Pharande Developers, Pune V. Deputy Commissioner of Income-tax,

ITA 1879/PUN/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 0478 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 10-10-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 16-10-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Proportionate interest
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 73; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, PUNE . . , BEFORE SHRI R.K. PANDA, AM . / ITA NO.1879/PN/2014 / ASSESSMENT YEAR : 2010-11 PHARANDE DEVELOPERS, ROOM NO.115, B.O. BHAVAN, S.NO.47, PLOT NO.1, PUNE SATARA ROAD, PUNE 411009 PAN AAFFP3023R . / APPELLANT V/S DCIT, CIRCLE-8, PUNE . / RESPONDENT / APPELLANT BY : SHRI SUNIL GANOO / RESPONDENT BY : SHRI YOGESH KAMAT / ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE O RDER DATED 18-08-2014 OF THE CIT(A)-V, PUNE RELATING TO ASSES SMENT YEAR 2010-11. 2. DISALLOWANCE OF INTEREST OF RS.1,77,787/- U/S.36(1)(III) IS THE ON LY ISSUED RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF DEVELOPERS AND BUILDERS. IT FILED ITS RETURN OF INCOME ON 12-10-2010 DECLARING TOTAL INCOME OF RS.29,69,860/-. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS DIVERTED IN TEREST BEARING FUNDS AMOUNTING TO RS.1,75,82,462/- TO ITS SISTER CONCERNS FOR OTHER / DATE OF HEARING :10.11.2016 / DATE OF PRONOUNCEMENT: 11.11.2016 2 ITA NO.1879/PN/2014 THAN BUSINESS PURPOSES. HE OBSERVED THAT THE ASSESSE E FIRM HAS CLAIMED TOTAL INTEREST EXPENDITURE OF RS.24,45,823/-. HE, THE REFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE INTEREST SHOULD NOT BE DISALLOWED. IT WAS SUBMITTED BY THE ASSESSEE THA T IT WAS HAVING INTEREST FREE ADVANCES FROM VARIOUS FLAT HOLDERS AMOUNTING TO RS.1,90,50,434/-, INTEREST FREE UNSECURED LOAN FROM FRIENDS AN D RELATIVES AT RS.29,90,000/- AND INTEREST FREE DEPOSITS FROM OTHER SISTER CONCERNS AMOUNTING TO RS.1,14,15,159/-. THE TOTAL OF THE AB OVE 3 AMOUNTS AGGREGATE TO RS.3,34,55,593/- WHEREAS THE ADVAN CES GIVEN TO SISTER CONCERNS FREE OF INTEREST IS ONLY RS.1,75,82,462/-. IT WAS ACCORDINGLY ARGUED THAT NO DISALLOWANCE IS CALLED FOR ON AC COUNT OF DIVERSION OF INTEREST FREE FUNDS TO SISTER CONCERNS. 4. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH TH E EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO HIM, THE ASSESSEE COULD NOT ESTABLISH THE ENTRY WISE NEXUS BETWEEN INTEREST FREE FUND RECEIVED AND INTEREST FREE ADVANCES MADE. HE, THEREFORE, ASKED TH E ASSESSEE TO FURNISH THE DETAILS IN THIS REGARD AND ESTABLISH DIRECT NEXU S BETWEEN INTEREST FREE FUNDS AND INTEREST FREE ADVANCES. THE ASSE SSEE FILED A STATEMENT SHOWING INTEREST FREE FUNDS RECEIVED FROM FLAT HO LDERS AS WELL AS OTHER SISTER CONCERNS AND SUBMITTED THAT THE FUNDS TRANSFERRED WAS OUT OF SUCH RECEIPTS. ON VERIFICATION WITH THE RELEVANT B ANK STATEMENT THE ASSESSING OFFICER NOTICED THAT INTEREST FREE FUNDS AS W ELL AS INTEREST BEARING FUNDS BOTH ARE ROUTED THROUGH MAINLY ONE BANK ACCOUNT. THEREFORE, IT IS DIFFICULT TO TREAT THAT THE INTEREST FREE FUND S WERE ACTUALLY TRANSFERRED TOWARDS INTEREST FREE ADVANCES OR FOR OTHER PURPOSE. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND IN ABSENCE OF ENTRY WISE NEXUS FOR THE YEAR UNDER CONSIDERATION AND EARLIER YEARS, THE ASSESSING OFFICER TREATED 50% INTEREST FREE ADVANCES AS OUT OF 3 ITA NO.1879/PN/2014 INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND CONSIDE RED THE BALANCE 50%, IE.. RS.87,91,231/- AS INTEREST FREE ADVANCES OU T OF TOTAL ASSETS. THE ASSESSING OFFICER ACCORDINGLY COMPUTED THE PROPORTIONATE DISALLOWANCE OF INTEREST 36(1)(III) AT RS.4,91,760/-. 5. IN APPEAL THE LD.CIT(A) RESTRICTED SUCH DISALLOWANCE TO RS.1,77,787/-. WHILE DOING SO, HE OBSERVED THAT THE BOOKIN G AMOUNT PAID BY THE FLAT HOLDERS ARE ON THE BASIS OF SUCH COMPLETION CERTIFICATE BY THE ARCHITECT AND THEREFORE IT CANNOT BE SAID THAT THE SAID AMOUNT WAS AVAILABLE WITH THE ASSESSEE. HE ACCORDINGLY REJECTED THE CLAIM OF INTEREST FREE FUNDS OF RS.1,90,50,434/- ON ACCOUNT OF BOOKING ADVANCE OF FLATS AS AVAILABLE TOWARDS GRANTING INTEREST FREE ADVANCES TO SISTE R CONCERNS. HE HOWEVER ACCEPTED THE BALANCE 2 AMOUNTS, I.E. INTEREST FRE E ADVANCES FROM GROUP CONCERNS AND UNSECURED LOANS FROM RELATIVES A ND FRIENDS BOTH TOTALING TO RS.1,44,04,159/- AS AVAILABLE TO THE ASSESS EE FOR GIVING INTEREST FREE ADVANCES TO SISTER CONCERNS AND ACCORDING LY RESTRICTED THE DISALLOWANCE TO RS.1,77,787/-. 6. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE PR OFIT AND LOSS ACCOUNT OF THE ASSESSEE FIRM FOR THE YEAR ENDING 31-03- 2010, COPY OF WHICH IS PLACED AT PAGE 14 OF THE PAPER BOOK DREW THE A TTENTION OF THE BENCH TO THE TOTAL INTEREST DEBITED TO THE PROFIT AND LO SS ACCOUNT AT RS.24,45,823/- WHICH INCLUDES : I. INTEREST ON CAPITAL AT RS.5,55,370/- II. INTEREST ON GIC LOAN RS.5,93,194/- III. INTEREST ON LOAN RS.12,97,259/- 4 ITA NO.1879/PN/2014 HE SUBMITTED THAT THE INTEREST ON CAPITAL OF PARTNERS IS AN APPROPRIATION OF PROFIT AND IS NOT AN EXPENDITURE. REFERRING TO THE DECIS ION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF QUALITY INDUSTRIES VS. JCIT REPO RTED IN 73 TAXMANN.COM 363 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT INTEREST PAID BY ASSESSEE FIRM ON IT S PARTNERS CAPITAL CANNOT BE REGARDED AS AN EXPENDITURE AMENABLE T O SECTION 14A. REFERRING TO THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF ADDL.CIT VS. HILL COUNTRY PROPERTIES LTD. REPORTED IN 57 TAXMANN.COM 400 HE SUBMITTED THAT THE TRIBUNAL IN THE S AID DECISION HAS HELD THAT WHERE ASSESSEE WAS HAVING ENOUGH OWN FUN DS IN FORM OF SHARE CAPITAL, RESERVES AND SURPLUS, INTEREST FREE ADVANCE FROM CUSTOMERS AND DEPOSITS TO GIVE INTEREST FREE ADVANCES TO SUBSIDIARIES, NO DISALLOWANCE COULD BE MADE OUT OF INTEREST PAID BY THE ASS ESSEE ON BORROWED FUNDS. REFERRING TO THE COPY OF THE BALANCE SHE ET, COPY OF WHICH IS PLACED AT PAGE 13 OF THE PAPER BOOK, HE SUBMITTE D THAT THE LOWER AUTHORITIES WHILE COMPUTING THE INTEREST FREE FUNDS AV AILABLE HAVE NOT CONSIDERED THE CAPITAL OF THE ASSESSEE FIRM WHICH STOO D AT RS.71,42,805/- AS ON 31-03-2010. HE SUBMITTED THAT IF TH E CAPITAL ACCOUNT OF THE PARTNERS AND THE UNSECURED LOANS, ADVAN CES FROM GROUP CONCERNS AND BOOKING ADVANCES RECEIVED FROM FLAT HOLDERS ARE CONSIDERED, THEN THE SAME IS MUCH MORE THAN THE AMOUNT ADVANCED TO SISTER CONCERNS FREE OF INTEREST. THEREFORE, NO DISALLOWANCE IS CALLED FOR . 8. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAN D HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE ASSESSEE HAS NOT PROVED THAT INTEREST BEARING FUNDS HAVE NOT BEEN D IVERTED TO SISTER CONCERNS FREE OF INTEREST. SINCE A PART OF THE INTEREST B EARING FUND HAS BEEN DIVERTED TO SISTER CONCERNS WITHOUT CHARGING ANY INTEREST, T HEREFORE, THE CIT(A) WAS FULLY JUSTIFIED IN SUSTAINING THE ADDITION OF RS .1,77,787/- 5 ITA NO.1879/PN/2014 OUT OF THE TOTAL DISALLOWANCE OF RS.4,91,760/- BY THE ASSESS ING OFFICER. SINCE THE ORDER OF THE CIT(A) IS A REASONED ONE, THEREFORE , THE SAME SHOULD BE UPHELD AND THE GROUND RAISED BY THE ASSESSEE SHOULD BE DISMISSED. 9. I HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH T HE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PA PER BOOK FILED ON BEHALF OF THE ASSESSEE. I HAVE ALSO CONSIDERED THE VARIO US DECISIONS CITED BEFORE ME. I FIND THE ASSESSING OFFICER DISALLOWED AN A MOUNT OF RS.4,91,760/- BEING PROPORTIONATE INTEREST ON 50% OF THE ADVANCES GIVEN TO SISTER CONCERNS FREE OF INTEREST ON THE GROUND THAT A PART OF THE INTEREST BEARING FUND HAS BEEN DIVERTED TO SISTER CONCER NS FREE OF INTEREST. I FIND IN APPEAL THE LD.CIT(A) WAS OF THE OPINION TH AT THE AMOUNT RECEIVED FROM FLAT HOLDERS FOR BOOKING CANNOT BE A VAILABLE TO THE ASSESSEE AS INTEREST FREE ADVANCES SINCE THE SAME IS R ECEIVED BY THE ASSESSEE FROM THE CUSTOMERS ON THE BASIS OF PROPORTIONA TE COMPLETION OF THE FLATS. HE, HOWEVER, HELD THAT THE UNSECURED LOAN RECE IVED FROM FRIENDS AND RELATIVES AT RS.29,90,000/- AND THE ADVANCES FR OM GROUP CONCERNS AND FRIENDS AT RS.1,14,15,159/- IS AVAILABLE TO THE ASSESSEE ARE FREE OF INTEREST. THE TOTAL OF THE ABOVE 2 COMES TO RS.1.44 CRORES WHEREAS THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCES TO SISTER CONCERNS ON WHICH NO INTEREST HAS BEEN CHARGED STANDS AT RS.1,75 ,85,462/-. HE ACCORDINGLY RESTRICTED THE DISALLOWANCE TO RS.1,77,787/-. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT SUCH INTEREST EXPENDITURE WHICH IS DEBITED TO THE PROFIT AND LOSS ACCOUN T INCLUDES INTEREST TO PARTNERS AT RS.5,55,370/- WHICH IS APPROPRIATIO N OF PROFIT AND CANNOT BE REGARDED AS THE EXPENDITURE FOR THE PUR POSE OF COMPUTATION OF PROVISIONS OF SECTION 14A. 6 ITA NO.1879/PN/2014 10. I FIND FORCE IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF Q UALITY INDUSTRIES (SUPRA) WHILE DECIDING AN IDENTICAL ISSUE HAS HELD T HAT INTEREST PAID BY THE ASSESSEE FIRM ON ITS PARTNERS CAPITA L CANNOT BE REGARDED AS AN EXPENDITURE AMENABLE TO SECTION 14A. TH E TRIBUNAL IN THE SAID DECISION HAS HELD THAT INTEREST PAID TO PARTNERS CANNOT BE TREATED AT PAR WITH OTHER INTEREST PAYABLE TO OUTSIDE P ARTIES. IN VIEW OF THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL ON T HIS VERY ISSUE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO MY N OTICE, I AGREE WITH THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT INTEREST PAID BY THE ASSESSEE FIRM TO THE PARTNERS ON THEIR CAPITAL CA NNOT BE REGARDED AS EXPENDITURE AMENABLE TO SECTION 14A. 11. SO FAR AS THE ARGUMENT OF THE LD. COUNSEL FOR THE AS SESSEE THAT THE PARTNERS CAPITAL AND THE UNSECURED LOAN AND ADVAN CES FROM GROUP CONCERNS COMBINED TOGETHER IS MORE THAN THE INTEREST FR EE ADVANCE GIVEN TO SISTER CONCERNS, I FIND THE SAME IS NOT VERIFIABLE FROM TH E BALANCE SHEET FILED BY THE ASSESSEE. IT IS NOTICED THAT THE CAPITA L ACCOUNT OF THE PARTNERS STANDS AT RS.71,42,805/- AND THE UNSECURED LOA N IS SHOWN AT RS.29,90,000/-. HOWEVER THE ADVANCE FROM GROUP CONCERNS AND FRIENDS SHOWN AT RS.1,14,15,159/- IS NOT VERIFIABLE FROM THE BALANCE SHEET. UNDER THESE CIRCUMSTANCES, I RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO VERIFY THE SAME AND IF THE ASSESSEE IS ABLE TO PROVE THAT THE CAPITAL OF THE PARTNERS, UNSECU RED LOAN FROM RELATIVES AND FRIENDS AND THE INTEREST FREE ADVANCES FROM GROUP CONCERNS IS MORE THAN THE INTEREST FREE ADVANCES GIVEN TO SISTER CONCERNS, THEN IN THAT CASE NO DISALLOWANCE IS CALLED FOR. IF THE ASSESSEE IS UNABLE TO PROV E THEN THE ASSESSING OFFICER IS DIRECTED TO RECOMPUTE THE D ISALLOWANCE OF INTEREST BY CONSIDERING THE INTEREST EXPENDITURE AT RS.18 ,90,453/- AS 7 ITA NO.1879/PN/2014 AGAINST RS.24,45,823/- TAKEN BY HIM. IN OTHER WORDS, THE INTEREST PAID TO PARTNERS ON THEIR CAPITAL HAS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S.36(1)(III). I HOLD AND DIRECT ACCORDINGLY. GROUND RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11-11-2016. SD/- ( R.K. PANDA ) ACCOUNTANT MEMBER PUNE ; DATED : 11 TH NOVEMBER, 2016. '# $# / COPY OF THE ORDER FORWARDED TO : / BY ORDER , $ % / TRUE COPY // // TRUE COPY // &' % * / SR. PRIVATE SECRETARY *, / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT (A) - 5, PUNE 4. THE PR.CIT, - 4, PUNE 5. $ %%* , * , SMC BENCH / DR, ITAT, SMC BENCH PUNE; 6. 2 / GUARD FILE.