PADAM & CO., Jaipur V. ITO, Jaipur

ITA 252/JPR/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1905 (ITAT-JAIPUR)
• Duration Of Justice: 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 03-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY MALLIK CIT DHK
• Assessee Lawyers: LOKESH SHARMA
• Keywords: Capital asset; Depreciation; Business expenditure; Proportionate interest

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES (SMC), JAIPUR JH HKKXPAN] YS[KK LNL; ] DS LE{K BEFORE: SHRI BHAGCHAND, ACCOUNTANT MEMBER VK;DJ VIHY LA-@ ITA NO. 252/JP/2017 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2012-13 M/S PADAM & CO., B-31, RAJDHANI KRISHI MANDI, SIKAR ROAD, JAIPUR. CUKE VS. INCOME TAX OFFICER, WARD-3(2), JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AABFP 9888 L VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY : SHRI LOKESH SHARMA (CA) JKTLO DH VKSJ LS@ REVENUE BY : SHRI AJAY MALLIK (ADDL.CIT) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 15/09/2017 MN?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 10/11/2017 VKNS'K@ ORDER PER: BHAGCHAND, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE EMANATES FR OM THE ORDER OF THE LD. CIT(A)-I, JAIPUR DATED 24/01/2017 FOR THE A.Y. 2012-13, WHEREIN THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN CONFIRMING THE ADDITION. 2. THAT THERE WAS DIRECT NEXUS BETWEEN THE EXPENDIT URE CLAIMED AND SAVINGS ACHIEVED AND THEREFORE, NO DISA LLOWED WAS WARRANTED. ITA 252/JP/2017_ M/S PADAM & CO. VS ITO 2 3. THAT THE INTEREST ON CAPITAL BORROWED FOR THE PU RPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE U/S 36(1)(III). 2. IN ALL THE GROUNDS OF APPEAL, THERE IS ONLY ONE ISSUE INVOLVED, WHICH IS AGAINST CONFIRMATION OF DISALLOWANCE OF INTE REST OF RS. 2,37,675/-. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED AS A TRADER/COMMISSION AGENT OF KHAL. DURING THE YEAR UN DER CONSIDERATION, THE ASSESSEE HAS PURCHASED PLOT NO. 15-16 IN MOHIT NAGAR VISTAR, SARANA DOONGRI, JAIPUR ADMEASURING 611.11+850.82= 1 461-53 SQ. YARDS FOR RS. 31,68,995/-. THE ASSESSING OFFICER DI SALLOWED THE INTEREST ON THE BORROWED CAPITAL ON RS. 31,68,995/- FOR SIX M ONTHS TOTALING TO RS. 2,37,675/-. 4. THE LD. CIT(A) HAS CONFIRMED THE DISALLOWANCE BY HO LDING AS UNDER: 3.1.2 DETERMINATION (I) THE BRIEF FACTS OF THE CASE ARE THAT THE APPELL ANT WAS ENGAGED AS A TRADER/COMMISSION AGENT OF KHAL. DURING THE YEAR UN DER CONSIDERATION, IT HAS PURCHASED PLOT NO. 15-16 IN M OHIT NAGAR VISTAR, SARANA DOONGRI, JAIPUR ADMEASURING (611.11+ 850.42) 1461.53 SQ YARDS FOR RS 31,68,995/-. DURING THE ASSESSMENT PRO CEEDINGS, IT WAS OBSERVED BY THE AO THAT THE APPELLANT HAS OBTAINED NET FRESH DEPOSIT OF RS. 1,28,23,673/-AND HAS PAID NET INTEREST OF RS . 34,67,957/-. IT WAS ITA 252/JP/2017_ M/S PADAM & CO. VS ITO 3 CONCLUDED BY THE AO THAT THE CAPITAL BORROWED TO TH E EXTENT OF RS. 31,68,995/- WERE USED FOR ACQUIRING THE CAPITAL ASS ETS WHICH WERE NOT PUT TO USE DURING THE YEAR UNDER CONSIDERATION AND HENCE THE AO HAS DISALLOWED PROPORTIONATE INTEREST OF RS. 2,37,675/- AND HAS MADE ADDITION OF THE SAME TO THE INCOME OF THE APPELLANT . (II) DURING THE APPELLATE PROCEEDINGS, IT WAS CLAIM ED BY THE APPELLANT THAT THE PLOTS HAVE BEEN ACQUIRED FOR CONSTRUCTING GO- D OWNS THEREON CONSIDERING BUSINESS EXPANSION AND FOR ENSURING BET TER FUND UTILIZATION CUM SAVINGS IN EXPENSES. THE APPELLANT HAD ACHIEVED TOTAL TURNOVER OF RS 10,08,23,511/- (RS 11,81,03,048/- IN PY) YIELDING G. P. RATE OF 5.96%(3.15% IN PY). THE TRADING RESULTS WER E BETTER AND NET PROFIT FOR THE YEAR WAS RS 4,82,205/- ( RS 4,00,269 IN PY) DESPITE OF INCREASE IN INTEREST COST TO RS 34,67,957/- IN COMP ARISON TO RS. 22,91,794 IN PY, WHICH MEANS THE INTEREST BEARING F UNDS WERE EFFECTIVELY UTILIZED BY IT IN THE PROMOTION OF BUSI NESS. IT WAS FURTHER STATED THAT THE GO-DOWN RENT HAS INCREASED TO RS 4, 38,478/- FROM RS 3,46,797/- IN THE PREVIOUS YEAR AND BUYING THE LAND FOR EXPANSION OF BUSINESS AND FUTURE SAVINGS IN GO-DOWN RENT WAS ULT IMATELY HAVING DIRECT NEXUS WITH THE BUSINESS EXPENDITURE AND IT I S EXPEDITIOUS AND DIRECTLY INCIDENTAL TO THE BUSINESS SO THE SAME SHO ULD BE ALLOWED. IT WAS ANOTHER CONTENTION THAT THE AO HAS NOT ESTABLIS HED THAT THE BORROWED FUNDS HAVE BEEN USED FOR PURCHASE OF THESE PLOTS. (III) IT WAS ALSO SUBMITTED THAT AS PER SECTION 36( 1) (III) OF THE ACT, THE DEDUCTION OF INTEREST PAID IN RESPECT OF CAPITAL BO RROWED FOR THE PURPOSE OF BUSINESS SHALL BE ALLOWED WHILE COMPUTIN G THE INCOME OF THE ASSESSEE. HERE THE RELEVANT WORDING OF THE ACT IS FOR THE PURPOSE OF BUSINESS AND THE ENTIRE FUNDS ON WHICH INTEREST WERE PAID IS DIRECTLY AND INCIDENTALLY INFUSED FOR BUSINESS PURPOSE. IT I S WELL ESTABLISHED ITA 252/JP/2017_ M/S PADAM & CO. VS ITO 4 PROPOSITION THAT WHEN THE REVENUE FAILS TO ESTABLIS H ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE FUNDS DIVERTED/L ENT, ANY DENIAL OF ALLOWANCES OF INTEREST UNDER SECTION 36[ 1 ] (II I) IS NOT PERMISSIBLE. IT WAS THE CONTENTION OF THE APPELLANT THAT THE PROVIS O TO SECTION 36(1) (III) WAS AMENDED W.E.F. 1.4.2016 BY DELETING THE W ORDS 'FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION AND IN THE RELE VANT ASSESSMENT YEAR I.E. AY 12-13, BEING PRIOR TO AMENDMENT EFFECTIVE F ROM AY 2016-17, THE DEDUCTION WAS ALLOWABLE FOR EXTENSION OF BUSINE SS & PROFESSION. IN SUPPORT OF ITS CONTENTIONS, THE APPELLANT HAS RELIE D UPON A NUMBER OF JUDICIAL PRONOUNCEMENTS. (IV) I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE APPELLANT, ASSESSMENT ORDER AND THE MATERIAL PLACED ON RECORD. I HAVE ALS O CONSIDERED THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLAN T AND FOUND THEM TO BE DISTINGUISHABLE ON FACTS. IT IS NOTED THAT TH E APPELLANT WAS ENGAGED AS A TRADER/COMMISSION AGENT OF KHAL FOR WH ICH ITS REQUIRED GO-DOWNS AND LOOKING TO THE INCREASE IN GODOWN RENT S, IT PURCHASED TWO PLOTS FOR THE PURPOSES OF EXTENSION OF ITS BUSI NESS. IT WOULD BE APPROPRIATE TO REPRODUCE THE PROVISIONS OF SECTION 36( 1) (III) OF THE ACT AS UNDER: 36(1) (III) THE AMOUNT OF THE INTEREST PAID IN RESP ECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION : PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTI NG BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT ); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BO RROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE , SHALL NOT BE ALLOWED AS DEDUCTION.' (V) IT IS CLEAR FROM THE PROVISO TO SECTION 36(1)(I II) OF THE ACT AS REPRODUCED ABOVE THAT INTEREST PAID IN RESPECT OF AN ASSET REQ UIRED FOR EXTENSION OF EXISTING BUSINESS CANNOT BE ALLOWED TILL THE DAT E SUCH ASSET WAS PUT ITA 252/JP/2017_ M/S PADAM & CO. VS ITO 5 TO USE. IT IS EVIDENT FROM THE DEPRECIATION CHART F ILED BY THE APPELLANT THAT THERE WAS NO ADDITION TO THESE PLOTS IN TERMS OF BOUNDARY WALL ETC. AND THE APPELLANT HAS INCURRED A SUM OF RS. 16 ,01,000/- THEREOF IN THE FY 2012-13 I.E. THE PLOTS PURCHASED BY THE APPE LLANT COULD NOT BE USED FOR THE PURPOSES OF THE BUSINESS OF THE APPELL ANT DURING THE YEAR UNDER CONSIDERATION. IT MAY BE MENTIONED THAT IN TH E CASE OF BREEZE CONSTRUCTIONS (P.) LTD. VS ITO [2012] 21 TAXMANN.CO M 114 (DELHI), IT WAS HELD BY THE HONBLE ITAT THAT: 'A READING OF SECTION 36(1) (HI) MAKES IT AMPLY CLEAR THAT INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN A SSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION; FOR ANY PERIOD BEG INNING FROM THE DOTE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF T HE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. BY IMPLICATION THIS PROVISO IS ALSO APPLICABLE WHEN AS SETS ARE ACQUIRED FOR NEW BUSINESS. IF THE PROVISO IS INTERPRETED TO SIGNIFY THAT THE SAME WILL NOT BE APPLICABLE TO SUCH ACQUISITION OF ASSETS, IT WILL D EFEAT THE WHOLE PURPOSE OF THE PROVISO. THUS, THE ASSESSEE'S PLEA THAT PROVISO IS NOT APPLICABLE, IS NOT SUSTAINABLE. IN THE BACKGROUND OF THE AFORESAID DIS CUSSION, THE COMMISSIONER (APPEALS) HAS PASSED A REASONABLE ORDE R WHICH DOES NOT NEED ANY INTERFERENCE AND, ACCORDINGLY, THE SAME WAS TO BE UPHELD. AS REGARDS THE ASSESSEE'S ALTERNATIVE SUBMISSION THE EXPENDITU RE INVOLVED BE ALLOWED TO BE CAPITALIZED, THE SAME IS ACCEPTABLE. HENCE, THE DIS ALLOWED EXPENDITURE BE ALLOWED TO BE CAPITALIZED. [PARA 7.4]' (VI) IT IS ALSO OBSERVED FROM THE MATERIAL PLACED ON REC ORD THAT AS ON 31.03.2012, THE PARTNER'S CAPITAL WAS TO THE TUNE O F RS. 2,60,742/- ONLY AND THE UNSECURED LOANS WERE TO THE TUNE OF RS . 3,72,38,259/- WHICH HAS INCREASED FROM RS. 2,48,69,710/- AS ON 31 .03.2011. IN VIEW OF THESE FACTS, IT CAN BE CONCLUDED THAT THE INVEST MENT IN THE PLOTS TO THE TUNE OF RS. 31,68,995/- WAS MADE OUT OF THE BOR ROWED FUNDS I.E. THERE IS A DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT IN PLOTS. THE EXPENDITURE MAY BE REQUIRED AS A COMMERC IAL EXPEDIENCY IS OF NO RELEVANCE HERE AS A CAPITAL ASSET WAS ACQUIRE D BY THE APPELLANT, WHICH WAS NOT PUT TO USE DURING THE- YEAR UNDER CON SIDERATION. ITA 252/JP/2017_ M/S PADAM & CO. VS ITO 6 (VII) THUS, IN VIEW OF THE ABOVE DISCUSSION AND LOO KING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, IT IS HELD THAT THE AO W AS JUSTIFIED IN MAKING DISALLOWANCE OF RS. 2,37,675/- OUT OF THE IN TEREST EXPENSES CLAIMED BY THE APPELLANT. HENCE, THIS GROUND OF APP EAL IS HEREBY REJECTED. 5. I HAVE HEARD BOTH THE SIDES ON THIS ISSUE. FROM THE FACTS OF THE CASE, IT IS CLEAR THAT THE ASSESSEE HAS ACHIEVED TH E TURNOVER OF RS. 10,08,23,511/- AND THE DECLARED THE GROSS PROFIT RA TE @ 5.96%, WHICH IS HIGHER THAN THE IMMEDIATE PRECEDING YEAR WHEN IT WAS 3.15% ONLY. THE PURCHASE OF THE PLOT WAS TO EXPAND THE BUSINESS O F THE ASSESSEE TO MAKE GO-DOWN AS THE ASSESSEE WAS PAYING RENT ON THE G O-DOWNS. THUS, THERE WAS A DIRECT NEXUS OF THIS EXPENDITURE WIT H THE BUSINESS OF THE ASSESSEE. SINCE THIS EXPENDITURE WAS DIRECTLY RE LATED TO THE BUSINESS OF THE ASSESSEE, THE INTEREST PAID ON THE BORROWED MONEY CANNOT BE DISALLOWED. THE LD. CIT(A)S OBSERVATION THA T THESE PLOTS WERE NOT UTILIZED FOR THE PURPOSE OF BUSINESS IS MIS PLACED. THE P&L ACCOUNT OF ASSESSEE SHOWS THAT THE ASSESSEE WAS PAYIN G GO-DOWN RENT OF RS. 6,90,366/- FOR THE YEAR UNDER CONSIDERATION F.Y 2012-13. SUBSEQUENTLY IT WAS REDUCED TO RS. 3,29,264/- (F.Y 2 013-14), WHICH IS EVIDENT FROM PAGE NO. 13 AND 15 OF THE PAPER BOOK R ESPECTIVELY. FURTHER THE FIXED ASSETS SCHEDULE ALSO SHOWS THAT TH E ASSESSEE HAS ITA 252/JP/2017_ M/S PADAM & CO. VS ITO 7 SPENT ON CONSTRUCTION RS. 16,01,000/- ON THESE PLOT S DURING THE YEAR UNDER CONSIDERATION. THESE PLOTS ARE BEING UTILIZED FOR THE BUSINESS PURPOSES. THE DISALLOWANCE OF INTEREST ON BORROWED MO NEY WAS NOT JUSTIFIED AS THE MONEY WAS UTILIZED FOR BUSINESS PUR POSES ONLY. THEREFORE, I ALLOW THE APPEAL OF THE ASSESSEE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10/11/2017. SD/- HKKXPAN (BHAGCHAND) YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 10 TH NOVEMBER, 2017 *RANJAN VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE APPELLANT- M/S PADAM & CO., SIKAR ROAD, JAIPUR. 2. IZR;FKHZ @ THE RESPONDENT- THE WARD-3(2), JAIPUR. 3. VK;DJ VK;QDR @ CIT 4. VK;DJ VK;QDRVIHY @ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (ITA NO. 252/JP/2017) VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR