ACIT, Mangalore V. M/s Sanu Palace International (P) Ltd., Mangalore

ITA 600/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5652 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2000-2001
• Appeal Filed On: 28-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JACINTA ZIMIK VASHAI
• Assessee Lawyers: SRINIVASAN V
• Keywords: Business expenditure
• Section: 43B; 143(3); 133A

Judgement Text

PAGE 1 OF 7 ITA NO.600/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI GEORGE GEORGE K, J.M. AND SHRI A MOHAN ALANKAMONY, A.M ITA NO.600/BANG/2010 (ASSESSMENT YEAR 2000-01) THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(1), MANGALORE. - APPELLANT VS M/S SANU PALACE INTERNATIONAL (P) LTD., SANU PALACE, KODIALBAIL, MANGALORE. - RESPONDENT APPELLANT BY : SMT. JACINTA ZIMIK VASHAI, ADDL. CIT RESPONDENT BY : SHRI SRINIVASAN V., C.A. ORD ER PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE REVENUE ARISE OUT O F THE ORDER OF LEARNED CIT(A), MANGALURU DATED 2/3/2010. THE ASST. YEAR CONCERNED IS 2000-01. 2. THE EFFECTIVE GROUND RAISED READS AS FOLLOWS:- THE LEARNED CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF INTEREST PAYABLE TO KSFC WITHOUT PROPERLY APPRECIATING THE FACTS THAT THE ASSESSEE COMPANY HAD DIVERTED THE FUNDS FOR NON-BUSINESS PURPOSES AND HENCE, THE INTEREST THEREON IS NOT ALLOWABLE AS BUSINESS EXPENDITURE. PAGE 2 OF 7 ITA NO.600/BANG/2010 2 3. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A PRIVATE LIMITED COMPANY. THE MA IN OBJECT OF THE COMPANY WAS TO TAKE ON LONG LEASE A LA ND OWNED BY SANU FAMILY TRUST AND TO CONSTRUCT AND DEVELOP A CO MMERCIAL COMPLEX KNOWN AS SANU PALACE ON THAT LAND, AND TO RENT/LEASE IT OUT TO VARIOUS ENTITIES. THE COMPANY WAS PROMOTED BY SHR I CHANDRAKANT P SANU, HIS WIFE AND THEIR FOUR SONS AN D DAUGHTERS-IN- LAW. THE ENTIRE SUBSCRIBED SHARE CAPITAL OF THE CO MPANY WAS HELD BY THE ABOVE SAID PERSONS. 4. PURSUANT TO SURVEY U/S 133A OF THE I T ACT, RETU RN OF INCOME WAS FILED ON 18/12/2002 DECLARING A LOSS OF RS.63,350/-. THE ASSESSEE COMPANY HAD COMPUTED THE LOSS OF RS.63, 354/- AFTER DEBITING TO THE P&L A/C NET INTEREST OF RS.18,64,60 0/- PAYABLE TO KSFC ON THE LOAN OF RS.2 CRORES IT HAD AVAILED FROM KSFC. THE AO, IN THE COURSE OF SCRUTINY ASSESSMENT, WHILE PERUSING THE BALANCE SHEET OF THE ASSESSEE COMPANY, NOTICED THAT THE LOAN TAKEN FROM KSFC WAS DIVERTED TO M/S SANU FAMILY TRUST TO THE E XTENT OF RS.1,40,17,137/- AND TO M/S P V SANU JEWELERS TO TH E EXTENT OF RS.59,82,863/-. THE ASSESSEE EXPLAINED THAT IT HAD CHARGED INTEREST ON THE AMOUNT ADVANCED TO M/S P V SANU JEW ELERS AT THE RATE OF 18% P.A. AND IN TERMS OF AGREEMENT DATED 25 /8/99, IT WAS THE OBLIGATION AND RESPONSIBILITY OF THE ASSESSEE CO MPANY TO PAY ALL THE OUTSTANDING LIABILITIES, INCLUDING THE INTEREST PAYABLE TO THE KSFC. PAGE 3 OF 7 ITA NO.600/BANG/2010 3 4.1 THE AO HELD THAT THE COMPANY HAD DIVERTED THE L OAN AVAILED FROM KSFC FOR NON-BUSINESS PURPOSE AND DISA LLOWED THE INTEREST OF RS.18,64,600/- PAID THEREON. HE ALSO AD DED A SUM OF RS.2,30,794/- TOWARDS INTEREST CHARGEABLE FROM M/S PV SANU JEWELERS ON THE AMOUNT OF RS.59,82,863/- DIVERTED T O IT FROM OUT OF THE KSFC LOAN AND RS.10,87,867/- FROM OUT OF ITS OWN FUNDS. IN THE RESULT, THE ASSESSEES TOTAL INCOME WAS DETERMI NED AT RS.20,38,060/- VIDE ASSESSMENT ORDER COMPLETED U/S 143(3) DATED 12/3/2003. THE RELEVANT FINDING OF THE AO READS A S FOLLOWS: ON THE OTHER HAND, THE ASSESSEES CLAIM FOR INTEREST PAYMENT OF RS.18,64,600/- DEBITED IN THE ACCOUNTS, WILL NOT BE ALLOWABLE AS AN EXPENDITURE I N VIEW OF THE FACT THAT THE SAID INTEREST WAS NOT PAID BY THE ASSESSEE TILL THE DATE OF FILING OF RETURN AS REQUIRED U/S 43B OF THE I T ACT, 1961. IN VIEW OF THE FACT THAT THE LOAN AVAILED WAS TREATED AS DIVERTED FOR NON BUSINESS PURPOSES OF THE ASSESSEE, THE ENTIRE INTEREST CLAIMED IS NEGATIVED. THUS, THE ASSESSEE IS ALSO NOT ENTITLE D FOR THE BENEFIT U/S 43B OF THE I T ACT, 1961, IN CASE THE ASSESSEE CLEARS THE INTEREST ON A LATER DATE OR SUBSEQUENT YEARS AS WELL. IN DOING SO, THE DIFFERENCE OF INTEREST INCOME RECEIVABLE OF RS.2,30,794/- FROM PV SANU JEWELLERS IS BROUGHT TO TAX AS INCOME OF THE YEAR. 5. THE ASSESSEE BEING AGGRIEVED CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 6. THE COMMISSIONER (APPEALS), VIDE HIS ORDER DATE D 7/1/2005 HELD THAT THE AO WAS NOT JUSTIFIED IN DISA LLOWING THE PAGE 4 OF 7 ITA NO.600/BANG/2010 4 INTEREST PAYABLE TO KSFC AS PROVISIONS OF SECTION 43 B WERE NOT APPLICABLE ON THE FACTS AND CIRCUMSTANCES OF THE CA SE. HE ALSO HELD THAT THERE IS NO CASE FOR MAKING AN ADDITION OF THE ESTIMATED INTEREST RECEIVABLE FROM M/S PV SANU JEWELERS, AS T HE ASSESSEE COMPANY HAS CHARGED INTEREST OF RS.8,25,000/- IN RES PECT OF LOAN GIVEN TO THAT FIRM. THE CIT(A) ACCORDINGLY DELETED THE ADDITION AND ALLOWED THE APPEAL OF THE ASSESSEE. 7. THE REVENUE CHALLENGED THE ORDER BEFORE THE TRI BUNAL BY STATING THAT THE CIT(A) HAD ERRED IN DELETING THE DISALLOWANCE OF INTEREST OF RS.18,64,600/- PAYABLE TO KSFC AND AL SO THE ADDITION OF INTEREST OF RS.2,30,794/- ON THE LOAN ADVANCED T O M/S PV SANU JEWELERS. THE REVENUE HAD ALSO RAISED AN ADDITIONA L GROUND BEFORE THE TRIBUNAL STATING THAT THE CIT(A) HAS ERRED IN D ELETING THE DISALLOWANCE OF INTEREST PAID TO KSFC WITHOUT CONSI DERING THE FACT THAT THE ASSESSEE HAS DIVERTED ITS LOAN FOR NON BUS INESS PURPOSE. 8. THE TRIBUNAL, VIDE ITS ORDER DATED 25.4.2008 IN ITA NO.523/BANG/2005, AFFIRMED THE ORDER OF THE CIT(A) AND DISMISSED THE APPEAL FILED BY THE REVENUE. HOWEVER, ON A MISCELLANEOUS PETITION FILED BY THE DEPARTMENT, THE TRIBUNAL IN ITS ORDER DATED 31.10.2008 DIRECTED THE CIT(A) TO CONSI DER WHETHER INTEREST IS TO BE DISALLOWED FOR THE REASON THAT TH ERE HAS BEEN A DIVERSION OF LOAN BY THE ASSESSEE FOR NON-BUSINESS P URPOSES. 9. PURSUANT TO THE ORDER OF THE TRIBUNAL IN THE MISCELLANEOUS PETITION, THE CIT(A) CONSIDERED THE M ATTER AND HELD PAGE 5 OF 7 ITA NO.600/BANG/2010 5 THAT THE LOAN AVAILED, THOUGH DIVERTED TO SANU FAMI LY TRUST, IS FOR THE ASSESSEES OWN PURPOSE AND THEREFORE, NO DISALL OWANCE OF INTEREST ON LOAN AVAILED FROM KSFC IS CALLED FOR. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE WAS ALLOWED. THE RELEV ANT FINDING OF THE CIT(A) READS AS FOLLOWS:- IN THE ABOVE FACTS AND CIRCUMSTANCES, I FIND NO MATERIAL TO SUPPORT THE CONCLUSION THAT ADVANCING OF AMOUNTS BY THE APPELLANT COMPANY TO THE TRUST FROM OUT OF THE LOAN IT AVAILED FROM KSFC CONSTITUTED A DIVERSION FOR NON-BUSINESS PURPOSES. AS ALREADY DISCUSSED, THE APPELLANT COMPANYS MAIN BUSINESS WAS TO CONSTRUCT THE COMMERCIAL COMPLEX ON THE LAND LEASED FROM THE TRUST AND THE SAID PURPOSE HAS BEEN MET. THE DEPARTMENT HAS ALSO ALLOWED INTEREST ON THE SAME LOAN OBTAINED FROM KSFC IN SUBSEQUENT ASSESSMENT YEARS. CONSIDERING THESE FACTS, I ALLOW THE GROUNDS OF APPEAL AND DELETE THE DISALLOWANCE OF RS.18,64,600/- MADE ON ACCOUNT OF INTEREST PAID TO KSFC. 10. THE REVENUE, BEING AGGRIEVED, IS IN APPEAL BEF ORE US. 11. THE LEARNED DR SUPPORTED THE ORDER OF THE AO. 12. THE LEARNED AR, ON THE OTHER HAND, REITERATED THE SUBMISSION MADE BEFORE THE AUTHORITIES BELOW AND SU PPORTED FINDING OF THE CIT(A). 13. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIALS ON RECORD. THE SOLITARY ISSUE THAT ARISES FOR OUR CONSIDERATION IS WHETHER THE INTEREST THAT IS PAID TO KSFC IS TO BE DISALLOWED FOR THE REASON THAT LOAN WAS DIVERTED FO R NON BUSINESS PAGE 6 OF 7 ITA NO.600/BANG/2010 6 PURPOSE. THE MAIN OBJECT OF THE ASSESSEE COMPANY WA S TO TAKE ON LONG LEASE A LAND OWNED BY M/S SANU FAMILY TRUST AND TO CONSTRUCT AND DEVELOP A COMMERCIAL COMPLEX KNOWN AS SANU PAL ACE. M/S SANU FAMILY TRUST HAD COMMENCED CONSTRUCTION OF SANU PALA CE AT R.S.NO.333/1 AND 337 AND T.S.NO.166/1 & 170 BY BORRO WING FUNDS FROM SYNDICATE BANK. THE ASSESSEE COMPANY HAD ENTERE D INTO A LEASE AGREEMENT WITH M/S SANU FAMILY TRUST AND OTHER S, TAKING OVER THE COMMERCIAL COMPLEX, INITIALLY FOR A PERIOD OF 9 YEARS 11 MONTHS WITH A PROVISION FOR EXTENSION OF LEASE PERI OD AT THE OPTION OF THE ASSESSEE, ON A NOMINAL LEASE RENT OF RS.7,50 0/-. THE COMMERCIAL COMPLEX SANU PALACE WAS CONSTRUCTED ON T HE SAME SURVEY NUMBERS, NAMELY, R.S.NO.333/1 AND 337 AND T.S. NO.166/1 & 170, FOR WHICH KSFC HAD SANCTIONED THE LOAN FOR CON STRUCTION OF THE COMMERCIAL COMPLEX. THE LOAN OBTAINED FROM KSF C AND PAID TO THE ACCOUNT OF SANU FAMILY TRUST WAS A COMMERCIAL BO RROWING FOR DISCHARGING THE OBLIGATION OF THE ASSESSEE COMPANY A ND THERE WAS NO DIVERSION OF FUNDS TO ANY THIRD PARTY FOR A NON-CO MMERCIAL TRANSACTION. THE KSFC, BEING THE FINANCIER, HAD SA NCTIONED THE LOAN OF RS.2 CRORES FOR THE CONSTRUCTION OF COMMERCIAL C OMPLEX ON THE SAME LAND ON WHICH THE TRUST HAD STARTED CONSTRUCTI ON BY AVAILING A DIFFERENT LOAN FROM SYNDICATE BANK AND KSFC DID NOT HAVE ANY OBJECTION TO THE LEASE OF LAND BY THE ASSESSEE COMPA NY FROM THE TRUST. IT IS AN UNDISPUTED FACT THAT THE CONSTRUCT ION OF COMMERCIAL COMPLEX CALLED SANU PALACE WAS UNDERTAKEN AND COMPL ETED AFTER UTILIZING THE SAID LOAN FROM KSFC. THERE IS ALSO NO DISPUTE ABOUT THE AMOUNT OF INTEREST THAT WAS PAID TO KSFC. ANOTHE R IMPORTANT PAGE 7 OF 7 ITA NO.600/BANG/2010 7 FACTOR TO BE NOTICED IS THAT THE REVENUE HAS ALLOWE D INTEREST ON THE SAME LOAN OBTAINED FROM KSFC IN THE SUBSEQUENT ASST . YEARS. FOR ALL THESE REASONS STATED ABOVE, WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) IS CORRECT AND IN ACCORDANCE WITH LAW AND NO INTERFERENCE IS CALLED FOR. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED ON FRIDAY, THE 8 TH DAY OF APRIL, 2011 AT BANGALORE. SD/- SD/- (A MOHAN ALANKAMONY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/3/3. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.