DARODE JOG REALTIES PRIVATE LIMITED, PUNE V. ITO, WARD 1(3), PUNE

ITA 2076/PUN/2019

AI Insights

Darode Jog Realities Private Limited appealed against the order of the Commissioner of Income Tax (Appeals) - 1, Pune, which had confirmed the disallowance of interest amounting to Rs 3,27,68,625 under section 36(1)(iii) of the Income Tax Act, 1961. The disallowance was initially made by the Assessing Officer on the grounds that the interest-bearing funds were diverted to a sister concern for non-business purposes. The Tribunal examined the purpose of the advances and the utilization of the funds, noting that the advances were made for business purposes related to land procurement. The Tribunal also considered the principle of consistency, as no disallowance had been made in previous years for similar transactions.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137143 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 11-01-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 23-12-2019
• Other Referred Cases: S.A. Builders Ltd. vs. CIT, Dhimant Hiralal Thakur vs. CIT, CIT vs. Sridev Enterprises, CIT vs. Givo Limited, Kumar Agro Products Private Limited vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rule of consistency
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI S. S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA No.2076/PUN/2019 िनधाᭅरण वषᭅ / Assessment Year : 2013-14 Darode Jog Realities Private Limited, 1212 Darode Jog House, Apte Road, Deccan Gymkhana, Pune- 411004. PAN : AADCD4389F Vs. ITO, Ward-1(3), Pune. Appellant Respondent आदेश / ORDER PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the order of ld. Commissioner of Income Tax (Appeals)- 1, Pune [‘the CIT(A)’] dated 29.10.2019 for the assessment year 2013-14. 2. The appellant raised the following grounds of appeal :- “1. The Learned Assessing Officer (‘Ld. AO) and Learned Commissioner of Income Tax (Appeals) (‘Ld. CIT(A)’) have erred in Assessee by : Shri Nikhil S. Pathak Revenue by : Shri Ramnath P. Murkunde Date of hearing : 12.01.2023 Date of pronouncement : 02.02.2023 ITA No.2076/PUN/2019 2 disallowing a sum of Rs 3,27,68,625/- under section 36(1)(iii) of the Income Tax Act, 1961 (‘IT Act). Prayer: The Appellant prays that the additions made under section 36(1)(iii) of the Act be deleted. 1(b) The Learned AO and Learned CIT(A) have erred in making an addition in respect of interest paid to directors on unsecured loans under section 40A(2)(b) of the Act of Rs 7,08,787/- considering it as unreasonable and excessive. Prayer: The Appellant prays that the addition made under section 40A(2)(b) of the Act be deleted.” 3. Briefly, the facts of the case are as under :- The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of Constructions, Builders and Promoters. The Return of Income for the assessment year 2013-14 was filed on 01.10.2013 declaring Rs.Nil income after setting of the carry forward losses. Against the said return of income, the assessment was completed by the Income Tax Officer, Ward-1(3), Pune (‘the Assessing Officer’) vide order dated 31.12.2015 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.1,65,70,924/- after setting of brought forward losses of Rs.8,56,76,365/-. While doing so, the Assessing Officer made addition of Rs.3,27,68,625/- u/s 36(1)(iii), with which we are concerned. The factual background of the case is as under : ITA No.2076/PUN/2019 3 During the course of assessment proceedings, the Assessing Officer observed on verification of the Balance Sheet that the appellant company made interest free advance to its sister concern, namely, Darode Jog and Associates. The details of which are set out by the Assessing Officer in assessment order are as under :- Date of Advance Amount of Advance Purpose of Advance as stated by the assessee Present Status/status of adjacent project 13-09-2010 6,00,00,000 Advance paid for acquisition for new project near at the same location The transaction is not yet finalized and the advance is shown as receivable from the group concern, 10-03-2011 20,53,00,000 -do- -do- 30-02-2012 4,30,25,000 -do- -do- Total 30,83,25,000 4. Based on the above information, he formed an opinion that the interest bearing funds had been diverted to its sister concern for non-business purpose and, therefore, the proportionate interest should be disallowed u/s 36(1)(iii) of the Act. The assessee was called upon to explain the same. In response to the same, the assessee filed a detailed explanation explaining that the loans were given to the said sister concern for the business purpose to procure, aggregate the land for the business purpose of the appellant, no disallowance should be made. However, the Assessing Officer rejecting the above contention of the appellant held that the ITA No.2076/PUN/2019 4 proportionate disallowance of interest should be made, accordingly, made disallowance of Rs.3,27,68,625/- u/s 36(1)(iii) of the Act. 5. Being aggrieved by the above disallowance, an appeal was filed before the ld. CIT(A) contending that the loans and advances were given to Darode Jog and Associates for the purpose of procurement of the land and, therefore, in view of the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT, 158 Taxman 74 (SC), no disallowance of interest can be made. However, the ld. CIT(A) after discussing flow of the funds of assessee firm to another company, namely, ASK Investment Managers Pvt. Ltd. to the appellant firm and then to the Darode Jog and Associates to its partners and then again to the appellant company, the details of which are set out by him in the impugned order vide para 6.1.1 had come to the conclusion that the purpose of loan to Darode Jog and Associates was not for business, accordingly, confirmed the action of the Assessing Officer. 6. Being aggrieved, the appellant is in appeal before us in the present appeal. 7. It is submitted that the appellant had borrowed funds from ASK Investment Managers Pvt. Ltd. in the form allotment of debentures carrying interest at the rate of 10%, in terms of ITA No.2076/PUN/2019 5 agreement entered into by the appellant company with ASK Investment Managers Pvt. Ltd. which is placed at page no.77 of the Paper Book. Vide column no.12, it is prescribed that the funds shall be utilized in the manner agreed therein which indicates that sum of Rs.20.53 crores shall be used by the appellant company to make advance to Darode Jog and Associates for aggregating the lands. He also submitted that ultimately the said company could not procure any land and part of the funds were utilized, came back to the appellant and its promoters in the form of allotment of debentures. Thus, he submitted that the purpose of making the advance was only for the business purpose and, therefore, no disallowance of interest can be made in view of the law laid down by the Hon’ble Supreme Court in the case S.A. Builders Ltd. (supra). Without prejudice to the above, he submits that during the previous year relevant to the assessment year under consideration, no fresh advance was made by the appellant company to the said Darode Jog and Associates. In the earlier assessment year, i.e. A.Ys. 2011-12 and 2012-13, no disallowance of interest was made u/s 36(1)(iii) and, on principle of consistency, no disallowance can be made even for the year under consideration placing reliance on the decision of the Co-ordinate Bench of this Tribunal in the case of ITA No.2076/PUN/2019 6 Kumar Agro Products Private Limited vs. ITO vide ITA No.556/PUN/2018 for A.Y. 2014-15 dated 12.07.2021. 8. On the other hand, ld. CIT-DR placing reliance on the order of the ld. CIT(A) submits that the purpose of making advance to the sister concern is not for business purpose and, therefore, the Assessing Officer had rightly made addition u/s 36(1)(iii) of the Act and no interference in the order of the ld. CIT(A) is required. 9. We heard rival submissions and perused the material on record. Ground of appeal no.1 did not press during the course of hearing, therefore, the same is dismissed as not pressed. 10. The ground of appeal no.2: The issue that arises for consideration is whether on the facts and circumstances of the case, the disallowance of interest u/s 36(1)(iii) made by the Assessing Officer is warranted or not. Admittedly, the appellant company advanced certain sums to its concern, Darode Jog and Associates during the earlier previous years. Admittedly, no fresh advance was made during the previous year relevant to the assessment year under consideration. The appellant company had borrowed the funds from ASK Investment Managers Pvt. Ltd. i.e. third party in the form of allotment of debentures at 10%. The interest on borrowed funds had been claimed as deduction while computing the income of the ITA No.2076/PUN/2019 7 assessee company. The assessee company had asserted before the Assessing Officer and the ld. CIT(A) that the advance was made by the assessee company to its sister concern, namely, Darode Jog and Associates for the business purposes i.e. procurement of lands in terms of agreement entered into by it with ASK Investment Managers Pvt. Ltd.. It is also an admitted fact that the said Darode Jog and Associates had not procured any land. Thus, the purpose of advance of loan only for business purpose is established beyond the doubt. As held by the Hon’ble Bombay High Court in the case of Dhimant Hiralal Thakur vs. CIT while deciding the allowability of expenditure u/s 37(1) one has to examine the purpose of the expenditure from the perspective of persons, who made the expenditure. In the present case, the assessee company had discharged the onus of proving the expenditure incurred for the purpose of business purpose. It is different matter that the beneficiary of loans i.e. Darode Jog and Associates had not utilized the funds for the business purpose. Therefore, the ratio of the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. (supra) is squarely applicable to the facts of the present case. 11. Further, we find that admittedly during the previous year relevant to the assessment year under consideration, the appellant ITA No.2076/PUN/2019 8 firm had not advanced any loan to the Darode Jog and Associates and it is also an admitted fact that in the earlier years in which the loans were made, no disallowance of interest was made. Therefore, the ratio of the Hon’ble Karnataka High Court in the case of CIT vs. Sridev Enterprises, 59 Taxman 439 (Karnataka) and the Hon’ble Delhi High Court in the case of CIT vs. Givo Limited (ITA No.941/2010), wherein, it was held that for the purpose of disallowance of interest u/s 36(1)(iii) in case where the disallowance was not made in the earlier years, the opening balance of loans and advances to sister concern should not be considered for the purpose of disallowance of interest. Thus, in the light of the above discussion, we are of the considered opinion that no disallowance of interest is warranted in the facts of the present. Thus, the ground of appeal no.2 filed by the assessee stands allowed. 12. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced on this 02 nd day of February, 2023. Sd/- Sd/- (S. S. VISWANETHRA RAVI) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 02 nd February, 2023. Sujeet ITA No.2076/PUN/2019 9 आदेश कᳱ ᮧितिलिप अᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A)-1, Pune. 4. The Pr. CIT-1, Pune. 5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, “A” बᱶच, पुणे / DR, ITAT, “A” Bench, Pune. 6. गाडᭅ फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.