DCIT - 15(2)(1), MUMBAI V. KALSHA BUILDERS PVT. LTD., NAVI MUMBAI

ITA 1202/MUM/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7277 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2013-2014
• Appeal Filed On: 01-03-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R BHOOPATI
• Keywords: Capital asset; Maximum Marginal Rate; Source of fund; Fair market value; Revenue expenditure; Set aside
• Section: 143(3); 115JB; 195; 143(2); 13; 28

Judgement Text

ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 1 IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI G. MANJUNATHA, ACCOUNT ANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBE R ITA NO.1202/MUM/2019 (ASSESSMENT YEAR: 2013-14) DCIT - 15(2)(1) R. NO. 357, 3 RD FLOOR, AAYAKAR BHAVAN,M.K. ROAD, MARINE LINES, MUMBAI 400 020 VS. M/S KALSHA BUILDERS PVT. LTD. A-1, ASHIAN SECTOR-17, VASHI, MUMBAI- 400 705 PAN AAACK3955F (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI R. BHOOPATI, D.R RESPONDENT BY: SHRI J.P. BAIRAGRA, A.R DATE OF HEARING: 26.02.2020 DATE OF PRONOUNCEMENT: 10.08.2020 O R D E R PER RAVISH SOOD, JM THE PRESENT APPEAL FILED BY THE REVENUE IS DIRECT ED AGAINST THE ORDER PASSED BY THE CIT(A)-24, MUMBAI, DATED 26.11.2018, WHICH IN T URN ARISES FROM THE ASSESSMENT ORDER PASSED BY THE A.O UNDER SEC. 143(3) OF THE INCOME T AX ACT 1961 (FOR SHORT ACT), DATED 07.03.2016 FOR A.Y. 2013-14. THE REVENUE HAS ASSAIL ED THE IMPUGNED ORDER ON THE FOLLOWING GROUNDS OF APPEAL BEFORE US: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.3,60,00,000/- MADE ON ACCOUNT OF DIRECTORS REMUNERATION WHICH IS HUGE COMPARED TO THE RATIO OF TOTAL EXPENSES SHOWN IN THE PROFIT & LOSS ACCOUNT OF RS.4,37,82,002/- IN ORDER TO SUPPRESSED THE FUTURE PROFIT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT EXPENDITURE INCURRED ON INTEREST IS REVENUE IS NATURE IGNORING THE FACT THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINE SS OF DEVELOPING PROJECTS AND INTEREST BEARING LOAN ARE USED FOR THE CAPITAL PURP OSE OF DEVELOPING THE PROJECT AND REQUIRED TO BE CAPITALIZED TO WORK IN PROGRESS. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CI T(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 2 4. THE APPLICANT CRAVES LEAVE TO ADD, AMEND OR ALTE R ANY GROUNDS OR ADD NEW GROUNDS ,WHICH MAY BE NECESSARY. 2. BRIEFLY STATED, THE ASSESSEE COMPANY WHICH IS EN GAGED IN THE BUSINESS ACTIVITIES OF BUILDING, DEVELOPING, DEALING IN PROPERTIES AND REA L ESTATE HAD E-FILED ITS RETURN OF INCOME FOR A.Y. 2013-14 ON 26.09.2013, DECLARING A LOSS OF RS. 2,06,19,597/-. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS PROCESSED AS SUCH UNDER SEC. 143(1 ) OF THE ACT. SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT U NDER SEC. 143(2) OF THE ACT. 3. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE A.O THAT THE ASSESSED HAD CLAIMED AN EXPENDITURE OF RS. 73,59,55 8/- ON ACCOUNT OF FINANCE COST IN ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. AS PER THE DETAILS FURNISHED BY THE ASSESSEE THE FINANCE COST WAS COMPRISED OF THE FOLLOWING INT EREST EXPENDITURE: SR. NO. FINANCE COST AMOUNT IN RS. 1. INTEREST ON CAR LOAN 6,87,379 2. INTEREST ON BANK OVERDRAFT 4,70,253/ - 3. INTEREST ON UNSECURED LOANS 62,01,926/ - TOTAL 73,59,558/ - AS NOTICED BY THE A.O, THE ASSESSEE HAD AVAILED THE OVERDRAFT FACILITY AND RAISED UNSECURED LOANS FOR DEVELOPING ITS PROJECTS. FURTHER, IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE WAS RECOGNIZING ITS REVENUE AS PER PROJECT COMPLETION M ETHOD. OBSERVING, THAT THE ASSESSEE DID NOT HAVE SUFFICIENT SELF-OWNED FUNDS OR ANY OTHER S OURCE OF FUNDING, THE A.O CALLED UPON IT TO EXPLAIN AS TO WHY THE INTEREST EXPENDITURE PERTAINI NG TO BANK OVERDRAFT AND UNSECURED LOANS OF RS.4,70,253/- AND RS.62,01,926/-, RESPECTIVELY, MAY NOT BE CAPITALISED TO ITS WORK-IN-PROGRESS. IN REPLY, IT WAS STATED BY THE ASSESSEE THAT IT HAD FULFILLED THE MATCHING CONCEPT OF COST AND REVENUE WHILE ALLOCATING THE COSTS TO THE RESPECTIV E PROJECTS FOR WHICH THEY WERE INCURRED. ALSO, IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE GENERA L ADMINISTRATIVE COSTS AND FINANCE COSTS WERE NOT ATTRIBUTABLE TO ANY SPECIFIC PROJECT HENCE THEY WERE RIGHTLY DEBITED AS A PERIODIC COST IN THE PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONS IDERATION. IN SUM AND SUBSTANCE, IT WAS THE CLAIM OF THE ASSESSEE THAT THE INTEREST EXPENDITURE WAS A PERIODIC COST WHICH WAS RECOGNIZED AS SUCH IN THE YEAR IN WHICH IT WAS INCURRED. ON TH E BASIS OF HIS AFORESAID SUBMISSIONS, IT WAS AVERRED BY THE ASSESSEE THAT THE INTEREST PAID ON T HE BANK OVERDRAFT AND UNSECURED LOANS WHICH WERE AVAILED FOR ITS WORKING CAPITAL REQUIREM ENT WAS NOT TO BE CAPITALISED OR ADDED TO THE ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 3 WIP. HOWEVER, THE A.O NOT BEING PERSUADED TO SUBSCR IBE TO THE AFORESAID CLAIM OF THE ASSESSEE DISALLOWED THE INTEREST EXPENDITURE INSOFA R THE SAME WAS RELATABLE TO THE BANK OVERDRAFT AND UNSECURED LOANS AND MADE A CONSEQUENT IAL ADDITION OF RS.66,72,179/-. APART FROM THAT, IT WAS OBSERVED BY THE A.O THAT THE ASSE SSEE HAD CLAIMED AN EXPENDITURE OF RS.3,60,00,000/- ON ACCOUNT OF REMUNERATION TO ITS DIRECTORS, AS UNDER: SR. NO. REMUNERATION TO DIRECTORS AMOUNT IN RS. 1. RAMCHANDRA G. VICHARE 2,34,00,000/ - 2. DAMODAR S. KARDILE 1,14,00,000/ - 3. NEELIMA D. KARDILE 6,00,000/ - 4. SHAILAJA R. VICHARE 6,00,000/ - TOTAL 3,60,00,000/ - OBSERVING THAT THE ASSESSEE COULD NOT SUBSTANTIATE THE PAYMENT OF THE AFORESAID EXORBITANT AMOUNT OF REMUNERATION TO ITS DIRECTORS, THE A.O HE LD A CONVICTION THAT THE ASSESSEE HAD TRIED TO CLAIM THE AFORESAID AMOUNT AS AN EXPENSE WITH AN IN TENT TO BOOK A LOSS DURING THE YEAR UNDER CONSIDERATION, WHICH COULD THEREAFTER BE SET OFF AGAINST ITS INCOME, IF ANY, FOR THE SUBSEQUENT YEARS. IT WAS FURTHER OBSERVED BY THE A.O THAT A MA JOR PORTION OF THE DIRECTORS REMUNERATION OF RS.2.56 CRORES (OUT OF RS.3.60 CORES ) WAS REFLECTE D BY THE ASSESSEE AS AN OUTSTANDING LIABILITY UNDER THE HEAD DIRECTORS REMUNERATION PAYABLE IN ITS BALANCE SHEET FOR THE YEAR UNDER CONSIDERATION. ALSO, IT WAS OBSERVED BY THE A.O THA T THE ASSESSEE HAD RAISED UNSECURED LOANS OF RS.6,96,00,000/- FROM THE ABOVEMENTIONED DIRECTO RS ON WHICH IT HAD CLAIMED TO HAVE PAID AN INTEREST AMOUNTING TO RS. 39,02,832/-. IN THE BACKD ROP OF HIS AFORESAID OBSERVATIONS, THE A.O HELD A CONVICTION THAT ASSESSEE BY PROVIDING UNREAS ONABLE REMUNERATION TO THE DIRECTORS HAD THEREAFTER RECEIVED BACK THE FUNDS BY WAY OF INTERE ST BEARING LOANS FROM THEM, AND THUS, IN THE GARB OF THE SAID TRANSACTIONS HAD TRIED TO SUPPRESS ITS PROFITS AND CONVERT THE SAME INTO LOSS. ON BEING CONFRONTED WITH THE AFORESAID FACTS THE ASSES SEE TRIED TO DISPEL THE DOUBTS RAISED BY THE A.O AS REGARDS THE GENUINENESS OF THE AFORESAID TRA NSACTIONS. HOWEVER, THE A.O NOT BEING PERSUADED TO ACCEPT THE CLAIM OF THE ASSESSEE DISAL LOWED THE ENTIRE AMOUNT OF THE DIRECTORS REMUNERATION OF RS.3,63,00,000/- UNDER SEC. 40A(2)( B) OF THE ACT. AFTER INTER ALIA MAKING THE AFORESAID ADDITIONS/DISALLOWANCES THE A.O ASSESSED THE TOTAL INCOME OF THE ASSESSEE UNDER THE NORMAL PROVISIONS AT RS. 2,20,66,080/- AND BOOK PR OFIT UNDER SEC. 115JB AT RS.2,09,04,614/-. 4. AGGRIEVED, THE ASSESSEE ASSAILED THE AFORESAID A DDITIONS/DISALLOWANCE IN APPEAL BEFORE THE CIT(A). INSOFAR THE DISALLOWANCE OF THE INTERES T EXPENDITURE WAS CONCERNED, THE CIT(A) ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 4 OBSERVED THAT THE DISPUTE THEREIN INVOLVED WAS AS T O WHETHER THE FINANCE COST WAS ON REVENUE ACCOUNT, AND THUS, WAS TO BE ALLOWED AS A PERIODIC COST OR WAS REQUIRED TO BE CAPITALIZED TO WIP. AS SUCH, THE CIT(A) WAS OF THE VIEW THAT THE D ISPUTE WAS MAINLY RELATED TO THE YEAR OF TAXABILITY, SINCE AT THE END OF THE PROJECT THERE W OULD BE NO IMPACT ON THE PROFIT OR LOSS AS THE ENTIRE FINANCE COST HAD TO BE ALLOWED BY THE A.O AS A PART OF THE WIP AS AGAINST PERIODIC COST CLAIMED BY THE ASSESSEE. AS OBSERVED BY THE CIT(A), ADMITTEDLY THE ENTIRE BORROWING IN QUESTION WAS UTILIZED FOR THE PURPOSES OF THE BUSIN ESS OF THE ASSESSEE. IT WAS FURTHER OBSERVED BY THE CIT(A) THAT THE ASSESSEE HAD CONSISTENTLY BE EN FOLLOWING THE SAME METHOD OF ACCOUNTING OF TREATING THE FINANCE COST AS PART OF PERIOD COST, AND THIS METHOD OF ACCOUNTING WAS ACCEPTED BY THE A.O IN THE EARLIER YEARS. ADVER TING TO THE FACTS INVOLVED IN THE CASE OF THE ASSESSEE FOR THE IMMEDIATELY PRECEDING YEAR I.E A.Y 2012-13, IT WAS OBSERVED BY THE CIT(A) THAT THE ASSESSEE IN THE SAID YEAR HAD CLAIMED DEDU CTION OF FINANCE COST AGGREGATING TO RS. 41,27,116/- (OUT OF WHICH AN AMOUNT OF RS. 34,00,20 5/- WAS IN RESPECT OF INTEREST ON UNSECURED LOANS UTILIZED TOWARDS BUSINESS PURPOSES). IT WAS N OTICED BY THE CIT(A) THAT THE ASSESSMENT FOR A.Y 2012-13 WAS FINALIZED U/S 143(3), AND THE A.O H AD ACCEPTED THE FINANCE COST AS A PERIODIC COST AND NOT CAPITALIZED THE SAME TO WIP. IT WAS OB SERVED BY THE CIT(A), THAT THE A.O WHILE CAPITALIZING THE INTEREST EXPENDITURE TO WIP DURING THE YEAR UNDER CONSIDERATION HAD NOT GIVEN ANY REASON FOR DEVIATING FROM THE REGULAR METHOD OF ACCOUNTING THAT WAS FOLLOWED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT IN THE PREC EDING YEARS. FURTHER, THE CIT(A) OBSERVED, THAT THE CLAIM OF THE ASSESSEE THAT THE I NTEREST EXPENDITURE BEING A PERIODIC COST WAS THUS TO BE ALLOWED AS A DEDUCTION EVEN THOUGH CORRE SPONDING INCOME WAS TO BE RECOGNIZED ONLY UPON COMPLETION OF THE PROJECT WAS SUPPORTED B Y THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF ACIT VS. LOKHANDWALA CONSTRUCTIONS INDUSTRIES LTD. (2003) 260 ITR 579 (BOM) . ALSO, IT WAS OBSERVED BY THE CIT(A) THAT THE ICDS ISSUED ON VALUATION OF INVENTORIES (THOUGH RELEVANT IN SUBSEQUENT YEARS), ALSO SUPPORTED THE AFORESAID CLAIM OF THE ASSESSEE. ACCORDINGLY, THE CIT(A) FINDING FAVOUR WI TH THE CONTENTIONS ADVANCED BY THE ASSESSEE VACATED THE DISALLOWANCE OF INTEREST EXPEN DITURE OF RS. 66,72,179/- SO MADE BY THE A.O. AS REGARDS THE DISALLOWANCE OF THE DIRECTORS REMUNERATION OF RS. 3.60 CRORES, IT WAS OBSERVED BY THE CIT(A) THAT IN EARLIER YEARS ALSO W HICH HAD BEEN SUBJECTED TO SCRUTINY ASSESSMENTS VIZ. A.Y 2007-08 TO A.Y 2012-13, THE RE MUNERATION PAID TO THE DIRECTORS WAS ALLOWED AND NO DISPUTE HAD THEREIN ARISEN. IN FACT, IT WAS OBSERVED BY THE CIT(A) THAT IN THE ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 5 IMMEDIATE PRECEDING TWO ASSESSMENT YEARS I.E A.Y 20 11-12 AND A.Y 2012-13 THE ASSESSEE COMPANY HAD RAISED CLAIM FOR DEDUCTION OF REMUNERAT ION TO DIRECTORS AGGREGATING TO RS. 5.94 CRORE, WHICH WAS ACCEPTED BY THE DEPARTMENT IN SCRU TINY ASSESSMENT. ALSO, IT WAS OBSERVED BY THE CIT(A) THAT ALL THE DIRECTORS HAD SHOWN THE AMO UNT OF REMUNERATION IN THEIR RESPECTIVE RETURNS OF INCOME AND HAD PAID TAX ON THE SAME AT T HE MAXIMUM MARGINAL RATE OF TAX. AS SUCH, THE CIT(A) WAS OF THE VIEW THAT THERE WAS NEITHER A NY LOSS TO THE REVENUE NOR EVASION OF ANY TAX BY THE ASSESSEE. IN THE BACKDROP OF HIS AFORESAID O BSERVATIONS THE CIT(A) VACATED THE DISALLOWANCE OF DIRECTORS REMUNERATION OF RS. 3.60 CRORE MADE BY THE A.O. 5. THE REVENUE BEING AGGRIEVED WITH THE ORDER OF TH E CIT(A) HAS CARRIED THE MATTER IN APPEAL BEFORE US. THE LD. DEPARTMENTAL REPRESENTATI VE (FOR SHORT D.R) ASSAILED THE ORDER OF THE CIT(A). IT WAS SUBMITTED BY THE LD. D.R THAT THE CI T(A) WAS IN ERROR IN DISLODGING THE WELL REASONED DISALLOWANCE OF INTEREST EXPENDITURE AND D IRECTORS REMUNERATION MADE BY THE A.O. AS SUCH, IT WAS THE CLAIM OF THE LD. D.R THAT THE ORDE R OF THE CIT(A) BE SET ASIDE AND THAT OF THE A.O BE RESTORED. PER CONTRA, THE LD. AUTHORISED RE PRESENTATIVE (FOR SHORT A.R) FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). THE LD. A.R TOOK US THROUGH THE OBSERVATIONS OF THE CIT(A) IN CONTEXT OF THE ISSUES IN QUESTION. IT WAS AVERRED B Y THE LD. A.R THAT AS THE CIT(A) HAD RIGHTLY VACATED THE DISALLOWANCES MADE BY THE A.O, THEREFOR E, THE APPEAL OF THE REVENUE WAS DEVOID OF ANY MERIT AND WAS LIABLE TO BE DISMISSED. 6. WE HAVE HEARD THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD, AS WELL AS THE JUDICIAL PRONOUNCEMENTS THAT HAVE BEEN PRESSED INTO SERVICE BY THEM. OUR INDULGENCE IN THE PRESENT APPEAL HAS BEEN SOUGHT BY THE REVENUE FOR ADJUDICAT ING THE SUSTAINABILITY OF THE VIEW TAKEN BY THE CIT(A) AS REGARDS VACATION OF THE TWO DISALLOWA NCES MADE BY THE A.O, VIZ. (I). DISALLOWANCE OF INTEREST ON BORROWED CAPITAL :RS.66,72,179/-; AN D (II). DISALLOWANCE OF DIRECTORS REMUNERATION U/S 40A(2)(A) : RS. 3.60CRORES. 7. WE SHALL FIRST ADVERT TO THE GRIEVANCE OF THE RE VENUE THAT THE CIT(A) HAD ERRED IN VACATING THE DISALLOWANCE OF INTEREST ON BORROWED C APITAL OF RS. 66,72,179/-. AS OBSERVED BY US HEREINABOVE, THE A.O TAKING COGNIZANCE OF THE FACT THAT THE ASSESSEE DID NOT HAVE SUFFICIENT SELF-OWNED FUNDS OR ANY OTHER SOURCE OF FUNDING, WA S OF THE VIEW, THAT IT HAD UTILISED ITS OVERDRAFT FACILITY AND ALSO THE UNSECURED LOANS SO RAISED IN ITS BUSINESS OF DEVELOPING OF ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 6 PROJECTS. OBSERVING, THAT THE ASSESSEE WAS RECOGNIS ING ITS INCOME/REVENUE AS PER THE PROJECT COMPLETION METHOD, THE A.O WAS OF THE VIEW THAT AS THE INTEREST BEARING BORROWED FUNDS WERE USED BY THE ASSESSEE FOR A CAPITAL PURPOSE, THUS, T HE INTEREST EXPENSES RELATABLE TO THE SAME BEING IN THE NATURE OF A CARRYING COST WAS TO BE CA PITALISED TO THE WIP OF THE ASSESSEE. AT THIS STAGE, WE MAY HEREIN OBSERVE THAT IT WAS THE CLAIM OF THE ASSESSEE BEFORE THE A.O THAT IT HAD FULFILLED THE MATCHING CONCEPT OF COST AND REVENUE WHILE ALLOCATING ALL COSTS TO THE RESPECTIVE PROJECTS FOR WHICH THEY WERE INCURRED. ALSO, IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE GENERAL ADMINISTRATIVE COST AND FINANCE COST WERE N OT ATTRIBUTABLE TO ANY SPECIFIC PROJECT, THEREFORE, THEY WERE DEBITED AS A PERIODIC COST IN THE PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. BUT THEN, WE FIND THAT THE AFORESAID CLAIM OF THE ASSESSEE WAS REJECTED BY THE A.O WITHOUT ASSIGNING ANY COGENT REASON. BE THAT AS IT MAY, WE FIND THAT THE ASSESSEE HAD CONSISTENTLY BEEN FOLLOWING THE SAME METHOD OF TREA TING THE FINANCE COST AS PART OF ITS PERIODIC COST, AND THIS METHOD OF ACCOUNTING WAS ACCEPTED BY THE A.O IN THE EARLIER YEARS. AS IS DISCERNIBLE FROM THE ORDER OF THE CIT(A), THE ASSES SEE IN THE IMMEDIATELY PRECEDING YEAR I.E A.Y 2012-13 HAD CLAIMED DEDUCTION OF FINANCE COST AGGRE GATING TO RS. 41,27,116/- (OUT OF WHICH AN AMOUNT OF RS. 34,00,205/- WAS TOWARDS INTEREST ON U NSECURED LOANS), WHICH WAS ACCEPTED BY THE A.O VIDE HIS ASSESSMENT FRAMED U/S 143(3) OF TH E ACT. IN SUM AND SUBSTANCE, THE A.O WHILE FRAMING THE ASSESSMENT IN THE CASE OF THE ASSESSEE FOR THE IMMEDIATELY PRECEDING YEAR I.E A.Y 2012-13 HAD ALLOWED THE ASSESSEES CLAIM OF DEDUCTI ON OF INTEREST ON BORROWED CAPITAL AS A PERIODIC COST AND HAD NOT CAPITALIZED THE SAME TO W IP. WE ARE UNABLE TO COMPREHEND THAT AS TO ON WHAT BASIS THE A.O DURING THE YEAR UNDER CONSIDE RATION HAD MADE A DEVIATION FROM THE REGULAR METHOD OF ACCOUNTING THAT WAS FOLLOWED BY T HE ASSESSEE AND ACCEPTED BY THE DEPARTMENT IN THE PRECEDING YEARS. IN FACT, WE CONC UR WITH THE VIEW TAKEN BY THE CIT(A) THAT THERE HAD TO BE A COGENT REASON FOR THE REVENUE FOR JUSTIFYING A DEVIATION FROM THE REGULAR METHOD OF ACCOUNTING THAT WAS FOLLOWED BY THE ASSES SEE AND ACCEPTED BY THE DEPARTMENT IN TE PRECEDING YEARS. IN OUR CONSIDERED VIEW, AS LONG A S THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE IS NOT HELD TO BE AN UNREA SONABLE METHOD, THEN, IN SUCH A CASE EVEN IF A BETTER METHOD COULD BE VISUALIZED, THE METHOD CONSISTENTLY FOLLOWED CANNOT BE REJECTED. OUR AFORESAID VIEW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. TATA IRON & STEEL CO .LTD. (1977)106 ITR 3 63 (BOM) . ALSO, AS OBSERVED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. BILL HARI INVESTMENT LTD. (2008) 299 ITR 1 ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 7 (SC) , EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE METHOD WHICH THE DEPARTMENT HAD EARLIER ACCEPTED. IT WAS FURTHER OBS ERVED BY THE HONBLE COURT, THAT IT WAS ONLY IN THOSE CASES WHERE THE DEPARTMENT RECORDS A FINDI NG THAT THE METHOD ADOPTED BY THE ASSESSEE RESULTS IN DISTORTION OF PROFITS, THAT THE DEPARTMENT CAN INSIST ON SUBSTITUTION OF THE EXISTING METHOD. AS SUCH, IN THE BACKDROP OF OUR AF ORESAID OBSERVATIONS, WE ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE DEVIATION BY THE A.O FROM THE REGULAR METHOD OF ACCOUNTING THAT WAS FOLLOWED BY THE ASSESSEE AND AC CEPTED BY THE DEPARTMENT IN THE PRECEDING YEARS. WE ARE THUS OF THE CONSIDERED VIEW THAT THER E WAS NO JUSTIFICATION FOR THE A.O TO HAVE DISALLOWED THE ASSESSEES CLAIM FOR DEDUCTION OF IN TEREST EXPENDITURE AS A PERIODIC COST SPECIFICALLY WHEN THE SAME IN THE COURSE OF SCRUTIN Y ASSESSMENT FRAMED U/S 143(3) FOR A.Y 2012-13 WAS ACCEPTED AS SUCH. INDEPENDENT OF OUR AF ORESAID OBSERVATIONS, WE FIND THAT THE AFORESAID CLAIM OF DEDUCTION OF INTEREST EXPENDITUR E BY THE ASSESSEE IS IN CONFORMITY WITH THE ACCOUNTING STANDARD-2 (AS-2) ISSUED BY THE ICAI ON VALUATION OF INVENTORIES. AS-2 PROVIDES THAT OVERHEADS OTHER THAN PRODUCTION OVERHEADS SHO ULD BE INCLUDED AS A PART OF THE INVENTORY COST ONLY TO THE EXTENT THAT THEY CLEARLY RELATE TO PUTTING THE INVENTORIES IN THEIR PRESENT LOCATION AND CONDITION. IN OUR CONSIDERED VIEW, AS THE INTE REST COSTS ARE IN THE NATURE OF PERIODIC COSTS, IT WOULD THUS NOT ONLY BE PRUDENT BUT IN FACT FAIR AND CORRECT TO TREAT THEM AS A REVENUE EXPENDITURE AND DEBIT THE SAME IN THE PROFIT & LOSS ACCOUNT. OUR AFORESAID VIEW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF ASST. CIT VS. LOKHANDWALA CONSTRUCTION INDUSTRIES LTD. (2003) 260 ITR 579 (BOM) . IN THE SAID CASE, THE HONBLE HIGH COURT HAD OBSERVED THAT PERIODIC COSTS CANNOT BE TREATED AS CARRYING COSTS AND HAVE TO BE ALLOWED AS DEDUCTION EVEN THOUGH CORRESP ONDING INCOME IS TO BE RECOGNISED ONLY ON COMPLETION OF THE PROJECT. THE HONBLE HIGH COUR T WHILE CONCLUDING AS HEREINABOVE HAD OBSERVED AS UNDER: 4. FROM THE FACTS FOUND BY THE TRIBUNAL ON RECORD, IT IS CLEAR THAT ASSESSEE UNDERTOOK TWO-FOLD ACTIVITIES. IT BOUGHT AND SOLD FLATS. SECONDLY, THE ASSESSEE WAS ALSO ENGAGED IN THE BUSINESS OF CONSTRUCTION OF BUILDINGS. THE PROFITS FROM BOTH TH E ACTIVITIES WERE ASSESSED UNDER S. 28 OF THE IT AC T. IN THIS CASE, WE ARE CONCERNED WITH THE SECOND ACTIVIT Y (HEREINAFTER REFERRED TO, FOR THE SAKE OF BREVITY , AS 'KANDIVALI PROJECT'). ACCORDING TO THE CIT, LOAN WA S RAISED FOR SECURING LAND/DEVELOPMENT RIGHTS FROM THE MANDAL. THAT, THE LOAN WAS UTILISED FOR PURCHASING THE DEVELOPMENT RIGHTS, WHICH, ACCORDING TO THE CIT , CONSTITUTED A CAPITAL ASSET. ACCORDING TO THE CIT, SINCE THE LOAN WAS RAISED FOR SECURING CAPITAL ASSE T, THE INTEREST INCURRED THEREON CONSTITUTED PART OF C APITAL EXPENDITURE. THIS FINDING OF THE CIT WAS ERRONEOUS. IN THE CASE OF INDIA CEMENTS LTD. VS. CI T (1966) 60 ITR 52 (SC), IT WAS HELD BY THE SUPREME COURT THAT IN CASES WHERE THE ACT OF BORROWING WAS INCIDENTAL TO CARRYING ON OF BUSINESS, THE LOAN OBTAINED WAS NOT AN ASSET. THAT, FOR THE PURPOSES O F DECIDING THE CLAIM OF DEDUCTION UNDER S. 10(2)(II I) OF ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 8 THE IT ACT, 1922 [S. 36(1)(III) OF THE PRESENT IT A CT], IT WAS IRRELEVANT TO CONSIDER THE PURPOSE FOR WHICH THE LOAN WAS OBTAINED. IN THE PRESENT CASE, THE ASS ESSEE WAS A BUILDER. IN THE PRESENT CASE, THE ASSESSEE HAD UNDERTAKEN THE PROJECT OF CONSTRUCTION OF FLATS UNDER THE KANDIVALI PROJECT. THEREFORE, T HE LOAN WAS FOR OBTAINING STOCK-IN-TRADE. THAT, THE KA NDIVALI PROJECT CONSTITUTED THE STOCK-IN-TRADE OF T HE ASSESSEE. THAT, THE PROJECT DID NOT CONSTITUTE A FI XED ASSET OF THE ASSESSEE. IN THIS CASE, WE ARE CONCERNED WITH DEDUCTION UNDER S. 36(1)(III). SINCE THE ASSESSEE HAD RECEIVED LOAN FOR OBTAINING STOCK - IN-TRADE (KANDIVALI PROJECT), THE ASSESSEE WAS ENTI TLED TO DEDUCTION UNDER S. 36(1)(III) OF THE ACT. T HAT, WHILE ADJUDICATING THE CLAIM FOR DEDUCTION UNDER S. 36(1)(III) OF THE ACT, THE NATURE OF THE EXPENSE WHETHER THE EXPENSE WAS ON CAPITAL ACCOUNT OR REVEN UE ACCOUNTWAS IRRELEVANT AS THE SECTION ITSELF SAYS THAT INTEREST PAID BY THE ASSESSEE ON THE CAPI TAL BORROWED BY THE ASSESSEE WAS AN ITEM OF DEDUCTION. THAT, THE UTILIZATION OF THE CAPITAL WAS IRRELEVANT FOR THE PURPOSES OF ADJUDICATING THE CL AIM FOR DEDUCTION UNDER S. 36(1)(III) OF THE ACT [SEE JUDGM ENT OF THE BOMBAY HIGH COURT IN THE CASE OF CALICO DYEING & PRINTING WORKS VS. CIT (1958) 34 ITR 265 ( BOM)]. IN THAT JUDGMENT, IT HAS BEEN LAID DOWN THAT WHERE AN ASSESSEE CLAIMS DEDUCTION OF INTEREST PAID ON CAPITAL BORROWED, ALL THAT THE ASSESSEE HAD TO SHOW WAS THAT THE CAPITAL WHICH WAS BORROWED WAS US ED FOR BUSINESS PURPOSE IN THE RELEVANT YEAR OF ACCOUNT AND IT DID NOT MATTER WHETHER THE CAPITAL W AS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET. THE SAID JUDGMENT OF THE BOMBAY HIGH COURT APPLIES TO THE FACTS OF THIS CASE. FURTHER, WE FIND THAT ICDS II ISSUED ON VALUATION O F INVENTORIES (THOUGH RELEVANT TO THE SUBSEQUENT YEARS) ALSO SUPPORTS THE AFORESAID CLAIM OF DEDUCTION OF THE ASSESSEE. IN THE BACKDROP OF OUR AFORESAID DELIBERATIONS, WE ARE OF THE CONSIDERED VIEW THAT AS THE INTEREST BEARING BORROWED FUNDS HAD BEEN RAISED BY THE ASSES SEE FOR THE PURPOSE OF ITS BUSINESS, AND USED FOR THE SAID PURPOSE, THEREFORE, THE INTEREST EXPENDITURE PERTAINING TO SUCH BORROWED FUNDS WAS RIGHTLY CLAIMED BY THE ASSESSEE AND ALLOWED AS A DEDUCTION BY THE CIT(A). WE THUS FINDING NO INFIRMITY IN THE VIEW TAKEN BY THE CIT(A) IN CON TEXT OF THE AFORESAID ISSUE UNDER CONSIDERATION UPHOLD HIS ORDER TO THE SAID EXTENT. THE GROUND OF APPEAL NO. 2 IS DISMISSED. 8. WE SHALL NOW TAKE UP THE CLAIM OF THE REVENUE TH AT THE CIT(A) HAD ERRED IN VACATING THE DISALLOWANCE OF THE DIRECTORS REMUNERATION OF RS. 3 .60 CRORES MADE BY THE A.O U/S 40A(2)(B) OF THE ACT. AS OBSERVED BY US HEREINABOVE, THE ASSESSE E HAD CLAIMED AN EXPENDITURE OF RS.3,60,00,000/- ON ACCOUNT OF REMUNERATION TO ITS DIRECTORS, AS UNDER: SR. NO. NAME OF DIRECTOR AGE DATE OF COMMENCE- MENT OF EMPLOYMENT EXPERIENCE IN BUSINESS R E SPONSIBILITIES AMOUNT IN RS. 1. RAMCHANDRA G. VICHARE 57 22/09/1992 35 YEARS KE Y PERSON - BRING THE PURCHASE PROJECTS IN THE COMPANY, POLICY DECISIONS, PUBLIC & SOCIAL RELATION S 2,34,00,000/ - 2. DAMODAR S. KARDILE 62 01/04/1993 27 YEARS FINANCE, TAXATION, LEGAL, CIDCO, NMMC. 1,14,00,000/ - 3. NEELIMA D. KARDILE 51 22/09/1992 20 YEARS ACCOUNTS 6,00,000/ - 4. SHAILAJA R. VICHARE 58 01/09/2005 11 YEARS GENERAL ADMINISTRATION & H.R 6,00,000/ - TOTAL 3,60,00,000/ - AS NOTICED BY US HEREINABOVE, THE A.O IN THE COURSE OF THE ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF AN EXORB ITANT AMOUNT OF REMUNERATION TO ITS DIRECTORS, WHICH THEREAFTER WAS ROUTED BACK TO THE COMPANY BY WAY OF INTEREST BEARING FUNDS ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 9 ADVANCED BY THE SAID DIRECTORS. OBSERVING THAT THE ASSESSEE COULD NOT SUBSTANTIATE THE PAYMENT OF THE AFORESAID EXORBITANT AMOUNT OF REMUN ERATION TO ITS DIRECTORS, THE A.O HELD A CONVICTION THAT THE ASSESSEE HAD TRIED TO CLAIM THE AFORESAID AMOUNT AS AN EXPENSE WITH AN INTENT TO BOOK LOSSES DURING THE YEAR UNDER CONSIDE RATION. ON A PERUSAL OF THE ASSESSMENT ORDER, WE FIND, THAT THE A.O WAS OF THE VIEW THAT T HE ASSESSEE HAD INTENDED TO BOOK THE AFORESAID LOSSES DURING THE YEAR IN QUESTION SO THA T THE SAME COULD THEREAFTER BE SET OFF AGAINST ITS INCOME, IF ANY, FOR THE SUBSEQUENT YEAR S. FURTHER, IT WAS OBSERVED BY THE A.O THAT A MAJOR PORTION OF THE DIRECTORS REMUNERATION OF RS. 2.56 CRORES (OUT OF RS.3.60 CORES) WAS REFLECTED BY THE ASSESSEE AS AN OUTSTANDING LIABILI TY UNDER THE HEAD DIRECTORS REMUNERATION PAYABLE IN ITS BALANCE SHEET FOR THE YEAR UNDER CO NSIDERATION. ALSO, IT WAS OBSERVED BY HIM THAT THE ASSESSEE HAD RAISED UNSECURED LOANS OF RS.6,96, 00,000/- FROM ITS AFORESAID DIRECTORS ON WHICH IT HAD CLAIMED TO HAVE PAID AN INTEREST AMOUN TING TO RS.39,02,832/-. IN THE BACKDROP OF HIS AFORESAID OBSERVATIONS, THE A.O DISALLOWED U/S 40A(2)(A) THE ENTIRE AMOUNT OF REMUNERATION TO DIRECTORS AMOUNTING TO RS. 3,60,00,000/-. ON APP EAL, THE CIT(A) FINDING FAVOUR WITH THE CONTENTIONS ADVANCED BY THE ASSESSEE HAD VACATED TH E AFORESAID DISALLOWANCE MADE BY THE A.O. 9. WE HAVE HEARD THE AUTHORISED REPRESENTATIVES FOR BOTH THE PARTIES ON THE ISSUE UNDER CONSIDERATION, PERUSED THE ORDERS OF THE LOWER AUTH ORITIES AND THE MATERIAL AVAILABLE ON RECORD, AS WELL AS THE JUDICIAL PRONOUNCEMENTS PRESSED INTO SERVICE BY THEM. ON A PERUSAL OF THE RECORDS, WE FIND THAT THE ASSESSEE COMPANY HAD CONS ISTENTLY BEEN PAYING REMUNERATION TO ITS DIRECTORS IN THE PRECEDING YEARS, AS UNDER: SR. NO. ASSESSMENT YEAR REMUNERATION PAID TO DIRECTORS 1. 2008 - 09 RS. 2.28 CRORES 2. 2009 - 10 RS. 1.47 CRORES 3. 2010 - 11 RS. 2.28 CRORES 4. 2011 - 12 RS. 5.94 CRORES 5. 2012 - 13 RS. 5.94 CRORES. INTERESTINGLY, THE AFORESAID CLAIM OF DEDUCTION OF REMUNERATION PAID TO DIRECTORS BY THE ASSESSEE COMPANY WAS SUBJECTED TO SCRUTINY ASSESSMENT IN THE AFORESAID RESPECTIVE YEARS, AND WAS ACCEPTED AS SUCH BY THE DEPARTMENT. WE CONCUR WITH THE VIEW TAKEN BY THE CIT(A), THAT NOW WHEN THE ASSESSEES CLAIM OF HAVING PAID A REMUNERA TION TO THE DIRECTORS AGGREGATING TO RS. ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 10 5.94 CRORES WAS FOUND TO BE IN ORDER AND ALLOWED BY THE DEPARTMENT WHILE FRAMING THE RESPECTIVE ASSESSMENTS IN THE CASE OF THE ASSESSEE FOR THE IMMEDIATELY TWO PRECEDING YEARS I.E A.Y 2011-12 AND A.Y 2012-13, THEN AS TO ON WHA T BASIS THE REMUNERATION AGGREGATING TO RS. 3.60 CRORES PAID TO THE SAME DIRECTORS BY THE A SSESSEE COMPANY DURING THE YEAR IN QUESTION COULD BE HELD TO BE EXORBITANT. APART FROM THAT, WE FIND THAT THE ASSESSEE COMPANY THAT WAS INCORPORATED WAY BACK IN THE YEAR 1992, HA D SINCE THEN WITH THE SAME SET OF DIRECTORS SUCCESSFULLY DEVELOPED 6 PROJECTS, ONE OF WHICH COM PRISED OF A HOUSING PROJECT HAVING 370 UNITS AT KOPARKHAIRANE, NAVI MUMBAI. INSOFAR THE YE AR UNDER CONSIDERATION IS CONCERNED, THE ASSESSEE WAS IN THE PROCESSS OF CONSTRUCTING A THIR TEEN-STOREYED BUILDING, VIZ. KALASH SAGAR ON A PLOT OF LAND OF 1000 SQ. METRES AT NERUL, NAVI MUMBAI, WHEREIN EACH FLOOR COMPRISED OF ONE PLUSH RESIDENTIAL UNIT CONSISTING OF 4 BED ROOM S, HALL, KITCHEN AND AN ADDITIONAL STORE & SERVANT ROOM. ON A PERUSAL OF THE RECORDS, WE FIND, THAT THE ASSESSEE HAD COMMENCED CONSTRUCTION OF THE PROJECT IN THE YEAR 2011, AND T HE SAME WAS THEREAFTER COMPLETED IN THE MONTH OF MAY, 2015, WHEN THE OCCUPANCY CERTIFICATE WAS RECEIVED FROM THE LOCAL AUTHORITY. FURTHER, THE ASSESSEE COMPANY HAD ACQUIRED A PLOT O F LAND ADMEASURING 3,900 SQ. MTRS. AT ULWE, TALUKA: PANVEL, DISTRICT: RAIGAD, AND ALSO A PLOT OF LAND ADMEASURING 15,000 SQ. MTRS AT KHARGHAR, TALUKA : PANVEL, DISTRICT : RAIGAD, FOR W HICH DURING THE YEAR UNDER CONSIDERATION ADVANCES WERE PAID TO VARIOUS PARTIES. ON THE BASI S OF THE AFORESAID FACTS, WE FIND, THAT THE ASSESSEE COMPANY WITH THE DIRECTIONS OF THE AFORESA ID DIRECTORS HAD SUCCESSFULLY DEVELOPED PROJECTS IN THE PRECEDING YEARS, AND WAS IN THE PRO CESS OF CONSTRUCTING A PROJECT DURING THE YEAR IN QUESTION. AS SUCH, IT IS NOT A CASE THAT A NON-P ERFORMING COMPANY WHOSE OPERATIONS HAD CAME TO A STANDSTILL WAS FOUND TO BE PAYING EXORBIT ANT REMUNERATION TO ITS DIRECTORS. INFACT THE VAST EXPERIENCE OF THE DIRECTORS WHO HAD BEEN RENDE RING THEIR SERVICES TO THE ASSESSEE COMPANY FOR DECADES DISPEL ANY TYPE OF DOUBT AS REG ARDS THE GENUINENESS AND VERACITY OF THE REMUNERATION PAID BY THE ASSESSEE TO THEM DURING TH E YEAR UNDER CONSIDERATION. APART FROM THAT, WE FIND THAT ALL THE DIRECTORS HAD DULY REFLE CTED THEIR RESPECTIVE REMUNERATIONS IN THEIR INDIVIDUAL INCOME-TAX RETURNS, AND THE SAID AMOUNTS HAD BEEN SUBJECTED TO TAX AT THE MAXIMUM MARGINAL RATE IN THEIR HANDS. AS SUCH, IT IS NEITHE R A CASE OF ANY LEAKAGE OF REVENUE NOR THAT OF A TAX EVASION. AT THIS STAGE, WE ARE REMINDED OF THE CBDT CIRCULAR NO. 6P(LXXVI-66) OF 1968, DATED 06.07.1968, WHEREIN IT WAS CLEARLY STATED THA T THE PROVISIONS OF SEC. 40A(2)(B) ARE MEANT FOR CHECKING TAX EVASION AND CANNOT BE PRESSED INTO SERVICE IN A MANNER WHICH WOULD CAUSE ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 11 HARDSHIPS IN BONAFIDE CASES. RELYING ON THE SAID CI RCULAR, THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. INDO SAUDI SERVICES (TRAVEL) P. LTD. (2009) 310 ITR 306 (BOM), HAD OBSERVED, THAT NO DISALLOWANCE U/S 40A(2)(B) CAN BE MADE IN RESPECT OF PAYMENTS TO RELATIVES OR SISTER CONCERNS WHEN THERE WAS NO ATTEMPT TO EVA DE TAX. AS SUCH, WE ARE OF THE CONSIDERED VIEW, THAT NOW WHEN THE DIRECTORS HAD BEEN SUBJECTE D TO TAX AT THE MAXIMUM MARGINAL RATES ON THE RESPECTIVE AMOUNTS OF REMUNERATION RECEIVED BY THEM FROM THE ASSESSEE COMPANY, THEREFORE, IN THE ABSENCE OF ANY REVENUE LEAKAGE TH E PROVISIONS OF SEC. 40A(2)(A) ON THE SAID COUNT ALSO COULD NOT HAVE BEEN INVOKED. AS REGARDS THE OBSERVATION OF THE A.O THAT THE ASSESSEE HAD NOT PAID THE AMOUNT OF REMUNERATION IN FULL TO THE DIRECTORS AND HAD SHOWN AN AMOUNT OF RS. 2.56 CRORES AS A LIABILITY UNDER THE HEAD DIRECTORS REMUNERATION PAYABLE IN THE BALANCE SHEET AS ON 31.03.2013, WE FIND HAD BEEN AR RIVED AT BY HIM BY ADOPTING A HALF BAKED APPROACH. ADMITTEDLY, AN AMOUNT OF RS. 2.56 CRORES WAS REFLECTED BY THE ASSESSEE AS OUTSTANDING/PAYABLE AS ON 31.03.2009. BUT THEN, AS PER THE DETAILS FILED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES, THE SAID LIABILITY WAS DISCH ARGED AND THE RESPECTIVE PAYMENTS WERE MADE BY THE ASSESSEE IN THE IMMEDIATELY SUCCEEDING YEAR, AS UNDER: DATE AMOUNT PAID 27.04.2013 RS. 72,30,600/ - 25.07.2013 RS. 5,69,356/ - 06.09.2013 RS. 1,35,46,510/ - 04.12.2013 RS. 30,00,000/ - 30.12.2013 RS. 12,62,377/ - TOTAL RS. 2,56,08,843/ - AS SUCH, THE AFORESAID DOUBTS DRAWN BY THE A.O AS R EGARDS THE GENUINENESS AND VERACITY OF THE ASSESSEES CLAIM OF HAVING PAID A REMUNERATION OF R S. 3.60 CRORES TO ITS DIRECTORS, ON THE GROUND, THAT A SUBSTANTIAL PART OF THE SAME WAS REF LECTED AS OUTSTANDING/PAYABLE, LOOSES ALL FORCE IN THE BACKDROP OF THE AFORESAID FACTUAL POSI TION. LASTLY, WE MAY HEREIN OBSERVE THAT WE ARE ALSO UNABLE TO SUBSCRIBE TO THE DISALLOWANCE OF THE ENTIRE AMOUNT OF DIRECTORS REMUNERATION OF RS. 3.60 CRORES AS HAD BEEN CARRIED OUT BY THE A.O U/S 40A(2)(A) OF THE ACT. AS SUBMITTED BY THE LD. A.R, AND RIGHTLY SO, THE PROVISIONS OF SEC. 40A(2)(A) CAN BE PRESSED INTO SERVICE BY THE A.O FOR CARRYING OUT A DISALLOWANCE, IN A CASE, WHE RE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENTS HAVE BEEN OR IS TO BE MAD E TO ANY RELATED PARTY AS SPECIFIED IN ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 12 CLAUSE (B) OF SUB-SECTION (2) TO SEC. 40A, TO THE E XTENT THE EXPENDITURE IS CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE F AIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH SUCH PAYMENT IS MADE FOR THE L EGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE, OR THE BENEFIT DERIVED BY OR ACCRU ING TO HIM THEREFROM. IN SUM AND SUBSTANCE, THE SCOPE OF THE PROVISIONS OF SEC. 40A(2)(A) IS TO DISALLOW THE EXCESSIVE OR UNREASONABLE COMPONENT OF THE EXPENDITURE INCURRED BY THE ASSESS EE IN RESPECT OF WHICH PAYMENTS HAVE BEEN OR IS TO BE MADE TO A RELATED PARTY THEREIN SP ECIFIED. APART FROM THAT, THE BASIS FOR GAUGING THE EXCESSIVENESS OR UNREASONABLENESS OF SUCH EXPEN DITURE INCURRED BY THE ASSESSEE IN RESPECT OF RELATED PARTIES HAS TO BE CARRIED OUT IN THE BACKDROP OF THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE. WE FIND THAT THE A.O BY MISCONSTRUING THE SCOPE AND GAMUT OF SEC. 40A(2)(A) HAD DISALLOWED THE ENTIRE AMOUNT OF THE DIRECTORS REMUNERATION. IN OUR CONSIDERED VIEW, THE AFORESAID DISALLOWANCE CARRIED OUT BY THE A.O BY PRESSING INTO SERVICE THE PROVISIONS OF SEC. 40A(2)(A), THEREIN PRINCIPALLY SUFFER FROM TWO SERIOUS INFIRMITIES, VIZ. (I). THAT THE A.O HAD LOS T SIGHT OF THE FACT THAT THE DISALLOWANCE OF THE RELATED PARTY EXPENDITURE U/S 40A(2)(A) COULD HAVE BEEN MADE ONLY TO THE EXTENT THE SAME WAS FOUND TO BE EXCESSIVE OR UNREASONABLE; AND (II). TH AT AS PER THE MANDATE OF SEC. 40A(2)(A) THE A.O REMAINED UNDER A STATUTORY OBLIGATION TO BENCHM ARK THE EXCESSIVENESS OR UNREASONABLENESS OF THE EXPENDITURE KEEPING IN VIEW THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT WAS MA DE OR WAS TO BE MADE TO THE SPECIFIED RELATED PARTY. IN THE BACKDROP OF OUR AFORESAID OBS ERVATIONS, WE ARE OF THE CONSIDERED VIEW THAT THE A.O HAD TRAVERSED BEYOND THE JURISDICTION THAT WAS VESTED WITH HIM U/S 40A(2)(A) OF THE ACT. OUR AFORESAID VIEW IS SUPPORTED BY THE ORDER OF THE TRIBUNAL IN THE CASE OF NAT STEEL EQUIPMENT (P) LTD. VS. DCIT (2018) 195 TTJ 0796 (MUMBAI). BE THAT AS IT MAY, IN THE BACKDROP OF OUR AFORESAID DELIBERATIONS, WE ARE OF THE CONSIDERED V IEW THAT THE REMUNERATION AGGREGATING TO RS. 3.63 CRORES PAID BY THE ASSESSEE TO ITS DIRECTORS C AN BY NO MEANS BE STAMPED AS EXORBITANT, AND THEREIN DISALLOWED BY INVOKING THE PROVISIONS O F SEC. 40A(2)(A) OF THE ACT. AS SUCH, FINDING NO INFIRMITY IN THE VIEW TAKEN BY THE CIT(A) IN CON TEXT OF THE AFORESAID ISSUE UNDER CONSIDERATION, WE UPHOLD HIS ORDER THEREIN VACATING THE DISALLOWANCE OF RS. 3.63 CRORES MADE BY THE A.O U/S 40A(2)(A) OF THE ACT. THE GROUND OF APPEAL NO. 1 IS DISMISSED. 10. THE GROUNDS OF APPEAL NOS. 3 & 4 BEING GENERAL IN NATURE ARE DISMISSED AS NOT PRESSED. ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 13 11. BEFORE PARTING, WE MAY HEREIN DEAL WITH A PROCE DURAL ISSUE THAT THOUGH THE HEARING OF THE CAPTIONED APPEAL WAS CONCLUDED ON 26.02.2020, H OWEVER, THIS ORDER IS BEING PRONOUNCED AFTER THE EXPIRY OF 90 DAYS FROM THE DATE OF CONCLU SION OF HEARING. WE FIND THAT RULE 34(5) OF THE INCOME-TAX APPELLATE TRIBUNAL RULES, 1962, WHICH EN VISAGES THE PROCEDURE FOR PRONOUNCEMENT OF ORDERS, PROVIDES AS FOLLOWS: (5) THE PRONOUNCEME NT MAY BE IN ANY OF THE FOLLOWING MANNERS:(A) THE BENCH MAY PRONOUNCE THE ORDER IMME DIATELY UPON THE CONCLUSION OF THE HEARING. (B) IN CASE WHERE THE ORDER IS NOT PRONOUN CED IMMEDIATELY ON THE CONCLUSION OF THE HEARING, THE BENCH SHALL GIVE A DATE FOR PRONOUNCEM ENT. IN A CASE WHERE NO DATE OF PRONOUNCEMENT IS GIVEN BY THE BENCH, EVERY ENDEAVOU R SHALL BE MADE BY THE BENCH TO PRONOUNCE THE ORDER WITHIN 60 DAYS FROM THE DATE ON WHICH THE HEARING OF THE CASE WAS CONCLUDED BUT, WHERE IT IS NOT PRACTICABLE SO TO DO ON THE GROUND OF EXCEPTIONAL AND EXTRAORDINARY CIRCUMSTANCES OF THE CASE, THE BENCH SHALL FIX A FUTURE DAY FOR PRONOUNCEMENT OF THE ORDER, AND SUCH DATE SHALL NOT ORDINARILY BE A DAY BEYOND A FURTHER PERIOD OF 30 DAYS AND DUE NOTICE OF THE DAY SO FIXED SHALL BE GIVEN ON TH E NOTICE BOARD. AS SUCH, ORDINARILY THE ORDER ON AN APPEAL SHOULD BE PRONOUNCED BY THE BENCH WITH IN NO MORE THAN 90 DAYS FROM THE DATE OF CONCLUDING THE HEARING. IT IS, HOWEVER, IMPORTANT T O NOTE THAT THE EXPRESSION ORDINARILY HAS BEEN USED IN THE SAID RULE ITSELF. THIS RULE WAS IN SERTED AS A RESULT OF DIRECTIONS OF HONBLE HIGH COURT IN THE CASE OF SHIVSAGAR VEG RESTAURANT VS ACIT (2009) 317 ITR 433 (BOM) WHEREIN IT WAS INTER ALIA, OBSERVED AS UNDER: WE, THEREFORE, DIRECT THE PRESIDENT OF THE APPELLA TE TRIBUNAL TO FRAME AND LAY DOWN THE GUIDELINES IN THE SIMILAR LINES AS ARE LAID DOWN BY THE APEX COURT IN THE CASE OF ANIL RAI (SUPRA) AND TO ISSUE APPROPRI ATE ADMINISTRATIVE DIRECTIONS TO ALL THE BENCHES OF THE TRIBUNAL IN THAT BEHALF. WE HOPE AND TRUST THAT SU ITABLE GUIDELINES SHALL BE FRAMED AND ISSUED BY THE PRESID ENT OF THE APPELLATE TRIBUNAL WITHIN SHORTEST REASONABLE TIME AND FOLLOWED STRICTLY BY ALL THE BE NCHES OF THE TRIBUNAL. IN THE MEANWHILE (EMPHASIS, BY UNDERLINING, SUPPLIED BY US NOW), ALL THE REVISIONA L AND APPELLATE AUTHORITIES UNDER THE INCOME-TAX AC T ARE DIRECTED TO DECIDE MATTERS HEARD BY THEM WITHIN A PERIOD OF THREE MONTHS FROM THE DATE CASE IS CLOSED FOR JUDGMENT. IN THE RULE SO FRAMED, AS A RESULT OF THESE DIRECTI ONS, THE EXPRESSION ORDINARILY HAS BEEN INSERTED IN THE REQUIREMENT TO PRONOUNCE THE ORDER WITHIN A PERIOD OF 90 DAYS. THE QUESTION THEN ARISES WHETHER OR NOT THE PASSING OF THIS ORDE R, BEYOND A PERIOD OF NINETY DAYS IN THE CASE BEFORE US WAS NECESSITATED BY ANY EXTRAORDINARY C IRCUMSTANCES. 12. WE FIND THAT THE AFORESAID ISSUE AFTER EXHAUST IVE DELIBERATIONS HAD BEEN ANSWERED BY A COORDINATE BENCH OF THE TRIBUNAL VIZ. ITAT, MUMBAI F BENCH IN DCIT, CENTRAL CIRCLE-3(2), ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 14 MUMBAI VS. JSW LIMITED & ORS. [ITA NO. 6264/MUM/18; DATED 14/05/2020, WHEREIN IT WAS OBSERVED AS UNDER: LET US IN THIS LIGHT REVERT TO THE PREVAILING SI TUATION IN THE COUNTRY. ON 24TH MARCH, 2020, HONBL E PRIME MINISTER OF INDIA TOOK THE BOLD STEP OF IMPOSING A NATIONWIDE LOCKDOWN, FOR 21 DAYS, TO PREVENT THE SPREAD OF COVID 19 EPIDEMIC, AND THIS LOCKDOWN WAS EXTENDED FROM TIME TO TIME. THE EPIDEMIC SITUATION BEING GRAVE, THERE WAS NOT MUCH OF A RELA XATION IN SUBSEQUENT LOCKDOWNS ALSO. IN ANY CASE, THERE WAS UNPRECEDENTED DISRUPTION OF JUDICIAL WOK ALL OVER THE COUNTRY. AS A MATTER OF FACT, IT HAS B EEN SUCH AN UNPRECEDENTED SITUATION, CAUSING DISRUPTION IN THE FUNCTIONING OF JUDICIAL MACHINERY, THAT HONBLE SUPREME COURT OF INDIA, IN AN UNPRECEDENTED ORDER IN THE HISTORY OF INDIA AND VIDE ORDER DATED 6.5.2020 READ WITH ORDER DATED 23.3.2020, EXTENDED THE LIMITATION TO EXCLUDE NOT ONLY THIS LOCKDOWN PERIOD BUT ALSO A FEW MORE DAYS PRIOR TO, AND AFTER , THE LOCKDOWN BY OBSERVING THAT IN CASE THE LIMITATION EXPIRED AFTER 15.03.2020 THEN THE PERIOD FROM 15.03.2020 TILL THE DATE ON WHICH THE LOCKDOW N IS LIFTED IN THE JURISDICTIONAL AREA WHERE THE DISP UTE LIES OR WHERE THE CAUSE OF ACTION ARISES SHALL BE EXTENDED FOR A PERIOD OF 15 DAYS AFTER THE LIFTING OF LOCKDOWN. HONBLE BOMBAY HIGH COURT, IN AN ORDE R DATED 15TH APRIL 2020, HAS, BESIDES EXTENDING THE V ALIDITY OF ALL INTERIM ORDERS, HAS ALSO OBSERVED TH AT, IT IS ALSO CLARIFIED THAT WHILE CALCULATING TIME F OR DISPOSAL OF MATTERS MADE TIME-BOUND BY THIS COUR T, THE PERIOD FOR WHICH THE ORDER DATED 26TH MARCH 2020 CO NTINUES TO OPERATE SHALL BE ADDED AND TIME SHALL STAND EXTENDED ACCORDINGLY, AND ALSO OBSERVED THAT ARRANGEMENT CONTINUED BY AN ORDER DATED 26TH MARCH 2020 TILL 30TH APRIL 2020 SHALL CONTINUE FURT HER TILL 15TH JUNE 2020. IT HAS BEEN AN UNPRECEDEN TED SITUATION NOT ONLY IN INDIA BUT ALL OVER THE WORLD. GOVERNMENT OF INDIA HAS, VIDE NOTIFICATION DATED 1 9TH FEBRUARY 2020, TAKEN THE STAND THAT, THE CORONAVIRU S SHOULD BE CONSIDERED A CASE OF NATURAL CALAMITY AND FMC (I.E. FORCE MAJEURE CLAUSE) MAYBE INVOKED, WHEREVER CONSIDERED APPROPRIATE, FOLLOWING THE DUE PROCEDURE. THE TERM FORCE MAJEURE HAS BEEN DEFINED IN BLACKS LAW DICTIONARY, AS AN EVENT OR EFFECT THAT CAN BE NEITHER ANTICIPATED NOR CONTROLL ED WHEN SUCH IS THE POSITION, AND IT IS OFFICIALLY SO NOTIFIED BY THE GOVERNMENT OF INDIA AND THE COVID-1 9 EPIDEMIC HAS BEEN NOTIFIED AS A DISASTER UNDER THE NATIONAL DISASTER MANAGEMENT ACT, 2005, AND ALS O IN THE LIGHT OF THE DISCUSSIONS ABOVE, THE PERIOD DURING WHICH LOCKDOWN WAS IN FORCE CAN BE ANYTHING BUT AN ORDINARY PERIOD. 10. IN THE LIGHT OF THE ABOVE DISCUSSIONS, WE ARE OF THE CONSIDERED VIEW THAT RATHER THAN TAKING A PEDANTIC VIEW OF THE RULE REQUIRING PRONOUNCEMENT O F ORDERS WITHIN 90 DAYS, DISREGARDING THE IMPORTANT FACT THAT THE ENTIRE COUNTRY WAS IN LOCKDOWN, WE SH OULD COMPUTE THE PERIOD OF 90 DAYS BY EXCLUDING AT LEAST THE PERIOD DURING WHICH THE LOCKDOWN WAS IN F ORCE. WE MUST FACTOR GROUND REALITIES IN MIND WHILE INTERPRETING THE TIME LIMIT FOR THE PRONOUNCEMENT O F THE ORDER. LAW IS NOT BROODING OMNIPOTENCE IN THE SKY. IT IS A PRAGMATIC TOOL OF THE SOCIAL ORDER. TH E TENETS OF LAW BEING ENACTED ON THE BASIS OF PRAGMATISM, AND THAT IS HOW THE LAW IS REQUIRED TO INTERPRETED. THE INTERPRETATION SO ASSIGNED BY US I S NOT ONLY IN CONSONANCE WITH THE LETTER AND SPIRIT O F RULE 34(5) BUT IS ALSO A PRAGMATIC APPROACH AT A TIME WHEN A DISASTER, NOTIFIED UNDER THE DISASTER MANAGE MENT ACT 2005, IS CAUSING UNPRECEDENTED DISRUPTION IN THE FUNCTIONING OF OUR JUSTICE DELIVE RY SYSTEM. UNDOUBTEDLY, IN THE CASE OF OTTERS CLUB VS DIT [(2017) 392 ITR 244 (BOM)], HONBLE BOMBAY HIGH COURT DID NOT APPROVE AN ORDER BEING PASSED BY THE TRIBUNAL BEYOND A PERIOD OF 90 DAYS, BUT THEN I N THE PRESENT SITUATION HONBLE BOMBAY HIGH COURT ITSELF HAS, VIDE JUDGMENT DATED 15TH APRIL 2020, HE LD THAT DIRECTED WHILE CALCULATING THE TIME FOR DI SPOSAL OF MATTERS MADE TIME BOUND BY THIS COURT, THE PERIO D FOR WHICH THE ORDER DATED 26TH MARCH 2020 CONTINUES TO OPERATE SHALL BE ADDED AND TIME SHALL STAND EXTENDED ACCORDINGLY. THE EXTRAORDINARY STEPS TAKEN SUO MOTU BY THE HONBLE HIGH COURT AND HONBLE SUPREME COURT ALSO INDICATE THAT THIS PERIOD OF LOCKDOWN CANNOT BE TREATED AS AN ORDINARY PERIOD DURING WHICH THE NORMAL TIME LIMITS ARE TO REMAIN IN FORCE. IN OUR CONSIDERED VIEW, EVEN WITHO UT THE WORDS ORDINARILY, IN THE LIGHT OF THE ABOV E ANALYSIS OF THE LEGAL POSITION, THE PERIOD DURING W HICH LOCKOUT WAS IN FORCE IS TO EXCLUDED FOR THE PU RPOSE OF TIME LIMITS SET OUT IN RULE 34(5) OF THE APPELLA TE TRIBUNAL RULES, 1963. VIEWED THUS, THE EXCEPTION , TO 90-DAY TIME-LIMIT FOR PRONOUNCEMENT OF ORDERS, INHE RENT IN RULE 34(5)(C), WITH RESPECT TO THE PRONOUNCEMENT OF ORDERS WITHIN NINETY DAYS, CLEARLY COMES INTO PLAY IN THE PRESENT CASE. ITA NO. 1202/MUM/2019 A.Y. 2013-14 DCIT-15(2)(1) VS. M/S KALSHA BUILDERS PVT. LTD. 15 WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE AFO RESAID OBSERVATIONS OF THE TRIBUNAL AND FINDING OURSELVES TO BE IN AGREEMENT WITH THE SAME, THEREIN RESPECTFULLY FOLLOW THE SAME. AS SUCH, WE ARE OF THE CONSIDERED VIEW THAT THE PERIOD DURING WHICH THE LOCKOUT WAS IN FORCE SHALL STAND EXCLUDED FOR THE PURPOSE OF WORKING OUT THE T IME LIMIT FOR PRONOUNCEMENT ORDERS, AS ENVISAGED IN RULE 34(5) OF THE APPELLATE TRIBUNAL R ULES, 1963. 13. RESULTANTLY, THE APPEAL FILED BY THE REVENUE IS DISMISSED IN TERMS OF OUR AFORESAID OBSERVATIONS. ORDER PRONOUNCED UNDER RULE 34(4) OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1962, BY PLACING THE DETAILS ON THE NOTICE BOARD. SD/- SD/- (G. MANJUNATHA) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; 10 .08.2020 P.S ROHIT / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A)- 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. !' / GUARD FILE. $ //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI.