DEVANSH ENTERPRISES P.LTD, MUMBAI V. ITO WD 15(1)(3), MUMBAI

ITA 6786/MUM/2014

• Counselvise Citation: 678619914 RSA 2014
• Duration Of Justice: 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 19-01-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 07-11-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VIJAYA KUMAR BORA
• Assessee Lawyers: TORAL SHAH
• Keywords: Business income; Business expenditure
• Section: 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'SMC' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT ITA NO. 6786/MUM/2014 (ASSESSMENT YEAR: 2005-06) M/S. DEVANSH ENTERPRISES P. LTD. VS. INCOME TAX OFFICER 15(1)(13) 102/103, NEW RAJRAM NIWAS 131/C, 1ST FLOOR, D.S.P. ROAD NEAR RAJNIT STUDIO, DADAR (E) MUMBAI 400014 MUMBAI PAN - AACCD0794M APPELLANT RESPONDENT APPELLANT BY: SHRI TORAL SHAH RESPONDENT BY: SHRI VIJAYA KUMAR BORA DATE OF HEARING: 27.01.2015 DATE OF PRONOUNCEMENT: 27.01.2015 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE ASSESSEE-COMPANY IS DIRECTED AGA INST THE ORDER PASSED BY THE CIT(A)-12 MUMBAI AND IT PERTAINS TO A Y 2005-06. 2. ASSESSEE RAISED THE FOLLOWING GROUNDS BEFORE THE TR IBUNAL: - 1. THE HON'BLE CIT(A) ERRED IN CONCLUDING THAT THE BUSINESS ACTIVITY HAD NOT YET STARTED AND TREATING INTEREST INCOME FR OM TEMPORARY ADVANCEMENT OF FUNDS AS INCOME FROM OTHER SOURCES I NSTEAD OF CONSIDERING THE SAME AS PROFITS & GAINS OF BUSINESS OR PROFESSION. 2. THE HON'BLE CIT(A) ERRED IN CAPITALIZING THE INT EREST PAID DURING THE YEAR TO THE COST OF LAND INSTEAD OF CONSIDERING INTEREST PAID AS NORMAL BUSINESS EXPENDITURE U/S 36 OF THE INCOME TAX ACT, 1961. 3. WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL , YOUR APPELLANT PRAYS AS UNDER; THE HON'BLE CIT(A) ERRED IN DISALLO WING THE DEDUCTION OF INTEREST PAID ON BORROWED FUNDS TO THE EXTENT THEY WERE ADVANCED AS LOANS, THE INTEREST ON WHICH HAS B EEN ASSESSED AS INCOME FROM OTHER SOURCE. ITA NO. 6786/MUM/2014 M/S. DEVANSH ENTERPRISES P. LTD. 2 YOUR APPELLANT PRAYS THAT, ON OVERALL BASIS, THERE IS DIRECT NEXUS BETWEEN THE FUNDS BORROWED AND FUNDS ADVANCED, THE INTEREST PAID BE ALLOWED AS DEDUCTION U/S 57(III). 3. FACTS NECESSARY FOR DISPOSAL OF THE APPEAL ARE STAT ED IN BRIEF. THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF CONS TRUCTION AND REAL ESTATE. AS COULD BE NOTICED FROM THE RECORD ASSESSE E HAD NOT TAKEN UP ANY COMMERCIAL ACTIVITY TILL THE FAG END OF THE YEAR; A DVANCE FOR PROPERTY AT LOWER PAREL WAS MADE ON 29.03.2005 AND 31.03.2005 TO THE TUNE OF ` 51 LAKHS. PRIOR TO THIS ACTIVITY ASSESSEE HAS UTILISED THE IN TEREST BEARING LOANS FOR THE PURPOSE OF GRANTING LOANS TO OUTSIDERS ON CHARGE OF INTEREST. IN THIS PROCESS THE ASSESSEE RECEIVED INTEREST AMOUNTING TO ` 2,87,803/- WHEREAS IT PAID INTEREST OF ` 4,12,325/-. DURING THE COURSE OF ASSESSMENT PROCEED INGS THE ASSESSEE WAS CALLED UPON TO EXPLAIN AS TO WHY INTER EST INCOME SHOULD NOT BE TREATED AS INCOME FROM OTHER SOURCES AND AT THE SAM E TIME WHY INTEREST PAID SHOULD NOT BE CAPITALISED. IN RESPONSE THERETO THE ASSESSEE SUBMITTED THAT THE COMPANY HAD COME INTO EXISTENCE FOR CARRYI NG ON REAL ESTATE AND CONSTRUCTION ACTIVITIES. ACCORDINGLY THERE WAS A PR OPOSAL SOMETIME IN NOVEMBER/DECEMBER 2004 FOR ACQUIRING AN INDUSTRIAL SHED IN MATHURADAS MILLS COMPOUND. IN ORDER TO FINALISE THE DEAL SOME FUNDS WERE REQUIRED. ACCORDINGLY THE COMPANY BORROWED FUNDS TO ADVANCE T HE SAME FOR ACQUIRING THE PROPERTY. ON ACCOUNT OF SOME CONTROVERSY OVER T HE TITLE OF THE SAID PROPERTY THERE WAS DELAY IN FINALISING THE DEAL. IN THE MEANTIME THE ASSESSEE-COMPANY THOUGHT IT PRUDENT TO ADVANCE THE IDLE SUM, LYING IN THE BANK ACCOUNT, ON INTEREST. THE RATE OF INTEREST ON THE AMOUNT BORROWED AS WELL AS THE INTEREST CHARGED BY THE ASSESSEE WAS TH E SAME, I.E. 12%. IT WAS CONTENDED THAT THE ASSESSEE HAVING COMMENCED BUSINE SS IN THE FORM OF PROCESSING THE PROPOSAL FOR PURCHASE OF THE PROPERT Y IT HAS TO BE ASSUMED THAT THE ASSESSEE COMMENCED BUSINESS IN WHICH EVENT THE INTEREST PAID BY THE ASSESSEE SHOULD BE TREATED AS REVENUE IN NATURE AND OUGHT TO HAVE BEEN ALLOWED AS BUSINESS EXPENDITURE. IN SO FAR AS THE I NTEREST RECEIVED BY THE ASSESSEE, IT WAS PLEADED THAT IN THE BUSINESS SOMET IMES FUNDS WOULD BE LYING IDLE AND WHEN SUCH IDLE FUNDS ARE APPROPRIATE LY UTILISED BY ADVANCING ITA NO. 6786/MUM/2014 M/S. DEVANSH ENTERPRISES P. LTD. 3 THE SAME ON SHORT TERM BASIS THE INCOME THEREFROM S HOULD BE TREATED AS BUSINESS RECEIPT. AT ANY RATE, EVEN IF THE SAME IS TREATED AS INCOME FROM OTHER SOURCES THE INTEREST PAID BY THE ASSESSEE TO THE BANK SHOULD HAVE BEEN SET OFF AGAINST THE INTEREST RECEIVED. 4. THE AO OBSERVED THAT IN THE INSTANT CASE THE COMPAN Y PAID INTEREST ON LOAN TAKEN PRIOR TO COMMENCEMENT OF ITS BUSINESS AN D HENCE INTEREST ON SUCH LOAN DESERVES TO BE CAPITALISED. IN SO FAR AS THE INTEREST EARNED BY THE ASSESSEE IS CONCERNED, IT IS CHARGEABLE TO TAX UNDE R SECTION 56 OF THE ACT AND ONLY THE EXPENDITURE WHICH FALLS UNDER SECTION 57 I S ALLOWABLE AS DEDUCTION AGAINST SUCH INTEREST RECEIPT. HE ACCORDINGLY COMPL ETED THE ASSESSMENT BY DETERMINING THE TOTAL INCOME AT ` 2,69,680/-. 5. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THA T THE INTEREST INCOME IS EARNED ON TEMPORARY ADVANCEMENT OF FUNDS AND HENCE IT OUGHT TO HAVE BEEN TREATED AS INCOME FROM BUSINESS. IT WAS A LSO CONTENDED THAT THE ASSESSEE HAVING COMMENCED THE BUSINESS, THE EXPENDI TURE IN THE FORM OF PAYMENT OF INTEREST SHOULD BE TREATED AS NORMAL BUS INESS EXPENDITURE, ALLOWABLE UNDER SECTION 36 OF THE ACT. RELIANCE WAS PLACED UPON SEVERAL CASE LAW IN THIS CONNECTION. 6. THE LEARNED CIT(A) CONSIDERED THE FACTS OF THE CASE , IN THE BACKDROP OF CASE LAW RELIED UPON BY THE ASSESSEE, AND OBSERVED THAT AS PER THE PROVISO TO SECTION 36(1)(III) EXPENDITURE ON ACCOUNT OF INT EREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET OR FOR EXTENSION OF EXISTING BUSINESS, TILL THE DATE ON WHICH SUCH ASSET WAS FIR ST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. IT MAY BE NOTED THAT PROVISO TO SUB-CLAUSE (III) TO SECTION 36(1) READS AS UNDER: - PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAP ITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUC TION. ITA NO. 6786/MUM/2014 M/S. DEVANSH ENTERPRISES P. LTD. 4 THE ABOVE PROVISO WAS INTRODUCED BY THE FINANCE ACT , 2003 W.E.F. 01.04.2004. 7. IN THE LIGHT OF THE SAID PROVISO THE LEARNED CIT(A) OBSERVED THAT THOUGH THE BORROWING WAS MADE FOR THE PURPOSE OF BUSINESS BUT THE AMOUNT WAS ADVANCED AND INTEREST EARNED FOR THE PERIOD PRIOR T O COMMENCEMENT OF BUSINESS IN THE INSTANT CASE AND HENCE INTEREST PAI D BY ASSESSEE CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. HE ALSO HIGHLIGHTE D THAT THE DECISION OF THE HON'BLE MADRAS HIGH COURT, RELIED UPON BY THE LEARN ED COUNSEL, IS NOT APPLICABLE SINCE IT WAS PASSED PRIOR TO THE INTRODU CTION OF THE PROVISO. HE THUS CONCLUDED THAT THE INTEREST EXPENDITURE WAS CO RRECTLY TREATED AS CAPITAL IN NATURE. 8. IN SO FAR AS THE INTEREST INCOME IS CONCERNED HE RE FERRED TO SEVERAL CASE LAW TO CONCLUDE THAT THE DECISION OF THE APEX COURT IN THE CASE OF TUTICORIN ALKALIES CHEMICALS & FERTILIZERS LTD. 93 TAXMAN 502 IS SQUARELY APPLICABLE TO THE CASE IN HAND. THUS THE DECISION O F THE AO WAS CONFIRMED. 9. FURTHER AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE STRONGLY SUBMITTED THAT THE CASE LAW RELIED UPON BY THE REVENUE ARE DISTINGUISHABLE ON FACTS. T HE LEARNED COUNSEL ADVERTED THE ATTENTION OF THE BENCH TO PAGES 35 AND 31 OF THE PAPER BOOK TO SUBMIT THAT DURING THE PREVIOUS YEAR, RELEVANT TO A SSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE COMMENCED ITS ACTIVITY IN THE FORM OF PAYING ADVANCE FOR PURCHASE OF PROPERTY AT LOWER PAREL AND HENCE IT HAS TO BE ASSUMED THAT THE ASSESSEE COMMENCED ITS ACTIVITY. W HEN ASKED AS TO HOW THE ASSESSEE ADVANCED THE IDLE FUNDS PRIOR TO COMME NCEMENT OF BUSINESS, IT WAS SUBMITTED THAT DISCUSSIONS WERE HELD DURING THE RELEVANT PERIOD OF TIME AND IN THE CASE OF REAL ESTATE BUSINESS WHEN THE PR OCESS OF FINALISATION OF DEAL COMMENCED IT HAS TO BE ASSUMED THAT THE BUSINE SS ACTIVITY HAD COMMENCED. IT WAS CLAIMED THAT SOMEWHERE IN THE MON TH OF NOVEMBER THE ASSESSEE STARTED THE PROCESS OF MAKING ENQUIRIES WI TH REGARD TO A PARTICULAR PROPERTY AND IN ORDER TO PURCHASE THE LAND IT HAD T AKEN LOAN FROM THE BANK BUT DUE TO SOME UNEXPECTED DELAY IN FINALISATION OF THE DEAL THE FUNDS WERE ITA NO. 6786/MUM/2014 M/S. DEVANSH ENTERPRISES P. LTD. 5 LYING IDLE BUT THE FACT REMAINS THAT THE ACTIVITY O F THE ASSESSEE HAD ALREADY COMMENCED BY NOVEMBER ITSELF. HOWEVER, NO PROOF WAS FURNISHED TO SHOW THAT THE ASSESSEE COMMENCED ACTIVITY IN NOVEMBER IT SELF. THE ONLY EVIDENCE AVAILABLE ON RECORD SHOWS THAT THE ACTIVITY, IF AT ALL, COMMENCED ONLY ON 28.03.2005, I.E. THE DATE WHEN THE ASSESSEE PAID SO ME AMOUNT AS ADVANCE TOWARDS PURCHASE OF PROPERTY AT LOWER PAREL. IN OTH ER WORDS, AS ON 28.12.2004, I.E. THE DATE OF ADVANCING INTEREST BEA RING LOANS BY THE ASSESSEE TO AN OUTSIDER, THE ASSESSEES BUSINESS ACTIVITY HA D NOT COMMENCED AND IN THE LIGHT OF THE PROVISIONS OF SECTION 36(1)(III) I NTEREST PAID CANNOT BE TREATED AS BUSINESS EXPENDITURE AND HENCE IT HAS TO BE TREA TED AS CAPITAL IN NATURE. 10. THE LEARNED D.R. RELIED UPON THE ORDER PASSED BY TH E ITAT B BENCH HYDERABAD IN THE CASE OF M/S. KAKINADA SEZ PVT. LTD . (ITA NO. 1218/HYD/ 2010 DATED 29 TH DECEMBER, 2010) WHEREIN IDENTICAL ISSUE HAD COME U P BEFORE THE BENCH. THE ITAT, HYDERABAD BENCH HAS TAK EN NOTE OF THE DECISION OF THE APEX COURT IN THE CASE OF TUTICORIN ALKALIES CHEMICALS & FERTILIZERS LTD. AND OBSERVED, ON IDENTICAL FACTS, THAT THE INTEREST RECEIVED BY THE ASSESSEE CANNOT BE TREATED AS INCOME FROM BUSIN ESS AND IT HAS TO BE TREATED AS INCOME FROM OTHER SOURCES. SIMILARLY THE INTEREST EXPENDITURE HAS TO BE CAPITALISED. 11. THE LEARNED COUNSEL FOR THE ASSESSEE COULD NOT PLAC E ANY MATERIAL TO CONTRADICT THE FINDING OF THE LEARNED CIT(A). 12. IT DESERVES TO BE NOTICED THAT THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON TWO DECISIONS OF THE HON'BLE DELHI HIGH COURT, I.E. M/S. DHOOMKETU BUILDERS & DEVELOPMENT PVT. LTD. 216 TAXM AN 76 AND INDIAN OIL PANIPAT POWER CONSORTIUM LTD. 315 ITR 255 BUT T HE LEARNED D.R. POINTED OUT THAT THE FACTS THEREIN ARE DIFFERENT. H E HIGHLIGHTED THAT SUBSEQUENT TO INSERTION OF PROVISO TO SECTION 36(1) (III) THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE HAS TO BE CAPI TALISED WHEREAS THE INTEREST INCOME RECEIVED BY THE ASSESSEE HAS TO BE TREATED AS INCOME FROM OTHER SOURCES. ITA NO. 6786/MUM/2014 M/S. DEVANSH ENTERPRISES P. LTD. 6 13. HAVING CAREFULLY PERUSED THE RECORD I AM OF THE FIR M VIEW THAT THE ORDER PASSED BY THE CIT(A) DOES NOT CALL FOR ANY IN TERFERENCE FOR THE DETAILED REASONS GIVEN THEREIN. I THEREFORE UPHOLD THE ORDER PASSED BY THE LEARNED CIT(A) AND DISMISS THE APPEAL FILED BY THE ASSESSEE . ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JANUARY, 2015. SD/- (D. MANMOHAN) VICE PRESIDENT MUMBAI, DATED: 27 TH JANUARY, 2015 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 12, MUMBAI 4. THE CIT 6, MUMBAI CITY 5. THE DR, SMC BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.