Embassy Property Developments Ltd., Bangalore V. DCIT, Bangalore

ITA 516/BANG/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80790 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 13-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRISCILLA SINGSIT CITIIIDR
• Assessee Lawyers: G SITARAMAN
• Keywords: Capital asset; Business income; Business expenditure; Revenue expenditure
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.516/BANG/2012 ASSESSMENT YEAR : 2007-08 EMBASSY PROPERTY DEVELOPMENTS LTD. [FORMERLY DYNASTY DEVELOPERS (P) LTD.], I FLOOR, EMBASSY POINT, 150, INFANTRY ROAD, BENGALURU 560 001. PAN: AAACD 6927A VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI G. SITARAMAN, C.A. RESPONDENT BY : MS. PRISCILLA SINGSIT, CIT-III(DR) DATE OF HEARING : 19.11.2014 DATE OF PRONOUNCEMENT : 05.12.2014 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IN THIS APPEAL BY THE ASSESSEE, IT IS ASSAILING TH E FOLLOWING ADDITIONS MADE BY THE ASSESSING OFFICER, WHICH WERE CONFIRMED BY THE CIT(APPEALS) :- ITA NO. 516/BANG/2012 PAGE 2 OF 16 RS . (A) DIMINUTION IN THE VALUE OF INVESTMENTS : 1,39,7 6,600 (B) ADVANCE FOR THE PROJECT WRITTEN OFF : 1,64,14,4 88 (C) CLAIMS PAID : 1,10,00,000 (D) SERVICE TAX FOR POONA PROJECT 20,20,495 (E) INTEREST PAID DISALLOWANCE 3,42,08,548 ---------------- 7,76,20,131 ---------------- 2. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN TH E BUSINESS OF BUILDERS AND DEVELOPERS, HAD FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR DECLARING AN INCOME OF RS. 25,51,56,620. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD CLAIMED RS.1,39 ,76,600 AS BUSINESS LOSS U/S. 28 OF THE INCOME-TAX ACT, 1961 [ THE ACT ]. LOSS CLAIMED WAS ON ACCOUNT OF DIMINUTION IN VALUE OF SHARES HELD BY THE ASSESSEE IN ONE M/S. GURUPRASAD HOTELS PVT. LTD. [GHPL]. AO PUT THE ASSESSEE ON NOTICE AS TO WHY THE CLAIM SHOULD NOT BE DISALLOWED TREATING IT AS A CAPITAL LOSS. REPLY OF THE ASSESSEE WAS THAT IT WAS A BUSIN ESS LOSS INCURRED ON SHARES ACQUIRED IN GHPL WHICH OWNED A PROPERTY. AS PER THE ASSESSEE, THE SHARES WERE ACQUIRED FOR FACILITATING DEVELOPME NT OF THE PROPERTY FOR FURTHER SALE. AS PER THE ASSESSEE, IT WAS IN THE BUSINESS OF REAL ESTATE DEVELOPMENT AND THE MODUS OPERANDI WAS TO ACQUIRE SHARES OF COMPANIES HOLDING LARGE TRACTS OF LAND AND DEVELOPMENT OF SUC H LAND FOR FURTHER SALE. HOWEVER, WITH REGARD TO THE PROPERTY HELD BY GHPL, THERE WERE LEGAL PROBLEMS MAKING IT DIFFICULT TO DEVELOP, WHICH CALL ED FOR REVALUATION OF THE SHARES HELD IN IT. SUCH A VALUATION RESULTED IN DI MINUTION IN THE VALUE OF ITA NO. 516/BANG/2012 PAGE 3 OF 16 SHARES RESULTING IN A LOSS AND IT WAS SO ACCOUNTED CONSIDERING ACCOUNTING STANDARD AS-13 OF INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA [ICAI]. 3. HOWEVER, THE AO WAS NOT IMPRESSED. ACCORDING TO HIM, IT WAS CLEAR FROM THE BALANCE SHEET OF THE ASSESSEE THAT SHARES WERE HELD BY IT AS INVESTMENTS AND SHOWN ACCORDINGLY ALONG WITH OTHER SHARES AND DEBENTURES HELD. THEREFORE, AS PER AO, ANY LOSS AR ISING OUT OF DEVALUATION OF SUCH CAPITAL INVESTMENT WOULD BE IN THE CAPITAL FIELD ONLY. HE DISALLOWED THE SAME. 4. IN ITS APPEAL BEFORE THE CIT(APPEALS), ASSESSEE REITERATED THE SAME CONTENTIONS AS STATED BEFORE THE AO. ASSESSEE ALS O STATED THAT SHARES WERE VALUED AT COST OR MARKET PRICE, WHICHEVER WAS LOWER. AS PER ASSESSEE, PROPERTY ACQUIRED THROUGH PURCHASE OF SHA RES, WERE INTENDED TO BE SOLD IN PARTS, BY TRANSFER OF SHARES TO THE EVEN TUAL PURCHASERS, AFTER DEVELOPMENT. THERE WERE LEGAL COMPLICATIONS DUE TO THIRD PARTY CLAIMS IN THE PROPERTY HELD BY GHPL, WHICH RESULTED IN DIMINU TION OF THE VALUE OF ITS SHARES. AS PER ASSESSEE, SUCH LOSS WAS ONLY IN TH E REVENUE FIELD AND NOT IN THE CAPITAL FIELD, SINCE IT WAS IN REAL ESTATE B USINESS. 5. HOWEVER, THE LD. CIT (APPEALS) WAS NOT IMPRESSED . AS PER LD. CIT(A), ASSESSEE WAS NOT DEVELOPING LANDS OR FLATS DIRECTLY, BUT THE PROPERTY WAS BEING ACQUIRED BY ASSESSEE, IN AN INDI RECT MANNER BY ACQUISITION OF SHARES IN OTHER COMPANIES, WHICH WER E HAVING LARGE TRACTS OF LAND. AS AND WHEN PROPERTIES WERE SOLD AFTER DEVEL OPMENT, THE SALE ITA NO. 516/BANG/2012 PAGE 4 OF 16 PROCEEDS WERE CREDITED AS REALIZATION ON SHARES AND SURPLUS OFFERED AS BUSINESS INCOME. AS PER LD. CIT(A), THE MAIN OBJEC T OF ASSESSEE COMPANY DID NOT ALLOW IT TO CARRY ON BUSINESS OF SHARE TRAD ING. IF IT WAS DEALING IN SHARES, IT WAS IN VIOLATION OF TERMS & CONDITIONS O F GRANTING REGISTRATION UNDER COMPANIES ACT AND IT WAS EVADING STAMP DUTY A S WELL AS CAPITAL GAINS TAX THROUGH THIS METHOD. IN THIS VIEW OF THE MATTER, HE UPHELD THE DISALLOWANCE MADE BY AO. 6. NOW BEFORE US, LD. AR SUBMITTED THAT THOUGH VALU E OF SHARES WERE SHOWN UNDER THE HEAD INVESTMENT, THESE WERE NOTHI NG BUT STOCK-IN-TRADE OF ASSESSEE. THE BUSINESS METHODOLOGY OF ASSESSEE WAS TO ACQUIRE PROPERTY THROUGH PURCHASING SHARES OF OTHER COMPANI ES, WHO WERE HAVING HOLDINGS OF LAND. AS PER LD. AR, THEREAFTER, ASSES SEE DEVELOPED THE LAND AND CONSTRUCTED BUILDING. WHEN THE SALES OF FLATS OR UNITS FROM SUCH PROPERTY WERE EFFECTED, THE REALIZATION ON ACCOUNT OF LAND WERE CREDITED IN THE INVESTMENT ACCOUNT; WHEREAS ON THE REALIZATION ARISING OUT OF SALE OF BUILDINGS, PROFITS WERE DIRECTLY SHOWN AS BUSINESS INCOME. AS PER LD. AR, WHOLE OF THE TRANSACTIONS WERE NOTHING BUT PART AND PARCEL OF ASSESSEES BUSINESS OF REAL ESTATE. LD. CIT(A), AS PER LD. AR , FELL IN ERROR IN COMING TO THE CONCLUSION THAT ASSESSEE WAS DOING SOMETHING IL LEGAL BY PURCHASING SHARES OF ANOTHER COMPANY WHICH WAS HOLDING THE PRO PERTY. ACCORDING TO HIM, ASSESSEE NEVER EVADED STAMP DUTY AND/OR CAPITA L GAINS TAX. IT WAS NOT DOING ANY UNLAWFUL ACTIVITY. AS PER LD. AR, VA LUE OF THE SHARES HAD GONE DOWN DUE TO DIFFICULTIES IN SELLING THE LAND H ELD BY GHPL. THERE WERE ITA NO. 516/BANG/2012 PAGE 5 OF 16 LITIGATIONS WITH REGARD TO SUCH PROPERTY WHICH MADE IT IMPOSSIBLE FOR ASSESSEE TO EFFECT SALE OF THE LAND. HENCE THE DIM INUTION IN THE VALUE OF THE SHARES, WHICH WERE NOTHING BUT STOCK-IN-TRADE, WAS A LOSS IN THE REVENUE FIELD AND NOT IN THE CAPITAL FIELD. IN ANY CASE, AS PER LD. AR, THIS WAS THE PRACTICE FOLLOWED BY ASSESSEE SINCE VERY MA NY YEARS AND THE DEPARTMENT HAD NOT FOUND ANYTHING UNUSUAL IN ANY OF THE EARLIER YEARS. FURTHER, AS PER LD. AR, ACQUISITION OF SHARES FOR O BTAINING PROPERTY COULD NOT BE HELD AS ACQUISITION OF ANY FIXED ASSET BY ASSESS EE. THEREFORE, AS PER LD. AR, THE LOWER AUTHORITIES FELL INTO ERROR IN DISALL OWING THE CLAIM OF ASSESSEE ON DIMINUTION IN THE VALUE OF SHARES. 7. PER CONTRA , LD. DR SUPPORTED THE ORDERS OF THE AUTHORITIES BE LOW. 8. WE HAVE PERUSED THE RECORDS AND HEARD THE RIVAL SUBMISSIONS. A READING OF THE ASSESSMENT ORDER AND CIT(A)S ORDER SHOW THAT THE SUM OF RS.1,39,76,600 CLAIMED BY THE ASSESSEE AS BUSINESS LOSS WAS WORKED OUT AS UNDER:- BOOK VALUE OF INVESTMENT IN GHPL : 1,40,00,000 LESS: VALUE OF SHARES AS ON 31.3.2007 : 23, 400 --------------- BALANCE : 1,39,76,600 --------------- 9. BEFORE THE AO, ARGUMENT OF ASSESSEE WAS THAT BUS INESS LOSS WAS CLAIMED IN ACCORDANCE WITH ACCOUNTING STANDARD 13 ( AS-13) PRESCRIBED BY ICAI. THE ARGUMENT NOW TAKEN UP BEFORE US IS THAT EVEN IF IT WAS SHOWN UNDER THE HEAD INVESTMENT, IT WAS NOTHING BUT STO CK-IN-TRADE. WE FIND THAT ITA NO. 516/BANG/2012 PAGE 6 OF 16 AS-13 IS WITH REGARD TO INVESTMENTS HELD BY AN ENTE RPRISE FOR EARNING INCOME BY WAY OF DIVIDENDS, INTEREST, RENTALS, CAPI TAL APPRECIATION OR ANY OTHER BENEFITS. IT IS CLEARLY SPECIFIED IN AS-13 T HAT ASSETS COVERED BY THE SAID STANDARD WERE INVESTMENTS AND NOT STOCK-IN- TRADE. ASSESSEE CANNOT ON THE SAME BREATH SAY THAT SHARES HELD BY I T IN GHPL WERE BOTH INVESTMENTS AS WELL AS STOCK-IN-TRADE. NEVERTHELES S, IF THE VALUE OF SHARES HAD GONE DOWN SUBSTANTIALLY DURING THE RELEVANT PRE VIOUS YEAR DUE TO ANY REASON, THEN SUCH DIMINUTION IN VALUE CAN BE CLAIME D BY THE ASSESSEE, AS A BUSINESS LOSS. THIS IS FOR THE REASON THAT ASSES SEES BUSINESS WAS IN REAL ESTATE AND NONE OF THE LOWER AUTHORITIES HAD D OUBTED THE VERACITY OF ITS CONTENTION THAT SHARES ACQUIRED BY IT IN GHPL WAS O NLY FOR THE PURPOSE OF DEVELOPMENT OF LAND HELD BY THE SAID GHPL. WHAT WE RE THE LEGAL PROBLEMS WITH REGARD TO THE SAID PROPERTY WHICH REQUIRED THE ASSESSEE TO GO FOR A DRASTIC DEVALUATION IS NOT CLEAR FROM THE RECORDS. IN OTHER WORDS, EVEN THOUGH LOSS HAS BEEN QUANTIFIED BY ASSESSEE AT RS.1 ,39,76,600, NONE OF THE AUTHORITIES BELOW HAVE GONE INTO WORKING OF THE LOSS AND CORRECTNESS OF THE CLAIM. AS MENTIONED BY US AT PARA 8 ABOVE, VAL UE OF HOLDING IN GHPL WAS SHOWN BY THE ASSESSEE AT THE END OF RELEVANT PR EVIOUS YEAR AS ONLY RS.23,400. CORRECTNESS OF THIS CLAIM HAS NOT BEEN VERIFIED BY THE LOWER AUTHORITIES. IT IS ALSO NOT CLEAR AS TO HOW BOOK V ALUE OF RS.1,40,00,000 FOR THE SHARES, HAS BEEN ARRIVED AT. IF THE ASSESSEE H AD ACQUIRED SHARES OF GHPL, THE PRICE AT WHICH THE SHARES WERE ACQUIRED W OULD BE COST OF THE SHARES. ONCE THE ASSESSEE HAS ACQUIRED THE SHARES , FURTHER EXPENDITURE ITA NO. 516/BANG/2012 PAGE 7 OF 16 INCURRED BY IT, ON ACCOUNT OF DEVELOPMENT OF THE PR OPERTY HELD BY IT IN GHPL, IN OUR OPINION, WOULD NOT RESULT IN ENHANCEME NT OF THE COST OF SHARES. ALL THESE ASPECTS HAVE NOT BEEN LOOKED INT O BY THE LOWER AUTHORITIES. WE ARE, THEREFORE, OF THE OPINION, TH AT THE MATTER REQUIRES A FRESH LOOK BY THE AO. WE THEREFORE SET ASIDE THE O RDERS OF THE AUTHORITIES BELOW AND REMAND THE ISSUE REGARDING CLAIM OF DIMIN UTION IN THE VALUE OF INVESTMENTS OF RS.1,39,76,600 BACK TO THE FILE OF T HE ASSESSING OFFICER FOR FRESH CONSIDERATION. 10. NEXT ITEM OF DISALLOWANCE WHICH HAS BEEN ASSAIL ED BY THE ASSESSEE IS RS.1,64,14,488 CLAIMED BY IT AS AN ADVANCE WRITE OFF. 11. THIS ABOVE DISALLOWANCE IS ALSO CLOSELY RELATED TO THE FIRST CLAIM OF THE ASSESSEE REGARDING DIMINUTION IN THE VALUE OF I NVESTMENTS. THE SUM OF RS.1,64,14,488 WAS AN ADVANCE GIVEN BY THE ASSESSEE TO GHPL. AO HAD DISALLOWED THE CLAIM FOR THE REASON THAT ADVANCE GI VEN BY THE ASSESSEE TO GHPL WAS NOT ROUTED THROUGH PROFIT & LOSS ACCOUNT I N ANY OF THE EARLIER YEARS. AS PER AO, IT WAS A CAPITAL LOSS. THOUGH A SSESSEE SUBMITTED THAT THE SAME WAS GIVEN TO THE SAID GHPL WITH THE INTENT ION OF CONSTRUCTING A COMMERCIAL PROJECT AND MARKETING THEM THEREAFTER TO INTERESTED PARTIES, WHICH PROJECT BECAME UNSUCCESSFUL, AO DID NOT ACCE PT SUCH PLEA. IN OTHER WORDS, AO REJECTED THE CONTENTION OF THE ASSESSEE, THAT ADVANCE WRITE OFF WAS TO BE ALLOWED AS A REVENUE OUTGO. 12. IN ITS APPEAL BEFORE THE CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT THOUGH THE PROPERTY WAS HELD BY GHPL, ASSE SSEE HAD PAID ITA NO. 516/BANG/2012 PAGE 8 OF 16 RS.1.64 CRORES TOWARDS ADVANCE AND SPENT RS.1.40 CR ORES FOR DEVELOPMENT. AS PER ASSESSEE, DEVELOPMENT COST WAS BOOKED AS COST OF SHARES WHEREAS ADVANCE WAS DEBITED UNDER THE HEAD LOANS & ADVANCES. THE PROPERTY, AS PER ASSESSEE, WAS HELD BY GHPL UND ER A LEASE AND THE ORIGINAL OWNERS OF THE PROPERTY HAD FILED CIVIL SUI TS FOR RETURN OF THE PROPERTY. AS PER ASSESSEE, SUCH CIVIL SUITS WERE DECIDED IN F AVOUR OF THE ORIGINAL OWNERS AND THEREBY THE VALUE OF SHARES HELD BY THE ASSESSEE IN GHPL WENT DOWN SUBSTANTIALLY AND BALANCES UNDER THE HEAD LOANS & ADVANCES BECAME IRRECOVERABLE. AS PER ASSESSEE, THESE WERE NOTHING BUT BUSINESS LOSS. SUBMISSION OF ASSESSEE WAS THAT DISALLOWANCE UNDER THE ACT HAD TO BE DECIDED BASED ON THE PROVISIONS OF THE ACT AND N OT BASED ON THE PROVISIONS OF ANY OTHER ENACTMENT OR THE METHOD OF DISCLOSURE IN THE BALANCE SHEET. 13. HOWEVER, LD. CIT(A) DID NOT ACCEPT ANY OF THE C ONTENTIONS TAKEN BY THE ASSESSEE. FOR THE SAME REASONS AS MENTIONED FO R CONFIRMING DISALLOWANCE WITH REGARD TO DIMINUTION IN THE VALUE OF INVESTMENTS, HE HELD THAT CLAIM OF THE ASSESSEE FOR WRITE OFF OF ADVANCE S ALSO COULD NOT BE ALLOWED. 14. NOW BEFORE US, LD. AR MADE SIMILAR ARGUMENTS AS HE MADE IN RESPECT OF THE ISSUE WITH REGARD TO DIMINUTION IN T HE VALUE OF SHARES HELD IN GHPL. PER CONTRA , LD. DR SUPPORTED THE ORDERS OF THE REVENUE AUTHOR ITIES. 15. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. PURCHASING SHARES OF ANOTHER COMPANY WITH A VIEW T O DEVELOP THE PROPERTY ITA NO. 516/BANG/2012 PAGE 9 OF 16 HELD BY SUCH OTHER COMPANY CANNOT, IN OUR VIEW, BE HELD TO BE AN UNLAWFUL ACTIVITY. HOWEVER, WITH REGARD TO CLAIM OF THE AS SESSEE ON DIMINUTION IN THE VALUE OF SHARES, WE HAVE ALREADY SET ASIDE THE ISSUE TO THE AUTHORITIES BELOW FOR VERIFICATION AFRESH. CLAIM OF DEVELOPMENT EXPENDITURE, HOWEVER, IS ON A DIFFERENT FOOTING. NONE OF THE AUTHORITIES BELOW HAVE DOUBTED THE CLAIM OF ASSESSEE THAT RS.1.40 CRORES WAS SPENT FOR DEVELOPMENT OF THE PROPERTY. ASSESSEE BEING IN REAL ESTATE BUSINESS, ANY PAYMENT DEBITED BY IT FOR ACQUIRING OR IMPROVING THE QUALITY OF STOCK- IN-TRADE, WOULD BE IN THE REVENUE FIELD ONLY. IF, AS MENTIONED BY THE ASSESS EE, THE PROPERTY HELD BY GHPL WAS ADJUDICATED TO BE HANDED OVER TO THE ORIGI NAL OWNERS, WHO HAD LEASED SUCH PROPERTY TO GHPL, THEN WHATEVER ASSESSE E HAD PAID FOR DEVELOPMENT OF THE PROPERTY WOULD GO IN VAIN. IT W OULD DEFINITELY BE ELIGIBLE FOR WRITE OFF OF SUCH ADVANCES. HOWEVER, IN OUR OP INION, NONE OF THE LOWER AUTHORITIES HAVE VERIFIED WHETHER CLAIM OF THE ASSE SSEE THAT PROPERTY HELD BY GHPL WAS ORDERED BY CIVIL COURTS TO BE GIVEN BAC K TO ITS ORIGINAL OWNERS WAS CORRECT, AND WHETHER THE MATTER HAS BEEN FINALL Y SETTLED IN FAVOUR OF THE ORIGINAL OWNERS. WE ARE THEREFORE OF THE OPINION TH AT THIS ISSUE ALSO REQUIRES A FRESH LOOK. WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND REMIT THE CLAIM OF ASSESSEE ON PROJECT WRITE OFF AL SO BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION IN ACCORD ANCE WITH LAW. 16. NEXT ISSUE RAISED BY THE ASSESSEE IS WITH REGAR D TO DISALLOWANCE OF A SUM OF RS.1,10,00,000. ITA NO. 516/BANG/2012 PAGE 10 OF 16 17. ASSESSEE HAD DURING THE RELEVANT PREVIOUS YEAR PAID A SUM OF RS.1,10,00,000 TO EICHER GOODEARTH LTD. [EGL]. A S PER ASSESSEE, THIS SUM WAS PAID TO EGL FOR WITHDRAWING A CASE FILED AG AINST THE PROPERTY WHICH WAS PROPOSED TO BE PURCHASED BY THE ASSESSEE. AO PUT THE ASSESSEE ON NOTICE AS TO WHY THE CLAIM SHOULD NOT B E DISALLOWED. REPLY OF ASSESSEE WAS THAT PROPERTY BEARING NO.30 SITUATED A T 29, KASTURBA ROAD, BANGALORE WAS A PART OF ITS STOCK-IN-TRADE. AS PER ASSESSEE, THE SUM OF RS.1,10,00,000 WAS PAID TO EGL FOR WITHDRAWING THE CASE FILED BY THE SAID COMPANY ON SUCH PROPERTY. THEREFORE, ASSESSEE SUBM ITTED THAT IT WAS A REVENUE EXPENDITURE. AO DID NOT ACCEPT THIS CONTEN TION. ACCORDING TO HIM, AMOUNT SPENT BY ASSESSEE SHOULD HAVE GONE INTO COST OF THE PROJECT. AO ALSO NOTED THAT ASSESSEE HAD NOT SHOWN ANY CLOSING STOCK IN ITS P&L ACCOUNT. HE THEREFORE DISALLOWED THE CLAIM. 18. BEFORE CIT(APPEALS), ARGUMENT OF THE ASSESSEE W AS THAT EGL WAS A TENANT IN THE PROPERTY HELD AT KASTURBA ROAD, BANGA LORE. THE PROPERTY WAS OWNED BY GEOFFREY POWER AND WAS INITIALLY LEASED TO VOLTAS LTD. EGL WAS A SUB-TENANT OF VOLTAS. ON 18.11.2005, ASSESSEE HA D PURCHASED THE PROPERTY FROM GEOFFREY POWER ON 'AS IS WHERE IS CON DITION'. ASSESSEE HAD ALSO INITIATED LITIGATION FOR EVACUATING EGL FROM T HE SAID PROPERTY. NEVERTHELESS, LATER ASSESSEE OPTED FOR A OUT-OF-COU RT SETTLEMENT WHEREBY IT PAID A SUM OF RS.1,10,00,000 TO EGL AND EGL WITHDRE W THE CASE FILED BY IT. THEREFORE, AS PER ASSESSEE, IT WAS ONLY A REVE NUE EXPENDITURE. ITA NO. 516/BANG/2012 PAGE 11 OF 16 19. LD. CIT(APPEALS), HOWEVER, WAS NOT APPRECIATIVE OF THE ABOVE CONTENTIONS. ACCORDING TO HIM, IF THE ASSESSEE WAS IN THE BUSINESS OF REAL ESTATE, A REAL ESTATE PURCHASED SHOULD HAVE BEEN SH OWN AS STOCK-IN-TRADE. THE ASSESSEE WAS ONLY ACQUIRING SHARES OF COMPANIES AND SELLING SUCH SHARES CLAIMING THAT SURPLUS WAS FROM REAL ESTATE B USINESS. AS PER LD. CIT(A), THE STAGE OF DEVELOPMENT OF THE SAID PROPER TY IN KASTURBA ROAD WAS STILL A LONG TIME OFF, SINCE POSSESSION WAS NOT YET WITH THE ASSESSEE. THUS, HE HELD THAT THE SUM OF RS.1,10,00,000 PAID T O EGL WAS ONLY AN ATTEMPT TO ACQUIRE A CAPITAL ASSET AND DISALLOWANCE MADE BY THE AO WAS JUSTIFIED. 20. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE OR DERS OF AUTHORITIES BELOW, SUBMITTED THAT PROPERTY WAS ORIGINALLY HELD ON LEASE BY M/S. VOLTAS LTD., WHO HAD SUB-LEASED TO EGL. THE OWNER OF THE P ROPERTY WAS M/S. GEOFFREY POWER. ASSESSEE HAD ACQUIRED THE PROPERTY ON 18.11.2005. IT WAS ACQUIRED ON AS IS WHERE IS CONDITION. EGL HAD FILED SUITS FOR GETTING TITLE OF THE PROPERTY SO AS TO SETTLE THE ISSUE. A SSESSEE HAD OPTED FOR A OUT- OF-COURT SETTLEMENT AND PAID RS.1,10,00,000. THE P ROPERTY IN QUESTION WAS SHOWN AS STOCK-IN-TRADE AND THEREFORE EXPENDITURE I NCURRED ON SETTLEMENT WAS A REVENUE OUTGO. 21. PER CONTRA , LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 22. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. CLAIM OF ASSESSEE IS THAT RS.1,10,00,000 WAS PAID TO EGL FOR WITHDRAWING A CASE WITH RESPECT TO A PROPERTY PURCHASED BY IT AT NO.29 , KASTURBA ROAD, ITA NO. 516/BANG/2012 PAGE 12 OF 16 BANGALORE. THOUGH ASSESSEE STATES THAT PROPERTY HA S BEEN SHOWN AS STOCK-IN-TRADE, IN THE ASSESSMENT ORDER AO HAS CLEA RLY MENTIONED THAT STOCK-IN-TRADE IS NOT APPEARING IN ITS P&L ACCOUNT. ASSESSEE HAS NOT FILED P&L ACCOUNT BEFORE US. IF, AS STATED BY ASSESSEE, PROPERTY WAS HELD AS STOCK-IN-TRADE, IT WAS NECESSARY THAT ITS STOCK-IN- TRADE OR ATLEAST INCREASE OR DECREASE IN STOCK-IN-TRADE SHOULD APPEAR IN THE P&L ACCOUNT. FURTHER, IT IS ALSO NOT CLEAR FROM THE ORDERS OF LOWER AUTHORITIES AS TO WHETHER THE SETTLEMENT CLAIMED BY THE ASSESSEE WAS VERIFIED BY THEM. ASSESSEE WOULD BE ELIGIBLE TO CLAIM THE SUM OF RS.1,10,00,000 IN T HE REVENUE FIELD, ONLY IF THE STOCK-IN-TRADE IS A PART OF ITS P&L ACCOUNT. E ITHER OPENING STOCK AND CLOSING STOCK CAN BE SHOWN, OR INCREASE/DECREASE IN STOCK CAN BE SHOWN. HOWEVER, IT SHOULD NECESSARILY APPEAR IN THE P&L AC COUNT, AS OTHERWISE, P&L ACCOUNT WILL NOT GIVE A TRUE AND FAIR VIEW OF T HE WORKING RESULTS. ALL THESE ASPECTS HAVE TO BE VERIFIED. THEREFORE, THIS ISSUE IS ALSO REMITTED BACK TO THE FILE OF ASSESSING OFFICER FOR FRESH CON SIDERATION AS INDICATED ABOVE IN ACCORDANCE WITH LAW. WE ACCORDINGLY SET A SIDE THE ORDERS OF AUTHORITIES BELOW. 23. NEXT ISSUE RAISED BY THE ASSESSEE IS WITH REGAR D TO DISALLOWANCE OF SERVICE TAX OF RS.20,20,495 INCURRED ON THE PROJECT CALLED POONA PROJECT. 24. FACTS APROPOS ARE THAT ASSESSEE HAD CLAIMED THI S AMOUNT AS PAID TO ONE OF ITS PROJECT POONA PROJECT UNDER THE HEAD MAIN OFFICE EXPENDITURE. AO WAS OF THE OPINION THAT IF IT WAS INCURRED FOR P OONA PROJECT, IT SHOULD HAVE GONE INTO THE COST OF SUCH PROJECT AND NOT CHA RGED TO THE OFFICE ITA NO. 516/BANG/2012 PAGE 13 OF 16 EXPENDITURE. IN OTHER WORDS, AO WAS OF THE VIEW TH AT EXPENDITURE SHOULD HAVE ENTERED THE CLOSING STOCK OR WORK-IN-PROGRESS. HE THEREFORE DISALLOWED THE CLAIM OF RS.20,20,495. 25. THE LD. CIT(APPEALS) CONFIRMED AOS VIEW. 26. NOW BEFORE US, LD. AR SUBMITS THAT IT WAS TO BE ALLOWED AS NORMAL BUSINESS EXPENDITURE. AS PER LD. AR, SERVICE TAX P AID HAD TO BE ALLOWED IN THE YEAR OF PAYMENT U/S. 43B. PER CONTRA , LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 27. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. NONE OF THE AUTHORITIES BELOW HAVE DOUBTED THE VERACITY OF THE CLAIM OF ASSESSEE THAT SUM OF RS.20,20,495 WAS PAID AS SERVICE TAX. NONE OF THE AUTHORITIES BELOW HAVE ALSO DOUBTED THAT IT WAS IN RELATION TO ASSESSEES PROJECT IN POONA. THEIR ONLY QUALM IS THAT IT SHOULD HAVE BEE N AS A PART OF PROJECT COST AND NOT CLAIMED AS A REVENUE OUTGO. SINCE P&L ACCOUNT IS NOT BEFORE US, WE ARE UNABLE TO VERIFY WHETHER ASSESSEE HAS SH OWN POONA PROJECT AS PART OF ITS STOCK-IN-TRADE AS WORK-IN-PROGRESS. WE ARE OF THE OPINION THAT THE EXPENDITURE HAD TO GO AS A PART OF THE PROJECT COST. NO DOUBT, CLAIM OF SERVICE TAX IS ALLOWABLE IN THE YEAR OF PAYMENT U/S . 43B. NEVERTHELESS, IN OUR OPINION, IT IS REQUIRED TO BE VERIFIED, WHETHER ASSESSEE HAD SHOWN THE PROJECT EXPENDITURE INCLUDING SERVICE TAX PAYMENT, AS A PART OF ITS WORK-IN- PROGRESS OR STOCK-IN-TRADE. WE ARE, THEREFORE, OF THE OPINION THAT THIS ISSUE ALSO REQUIRES A FRESH LOOK BY THE ASSESSING OFFICER . WE SET ASIDE THE ITA NO. 516/BANG/2012 PAGE 14 OF 16 ORDERS OF AUTHORITIES BELOW AND REMIT THIS ISSUE AL SO BACK TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION IN ACCORD ANCE WITH LAW. 28. LAST OF THE ISSUE RAISED BY THE ASSESSEE IS WIT H REGARD TO DISALLOWANCE OF INTEREST OF RS.3,42,08,548, WHICH W AS CONFIRMED BY THE LD. CIT(APPEALS). 29. FACTS APROPOS ARE THAT ASSESSEE HAD DURING THE RELEVANT PREVIOUS YEAR DEBITED INTEREST OF RS.15,19,74,415 IN ITS P&L ACCOUNT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTED THAT SUM OF RS.2,51,27,474 COMPRISED IN THE ABOVE AMOUNT WAS RELATED TO A PROJ ECT CALLED TITAN PROJECT AND ANOTHER SUM OF RS.90,81,074 RELATED TO A PROJECT CALLED VOLTAS PROJECT. AS PER AO, INTEREST PAID WERE ATTRIBUTAB LE TO SPECIFIC PROJECTS, SINCE LOANS WERE INVESTED IN SPECIFIC PROJECTS VIZ. , TITAN PROPERTIES AND VOLTAS PROPERTIES. THEREFORE, AS PER AO, INTEREST EXPENDITURE WAS REQUIRED TO BE A PART OF THE PROJECT COSTS. IN OTHER WORDS, ACCORDING TO HIM, IT COULD NOT BE ALLOWED AS REVENUE EXPENDITURE. HE MADE A DISALLOWANCE OF 3,42,08,548. 30. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF ASSESSEE WAS THAT THE BORROWED FUNDS WERE UTILISED FOR TWO PROPERTIES VIZ., TITAN PROPERTIES AND VOLTAS PROPERTIES LTD. AS PER ASSESSEE, SURPLU S ON SALE OF SUCH PROPERTIES WERE TO BE OFFERED AS BUSINESS INCOME. BORROWED FUNDS WERE UTILISED FOR BUSINESS PURPOSES. ACCORDING TO ASSES SEE, INTEREST THEREON WAS ALLOWABLE U/S. 36(1)(III) OF THE ACT. HOWEVER, LD. CIT(A), RELYING ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF DY. CIT V. CORE HEALTH ITA NO. 516/BANG/2012 PAGE 15 OF 16 CARE LTD. (2008) 298 ITR 194 (SC) , HELD THAT BORROWED FUNDS IF UTILISED FOR ACQUISITION OF CAPITAL ASSET, INTEREST THEREON COUL D NOT BE ALLOWED, UNTIL AND UNLESS SUCH CAPITAL ASSET WAS PUT TO USE. HE RELIE D ON THE PROVISO TO SECTION 36(1)(III) INSERTED BY FINANCE ACT, 2003 W. E.F. 1.4.2004. HE THUS CONFIRMED THE DISALLOWANCE MADE BY AO. 31. NOW BEFORE US, LD. AR SUBMITTED THAT IT WAS NOT DOUBTED BY ANY LOWER AUTHORITIES THAT EXPENDITURE OF INTEREST WAS ON LOANS RAISED FOR SPECIFIC REAL ESTATE PROJECTS. ASSESSEE WAS IN R EAL ESTATE BUSINESS. THE PROJECTS HAD BEEN UNDERTAKEN BY THE ASSESSEE IN THE COURSE OF SUCH BUSINESS. AS PER LD. AR IT WAS NOT FOR ACQUIRING A NY FIXED ASSET. THEREFORE, INTEREST ON LOANS WHICH ULTIMATELY WAS A PART OF ST OCK-IN-TRADE HAD TO BE ALLOWED U/S. 36(1)(III). 32. PER CONTRA, LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 33. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. NONE OF THE AUTHORITIES BELOW HAVE DISPUTED THE CLAIM OF THE ASSESSEE THAT LOANS RAISED WERE USED ON PROJECTS UNDERTAKEN BY IT AS A PART OF ITS BUSINESS IN REAL ESTATE. IF IT IS SO, THEN INTEREST ON SUCH LO ANS IS AN ALLOWABLE ITEM, AND CANNOT BE CONSIDERED TO BE IN A CAPITAL FIELD. SEC TION 36(1)(III) CLEARLY SPECIFIES THAT AMOUNT OF INTEREST PAID IN RESPECT O F CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE. LD . CIT(A), IN OUR OPINION, FELL IN ERROR WHEN HE HELD THAT SUCH EXPENDITURE SH OULD BE CAPITALISED, TILL THE ASSET WAS FIRST PUT TO USE. ASSESSEE WAS SPEND ING MONEY ON THE PROPERTIES, NOT FOR THE PURPOSE OF ACQUIRING ANY FI XED ASSET FOR ITS OWN USE. ITA NO. 516/BANG/2012 PAGE 16 OF 16 IT WAS A PART OF ITS REGULAR BUSINESS IN REAL ESTAT E. SUCH INTEREST PAID, THEREFORE, WAS ONLY FOR THE PURPOSE OF BUSINESS OF ASSESSEE AND WAS ALLOWABLE. WE ARE, THEREFORE, OF THE OPINION THAT DISALLOWANCE WAS NOT CALLED FOR. THE DISALLOWANCE IS DELETED. THIS ISS UE IS DECIDED IN FAVOUR OF ASSESSEE. 34. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 5 TH DAY OF DECEMBER , 2014 . SD/- SD/- ( P. MADHAVI DEVI ) ( ABRAHAM P. GEOR GE ) JUDICIAL MEMBER ACCOUNTANT ME MBER BANGALORE, DATED, THE 5 TH DECEMBER, 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.