JCIT, Range-5, Pune V. M/s. Modi Builders, Pune

ITA 1728/PUN/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93841 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 10-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANURADHA RAVI
• Assessee Lawyers: S N DOSHI
• Keywords: Business income; Business expenditure; Opportunity of being heard; Principle of natural justice; Retrospective amendment; Cost of acquisition; Non-deduction of tax; Commercial expediency; Revenue expenditure
• Section: 37(1); 194C; 201(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.1693/PN/2013 (ASSESSMENT YEAR : 2009-10) M/S. MODI BUILDERS, 1144, SHUKRAWAR PETH, PUNE 411002 .. APPELLANT PAN NO.AAIFM7044C VS. JCIT, RANGE-5, PUNE .. RESPONDENT ITA NO.1728/PN/2013 (ASSESSMENT YEAR : 2009-10) ACIT, CIRCLE-5, PUNE .. APPELLANT VS. M/S. MODI BUILDERS, 1144, SHUKRAWAR PETH, PUNE 411002 .. RESPONDENT PAN NO.AAIFM7044C APPELLANT BY : SHRI S.N. DOSHI DEPARTMENT BY : SMT. ANURADHA RAVI DATE OF HEARING : 17-06-2015 DATE OF PRONOUNCEMENT : 26-06-2015 ORDER PER R.K. PANDA, AM : THESE ARE CROSS APPEALS. THE FIRST ONE IS FILED BY THE ASSESSEE AND THE SECOND ONE FILED BY THE REVENUE AND A RE DIRECTED AGAINST THE ORDER DATED 19-10-2012 OF THE CIT (A)-III, PUNE RELATING TO ASSESSMENT YEAR 2009-10. FOR THE SAK E OF CONVENIENCE, THESE WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS COMMON ORDER. 2 ITA NO.1693/PN/2013 : 2. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) HAS ERRED IN DISALLOWING THE EXPENDITURE OF RS. 6,60,000/ - PAID BY THE APPELLANT TO PUNE MUNICIPAL CORPORATION(PMC) FOR RE GULARIZING THE EXCESS AREA CONSTRUCTED FOR A BUILDING CALLED 'MODI MA LL' BY INVOKING THE EXPLANATION TO SEC 37(1). 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF LAND DEVELOPERS AND BUILDERS, LEASING OUT COMMERCIAL AND RESIDENTIAL PROPERTY. IT FILED ITS RETURN OF INCOME ON 31-10-2009 DECLARING TOTAL INCO ME OF RS.12,26,71,670/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT ASSESSEE FIRM HAS DEBITED AN AMOUNT OF RS.6,60,000/- UNDER THE HEAD DIRECT EXPENSES TOWARDS PENALTY CHARGES FOR COMPLETION CERTIFICAT E TO THE PROFIT AND LOSS ACCOUNT. ON BEING QUESTIONED BY THE ASSESSING OFFICER IT WAS SUBMITTED THAT THE SAME HAS BEEN PAID TO PMC FOR REGULARISING THE EXCESS AREA THAT HAD BEEN CONSTRUCTED THAN IT WAS SANCTIONED. IT WAS ARGUED THA T THE IMPUGNED PAYMENT REPRESENTED TADJOD FEE PAID TO PMC AN D WAS NOT IN THE NATURE OF PENALTY OR FINE. 4. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THAT TH E ASSESSEE HAS VIOLATED THE NORMS LEVIED BY THE MUNICIPAL AUTHORITIES WHILE CONSTRUCTING THE MODI MALL DUE TO WHICH THE PMC HAS LEVIED PENALTY OF RS.6,60,000/-. ACCORDING TO THE ASSESSING OFFICER AS PER EXPLANATION TO SECTION 37(1) ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR A PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW WILL NOT BE DEEMED TO HAVE 3 BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION A ND NO DEDUCTION OR ALLOWANCE WILL BE MADE IN RESPECT OF SUCH EXPENDITURE. HE ACCORDINGLY DISALLOWED THE AMOUNT OF RS.6,60,000/- CLAIMED BY THE ASSESSEE AND ADDED BACK THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 5. IN APPEAL THE LD.CIT(A) FOLLOWING THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. MAMTA ENTE RPRISES REPORTED IN 266 ITR 356 WHICH IS DIRECTLY ON THIS ISSUE H ELD THAT THE COMPOUNDING FEES PAID BY THE ASSESSEE TO THE MUNI CIPAL CORPORATION FOR VIOLATION OF BUILDING CONSTRUCTION NORMS NOTIFIE D BY PMC IS IN THE NATURE OF FINE OR PENALTY FOR INFRACTION OF LA W AND THEREFORE PROVISIONS OF EXPLANATION TO SECTION 37(1) OF THE I.T. ACT ARE CLEARLY ATTRACTED TO SUCH EXPENDITURE. HE ACCORDIN GLY UPHELD THE ACTION OF THE ASSESSING OFFICER. 6. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLENGED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THIS COMPOUNDING FE ES CANNOT BE TREATED AS AN EXPENDITURE INCURRED FOR A PUR POSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. ACCORDING TO HIM THE TERM OFFENCE CONNOTES AN ILLEGAL ACT WHICH IS AGAINST THE PUBLIC POLICY. SUCH OFFENCE IS NOT PARDONABLE OR COMPOUNDAB LE. HE SUBMITTED THAT THE EXPLANATION COMES INTO PLAY ONLY W HEN IT IS PROVED THAT THE EXPENDITURE THOUGH INCURRED FOR BUSIN ESS PURPOSE BUT THE SAME IS COUPLED WITH THE PURPOSE WHICH IS AN OFFENCE OR PROHIBITED BY LAW. AS LONG AS COMPOUNDING FEES A RE PAID FOR THE BUSINESS PURPOSE AND WHICH IS NOT AN OFFENCE OR PROHIBITED BY LAW AND OTHERWISE ALLOWABLE U/S.37(1) NO 4 DISALLOWANCE COULD BE MADE. HE FURTHER SUBMITTED THAT EXPLANATION TO SECTION 37(1) IS IN THE NATURE OF DEEMING PROVISION. IT IS A LEGAL FICTION AND IT IS COMMONLY CALLED AS FIC TION WHOSE MANDATE DOES NOT EXIST BUT FOR SUCH A PROVISION. THE SCOPE OF DEEMING PROVISION HAS TO BE RESTRICTED TO WHAT IS EXPRESSLY STATED IN SUCH A PROVISION. 8. SO FAR AS THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF MAMTA ENTERPRISES (SUPRA) IS CONCERNED HE SUBMITTED THAT THE HONBLE KARNATAKA HIGH COURT HAS NO T CONSIDERED THE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF CIT VS. AHMEDABAD COTTON MANUFACTURING COMPANY LTD. AND OTHERS REPORTED IN 205 ITR 163. REFERRING TO THE ABOV E DECISION OF THE HONBLE SUPREME COURT HE SUBMITTED THAT THE HON BLE SUPREME COURT IN THE SAID DECISION HAS HELD THAT PAYMENT S, THOUGH REFERRED TO AS PENALTY, BUT IN FACT MADE IN EXERC ISE OF OPTION AVAILABLE UNDER STATUTORY SCHEME, IN THE COURSE OF ASSESSEES BUSINESS IS AN ALLOWABLE EXPENDITURE. HE SUBMIT TED THAT IN THAT CASE THE ASSESSEE BEING A MANUFACTURER OF COTTON TEXTILES HAD TO COMPLY WITH THE DIRECTIONS ISSUED FROM TI ME TO TIME BY THE TEXTILE COMMISSIONER UNDER THE PROVISIONS OF CO TTON TEXTILES (CONTROL ORDER), 1948. THE ASSESSEE INSTEAD OF PRODUCING AND PACKING THE MINIMUM QUANTITY OF SPECIFIED TYPE AS REQUIRED BY THE AFORESAID DIRECTIONS OF THE TEXTILE COMMISSIONER PAID TO THE TEXTILE COMMISSIONER TO RS.1,70,766/- IN EXERCISE OF THE OPTION AVAILABLE TO IT UNDER CLAUSE 21C(1)(B) OF THE CONTROL ORDER. THE ASSESSEE CLAIMED THE AMOUNTS AS DEDUCTION FROM ITS PROFIT WHICH WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT THE SAID AMOUNT S PAID BY THE ASSESSEE TO THE TEXTILE COMMISSIONER WERE NOT D EDUCTIONS 5 WHICH CAN BE ALLOWED AS ITEMS OF BUSINESS EXPENDITURE. THE AAC ALLOWED THE CLAIM. THE APPEAL FILED BY THE REVENUE BEFOR E THE TRIBUNAL WAS DISMISSED. A DIVISION BENCH OF THE HONBLE GUJARAT HIGH COURT DECIDED THE ISSUE AGAINST THE REVENU E AND IN FAVOUR OF THE ASSESSEE. ON FURTHER APPEAL BY THE REVE NUE THE HONBLE SUPREME COURT HELD THAT PAYMENT THOUGH REFERRE D TO AS PENALTY, BUT IN FACT MADE IN EXERCISE OF OPTION AVAILABLE UNDE R STATUTORY SCHEME IN THE COURSE OF ASSESSEES BUSINESS IS AN ALLOWABLE BUSINESS EXPENDITURE. 8.1 HE SUBMITTED THAT IN THE INSTANT CASE ALSO IT IS KNOWN AS COMPOUNDING FEES. HOWEVER, IT IS FOR COMMERCIAL EXPEDIENCY. HE SUBMITTED THAT ASSESSEE IS IN THE BUSINESS OF LAND DEVELOPERS AND BUILDERS, LEASING OF COMMERCIAL AND RESIDENTIAL PROPERTIES ETC. AS PER CLAUSE 4 OF THE PARTNERSHIP DEED. IT CONSTR UCTED THE BUILDING CALLED MODI MALL. THE PMC FOUND THAT EXCESS AREA HAD BEEN CONSTRUCTED BY THE ASSESSEE THAN THE SANCTIONE D AREA. ON PAYMENT OF COMPOUNDING FEES THE PMC REGULARISED THE EXCE SS CONSTRUCTION AS PER THE OFFICE CIRCULAR DATED 16-06-2011. HE SUBMITTED THAT HAD IT BEEN FOR AN INFRACTION OF LAW THE PMC WOULD NOT HAVE ACCEPTED THE COMPOUNDING FEES AND REGULA RISED THE EXCESS CONSTRUCTION. THEREFORE, THE AMOUNT PAID TO THE PMC THOUGH CALLED COMPOUNDING FEE IS AN ALLOWABLE EXPENDITURE. 8.2 REFERRING TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. LOKENATH AND CO. (CONSTRUCTION) REPO RTED IN 147 ITR 624 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS UPHELD THE DECISION OF THE TRIBUNAL WHEREIN THE AMOUNT PAID TO MUNICIPALITY AS COMPENSATION FOR CONDON ING DEVIATIONS FROM ORIGINAL SANCTION AND ACCEPTING REVISED PLAN OF CONSTRUCTION WAS ALLOWED AS DEDUCTIBLE BUSINESS EXPENDITUR E BY 6 HOLDING THAT IT IS NOT PENALTY FOR INFRACTION OF LAW. HE ALSO RE LIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. BHARAT C. GANDHI REPORTED IN 46 SOT 258 AND THE DECISION OF THE HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. TRANSPORT CORPORATION OF INDIA REPORTED IN 368 I TR 728. HE ACCORDINGLY SUBMITTED THAT THE AMOUNT SHOULD BE ALLOW ED AS DEDUCTION U/S.371(1). 9. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED T HAT THE EXPLANATION TO PROVISIONS OF SECTION 37(1) WAS NOT BEFORE TH E HONBLE SUPREME COURT IN THE CASE OF AHMEDABAD COTTON MFG. CO. LTD. (SUPRA). HE SUBMITTED THAT THE HONBLE KARNATAK A HIGH COURT IN THE CASE OF MAMTA ENTERPRISES (SUPRA) HAD DECIDE D THE ISSUE WHICH IS DIRECTLY ON THIS ISSUE. HE SUBMITTED THAT T HERE IS NO COMMERCIAL EXPEDIENCY IN VIOLATING MUNICIPALITY LAW AND THE ASSESSEE CANNOT BE REWARDED FOR AN ILLEGAL ACT. 9.1 SO FAR AS THE DECISION OF HONBLE DELHI HIGH COURT IN T HE CASE OF LOKENATH AND CO. (SUPRA) IS CONCERNED HE SUBMITTE D THAT THE ORDER IS DATED 13-01-1984 AND THE EXPLANATION TO S ECTION 37(1) WAS INCORPORATED BY FINANCE NO.2 ACT, 1998 WITH RETROSPECTIVE EFFECT FROM 01-04-1962. THEREFORE, THE EXP LANATION TO SECTION 37(1) WAS NOT BEFORE THE HONBLE DELHI HIGH COUR T. THEREFORE, THE SAME CANNOT BE FOLLOWED. AS REGARDS VARIOUS OTHER DECISIONS RELIED ON BY LD. COUNSEL FOR THE ASSESSEE ARE CONCERNED, HE SUBMITTED THAT THEY ARE ON DIFFERENT ISSUES AND ARE DISTINGUISHABLE. HE ACCORDINGLY SUBMITTED THAT THE OR DER OF THE CIT(A) SHOULD BE UPHELD AND THE GROUND RAISED BY THE ASSESSEE SHOULD BE DISMISSED. 7 10. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND TH E CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HA VE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THE O NLY DISPUTE TO BE ADJUDICATED IN THE IMPUGNED GROUND IS REG ARDING ALLOWABILITY OF COMPOUNDING FEES OF RS.6,60,000/- PAID BY THE ASSESSEE TO PMC FOR REGULARISING THE EXCESS AREA CONSTR UCTED AS DEDUCTIBLE EXPENDITURE. WE FIND THE ASSESSING OFFICER DISALLOWE D THE CLAIM OF EXPENDITURE ON THE GROUND THAT THE PENALTY PAID TO THE PMC WAS FOR VIOLATION OF THE NORMS LEVIED BY THE MUNICIP AL AUTHORITIES, THEREFORE, EXPLANATION TO SECTION 37(1) IS CLEARLY APPLICABLE. WE FIND THE LD.CIT(A) ALSO UPHELD THE ACTION OF TH E ASSESSING OFFICER BY HOLDING THAT THE COMPOUNDING FEES PAID BY THE ASSESSEE TO MUNICIPAL CORPORATION FOR VIOLATION OF BUILDING CONSTRUCTION NORMS NOTIFIED BY THE PMC IS IN THE NATURE O F FINE OR PENALTY FOR INFRACTION OF LAW AND THEREFORE PROVISIONS OF EXPLANATION TO SECTION 37(1) OF THE I.T. ACT ARE CLEARLY ATTRACTED. WHILE DOING SO, HE FOLLOWED THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MAMTA ENTERPRISES (SUPRA). 10.1 IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESS EE THAT THE HONBLE KARNATAKA HIGH COURT HAS NOT CONSIDER ED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF AHMEDABAD COTTON MFG. CO. LTD. AND OTHERS (SUPRA). FURTHER, ACCORD ING TO HIM THE PAYMENT THOUGH REFERRED TO AS PENALTY BUT IN FAC T MADE IN EXERCISE OF OPTION AVAILABLE UNDER STATUTORY SCHEME IN T HE COURSE OF ASSESSEES BUSINESS AND THEREFORE IS AN ALLOWAB LE BUSINESS EXPENDITURE. 8 10.2 WE FIND THE FINANCE (NO.2) ACT, 1998 HAD INSERTED EXPLANATION TO SECTION 37(1) OF THE ACT WITH RETROSPECTIVE EFFECT FROM 1.4.1962. THE EXPLANATION READS THUS: 'EXPLANATION FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.' ACCORDING TO THE EXPLANATION, EXPENDITURE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW, IS NOT ENTITLED FOR DEDUCTION. THUS, THE AMOUNT PAID ON ACCOUNT O F COMPOUNDING FEE AS COMPENSATION FOR CONDONING DEVIATIONS FROM ORIGINAL SANCTIONED PLAN IN VIEW OF THE EXPLANATION TO SECTION 37(1) OF THE ACT IN OUR OPINION WOULD NOT BE AN ADMISSIBLE DEDUCTION. 10.3 WE FIND THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MAMTA ENTERPRISES (SUPRA) HAS HELD THAT COMPOUNDING FEE P AID BY THE ASSESSEE TO REGULARISE THE CONSTRUCTION OF THE B UILDING MADE IN VIOLATION OF THE BUILDING REGULATIONS COULD NOT BE ALLOWED AS DEDUCTION IN VIEW OF SPECIFIC PROHIBITION IN EXPLANATION TO SECTION 37(1) AS COMPOUNDING OF SUCH AN OFFENCE BY PAYING COMPOUNDING FINE DID NOT WIPE OUT THE OFFENCE OR INFRACTION OF LAW COMMITTED BY THE ASSESSEE UNDER THE RELE VANT CORPORATION ACT. 10.4 THE DECISION OF THE HONBLE SUPREME COURT IN THE CAS E OF AHMEDABAD COTTON MFG. CO. LTD. AND OTHERS (SUPRA) AND TH E DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF LOKENATH AND CO. (SUPRA) WERE PRIOR TO THE INSERTION OF EXPLANATION TO S ECTION 37(1) OF THE I.T. ACT. THEREFORE, THE ABOVE DECISIONS IN OUR OPINION ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 9 10.5 SO FAR AS THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF BHARAT C. GANDHI (SUPRA) IS CONCERNED WE FIND, THE ISSUE IN THAT CASE IS REGARDING SETTLEMENT FEES PAID UNDER MOTOR VEHICLE ACT. THE ISSUE IN THE CASE OF TRANSPORT CORPORA TION OF INDIA (SUPRA) WAS SECRET COMMISSION PAID TO PROMOTE ITS BUSINESS. THEREFORE, THE DECISIONS RELIED ON BY THE LD. COU NSEL FOR THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE P RESENT CASE. 10.6 WE FIND THE HONBLE KARNATAKA HIGH COURT IN THE CAS E OF MAMTA ENTERPRISES (SUPRA) DISTINGUISHING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF LOKENATH AND CO. (SUPRA) AND FOLLOWING THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF HAJI AZIZ & ABDUL SHAKOOR BROS.REPORTED IN 41 ITR 350 AND IN THE CASE OF MADDI VENKATARAMAN & CO. PVT. L TD. VS. CIT REPORTED IN 229 ITR 534 HAS OBSERVED AS UNDER : 8. IN OUR VIEW, THE ABOVE OBSERVATION MADE BY THE D ELHI HIGH COURT CANNOT BE OF ANY ASSISTANCE TO LEARNED COUNSEL FO R THE RESPONDENT TO SUPPORT HIS CASE AS THE SAID DECISION WAS REN DERED PRIOR TO THE AMENDMENT TO SECTION 37 OF THE ACT BY I NCORPORATING THE EXPLANATION REFERRED TO ABOVE BY MEANS OF THE FI NANCE (NO. 2) ACT, 1998, WHICH IS MADE RETROSPECTIVE EFFECT WITH EF FECT FROM APRIL 1, 1962. WHEN THE SECTION ITSELF DECLARES THE EXPENDIT URE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHI CH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN I NCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE , IT IS NOT POSSIBLE TO TAKE THE VIEW THAT THE EXPENDITURE INCURR ED FOR COMPOUNDING OF THE OFFENCE SHOULD BE ALLOWED. WHEN T HE SECTION IS CLEAR AND UNAMBIGUOUS, IT IS NOT PERMISSIBLE FOR THE CO URTS TO STRETCH THE MEANING ATTACHED TO THE PROVISION OF LAW TO EXTEND THE BENEFIT TO A PERSON WHO VIOLATES THE LAW OR THE REGUL ATIONS/RULES MADE BY THE CORPORATION OR THE MUNICIPAL AUTHORITIE S WITH IMPUNITY. UNDER THESE CIRCUMSTANCES, THE EXPENDITURE I NCURRED TO PAY THE PENALTY CANNOT BE TREATED AS LOSS IN BUSINESS TO GET THE BENEFIT. IN OUR VIEW, THE PENALTY PAID HAS ENURED TO THE BENEFIT OF THE ASSESSEE TO SAVE THE ADDITIONAL CONSTRUCTION PUT UP I N VIOLATION OF THE PROVISIONS OF THE ACT AND BYE-LAWS FRAMED THERE UNDER AND ALSO THE CONSEQUENCES OF PENAL PROVISION PROVIDED UNDER THE CORPORATION OR THE MUNICIPAL LAW. THE VIEW WE HAVE TAKEN ABOVE IS FULLY SUPPORTED BY THE DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE OF HAJI AZIZ AND ABDUL SHAKOOR BROS. [1961] 41 I TR 350, WHEREIN THE SUPREME COURT HAS OBSERVED AS FOLLOWS (PAGE 359) : 10 'IF A SUM IS PAID BY AN ASSESSEE CONDUCTING HIS BUSINESS, BEC AUSE IN CONDUCTING IT HE HAS ACTED IN A MANNER WHICH HAS REND ERED HIM LIABLE TO PENALTY, IT CANNOT BE CLAIMED AS A DEDUCTI BLE EXPENSE. IT MUST BE A COMMERCIAL LOSS AND IN ITS NATURE MUST BE CONT EMPLABLE AS SUCH. SUCH PENALTIES WHICH ARE INCURRED BY AN ASSESSEE IN PROCEEDINGS LAUNCHED AGAINST HIM FOR AN INFRACTION OF THE LAW CANNOT BE CALLED COMMERCIAL LOSSES INCURRED BY AN ASSESSEE IN CARRYING ON HIS BUSINESS. INFRACTION OF THE LAW IS NOT A NORMAL INCIDENT OF BUSINESS AND, THEREFORE, ONLY SUCH DISBURSEME NTS CAN BE DEDUCTED AS ARE REALLY INCIDENTAL TO THE BUSINESS ITSELF . THEY CANNOT BE DEDUCTED IF THEY FALL ON THE ASSESSEE IN SOME CHARACT ER OTHER THAN THAT OF A TRADER. THEREFORE, WHERE A PENALTY I S INCURRED FOR THE CONTRAVENTION OF ANY SPECIFIC STATUTORY PROVISION, I T CANNOT BE SAID TO BE A COMMERCIAL LOSS FALLING ON THE ASSESSEE AS A TRAD ER THE TEST BEING THAT THE EXPENSES WHICH ARE FOR THE PURPOSE OF ENABLING A PERSON TO CARRY ON TRADE FOR MAKING PROFITS IN THE BU SINESS ARE PERMITTED BUT NOT IF THEY ARE MERELY CONNECTED WITH THE BUSINESS. . . . IN OUR OPINION, NO EXPENSE WHICH IS PAID BY WAY OF PE NALTY FOR A BREACH OF THE LAW CAN BE SAID TO BE AN AMOUNT WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS. TH E DISTINCTION SOUGHT TO BE DRAWN BETWEEN A PERSONAL LIABILITY AND A LIABILITY OF THE KIND NOW BEFORE US IS NOT SUSTAINABLE BECAUSE ANYTHI NG DONE WHICH IS AN INFRACTION OF THE LAW AND IS VISITED WITH A PENALTY CANNOT ON GROUNDS OF PUBLIC POLICY BE SAID TO BE A COMMERCIA L EXPENSE FOR THE PURPOSE OF A BUSINESS OR A DISBURSEMENT MADE FOR THE PURPOSES OF EARNING THE PROFITS OF SUCH BUSINESS.' FURTHER, A SIMILAR VIEW IS TAKEN BY THE SUPREME COURT IN THE CASE OF MADDI VENKATARAMAN AND CO. (P.) LTD. [1998] 229 ITR 534. AT PAGE 545 OF THE JUDGMENT, THE SUPREME COURT HAS OBSERVED T HUS : 'IN THE INSTANT CASE, THE ASSESSEE HAD INDULGED IN TRANSAC TIONS IN VIOLATION OF THE PROVISIONS OF THE FOREIGN EXCHANGE (REGULATION) ACT. THE ASSESSEE'S PLEA IS THAT UNLESS IT ENTERED INTO SUCH A TRANSACTION, IT WOULD HAVE BEEN UNABLE TO DISPOSE OF T HE UNSOLD STOCK OF INFERIOR QUALITY OF TOBACCO. IN OTHER WORDS, THE ASSESSEE WOULD HAVE INCURRED A LOSS. SPUR OF LOSS CANNOT BE A JU STIFICATION FOR CONTRAVENTION OF LAW. THE ASSESSEE WAS ENGAGED IN TOBACC O BUSINESS. THE ASSESSEE WAS EXPECTED TO CARRY ON THE BUSINES S IN ACCORDANCE WITH LAW. IF THE ASSESSEE CONTRAVENES THE PRO VISIONS OF THE FERA TO CUT DOWN ITS LOSSES OR TO MAKE LARGER PROF ITS WHILE CARRYING ON THE BUSINESS, IT WAS ONLY TO BE EXPECTED TH AT PROCEEDINGS WILL BE TAKEN AGAINST THE ASSESSEE FOR VIOLA TION OF THE ACT. THE EXPENDITURE INCURRED FOR EVADING THE PROVI SIONS OF THE ACT AND ALSO THE PENALTY LEVIED FOR SUCH EVASION CANNOT BE ALLOWED AS DEDUCTION. AS WAS LAID DOWN BY LORD STERNDALE IN THE CASE OF ALEXANDER VON GLEHN AND CO. LTD. (1920) 12 TC 232 ( CA), IT WAS NOT ENOUGH THAT THE DISBURSEMENT WAS MADE IN THE COURSE OF TRADE. IT MUST BE FOR THE PURPOSE OF THE TRADE. THE PURPOSE MUST BE A LAWFUL PURPOSE.' 9. THEREFORE, WE ARE CLEARLY OF THE OPINION THAT DE DUCTION PERMITTED BY THE COMMISSIONER AS WELL AS THE TRIBUNAL IS TOTALLY UNSUSTAINABLE IN LAW. THEREFORE, IN THE LIGHT OF THE ABOVE CONCLUSION REACHED BY US, THE QUESTION REFERRED TO US BY THE TRI BUNAL IS REQUIRED TO BE ANSWERED AGAINST THE ASSESSEE AND IN FAVO UR OF THE REVENUE. ACCORDINGLY, IT IS ANSWERED AND THIS REFERENC E CASE IS DISPOSED OF. HOWEVER, NO ORDER IS MADE AS TO COSTS. 11 10.7 IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED OPINIO N THAT COMPOUNDING FEE PAID BY THE ASSESSEE TO THE MUNICIPAL CORPORATION ON ACCOUNT OF DEVIATIONS FROM ORIGINAL SANCTION ED PLAN IS IN THE NATURE OF PENALTY AND THEREFORE WOULD NOT B E ALLOWABLE AS DEDUCTION IN VIEW OF PROVISIONS OF EXPLANATION TO SECTION 37(1) OF THE I.T. ACT. THE ABOVE VIEW OF OURS ALSO FINDS SUPPORT FROM THE DECISION OF THE HONBLE PUNJAB & HARYAN A HIGH COURT IN THE CASE OF NAHAR SPINNING MILLS VS. CIT REPORTED IN (2014) 49 TAXMANN.COM 565 AND THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF MILLENNIA DEVELOPERS PV T. LTD. VS. DCIT REPORTED IN 188 TAXMANN 388 (KAR.) IN VIE W OF THE ABOVE DISCUSSION GROUND OF APPEAL NO.1 BY THE ASSES SEE IS DISMISSED. 11. GROUND OF APPEAL NO.2 BY THE ASSESSEE READS AS UNDER : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE CIT(A) HAS ERRED IN SUSTAINING THE DISALLOWANCE OF PAYMENT OF INTEREST OF RS 55,85,717/- BY INVOKING THE PROVISIONS OF SEC 40(A) (IA) OVERLOOKING THE FACT THAT THE INTEREST IS PAYABLE TO THE NBFC'S WHICH ARE GRANTED EXEMPTION FOR NO IDS U/S 194A(3)(III)(F) AND ALSO OVERLOOKING THE FACT THAT THE ENTIRE INTEREST HAS BEE N PAID IN THE PREVIOUS YEAR. 12. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING T HE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSEE HAS NOT DEDUCTED TDS FROM THE FOLLOWING PAYMENTS : A. CITY FINANCIAL RS.7,31,374/- B. CITY FINANCE (EDULJEE) RS.26,83,156/- C. INDIA BULLS RS.21,71,187/- ------------------- TOTAL RS.55,85,717/- ------------------- 12 HE THEREFORE DISALLOWED THE ABOVE AMOUNT U/S.40(A)(IA) OF THE I.T. ACT. 13. BEFORE CIT(A) IT WAS ARGUED THAT NO AMOUNT IS OUTSTA NDING AND PROVISIONS OF SECTION 40(A)(IA) ARE APPLICABLE ONLY IF THE INTEREST AMOUNT IS PAYABLE AND OUTSTANDING AS ON 31 ST OF MARCH OF THE RELEVANT YEAR. REJECTING THE VARIOUS SUBMISSIONS M ADE BY THE ASSESSEE AND DISTINGUISHING THE VARIOUS DECISIONS CITED BEFORE HIM THE LD.CIT(A) UPHELD THE ACTION OF THE AO. 14 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 15. THE LD. COUNSEL FOR THE ASSESSEE MADE TWO FOLD ARGUMENTS. HE SUBMITTED THAT SINCE NO AMOUNT IS PAYABL E AT THE END OF THE FINANCIAL YEAR, THEREFORE, PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE. REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. ARCADIA SH ARE AND STOCK BROKERS PVT. LTD., VS. DCIT VIDE ITA NO.1871/MUM/2013 ORDER DATED 22-12-2014 FOR A.Y. 2006-0 7 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION AFTER CONSIDERING THE DISMISSAL OF THE SLP FILED BY THE REVENUE I N THE CASE OF VECTOR SHIPPING SERVICES PVT. LTD. HAS HELD THAT PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE TO A CASE WH ERE NO AMOUNT IS PAYABLE AT THE END OF THE YEAR AND WHICH H AS ALREADY BEEN PAID. HE ACCORDINGLY SUBMITTED THAT ALTHOUG H THE PUNE BENCHES OF THE TRIBUNAL ARE TAKING THE VIEW WHICH IS AGAINST THE ASSESSEE, HOWEVER, IN VIEW OF THE LATEST DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL NO DISALLOWANCE U/S.40(A)(IA) IS CALLED FOR WHEN ADMITTEDLY NO AMOUNT IS PAYABLE ON ACCOUNT OF SUCH INTEREST TO NBFCS. 13 15.1 IN HIS ALTERNATE ARGUMENT THE LD. COUNSEL FOR THE AS SESSEE REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNA L IN THE CASE OF ITO VS. GAURIMAL MAHAJAN AND SONS VIDE ITA NO.1852/PN/2012 ORDER DATED 06-11-2014 FOR A.Y. 2008-09 SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD T HAT DISALLOWANCE U/S.40(A)(IA) OF THE I.T. ACT COULD NOT BE MADE IF THE ASSESSEE IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UND ER THE FIRST PROVISO TO SECTION 201(1) OF THE I.T. ACT IF THE PA YERS HAVE FILED THE RETURN OF INCOME SHOWING THE INTEREST RECEIPT. HE SUBMITTED THAT ALTHOUGH THIS ARGUMENT WAS NOT ADVANCE D BEFORE THE LOWER AUTHORITIES, HOWEVER, IN VIEW OF THE DECISION OF TH E TRIBUNAL, THIS ARGUMENT OF THE ASSESSEE SHOULD BE ACCEPTE D AND HE HAS NO OBJECTION IF THE ISSUE IS RESTORED TO THE FILE OF THE AO FOR FRESH ADJUDICATION. 16. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED T HAT THE PUNE BENCH OF THE TRIBUNAL ARE CONSTANTLY TAKING THE VIE W FOLLOWING THE DECISION OF THE HONBLE GUJARAT HIGH COURT AN D HONBLE CALCUTTA HIGH COURT THAT PROVISIONS OF SECTION 4 0(A)(IA) ARE APPLICABLE EVEN IF NO AMOUNT IS PAYABLE AT THE YEAR EN D WHERE TDS HAS NOT BEEN DEDUCTED FROM SUCH PAYMENTS. THEREFORE, THE ISSUE HAS TO BE DECIDED AGAINST THE ASSES SEE. SO FAR AS THE ALTERNATE ARGUMENT OF THE ASSESSEE IS CONCER NED, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT SUCH AR GUMENT WAS NEVER TAKEN BEFORE THE LOWER AUTHORITIES. HOWEVER, HE LEFT IT TO THE BENCH. 17. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES. SO FAR AS THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE U/S.40(A)(IA) IS REQUIRED SINCE N O 14 AMOUNT IS PAYABLE AT THE END OF THE YEAR, WE FIND THE PU NE BENCHES OF THE TRIBUNAL FOLLOWING THE DECISIONS OF HONBLE GUJARAT HIGH COURT AND HONBLE CALCUTTA HIGH COURT ARE TAKING THE CONSISTENT VIEW THAT PROVISIONS OF SECTION 40(A)(IA) ARE APPLICABLE FOR TDS DEFAULT EVEN IF NO AMOUNT IS PAYABLE AT TH E END OF THE YEAR. THE ABOVE VIEW OF THE TRIBUNAL ALSO FINDS SUPPORT FROM THE DECISION OF THE HONBLE PUNJAB & HARYAN A HIGH COURT IN THE CASE OF PMS DIESELS VS. CIT REPORTED IN TS-3 46-HC- 2015 (P&H). THE HONBLE HIGH COURT AFTER CONSIDERING THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF VEC TOR SHIPPING SERVICES (P) LTD. REPORTED IN 262 CTR 545 AND TH E DISMISSAL OF THE SLP BEFORE HONBLE SUPREME COURT HAS HELD THAT PROVISIONS OF SECTION 40(A)(IA) ARE APPLICABLE EVEN IF NO AMOUNT IS PAYABLE AT THE END OF THE YEAR. THEREFORE, THE FIRST LIMB OF ARGUMENT OF THE LD. COUNSEL HAS TO BE REJECTED. 17.1 SO FAR AS THE ALTERNATE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT DISALLOWANCE U/S.40(A)(IA) COULD NOT BE MADE IF THE ASSESSEE IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UND ER THE FIRST PROVISO TO SECTION 201(1) OF THE ACT WHEREOF THE PAY EES HAVE FILED THE RETURN SHOWING SUCH INCOME IN THE RETURN OF INCOM E, WE FIND THE SAME IS ACCEPTABLE. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF GAURIMAL MAHAJAN AND SONS (SUPRA) WHILE DECIDING AN IDENTICAL ISSUE HAS OBSERVED AS UNDER : 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. W E HAVE ALSO CONSIDERED THE VARIOUS DECISIONS BROUGHT TO OUR NOTICE BY BOTH THE SIDES. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE H AS NOT DEDUCTED TDS ON AN AMOUNT OF RS.58,81,847/- FOR WHIC H THE ASSESSING OFFICER APPLYING THE PROVISIONS OF SECTION 40(A) (IA) MADE ADDITION OF THE ABOVE AMOUNT. WE FIND THE LD.CIT(A ) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER ON THE GROUND TH AT PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE SINC E NO AMOUNT IS PAYABLE AT THE END OF THE YEAR. WHILE DOING SO, HE RELIED UPON THE 15 DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING AND TRANSPORT (SUPRA). THE COORDINATE BENC H IN THE CASE OF VINAY ASHWINIKUMAR JONEJA (SUPRA) HAS ALREADY TAK EN A VIEW THAT PROVISIONS OF SECTION 40(A)(IA) ARE APPLICABLE EV EN IF NO AMOUNT IS PAYABLE AT THE END OF THE YEAR. THEREFORE , THE ORDER OF THE CIT(A) HAS TO BE REVERSED. 8.1 HOWEVER, THE ASSESSEE HAS MADE A NEW LEGAL ARGUMENT THAT THE FINANCE ACT, 2010 HAS AMENDED THE FIRST PROVISO TO SECTION 40(A)(IA) W.E.F. 01-04-2010 AND IT HAS BEEN HELD BY VARIOUS JUDICIAL AUTHORITIES THAT SUCH AMENDMENT IS RETROSPECTIVE IN NAT URE. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT TH E SECOND PROVISO TO SECTION 40(A)(IA) WAS INSERTED BY THE FINANC E ACT, 2012 W.E.F. 01-04-2013 WHEREIN IT IS STATED THAT DISALLOWAN CE U/S.40(A)(IA) OF THE ACT NEED NOT BE MADE IF THE ASSESSE E IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROV ISO TO SECTION 201(1) OF THE I.T. ACT., THEREFORE, THIS SHOU LD ALSO BE HELD AS RETROSPECTIVE SINCE IT HAS BEEN INTRODUCED TO ELIMINAT E UNINTENDED CONSEQUENCES WHICH MAY CAUSE UNDUE HARDSHIP TO THE TAX PAYERS. 8.2 WE FIND SOME FORCE IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. WE FIND THE COCHIN BENCH OF THE TRIB UNAL IN THE CASE OF ANTONY D. MUNDACKAL (SUPRA) RELIED ON BY LD. COUNSEL FOR THE ASSESSEE, HAD AN OCCASION TO DECIDE AN ISSUE IN THE LI GHT OF THE ABOVE ARGUMENT AND HAS RESTORED THE ISSUE TO THE FILE O F THE ASSESSING OFFICER WITH CERTAIN DIRECTIONS. THE RELEVANT OBSERVATION OF THE TRIBUNAL AT PARA 7 OF THE ORDER READ AS UNDER : 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFUL LY PERUSED THE RECORD. ACCORDING TO THE ASSESSEE, THERE IS NO WRIT TEN CONTRACT BETWEEN HIM AND THE PERSONS DOING POLISHING WORKS. ACC ORDINGLY, THE ASSESSEE HAS CONTENDED BEFORE US THAT THE PROVISIONS OF SEC. 194C SHALL NOT APPLY TO THE POLISHING CHARGES. HOWEVER , WE NOTICE THAT THE ASSESSING OFFICER HAS GIVEN A CLEAR FINDING THA T ESSENTIAL INGREDIENTS OF A CONTRACT ARE VERY MUCH AVAILABLE IN THE POLISHING WORKS ENTRUSTED BY THE ASSESSEE. FURTHER WE NOTICE THAT THE CBDT, VIDE CIRCULAR NO.433 DATED 25-09-1985 (1986)(157 IT R ST. 27) HAS CLARIFIED THAT THE PROVISIONS OF SEC. 194C ARE WIDE EN OUGH TO COVER ORAL CONTRACTS ALSO. A CONTRACT IS NORMALLY REDUCED IN WRITING IN ORDER TO MAKE CLEAR THE TERMS AND CONDITIONS, OBLIGAT IONS OF THE PARTIES TO THE CONTRACT ETC. IF THE CONDITIONS OF CON TRACT ARE OTHERWISE UNDERSTOOD BY THE PARTIES, IN VIEW OF THE R EPEATED TRANSACTIONS, IN OUR VIEW, THE ABSENCE OF A WRITTEN CO NTRACT WOULD NOT MAKE ANY DIFFERENCE. IN THE INSTANT CASE, THE ASSESS EE IS REPEATEDLY GIVEN WORKS TO THE POLISHING PEOPLE AND H ENCE THE TERMS AND CONDITIONS OF THE WORK WOULD BE CLEARLY UNDERSTOO D BY BOTH THE PARTIES. ACCORDINGLY, WE REJECT THIS CONTENTION OF THE ASSESSEE AND HOLD THAT THE PROVISIONS OF SEC. 194C SHALL APPLY T O THE POLISHING WORKS GIVEN BY THE ASSESSEE. 7.1 ACCORDING TO LD A.R, THE ASSESSEE HAS ACTED AS A CON DUIT PIPE IN CONNECTION WITH THE POLISHING WORKS BETWEEN THE CU STOMERS AND THE PERSON DOING POLISHING JOB. ACCORDINGLY, IT WAS SU BMITTED THAT THERE IS NO PROFIT ELEMENT IN THE SAID TRANSACTIONS. TH E LD A.R FURTHER SUBMITTED THAT THE ASSESSEE HAS INCLUDED THE COS T OF POLISHING WORKS IN THE SALE VALUE OF ALUMINIUM EXTRUSIO NS, WITHOUT KNOWING TAX IMPLICATIONS. HOWEVER, WE NOTICE THAT TH E ASSESSEE DID 16 NOT FURNISH ANY PROOF TO SUBSTANTIATE THE ABOVE SAID CL AIMS. THE ASSESSEE, BEING A DEALER IN ALUMINIUM EXTRUSIONS, HAS ONLY SUPPLIED THE PRODUCTS AFTER CARRYING OUT THE POLISHING WORKS A CCORDING TO THE TASTE AND REQUIREMENT OF CUSTOMERS. IT IS ONLY ONE OF THE MANY BUSINESS TECHNIQUES NORMALLY ADOPTED BY A BUSINESS MAN TO IMPROVE HIS SALES, SINCE IT WILL BE VERY DIFFICULT FOR CUSTOMERS TO IDENTIFY THE POLISHING PEOPLE AND GET THE WORK DONE BY THEMSELVES. HENCE, WE ARE OF THE VIEW THAT IT MAY NOT BE CORREC T TO ARGUE THAT THE CONTRACT EXISTED BETWEEN THE CUSTOMERS AND THE POL ISHING PEOPLE. IN FACT, THE CUSTOMER MAY NOT HAVE ANY CONT ACT WITH THE POLISHING PEOPLE IN THIS TYPE OF TRANSACTIONS. HENCE, IT IS HARD TO BELIEVE THE CLAIM OF THE ASSESSEE THAT HE HAS ACTED AS ME RE CONDUIT PIPE BETWEEN THE CUSTOMERS AND POLISHING PEOPLE, ACCOR DINGLY, THE CLAIM THAT THE ASSESSEE STANDS IN A FIDUCIARY CAPACITY IS ALSO LIABLE TO BE REJECTED. IN THIS KIND OF FACTUAL SITUATION, IN OU R VIEW, THE EXISTENCE OR ABSENCE OF PROFIT ELEMENT IN THE POLISHIN G WORKS DOES NOT MAKE ANY DIFFERENCE. 7.2 THE LD COUNSEL, BY PLACING RELIANCE ON THE DECI SION OF SPECIAL BENCH IN THE CASE OF MERYLINE SHIPPING AND TR ANSPORTS (SUPRA) CONTENDED THAT THE PROVISIONS OF SEC. 40(A)(IA) SHALL APPLY ONLY TO AMOUNT PAYABLE AND NOT TO THE AMOUNT PAID. HOWEVER, THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SIK ANDAR KHAN N TUNVAR (357 ITR 312) AND THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. CRESCENT EXPORT SYNDICATE (ITAT 20 OF 2013) HAVE HELD THAT THE DECISION RENDERED BY THE SPECIAL BENCH IN THE CASE OF MERYLINE SHIPPING & TRANSPORTS IS NOT A GOOD LAW. THE LD A.R, HOWEVER, PLACED RELIANCE ON THE DECISION OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF VECTOR SHIPPING SERVICES (357 IT R 642). ON A CAREFUL PERUSAL OF THE DECISION GIVEN BY HON'BLE ALLA HABAD HIGH COURT, WE NOTICE THAT THE HIGH COURT HAS DECIDED THE ISSUE REFERRED TO IT ON A DIFFERENT FOOTING AND HAS MADE A PASSING C OMMENT ABOUT THE DECISION RENDERED BY THE SPECIAL BENCH. THUS, THE RATIO OF THE SAID DECISION IS DIFFERENT FROM THAT RENDERED IN THE C ASE OF MERYLINE SHIPPING AND TRANSPORTS BY THE SPECIAL BENCH. HENCE, WE ARE INCLINED TO REJECT THE CONTENTIONS OF THE ASSESSEE ON T HIS POINT ALSO. 7.3 THE ASSESSEE PLACED RELIANCE ON THE DECISION OF HON 'BLE SUPREME COURT IN THE CASE OF HINDUSTAN COCO-COLA BEVE RAGES LTD (SUPRA) IN ORDER TO CONTEND THAT THE REVENUE IS NOT E NTITLED TO RECOVER TAXES, IF THE RECIPIENT HAS DECLARED THE PAYM ENTS IN HIS RETURN OF INCOME. WE NOTICE THAT THE ABOVE SAID DECI SION WAS RENDERED IN THE CONTEXT OF THE PROVISIONS OF SEC. 201 (1) AND HENCE, WE ARE OF THE VIEW THAT THE RATIO OF THE SAID DECISIO N CANNOT BE APPLIED TO THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT, 7.4 THE LAST CONTENTION OF THE ASSESSEE IS THAT THE SECON D PROVISO TO SEC, 40(A)(IA) OF THE ACT, INSERTED BY THE FINANCE ACT, 2012 WITH EFFECT FROM 1.4.2013 IS CLARIFICATORY IN N ATURE AND HENCE THE BENEFIT OF THE SAME SHOULD BE APPLIED RETROSPECTIV ELY. HOWEVER, THE CORRECTNESS OF THIS CONTENTION HAS NOT BEEN EXAMINE D BY THE TAX AUTHORITIES. HENCE, IN THE INTEREST OF NATURAL JUSTICE , WE ARE OF THE VIEW THAT THIS CONTENTION OF THE ASSESSEE REQUIRES EXAMIN ATION AT THE END OF THE ASSESSING OFFICER. ACCORDINGLY, WE MODI FY THE ORDER OF THE LD.CIT(A) AND SET ASIDE THIS GROUND TO THE FIL E OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE ABO VE SAID CONTENTION OF THE ASSESSEE AND DECIDE THE SAME IN ACCOR DANCE WITH LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING H EARD. WE 17 MAKE IT CLEAR THAT WE HAVE, IN EFFECT, REJECTED ALL THE CONTENTIONS OF THE ASSESSEE EXCEPT THE GROUND RELATING TO APPLICABILIT Y OF THE SECOND PROVISO TO SEC.40(A)(IA) OF THE ACT TO THE YEAR UNDER CONSIDERATION. 8.3 SINCE THE ABOVE ARGUMENTS ARE BEING ADVANCED BEF ORE THE TRIBUNAL FOR THE FIRST TIME AND THE CORRECTNESS OF THE CONTENTION HAS NOT BEEN EXAMINED BY THE TAX AUTHORITIES, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE COCHIN BENCH OF THE TR IBUNAL CITED (SUPRA) AND IN THE INTEREST OF JUSTICE, WE RESTORE THI S ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO EXAMINE TH E ABOVE CONTENTION OF THE ASSESSEE AND DECIDE THE ISSUE AFRESH AN D IN ACCORDANCE WITH LAW. NEEDLESS TO SAY, THE ASSESSING OFFIC ER SHALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 17.2 FOLLOWING THE ABOVE DECISION WE DEEM IT PROPER TO RE STORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE T HE ISSUE AFRESH IN THE LIGHT OF THE ABOVE DECISION OF THE TRIBUNAL. GROUND NO.2 BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDER : 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE C1T(A) HAS ERRED IN SUSTAINING THE DISALLOWANCE OF INTEREST OF RS. 5,85,000/- PAID ON UNSECURED LOANS BY INVOKING THE PR OVISION OF SECTION 40(A)(IA) OVERLOOKING THE FACT THAT THE APPE LLANT HAS DULY DEDUCTED THE TAX AT SOURCE AND DEPOSITED IN TIME. 19. AFTER HEARING BOTH THE SIDES, WE FIND INVOKING THE PROVISIONS OF SECTION 40(A)(IA) THE ASSESSING OFFICER DISALLOWED A N AMOUNT OF RS.5,85,000/- BEING INTEREST PAID TO UNSECURED LO AN CREDITORS WHICH HAS BEEN UPHELD BY THE CIT(A). BOTH THE SIDES AGREED THAT THIS ISSUE IS IDENTICAL TO GROUND OF APPEAL NO.2 ABOVE. THEREFORE, FOLLOWING THE RATIO LAID DOWN IN GROUND O F APPEAL NO.2, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESS ING OFFICER FOR DECIDING THE ISSUE AFRESH IN THE LIGHT OF THE OBSERVATIONS GIVEN WHILE ADJUDICATING GROUND OF APPEAL NO.2. 18 THIS GROUND BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR ST ATISTICAL PURPOSES. 20. THE ASSESSEE HAS ALSO TAKEN TWO ADDITIONAL GROUNDS WHICH ARE AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE C IT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST OF R S.2,02,91,840/- CLAIMED AS DEDUCTION FROM INCOME FROM HOUSE PROPERT Y. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE CI T(A) HAS ALSO ERRED IN NOT ALLOWING THE ALTERNATE SUBMISSION THA T THE ENTIRE INTEREST IS ALLOWABLE U/S.36(1)(III) OF THE ACT AND HA S FURTHER ERRED IN HOLDING THAT THIS INTEREST IS TO BE CAPITALISED TO THE QUALIFYING ASSETS BY RELYING ON PROVISO TO SEC. 36(1)(III) OVERLOOK ING THE FACT THAT THE SAID PROVISO IS APPLICABLE TO THE CAPITAL A SSETS AND TO THE CURRENT ASSETS. 21. THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS THE ADDITIONAL GROUND NO.1. SO FAR AS THE ADDITIONAL GROUND NO.2 IS CONCERNED HE SUBMITTED THAT THE ABOVE GROUND ARISES FROM THE ORDER OF THE CIT(A) AND GOES TO THE ROOT OF THE ISSUE IN VOLVED IN THE APPEAL. RELYING ON VARIOUS DECISIONS HE SUBMITTED THA T THIS ADDITIONAL GROUND NO.2 SHOULD BE ADMITTED. 22. AFTER HEARING BOTH THE SIDES AND CONSIDERING THAT THE FACTS ARE ALREADY ON RECORD THE ADDITIONAL GROUND NO.2 BY THE ASSESSEE IS ADMITTED. 23. WE FIND THE REVENUE HAS ALSO FILED THE FOLLOWING GROUNDS WHICH ARE ON THE SAME ISSUE. GROUNDS RAISED BY THE REV ENUE ARE AS UNDER : 1. THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A PPEALS) IS CONTRARY TO THE LAW AND FACTS AND CIRCUMSTANCES OF T HE CASE. 2. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS NO T APPRECIATE THE EFFORTS OF ASSESSING OFFICER TO PUT: FORT H THE FACTS THAT THE LOANS WERE TAKEN AGAINST THE PROPERTY AND RENT RE CEIVABLE, NOT FOR ACQUIRING OR CONSTRUCTION OF THE PROPERTY OR ANY OTHERS. HENCE, THE INTEREST PAID IS NOT ALLOWABLE FOR PARTLY ACQUIR ING OR CONSTRUCTION OF THE PROPERTY. 19 3. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW THAT UNDER THE PROVISO TO SECTION 36( 1)(III), THE INTEREST PAID SHALL RIOT BE ALLOWED AS DEDUCTION TILL THE ASSET IS FIRST PUT TO USE BUT THE ASSESSEE HAS PARTLY UTILIZED FOR PURCH ASED OF PLOT, CONSTRUCTION OF MALL AND PURCHASE OF OTHER STOCK, HENC E, ALL THE INTEREST AMOUNT IS NOT ALLOWABLE U/S 36(1)(III) OF THE I. T, ACT, 1961. 4. FOR THESE AND SUCH ABOVE OTHER GROUNDS AS MAY BE URG ED AT THE TIME OF THE HEARING, THE ORDER OF THE LEARNED C IT(APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED . 5. THE APPELLANT CRAVES, LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUND OF APPEAL DURING THE COURSE OF THE APPELLANT PROCEEDINGS BEFORE THE ITAT. THEREFORE, ADDITIONAL GROUND NO.2 BY THE ASSESSEE AND THE GROUNDS RAISED BY THE REVENUE ARE BEING ADJUDICATED TOGETHER. 24. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSING O FFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSEE HAS CLAIMED LOSS OF RS.45,56,360/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY AFTER CLAIMING DEDUCTION U/S.24 BEING INTEREST ON LOAN TO THE EXTENT OF RS.2,02,91,840/- . THE INTEREST WAS CLAIMED AGAINST RENT RECEIVED FROM KRISHNA SAHAKARI BANK RS.18,75,284/- AND LNB TEXTILES PVT. LTD., RS.1,84,05,556/. ACCORDING TO THE ASSESSING OFFICER THE SAID DEDUCTION IS ALLOWABLE WHERE THE PROPERTY HAS BEEN ACQUIR ED, CONSTRUCTED, REPAIRED, RENEWED OR RECONSTRUCTED WITH BO RROWED CAPITAL. HE THEREFORE ASKED THE ASSESSEE TO EXPLAIN THE ALLOWABILITY OF THE SAME. IT WAS SUBMITTED THAT LOAN HAS B EEN UTILISED PARTLY FOR PURCHASE OF PLOT, CONSTRUCTION OF MALL, PURCHASE OF OTHER STOCK. IT WAS ARGUED THAT THE INTER EST PAID ON THE ABOVE LOAN IF NOT ALLOWED AS A DEDUCTION UNDER THE H EAD INCOME FROM HOUSE PROPERTY U/S.24 SHOULD BE ALLOWED AS DEDUCTION UNDER THE HEAD INCOME FROM BUSINESS OR PROFESS ION U/S.36(1)(III) SINCE SUCH INTEREST PAID ON LOANS WERE RAISED FOR BUSINESS PURPOSES. IT WAS SUBMITTED THAT THE INTEREST PAID ON 20 THE ENTIRE LOAN HAS BEEN DEBITED TO THE P&L ACCOUNT IN THE AUDITED PROFIT AND LOSS ACCOUNT. IT WAS SUBMITTED THAT T HE GROSS TOTAL INCOME OF THE FIRM WILL NOT BE AFFECTED BY ALLOWING THE INTEREST EITHER U/S.24 OR U/S.36(I)(III). THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. LOKANDW ALA CONSTRUCTION INDUSTRIES LTD. WAS ALSO BROUGHT TO THE NO TICE OF THE ASSESSING OFFICER. 25. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH TH E EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO HIM, THE ASSESSEE HAS TAKEN THE LOAN AGAINST THE PROPERTY AND RENT RECEIVABLE. THE INTEREST IS NOT PAID ON CAPITAL BORROWED FO R ACQUIRING OR CONSTRUCTION OF THE PROPERTY WITHIN THE MEAN ING OF SECTION 24(B). AS REGARDS THE CLAIM OF DEDUCTION U/S.36(A)(III) IS CONCERNED THE ASSESSING OFFICER NOTED THAT DURING THE IMP UGNED ASSESSMENT YEAR THE ASSESSEE HAS DECLARED LOSS UNDER THE HEAD HOUSE PROPERTY, BUSINESS INCOME FROM SALE OF KHARADI PLOT AT KHARADI AND INTEREST RECEIVED FROM FIXED DEPOSITS. THE A SSESSEE MADE INVESTMENT OF RS.20,75,93,364/- IN LAND, SHOPS AND WORK - IN-PROGRESS AND RS.15,22,42,987/- TOWARDS ADVANCE FOR LAND AND OTHER ADVANCES. THE ADVANCES INCLUDE RS.25,05,000/- TO MODI LAND DEVELOPERS, RS.10,51,98,692/- TO MODI MILK AND AGRO PRODUCTS, RS.44,17,480/- TO MODI PROPERTIES, RS.45 LAKHS TO REFRIGERATION ELECTRICAL APPLIANCES PVT. LTD., RS.41,51,000/- TO R.S DEVELOPERS, RS.1.10 CRORES TO SANJAY N. JALAN (HUF ), RS.11 LAKHS TO SHANTA RAM KADU, RS.30 LAKHS TO VIJAY ASSOCIATES. NO INTEREST HAS BEEN OFFERED FROM THE LOANS A ND ADVANCES AND ALSO THE LAND/PLOTS HAVE NOT BEEN PUT TO USE FOR THE PURPOSE OF BUSINESS. HE THEREFORE ASKED THE ASSES SEE TO EXPLAIN AS TO WHY THE INTEREST SHOULD NOT BE DISALLOWED. 21 ACCORDING TO THE ASSESSING OFFICER OPERATING COSTS THAT A RE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION, CONSTRUCTION OR PRODUCTION OF A QUALIFYING ASSET SHOULD BE CAPITALISED AS P ART OF THE COST OF THE ASSET. THEREFORE, FINANCIAL COSTS IDENTIFIABLE WITH A PARTICULAR PROJECT HAVE TO BE ADDED TO THE COST OF T HE PROJECT AS ANY OTHER METHOD IS GOING TO DISTORT THE PROFITS OR SALE O F KHARADI PLOT. HE OBSERVED FROM THE ACCOUNTS THAT INTEREST PAID TO CITI FINANCIAL, CITI FINANCE AND INDIA BILLS AND UNSECURED LOANS AMOUNTING TO RS.61,70,717/- HAS BEEN UTILISED FOR ACQUISITIO N OF LANDS AMOUNTING TO RS.20.76 CRORES SHOWN AS CLOSING STOCK AND ALSO ADVANCE FOR PURCHASE OF LAND AT RS.15.22 CRORES. SIN CE ONLY PROFIT FROM SALE OF KHARADI PLOT HAS BEEN DECLARED DURING T HE YEAR THE DEDUCTION CLAIMED FOR INTEREST PAID AGAINST THE P ROFIT HAS TO BE DISALLOWED AS PER ACCOUNTING STANDARD-16. HE ALSO BROUGHT TO THE NOTICE OF THE ASSESSEE THE PROVISIONS O F AS-16. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS THE ASSESSING OFFICER HELD THAT INTEREST AMOUNTING TO RS.2,64,62,557/- HAS TO BE DISALLOWED. WHILE DOING SO, HE ALSO OBSERVED THAT AN AMOUNT OF RS.55,85,717/- OUT OF THE ABOVE AMOUNT OF RS.2,64,62,557/- PAID TO NBFCS IS ALSO LIABLE TO BE DISALLOWED U/S.40(A)(IA) AS NO TAX HAS BEEN DEDUCTED AT SOURCE. 26. BEFORE CIT(A) IT WAS SUBMITTED THAT THE BANK LOANS WE RE UNDISPUTEDLY UTILISED FOR CONSTRUCTION OF THE BUILDING, LAY OU T AS WELL AS FOR THEIR ON-GOING BUSINESS OF TRADING IN LANDS ETC. IT WAS ARGUED THAT MOST OF THE LOANS HAVE BEEN USED FOR ACQUISITION AND CONSTRUCTION OF THE PROPERTIES WHICH ARE RENTED OUT AND THEREF ORE INTEREST TO THE EXTENT OF RS.2,02,91,840/- HAS BEEN CLAIMED AS DEDUCTION U/S.24(B) UNDER THE HEAD INCOME FROM HOUSE PROP ERTY 22 AND THE BALANCE HAS BEEN CLAIMED AS DEDUCTION FROM BUSIN ESS PROFITS. REFERRING TO THE LAND SANCTION LETTER FROM INDIA BU LLS FINANCIAL SERVICES LTD IT WAS ARGUED THAT AS PER THE SAN CTION LETTER AN AMOUNT OF RS.1,97,20,828/- AND RS.2,19,720/- RESPECTIVELY WERE DIRECTLY PAID TO KANISHKA PROPERTIES FOR THE PURCHASE OF THE PROPERTY SITUATED AT 610, SADASHIV PETH, PUNE. 27. AS REGARDS THE RELIANCE OF ACCOUNTING STANDARD-16 B Y THE ASSESSING OFFICER IS CONCERNED IT WAS SUBMITTED THAT THE ASSESSING OFFICER DISALLOWED THE INTEREST EXPENDITURE ON THE GROUND THAT THEY WERE UTILISED TOWARDS THE QUALIFYING ASS ETS. HOWEVER, THE ASSESSEE DEALS IN LAND AND THESE ARE NOT T HE PROJECTS AND THEREFORE THEY CANNOT BE TERMED AS QUA LIFYING ASSETS SO AS TO ATTRACT AS-16. IT WAS ARGUED THAT T HE LOANS ARE TAKEN AS WORKING CAPITAL FOR PURCHASING THE LANDS AND THE INTEREST PAID THEREON IS AN INDIRECT EXPENDITURE AND IT IS NOT DIRECTLY GOING TO THE PURCHASE COST OF THE LANDS. IT WA S ACCORDINGLY ARGUED THAT THE BASIC APPROACH ADOPTED BY THE ASSESSING OFFICER IS INCORRECT BOTH ON FACTS AND IN LAW. 28. AS REGARDS THE ALTERNATE VIEW EXPRESSED BY THE AS SESSING OFFICER THAT INTEREST PAID TO NBFCS TO THE EXTENT OF RS.55,85,717/- WAS ALSO OTHERWISE NOT ADMISSIBLE AS DEDUCTIO N IN THE LIGHT OF THE PROVISIONS OF SECTION 40(A)(IA) FOR FAILURE TO DEDUCT TAX AT SOURCE IT WAS ARGUED THAT NO DISALLOWANCE COULD HAVE BEEN MADE SINCE THE ENTIRE INTEREST HAS BEEN PAID TO THESE NBFCS. IT WAS ARGUED THAT DISALLOWANCE U/S.40(A)(IA) CAN BE MADE ONLY IF SUCH INTEREST WAS PAYABLE AS ON 31-03-2009 . HOWEVER, SINCE THE ENTIRE INTEREST HAS BEEN PAID AND NO AMOUNT IS OUTSTANDING AS AT THE YEAR END, THEREFORE, IN VIEW OF T HE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF 23 MERILYN SHIPPING AND TRANSPORTS REPORTED IN 136 ITD 23 NO DISALLOWANCE U/S.40(A)(IA) CAN BE MADE. 29. HOWEVER, THE CIT(A) WAS ALSO NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. SO FAR AS THE CLAIM O F DEDUCTION U/S.24(B) IS CONCERNED HE DISALLOWED THE CLAIM ON T HE GROUND THAT THERE IS NO DIRECT NEXUS BETWEEN THE BORROWED FUN DS AND THE ACQUISITION OR CONSTRUCTION OF PROPERTIES. THERE FORE, HE HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING THE INTEREST OF RS.2,29,90,881/- CLAIMED U/S.24 AGAINST INCOME FRO M HOUSE PROPERTY. 30. SO FAR AS THE ARGUMENT OF THE ASSESSEE THAT THE IN TEREST CAN BE ALLOWED AS DEDUCTION U/S.36(1)(III) IS CONCERNED THE LD.CIT(A) OBSERVED AT PARA 3.3.2.8 AS UNDER : 3.3.2.8 TO SUM UP THE INTEREST ON THE CAPITAL BORROW ED GENERALLY, WHICH WAS ALSO USED FOR THE PURPOSE OF INCOM PLETE ON- GOING VENTURES AND DEVELOPMENT OF NEW VENTURES PROJEC TS SHALL BE HIT BY THE PROVISO TO SEC.36(1)(III) AND INTEREST, BEG INNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR THE ACQUI SITION OF THESE ASSETS TILL THE DATE ON WHICH SUCH ASSETS WERE READY FOR I TS INTENDED USE OR SALE, I.E. FIRST PUT TO USE, CANNOT BE ALLOWED A S DEDUCTION. IN OTHER WORDS, THE FINANCE COST RELATABLE TO THESE VENTU RES/PROJECTS CANNOT BE ALLOWED AS DEDUCTION UNDER SEC.36(1)(III) I N THIS YEAR. THIS POSITION IS ALSO IN LINE WITH THE ACCOUNTING STAND ARD-16, WHICH IS EXTRACTED HEREINABOVE, AND THE PROJECTS OF THIS NAT URE FALL WITHIN THE DEFINITION OF QUALIFYING ASSETS. AS PER THE DEFINI TION, A QUALIFYING ASSET IS AN ASSET THAT NECESSARILY TAKES A SUBSTAN TIAL PERIOD OF TIME TO GET READY FOR ITS INTENDED USE OR SA LE. THE BORROWING COST RELATABLE TO QUALIFYING ASSET, I.E. LAN D DEVELOPMENT PROJECTS ARE REQUIRED TO BE CAPITALISED AND ADDED TO THE COST OR WIP OF SUCH PROJECTS. CAPITALISATION OF BORROWING COSTS SHOU LD CEASE WHEN SUBSTANTIALLY ALL THE ACTIVITIES NECESSARY TO PRE PARE THE QUALIFYING ASSET FOR ITS INTENDED OR SALE ARE COMPLETE AND THAT STAGE HAS NOT REACHED YET IN THE YEAR UNDER CONSIDERATION I N CASE OF SEVERAL VENTURES UNDERTAKEN BY THE APPELLANT. THUS, T HE ASSESSING OFFICER IS JUSTIFIED IN PRINCIPLE IN HOLDING THAT THE LAND DEVELOPMENT VENTURES, THE INCOME FROM WHICH IS NOT YET RECOGNIZED AS ON 31-03- 2009, ARE QUALIFYING ASSETS FOR THE PURPOSE OF CAPITALI SATION OF INTEREST RELATABLE TO THESE PROJECTS. 24 31. HE ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO COMP UTE THE ALLOWABILITY OF DEDUCTION U/S.36(1)(III) BY OBSERVING AS UNDER: 1. THE ASSESSING OFFICER SHALL FIRST IDENTIFY THE ACTUA L QUALIFYING ASSETS FROM THE VENTURES UNDERTAKEN BY THE APPELLANT DU RING THE YEAR AND THE EARLIER YEARS, I.E. THE PROJECTS WHICH W ERE IN EXECUTION STAGE AND NOT READY FOR INTENDED SALE AS ON 31-03-2009 . 2. THEREAFTER, THE ASSESSING OFFICER SHALL COMPUTE THE I NTEREST ATTRIBUTABLE TO SUCH QUALIFYING ASSETS IN TERMS OF PARAG RAPH 12 OF THE ACCOUNTING STANDARD-16, WHICH PROVIDES THAT THE AMOUNT OF BORROWING COSTS ELIGIBLE FOR CAPITALIZATION SHOULD BE DETERMINED BY APPLYING A CAPITALISATION RATE TO THE EXPENDITURE ON THAT ASSET. THE CAPITALISATION RATE SHOULD BE THE WEIGHTED AVERAGE OF THE BORROWING COSTS APPLICABLE TO THE BORROWINGS OF THE ENTERPRISE T HAT ARE OUTSTANDING DURING THE PERIOD, OTHER THAN BORROWINGS MADE SPECIFICALLY FOR THE PURPOSE OF OBTAINING A QUALIFYIN G ASSET. THE AMOUNT OF BORROWING COSTS CAPITALISED DURING A PERIOD SHOULD NOT EXCEED THE AMOUNT OF BORROWING COSTS INCURRED DURING THAT PERIOD. 3. THE INTEREST SO COMPUTED AS PER AS-16 AND ATTRIBUTA BLE TO QUALIFYING ASSETS SHALL BE CAPITALISED FOR FORM PART OF THE COST OR WIP OF THE QUALIFYING ASSETS. THE INTEREST SO CAPITALISE D IS NOT AN ALLOWABLE DEDUCTION U/S.36(I)(III) IN THE YEAR UNDER CONSIDERATION. SUBJECT TO THE ABOVE DIRECTIONS, THE GROUNDS RAISED BY THE APPELLANT RELATING TO DISALLOWANCE OF INTEREST STAND DISPOSED OF. 32. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 33. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE C OPY OF THE PARTNERSHIP DEED DREW THE ATTENTION OF THE BENCH T O CLAUSE 4 OF THE PARTNERSHIP DEED WHICH READS AS UNDER : 4. NATURE OF PARTNERSHIP BUSINESS : A] THE BUSINESS OF THE PARTNERSHIP SHALL BE PURCHASE, SAL E, LEASE/RENT, DEVELOPMENT, INVESTMENT IN LAND, REAL EST ATE, COMMERCIAL AND RESIDENTIAL PLOT AND ACT AS COMMISSION A GENT AND ALL OTHER ALLIED ACTIVITIES. B] THE PARTNERS MAY VARY THE NATURE OF BUSINESS AND DO ANY ADDITIONAL TYPE OF BUSINESS WITH THEIR MUTUAL CONSENTS F ROM TIME TO TIME. 34. HE ACCORDINGLY SUBMITTED THAT THE ASSESSEE IS ENGA GED IN THE BUSINESS OF LAND TRADING. THESE LANDS ARE HELD AS STO CK IN TRADE AND CURRENT ASSETS AND AS SUCH THE INTEREST IS CERTAINLY 25 ALLOWABLE AS DEDUCTION U/S.36(1)(III) OF THE I.T. ACT. REFERRING T O THE COPY OF THE ORDER GIVING EFFECT TO THE ORDER OF THE C IT(A) THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE ARE N O QUALIFYING ASSETS. THEREFORE, THE QUESTION OF CAPITALISING THE INTEREST TO THOSE QUALIFYING ASSETS DOES NOT ARISE. THE REFORE, THE ENTIRE INTEREST OF RS.2,64,62,557/- CLAIMED BY THE ASSESSEE HAS TO BE ALLOWED U/S.36(1)(III) OF THE I.T. ACT. HE SUBMITTED THAT THE FACT THAT LOANS ARE TAKEN FOR TRADING STANDS PROVED AS PER THE COPIES OF THE FINAL ACCOUNTS WHEREIN THE LANDS ARE SHOWN A S TRADING ASSETS AND NOT HELD FOR ANY CONSTRUCTION THEREO N. HE SUBMITTED THAT AFTER THE ORDER OF THE CIT(A) DIRECTING THE ASSESSEE TO FURNISH THE LIST OF QUALIFYING ASSETS AND THE COST INCURRED THEREON THE ASSESSEE FILED THE REQUISITE DETAILS B EFORE THE ASSESSING OFFICER VIDE LETTER DATED 05-08-2013 PROVIDIN G DETAILS OF ALL SUCH ASSETS. AFTER DUE VERIFICATION THE ASSESS ING OFFICER ON BEING SATISFIED PASSED THE ORDER U/S.250 OF THE ACT ON 19-08-2013 AND ALLOWED THE RELIEF STATING CATEGORICALLY T HAT THE SAME IS ALLOWED FOLLOWING THE DIRECTION BY THE CIT(A). HE SUBMITTED THAT ALTHOUGH THE ASSESSEE HAS GOT REQUISITE RELIEF AFTER THE ORDER OF THE CIT(A), STILL TOOK THIS ADDITIONAL GROU ND AS THE INTEREST IS ALLOWABLE U/S.36(1)(III) OF THE ACT SINCE THE ASSESSEE IS A TRADER IN LAND AND THE BORROWED FUNDS HAV E BEEN UTILISED FOR SUCH TRADING ASSETS WHICH ARE SHOWN AS STOCK IN TRADE. 35. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDER OF THE ASSESSING OFFICER. 36. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND TH E CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HA VE ALSO 26 CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE NATURE OF BUSINESS OF THE P ARTNERSHIP IS TO PURCHASE, SALE, LEASE/RENT, DEVELOPMENT, INVESTMENT IN LAND, REAL ESTATE, COMMERCIAL AND RESIDENTIAL PLOTS AND ACT AS COMMISSIONING AGENT AND OTHER ALLIED ACTIVITIES. WE FIND THE ASSESSEE CLAIMED DEDUCTION OF INTEREST EXPENDITURE OF RS.2,02,91,840/- AS DEDUCTION TOWARDS INCOME FROM HOUSE PROPERTY BEING RENT RECEIVED FROM KRISHNA SAHAKARI BANK AT RS.18,26,284/- AND LNB TEXTILES PVT. LTD. RS.1.85 CRORES. TH E ASSESSING OFFICER DISALLOWED THE INTEREST CLAIMED U/S.24(B) ON THE GROUND THAT SUCH INTEREST HAS NOT BEEN USED FOR CONSTRUCTION OF THE PROPERTY ON WHICH RENT IS RECEIVED. THE ALTERNATE CONTENTION OF THE ASSESSEE THAT SUCH INTEREST HAS BEEN UTILISED FOR BUSINESS AND THEREFORE ALLOWABLE U/S.36(1)(III) WAS ALSO REJECTED BY THE ASSESSING OFFICER BY REFERRING TO THE ACC OUNTING STANDARD-16. ACCORDING TO THE ASSESSING OFFICER OPERATING COSTS THAT ARE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION, CONSTRU CTION OR PRODUCTION OF A QUALIFYING ASSET SHOULD BE CAPITALISED AS P ART OF THE CAST OF THAT ASSET. HE ALSO DISALLOWED THE BALANCE AM OUNT OF RS.61,70,717/- BEING INTEREST OF RS.7,31,374/- PAID TO CITY FINANCIAL, RS.26,83,156/- PAID TO CITY FINANCE,RS.21,71,187/- PAID TO INDIA BULLS AND INTEREST ON UNSECURED LOANS AT RS.5,85,000/- ON THE GROUND THAT SUCH INTEREST SHOULD HAVE ALSO BEEN CAPITALISED TO THE CLOSING STOCK OF LAND. THUS, IN EFFE CT, THE ASSESSING OFFICER DISALLOWED INTEREST OF RS.2,64,62,557/- ON THE GROUND THAT SUCH INTEREST NEEDS TO BE CAPITALISED AND A DDED TO THE COST OF THE ASSET AND CANNOT BE CLAIMED AS REVENUE EXPENDITURE. 27 37. THE ASSESSING OFFICER FURTHER HELD THAT THE AMOUNT O F RS.61,70,717/- MENTIONED ABOVE INCLUDES INTEREST OF RS.55,85,717/- PAID TO NBFCS ON WHICH NO TAX HAS BEEN DEDUCTED, THEREFORE, THE SAME IS OTHERWISE ALSO NOT ALLOWAB LE U/S.40(A)(IA). 38. WE FIND IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF TH E ASSESSING OFFICER SO FAR AS THE DISALLOWANCE U/S.24(B) IS CONCERNED. AS REGARDS THE ALTERNATE CLAIM THAT SUCH INT EREST SHOULD BE ALLOWED U/S.36(1)(III) HE GAVE CERTAIN DIRECTIONS TO T HE ASSESSING OFFICER TO FIND OUT THE QUALIFYING ASSETS AND COMP UTE THE INTEREST ATTRIBUTABLE TO SUCH QUALIFYING ASSETS IN TER MS OF PARAGRAPHS 12 OF THE ACCOUNTING STANDARD-16 ACCORDING TO WHICH THE INTEREST SO COMPUTED AS PER ACCOUNTING STAND ARD-16 ATTRIBUTABLE TO QUALIFYING ASSET SHALL BE CAPITALISED TO FORM PART OF THE COST OF THE WORK-IN-PROGRESS. ONLY THE INTEREST NOT SO CAPITALISED IS ALLOWABLE DEDUCTION U/S.36(1)(III). WE FIND AFTER SUCH DIRECTION OF THE CIT(A) THE ASSESSING OFFICER CALLED FOR T HE DETAILS FROM THE ASSESSEE AND AFTER DUE VERIFICATION HELD TH AT THERE IS NO QUALIFYING ASSET AS PER ACCOUNTING STANDARD- 16 AND THE ENTIRE INTEREST IS ALLOWABLE. A COPY OF THE ORDER OF T HE ASSESSING OFFICER GIVING EFFECT TO SUCH DIRECTION OF THE CIT(A ) IS PLACED AT PAGE 23 OF THE PAPER BOOK. WE FIND THE ASSES SING OFFICER HAS ALLOWED RELIEF OF RS.2,02,91,840/- BEING INTEREST WHICH WAS EARLIER CLAIMED AS DEDUCTION FROM HOUSE PROPERT Y INCOME. EVEN OTHERWISE ALSO, THE BUSINESS OF THE ASSESSEE IS THAT OF PURCHASE AND SALE OF LAND, INVESTMENT IN LAND, REAL ESTATE, COMMERCIAL AND RESIDENTIAL PLOT ETC. THE FUNDS BORR OWED HAVE BEEN UTILISED FOR SUCH BUSINESS ACTIVITY, THEREFORE, TH E ENTIRE INTEREST PAID HAS TO BE ALLOWED AS DEDUCTION U/S.36 (1)(III) 28 OF THE I.T. ACT. THE SAME IS ALSO BORNE OUT FROM THE REC ORD AFTER THE ORDER OF THE ASSESSING OFFICER GIVING APPEAL EFFECT TO THE ORDER OF THE CIT(A). IN THIS VIEW OF THE MATTER THE GROUNDS RAIS ED BY THE REVENUE ARE DISMISSED AND THE ADDITIONAL GROUND NO.2 BY THE ASSESSEE IS ALLOWED. 39. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMIS SED AND THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26-06-2015. SD/- SD/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE DATED: 26 TH JUNE, 2015 COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-III, PUNE 4. CIT-III, PUNE 5. THE D.R, B PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE