Assistant Commissioner of Income-tax, Circle - 6, Pune V. Sharada Erectors Private Limited., Pune`

ITA 2043/PUN/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5123 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 7 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 23-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DIVYA BAJPAI
• Keywords: Depreciation; Rule of consistency; Assessment record
• Section: 14A; 72

Judgement Text

आयकरअपीलीयअिधकरण “ए” Ɋायपीठ पुणे मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE BEFORE SHRI PARTHA SARATHI CHAUDHURY, JM AND DR. DIPAK P. RIPOTE, AM आयकर अपील सं. / ITA No. 2043/PUN/2017 Ǔनधा[रणवष[ / Assessment Year : 2013-14 The A.C.I.T., Circle-6, Pune Vs Sharada Erectors Pvt. Ltd. 38, Vijayanagar Colony, Pune-411030. PAN No. AACCS 6028 D Appellant/ Assessee Respondent /Revenue Revenue by Ms. Divya Bajpai (CIT-DR) Assessee by Shri Nikhil S Pathak Date of hearing 22/03/2022 Date of pronouncement 06/04/2022 आदेश/ ORDER PER: DR. DIPAK P. RIPOTE, AM: This is an appeal filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)-4, Pune, Appeal No.PN/CIT(A)-4/DCIT, Circle-6, Pune/85/2016-17/152 dated 27/03/2017 for the Assessment Year 2013- 14. The Revenue has raised following grounds of appeal: “1. On the facts and the circumstances of the case and in the law, the ld. CIT(A) has erred in deleting the addition on account of disallowance of interest of Rs. 7,44,78,911/- u/s 36(1)(iii) of the Income Tax Act, 1961, when the funds were raised by interest bearing loan which was advanced to sister concern for non business purpose. 2. For this an such other reasons as may be urged at the time of hearing, the order of the CIT(A) may be vacated and that of the Assessing officer be restored. 3. The appellant craves leave to add, amend alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon’ble Tribunal.” 2. The Assessee is a Builder-Developer. Brief facts of the case are that, in the assessment order, it is claimed that the assessee has used interest bearing funds for giving advances to its sister concerns and related entities, therefore, the A.O. opined that the funds have been used for non-business purposes. The assessee submitted before the A.O. during the assessment proceedings that they have ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 2 sufficient funds and the advances have been given out of its own excess funds. The assessee made an elaborate submission before the A.O., however, the A.O. disallowed Rs. 7,44,78,911/- out of total interest expenditure of Rs. 11,09,84,335/- claimed by assessee U/s 36(1)(iii) of the Income Tax Act, 1961 (in short, the Act). The A.O. also made disallowance U/s 14A of the Act at Rs. 31,48,123/-. 3. Being aggrieved by the order of the A.O., the assessee carried the matter before the ld. CIT(A)-4, Pune, who after considering the submissions of the parties and material placed on record, given part relief to the assessee by sustaining the disallowance U/s 14A of the Act. The CIT(A) has dealt with the issue in para 5.3 of his order and the same is reproduced as under: “5.3 I have perused the assessment order and the submission made by the appellant as above carefully. I have already allowed the appeals of the appellant for the A.Ys. 2000-01 and 2006-07 to 2012-13 and deleted the disallowance of interest made therein by the AO. In the instant case, during this year the A.O. has adopted a different method to compute the disallowance of interest u/s 36(1)(iii) of the Act. The A.O. has allowed interest amounting to Rs. 3,65,05,424/- computed @ 12% on the amount of investment of Rs. 30,42,11,868/- (comprising of non- current assets, trade receivable, cash and bank balance and other current assets) considered by him as for the purpose of business of the appellant. The remaining amount of Rs. 7,44,78,911/- (Rs. 11,09,84,335/- Less: Rs. 3,65,05,424/-) has been disallowed by him. Assessee has filed an elaborate parawise/issue-wise reply to the observation of the A.O. 5.3.1 On the other hand, the ld. AR submitted that the appellant’s business since inception continues to be that of construction of commercial complexes and development of properties. The advances for purchase of land constitute trading assets of the appellant and interest attributable to the said advances deserves to be allowed. The ld. AR contended that the AO has ignored the fact that finance cost includes Rs. 1,67,95,148/- loss of foreign exchange fluctuation and Rs. ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 3 48,21,961/- towards other borrowing costs which do not constitute interest and are therefore not liable to disallowance u/s 36(1)(iii) of the Income Tax Act, 1961. Further, it was contended that the AO has not regarded the following for the purpose of business of the appellant which is miscarriage of justice and misunderstanding of accounting principles. Sr. Particulars Amount Rs. 1 Tangible and Intangible Assets in Note A-10 the Balance Sheet 3,88,25,404 2 Current Investments in Note A-14 to the Balance Sheet 9,39,535 3 Inventories in Note A-15 to the Balance Sheet 27,82,80,242 4 Short-term Loans and Advances in Note A-18 to the balance Sheet 72,32,01,759 Total 104,12,46,940 The ld. AR emphasized that AO did not regard even Tangible Assets (fixed Assets) and Inventories for the purpose of business of the assessee. 5.3.2 While commenting on the observations of the AO that “Rather interest free advances are given to directors of Rs. 23 Crore and against land of Rs. 30 Crores. Thus, total short term loans and advances of Rs. 72 Crores are not for business purpose and not earned any revenue in this year. Similarly, inventory of Rs. 27 Crores is idle and no sale took place till end of this year AY 2013-14”, the ld. AR submitted that advance given to directors is against Joint Development Agreement in respect of land owned by the director under a revenue sharing model. Assessee’s housing project “Myria” is underway at the site. A.O. has verified the agreement which is on the assessment record and is satisfied with the explanation. We believe the A.O’s only apprehension is that it is paid to a director. Our belief is fortified by the fact that while A.O. has reproduced part of our submission dated 18/03/2016 (refer page 4 of the Order) relating to advance for purchase of land (from other than director) Rs. 30 Crores, he has not reproduced our submission regarding advance to directors contained in the same letter. What the A.O. has referred to as short term borrowings of Rs. 72 Crores in fact represent total borrowing including long term borrowings. That there is no sale during the year is true. However, to say that the inventory is idle as there is no sale of premises is incorrect. It may be noted that rent is earned out of “Trading Assets” i.e. Finished Goods. ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 4 5.3.3 Again the ld. AR stated that the figure of interest quoted by the A.O. at Rs. 11 Crores itself is wrong. In this connection, it may kindly be noted that vide our rectification application dated 18/04/2016 we have brought it to the A.O.’s notice that an amount of Rs. 2,16,17,109/- out of Rs. 11,09,84,335/- considered as interest by the A.O. is in fact not interest within the meaning of the Income Tax Act. A large component of it amounting to Rs. 1,67,95,148/- represents foreign exchange fluctuation loss and therefore, cannot be subjected to disallowance u/s 36(1)(iii). Though the A.O. agreed to rectify the mistake, the same has not happened. 5.3.4 To buttress his case the ld. AR stated that in the case of Modi Builders Vs JCIT, Pune (ITA No. 1693) the Hon’ble ITAT, Pune Bench “B” Pune has considered a similar case of Builder-Developer and held that, the entire interest paid is allowable u/s 36(1)(iii). Assessee has already capitalized interest and other finance costs to the work in progress of its “Sharada Myria” project. Secondly it is submitted that the AO has not disputed the nexus of the advances with the business carried on by the assessee and has in-fact suggested capitalizing the interest to the inventory. It is not a case where the nexus of the advance with the business itself is not accepted resulting in disallowance of interest u/s 36(1)(iii) forever. The AO’s main apprehension appears to be that the interest expenditure incurred is not earning any revenue during the year. Appellant has countered this by relying on the decision of the Hon’ble Supreme Court in S.A. Builders Ltd. [2007 (288 ITR 1 (SC)] wherein the Hon’ble Court has reiterated its decision in CIT Vs Malayam Plantations Ltd [1964 53 ITR 140 (SC)] to hold that the expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits”. The Court also agreed with the view taken by Delhi High Court in Dalmia Cements (B) Ltd. [2002 (254) ITR 377] wherein it was held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. In the case of the appellant before me the A.O. has even ignored the investment in inventory and fixed assets. There is no justification for the approach of the A.O. in ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 5 disallowing interest without bringing material on record to show that interest bearing funds have been used for giving interest free advances to sister concerns or for other advances regarded by AO as not for the purpose of business of the assessee. The AO has not shown any advance paid by the assessee which is not for the purpose of business of the assessee. The action on then part of the AO is inconsistent with the stand taken by him in all the earlier years. Rule of consistency cannot be given a complete go by without proper justification. It is well settled law that Principle of Consistency applies to the income tax proceedings. Furthermore, effectively the A.O. has ignored the ratio of the Hon’ble High Court of Bombay in the matter of Reliance Utilities and Power Ltd. 313 ITR 340 (Bom) and HDFC Bank Limited 366 ITR 505 (Bom) relied upon by the assessee. 5.3.3 Having regard to the facts of the case, submissions of the appellant, findings of the AO and the case laws relied upon by the appellant, in my considered opinion the interest expenditure in its entirety deserves to be allowed. Accordingly, I direct the A.O. to delete the addition made on account of disallowance of interest u/s 36(1)(iii) of Income Tax Act, amounting to Rs. 7,44,78,911/- in this year under consideration. Ground No. 1 raised by the appellant is accordingly allowed.” 4. Now the Revenue is in appeal before us. The Ld. Departmental representative (DR) strongly relied on the order of the Assessing Officer. The Ld. DR tried to distinguish the present year from the earlier years. 5. The Ld.AR appearing on behalf of the assessee has submitted that the Assessee was having own sufficient funds. He explained that the assessee was having Share Capital of Rs.20,30,00,000/- and Reserve of Rs.6,82,47,640/-. Therefore, the Ld.AR stated that the total of Share Capital and Reserve is Rs.27,12,47,640/-. He further submitted that the Advances given to its Sister Concerns/related concerns were only Rs.8,68,18,973.07/- (which are available at Paper book page 47 & 48). The ld. AR submitted the following table to demonstrate the availability of interest free funds as under: ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 6 Sr. No. Particulars Amount Rs. 1 Share Capital 20,30,00,000.00 2. Reserve & Surplus 6,82,47,640.16 3. Deferred Tax Liability 62,33,145.00 4. Accumulated Depreciation 14,21,60,804.15 5. Advance from R M Dhariwal & HUF 1,25,00,000.00 6. Deposits towards leased premises 7,38,76,725.00 Total 50,60,18,314.31 The ld. AR further submitted that the assessee was having its own funds of Rs. 27.12 crores whereas the interest free advances to its sister concerns were only Rs. 8.68 crores which shows that assessee was having sufficient funds to advance interest free funds to its sister concerns. The ld. AR relied on the decisions of the Hon’ble Bombay High Court in the case of CIT Vs Reliance Utilities 313 ITR 340 (Bom) and CIT Vs HDFC Bank Ltd. 366 ITR 505 (Bom). The ld. AR has vehemently supported the order of the ld. CIT(A). He also invited our attention to the tables submitted by the assessee before the A.O. vide letter dated 18/03/2016 (which are at Paper Book page No. 28 to 34). 6. We have considered the rival contentions of both the parties and perused the material placed on record. In this case, the AO, in the assessment order on page 6 has given the finding that interest expenditure is Rs.11,09,84,335/- debited to P&L account, similar finding is given by AO on page 2 of the assessment order. However, these findings are blatantly incorrect, the note A-25 of the Balance Sheet is reproduced here as under: Finance Cost Note A-25 As on 31.03.2013 As on 31.03.2012 Interest Expenses 8,93,67,226.30/- 9,64,47,098.85/- Other borrowing cost 48,21,961/- 44,33,000/- Loss on Foreign exchange transaction 1,67,95,148/- - Total 11,09,84,335.30/- 10,08,80,098.85/- Thus, the actual interest expenditure is Rs.8,93,67,226/-. ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 7 In this case, the A.O. in the assessment order has calculated the disallowance of Section 36(1)(iii) of the Act in a different manner, which he discussed on page No. 6 of the assessment order. The A.O. considered investment made in current assets, trade receivables, cash and bank balance, other current assets as investment for the business purpose, the total of these assets are Rs. 30,42,11,868/- (10,65,07,347 + 9,81,61,722 + 6,78,63,663 + 3,16,79,136= 30,42,11,868). The A.O. presumed that borrowed funds were utilized for the said investment of Rs. 30,42,11,868/- and applied the interest rate of 12% on Rs.30,42,11,868/- which comes to Rs. 3,65,05,424/-, therefore, A.O. allowed interest of Rs. 3,65,05,424/- out of total interest debited to P&L account of Rs. 11,09,84,335/- and added the remaining amount of Rs. 7,44,78,911/-. However, this investment has nothing to do with the disallowance made by the AO u/s 36(1)(iii) of the Act out of the interest expenses. The A.O. has merely alleged that there is diversion of interest bearing funds to sister concerns, however, he has not established the diversion of interest bearing funds to sister concerns. While calculating the current assets of Rs. 30,42,11,868/-, for which, according to the A.O., interest bearing funds were utilized, the A.O. has overlooked other current assets i.e., - Inventory Rs. 27,82,80,241/- - Flat at Wanowrie Rs. 9,39,535/- Also, the most important issue which AO had to consider was whether there were sufficient non-interest-bearing funds with the assessee at the time of giving non-interest bearing advances to its sister concerns. However, AO has not given any categorical finding. Whereas, the Ld. CIT (A) after verification of the records has arrived at the conclusion that the assessee was having more than ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 8 sufficient non-interest-bearing funds when it gave advance to sister concern. On perusal of the records, we have observed that the Assessee was having Share Capital of Rs.20,30,00,000/- and Reserve and surplus of Rs.6,82,47,640/-, thus the assessee’s funds were Rs.27,12,47,640/. The advance given to sister concern is only Rs.8,68,18,973.07/-. Thus, assessee was having sufficiently more non- interest bearing funds. It has been held by Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd. (supra) that, “If there be interest- free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available.” Applying the said proposition of law as laid down by the Hon’ble Bombay High Court to the present case, the assessee was having own funds of Rs.27,12,47,640/-, then it can be presumed that the advances of Rs.8,68,18,973.07/-were given out of its own funds by the assessee. Similar question was considered by the Hon’ble ITAT Pune in assessee’s own case for the A.Y. 2005-06 in ITA No. 472/Pune/2010 order dated 25/06/2013 has held as under: Quote “Such chart has been made date wise and it is seen that the peak amount of interest free funds as also the minimum amount of interest-free funds available with the assessee at any given point of time during the year is sufficient to cover the impugned interest-free advances of Rs.9,28,96,036/- made to the sister concerns. The aforesaid position has not been controverted by the Revenue either in the course of hearing or even in the remand report furnished by the Revenue on the basis of the material on record. Therefore, in the face of the said factual matrix, which is supported by the relevant material on record, and is not controverted by the Revenue, the principle approved by the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) clearly militates against the disallowance made by the Assessing Officer. Applying the parity of reasoning laid down by the Hon’ble High Court in the case of Reliance Utilities & Power Ltd. (supra) it has to be held in the present case that as there are funds available both interest-free and interest bearing, then the presumption ITA 2043/PUN/2017 for A.Y. 2013-14 ACIT Vs Sharada Erectors P ltd. 9 is that the impugned interest-free advances made to the sister concerns are out of interest-free funds available with the assessee company as the interest-free funds are sufficient to cover the impugned interest-free advances made to the sister concerns. Therefore, the disallowance of interest expenditure made by the Assessing Officer becomes untenable.” Unquote Once, it is established that the assessee was having more than sufficient own funds then the presumption is that the advances have been given out of the own funds, therefore there is no question of disallowance of interest u/s 36(1)(iii) of the Act. Therefore, respectfully following the decision of the Hon’ble ITAT, Pune in assessee’s own case mentioned above and proposition of law laid down by the Hon’ble Bombay High Court, the order of the ld.CIT(A) is upheld on this issue. Hence, the ground numbers 1 & 2 of Revenue’s appeal are dismissed. 7. The Revenue has neither raised any additional ground nor altered any ground, hence ground number 3 of the appeal is academic in nature and is dismissed. 8. In the result, this appeal of the Revenue stands dismissed. Order pronounced in the open Court on April 6 th , 2022. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (DR. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER प ु णे / Pune; Ǒदनांक / Dated : April 6 th , 2022 *Ranjan आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of the Order forwarded to : 1. अपीलाथȸ / The Appellant. 2. Ĥ×यथȸ / The Respondent. 3. The PCIT-concerned 4. The CIT(A)-concerned 5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण, “ए” बɅच, प ु णे / DR, ITAT, “A” Bench, Pune. 6. गाड[फ़ाइल / Guard File. आदेशान ु सार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलȣय अͬधकरण, प ु णे/ITAT, Pune.