M/S. AHUJA PLATINUM PROPERTIES P. LTD, MUMBAI V. THE JCIT WD 15(2), MUMBAI

ITA 4723/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49377 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 15-06-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 27-06-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIVAS RAO
• Assessee Lawyers: REEPAL G TRALSHAWALA
• Keywords: Transfer pricing; Business expenditure; Avoidance of tax; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.4723/MUM/2007(A.Y.2003-04) AHUJA PLATINUM PROPERTIES P. LTD.,A/1, RAJPIPLA, GR.FLOOR, OPP. STANDARD CHARTERED BANK, LINKING ROAD, SANTACRUZ (W), MUMBAI. PAN: AAECA 4138 (APPELLANT) VS. THE JCIT, WD. 15(2), ROOM NO.113, MATRU MANDIR, TARDEO, MUMBAI 07. (RESPONDENT) ITA NO.4558/MUM/2007(A.Y. 2003-04) THE ACIT, RG. 9(1), ROOM NO.223, AAYKAR BHAVAN, MUMBAI 20. (APPELLANT) VS. AHUJA PLATINUM PROPERTIES P. LTD.,A/1, RAJPIPLA, GR.FLOOR, OPP. STANDARD CHARTERED BANK, LINKING ROAD, SANTACRUZ (W), MUMBAI. PAN: AAECA 4138 (RESPONDENT) ASSESSEE BY : SHRI REEPAL G. TRALSHAWALA REVENUE BY : SHRI GOLI SRINIVAS RAO ORDER PER N.V.VASUDEVAN, J.M ITA NO.4723/M/07 IS AN APPEAL BY THE ASSESSEE WHI LE ITA NO.4558/M/07 IS AN APPEAL BY THE REVENUE. BOTH THE SE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 11/4/2007 OF CIT(A)XV, MUMB AI RELATING TO ASSESSMENT YEAR 2003-04. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE LEAR NED CIT(A) ERRED CONFIRMING IN HOLDING DISALLOWANCE OF RS.52,02,322 /- AS RELATABLE INTEREST U/S. 36(1)(III) OF THE I.T. ACT 1961 TO IN TEREST FREE ADVANCES TO SISTER CONCERNS WITHOUT APPRECIATION OF THE FACT TH AT THE WHOLE OF THE ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 2 IMPUGNED ADVANCES OF RS.4,16,48,575/- WAS OUT OF TH E INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT. 2. THIS GROUND CAN BE CONVENIENTLY DECIDED TOGETHER WITH GROUND NO.4 RAISED BY THE REVENUE IN ITS APPEAL, WHICH READS AS FOLLOWS: 4. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE OUT OF INTEREST PAID TO M/S. AHUJA PROPERTIES P. LTD. BY HOLDING THAT DEBIT BALA NCE OF AMOUNT OF RS. 1,27,46,781/- CANNOT BE CONSIDERED AS LOANS AND ADV ANCES DIVERTED FOR NON-BUSINESS PURPOSE AND IS TO BE EXCLUDED FROM THE RS. 4,16,48,575/- FOR THE PURPOSE OF DETERMINING THE IN TEREST DISALLOWABLE. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS AS PROPERTY DEVELOPER. THE ASSESSEE COMPANY CAME INTO EXISTEN CE WITH EFFECT FROM 26.03.2003 AS A PART IX COMPANY UNDER THE COMPANIES ACT, 1956 I.E. BY CONVERSION OF M/S. AHUJA PLATINUM, A PARTNERSHIP FI RM INTO PART IX COMPANY VIDE CERTIFICATE OF INCORPORATION DATED 26.03.2003 ISSUED BY THE ROC. BY VIRTUE OF THIS, ALL THE ASSETS AND ALL THE LIABILIT IES OF THE ERSTWHILE FIRM BECAME THE ASSETS AND LIABILITIES OF THE ASSESSEE COMPANY. SHARES WERE ALLOTTED TO THE PARTNERS OF THE ERSTWHILE FIRM IN PROPORTION OF THEIR CAPITALS IN THE SAID FIRM IN ORDER TO FULFILL THE CONDITIONS AS HAVE BEE N LAID DOWN IN SECTION 47 (XIII) R.W.S. 72A(6) OF THE INCOME TAX ACT, 1961 (T HE ACT). THE ASSESSEE FILED A RETURN OF INCOME FOR A.Y 2003-04 DECLARING A LOSS OF RS. 2,94,95,379/-. IT IS NOT IN DISPUTE THAT THE ASSESSEE FOLLOWS PROJECT COMPLETION METHOD OF ACCOUNTING FOR ITS REVENUE IN RESPECT OF THE VARIOU S PROJECTS THAT HAD UNDERTAKEN TO CONSTRUCT/DEVELOPED. IN THE PROFIT A ND LOSS ACCOUNT THE ASSESSEE HAS SHOWN SALES IN RESPECT OF TWO OF ITS P ROJECTS, VIZ. ASHIRWAD CHSL AND VIJAYDEEP CHSL. THE OTHER ON GOING PROJEC TS ARE THOSE OF PEOPLES COSMOPOLITAN CHSL, AMBERCFOFT CHSL, ANN ABODE CHSL, CHARDHAM CHSL AND SEETA GEETA CHSL. THESE PROJECTS ARE REFLECTED IN THE BALANCE SHEET AS WORK IN PROGRESS. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 3 4. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSE SSING OFFICER NOTICED THAT THE ASSESSEE HAD BORROWED FUNDS ON WHICH IT P AID INTEREST AND WHICH WAS CLAIMED AS EXPENSES IN THE P&L ACCOUNT. THE AS SESSING OFFICER ALSO NOTICED THAT THE ASSESSEE HAD GIVEN INTEREST FREE A DVANCES TO ITS SISTER CONCERN AND OTHERS. THE ASSESSING OFFICER THEREFOR E, CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE INTERES T DEBITED IN THE P&L ACCOUNT SHOULD NOT BE DISALLOWED ON THE GROUND THAT BORROWED FUNDS ON WHICH INTEREST PAID WERE NOT UTILIZED FOR THE PURPO SE OF BUSINESS BUT WERE GIVEN AS INTEREST FREE LOANS TO SISTER CONCERN. TH E ASSESSEE IN REPLY SUBMITTED THAT IT WAS IN POSSESSION OF INTEREST FRE E FUNDS TO THE TUNE OF RS. 12,88,64,910/- AND THAT THE INTEREST FREE ADVANCES GIVEN BY THE ASSESSEE WERE ONLY RS.4,16,48,576/-. THE ASSESSEE THUS SUBM ITTED THAT IT CAN BE PRESUMED THAT THE INTEREST FREE ADVANCES WERE GIVEN BY IT TO THE SISTER CONCERN OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO DISALLOWANCE OF INTEREST EXPENSES CAN BE MADE ON THE PRESUMPTION THAT FUNDS ON WHICH INTEREST WAS PAID WAS GIVEN AS INTEREST FREE LOANS TO THE SISTER CONCERN. THE ASSESSING OFFICER HOWEVER, WAS OF THE VIEW THAT THAT THERE WA S NO NEED FOR THE ASSESSEE TO HAVE BORROWED FUNDS WHEN IT HAD SUFFICIENT OWN F UNDS. HE ALSO HELD THAT THE NEXUS BETWEEN INTEREST FREE FUNDS AND INTEREST FREE LOANS TO THE SISTER CONCERN WERE NOT ESTABLISHED BY THE ASSESSEE. HE, THEREFORE, CONCLUDED THAT THE ASSESSEE HAS FAILED TO PROVE THAT BORROWED FUND S ON WHICH INTEREST WAS PAID HAVE NOT BEEN UTILIZED FOR THE PURPOSE OF BUSI NESS. THEREAFTER THE ASSESSING OFFICER ADOPTED 18% AS AVERAGE INTEREST R ATE AND DISALLOWED A SUM OF RS.74,96,744/-(18% INTEREST X RS.4,16,48,576/- BEING TOTAL INTEREST FREE LOANS TO THE SISTER CONCERN) OUT OF THE TOTAL INTER EST EXPENSES OF RS. 2,17,87,258/- DEBITED IN THE P&L ACCOUNT AS INTERES T EXPENSES BY THE ASSESSEE. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 4 5. THE ASSESSING OFFICER ALSO RELIED ON CERTAIN JUD ICIAL PRONOUNCEMENTS FOR THE PROPOSITION THAT THE ASSESSEE HAS TO ESTABL ISH UTILIZATION OF BORROWED FUNDS FOR THE PURPOSE OF BUSINESS TO CLAIM INTEREST EXPENSES ON BORROWED CAPITAL AS DEDUCTION. 6. THE BREAK-UP OF THE NON-INTEREST BEARING LOANS GIVEN BY THE ASSESSEE WAS AS FOLLOWS: AHUJA PLATINUM PROPERTIES PVT. LTD STATEMENT OF FUND, LOANS & ADVANCES GIVEN AS ON 31 ST MARCH 2003 PARTICULARS CLOSING AMOUNT RS. NON-INTEREST BEARING FUNDS GROUP COS/ASSOCIATES AHUJA TRADERS 400,000.00 AHUJA HOUSING PROJECTS PVT. LTD 2,570,473.65 SHREE AHUJA PROPERTIES PVT. LTD. 12,746,781.00 BIHARI B AHUJA 150,000.00 GOUTAM AHUJA 10,000.00 KOMAL AHUJA 10,000.00 ANDANA J AHUJA 10,000.00 TOTAL (A) 15,897,254.65 OTHERS ALOK KUMAR 500,000.00 ARUNKUMAR JAMNADAS ASHAR 4,161,042.00 EAST & WEST BUILDERS 168,162.00 KUNAL JAIN 250,000.00 M K BHOJWANI 6,522,500.00 PRAKASH J BAROT 1,033,880.00 PISHU TOURS & TRAVELS 500,000.00 RAJU N. PUNJABI 200,000.00 SARANGA AGARWAL 3,463,451.00 SKYLINE CONSTRUCTIONS CO. 4,758,120.00 VINOD PUNJABI 600,000.00 WELDONSPARES CORPORATION 1,800,000.00 OTHERS 1,794,166.00 TOTAL (B) 25,751,321.00 TOTAL (A) +(B) 41,648,575.65 ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 5 7. THE ADMITTED FACTS WITH REGARD TO AVAILABILITY O F INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AS ON 31/3/2003 IS AS F OLLOWS: AHUJA PLATINUM PROPERTIES PVT. LTD. INTEREST FREE LOANS & ADVANCES (LIABILITIES) AS ON 3 1 ST MAR.2003 PARTICULARS CLOSING AMT. RS. AVERAGE AMT. RS. GROUP COS/ASSOCIATES GOPAL CONSULTANCY SERVICES P. LTD 12,321,027.88 4,108,439.00 AHUJA CREATIVE CONSTRUCTIONS PVT. LTD. 41,82 0.00 - GOPAL B AHUJA 15,914,738.54 129,685.00 JAGDISH B AHUJA 3,926,289.30 64,542.00 KEEPSADE PROPERTIES PVT. LTD 70,499,234.24 8 00,729.00 OTHERS ARUN KESWANI 25,000.00 - BHAGWAN DAS ADANI 5,400,000.00 5,400,000.00 KARAN SINGH 300,000.00 101,918.00 PARESH AHUJA AND MANISH AHUJA 3,900,000.00 3,90 0,000.00 KISHAN KEWLANI 3,300,000.00 3,166,301.00 HU NAGPAL 2,049,000.00 1,329,822.00 MAHESH NAGPAL 2,802,950.00 1,535,024.00 BHAVNA NAGPAL 1,302,950.00 856,942.00 AKRAND JOSHI 100,000.00 16,438.00 SURESH AHUJA AND RACHNA AHUJA 3,425,000.00 3, 443,767.00 SURESH HOTCHAND 3,056,900.00 1,480,528.00 VISHAL MAKHIJA 500,000.00 46,575.00 TOTAL 128,864,909.00 26,380,710.00 RATE OF INTEREST 19.50% 5,144,238.45 ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 6 8. ON APPEAL BY THE ASSESSEE, THE CIT(A) HELD THAT THERE WAS FACTUALLY INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. H E WAS HOWEVER OF THE VIEW THAT IT WAS IMPOSSIBLE TO ESTABLISH NEXUS BETWEEN T HE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND THE INTEREST FREE L OAN GIVEN TO THE SISTER CONCERNS. IN SUCH AN EVENT HE WAS OF THE VIEW THAT EVEN IF INTEREST FREE FUNDS WERE AVAILABLE, THE INTEREST FREE LOANS TO SI STER CONCERN WILL ULTIMATELY RESULT IN DEPLETION OF FUNDS AVAILABLE FOR BUSINESS AND THEY WOULD STAND SUBSTITUTED BY INTEREST FREE FUNDS AVAILABLE WITH T HE ASSESSEE AND THEREFORE THERE WAS EVERY JUSTIFICATION FOR DISALLOWING INTER EST EXPENSES U/S.36(1)(III) OF THE ACT. THE CIT(A) RELIED ON SOME JUDICIAL PRONO UNCEMENTS IN SUPPORT OF THE ABOVE CONCLUSION. WE WILL DEAL WITH THEM A LIT TLE LATER. THE CIT(A) THEREAFTER QUANTIFIED THE DISALLOWANCE OF INTEREST EXPENSES. THE CIT(A) AFTER NOTICING THE BREAK-UP OF INTEREST FREE LOANS GIVEN TO THE SISTER CONCERNS EXAMINED EACH OF THE LOANS. THE SAME IS AS FOLLOWS . 1. INTEREST FREE FUNDS BREAK-UP MADE AS UNDER: (A) RS.83,89,733/- IN RESPECT OF 3 PARTIES I.E. E AST & WEST BUILDERS, SKYLAND CONST. & SARANGA AGARWAL. (B) RS.25,70,473/- IN RESPECT OF AHUJA HOUSING PROJ ECTS PVT. LTD. DEBIT BALANCE IN THE PARTNERS ACCOUNT PRIOR TO THE CONVERSION. (C) RS. 1,27,46,781/- IN RESPECT OF SHREE AHUJA PRO PERTIES P. LTD. DEBIT BALANCE DUE TO J/V. PASSED ON 31/3/2003 TOWAR DS RECOVERY OF PROJECT PROFITS ASHIRWAD PROJECT. (D) RS.1,46,89,194/- ADVANCED INTEREST FREE TO SIST ER CONCERN OUT OF INTEREST FREE FUNDS RECEIVED AND HAVING DIRECT NEXU S. (E) BALANCE RS. 32,52,394/- OUT OF WHICH, INTEREST FREE FUNDS ADVANCED TO OTHERS FROM INTEREST FREE FUNDS AVAILAB LE RS.14,38,228/- (THIS AMOUNT PLUS RS. 1,46,89,194/- TOTALS TO RS.1,61,27,422/- AS TAKEN IN THE CHART IN PAPER BOO K PG.82) & THUS BALANCE AMOUNT REMAINS RS.18,14,166/- ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 7 2. WITH RESPECT TO A ABOVE, THE CIT(A) FOUND THAT THE ASSESSEE HAD A RUNNING ACCOUNT WITH THESE PARTIES AND THE CLAIM OF THE ASSESSEE THAT THESE CANNOT BE TERMED AS INTEREST FREE LOANS WAS N EGATIVED BY THE CIT(A). THE CIT(A) HELD THAT OUTSTANDING AMOUNT IN THESE ACCOUNTS TAKES CHARACTER OF PRINCIPAL AMOUNT OF LOAN ON WHIC H NO INTEREST IS CHARGED, HENCE, DISALLOWANCE OUT OF INTEREST WAS PR OPER. 3. WITH RESPECT TO B, THE CIT(A) FOUND THAT THE SAM E WAS IN THE NATURE OF LOAN OR ADVANCE AND DISALLOWANCE OF INTEREST. T HE ASSESSEE PLEADED THAT THE SUM REPRESENTED LOSS OF THE ERSTWHILE FIRM DEBITED IN THE PARTNERS CAPITAL ACCOUNT AND THEREFORE IT CANNOT B E SAID TO BE LOAN OR ADVANCE. THE CIT(A) THEREFORE UPHELD THE DISALLOWAN CE. 4. WITH RESPECT TO C ABOVE, THE CIT(A) ACCEPTED TH E PLEA OF THE ASSESSEE THAT THE SAID SUM IS NOT LOAN OR ADVANCE B UT PROFIT RECEIVABLE IN PROJECT FOR WHICH J/V. WAS PASSED. THE DISALLOW ANCE OF INTEREST TO THIS EXTEND WAS DELETED BY THE CIT(A). 5. WITH RESPECT TO D&E ABOVE NEXUS OF INTEREST FRE E FUNDS ADVANCED TO SISTER CONCERNS OUT OF INTEREST FREE FUNDS RECEIVED WAS NOT ESTABLISHED AND THEREFORE, HE HELD THAT INTEREST BEARING FUNDS WERE USED FOR NON- BUSINESS PURPOSES. HE THEREFORE UPHELD THE DISALLO WANCE OF INTEREST TO THAT EXTENT. 9. AGGRIEVED BY THE ORDER OF THE CIT(A) SUSTAINING THE DISALLOWANCE OF INTEREST EXPENSES TO THE EXTENT OF RS.52,02,322/- T HE ASSESSEE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE OF INTEREST IN RESPECT OF INTEREST FREE ADVANCES TO M/S. AHUJA HOUSING PROJECT PVT. LTD. THE REVENUE HA S RAISED GROUND NO.4 BEFORE THE TRIBUNAL. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 8 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE AVAILA BILITY OF INTEREST FREE FUNDS AS GIVEN IN THE EARLIER PART OF THIS ORDER IS NOT IN DISPUTE. THE ASSESSING OFFICER HAS PROCEEDED ON THE ASSUMPTION T HAT THE ASSESSEE DID NOT ESTABLISH THE NEXUS BETWEEN THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND INTEREST FREE LOANS GIVEN TO THE SISTE R CONCERN. IN THIS REGARD WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD., 313 ITR 340 (BOM) HAD AN OCCASION TO EXAMINE THE QUESTION WITH REGARD TO DISALLOWANCE OF INTEREST, W HERE THE ASSESSEE IS IN POSSESSION OF BOTH INTEREST FREE FUNDS AS WELL AS B ORROWED FUNDS ON WHICH INTEREST WAS PAID BY THE ASSESSEE. THE HONBLE BOM BAY HIGH COURT HELD THAT IF THERE ARE INTEREST FREE FUNDS AVAILABLE TO AN AS SESSEE SUFFICIENT TO MEET ITS INVESTMENT (IN THE PRESENT CASE INVESTMENT HAVE TO BE READ AS INTEREST FREE LOANS TO SISTER CONCERN) AND AT THE SAME TIME ASSES SEE HAD RAISED LOANS IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE. IN THE PRESENT CASE WE HAVE ALREADY SEE N THAT THE TOTAL INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS ABOUT 12 .88 CRORES, THE TOTAL INTEREST FREE FUNDS ADVANCED TO THE SISTER CONCERN AND OTHERS WERE ONLY RS. 4.16 CRORES. THUS PRIMA FACIE INTEREST FREE FUNDS AVAILABLE WERE MUCH MORE THAN THE INTEREST FREE ADVANCES GIVEN BY THE ASSESS EE. IN SUCH CIRCUMSTANCES THERE IS NO BASIS FOR THE ASSESSING O FFICER TO PRESUME THAT INTEREST BEARING FUNDS WERE ADVANCED TO THE SISTER CONCERN AS INTEREST FREE LOANS. AS LAID DOWN BY HONBLE BOMBAY HIGH COURT T HE PRESUMPTION SHOULD BE THAT THE INTEREST FREE FUNDS WERE USED TO GIVE T HE INTEREST FREE LOANS TO THE SISTER CONCERN. ON THIS GROUND, WE ARE OF THE VIEW THAT THE DISALLOWANCE SUSTAINED BY THE CIT(A) SHOULD ALSO BE DELETED. TH E DECISION RELIED UPON BY THE CIT(A) TO SUSTAIN DISALLOWANCE ARE NO LONGER AP PLICABLE. 1. CIT VS. ABHISHEK IND. LTD. 286 ITR 1 (P&H) RELI ED BY CIT(A) HAS NOW BEEN BY THE HONBLE SUPREME COURT DECISION IN M UNJAL SALES CORP. 298 ITR 298(SC) ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 9 2. THE DECISION OF THE HONBLE BOMBAY HIGH COURT I N THE CASE OF RELIANCE POWER UTILITIES & POWER LTD. (SUPRA) HAS B EEN CONSISTENTLY FOLLOWED BY THE VARIOUS BENCHES OF THE ITAT IN THE FOLLOWING ORDERS DCIT VS. UK PAINTS (INDIA) LTD. 4 ITR (TRIB) 455(DE L) MADHU INDUSTRIES LTD. ITO 132 TTJ 233 (AHD) - MANOHAR DA TTATRAYA SIRSAVKAR VS. ITO, ITA NO.6154/M/09, A.Y. 2006-07, BENCH G ORDER DATED 17/9/10. ACCELERATED FREEZE DRYING CO. LTD. V S. DCIT (2009) 180 TAXMAN 68 (COCH)(MAG) 11. AS FAR AS THE GRIEVANCE PROJECTED BY THE REVEN UE IN ITS APPEAL IS CONCERNED THE SUM OF RS. 25,70,473/- WHICH WAS EXC ESS WITHDRAWAL BY THE PARTNERS OF THE FIRM AHUJA PLATINUM, WHICH LATER ON WAS CONVERTED INTO A PRIVATE LIMITED COMPANY, WHICH IS THE ASSESSEE IN T HIS APPEAL. THE CIT(A) HAS HELD THAT THIS WITHDRAWAL WILL ONLY GO TO DEPL ETE THE BUSINESS FUNDS AND CANNOT BE TREATED AS LOANS OR ADVANCES. WITHOUT GO ING INTO THIS ASPECT, WE ARE OF THE VIEW THAT IN THE LIGHT OF THE AVAILABILI TY OF SUFFICIENT INTEREST FREE FUNDS THIS DISALLOWANCE WAS ALSO NOT PROPER AND WAS RIGHTLY DELETED BY THE CIT(A). 12. THE LD. COUNSEL FOR THE ASSESSEE ALSO ADDRESSED ARGUMENTS WITH REGARD TO INDIVIDUAL INTEREST FREE LOANS WHICH WERE CONSID ERED FOR MAKING PROPORTIONATE DISALLOWANCE BY THE ASSESSING OFFICER . IN THE LIGHT OF THE VIEW, WHICH WE HAVE TAKEN, FOLLOWING DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILTIES & POWER LTD. (SUPR A), WE HAVE NOT GONE INTO THESE SUBMISSIONS. 13. IN THE RESULT, GROUND NO.1 RAISED BY THE ASSESS EE IS ALLOWED WHILE GROUND NO.4 RAISED BY THE REVENUE IS DISMISSED. 14. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOL LOWS: ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 10 IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN LAW , THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCES AGGREGATING T O RS.58,50,296/- MADE BY THE LEARNED AO ON GROUND THAT THEY REPRESEN TED REVERSAL ENTRIES WITHOUT APPRECIATING THE EXPLANATION OFFERE D BY APPELLANT. 15. ON GOING THROUGH THE DETAILS FURNISHED BY THE ASSESSEE, THE AO NOTICED THAT THE ASSESSEE HAD MADE PROVISION FOR CE RTAIN EXPENSES AND ON THE BASIS OF SUCH PROVISION, THE ASSESSEE HAD CLAIM ED DEDUCTION OF CERTAIN EXPENSES IN THE PROFIT AND LOSS ACCOUNT. THE PARTI CULARS IN THIS REGARD WERE AS FOLLOWS: S.NO. PARTICULARS AMOUNT DEBITED TO COST (RS) AMOUNT REVERSED (RS.) 1. PROVISION OF EXPENSES(FOR ASHIRWAD) 6,42 ,408/- 2,60,224/- 2. EARNEST MONEY DEPOSITS(VIJAYDEEP) 15,00,000 /- 15,00,000/- 3. OUT OF ALTERNATIVE ACCOMMODATION (VIJAYDEEP) 42,55,027/- 40,90,072/- AS CAN BE SEEN FROM THE ABOVE DETAILS, THE PROJECT ASHIRWAD WAS COMPLETED IN THIS YEAR. SINCE INCOME FROM THIS PROJECT WAS OFFERED TO TAX, THE ANTICIPATED EXPENSES TO BE INCURRED IN CONNECTION W ITH THIS PROJECT WAS ESTIMATED AND CLAIMED AS DEDUCTION AS PROVISION FOR EXPENSES. SIMILARLY FOR THE PROJECT VIJAYDEEP ALSO EXPENSES WERE BEING CLAI MED ON THE BASIS OF ANTICIPATED LIABILITY. THE AO HOWEVER NOTICED THAT THE AMOUNTS CLAIMED AS EXPENSES ON THE BASIS OF PROVISION WERE LATER REVER SED IN THE SUBSEQUENT A.Y. 04-05 AND THESE HAVE BEEN SHOWN IN THE LAST COLUMN OF THE CHART GIVEN ABOVE. ACCORDING TO THE AO, DESPITE BEING GIVEN O PPORTUNITY TO EXPLAIN THE NATURE OF THESE REVERSALS, THE ASSESSEE DID NOT BEE N EXPLAIN THE SAME. ACCORDINGLY, THE AO DISALLOWED THE CLAIM FOR DEDUCT ION OF RS. 58,50,296/- AND THE SAME WAS ADDED BACK TO THE TOTAL INCOME. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 11 16. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT THE VIJAYDEEP PROJECT WAS DEVELOPED BY THE ASSESSEE ON THE LAND BELONGING TO THE GANDHI FAMILY. AS PER THE AGREEMENT WITH THE LAND OWNERS, THE ASSESS EE HAD TO PAY A SUM OF RS. 15 LACS AS PER CLAUSE 6 & 7 OF THE DEVELOPMENT AGREEMENT AS EARNEST DEPOSIT. AS FAR AS REVERSAL OF THIS SUM IN THE FOL LOWING ASSESSMENT YEAR IS CONCERNED, THE ASSESSEE EXPLAINED THAT IN THE IMMED IATELY FOLLOWING YEAR I.E. THE ACCOUNTING YEAR 2003-04 THE ASSESSEE IN FACT IN CURRED FURTHER EXPENDITURE ON VIJAYDEEP PROJECT ON BEHALF OF THE O WNERS OF THE LAND. THESE EXPENSES AGGREGATING TO RS.55,90,072/- WERE NOT REC OVERABLE, THE AGGREGATE OF THE EXPENDITURE OF RS.55,90,072/- WAS SOUGHT TO BE ADJUSTED HOPING THAT THE EQUAL AMOUNT WOULD BE RECOVERABLE FROM THE OWNE R. IT WAS IN THIS VIEW OF THE MATTER THAT THE SAID EXPENDITURE WAS ADJUSTE D BY WAY THE AMOUNTS PAID TO THE OWNER AS EARNEST MONEY DEPOSIT. THE PE RSONNEL WHO USED TO WRITE THE ACCOUNTS HOWEVER USED THE WORDING AS REV ERSAL SEEING THE IDENTICAL AMOUNT DEBITED IN THE COST OF CONSTRUCTIO N IN THE EARLIER YEAR. IT WAS SUBMITTED THAT THERE WAS NO REVERSAL OF DEBIT F ROM THE COST OF LAND AS VISUALIZED BY THE A.O, BUT A REDUCTION OF THE FURTH ER COST INCURRED BY THE ASSESSEE ON THE VIJAYDEEP PROJECT IN THE FOLLOWING YEAR. IT WAS SUBMITTED THAT THAT THE ENTRIES OF SO CALLED REVERSAL DID NOT REDUCE THE COST OF LAND AS APPEARING TILL ACCOUNTING YEAR ENDED 31/3/2003 BUT HAVE ONLY REDUCED THE EXPENDITURE OF THE IMMEDIATE FOLLOWING YEAR I.E. AC COUNTING YEAR 2003-04 RELEVANT ASSESSMENT YEAR 2004-05. IN THE SAID ACCO UNTING YEAR I.E. 2003-04 HOWEVER ASSESSEE HAS NOT CLAIMED ANY OF THESE EXPEN SES, WHEREAS SO CALLED REVERSAL ENTRIES STILL CONTINUED TO BE SHOWN IN THE BALANCE SHEET AS RECOVERABLE FROM THE SAID GANDHI FAMILY. IN VIEW O F THE ABOVE, IT WAS SUBMITTED THAT THE AO OUGHT NOT TO HAVE PRESUMED TH AT THE SAID ENTRIES REPRESENTED THE REVERSAL OF THE COST OF THE LAND WI THOUT GETTING PROPER EXPLANATION FROM THE ASSESSEE. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 12 17. IN RESPECT OF THE REVERSAL OF A SUM OF RS. 2,6 0,224/- OUT OF RS. 6,42,408/- BEING PROVISION OF EXPENSES FOR ASHIRWAD PROJECT, THE ASSESSEE POINTED OUT THAT THESE WERE EXPENSES REQUIRED TO CO MPLETE THE PROJECT ASHIRWARD WHICH WAS PROVIDED IN THE BOOKS OF ACCOUN TS. IN THE FOLLOWING YEAR A SUM OF RS.2,60,224/- WERE REMAINED TO BE PA ID WHICH WAS SHOWN AS REVERSAL OF EXPENSES. THE ASSESSEE EXPLAINED THAT THIS WAS ALSO WRONG NOMENCLATURE USED BY THE ASSESSEE. 18. THE CIT(A) HOWEVER, DID NOT AGREE WITH THE SUB MISSIONS OF THE ASSESSEE AND HE HELD AS FOLLOWS: 7.3 I HAVE TAKEN INTO ACCOUNT THE FACTS OF THE CA SE TO ADJUDICATE THIS PARTICULAR ISSUE. I FIND THAT THE APPELLANT HAS ME RELY MADE CERTAIN PROVISIONS OF EXPENDITURE WHICH HAS BEEN CLAIMED IN ENTIRETY IN THE P&L A/C. I ALSO FIND THAT PART OF THE AMOUNT DEBIT ED IN THE P&L ACCOUNT IN RESPECT OF ASHIRWARD & VIJAYDEEP PROJECT HAS NOT BEEN CRYSTALISED AT ALL DURING THE PREVIOUS YEAR RELEVAN T TO ASSESSMENT YEAR. IT IS UNDERSTOOD FROM THE SUBMISSION MADE BY THE AP PELLANT THAT THE APPELLANT COMPANY HAS DEBITED SOME EXPENDITURE WHIC H ID NOT PERTAIN TO THEM. THE VERY FACT THAT PART OF SUCH E XPENDITURE HAS BEEN REVERSED BY THE APPELLANT FOR SUBSEQUENT ASSESSMENT YEAR ITSELF IS A TESTIMONY THAT SUCH EXPENDITURE WERE NOT PERTAINING TO THE EXPENDITURE TO BE INCURRED BY THE APPELLANT. THE P ROVISION OF EXPENSES IN RESPECT OF ASHIRWAD PROJECT AT RS. 6,42,408/- IS MERELY A PROVISION AND NOT A CRYSTALISED EXPENDITURE. NEEDLESS TO MEN TION THAT MERE PROVISION OF EXPENDITURE IS NOT ALLOWABLE DEDUCTION UNDER THE INCOME TAX ACT. PRIMA FACIE THE EARNEST MONEY DEPOSIT AG GREGATING TO RS.15 LAKHS IS NOT AN EXPENDITURE OF REVENUE NATURE. FUR THER, THE APPELLANT IN HIS SUBMISSION HAS ACCEPTED THAT THEY HAVE INCUR RED SOME EXPENDITURE HOPING THAT EQUAL AMOUNT WILL BE RECOVE RABLE FROM THE OWNER. THE EXPENDITURE U/S. 37 IS TO BE ALLOWED WH EN IT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IT IS NOT IN CAPITAL NATURE. IT IS NOT UNDERSTANDABLE AS TO HOW COME THE APPELLANT HAS DEBITED EXPENDITURE WHICH HIMSELF IS RECOGNIZIN G THAT IT IS RECOVERABLE FROM OTHER PARTIES. I AM NOT ABLE TO A CCEPT THE ARGUMENT OF THE APPELLANT THAT REVERSAL OF ENTRY REPRESENTED PROFIT TO BE TAKEN U/S. 41(2) BY WAY OF RECOVERY OF AMOUNT FROM THEM. NEITHER BEFORE THE AO NOR BEFORE CIT(A) THE APPELLANT HAS LAID ANY CRE DIBLE EVIDENCE TO SAY THAT THE EXPENDITURE DEBITED TO THE P&L ACCOUNT UNDER THE PROVISION HAS CRYSTALISED DURING THE PREVIOUS YEAR RELEVANT TO ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 13 ASSESSMENT YEAR AND IT IS EXPENDITURE WHOLLY AND EX CLUSIVELY PERTAINING TO THE APPELLANT. IN FACT, THE APPELLAN T NEITHER BEFORE THE AO NOR BEFORE THE CIT(A) HAS GIVEN A COMPLETE DETA ILS REGARDING AS TO HOW THE APPELLANT HAS INCURRED SUCH EXPENDITURE FOR THE PURPOSE OF BUSINESS. 18. AGGRIEVED BY THE ORDER OF CIT(A) ASSESSEE RAISE D GROUND NO.2 BEFORE THE TRIBUNAL. 19. WE HAVE HEARD THE RIVAL SUBMISSION. AS FAR AS PROVISION FOR EXPENSES OF ASHIRWAD PROJECT IS CONCERNED, A SUM OF RS.6,42, 408/- WAS PROVIDED IN THE BOOKS OF ACCOUNTS OF THE PREVIOUS YEAR RELEVANT TO AY 03-04. IN THE PREVIOUS YEAR RELEVANT TO AY 04-05 A SUM OF RS.2,60 ,224/- OUT OF TOTAL PROVISION MADE IN AY 03-04 REMAINED UNPAID AND THER EFORE THE SAME WAS SHOWN AS REVERSAL OF PROVISION MADE IN AY 03-04. A S TO WHETHER THIS AMOUNT WAS INCOME OF THE AY 04-05 IS NOT KNOWN. SI MILARLY AS FAR AS THE SUM OF RS.15,00,000/- PAYABLE TO GANDHI FAMILY IS CONCERNED, THE SAME IS CLAIMED TO BE COST OF THE LAND IN RESPECT OF VIJAYD EEP PROJECT. IT HAS BEEN SUBMITTED THAT AS PER THE DEVELOPMENT AGREEMENT WIT H THE LAND OWNERS, THE APPELLANT HAD TO PAY RS.15 LACS AS EARNEST MONEY DE POSIT, WHICH WAS PART OF THE CONSIDERATION PAYABLE TO LAND OWNER AS PER CLAU SES 6 & 7. IT WAS SUBMITTED THAT THESE EXPENSES WERE RIGHTLY CLAIMED AS EXPENSES AS PART OF COST OF LAND. IN RESPECT OF EXPENSES ON ALTERNATIV E ACCOMMODATION IN PROJECT VIJAYDEEP THE SAME IS ALSO INCURRED FOR THE PURPOSE OF BUSINESS OF THE APPELLANT AND AS PART OF THE DEVELOPMENT AGREEMENT AS PER CLAUSE 6 WHEREBY IT WAS THE DEVELOPER RESPONSIBLE FOR INCURRING EXPE NSES FOR VACATING THE PLOT OF LAND FROM THE TENANTS AND PROVIDING THEM WITH AL TERNATE ACCOMMODATION IN THE SAME PROJECT OR ELSEWHERE AND THIS COST IS O VER AND ABOVE THE CONSIDERATION PAID TO THE LAND OWNERS. THUS IT WAS SUBMITTED THAT THESE EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF THE BUSINESS AND RIGHTLY CLAIMED IN A.Y 2003-04 SINCE T HE PROJECT WAS COMPLETED ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 14 IN THAT YEAR, HENCE, ALSO CRYSTALISED IN THE SAID Y EAR. IT WAS ALSO SUBMITTED THAT IN THE NEXT YEAR THERE WERE FURTHER EXPENSES I NCURRED IN RESPECT OF VIJAYDEEP PROJECT AND CERTAIN AMOUNTS WERE RECOVERA BLE FROM LAND OWNERS WHICH AMOUNTS WERE REDUCED FROM THE EXPENSES INCURR ED IN THE NEXT YEAR. IT WAS THE PLEA OF THE ASSESSEE THAT THE REDUCTION IN THE COST IN NEXT YEAR HAS NOTHING TO DO WITH THE EXPENSES INCURRED IN THE IMP UGNED YEAR. THE EXPENSES THUS CRYSTALISED IN THE IMPUGNED YEAR SINC E THE PROJECT IS COMPLETED AND SINCE THE EXPENSES ARE INCURRED FOR T HE PURPOSE OF THE BUSINESS OF THE APPELLANT, THE SAME NEED TO BE ALLO WED. 20. WE ARE OF THE VIEW THAT THE ABOVE SUBMISSIONS OF THE ASSESSEE REQUIRE EXAMINATION BY THE ASSESSING OFFICER IN THE LIGHT O F WHAT TRANSPIRED IN THE ASSESSMENT FOR ASSESSMENT YEAR 2004-05 IN RESPECT OF THE REVERSAL ENTRY SHOWN IN THAT YEAR. AS FAR AS THIS ASSESSMENT YEAR IS CONCERNED THESE EXPENSES WERE CONNECTED WITH THE BUSINESS OF THE AS SESSEE AND HAD TO BE ALLOWED AS DEDUCTION. THE ESTIMATE OF EXPENSES TO BE INCURRED FOR THE PROJECT ASHIRWARD HAD TO BE ALLOWED AS DEDUCTION BE CAUSE THE INCOME FROM THE SAID PROJECT WAS DECLARED BY THE ASSESSEE IN TH E PREVIOUS YEAR. SIMILARLY THE ASSESSEE HAD AN OBLIGATION TO PAY RS. 15 LACS T O THE LAND OWNERS AND ALSO PROVIDE ALTERNATE ACCOMMODATION TO THE TENANTS OF THE PROPERTY WHICH WAS TO BE DEVELOPED BY THE ASSESSEE. THESE EXPENS ES WERE, THEREFORE, LEGITIMATE BUSINESS EXPENSES WHICH ARE TO BE ALLOWE D AS DEDUCTION. THE ENTRY WITH REGARD TO REVERSAL IN A,Y 2004-05 WILL H OWEVER HAVE A BEARING ON THE CLAIM MADE BY THE ASSESSEE IN AY 03-04, IF IT I S FOUND THAT THESE EXPENSES WERE ULTIMATELY NOT TO BE INCURRED BY THE ASSESSEE. IN SUCH EVENT, IF THE ABOVE EXPENSES ARE ALLOWED AS DEDUCTION THE REVERSAL ENTRY, IF IT IS NOT PROPERLY EXPLAINED WILL BE INCOME OF AY 04-05. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND DIRECT THE AO TO EXAMINE THE ISSUE IN THE LIGHT OF THE CONCLUSIONS ON THE RELEVANT REVERSAL E NTRIES IN AY 04-05. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 15 21. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOL LOWS: 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASES AN D IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 3,95,054/- MADE OUT OF SITE EXPENSES ON ADHOC BASIS WITHOUT APPRECIATIN G THAT THERE WAS NO MATERIAL BROUGHT ON RECORD BY THE AO TO JUSTIFY THE DISALLOWANCE. 22. THE ASSESSING OFFICER DISALLOWED A SUM OF RS. 3 ,95,054/- ON THE GROUND THAT THE SITE EXPENSES AND SUNDRY PURCHASE O F THE PROJECT VIJAYDEEP AND ASHIRWARD FURNISHED BY THE ASSESSEE DID NOT HAV E SUPPORTING DOCUMENTS AND WERE NOT FULLY VOUCHED. AN ADHOC DIS ALLOWANCE OF 10% OF THE TOTAL EXPENSES NAMELY RS. 39,50,545/- WAS MADE BY T HE ASSESSING OFFICER. THE CIT(A) WAS OF THE VIEW THAT THE DISALLOWANCE MA DE BY THE ASSESSING OFFICER WAS REASONABLE AND HE, THEREFORE, CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 23. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT COMPLETE DETAILS OF EXPENSES WITH SUPPORTING DOCUMENTS LIKE BILLS VOUCHERS WERE SUBMITTED BEFORE THE ASSESSING OFFICER AND NO DEFIC IENCY HAS BEEN POINTED OUT BY THE ASSESSING OFFICER EXCEPT GENERAL REMARKS . IT WAS ALSO SUBMITTED THAT NO ADHOC DISALLOWANCE CAN BE MADE WITHOUT POIN TING OUT SPECIFIC DEFECTS OR GIVING A FINDING THAT EXPENSES WERE NOT INCURRED FOR THE PURPOSE OF BUSINESS. IT WAS ALSO ARGUED THAT THERE WAS NO FI NDING THAT THE EXPENSES WERE BOGUS OR INFLATED. 24. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. C OUNSEL FOR THE ASSESSEE. WE ARE OF THE VIEW THAT IN THE GIVEN FAC TS AND CIRCUMSTANCES OF THE CASE DISALLOWANCE OF 5% OF THE SITE EXPENSES AND SU NDRY EXPENSES WOULD BE FAIR AND REASONABLE. WE ORDER ACCORDINGLY. GROUND NO.3 IS THUS PARTLY ALLOWED. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 16 25. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. ITA NO.4558/MUM/2007- REVENUES APPEAL: 26. GROUND NO.1 RAISED BY THE REVENUE READS AS FOLL OWS: 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 2 3,90,747/- U/S. 40(A)(2)(B) ON ACCOUNT OF EXCESSIVE PAYMENTS MADE T O M/S. JAYGOPAL CONSULTANCY SERVICE (P) LTD. 27. THE AO FOUND THAT THE ASSESSEE HAS DEBITED A TO TAL SUM OF RS.1,23,21,028/- AS PAYMENT MADE TO M/S. JAYGOPAL C ONSULTANCY SERVICES P. LTD., WHICH WAS A SISTER CONCERN OF THE ASSESSEE , DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR. ON A SPECIFIC QUERY R AISED BY THE AO THE ASSESSEE EXPLAINED THAT IT REPRESENTED THE PAYMENT MADE TO SAID CONCERN AS PART OF ITS SHARE OF CONTRIBUTION TOWARDS COST OF A DMINISTRATIVE AND OTHER CHARGES. THE ASSESSEE FURTHER EXPLAINED THAT THE A SSESSEE COMPANY ALONGWITH THE OTHER NINE SISTER CONCERNS HAD FORMED A CONSORTIUM VIDE AGREEMENT/MOU DTD. 12/12/1999 TO TREAT M/S. JAYGOPA L CONSULTANCY SERVICES P. LTD. AS A COMMON POOL COMPANY WHICH W ILL CATER ALL THE ADMINISTRATIVE AND MANAGERIAL REQUIREMENT OF THE CO NSTITUENT MEMBERS ON THE BASIS OF BEARING THE PROPORTIONATE EXPENDITURE. IN OTHER WORDS, THE COMMON POOL COMPANY WILL PROVIDE ADMINISTRATIVE & MANAGERIAL SERVICE TO ITS CONSTITUENT MEMBERS AND THE COMMON POOL COMPANY HAS TO RECOVER THE EXPENDITURE FROM ITS CONSTITUENT MEMBERS ON PROPORT IONATE BASIS OF THE SERVICES RENDERED BY THEM. FURTHER, IT WAS ALSO SU BMITTED BY THE ASSESSEE THAT THE COMMON POOL COMPANY VIZ. M/S. JAYGOPAL CON SULTANCY SERVICES PVT. LTD. WAS FUNCTIONING ON THE PRINCIPLE OF MUTUALITY ON NO PROFIT NO LOSS BASIS TO SERVE THE ADMINISTRATIVE AND MANAGERIAL REQUIREM ENT OF THE CONSTITUENT MEMBERS. THE ASSESSEE EXPLAINED THAT THE PAYMENT M ADE AT RS. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 17 1,23,21,028/- REPRESENTED THE PROPORTIONATE COST OF SERVICES RENDERED BY THE COMMON POOL COMPANY TO THE ASSESSEE COMPANY. 28. THE AO WAS OF THE VIEW THAT THOUGH THE COST HAS BEEN RECOVERED FROM THE CONSTITUENT MEMBER OF THE COMMON POOL COMPANY O N THE BASIS OF COST INCURRED IN DIFFERENT PROJECTS BELONGING TO DIFFERE NT CONCERNS WHEREIN THE COMMON POOL COMPANY HAS PROVIDED ITS ADMINISTRATIVE AND MANAGERIAL SERVICES, BUT NOTHING HAS BEEN PROVIDED REGARDING T HE EXPENDITURE TO BE INCURRED FOR THE SURVIVAL OF COMMON POOL COMPANY AS A INDEPENDENT ENTITY. IN OTHER WORDS, THE AO WAS OF THE VIEW THAT SOME AM OUNT OF EXPENDITURE WILL ALSO BE REQUIRED TO MEET THE ADMINISTRATIVE AND MAN AGERIAL EXPENDITURE OF M/S. JAYGOPAL CONSULTANCY SERVICES P. LTD., TO SUST AIN ITS INDEPENDENT EXISTENCE. TO THE EXTENT THE ASSESSEE HAD REIMBURS ED SUCH ADMINISTRATIVE AND MANAGERIAL EXPENDITURE, THE AO HELD THAT THE SA ME CANNOT BE ATTRIBUTED AS EXPENDITURE RELATING TO CONSTITUENT MEMBERS. TH E AO SEREGATED A PORTION OF EXPENDITURE ON ESTIMATE BASIS TO BE ATTR IBUTABLE TO SUSTAIN THE EXISTENCE OF M/S. JAYGOPAL CONSULTANCY SERVICES P. LTD. AND HE HELD THAT TO THIS EXTENT THE SAME CANNOT BE ALLOWED AS EXPENDITU RE IN THE HAND OF THE ASSESSEE OR ANY OF CONSTITUENT MEMBERS FOR THAT MA TTER. THE AO ESTIMATED 30% OF EXPENSES AS REASONABLY ATTRIBUTABLE TO THE W ORKING OF M/S. JAYGOPAL CONSULTANCY SERVICES P. LTD. AS AN ENTITY BY ITSELF . ACCORDINGLY, THE AO COMPUTED RS. 23,90,747/- (RS.11,40,680/- & RS.12,50 ,067/-) AS DISALLOWABLE EXPENDITURE IN RESPECT OF ASHIRWARD & VIJAYDEEP PROJECTS. FURTHER THE AO HELD THAT THE AFORESAID AMOUNT WAS E XCESSIVE TO BE DISALLOWED U/S. 40A(2)(B) OF THE ACT. 29. ON APPEAL BY THE ASSESSEE CIT(A) HELD AS FOLL OWS: 3.4 I HAVE TAKEN INTO ACCOUNT ENTIRE SPECTRUM OF T HE FACTS & CIRCUMSTANCES OF THE CASE IN PROPER PROSPECTIVE. I FIND THAT THE AO HAS PROCEEDED ON A PRESUMPTION OF THE FACT THAT EAC H CONCERN HAS TO ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 18 NECESSARILY INCUR SOME EXPENDITURE ATTRIBUTABLE TO THE EXISTENCE OF ITS OWN. THERE IS NO LEGAL AND FACTUAL SUBSTRATUM OF H AVING SUCH PRESUMPTION IN THE LIMELIGHT OF THE FACTS AND CIRCU MSTANCES OF THIS PARTICULAR CASE. THE FACTS ARE NOT UNDER DISPUTE T HAT THE COMMON POOL COMPANY I.E. M/S. JAYGOPAL CONSULTANCY SERVICE P. L TD. IS FUNCTIONING UNDER THE CONCEPT OF MUTUALITY ON NO PROFIT NO LOSS BASIS. HAVING UNDERSTOOD THIS FACT, IT DOES NOT PROVIDE A FURTHER SCOPE FOR HOLDING THE PRESUMPTION WHICH AO HAD IN HIS MIND. THERE IS NO LEGAL FICTION CREATED BY ANY AUTHORITY TO HAVE SUCH PRESUMPTION U NDER ALL THE CIRCUMSTANCES. THE LAW DOES NOT PUT ANY EMBARGO OF HAVING SUCH COMMON POOL COMPANY. THEREFORE, IT IS NOT POSSIB LE TO SUSTAIN THE PRESUMPTION OF THE AO. THE FACTS ARE VERY SIMPLE T HAT EVERY PART OF EXPENDITURE INCURRED BY COMMON POOL COMPANY IN RESP ECT OF ADMINISTRATIVE & MANAGERIAL SERVICES PROVIDED BY TH EM TO THE CONSTITUENT MEMBER IS TO BE SHARED AND REIMBURSED O N CERTAIN MUTUALLY AGREED BASIS I.E. IN PROPORTION OF THE COS T OF PROJECT, THE QUESTION DOES NOT ARISE TO ATTRIBUTE ANY PART OF EX PENDITURE INDIVIDUALLY RELATING TO COMMON POOL COMPANY. IN V IEW OF THE ABOVE, I HAVE NO DOUBT IN MY MIND THAT THE ENTIRE EXPENDITUR E CLAIMED BY THE APPELLANT AT RS. 1,23,21,028/- IS ALLOWABLE DEDUCTI ON WITHIN THE FOUR CORNER OF LAW AND NO PART OF EXPENDITURE CAN BE DIS ALLOWED U/S. 40A(2)(B). THE AO HAS NOT GIVEN ANY FINDING THAT A PART OF EXPENDITURE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF SERVICES RENDERED U/S. 40A(2)(B). FURTHER , I ALSO FIND THAT ABSOLUTELY, THERE IS NO SCOPE FOR APPLYING THE PROVISION OF SEC . 40A (2)(B) ON THE FACTUAL CIRCUMSTANCES OF THE CASE WHERE THE COMMON POOL COMPANY IS FUNCTIONING ON NO PROFIT OR NO LOSS BASIS. FURTHER , THE APPELLANTS CASE ALSO GETS A JUDICIAL SUPPORT FROM THE DECISION IN T HE CASE OF GLAXO SMITHKLINE ASEA (P) LTD., ACIT, DELHI ITAT C BENC H 6 SOT 113 (DEL) WHICH HAS BEEN REFERRED IN PARA 3.3 OF THIS APPELLA TE ORDER. HENCE, THE DISALLOWANCE OF RS. 23,90,747/- IS DELETED. HENCE, THE APPEAL IS ALLOWED ON THIS GROUND. 30. BEFORE US LD. D.R RELIED ON ORDER OF THE ASSES SING OFFICER. WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THIS ISSUE HAS TO BE UPHELD. IT IS SEEN THAT GROUP CONCERNS HAVE ENTERED INTO MOU FOR CREATION OF COMMON POOL COMPANY TO FUNCTION ON NO PROFIT NO LOSS BAS IS IN PROVIDING ADMINISTRATIVE & MANAGERIAL REQUIREMENT OF THE CONS TITUENT MEMBERS. AMOUNT TO BE REIMBURSED IN THE PROPORTION TO THE CO NSTRUCTION COST INCURRED ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 19 BY EACH OF THE CONSTITUENT MEMBER. IN SCRUTINY ASS ESSMENT MADE IN THE CASE OF M/S. JAYAGOPAL CONSULTANCY SERVICES PRIVATE LIMITED U/S. 143(3) IT WAS ACCEPTED BY THE AO IN THAT M/S. JAYGOPAL CONSUL TANCY SERVICES PRIVATE LIMITED WAS FUNCTIONING ON NO LOSS NO PROFIT BASIS AND NO COMMERCIAL ACTIVITY WAS CARRIED OUT BY IT EXCEPT FOR INCURRING EXPENSES ON BEHALF OF THE GROUP COMPANIES AS A POOL COMPANY. THE PAYMENTS MADE BY THE ASSESSEE AND THE VARIOUS CONSTITUENTS ARE MERELY REIMBURSEME NT OF THE ACTUAL EXPENSES INCURRED AND THIS FACT IS NOT DISPUTED. I N SUCH CIRCUMSTANCES, IT CANNOT BE SAID THAT THE PAYMENT WAS NOT FOR PURPOSE OF BUSINESS OR WAS EXCESSIVE OR UNREASONABLE. FOR THE REASONS STATED A BOVE GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 31. GROUND NO.2 RAISED BY THE REVENUE READS AS FOL LOWS: 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 96 ,78,967/- MADE U/S.40A(20(B) OUT OF PURCHASE OF MARBLE FROM M/S.TO PAIM PROPERTIES P. LTD. WHICH IS SISTER CONCERN OF ASSESEE. 32. WHILE SCRUTINIZING THE DETAIL OF MATERIAL CONSU MPTION IN RESPECT OF CONSTRUCTION ACTIVITIES OF VARIOUS PROJECTS UNDERT AKEN BY THE ASSESSEE COMPANY, THE AO FOUND THAT THE TOTAL CONSUMPTION O F MARBLE ARE SHOWN AT RS. 1,42,10,989/- IN RESPECT OF PROJECT VIJAYDEEP. FURTHER THE AO ASKED THE ASSESSEE TO EXPLAIN THE CONSUMPTION OF MARBLE WITH REFERENCE TO TOTAL BUILT UP AREA OF TWO PROJECTS NAMELY VIJAYDEEP AND ASHIRW AD. THE AO NOTED THAT THE TOTAL COST OF THE MARBLE SHOWN IN VIJAYDEEP WAS AT RS. 1,42,10,989/- WHICH WORKED OUT THE MARBLE COST PER SQ.FT. AT RS. 613/-. THIS WORKING OF MARBLE PER SQ. FT. AT RS. 613/- COMPELLED THE AO TO ASK FOR THE EXPLANATION OF THE ASSESSEE AS TO WHY THE PROVISION OF SEC.40A( 2)(B) SHOULD NOT BE INVOKED IN VIEW OF THE FACT THAT THE RATES OF MARBL E COST CONSUMED PER SQ. FT. STANDS HIGHER THAN THE NORMAL MARKET RATE. THEREAF TER, THE ASSESSEE REPLIED ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 20 TO THE AO VIDE LETTER DTD. 6/3/2006 EXPLAINING THE COST OF MARBLE CONSUMED PER SQ. FT. IN VIJAYDEEP PROJECT. THE ASSESSEE SUB MITTED THAT THE COST OF MARBLE SHOW AT VIJAYDEEP AT RS. 1,42,10,989/- REPR ESENTED TWO COMPONENTS. ACCORDING TO THE ASSESSEE, THE FIRST COMPONENT WAS THE ACTUAL COST OF MARBLE WHICH WAS INCURRED FOR LAYING DOWN THE MARBLE IN TH E VIJAYDEEP PROJECT WHICH AMOUNTED ONLY RS. 72,98,550/-. THE OTHER COM PONENT OF MARBLE COST WAS RS. 69,12,439/- WHICH REMAINED UNUTILIZED IN TH E FORM OF STOCK INCLUDED IN THE WIP CARRIED FORWARD. 33. MARBLE WORTH RS.69,12,439/-: THE ASSESSEE FURTHER SUBMITTED THAT THE IMPUGNED COST OF MARBLE AT RS.69,12,439/- REPRE SENTED THE COST OF MARBLE ACTUALLY PURCHASED ON 15/3/2002 AND 25/3/200 2 FROM M/S. TOPAIM PROPERTY PVT. LTD. BY THE ERSTWHILE FIRM WHICH WAS INCLUDED BOTH IN WORK IN PROGRESS AS ON 1/4/2002 AT RS.7,23,13,793/- AS WELL AS THE WORK IN PROGRESS AS ON 31/3/2003 SHOW AT RS.7,34,97,920/-. IN OTHER WORDS, THE ASSESSEE MADE A POINT THAT THE MARBLE COST OF RS. 6 9,12,439/- WAS LYING IN FORM OF STOCK BROUGHT FORWARD FROM THE STOCK OF ER STWHILE FIRM WHICH FORMED PART OF OPENING AS WELL AS CLOSING WORK IN PROGRESS FOR THE RELEVANT ASSESSMENT YEAR. IN THIS WAY, THE ASSESSEE ALSO ST ATED THAT THE ACTUAL COST OF MARBLE CONSUMED IN VIJAYDEEP WORKED OUT ONLY @ 3 15 PER SQ.FT. INCLUDING THE LABOUR COST FOR LAYING THE MARBLE. THE WORK OF LAYING DOWN OF MARBLE WAS ALSO GOT DONE BY M/S. TOPAIM PROPERTY PVT. LTD. AT THE RATE OF RS. 315/- PER SQ. FT. AND THE BILL IN SUPPORT OF THE SAME WAS ALSO FILED. THE AO NOTICED THAT M/S. TOPAIM PROPERTY PVT. LTD. HAPPENED TO BE A SISTER CONCERN OF THE ASSESSEE COMPANY. THE ASSESSEE ALSO SUBMITTED THAT THE MARBLE WORTH RS.69,12,439/- ALREADY INCLUDED IN THE WIP AS ON 1- 4-02 REMAINED UNUSED AND WAS SOLD TO M/S. TOPAIM PROPERTY PVT. LTD. AT DISCOUNTED PRICE DURING THE FINANCIAL YEAR 2005-06. IT WAS SUBMITTED THAT THIS FACT WOULD GO TO PROVE THAT THE MARBLES WORTH RS.69,12,439/- VERY MUCH EX ISTING PHYSICALLY IN THE CLOSING STOCK. THE AO HOWEVER HELD THAT THE MARBLE COST OF RS. 69,12,439/- ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 21 WAS NOT INCLUDED IN THE CLOSING STOCK ON THE GROUND THAT NO STOCK REGISTER WAS MAINTAINED AND ULTIMATELY RESULTED INTO AN ADDI TION OF RS. 69,12,439/-. 34. REMAINING CONSUMPTION OF MARBLE WORTH RS. 72,98,550 /-: WITH REGARD TO THE ABOVE, THE AO WAS OF THE VIEW THAT TH E PAYMENT FOR LAYING MARBLES BY THE ASSESSEE TO ITS SISTER CONCERN WAS E XCESSIVE. THE AO ALSO APPLIED THE PROVISION OF SECTION 40A(2)(B) HOLDING THAT THE RATE FOR LAYING DOWN THE MARBLE INCLUDING LABOUR COST WAS QUOTED AT HIGHER RATE THAN THE MARKET RATE BY THE SISTER CONCERN VIZ. M/S. TOPAIM PROPERTY PVT. LTD. THE AO DISALLOWED A SUM OF RS. 15,06,050/- IN CASE OF MARB LES LAID IN VIJAYDEEP PROJECT AND RS. 12,60,208/- IN CASE OF MARBLES LAID IN ASHIRWARD PROJECT. IN THIS WAY, CONSUMPTION OF THE MARBLE RESULTED INTO T HREE ADDITIONS I.E. RS. 69,12,439/- , RS. 15,06,050/- AND RS. 12,60,208/- . 35. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT AS F AR AS ADDITION OF RS. 15,06,050/- AND RS. 12,60,208/- MADE BY THE ASSESSI NG OFFICER BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE INCOME T AX ACT, 1961 (THE ACT) IS CONCERNED THE ASSESSING OFFICER APPLIED THE RATE OF 250/- PER SQ.FT. AS GENERAL MARKET RATE. AS AGAINST THE ASSESSEE HAD P AID RS. 315/- PER SQ.FT. FOR LAYING MARBLE FLOOR IN THE CASE OF VIJAYDEEP PR OJECT AND RS. 310/- PER SQ. FT. IN THE CASE OF ASHIRWAD PROJECT. THE ASSESSEE POINTED OUT THAT A SUM OF RS.250/- PER SQ. FT. TAKEN BY THE ASSESSING OFFICER AS MARKET PRICE WAS ARBITRARY. THE ASSESSEE POINTED OUT THAT DEPENDING UPON THE QUALITY OF MARBLE THE RATES CAN VARY BETWEEN RS. 150 PER SQ.FT . TO RS. 700/- PER SQ.FT. THE ASSESSEE ALSO POINTED OUT THAT THE VERY SAME SI STER CONCERN NAMELY M/S. TOPAIM PROPERTIES PVT. LTD. HAD LAID MARBLE STONES AT HINDUJA HOSPITAL & RESEARCH CENTRE AT RS.700 PER SQ. FT. THE ASSESSE E ALSO FILED CONFIRMATION OF TOPAIM PROPERTIES PVT. LTD. REGARDING THE QUALITY O F MARBLES LAID IN THE PROJECTS VIJAYDEEP AND ASHIRWARD. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 22 36. ON CONSIDERATION OF THE ABOVE CONFIRMATIONS THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER HOLDING AS F OLLOWS: 4.2.2 I HAVE TAKEN INTO ACCOUNT THE FACTS OF THE C ASE. I FIND THAT M/S. TOPAIM PROPERTY PVT. LTD. HAS QUOTED DIFFERENT RATE S FOR LAYING DOWN THE MARBLE FOR DIFFERENT CUSTOMERS DEPENDING UPON THE QUALITY OF THE MARBLE USED. OTHERWISE ALSO, IT GOES WITHOUT SAYIN G THAT THE COST OF THE MARBLE AVAILABLE IN THE MARKET DOES NOT HAVE AN Y UNIFORM RATE. THE RATES OF THE MARBLE AVAILABLE IN THE MARKET DOE S NOT HAVE ANY UNIFORM RATE. THE RATES OF THE MARBLE DIFFERS DIST INCTLY DEPENDING UPON THE UTILITY OF MARBLE. IT IS NOT POSSIBLE TO BENCH MARK THE RATE REGARDING THE ARMS LENGTH PRICE UNLESS THE QUALITY OF MARBLE IS SPECIFIED. I FIND THAT THE AO HAS ACTED ARBITRARIL Y TO TAKE THE ARMS LENGTH PRICE @ RS. 250/- PER SQ. FT. FURTHER, IT I S ALSO TO BE UNDERSTOOD THAT THE ONUS REST ON THE DEPARTMENT TO PROVIDE THE MATERIAL TO APPLY THE PROVISION OF SEC. 40A(2)(B) AS HELD IN THE CASE OF SHRI RAM PIPES LTD. VS. ISC REPORTED IN 39 TTJ (DEL) 132. THEREF ORE, I AM UNABLE TO SUSTAIN THE DISALLOWANCE MADE BY THE AO U/S.40A(2)( B) AT RS. 15,06,050/- & RS.12,60,208/-. 37. AS FAR AS THE ADDITION OF RS. 69,12,439/- IS CO NCERNED THE ASSESSEE POINTED OUT THAT THE UNUTILIZED MARBLES WERE ALREAD Y INCLUDED AS VALUE OF WIP OF THE ERSTWHILE FIRM AND HAS ALREADY BEEN SHO WN AS COST OF CONSTRUCTION. THE CIT(A) HELD AS FOLLOWS: 4.3.3. I HAVE CIRCUMSPECTED THE FACTS OF THE CAS E. I FIND THAT THE FACTS ARE NOT IN DISPUTE THAT THE ERSTWHILE FIRM HAD PURCHASED MARBLE WORTH RS.22,88,439/- AND RS. 46,24,000/- ON 15/3/2002 AND 25/3/2002 RESPECTIVELY FROM M/S. TOPAIM PROPERTY P. LTD. THE ALLEGED MARBLE WAS SAID TO HAVE EMBEDDED IN W.I.P. OF VIJAYDEEP PROJECT AS ON 31/3/2002 SHOWN AT RS.7,23,13,793/- I N THE HAND OF ERSTWHILE FIRM VIZ. M/S. AHUJA PLATINUM PROPERTIES P. LTD. THIS WIP WAS SHOWN AS OPENING STOCK AS ON 1/4/2002. THE AP PELLANT COMPANY HAS TAKEN OVER THE ASSETS AND LIABILITIES O F ERSTWHILE FIRM ON 25/3/2003 WHICH HAD WIP AND THE WIP STANDS AT RS. 1 0,13,48,483/- AS ON 25/3/2003. THE FOLLOWING IS THE DETAIL OF W IP SHOWN BY THE APPELLANT (CERTIFIED BY A CHARTERED ACCOUNTANT): OP. WIP AS ON 1/4/2002 72,313,793.98 ADD: 1) OTHER CONSTRUCTION COST 21,736,140.01 (I) LAYING OF MARBLE BY TOPAIM PROPERTIES LTD. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 23 AS BILL NO.10B/2002-2003 DT. 02/1/03 23,170. 00 7,298,550.00 WIP AS ON 25/3/03 101,348,483.99 LESS: COST OF SALE OF THREE FLATS 27,850,563.99 CL. WIP AS ON 31.3.03 73,497,920.00 FROM THE ABOVE DETAILS, IT MAY BE SEEN THAT THE OTH ER CONSTRUCTION COST STANDS AT RS. 2,17,36,140/- AND LAYING COST OF THE MARBLE BY M/S. TOPAIM PROPERTIES P. LTD. IS AT RS. 72,98,550/-. T HESE FIGURES ARE NOT DISPUTED BY THE AO. NOW THE QUESTION ARISES WHETHE R THE AOS PRESUMPTION OF NON-INCLUSION OF CLOSING STOCK AT RS . 69,12,439/- IN THE OPENING AS WELL AS CLOSING WIP IS CORRECT OR NO T. THE FINDING OF THE AO IS BASED ON HIS OBSERVATION THAT THE APPELLANT H AS NOT MAINTAINED ANY SEPARATE STOCK REGISTER AND COST OF THE MARBLE DOES NOT FIND PLACE THEREIN. FURTHER, THE AO HAS ALSO OBSERVED THAT SI NCE THE PROJECT VIJAYDEEP IS COMPLETED THE FIGURE OF WIP SHOULD NOT CONSIST OF UNUSED MATERIAL. AO HAS VIRTUALLY PROCEEDED ON THE PRESUM PTION THAT THE OPENING WIP AS ON 1/4/2002 AS WELL AS CLOSING STOCK AS ON 31/3/2003 DID NOT HAVE THE ELEMENT OF UNUSED MARBLE WORTH RS.69,12,439/-. IF WE LOOK AT THE FINDING OF THE A O, I FIND THAT THE AO HAD SOME SUSPICION AND HUNCH IN HIS MIND REGARDING THE INCLUSION OF UNUSED MARBLE TO HAVE INCLUDED IN WIP OR NOT BECAUS E THE WIP SHOULD NOT HAVE AN ELEMENT OF UNUSED MATERIAL AND NON-MAIN TENANCE OF STOCK REGISTER SEPARATELY FURTHER COMPOUNDED TO THE CONFU SION. STRICTLY SPEAKING FROM THE POINT OF ACCOUNTING ANGLE, THE AO HAS SOME POINT TO CREATE A DOUBT IN HIS MIND BUT THAT ITSELF CANNOT L EAD TO AN ADDITION. THE AO HAS TO LOOK INTO THE TOTALITY OF THE FACTS A ND ARRIVE AT A CONCLUSION WHICH HAS GOT SUPPORT OF THE FACT AND NO DOUBTS. LOOKING TO THE FACT THAT THE PURCHASE OF THE MARBLE WORTH R S. 69,12,439/- WAS BROUGHT ON RECORD BY THE ERSTWHILE FIRM AND IT IS I NCLUDED IN THE TOTAL COST OF CONSTRUCTION, IT IS BOUND TO GET PLACE AUT OMATICALLY IN THE WIP IF THE CLOSING STOCK IS NOT SHOWN SEPARATELY. FROM ACCOUNTING POINT OF VIEW THE UNUTILIZED MARBLE SHOULD HAVE FOUND ITS PL ACE IN THE CLOSING STOCK SEPARATELY AND NOT IN THE WIP. NEVERTHELESS, AFTER IT FINDS ITS PLACE IN WIP THE CREDIT SIDE OF THE ENTRY IS SUPPOS ED TO HAVE COMPLETED AND IT DOES NOT CREATE ANY DISCREPANCY AS SUCH WHIC H HAS GOT BEARING ON THE INCOME OF THE APPELLANT. IF AT ALL, SOME DI SCREPANCY ON THIS ACCOUNT COULD HAVE BEEN ATTRIBUTED , IT GOES BACK T O THE AY 2002-03 IN THE HAND OF THE FIRM AND NOT IN THE CASE OF THE APP ELLANT COMPANY FOR THE A.Y 2003-04. FURTHER, THE AO, AFTER HAVING SAI D THAT THE IMPUGNED STOCK OF UNUTILIZED MARBLE HAS NOT FOUND ITS PLACE EITHER IN OPENING ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 24 WIP AS ON 1/4/2002 OR IN CLOSING WIP AS ON 31/3/200 3, HE CANNOT CHOOSE UNILATERALLY TO ADD AN AMOUNT OF RS.69,12,43 9/- IN THE CLOSING STOCK WITHOUT GIVING ANY CREDIT IN THE OPENING WIP OR STOCK. THE ACTION OF THE AO GIVES RISE TO AN ABSURD RESULT IN ACCOUNTING PARLANCE AS THE IMPUGNED AMOUNT HAS TO BE IN OPENING WIP ALS O. IN THAT SITUATION, THE ADDITION GETS NEUTRALIZED BY HAVING EQUAL AMOUNT ADDED IN THE OPENING WIP AS WELL AS CLOSING WIP. FURTHE R, THE FACT THAT THE APPELLANT HIMSELF HAS SOLD THE SAID UNUTILIZED MAR BLE ON DISCOUNTED RATE TO THE SAME COMPANY I.E. M/S. TOPAIM PROPERTIE S P. LTD. GOES TO PROVE A POINT UNDOUBTEDLY THAT IT DEEMS TO HAVE AL WAYS EMBEDDED IN THE OPENING WIP AS WELL AS CLOSING WIP FOR THE A.Y 2003-04 ONWARDS TILL IT WAS SOLD. IT MAY ALSO BE IMPORTANT TO SAY THAT THE ENTRY MADE IN THE BOOKS OF ACCOUNT ITSELF IS NOT DETERMINATIVE OF THE ACCRUAL OF INCOME. ONE HAS TO SEE THE SUBSTANCE OF THE ENTRY MADE AND ITS IMPACT ON THE INCOME AND NOT THE FORM OF THE ENTRY. THEREFORE, WHETHER THE AMOUNT OF UNUTILIZED STOCK OF MARBLE WA S KEPT IN WIP OR CLOSING STOCK DOES NOT REALLY MATTER IN REAL TERM W HILE DETERMINING THE INCOME. IT WAS HELD IN CASE OF KEDARNATH JUTE MFG. CO. LTD. VS. CIT 82 ITR 363 (SC) THAT ACCOUNTING BY A PARTY IS NOT CONC LUSIVE. IT IS ONLY QUESTION OF REPRESENTING THE ANTECEDENT OF A PARTIC ULAR ENTRY UNDER THE NARRATION WIP OR CLOSING STOCK BUT THAT ITSELF DOES NOT MAKE ANY SUBSTANTIAL DIFFERENCE IN ITS IMPLICATION ON PROFIT AS BOTH FIND ITS PLACE ON CREDIT SIDE ONLY. THE ACCOUNTING IMPLICATION I N BOTH SITUATION REMAINS THE SAME. NON-MAINTENANCE OF STOCK REGIST ER ALSO CANNOT DISTORT THE HAPPENING ACCOUNTING IMPLICATION. AS F AR AS RELEVANT ASSESSMENT YEAR IS CONCERNED, THE MAJOR CHUNK OF C LOSING WIP HAS GOT THE CONTRIBUTION OF OPENING WIP AT RS. 7,23,13,793/ - WHICH IS SUPPOSED TO HAVE THE ELEMENT OF VALUE UNUTILIZED MA RBLE STOCK BY VIRTUE OF HAVING GOT THE PURCHASE OF MARBLE ON 15/3 /2002 & 25/3/2002 UNLESS PROVED OTHERWISE. THE AO CANNOT P ROCEED TO MAKE ADDITION ONLY ON PRESUMPTION WITHOUT ANY FACTUAL SU PPORT. IF THE AO HAS GOT HIS FINDING THAT THE ALLEGED MARBLE STOCK I S MISSING BOTH IN OPENING WIP AS ON 1//4/2002 AND CLOSING WIP AS ON 3 1/3/2003 AS WELL THE CORRECT LEGAL COURSE WOULD HAVE BEEN TO A NALYSE THE CLOSING WIP SHOWN BY THE ERSTWHILE FIRM M/S. AHUJA PLATINUM FOR A.Y 2002-03 AND TO FIND WHETHER IT WAS CORRECTLY SHOWN OR NOT. IN THE CASE OF ANY DISCREPANCY DETECTED, THE ADDITION WOULD HAVE WARRA NTED FOR A.Y 2002- 03 IN THE CASE OF ERSTWHILE FIRM. BUT ANY STRETCH OF ACCOUNTING LOGIC, THE RELEVANT ASSESSMENT YEAR IN THE APPELLANTS CA SE CANNOT BE SLAPPED WITH ADDITION MADE BY THE AO. THEREFORE, I AM UNABLE TO SUSTAIN THE FINDING OF THE AO BOTH IN LEGAL PROSPEC TIVE AS WELL AS ON ACCOUNTING PRINCIPLE. HENCE, I HOLD THAT THE ADDIT ION OF RS. 69,12,439/- WAS UNCALLED FOR AND UNWARRANTED AND IT DESERVES TO BE DELETED. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 25 38. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 39. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR A S THE ADDITION U/S.40A(2)(B) AT RS. 15,06,050/- & RS.12,60,208/- I N RESPECT OF MARBLES LAID AT VIJAYDEEP PROJECT AND ASHIRWAD PROJECT RESPECTIV ELY IS CONCERNED, WE FIND THAT THE COST OF MARBLE PLUS LAYING CHARGES CHARGED BY SISTER CONCERN TOPAIM WAS RS. 315/- PER SQ. FT. FOR VIJAYDEEP PROJET AND SIMILARLY, THE RATE WAS RS.310/- PER SQ. FT. FOR ASHIRWAD PROJECT. THE COS T OF MARBLE AND LAYING THEREOF DEPENDS UPON THE QUALITY OF MARBLE AND THIS WAS DEMONSTRATED ON BY THE ASSESSEE BY SHOWING THAT FOR DIFFERENT PROJECT IN THE ASSESSEE COMPANY, THE RATE PER SQ. FT. VARIED FROM RS. 280/- PER SQ. FT. TO 315/- PER SQ. FT. THE RATE ALSO VARIED FOR OUTSIDE PARTIES AND THE RANGE WAS BETWEEN RS. 150 PER SQ. FT. TO RS. 700/- PER SQ. FT. NO MATERIAL BROUG HT ON RECORD BY AO PROVING THAT RATE CHARGED BY TOPAIM WAS ON HIGHER SIDE, HEN CE, DISALLOWANCE MADE U/S.40A(2)(B). THE ADDITION IN OUR VIEW WAS THERE FORE RIGHTLY DELETED BY THE CIT(A). 40. WITH REFERENCE TO THE PURCHASE OF MARBLE FROM TOPAIM, THE ASSESSEE PRODUCED 2 BILLS OF TOPAIM AND THE PURCHASE OF MARB LE IN THE YEAR ENDING ON 31/3/2002 IN THE ERSTWHILE FIRM AND THE SAME WAS IN CLUDED IN THE WIP OF THE ERSTWHILE FIRM AS AT 31/3/2002. FURTHER COST OF CONSTRUCTION INCURRED IN THE YEAR 2003 AND COST OF LAYING MARBLE BY TOPAI M WAS ADDED TO THE OPENING WIP TO ARRIVE AT CLOSING WIP AS AT 25/3/200 3 ON WHICH THE FIRM WAS CONVERTED INTO THE ASSESSEE COMPANY. THUS, THE CO ST OF PURCHASE OF MARBLES FROM TOPAIM WAS PART OF OPENING AND CLOSING WIP. THE ASSESSEE WAS NOT A DEALER IN MARBLES AND HENCE, HAS NOT SHOW N SEPARATELY AS STOCK IN TRADE AND AT THE TIME OF PURCHASE OF MARBLES BY THE ERSTWHILE FIRM, IT WAS NOT ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 26 INTENDED THAT THE SAID MARBLE WOULD NOT BE USED IN THE PROJECT AND DIFFERENT MARBLES WOULD BE USED AND HENCE, AS AT 31/3/2002, I N THE BOOKS OF ERSTWHILE FIRM, IT WAS CORRECTLY REFLECTED AS PART OF CONSTRUCTION COST AND HENCE, PART OF WIP. NO ADDITION COULD BE MADE ON P RESUMPTION WITHOUT THE AO PROVING THAT THE SAME WAS NOT FORMING PART OF WI P. FURTHER, THE ASSESSEE ALREADY SOLD BACK THE SAID UNUSED MARBLES TO TOPAIM IN A.Y 2006- 07 AND THE SAME IS ALSO ACCEPTED BY THE DEPARTMENT IN THE SCRUTINY ASSESSMENT FOR THAT YEAR. THUS IT PROVES THAT THE MARBLES FORMED PART OF CLOSING WIP IN THE BOOKS OF THE ASSESSEE COMPANY. IN VIEW OF THE ABOVE WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) DESERV ES TO BE UPHELD. WE ACCORDINGLY DISMISS THE GROUND NO.2 RAISED BY THE R EVENUE. 41. GROUND NO.3 RAISED BY THE REVENUE READS AS FOLL OWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONFIRMING THE DISALLOWANCE OF RS. 32,83,710/- MADE U/S. 40A(2)(B) ON ACCOUNT OF EXCESSIVE INTERES T PAID TO M/S. AHUJA PROPERTIES. 42. THE ASSESSEE PAID INTEREST ON LOAN TO SISTER CO NCERN AHUJA PROPERTIES OF RS. 1,42,29,411/- AT THE RATE OF 19.50%. ACCORD ING TO THE AO, THE ASSESSEE PAID INTEREST ON BORROWING FROM OTHERS/OUT SIDERS AT THE RATE OF 15% AND HENCE INTEREST PAID TO SISTER CONCERN WAS EXCES SIVE BY 4.5% AND THUS, THE DIFFERENCE OF INTEREST AMOUNTING TO RS. 32,83,7 10/- WAS DISALLOWED BY THE AO INVOKING THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT. 43. BEFORE CIT(A), THE ASSESSEE POINTED OUT THAT T HE ASSESSEE HAD PAID INTEREST TO OUTSIDERS ABOUT 105 PARTIES WHEREIN IN MAJORITY OF CASES RATE OF INTEREST INCLUSIVE OF BROKERAGE WAS MORE THAN 18%. IT WAS ARGUED THAT THE FINDING OF THE AO THAT AVERAGE INTEREST WAS 15% WAS FACTUALLY INCORRECT. IT WAS ALSO POINTED OUT THAT THE RATE OF INTEREST PREV AILING AT THAT TIME WAS ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 27 MORE THAN 18% AND CONSIDERING FURTHER COST AND HAS SLE INVOLVED IN MAINTAINING THE LOAN SCHEDULE ETC. INTEREST PAID TO SISTER CONCERN AT 19.5% CANNOT BE SAID TO BE EXCESSIVE. IT WAS SUBMITTED T HAT THE ASSESSEE COMPANY HAS INCURRED LOSS FOR THE YEAR WHEREAS SISTER CONCE RN AHUJA PROPERTIES HAS SHOWN PROFIT AND PAID TAX AND HENCE, IT CAN BE CONC LUDED THAT APPELLANT NOT PAID ANY EXCESSIVE INTEREST AND THE DISALLOWANCE D ELETED. THE CIT(A) DELETED THE ADDITION MADE BY THE AO ACCEPTING THE PLEA OF T HE ASSESSEE. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. 44. WE HAVE HEARD THE RIVAL CONTENTIONS. THE LEAR NED D.R. RELIED ON THE ORDER OF THE AO. WE HAVE CONSIDERED THE SUBMISSION . WE FIND THAT AHUJA PROPERTIES IS GROUP CONCERN CARRYING ON THE BUSINES S OF FINANCING I.E. IT BORROWS FROM THE MARKET AND LENDS TO ANY OF THE GRO UP CONCERNS IN REQUIREMENT OF FUND. LOANS ARE MOSTLY BORROWED TH ROUGH BROKERS AND HENCE, BROKERAGE OF 3% IS CHARGED OVER AND ABOVE TH E RATE OF INTEREST. IN ASSESSEES CASE, LOANS BORROWED FROM OUTSIDERS WERE IN MAJORITY OF CASE AT THE RATE OF INTEREST INCLUDING BROKERAGE RANGING 18 % TO 27%. THUS, AVERAGE RATE OF INTEREST WORKED OUT TO MORE THAN 18% AS AGA INST THE FINDING OF THE AO THAT THE ASSESSEE BORROWED FROM OUTSIDERS/OTHERS @ 15%. AHUJA PROPERTIES HAS IN TURN BORROWED FUNDS FROM OUTSIDER S AND HAS PAID INTEREST RANGING FROM 15% TO 21% . IT HAS CHARGED TO ALL TH E GROUP CONCERNS AT THE RATE OF 19.5% AND FROM THE PROFIT AND LOSS ACCOUNT OF AHUJA PROP., IT CAN BE SEEN THAT IT HAS INCURRED EXPENSES FOR MAINTAINING THE LOANS AND AFTER REDUCING THE PAYMENT OF INTEREST TO OUTSIDERS, HAS SHOWN SOME PROFIT EARNING ON FINANCING BUSINESS AND OFFERED THE SAME FOR TAX AND PAID TAX. THE ASSESSEE IS A LOSS MAKING COMPANY AND HENCE, THERE IS NO AVOIDANCE OF TAX. IN SUCH CIRCUMSTANCES NO DISALLOWANCE CAN BE MADE B Y INVOKING THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT AS LAID DOWN IN THE FOLLOWING DECISIONS CIT VS AMRIT SOAP C. 308 ITR 287 (P&H) & DCIT VS. J .H. FINVEST (P) LTD. 21 ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 28 ITR (TRIB) 620 (DEL). WE THEREFORE FIND NO GROUNDS TO INTERFERE WITH THE ORDER OF THE CIT(A) AND DISMISS GROUND NO.3 RAISED BY THE REVENUE. 45. GROUND NO.4 HAS ALREADY BEEN DECIDED WHILE DECI DING GROUND NO.1 RAISED BY THE ASSESSEE. FOR THE REASONS STATED THE REIN THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 46. GROUND NO.5 RAISED BY THE REVENUE READS AS FOLL OWS: 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE DELETING THE DISA LLOWING OF RS.5,22,696/- ON ACCOUNT OF FITNESS EQUIPMENT AND D OOR CAMERAS WITHOUT APPRECIATING THE FACT THAT AS PER MOU, IN A SHIRWAD PROJECT, THE ASSESSEE WAS TO BEAR ONLY CONSTRUCTION COST. 47. THE AO DISALLOWED EXPENSES INCURRED BY THE ASSE SSEE ON ACCOUNT OF FITNESS EQUIPMENT AND DOOR CAMERAS OF RS. 5,22,696 . THE AO WAS OF THE VIEW THAT AS PER THE MOU THE ASSESSEE HAS TO BEAR O NLY CONSTRUCTION COST AND THERE WAS NO NEED OR BUSINESS EXIGENCY TO HAVE INSTALLED FITNESS EQUIPMENTS OR DOOR CAMERAS AND THEREFORE THE EXPENS ES ARE NOT ALLOWABLE. THE CIT(A) DELETED THE ADDITION MADE BY THE AO HOLD ING THAT THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSIN ESS OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE H AS RAISED GROUND NO.5 BEFORE THE TRIBUNAL. 48. WE HAVE HEARD THE SUBMISSION OF THE LEARNED D. R. WHO RELIED ON THE ORDER OF THE AO. WE ARE OF THE VIEW THAT THE EXPEN DITURE WAS INCURRED BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS. THE AO HAS NOT DOUBTED THE GENUINENESS OF EXPENSES. FITNESS EQUIPMENT AND DOO R CAMERA PART AND PARCEL OF CONSTRUCTION WORK. THESE EXPENSE ARE WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HENCE, THEY WERE RIGHTLY DIRE CTED TO BE ALLOWED AS ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 29 DEDUCTION BY THE CIT(A). WE DO NOT FIND ANY GROUND S TO INTERFERE WITH THE ORDER OF THE CIT(A). GROUND NO.5 IS ACCORDINGLY DI SMISSED. 49. IN THE RESULT, APPEAL BY THE REVENUE IS DISMISS ED. 50. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED WHILE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 24 TH DAY OF JUNE, 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 24 TH JUNE.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RH BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.4723&4558/MUM/2007(A.Y.2003-04) 30 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 7/6/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 8/6/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER