ITO, Jaipur V. EROS CRAFTS, Jaipur

ITA 632/JPR/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 5318 (ITAT-JAIPUR)
• Duration Of Justice: 2 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 19-06-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P C PARWAL CA DHK
• Keywords: Business income; Opportunity of being heard; Commercial expediency; Capital expenditure
• Section: 43B; 143(3); 10AA; 37

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH VH-VKJ-EHUK] YS[KK LNL; ,OA JH YFYR DQEKJ] U;KF; D LNL; DS LE{K BEFORE:SHRI T.R. MEENA,AM & SHRI LALIET KUMAR, JM VK;DJ VIHY LA-@ ITA NO. 632/JP/2013 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2010-11 THE ITO WARD- 1 (4) JAIPUR CUKE VS. M/S. EROS CRAFTS 750, ACHARIYON KA RASTA KISHANPOLE BAZAR,JAIPUR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO .: AABFE 5392 G VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT C.O. NO.50/JP/2013 (ARISING OUT OF VK;DJ VIHY LA-@ ITA NO. 632/JP/2013) FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2010-11 M/S. EROS CRAFTS 750, ACHARIYON KA RASTA KISHANPOLE BAZAR,JAIPUR CUKE VS. THE ITO WARD- 1 (4) JAIPUR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO .: AABFE 5392 G VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT JKTLO DH VKSJ LS@ REVENUE BY : SHRI M.S. MEENA, CIT -DR FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY : SHRI P.C. PARWAL , CA LQUOKBZ DH RKJH[K@ DATE OF HEARING : 01/04/2016 ?KKS'K .KK DH RKJH[K@ DATE OF PRONOUNCEMENT : 13 /05/2016 VKNS'K@ ORDER PER LALIET KUMAR, JM THE REVENUE HAS FILED AN APPEAL WHILE THE ASSESS EE HAS FILED THE CROSS OBJECTION AGAINST THE ORDER OF THE LD. CIT (A)-I, JAIPUR DATED 16- 04-2013 FOR THE ASSESSMENT YEAR 2010-11. ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 2 2.1 THE REVENUE HAS RAISED FOLLOWING GROUNDS IN ITS APPEAL. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) WAS JUSTIFIED IN:- (I) GRANTING RELIEF OF RS. 10,76,730/- ON ACCOUNT O F DISALLOWANCE OF INTEREST. (II) DELETING THE DISALLOWANCE OF RS. 2,99,23,322/- ON ACCOUNT OF DEDUCTION U/S 10AA MADE BY THE AO. 3.1 THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN IT S C.O. (I) THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF RS. 1,31,130/- OUT O F INTEREST EXPENSES HOLDING THAT PART OF BORROWED FUNDS HAS BE EN UTILIZED IN PROVIDING INTEREST FREE LOANS TO M/S. EROS EXPORTS, PROPRIETARY CONCERN OF THE PARTNER OF THE ASSESSEE FIRM BY NOT ACCEPTING THE EXPLANATION THAT ADVANCES WERE GIVEN IN COMMERCIAL EXPEDIENCY AND PARTNERS OTHERWISE HAVE SUFFICIENT CAPITAL TO G IVE SUCH ADVANCE. (I.I) THE LD. CIT(A) HAS FURTHER ERRED ON FACTS AND IN LAW IN HOLDING THAT DEDUCTION U/S 10AA IS NOT ALLOWABLE ON DISALLOWANCE OF INTEREST CONFIRMED BY HER. 2. THE LD. CIT(A) HAS ERRED ON FACT AND IN LAW IN CONFIRMING THE DISALLOWANCE OF RS. 2,42,600/- IN RE SPECT OF SERVICE CHARGES (LEASE RENT) PAID TO RIICO BY TREATING THE SAME AS CAPITAL EXPENDITURE. 4.1 FIRST OF ALL, WE TAKE UP THE GROUND NO.1 OF THE DEPARTMENT AND GROUND NO. 1 AND 1.1 OF C.O. OF THE ASSESSEE TO ADJ UDICATE HEREUNDER- (1) GRANTING RELIEF OF RS. 10,76,730/- ON ACCOUNT O F DISALLOWANCE OF INTEREST. (REVENUE ) (I) THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF RS. 1,31,130/- OUT O F INTEREST EXPENSES HOLDING THAT PART OF BORROWED FUNDS HAS BE EN ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 3 UTILIZED IN PROVIDING INTEREST FREE LOANS TO M/S. E ROS EXPORTS, PROPRIETARY CONCERN OF THE PARTNER OF THE ASSESSEE FIRM BY NOT ACCEPTING THE EXPLANATION THAT ADVANCES WERE GIVEN IN COMMERCIAL EXPEDIENCY AND PARTNERS OTHERWISE HAVE SUFFICIENT CAPITAL TO GIVE SUCH ADVANCE. (I.I) THE LD. CIT(A) HAS FURTHER ERRED ON FACTS AND IN LAW IN HOLDING THAT DEDUCTION U/S 10AA IS NOT ALLOW ABLE ON DISALLOWANCE OF INTEREST CONFIRMED BY HER (ASSESSEE ) 5.1 BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE F ILED ITS RETURN OF INCOME BY E-FILING ON 30-09-2011 FOR THE ASSESSMENT YEAR 2010-11 DECLARING TOTAL INCOME AT NIL AND THE SAME WAS PROC ESSED. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY UNDER CASS AND A CCORDINGLY NOTICE U/S 143(2) WAS ISSUED ON 29-08-2011. THUS THE ASSESSMEN T WAS MADE U/S 143(3) OF THE ACT. THE AO OBSERVED IN THIS GROUND T HAT DURING THE YEAR THE ASSESSEE HAS TAKEN UNSECURED LOAN ON WHICH IT H AD CLAIMED INTEREST EXPENSES OF RS. 35,07,133/- IN THE PROFIT AND LOSS ACCOUNT WHILE ON THE OTHER HAND THE ASSESSEE HAD GIVEN INTEREST FREE LOA N TO THE TUNE OF RS. 1,00,65,000/- TO M/S. EROS EXPORT, A PROPRIETARY CO NCERN OF PARTNER SHRI SANJAY GODHAR. THE AO REQUIRED THE ASSESSEE TO JUSTIFY AS TO WHY INTEREST WAS NOT CHARGED FROM M/S. EROS EXPORT ON T HE TOTAL LOAN AMOUNT OF RS. 1,00,65,000/- WHEREAS THE ASSESSEE HAS PA ID INTEREST ON THE LOANS TAKEN DURING THE YEAR. THE AO OBSERVED THAT THE ASS ESSEE DID NOT FILE ANY REPLY IN THE MATTER. THE AO FURTHER OBSERVED THAT T HE ASSESSEE ON THE ONE ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 4 HAND IS CLAIMING INTEREST EXPENSES OF RS. 35,07,133 /- ON INTEREST BEARING LOANS AND ON THE OTHER HAND THE ASSESSEE HAS GIVEN INTEREST FREE LOAN OF RS. 1,00,65,000/- TO M/S. EROS EXPORTS. THUS THE AO COMPUTED THE INTEREST @ 12% ON THE INTEREST FREE ADVANCE OF RS. 1,00,65,000/- WHICH COMES TO RS. 12,07,862/-. HENCE, THE INTEREST AMOUN T OF RS. 12,07,862/- WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSES SEE BY RELYING ON THE DECISION OF LD. CIT(A), JAIPUR IN THE CASE OF M/S. MEHAR CHAND JAIN & SONS IN ITA NO. 459/09-10. 5.2 BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTE R BEFORE THE LD. CIT(A) WHO RESTRICTED THE DISALLOWANCE TO THE TUNE OF RS. 1,31,130/- BY OBSERVING AS UNDER:- ON PERUSAL OF THE ORDER IN THE CASE OF THE APPELL ANT FOR A.Y. 09-10, IT IS SEEN THAT IN PRINCIPLE THE MATTER WAS DECIDED AG AINST THE APPELLANT IN SO FAR THAT ON VERIFICATION OF THE FACTS ADMITTED TO BY TH E AR DURING THE COURSE OF APPELLATE PROCEEDINGS, IT WAS SEEN THAT RS.3,50,000 /- WAS GIVEN ON 14.04.2008 AND RS.8,00,000/- ON 21.04.2008 FROM UNSECURED LOAN TO M/S EROS EXPORT. THE CIT(A) HELD IN HER ORDER THAT SINCE A CLEAR CUT NEX US WAS PROVED BETWEEN THE LOANS TAKEN ON INTEREST FREE LOANS ADVANCED TO THE PARTNER OF THE FIRM, THE CASE OF THE ASSESSEE WAS NOT COVERED BY SA BUILDERS VS. CIT AND DISALLOWED THE INTEREST @12%. IT WAS ALSO HELD THAT SINCE THE ASSE SSEE INCURRED THIS INTEREST EXPENDITURE WHICH WAS NOT CONNECTED TO ITS EXPORT I NCOME, EXEMPTION U/S 10AA WAS NOT ALLOWABLE TO IT ON THIS DISALLOWANCE O F INTEREST. HOWEVER, ON PERUSAL OF THE ORDER, IT IS SEEN THAT DISALLOWANCE @12% IS REQUIRED TO BE MADE ON RS.11,50,000/- FOR WHICH A CLEAR CUT NEXUS HAS B EEN ESTABLISHED. THE AO IS THUS DIRECTED TO RECOMPUTE INCOME/GAINS FROM EXPORT DURING THIS A.Y. WITHOUT ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 5 ALLOWANCE OF THE CLAIM OF RS.1,31,130/- AND THEN AL LOW THE CLAIM OF EXEMPTION U/S 10AA. 5.3 THE LD. DR RELIED ON THE ORDERS OF LOWER AUTHOR ITIES. 5.4 DURING THE COURSE OF HEARING, THE LD. AR OF THE ASSESSEE FILED THE WRITTEN SUBMISSION AS UNDER:- 1. AT THE OUTSET, IT IS TO BE NOTED THAT SIMILAR DISAL LOWANCE WAS MADE BY AO IN A.Y. 09-10 AGAINST WHICH THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) IN THAT YEAR HELD THAT ASSESSEE HAS NOT ESTA BLISHED THAT ADVANCES GIVEN TO EROS EXPORTS WAS FOR THE BUSINESS PURPOSE OF THE ASSESSEE BUT RE STRICTED THE DISALLOWANCE OUT OF INTEREST EXPENSES TO RS.1,31,130/- CONSIDERING THAT OUT OF T OTAL ADVANCE OF RS.1,00,65,000/-, ONLY AN AMOUNT OF RS.11,50,000/- IS GIVEN OUT OF BORROWED F UNDS AND REMAINING ADVANCE IS GIVEN OUT OF INTEREST FREE FUNDS. AGAINST THE ORDER OF LD. CI T(A), BOTH THE ASSESSEE AND THE DEPARTMENT PREFERRED AN APPEAL BEFORE THE HONBLE ITAT WHO VID E ORDER DT. 20.07.2015 IN PARA 13 (PB 38) HELD THAT CIT(A) HAS WRONGLY CONCLUDED THAT THE AD VANCES GIVEN TO THE EROS EXPORTS (WRONGLY MENTIONED AS EROS CRAFTS) WERE FOR BUSINES S PURPOSE AND THEREBY THE DISALLOWANCE MADE BY THE AO OUT OF INTEREST EXPENSES IS RESTORED . IN GIVING THIS FINDING, IT IS IGNORED THAT CIT(A) HAS ALSO HELD THAT ADVANCES GIVEN TO EROS EX PORT WAS NOT FOR BUSINESS PURPOSE BUT APPLYING THE NEXUS THEORY, HE RESTRICTED THE DISALL OWANCE TO RS.1,31,130/-. THEREFORE, THE DISALLOWANCE, IF ANY, SHOULD BE RESTRICTED TO RS.1, 31,130/-. (THE MISCELLANEOUS APPLICATION FILED ON 29.07.2015 AGAINST THE ORDER OF ITAT FOR A .Y. 09-10 IS PENDING FOR DISPOSAL). 2. IT IS TO BE NOTED THAT THE CREDIT BALANCE IN THE CAPITAL ACCOUNT OF THE PARTNERS AS ON 31.03.2010 IS RS.1.65 CRORES WHICH IS MUCH MORE THA N THE INTEREST FREE ADVANCE GIVEN TO M/S EROS EXPORT. FURTHER, THE NET PROFIT FOR THE YEAR I S RS.2,29,23,322/- WHICH IS MORE THAN THE INTEREST FREE ADVANCE GIVEN. IT IS A SETTLED PROPOS ITION THAT WHERE ASSESSEE HAS BOTH INTEREST FREE AND BORROWED FUNDS, THAN IT IS PRESUMED THAT ADVANC E/INVESTMENT IS MADE OUT OF THE INTEREST FREE FUNDS. FOR THIS RELIANCE IS PLACED ON THE FOLL OWING CASES:- (I) S.P. JAISWAL ESTATES (P) LTD. VS. CIT (2012) 74 DTR 294 (KOL.)(TM)(TRIB.) TOTAL CASH PROFITS OF THE ASSESSEE COMPANY IN THE R ELEVANT YEAR BEING FAR MORE THAT THE TOTAL INTEREST FREE ADVANCES GIVEN BY IT TO SUBSIDIARY CO MPANIES, IT HAS TO BE PRESUMED THAT THE ENTIRE INTEREST FREE ADVANCES WERE GIVEN OUT OF INTEREST F REE FUNDS AVAILABLE WITH THE ASSESSEE & NO PART OF THE BORROWED FUNDS CAN BE SAID TO HAVE BEEN DIVERTED AS NON INTEREST BEARING ADVANCES TO THE SUBSIDIARY COMPANIES & THEREFORE NO DISALLOW ANCE CAN BE MADE OUT OF INTEREST PAID ON BORROWINGS. (II) PRANIK SHIPPING & SERVICES LTD. VS. ACIT (2012 ) 70 DTR 417(MUM.)(TRIB.) INTEREST-FREE FUNDS AVAILABLE AT THE DISPOSAL OF TH E ASSESSEE BEING FAR IN EXCESS OF THE INTEREST- FREE LOANS ADVANCED BY THE ASSESSEE TO THE SISTER C ONCERNS, NO DISALLOWANCE COULD BE MADE OUT OF INTEREST PAID ON BORROWINGS. (III) VISEN INDUSTRIES LTD. VS. ACIT 136 ITD 309 (M UM.)(TM) IF ASSESSEE HAS INTEREST FREE FUNDS AS WELL AS INTE REST BEARING FUNDS AT ITS DISPOSAL, THEN PRESUMPTION WOULD BE THAT INVESTMENTS WERE MADE FRO M INTEREST FREE FUNDS AT DISPOSAL OF ASSESSEE. FURTHER, WHEN INVESTMENT FOR NON BUSINESS PURPOSES IS OUT OF INTEREST FREE FUNDS, THEN THERE CANNOT BE DISALLOWANCE OF INTEREST & VICE VER SA. WHERE CASH PROFIT AVAILABLE DURING RELEVANT YEAR IS MUCH MORE THAN THE AMOUNT INVESTED BY THE ASSESSEE, NO PART OF INTEREST PAID BY IT COULD BE DISALLOWED. ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 6 (IV) CIT VS. HOTEL SAVERA 239 ITR 795 (MAD) WHERE THE ASSESSEE HAS ITS OWN FUNDS AS WELL AS BOR ROWED FUNDS & IT IS NOT CLEAR THAT IT HAD NOT ADVANCED MONEY OUT OF ITS OWN FUNDS AND IN THE ABSE NCE OF ANY MATERIALS TO INDICATE THAT THE ASSESSEE HAD ADVANCED MONEYS OUT OF FUNDS BORROWED FOR BUSINESS PURPOSES, THE PRESUMPTION WOULD ARISE, WHERE THERE WAS A COMMON FUND, THAT TH E MONEY ADVANCED CAME ONLY OUT OF ITS OWN FUNDS. THEREFORE, NO PART OF INTEREST SHOULD BE DISALLOWED ESPECIALLY IN THE ABSENCE OF ANY FINDING THAT THE MONEY BORROWED WAS ADVANCED FREE O F INTEREST. (V) CIT VS. RELIANCE UTILITIES POWER LIMITED 178 TA XMAN 135 (MUM) IT WAS HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH, INTEREST FREE AND OVER DRAFT AND / OR LOANS ARE TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTME NTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS ARE SUFFICIENT TO MEET THE INVESTMENT. (VI) CIT VS. RADICO KHAITAN LTD. 274 ITR 354 (ALL.) WHERE THERE ARE SUFFICIENT FUNDS, OTHER THAN BORROW ED MONEY, AVAILABLE WITH THE ASSESSEE IN THE FORM OF SHARE CAPITAL, SHARE APPLICATION MONEY, RESERVE & SURPLUSES FOR DIVERTING A PARTICULAR SUM TO ITS SISTER CONCERN, IT COULD NOT BE SAID THAT THE LOAN ADVANCED TO THE SISTER CONCERN CAME OUT OF THE BORROWED MONEY. 3. WITHOUT PREJUDICE TO ABOVE, WHERE ADDITION IS MA DE TO INCOME ON DISALLOWANCE OF EXPENSES, THE SAME WOULD BE ELIGIBLE FOR ENHANCED D EDUCTION U/S 10A/80IB. IN A.Y. 09-10, HONBLE ITAT VIDE ORDER DT. 20.07.2015 HELD THAT O N DISALLOWANCE OF INTEREST, DEDUCTION U/S 10AA IS NOT ALLOWABLE AS THIS INCOME HAS NOT BEEN D ERIVED FROM THE SEZ UNIT BUT IN HOLDING SO IT IGNORED THE FACT THAT IT IS NOT THE INTEREST INCOME WHICH IS TAXED BUT IT IS THE INTEREST EXPENSE WHICH IS NOT ALLOWED. ONCE THE INTEREST EXP ENSE IS NOT ALLOWED OR WHERE THE ASSESSEE SUO-MOTO DISALLOWS THE EXPENSES, IT WOULD ONLY INCR EASE THE PROFIT OF THE INDUSTRIAL UNDERTAKING ON WHICH DEDUCTION U/S 10AA WOULD BE AL LOWABLE AS PER THE PROVISIONS OF THE ACT. FOR THIS, RELIANCE IS PLACED ON THE FOLLOWING CASES:- (I) ITO VS. KEVAL CONSTRUCTION 354 ITR 13 (GUJ.) DURING THE COURSE OF THE ASSESSMENT, THE AO DISALLO WED SOME EXPENDITURE U/S 40(A)(IA). IT WAS HELD THAT EVEN IF CERTAIN EXPENDITURE WHICH WAS INC URRED BY THE ASSESSEE ARE NOT ALLOWED U/S 40(A)(IA), IT COULD NOT BE DENIED THAT SUCH DISALLO WANCE WOULD ULTIMATELY GO TO INCREASE THE ASSESSEES PROFIT. WHATEVER BE THE ULTIMATE PROFIT OF THE ASSESSEE AS COMPUTED EVEN AFTER MAKING DISALLOWANCE U/S 40(A)(IA) WOULD QUALIFY FOR DEDUCTION AS PROVIDED U/S 80IB(10). (II) CIT VS. GEM PLUS JEWELLERY INDIA LTD. (2011) 3 30 ITR 175 (BOM) SINCE ALL PROFITS OF THE UNIT OF THE ASSESSEE HAS B EEN DERIVED FROM MANUFACTURING ACTIVITY, THE CONTENTION OF THE REVENUE THAT IN COMPUTING THE DED UCTION U/S 10A THE ADDITION MADE ON ACCOUNT OF THE DISALLOWANCE OF THE PROVIDENT FUND/E SIC PAYMENT OUGHT TO BE IGNORED CANNOT BE ACCEPTED AND ACCORDINGLY THE ASSESSEE IS TO BE G RANTED THE EXEMPTION U/S 10A. (III) VISHAL PAPER INDUSTRIES VS. JCIT 21 ITR (TRIB ) 220 (CHANDIGARH) IT WAS HELD THAT ANY ADDITION TO THE INCOME OF THE ASSESSEE WOULD ENTITLE IT TO ENHANCED ADDITIONAL DEDUCTION U/S 80IB. (IV) DCIT VS. MAGARPATTA TOWNSHIP DEVELOPMENT & CON STRUCTION CO. 141 ITD 682 (PUNE ) IT WAS HELD THAT DEDUCTION U/S 80IB(10) IS ALSO AVA ILABLE IN RESPECT OF AMOUNTS WHICH WERE DISALLOWED U/S 40(A)(IA), 43B & 35(1)(VA). (V) IN A.Y. 09-10, THE ABOVE CASES THOUGH CITED BEF ORE THE HONBLE ITAT WERE NOT CONSIDERED FOR WHICH A MISCELLANEOUS APPLICATION HA S BEEN FILED. ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 7 (VI) RECENTLY THE PUNE BENCH OF TRIBUNAL IN CASE OF JOHN DEERE INDIA PVT. LTD. VS. ACIT (2015) 121 DTR 203 HAS ALSO HELD THAT DEDUCTION U/S 10A IS ALLOWABLE ON BUSINESS INCOME ENHANCED ON ACCOUNT OF DISALLOWANCE U/S 40(A)(IA) A ND 43B. IN VIEW OF ABOVE, THE DISALLOWANCE OF RS.1,31,130/- CONFIRMED BY CIT(A) BE DELETED OR OTHERWISE THE DEDUCTION U/S 10AA BE ENHANCED TO THAT EXTENT AND THE GROUND OF THE DEPARTMENT BE DISMISSED AND THE CO OF THE ASSESSEE BE ALLOWED. 5.5 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT EMERGES FROM THE RECORD THA T THE ASSESSEE HAS GIVEN INTEREST FREE LOAN OF RS. 1,00,65,000/- TO M/S. ERO S EXPORT, A PROPRIETARY CONCERN OF PARTNER SHRI SANJAY GODHA FOR WHICH THE ASSESSEE HAS CLAIMED INTEREST EXPENSES OF RS. 35,07,133/- IN THE PROFIT AND LOSS ACCOUNT ON THE UNSECURED LOAN TAKEN BY IT. THE AO HAS COMPUTED THE INTEREST @ 12% ON THE INTEREST FREE ADVANCE OF RS. 1,00,65,000/- WHIC H COMES TO RS. 12,07,862/- AND THE SAME WAS ADDED TO THE TOTAL INC OME OF THE ASSESSEE. THE LD. CIT(A) RESTRICTED THE SAME TO THE EXTENT OF RS. 1,31,130/-. WE FIND THAT IN ASSESSMENT YEAR 2009-10 IN ASSESSEE'S OWN CASE, THE COORDINATE BENCH HAS UPHELD THE DISALLOWANCE OF INT EREST AND THEREFORE FOLLOWING THE COORDINATE BENCH ORDER DATED 20-07-2 015 IN ITA NO. 876/JP/12 AND C.O. 78/JP/12, THE DISALLOWANCE MAD E BY THE AO IS CONFIRMED. THUS, GROUND NO. 1 OF THE DEPARTMENT IS ALLOWED AND GROUND NO. 1 OF THE CROSS OBJECTION OF THE ASSESSEE IS DIS MISSED. 5.6 SO FAR AS GROUND NO. 1.1 OF THE CROSS OBJECTION OF THE ASSESSEE IS CONCERNED, WE FIND THAT IN ASSESSMENT YEAR 2009-1 0 (SUPRA) WE HAVE ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 8 HELD THAT ON DISALLOWANCE OF INTEREST, DEDUCTION U/ S 10AA IS NOT ALLOWABLE AS THIS INCOME HAS NOT BEEN DERIVED FROM THE SEZ UN IT BUT THE LD. AR ARGUED THAT IT IS NOT THE CASE OF ASSESSING THE INT EREST INCOME BUT IT IS A CASE OF DISALLOWANCE OF INTEREST EXPENSES AND THERE FORE, ONCE THE INTEREST EXPENSE IS NOT ALLOWED, THE CORRESPONDING INCREASE OF PROFIT AND GAINS OF BUSINESS WOULD BE ENTITLED FOR DEDUCTION U/S 10AA O F THE ACT. IN THE INTEREST OF JUSTICE, WE THEREFORE, SET ASIDE THIS M ATTER TO THE AO FILE OF THE AO TO VERIFY THIS FACT DE NOVO BUT BY PROVIDING AD EQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. THEREFORE, GROUND NO. 1.1 OF THE C.O. OF THE ASSESS EE IS ALLOWED FOR STATISTICAL PURPOSES. 6.1 NOW WE TAKE UP GROUND NO. 2 OF THE DEPARTMENT W HEREIN THE REVENUE IS AGGRIEVED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS. 2,99,23,322/- MADE BY THE AO O N ACCOUNT OF DEDUCTION U/S 10AA OF THE ACT. 6.2 AT THE OUTSET OF THE HEARING, THE LD. AR OF THE ASSESSEE PRAYED THAT THE GROUND NO. 2 RAISED BY THE REVENUE IS COVERED BY THE ORDER OF COORDINATE BENCH ITAT, JAIPUR VIDE ORDER DATED 20-0 7-2015 IN ITA NO. ITA NO. 631/JP/13 (A.Y. 2007-08) AND 876/JP/2012 ( A.Y. 2009-10) IN ASSESSEE'S OWN CASE WHEREIN ISSUE IN QUESTION RAIS ED BY THE REVENUE IS DECIDED AGAINST THE REVENUE. ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 9 6.3 THE LD. DR RELIED ON THE ORDER OF THE AO 6.4 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ISSUE RAISED BY THE REVENUE IN GROUND NO. 2 HAS BEEN DECIDED BY THE COORDINATE BEN CH IN ITA NO. 631/JP/13 (A.Y. 2007-08) AND 876/JP/2012(A.Y. 2009- 10) (SUPRA) AGAINST THE REVENUE WHEREIN THE OBSERVATION OF THE BENCH IS AS UNDER:- WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PAR TIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. THE ASSESSEE WAS ISSUED FIRST LOP VIDE LETTER DT. 31.10.2003 FOR ONE YEAR, WHICH WAS LATER ON EXTENDED FOR THREE YEARS VIDE LETTER DT. 06.12.2005. AS PER THIS LETTER, THE ASSESSEE HAS TO MANUFACTURE OR PRODUCE THE ARTICLE/GOODS IN SEZ UNIT ON OR BEFO RE 31.10.2006. THE AR HAS FURNISHED THE EVIDENCE FOR PURCHASE OF ROUGH STONES AND HAS ALSO FURNISHED THE EVIDENCE TO ISSUE THE SAME TO THE KARIGARS ON 24.10 .2006. THE ASSESSEE HAS EXPORTED THE GOODS ON 28.10.2006 TO M/S FINE GEMS, NEW YORK, USA. THESE DETAILS WERE PROVIDED TO THE AO DURING THE ASSESSME NT PROCEEDINGS FOR A.Y. 07-08. HOWEVER, CERTIFICATE OF COMMENCEMENT OF PROD UCTION ISSUED BY THE ASSISTANT DEVELOPMENT COMMISSIONER ON 19.12.2011 WE RE PRODUCED DURING THE ASSESSMENT PROCEEDINGS FOR A.Y. 09-10. THE ASSE SSING OFFICERS OBJECTION WAS THAT THE ASSESSEE HAD PURCHASED MACHINE ON 31.1 0.2006. WITHOUT MACHINERY, THE ASSESSEE COULD NOT HAVE STARTED PROD UCTION BUT AS CLAIMED BY THE ASSESSEE THAT THE ASSESSEES ACTIVITY IS AS SUC H THAT IT CAN BE DONE BY KARIGARS WITH THE HELP OF HAND TOOLS, WHICH ARE MAD E AND CARRIED BY THEMSELVES. THE ASSESSEE ALSO PRODUCED THE GATE PAS S ENTRY MAINTAINED BY THE SEZ AUTHORITY TO DEMONSTRATE THAT OLD NAGEENA MACHI NE WAS BROUGHT TO THE UNIT OF THE ASSESSEE. THE FINAL PRODUCE WAS EXPORTE D BY THE ASSESSEE ON 28.10.2006. THE GOODS WERE SHIPPED BY FLIGHT NO. IC 612 DT. 29.10.2006, WHICH IS EVIDENT FROM THE NOTING ON THE BACK OF THE SHIPPING BILLS. THE INVOICE AND SHIPPING BILL WAS DULY SIGNED BY THE SUPERINTEN DENT, CUSTOM, JAIPUR SEZ ON 28.10.2006. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE LD. CIT(A) ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 10 WAS RIGHT TO ALLOW 10AA DEDUCTION IN A.Y. 07-08 AND 09-10. ACCORDINGLY, REVENUES APPEAL IN BOTH THE YEARS IS DISMISSED. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH DATED 20-07-2015 (SUPRA) AND ALSO OBSERVING THE FINDING O F THE LD. CIT(A), THE ISSUE IN QUESTION IS DECIDED IN FAVOUR OF THE ASSES SEE. THUS GROUND NO. 2 OF THE REVENUE IS DISMISSED. 7.1 NOW WE TAKE UP GROUND NO. 2 OF THE C.O. OF THE ASSESSEE WHEREIN THE ASSESSEE IS AGGRIEVED THAT THE LD. CIT(A) HAS E RRED IN CONFIRMING THE DISALLOWANCE OF RS. 2,42,600/- IN RESPECT OF SERVI CE CHARGE (LEASE RENT) PAID BY RIICO BY TREATING THE SAME AS CAPITAL EXPEN SES. 7.2 BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE H AS PAID RS. 2,42,600/- ONE TIME LEASE RENT TO RIICO VIDE RECEIPT NO. 49 AN D BOOK NO.12829 AND THE SAME WAS DEBITED IN PROFIT AND LOSS ACCOUNT. TH E AO OBSERVED THAT THIS EXPENSES IS NOT ALLOWABLE U/S 37 OF THE ACT BE ING CAPITAL EXPENDITURE AND THUS THE AO MADE DISALLOWANCE OF RS. 2,42,600/- . 7.3 BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTE R BEFORE THE LD. CIT(A) WHO HAS UPHELD THE ACTION OF THE AO BY OBSER VING AS UNDER:- I HAVE CAREFULLY PERUSED THE ORDER OF THE AO AND T HE SUBMISSION OF THE AR AND FIND THAT THE ASSESSEE HAS MERELY SUBMITTED A COPY OF THE RECEIPT FROM RAJASTHAN STATE INDUSTRIAL DEVELOPMENT AND INVESTME NT CORPORATION LTD. OF RS.2,42,600/-. HOWEVER, HE HAS FAILED TO FURNISH AN Y OTHER DETAILS REGARDING THE NATURE OF THESE PAYMENTS. IT IS NOT CLEAR FROM THIS RECEIPT WHETHER THIS WAS RENT BECAUSE IT HAS MENTIONED IN THE RECEIPT THAT P AYMENT OF RS.34,500/- WAS ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 11 FOR SC, RS.2,07,000/- WAS FOR SC (OT) AND RS.1,100/ - WAS FOR FSL. NOWHERE ON THIS RECEIPT HAS IT BEEN MENTIONED THAT THIS AMO UNT WAS ONETIME PAYMENT OF LEASE RENT. IN ABSENCE OF ANY CLARIFICATION, THE AM OUNT IS DIRECTED TO BE CAPITALIZED AND HELD DISALLOWABLE U/S 37. THEREFORE , THE DECISION OF THE AO TO DISALLOW RS.2,42,600/- AS PAYMENT MADE TO RSIDCL U/ S 37 IS UPHELD. 7.4 NOW THE ASSESSEE IS BEFORE US BY FILING ITS WRITTEN SUBMISSION AS UNDER:- FROM THE COPY OF RECEIPT DT. 22.07.2009 OF RICCO LTD. , IT IS CLEARLY EVIDENT THAT RS. 2,42,600/- HAS BEEN PAID TO IT TOW ARDS ONE-TIME LEASE RENT AS PER THE FOLLOWING BREAK-UP:- SERVICE CHARGES (SC) RS.34,500/- SERVICE CHARGES ONE TIME [SC(OT)] RS.2,07,000/- FIRE STATION SERVICE CHARGES RS.1,100/- TOTAL RS.2,42,600/- EVERY YEAR ASSESSEE HAS TO PAY LEASE RENT CHARGES T O RIICO. THIS IS A RECURRING EXPENDITURE AND THEREFORE CANT BE TREATE D AS CAPITAL EXPENDITURE SINCE NO NEW ASSET HAS BEEN CREATED AS A RESULT OF PAYMENT OF LEASE RENT. IN EARLIER YEAR ALSO, PAYMENT OF SUCH LEASE CHARGES WA S ALLOWED. CIT(A) HAS ERRED IN DISALLOWING THE EXPENSES IN THE ABSENCE OF CLARIFICATION WITHOUT REQUIRING THE ASSESSEE TO EXPLAIN THE NATURE OF THE CHARGES. IN VIEW OF ABOVE, DISALLOWANCE OF RS.2,42,600/- MAD E BY AO AND CONFIRMED BY CIT(A) BE DELETED. 7.5 THE LD. DR RELIED ON THE ORDERS OF THE AUTHORIT IES BELOW. 7.6 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FEEL THAT SUCH LEASE RENT C HARGES IS PAID BY THE ASSESSEE TO RIICO EVERY YEAR AND IT IS A RECURRING EXPENDITURE. WHEN SUCH LEASE CHARGES ARE RECURRING IN NATURE THEN IT CANNOT BE TREATED AS ITA NO.632//JP/2013 THE ITO, WARD- 1(4), JAIPUR VS. M/S. EROS CRAFTS, J AIPUR . 12 CAPITAL EXPENDITURE AS THE ASSESSEE HAS NOT CREATED NEW ASSETS AS A RESULT OF LEASE RENT. IN VIEW THEREOF, WE REVERSE THE ORDE R OF THE LD. CIT(A) AND ALLOW GROUND NO. 2 OF THE C.O. OF THE ASSESSEE. 8.0 IN THE RESULT, THE APPEAL OF THE REVENUE IS P ARTLY ALLOWED AND THAT OF THE C.O. OF THE ASSESSEE IS PARTLY ALLOWED FOR S TATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13 /05 /2016. SD/- SD/- VH-VKJ-EHUK YFYR DQEKJ (T.R. MEENA) (LALIET KUMAR) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 13 /05/ 2016 *MISHRA VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT THE ITO, WARD- 1(4), JAIPUR 2. IZR;FKHZ@ THE RESPONDENT- M/S. EROS CRAFTS, JAIPUR 3. VK;DJ VK;QDRVIHY ) @ CIT(A) 3. VK;DJ VK;QDR@ CIT 4. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 5. XKMZ QKBZY@ GUARD FILE (ITA NO.632/JP/2013) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASSISTANT. REGISTRAR