THE ASSESSEE 6.3.1. IN SUPPORT OF ITS SUBMISSION, THE ASSESSEE HAD ALSO FURNISHED THE FOLLOWING DOCUMENTS/MOUS WITH ITS SIS TER CONCERNS: (A) M/S BAGMANE BUILDERS PVT. LTD (11-12-2002) TO ACQUIRE AND DEVELOP LAND AND RETURN TO THE ASSESSEE AT COST + 4%; (B) M/S BAGMANE CONSTRUCTIONS PVT. LTD (23.9.2005) T O ACQUIRE AND DEVELOP LAND AND RETURN TO THE ASSESSEE AT COST + 5%; (C) M/S. BAGMANE LEASING & FINANCE PVT. LTD (16.4.2003 ) PURCHASE AND INSTALL FITTINGS IN THE PREMISES OF TH E ASSESSEES PREMISES SINCE ITS ARTICLES DID NOT PERM IT IT TO DO SO; & (D) M/S. CHANDRA DEVELOPERS PVT. LTD (13-11-2002) TO ACQUIRE AND DEVELOP LAND AND RETURN TO THE ASSESSEE AT COST + 4% - THAT THE AGREEMENT FOR SALE DT 3.5.2002 BETWEEN SHRI RAJA BAGMANE, SHRI V VEERAPPA AND MRS.VASUNDHRA RAJA AND THE ASSESSEE WHEREIN THE INDIVIDUALS HAVE AGREED TO SEL L THE LAND(S) TO THE ASSESSEE FOR A CONSIDERATION OF RS.2 0 CRORES; - THAT ON 3.3.2006, THE ASSESSEE APPLIED TO THE GO VERNMENT OF INDIA FOR SETTING UP A SEZ OVER 15.5. HECTARES OF L AND AT CV RAMAN NAGAR AND SUBJECT TO THE ACCUMULATION OF THE SAID LAND, APPROVAL FOR SEZ WAS TRANSFERRED FROM THE ASS ESSEE TO BAGMANE BUILDERS PVT. LTD AND THAT THE APPLICATIO N WAS FILED BEFORE THE DATE OF SEARCH OF THE ASSESSEES PREMISE S; - THAT THE LANDS PURCHASED BY VASUNDHRA RAJA AND S HRI VEERAPPA WERE TRANSFERRED TO M/S. BAGMANE BUILDERS PVT. LTD TO SET UP SEZ COPIES OF SALE DEEDS HAVE BEEN FURN ISHED IN THE PAPER BOOK; ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 12 OF 23 - PROFIT OF RS.20.37 CRORES EARNED ON TRANSFER OF LAND TO BAGMANE BUILDERS PVT LTD WAS OFFERED TO TAX FOR THE AY 2010- 11; - THAT SHRI RAJA BAGMANE HAD PURCHASED VARIOUS PLO TS OF AGRICULTURAL LANDS WHICH WERE TRANSFERRED TO THE AS SESSEE; - THAT M/S. CHANDRA DEVELOPERS PVT. LTD WAS PRIMAR ILY ESTABLISHED FOR THE PURPOSE OF ACQUISITION OF LANDS BY WAY OF AUCTIONS AND DEVELOPMENT OF PROPERTIES OVER A PERIO D OF TIME. THE AGREEMENT ENTERED INTO BETWEEN CHANDRA DEVELOPE RS PVT. LTD AND THE ASSESSEE SUBSCRIBE THAT WHEREAS PURSUANT TO THE ABOVE, THE FIRST PARTY (CH ANDRA DEVELOPERS PVT. LTD) SHALL ASSEMBLE THE PROPERTIES IN THE PERIPHERIES OF OLD MADRAS ROAD AND OTHER AREAS AND CONSTRUCT COMMERCIAL/RESIDENTIAL COMPLEX ON THE LANDS SO ACQU IRED AS PER THE DESIGNS APPROVED BY THE SECOND PARTY (ASSESSEE) - THAT THE INTENTION OF THE AGREEMENTS WAS TO ACQUIRE THE PROPERTY BEING AUCTIONED BY NGEF LTD LOCATED ON THE PERIPHERIES OF OLD MADRAS ROAD FOR WHICH AMOUNT WAS ADVANCED TO CHANDRA DEVELOPERS PVT. LTD. THOUGH CH ANDRA DEVELOPERS PVT. LTD WON IN THE BIDDING, CLAIMS OF N GEFS BANKERS AND EMPLOYEES HAVE BEEN UPHELD BY THE HONB LE SUPREME COURT. HOWEVER, CHANDRA DEVELOPERS PVT. LT D WAS SUCCESSFUL IN ITS BIDDING FOR A LAND AD-MEASURING 6 3.32 ACRES FROM M/S CODURAS EXPORTS PRIVATE LIMITED. 6.3.2. IN CONCLUSION, IT WAS THE PLEA OF THE ASSES SEE THAT IT HAD MADE ADVANCES TO ITS DIRECTORS AND SISTER CO NCERNS DURING THE NORMAL COURSE OF BUSINESS. IT WAS, FURTHER, SUBMITT ED THAT THE PRESENT ISSUE IS SQUARELY COVERED BY THE ORDER OF T HE EARLIER BENCH OF THIS HONBLE TRIBUNAL IN ITA NOS. 182, 183, 382 & 383(BNG)/2010 DATED 3.12.2010 FOR THE AYS 2002-03 T O 2005-06 IN THE ASSESSEES OWN CASE. IN VIEW OF THE ABOVE SUB MISSIONS, IT WAS PRAYED THAT THE FINDINGS OF THE CIT (A) FOR BOTH TH E ASSESSMENT YEARS UNDER DISPUTE REQUIRE TO BE SUSTAINED. ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 13 OF 23 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS OF EITHER OF THE PARTY, PERUSED THE RELEVANT CASE RECO RDS, CASE LAWS AND OTHER DOCUMENTARY EVIDENCES SUCH AS VARIOUS AGREEME NTS ENTERED INTO BY THE ASSESSEE ETC., PRODUCED BY THE LEARNED AR IN THE FORM OF PAPER BOOKS. THE ISSUES RAISED BY THE REVENUE IN I TS APPEALS UNDER DISPUTE ARE DEALT WITH ISSUE-WISE AS UNDER: (I) CASH DRAWINGS OF RS.15.5 LAKHS: 7.1. DURING THE COURSE OF HEARING, THE LEARN ED AR ASSERTED THAT THE ASSESSEE HAD, IN FACT, AGREED DURING THE COURSE OF SEARCH PROCEEDINGS THAT THE EXPENSES OF RS.42.15 LAKHS AND RS.15.5 LAKHS ALLEGEDLY INCURRED DURING THE AYS 2006 -07 AND 2007-08 WERE NOT ADMISSIBLE AS PER THE I T ACT. ACCORDINGLY, IT WAS VOUCHED BY THE LEARNED AR THAT WHILE PREPARING P & L ACCOUNT FOR T HE AY 2007-08 UNDER CONSIDERATION, THE SUM OF RS.15.5. LAKHS WAS NOT TAKEN INTO CONSIDERATION AND, THUS, THE QUESTION OF ADDING BAC K TO THE TOTAL INCOME DOESNT ARISE. HOWEVER, WHILE CONCLUDING TH E ASSESSMENT, THE AO ADDED THE SAID SUM TO THE RETURNED INCOME ON THE PREMISE THAT NO SUCH DISALLOWANCE HAS BEEN MADE BY THE ASSESSEE IN ITS COMPUTATION OF TOTAL. HOWEVER, THE CIT (A), WHILE CONSIDERING THE ISSUE, HAS STATED THAT (ON PAGE 25) IT IS SEEN FROM THE PROFIT AND LOSS ACCOUNT THAT THE APPELLANT HAS CLAIMED MISCELLANEOU S EXPENDITURE ONLY TO THE EXTENT OF RS.52,932/- AND THEY HAVE NOT USED THE CASH WITHDRAWALS OF RS.15,50,000/- FOR ANY PURPOSES WHIC H ARE MENTIONED IN EXPLANATION TO SEC. 37(1). APPARENTLY , WHEN THE ENTIRE MISCELLANEOUS EXPENDITURE CLAIMED ITSELF WAS ONLY R S.52,932/- ON A TOTAL TURNOVER OF RS.52,78,53,632/- WHICH DOES NOT EVEN CONSTITUTE A MINISCULE OF THE TOTAL TURNOVER AND SINCE RS.52,932 /- DOES NOT HAVE ANY ITEMS MENTIONED IN EXPLANATION TO SEC. 37(1), I T IS HELD THAT THE ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 14 OF 23 DISALLOWANCE OF RS.15,50,000/- IS NOT PROPER AND TH E SAME IS DELETED. 7.1.1. THE REVENUE BEING AGGRIEVED, IT IS I N APPEAL BEFORE US. THE LEARNED DR RELIED ON THE ORDER OF THE AO. ON T HE OTHER HAND, THE LEARNED AR REITERATED THE SUBMISSION MADE BEFOR E THE INCOME- TAX AUTHORITIES AND ALSO RELIED ON THE REASONING OF THE CIT (A). 7.1.2. WE HAVE HEARD RIVAL SUBMISSIONS AN D PERUSED THE MATERIALS ON RECORD. IN THE COURSE OF SEARCH, IT W AS NOTICED BY THE DEPARTMENT THAT THE EXPENSES OF RS.42,15,000 INCURR ED FOR THE AY 2006-07 AND A SUM OF RS.15.5. LAKHS FOR THE PERIOD FROM 1.4.2006 TO 3.9.2006 ARE NOT ADMISSIBLE AS PER THE INCOME-TA X ACT. THE ASSESSEE HAD AGREED NOT TO CLAIM THE AFORESAID SUM WHILE ARRIVING AT THE TAXABLE INCOME FOR THESE TWO ASSESSMENT YEARS. FOR THE A.Y. 2006-07, SINCE THE P & L ACCOUNT WAS ALREADY FINALI SED, THE ASSESSEE FILED A COMPUTATION STATEMENT WHEREBY A SU M OF RS.42,15,000 WAS ADDED BACK AND OFFERED AS INADMISS IBLE EXPENSES. FOR THE CURRENT YEAR, THE P &L ACCOUNT W AS NOT COMPLETED AS ON THE DATE OF SEARCH AND THE ASSESSEE DID NOT TAKE INTO CONSIDERATION THE SAID SUM OF RS.15.5. LAKHS A S DEDUCTION WHILE COMPUTING THE TAXABLE INCOME. ON A PERUSAL O F VARIOUS EXPENSES, IT IS VERY EVIDENT THAT THE SAID SUM HAS NOT BEEN CLAIMED AS A DEDUCTION AND WAS NOT DEBITED IN THE P & L ACC OUNT. UNDER THE HEAD MISC. EXPENSES, THE AMOUNT DEBITED IN P & L ACCOUNT WAS ONLY A SUM OF RS.52,932/- ON A TOTAL TURNOVER O F RS.52,78,53,632/- AND, THEREFORE, THE IMPUGNED AMO UNT OF RS.15.5 LAKHS WAS NOT AN EXPENDITURE THAT WAS CLAIMED AS AN EXPENDITURE. ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 15 OF 23 THUS, THE DISALLOWANCE OF RS.15.5 LAKHS WILL NOT AR ISE WHILE COMPUTING THE ASSESSEES TAXABLE INCOME. THEREFORE, THE ORDER OF THE CIT (A) IS CORRECT AND IN ACCORDANCE WITH LAW AND, HENCE, THE SAME DOESNT WARRANT ANY INTERFERENCE. IT IS ORDERED ACC ORDINGLY. (II) INTEREST ON BORROWED CAPITALS OF RS.51,87,552/- & RS.16,56,73,063/- FOR THE AYS 2007-08 & 2008-09 RES PECTIVELY: 7.2. THE AO, COMPARING THE BALANCE SHEETS OF THE ASSESSMENT YEARS UNDER CONSIDERATION WITH THAT OF THE PREVIOUS YEARS, CAME TO A CONCLUSION THAT THE MONIES HAVE BEEN ADVANCED OUT O F THE BORROWED FUNDS AND, THEREFORE, INTEREST REQUIRES TO BE DISAL LOWED PROPORTIONATELY. ACCORDING TO THE AO, THE ASSESSEE HAD FAILED TO BRING ON RECORD ANY SUBSTANCE TO JUSTIFY THAT THE A MOUNTS WERE DIVERTED FOR COMMERCIAL EXPEDIENCY. 7.2.1. IT IS AN UNDISPUTED FACT THAT THE ASSE SSEE HAD CARRIED ON THE BUSINESS AS A DEVELOPER AND BUILDER. IT WAS AL SO A FACT THAT MOST OF THE LANDS SITUATED IN AND SURROUNDING AREAS OF BANGALORE AT THAT RELEVANT PERIOD OF TIME WERE CATEGORIZED AS AG RICULTURAL LANDS AND THE ASSESSEE BEING A COMPANY COULD NOT ACQUIRE SUCH LANDS ON ITS OWN. TO OVERCOME THIS HURDLE, THE ASSESSEE HAD ADVANCED MONIES TO CERTAIN INDIVIDUALS TO PROCURE SUCH AGRIC ULTURAL LANDS ON ITS BEHALF AND ONCE THE PROPERTIES WERE CONVERTED F OR NON- AGRICULTURAL USE, THE SAME WERE ACQUIRED FROM SUCH INDIVIDUALS BY THE ASSESSEE. WHILE ADVANCING MONIES TO THE INDIVI DUALS, THE ASSESSEE HAD ENTERED INTO AGREEMENTS WITH THEM, SET TING-FORTH THE PURPOSE(S) FOR WHICH MONIES WERE ADVANCED, THE COMM ITMENTS OF SUCH INDIVIDUALS/CONCERNS ETC. LIKEWISE, THE ASSES SEE HAD ALSO ENTERED INTO PROCUREMENT/JOINT VENTURE AGREEMENTS W ITH ITS SISTER ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 16 OF 23 CONCERNS AND, ACCORDINGLY, ADVANCED MONIES FOR ACQU IRING THE LANDS FOR DEVELOPMENT BY THE ASSESSEE. 7.2.2. WE HAVE DULY PERUSED THE AGREEMENTS ENTE RED INTO BY THE ASSESSEE WITH INDIVIDUALS/SISTER CONCERNS. THE MAI N PURPOSE OF THE ASSESSEES BUSINESS WAS TO CARRY ON REAL ESTATE OPE RATIONS. IN THE PROCESS OF ACQUIRING AND DEALING WITH PROPERTIES, M ONIES WERE ADVANCED TO ITS SISTER CONCERNS AND INDIVIDUALS FOR ACQUIRING PROPERTIES WHICH AT THAT RELEVANT TIME WERE CATEGOR ISED AS AGRICULTURAL LANDS. THE ASSESSEE BEING A COMPANY W AS PREVENTED BY THE STATE LAW TO BUY ANY AGRICULTURAL LANDS FOR EXP LOITATION OF THE SAME FOR NON-AGRICULTURAL PURPOSES. TO OUTSMART SU CH RESTRICTIONS IMPOSED BY THE STATE GOVERNMENT, THE ASSESSEE HAD I NDULGED BY ROPING IN THE INDIVIDUALS BY ADVANCING MONIES TO BU Y AGRICULTURAL LANDS ON ITS BEHALF AND GET THEM CONVERTED INTO NON -AGRICULTURAL PURPOSES ETC. AS A MATTER OF FACT, THE ASSESSEE HA D ENTERED INTO AGREEMENT ON 3.5.2002 WITH SHRI RAJA BAGMANE, MANAG ING DIRECTOR OF THE ASSESSEE, HIS WIFE SMT VASUNDHARA RAJA AND S HRI V VEERAPPA [FATHER-IN-LAW OF SHRI RAJA BAGMANE] TO PURCHASE TH E AGRICULTURAL LANDS IN THEIR NAMES, CONVERT THEM FOR NON-AGRICULT URAL USE AND SUBSEQUENTLY TRANSFER THEM TO THE ASSESSEE [COURTES Y: P 21 TO 33 OF PB AR]. AS FAR AS THE ADVANCING OF MONIES TO THE AS SESSEES SISTER CONCERNS WITHOUT CHARGING INTEREST ARE CONCERNED, I T IS NOTICED, BY EXAMINING THE AGREEMENTS/MOU ENTERED INTO WITH ITS SISTER CONCERNS, THAT THE MONIES ADVANCED FOR EXAMPLE TO ( I) BAGMANE BUILDERS PVT. LTD.,(II) CHANDRA DEVELOPERS PVT. LTD AND (III) BAGMANE CONSTRUCTIONS PVT. LTD WERE TO ACQUIRE AND DEVELOP LANDS AND ALSO FINANCE THE CONSTRUCTION TILL SUCH A TIME THE SISTE R CONCERN WAS ABLE TO SECURE FINANCE FROM THE BANK(S) FOR THE PROJECT OR FIND AN INVESTOR ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 17 OF 23 FOR THE PROJECT AND THAT ON COMPLETION OF CONSTRUCT ION ON THE PROPERTIES SO ACQUIRED, THE SISTER CONCERN(S) SHALL ASSIGN THE AREA ON THE BASIS OF THE COST + 4% OR 5% [AS THE CASE MAY B E] MARGIN TO THE ASSESSEE FOR THE AMOUNTS PAID BY THE ASSESSEE IN PU RSUANT OF THE ARRANGEMENT ENTERED INTO. LIKEWISE, THE ASSESSEE H AD ADVANCED MONEY TO ITS SISTER CONCERN, NAMELY, BAGMANE LEASIN G & FINANCE PVT. LTD [AS PER AGREEMENT DATED 16.4.2003 - COURTE SY: PAGES 11 TO 15 OF PB AR] TO PURCHASE AND PROVIDE FITTINGS AND O FFICE EQUIPMENT TO ITS PREMISES LET OUT TO MOTOROLA. IT IS ALSO NO TICED THAT THE ABOVE MENTIONED AGREEMENTS CONTAINED A CLAUSE THAT THE ASSESSEE WOULD ADVANCE FUNDS TO ITS SISTER CONCERNS TO MEET THE CO ST OF ACQUISITION OF LAND AND FITTINGS, INSTALLATION OF THE SAME, CONSTR UCTION OF BUILDINGS ETC., IT IS ALSO SIGNIFICANT TO NOTE THAT THE ASSESSEE B EING A RENOWNED DEVELOPER IN DEVELOPING TECHNICAL PARK(S), IN VIEW OF THE FACT THAT PER CLIENT EXPOSURE FROM BANK(S) LIKELY T O EXCEED FOR ITS PRESENT PROJECTS AND THE ASSESSEE MAY NOT BE ABLE T O GET FINANCIAL ASSISTANCE FROM BANKS AND INVESTORS FOR THE PROJECT ENVISAGED, BAGMANE CONSTRUCTIONS PVT. LIMITED WAS ESTABLISHED AS A SPECIAL PURPOSE VEHICLE TO OVERCOME THE HURDLE WHICH MAY BE IMPOSED BY THE BANKS FOR EXTENDING FINANCIAL ASSISTANCE TO THE ASSESSEE. 7.2.3. AS MENTIONED ABOVE, THE ASSESSEE, WHILE ADVA NCING MONIES, HAD ENTERED INTO AGREEMENTS, DULY INCORPORA TING THE INTENTION OF ADVANCING SUCH MONIES. ON A CAREFUL EXAMINATION OF SUCH AGREEMENTS, IT IS OBSERVED THAT THE PURPOSE OF MONIES ADVANCED, TERMS AND CONDITIONS HAVE BEEN DULY SPELT OUT. IT IS OBVIOUS THAT THE ADVANCES WERE MADE IN THE COURSE O F BUSINESS AND FOR THE PURPOSES OF THE ASSESSEES BUSINESS ONLY. FOR EXAMPLE, THE ASSESSEE HAD MADE AN ADVANCE OF RS.11.56 CRORES TO SHRI VEERAPPA ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 18 OF 23 FOR ACQUIRING LANDS AS THE ASSESSEE COULD NOT PURCH ASE THE LANDS IN ITS NAME IN VIEW OF THE KARNATAKA LAND REFORMS ACT, 1974. HOWEVER, SHRI VEERAPPA HAD SOLD THOSE LANDS TO A TH IRD PARTY ON THEIR CONVERSION AND THE PROFIT OF RS.11.88 CRORES RECEIVED BY THE ASSESSEE WAS OFFERED BY THE ASSESSEE FOR TAXATION D URING THE AYS 2008-09 & 2009-10. THIS BELIES THE AOS OBSERVATIO N THAT THE ADVANCES WERE GIVEN FOR THE PERSONAL REQUIREMENTS O F THE DIRECTORS/SISTER CONCERNS. IT IS ALSO OBSERVED TH AT BY MAKING SUCH ADVANCES, THE ASSESSEE HAD EARNED A SIGNIFICANT PRO FIT AND ALSO GOT REGISTRATION OF FEW LANDS. AS PER THE DETAILS FURN ISHED, THE ADVANCES GIVEN TO A FEW SISTER CONCERNS WERE IN THE PROCESS OF CONSTRUCTING THE BUILDINGS AND AS SUCH, THE TRANSACTIONS ARE STI LL INCOMPLETE. ONE OF THE REASONS GIVEN BY THE AO FOR REJECTING TH E AGREEMENTS WAS THAT THEY WERE NOT FOUND AT THE TIME OF SEARCH. TH IS OBSERVATION OF THE AO IS IRRELEVANT SINCE THE SEARCH PARTY WAS NOT EXPECTED TO RECORD OR SEIZE EVERY PAPER. IN OTHER WORDS, NON-S EIZURE OF AGREEMENT COPIES BY THE SEARCH PARTY IS NOT AN INDI CATION ABOUT THE EXISTENCE/GENUINENESS OF THE AGREEMENTS. YET ANOTH ER REASON GIVEN BY THE AO FOR REJECTING THE AGREEMENTS IS THAT THEY WERE TIME- BARRED. IT IS TO BE MENTIONED THAT THE LIMITATION STARTS FROM THE DATE OF DEFAULT AND NOT EARLIER. MOREOVER, EVEN IF THE REMEDY UNDER SPECIFIC RELIEF ACT IS NOT AVAILABLE, THE AGGRIEVED PARTY CAN SEEK RELIEF UNDER CPC. 7.2.4 IT IS, FURTHER, OBSERVED THAT THE ASSESS EE HAD MADE AN APPLICATION ON 3.3.2006 WITH THE COMPETENT AUTHORIT Y FOR SETTING UP A SPECIAL ECONOMIC ZONE [SEZ]. AS CERTAIN CONDITIO NS WERE TO BE FULFILLED FOR ESTABLISHING SEZ, ONE OF WHICH WAS TO ESTABLISH ELECTRONIC HARDWARE AND SOFTWARE OR INFORMATION TEC HNOLOGY ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 19 OF 23 ENABLED SERVICES, A MINIMUM AREA REQUIREMENT OF 10 HECTARES OF LAND WITH MINIMUM BUILT UP AREA OF ONE LAKH SQUARE METERS. IT IS NOTICED THAT SINCE BAGMANE BUILDERS PVT. LTD [BBPL] WAS ALREADY IN POSSESSION OF CERTAIN PIECE OF LAND AND TO DEVELOP SEZ IN EXISTING SPECIAL PURPOSE VEHICLE, THE ASSESSEE ASSIGNED THE RIGHTS OF THE AGREEMENT OF CERTAIN LANDS TO BBPL AS PROVIDED IN C LAUSE 7 OF THE SALE DEED DATED 4.11.2009 [REFER: P 36 OF PB AR]. A CCORDINGLY, SHRI RAJA BAGMANE, SMT. VASUNDHARA RAJA AND SHRI VEERAPP A HAVE REGISTERED THE LANDS IN THE NAME OF BBPL AND ALSO T HE ASSESSEE BEING A CONFIRMING PARTY TO ALL THOSE SALE DEEDS. THE APPLICATION FOR TRANSFER OF APPROVAL OF SEZ FROM BDPL TO BBPL WAS M ADE AND THE SAME WAS APPROVED BY THE MINISTRY OF COMMERCE & IND USTRY (SEZ), GOVERNMENT OF INDIA VIDE THEIR LETTER DATED 4.10.20 10. IT IS ALSO NOTICED FROM THE DETAILS FURNISHED AT PAGE 83 OF TH E PAPER BOOK [SCHEDULE TO PROFIT & LOSS ACCOUNT] THAT BY VIRTUE OF THE ABOVE TRANSACTION, THE ASSESSEE HAD EARNED ASSIGNMENT INC OME OF NEARLY RS.20.37 CRORES WHICH WAS DULY DISCLOSED IN THE ASS ESSEES RETURN OF INCOME FOR THE AY 2010-11. 7.2.5. THE ABOVE NARRATION MAKES IT EXPLICIT THAT T HE AGREEMENT WITH SHRI RAJA RAJMANE, SMT. VASUNDHARA RAJA AND SH RI VEERAPPA AND ALSO APPLICATION FOR SETTING UP OF SEZ DATED 3. 3.2006 WERE PRIOR TO THE SEARCH OF THE ASSESSEES PREMISES WHICH TOOK PLACE ON 14.9.2006. IT WAS, FURTHER, OBSERVED THAT THE SURV EY NUMBERS MENTIONED IN THE SEZ APPLICATION WERE IDENTICAL TO THAT OF THE SURVEY NUMBERS FINDING A PLACE IN THE AGREEMENT DAT ED 3.5.2002. OSTENSIBLY, THIS BELIES THE AOS OBSERVATION THAT THE PROCUREMENT AGREEMENT AND THE AGREEMENT FOR SALE ARE ONLY A FTERTHOUGHTS OF THE ASSESSEE AND A CAMOUFLAGE FOR THE ACTUAL NATURE OF TRANSACTION ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 20 OF 23 WITH THE COMPANY. [SOURCE: PARA 4.6 OF THE ASST. ORDER FOR AY 2007- 08]. 7.2.6. ON A CAREFUL PERUSAL OF VARIOUS DETAILS AS CONTAINED ON PAGES 96 TO 133 OF THE PAPER BOOK, IT IS NOTICED TH AT THE ACTIVITIES OF PURCHASE AND CONVERSION OF AGRICULTURAL LANDS WERE CONTINUED MUCH BEFORE THE DATE OF SEARCH OF THE ASSESSEES PR EMISES WHICH AUGMENT THE ASSESSEES ASSERTION THAT THE FUNDS WER E TRANSFERRED FOR FURTHERANCE OF THE ASSESSEES BUSINESS ONLY. 7.2.7. IT IS ALSO BROUGHT TO THE REFERENCE OF THIS BENCH BY THE LEARNED AR THAT WHILE CONCLUDING THE ASSESSMENTS IN THE CASE OF THE SISTER CONCERNS AND DIRECTORS OF THE ASSESSEE FOR T HE PREVIOUS ASSESSMENT YEARS, THE AO HAD INVOKED THE PROVISIONS OF S. 2 (22)(E) OF THE ACT FOR HAVING RECEIVED ADVANCES FROM THE AS SESSEE. WHEN THE ISSUE WENT BEFORE THE EARLIER BENCH OF THIS TRI BUNAL, IT WAS DECIDED THAT THE ADVANCES GIVEN WERE BUSINESS ADVAN CES OUT OF COMMERCIAL EXPEDIENCY AND NOT A LOAN/ADVANCE COMING WITHIN THE PURVIEW OF THE PROVISIONS OF S. 2 (22)(E) OF THE AC T. ACCORDINGLY, THE ENTIRE ADDITIONS MADE IN THE HANDS OF THE ASSESSEE S SISTER CONCERNS AND DIRECTORS AS DEEMED DIVIDEND U/S 2(22) (E) OF THE ACT WERE DELETED. FOLLOWING ARE THE ORDERS PASSED BY THE TRI BUNAL IN RESPECT OF THE SISTER CONCERNS AND DIRECTOR SHRI RAJA BAGMA NE: > M/S. VAGAI INVESTMENTS PVT. LTD V. ACIT ITA NO.453/BANG/2010; > BAGAMANE BUILDERS PVT. LTD V. ACIT ITA NO.447 T O 450/BANG/2010; > BAGAMANE REALTORS PVT. LTD V. ACIT ITA NO.445/B ANG/2010; ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 21 OF 23 > CHANDRA DEVELOPERS PVT. LTD V. ACIT ITA NO.458 TO 461/BANG/2010; > BAGAMANE CONSTRUCTIONS PVT. LTD V. ACIT ITA NO.446/BANG/2010; > BAGAMANE LEASING & FIN. PVT. LTD V. ACIT ITA NO S.442 TO 444/B/2010; & > RAJA BAGAMANE V. ACIT ITA NOS. 484 TO 490/BANG/ 2010 7.2.8. AS RIGHTLY POINTED OUT BY THE LEA RNED AR, THE EARLIER BENCH OF THIS TRIBUNAL HAD AN OCCASION TO CONSIDER AN IDENTICAL ISSUE TO THAT OF THE PRESENT ONE IN THE ASSESSEES OWN CASE IN ITA NOS.182, 183, 382 & 383 (BANG)/2010 DATED 3.12.2010 FOR THE ASSESSMENT YEAR 2003-04. AFTER CAREFUL CONSIDERATI ON OF RIVAL SUBMISSIONS AND FOR THE ELABORATE REASONS RECORDED THEREIN, THE HONBLE BENCH HAD CONCLUDED AS UNDER: 16.4.IN A NUT-SHELL, THE DOCUMENTARY PROOFS PRODUC ED BY THE ASSESSEE AS WELL AS RULING OF THE HONBLE SUPREME C OURT CITED SUPRA [S.A. BUILDERS V. CIT 288 ITR 1 (SC)] B ELIE THE STAND OF THE REVENUE ON THIS POINT. THE AUTHORITIE S BELOW WERE NOT JUSTIFIED IN DISALLOWING THE INTEREST OF R S.1,47,548/- AS CLAIMED BY THE ASSESSEE AS A DEDUCTION . 7.2.9. THE STAND OF AO WAS THAT THE ADVANCES WERE N OT RELATED TO ITS BUSINESS AND, THEREFORE, THE INTEREST CLAIME D REQUIRES TO BE DISALLOWED. IN THIS CONNECTION, WE REFER TO THE JUD GMENT OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT REPORTED IN 288 ITR 1 (SC). THE HONBLE COURT HAS HELD THAT THE INTEREST-FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SU BSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AN D IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. THE EXPRESSION 'COMMERCIA L EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH E XPENDITURE AS A ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 22 OF 23 PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSIN ESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. WHILE ARRIVING AT SUCH A CONCLUSION, THE HONBLE CO URT HAD RATIFIED THE RATIO LAID BY THE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 254 ITR 377 (DEL). THE RELEVANT PORTION OF THE HONBLE APEX COURTS OBSERVATION IS EXTRACTE D AS UNDER: 31. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 174 CTR (DEL) 188 : (2002) 254 ITR 377 (DEL) THAT ONCE IT IS ESTABLIS HED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE O F THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINES S OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CL AIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECID E HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE CO MPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOO K AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDE NT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SE E THE TRANSFER OF THE BORROWED FUNDS TO A SISTER-CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. 7.2.10. TAKING INTO ACCOUNT ALL THE FACTS AND CIRC UMSTANCES OF THE ISSUE AS DISCUSSED IN THE FORE-GOING PARAGRAPHS , IN CONFORMITY WITH THE JUDGMENT OF THE HONBLE SUPREME COURT AND ALSO THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL (SUP RA), WE ARE OF THE CONSIDERED VIEW THAT THE CIT (A) WAS JUSTIFIED IN D ELETING THE ITA NOS.346 OF 2012 AND 1126 OF 2011 BAGMANE DEVELO PERS PVT LTD BANGALORE PAGE 23 OF 23 ADDITIONS OF RS.51,87,552/- AND RS.16,56,73,063/ - FOR THE ASSESSMENT YEARS 2007-08 AND 2008-09 RESPECTIVELY. IT IS ORDERED ACCORDINGLY. 8. IN THE RESULT , THE REVENUES APPEALS FOR THE AYS 2007-08 AND 2008-09 ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH NOVEMBER, 2013. SD/- SD/ (N. BARTHVAJASANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER BANGALORE DATED 07 TH NOVEMBER, 2013. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE