ACIT, Central Circle-3, Hyderabad V. M/s. KNR Constructions Ltd, Hyderabad

ITA 831/HYD/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5570 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 25-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUDHAKAR RAO
• Keywords: Unexplained cash credit; Business expenditure; Principle of natural justice; Notional interest; Commercial expediency
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 831/HYD/2012 ASSESSMENT YEAR: 2008-09 ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 3, HYDERABAD. VS. M/S KNR CONSTRUCTIONS LTD., HYDERABAD. PAN AAACK8316L ASSESSEE RESPONDENT C.O. NO. 38 /HYD/2013 (IN ITA NO. 831/HYD/2012 ASSESSMENT YEAR: 2008-09 M/S KNR CONSTRUCTIONS LTD., HYDERABAD. PAN AAACK8316L VS. ASST. COMMISSIONER OF INCOME- TAX, CENTRAL CIRCLE 3, HYDERABAD. CROSS OBJECTOR RESPONDENT REVENUE BY: SRI SUDHAKAR RAO ASSESSEE BY: SRI SALIL KAPOOR & VIKAS JAIN DATE OF HEARING: 09/01/2014 DATE OF PRONOUNCEMENT: 09/01/2014 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A)-III, HYDERABAD DATED 26/03/2012 FOR THE ASSESSMENT YEAR 2008-2009. THE ASSESSEE FILED C.O. AGAINST THE SAID ORDER OF THE CIT(A). I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 2 2. THE REVENUE HAS RAISE THE FOLLOWING GROUNDS OF A PPEAL: 1. THE ORDER OF CIT(A) IS ERRONEOUS ON FACTS. 2. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE ASS ESSEE COMPANY IS PAYING INTEREST ON MOBILISATION ADVANCE AND HAS NOT CHARGED THE SAME. 3. THE CIT(A) FAILED TO APPRECIATE THAT THE ASSESSE E COMPANY FAILED TO PROVE NEXUS OF THE INTEREST FREE LOANS TO INTEREST FREE MOBILISATION ADVANCE, WHICH IS RELIED BY THE CIT(A) . 3. BRIEFLY THE FACTS OF THE CASE ARE THAT THE AO HA S OBSERVED THAT, THE ASSESSEE HAD GIVEN MOBILIZATION ADVANCES TO SUB- CONTRACTORS AMOUNTING TO RS. RS. 35,36,85,209/- ON WHICH NO INTEREST INCOME IS BEING SHOWN BY THE ASSESSEE. IT WAS ALSO OBSERVED BY THE AO THAT THE ASSESSEE HAS BEEN PAYIN G INTEREST ON MOBILIZATION ADVANCES RECEIVED BY IT AND ALSO PAYIN G HUGE AMOUNT OF INTEREST ON VARIOUS LOANS TAKEN BY THE ASSESSEE. WITH THIS OBSERVATIONS HE OPINIONED THAT, IT IS REASONABLE TO DISALLOW AN AMOUNT OF RS.4,95,15,929/- BEING INTEREST AT 14% ON MOBILIZATION ADVANCES OF RS. 35,36,85,209/- GIVEN TO SUB-CONTRAC TORS KEEPING IN VIEW THE BANK RATE OF INTEREST FOR ADVANCING LOANS AT 14%, AS DEDUCTION OUT OF INTEREST AND FINANCIAL CHARGES OF RS.10,03,83,551/- DEBITED TO THE PROFIT & LOSS ACCOUNT. ACCORDINGLY, AN AMOUNT OF RS. 4,95,15,929/- WAS DISALLOWED AND ADDED TO THE ADMI TTED INCOME OF THE ASSESSEE. 4. ON APPEAL, BEFORE THE CIT(A) IT WAS SUBMITTED TH AT THE ADDITION MADE BY THE AO BY CHARGING INTEREST @ 14% ON ADVANCES GIVEN TO SUB-CONTRACTORS, WITHOUT PROPERLY APPRECIA TING THE CONCEPT OF BUSINESS PURPOSE AND EXPEDIENCY AND WITHOUT LOOK ING AT THE FACTS ABOUT THE QUANTUM OF INTEREST FREE FUNDS AND ADVANCES AVAILABLE WITH THE ASSESSEE VIS--VIS THE QUANTUM O F ADVANCES GIVEN TO SUB-CONTRACTORS FREE OF INTEREST, IS INVAL ID. 5. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, NOTED THAT THE ADDITION MADE BY THE AO IS INVALID IN LAW I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 3 ON THE CONCEPT OF BUSINESS EXPEDIENCY AND ON FACTS THAT INTEREST FREE ADVANCES ARE LESSER THAN THE INTEREST FREE ADV ANCES RECEIVED AND THE ADDITION IS AB-INITIO VOID AS THE ADVANCES WERE GIVEN TO SUB-CONTRACTORS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AS A MATTER OF BUSINESS EXPEDIENCY AND ANY INTEREST PA ID ON LOANS TAKEN BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS I S ALLOWED AS BUSINESS EXPENDITURE AND DEDUCTED FROM THE INCOME U /S 36(1)(III) OF THE INCOME TAX ACT 1961. HE NOTED THAT NO NOTIONA L INTEREST CAN BE CHARGED ON THESE INTEREST FREE ADVANCES GIVEN TO SUB- CONTRACTORS, BECAUSE OF EXISTENCE OF BUSINESS EXPED IENCY IN GIVING SUCH ADVANCES. THE CIT(A) BY REFERRING TO SECTIONS 28 TO 43 D OF THE INCOME TAX ACT 1961, AND PARTICULARLY SECTION 3 6(1)(III) OF THE INCOME TAX ACT 1961, OBSERVED THAT BY VIRTUE OF THE SE CLAUSES THERE IS NO OBLIGATION ON THE ASSESSEE TO EARN INCO ME DIRECTLY ON BORROWED CAPITAL TO ALLOW DEDUCTION OF INTEREST PAI D ON BORROWED CAPITAL. IT ONLY REQUIRED THE ASSESSEE TO USE THE C APITAL BORROWED FOR THE PURPOSE OF BUSINESS WHATEVER MAY BE THE OUT COME EITHER PROFIT OR LOSS. THE CIT(A) ALSO BY REFERRING TO THE MAIN OBJECTS AND THE ANCILLARY OBJECTS IN THE MEMORANDUM OF ASSOCIAT ION OF THE ASSESSEE OBSERVED THAT THE ASSESSEE IS ENGAGED IN T HE BUSINESS OF WORKS CONTRACT AS PER THE MAIN OBJECTS AND IT IS AL LOWED TO LEND OR ADVANCE MONIES BELONGING OR ENTRUSTED OR AT THE DIS POSAL OF THE ASSESSEE TO ANY COMPANY AND IN PARTICULAR TO CUSTOM ERS AND OTHERS HAVING DEALINGS WITH THE COMPANY ON SUCH TERMS AND CONDITIONS AS MAY SEEN EXPEDIENT, AND ACCORDINGLY THE ADVANCES WE RE GIVEN TO SUB-CONTRACTORS WHO ARE EXECUTING THE WORKS GIVEN B Y THE ASSESSEE TO THESE SUB-CONTRACTORS, AND THE ADVANCES WERE GIV EN ON ACCOUNT BASIS WHICH ARE ADJUSTED AGAINST THE WORKS BILLS OF THE SUB- CONTRACTORS. THE CIT(A) ALSO NOTED THAT IT IS NOT P OSSIBLE TO EXECUTE ALL WORKS ON ITS OWN WITH THE LIMITED MACHINERY, MA N POWER AND INFRASTRUCTURE FACILITIES AVAILABLE WITH THE ASSESS EE AND THEREFORE A NECESSITY ARISES TO GIVE WORK ON SUB-CONTRACT. WHEN THE WORKS ARE GIVEN ON SUB-CONTRACT ADVANCES ARE TO BE GIVEN TO T HE SUB- I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 4 CONTRACTORS TO BRIDGE THE GAP IN WORKING FUNDS BETW EEN THE WORK EXECUTED BY SUB-CONTRACTORS AND THE BILL PAID BY TH E ASSESSEE FOR THE WORK EXECUTED BY THEM. IT WAS OBSERVED THAT THE SE INTEREST FREE ADVANCES WERE GIVEN TO SUB-CONTRACTORS FOR THE PURP OSE OF THE BUSINESS OF THE ASSESSEE AND THE CONCEPT OF BUSINES S EXPEDIENCY PREVAILS IN SUCH ADVANCES. 5.1 THE CIT(A) OBSERVED THAT THE MOBILIZATION ADVA NCES RECEIVED BY THE ASSESSEE COMPANY FROM ITS CLIENTS ARE MORE T HAN THE INTEREST FREE ADVANCES GIVEN TO SUB-CONTRACTORS, BECAUSE OF THE FACT THAT, THE INTEREST FREE MOBILIZATION ADVANCES RECEIVED OU TSTANDING AS ON 31.03.2008 ARE RS.52,68,52,421/-, WHERE AS THE INTE REST FREE ADVANCES GIVEN TO SUB-CONTRACTORS WERE ONLY RS.35,3 5,85,209/-, AND WHEN INTEREST FREE ADVANCES RECEIVED ARE MORE T HAN THE INTEREST FREE ADVANCES GIVEN THE ADDITION MADE BY T HE AO IS NOT CORRECT. IT WAS ALSO ARGUED BY THE ASSESSEE THAT 'A PART FROM THE INTEREST FREE MOBILIZATION ADVANCES RECEIVED FROM C LIENTS, THE ASSESSEE IS HAVING OTHER INTEREST FREE FUNDS TO THE EXTENT OF RS.228,15,96,016/- AS ON 31.03.2008 IN THE FORM OF PAID UP SHARE CAPITAL OF RS. 28,12,34,600/-, RESERVES AND SURPLUS ES OF RS.198,12,79,469/-, MACHINERY ADVANCES OF RS.1,90,8 1,947/-. BASED ON THE ABOVE ARGUMENTS THE ASSESSEE CONTENDED THAT, WHEN THE INTEREST FREE FUNDS OR MOBILIZATION ADVANCES RE CEIVED ARE MORE THAN THE INTEREST FREE ADVANCES GIVEN TO THE SUB-CO NTRACTORS, THE ASSESSING OFFICER OUGHT NOT TO HAVE DISALLOWED INTE REST AND FINANCE CHARGES, BY CHARGING INTEREST AT 14% ON ADVANCES G IVEN TO SUB- CONTRACTORS. IN SUPPORT OF HIS ARGUMENTS THE ASSESS EE HAS RELIED AND REFERRED TO THE JUDGMENTS IN THE CASE OF CIT VS . PREM HEAVY ENGINEERING WORKS LTD., 285 ITR 554 [ALL.], DCIT VS . UK PAINTS INDIA LTD, [2010] 4 ITR 455 (DELHI TRIBUNAL), CI T VS. BHARATHI TELE VENTURE LTD., [2011] 331 ITR 502 (DEL.), DCIT VS. SOPHISTICATED MARBLES & GRANITES INDUSTRIES, [2010] 003 ITR (TRIB) 0220(DELHI). I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 5 5.2 FURTHER, THE CIT(A) OBSERVED THAT AS PER THE A SSESSMENT ORDER THE ASSESSING OFFICER IN PARA NO.3 HELD THAT THE ADVANCE GIVEN TO SUB-CONTRACTORS ARE MOBILIZATION ADVANCES AND INTEREST WAS PAID ON MOBILIZATION ADVANCES RECEIVED BY THE ASSES SEE. FURTHER THE ASSESSEE HAS PAID HUGE AMOUNT OF INTEREST ON VA RIOUS LOANS TAKEN BY THE ASSESSEE. WHEN THIS WAS PUT FORTH BEFO RE THE ASSESSEE FOR HIS COMMENTS, THE ASSESSEE SUBMITTED A DETAILED REPLY ON 19.03.2012. 5.3 IN ITS REPLY IT WAS ARGUED THAT, THE ASSESSEE NEVER GIVEN ANY MOBILIZATION ADVANCE TO ITS SUB-CONTRACTORS, BECAUS E AS PER SUB- CONTRACT AGREEMENTS THERE IS NO SUCH NECESSITY FOR THE ASSESSEE TO GIVE MOBILIZATION ADVANCE. BUT AS PER THE SAME SUB- CONTRACT AGREEMENT THE ASSESSEE IS UNDER OBLIGATION TO MAKE THE PAYMENTS TO THE SUB-CONTRACTORS FOR THE VALUE OF WORK EXECUT ED BY THEM. IT IS THE NORMAL PRACTICE THAT, EVEN THOUGH THE SUB-CONTR ACTOR EXECUTE THE WORK, THE COMPANY WILL NOT ACCOUNT FOR THE VALU E OF WORK EXECUTED BY THE SUB-CONTRACTOR AS BILL PAYABLE TO T HEM UNTIL AND UNLESS THE WORK EXECUTED BY HIM IS APPROVED BY THE CLIENT OF THE COMPANY AND RELEASE THE PAYMENT FOR THAT WORK EXECU TED. UNTIL SUCH TIME THE PAYMENT MADE TO THE SUB-CONTRACTORS I S KEPT AS ADVANCE. THIS ADVANCE IS ADJUSTED AGAINST THE RUNNI NG BILLS OF THE SUB-CONTRACT AS APPROVED BY THE CLIENT OF THE COMPA NY. THUS THE ADVANCES GIVEN TO THE SUB-CONTRACTOR IS ON THE BASI S OF WORK EXECUTED BY SUB-CONTRACT AND IS IN THE NATURE OF BU SINESS ADVANCES. 0N ACCOUNT OF THE ABOVE REASONS THERE IS NO MOBILIZATION ADVANCE GIVEN TO THE SUB-CONTRACTORS. THIS IS ALSO EVIDENCED BY THE FACT THAT IN TILE BALANCE SHEET THE MOBILIZATION AD VANCES RECEIVED FROM THE CLIENT WERE KEPT CLEARLY UNDER THE HEAD MO BILIZATION ADVANCE, WHEREAS THE ADVANCE TO SUB-CONTRACTORS CON TRACTORS, IS MISCONCEIVED BY THE AO IN HIS ASSESSMENT ORDER. 5.4 THE CIT(A) NOTED THAT WITH REGARD TO THE PAYME NT OF HUGE AMOUNT OF INTEREST OF RS.10,03,83,551/- AS OBSERVED BY THE AO IN I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 6 HIS ASSESSMENT ORDER IS CONCERNED, THE ASSESSEE SUB MITTED THAT, 'THIS OBSERVATION OF THE AO IS ALSO NOT CORRECT ON FACTUAL BASIS, BECAUSE IN THE BALANCE SHEET OF THE COMPANY, IN SCH EDULE NO.20 ON PAGE NO.48, THE INTEREST PAID WAS MAINLY TOWARDS WO RKING CAPITAL LOANS, TERM LOANS, INTEREST TO OTHERS AND OTHER FIN ANCIAL CHARGES WHICH IS NOT CONNECTED WITH THE MOBILIZATION ADVANC ES RECEIVED BY THE COMPANY EXCEPT TO THE EXTENT OF INTEREST ON MOB ILIZATION ADVANCE OF RS. 4 CRORES ONLY. EVEN THIS RS.4 CRORES WAS NOT UTILIZED BY THE COMPANY FOR ADVANCES TO SUB-CONTRACTORS, BUT WAS DEPOSITED INTO THE BANK ACCOUNT OF THE ASSESSEE. IT IS ALSO S UBMITTED BY THE ASSESSEE THAT INTEREST ON THAT ACCOUNT IS ONLY RS. 79,37,203/- WHICH INCLUDES THE INTEREST PART IS RS. 59,44,190/- AND T HE PRELIMINARY EXPENSES OF JV EXPENDITURE IS RS.19,93,013/-. THE A SSESSEE FURTHER SUBMITTED THAT THE AO ALSO DID NOT TAKE INTO ACCOUN T THE OTHER SIDE OF THE FACT THAT, THE COMPANY IS HAVING PLENTY OF I NTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL RESERVES AND MACHINERY ADVANCES TO THE EXTENT OF RS.228,15,96,016/- IN ADDITION TO THE INT EREST FREE MOBILIZATION ADVANCE OF RS.52,68,52;421/-. THUS ALL PUT TOGETHER THE 'COMPANY IS HAVING INTEREST' FREE FUNDS TO THE, EXTENT OF RS.280.84 'CRORES AS AGAINST ALL ITS INTEREST BEARI NG LOANS OF RS.108.95 CRORES IN THE FORM OF' SECURED LOANS AND UNSECURED LOANS, WHICH IS MORE THAN TWICE THAN THE INTEREST B EARING FUNDS. WHEN THE COMPANY IS HAVING SUCH A HUGE INTEREST FRE E FUNDS TO COVER TWICE THE INTEREST BEARING LOANS OF THE COMPA NY, THE OBSERVATION OF THE AO THAT, THE ASSESSEE IS PAYING HUGE AMOUNT OF INTEREST AND LINKING IT TO THE INTEREST CHARGEABLE ON ADVANCES TO SUB-CONTRACTORS IS INVALID. IT IS ALSO DECIDED IN T HE CASE LAWS CITED ABOVE THAT, WHEN AS LONG AS THE INTEREST FREE FUNDS ARE THERE TO COVER THEIR INTEREST FREE LOANS OR ADVANCES NO INTE REST CAN BE DISALLOWED U/S 36(1)(III) OF THE IT ACT, 1961. THER EFORE, NEITHER INTEREST IS TO BE DISALLOWED NOR NOTIONAL INTEREST CAN BE CHARGED ON INTEREST FRE`E ADVANCES AND RECOGNIZE THE SAME AS I NCOME OF THE COMPANY. I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 7 5.5 THE CIT(A) REFERRED THE ORDER OF THE CIT(A) IN EARLIER YEAR, I.E. A.Y. 2007-08, WHEREIN THE CIT(A) HELD AS FOLLO WS: 'IN MY VIEW, HE WAS JUSTIFIED IN DISALLOWING THE SA ID AMOUNT OF RS.1,88,34,670/-, TOWARDS THE CHARGEABLE INTEREST O N SUCH MOBILIZATION ADVANCES GIVEN BY IT, OUT OF THE TOTAL CLAIM OF INTEREST MADE BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT. RELIANCE IN SUPPORT OF THIS DISALLOWANCE, IS PLACED ON THE DECISION OF HON'BLE ITAT, COCHIN BENCH, IN THE CASE OF ASST. CIT VS. CENTURY TOWERS (2009) 312 ITR (AT) 161, WHE REIN, EVEN AFTER REFERRING TO THE DECISION OF THE APEX CO URT IN S.A. BUILDERS LTD. (SUPRA), THE HON'BLE TRIBUNAL HELD TH AT WHEN THERE IS NO DIRECT NEXUS BETWEEN THE BENEFIT DERIVE D BY THE ASSESSEE AND ADVANCES GIVEN INTEREST FREE TO THE GR OUP CONCERNS, THE DISALLOWANCE OUT OF INTEREST MADE BY THE AO WAS JUSTIFIED'. 5.6 THE CIT(A) NOTED THAT WITH REGARD TO THE ABOVE , THE ASSESSEE SUBMITTED THAT THE OBSERVATION MADE BY THE ID. CIT( A) BASING ON THE JUDGMENT IN THE CASE OF ASST. CIT V. CENTURY TOWERS IS NOT CORRECT BECAUSE, THE CASE REFERRED BY THE CIT (APPEALS - II I) IS DISTINGUISHED TO THE CASE OF THE ASSESSEE, SINCE TH E FACTS IN BOTH THE CASES ARE DIFFERENT'. THE ASSESSEE ALSO SUBMITT ED IN THE FORM OF A TABLE THE DIFFERENCES IN FACTS IN THIS CASE AND T HAT OF THE ASSESSEE, WHICH IS PRESENTED HERE. THE FACTS OF THE CASE LAW CIT V CENTURY TOWERS, REFERRED BY CIT (A) ARE NOT RELEVAN T TO THE ASSESSEE'S CASE FOR THE FOLLOWING REASONS: SL.NO. FACTS OF THE CASE REFERRED BY CIT(A) REASONS FOR NON APPLICATION TO THE ASSESSEES CASE 1 THE ADVANCES WERE GIVEN TO THE PARTNERS IN THE FORM OF WITHDRAWALS AND ALSO INVESTMENT IN THE GROUP CONCERNS. THE ADVANCES WERE GIVEN TO THE OWN SUB-CONTRACTORS OF THE ASSESSEE WHO EXECUTED THE SUB-LET WORK ON BEHALF OF THE ASSESSEE II. THERE IS NO BUSINESS CONNECTION BETWEEN GROUP CONCERNS AND THE ASSESSEE BECAUSE THE ASSESSEE IS A BUILDER AND THE GROUPS CONCERNS ARE ENGAGED IN THE BUSINESS OF FILMS. HERE IS A BUSINESS CONNECTION IS ESTABLISHED BY WAY OF SUB-CONTRACT AGREEMENT BETWEEN THE ASSESSEE AND THE SUB-CONTRACTOR FOR EXECUTION OF ASSESEES OWN WORK. III. THERE ARE NO INTEREST FREE FUNDS AVAILABLE WITH THE THE ASSESSEE IS HAVING ABUNDANT INTEREST FREE I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 8 ASSESSEE. MOBILIZATION ADVANCE TO COVER INTEREST FREE SUB-CONTRACTOR ADVANCES. IV. THERE IS NO BUSINESS EXPEDIENCY BUSINESS EXPEDIENCY DO EXISTS IN THIS CASE. V. THERE IS NO NEXUS BETWEEN THE ADVANCE AND BENEFIT TO THE ASSESSEE. THE ASSESSEE IS BENEFITED IN FORM OF GROSS MARGIN OF RS. 25.61 CRORES BETWEEN TURNOVER BOOKED ON ACCOUNT OF SUB- CONTRACTOR BILLS AND THE SUB- CONTRACTORS EXPENSES PAID AGAINST WHICH THE ADVANCES ARE ADJUSTED. VI. THE DECISION IN THIS CASE IS ALSO SQUASHED BY THE ITAT, MUMBAI BENCH - 'A' IN APPEAL NO. 6520/MUM/2009, ASST. YEAR 2005-06. 5.7 THE CIT(A) NOTED THAT FURTHER THE ASSESSEE ALS O CITED THE JUDGMENT IN THE CASE LAW LIMELITE SECURITIES LTD V. DCIT, ITA NO.6520/MUM/2009 DELIVERED BY A HON'BLE ITAT, MUMBA I - 'A' BENCH. IN THIS CASE LAW THE MUMBAI TRIBUNAL HAS SQU ASHED THE ORDER OF THE CIT (APPEALS) UPHOLDING THE ADDITION O F INTEREST ON INTEREST FREE ADVANCES SAYING THAT NO NEXUS WAS NOT ESTABLISHED, PROPORTIONATE DISALLOWANCE OF INTEREST CLAIMED COUL D BE MADE. THE ASSESSEE HAS NOT ESTABLISHED HOW THE GIVING OF ADVA NCE HAS BENEFITED THE ASSESSEE, BY REFERRING THE CASE LAWS IN 'ACIT V. CENTURY TOWERS AND CIT VS. VP BAY & CO.', ON THE GR OUND THAT, THE AO CANNOT DISALLOW THE INTEREST EXPENSE FOR THE YEA R UNDER CONSIDERATION ON THE PREMISE THAT INTEREST BEARING FUNDS ARE USED TO ADVANCE INTEREST FREE ADVANCES, IF NO SUCH DISALLOW ANCES ARE MADE IN ANY PRIOR ASSESSMENT YEAR. THEREFORE, THE ASSESS EES CLAIM IS TO BE ALLOWED. 5.8 THE CIT(A) FURTHER OBSERVED THAT BY GIVING SUC H ADVANCES TO SUB-CONTRACTORS A TURNOVER OF RS.167.49 CRORES ADDE D TO THE TURNOVER, AND A SUM OF RS. 25.61 CRORES WAS ADDED T O THE MARGIN OF I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 9 THE ASSESSEE SHOWING A DIRECT NEXUS BETWEEN THE INT EREST FREE ADVANCES AND THE BENEFIT TO THE ASSESSEE UNLIKE IN THE CASE OF ASST. CENTURY TOWERS, REFERRED BY THE CIT (APPEALS) IN THE APPELLATE ORDER FOR THE AY 2007-08. 5.9 THE CIT(A) NOTED THAT THERE ARE MOBILIZATION A DVANCES RECEIVED BY THE COMPANY AND ALSO INTEREST FREE ADVA NCES GIVEN TO SUB-CONTRACTORS IN THE PREVIOUS YEARS, EARLIER TO T HE PREVIOUS YEARS 2006-07 AND 2007-08. SCRUTINY ASSESSMENTS WERE ALSO COMPLETED U/SS 143(3), BUT NO INTEREST WAS CHARGED ON ADVANCE S GIVEN TO SUB- CONTRACTORS LEADING TO DISALLOWANCE OF INTEREST EXP ENDITURE, BECAUSE IN THOSE PREVIOUS YEARS THE THEN ASSESSING OFFICERS RECOGNISED THE CONCEPT OF BUSINESS EXPEDIENCY IN GI VING SUCH ADVANCES. 5 .10 IN VIEW OF THE ABOVE OBSERVATIONS AND DISCUS SION, THE CIT(A) FINALLY HELD AS FOLLOWS: I HAVE CAREFULLY GONE THROUGH THE PARA NO.3 OF THE ASST. ORDER AND ALSO THE APPELLATE ORDER OF MY PREDECESSOR FOR EARLIER A.Y. AND THE DETAILED ARGUMENTS OF THE AR OF THE AS SESSEE AND ALSO THE VARIOUS SUBMISSIONS FURNISHED BY THE A SSESSEE DURING HEARING PROCEEDINGS WITH REGARD TO THE ISSUE OF - CHARGING INTEREST AT 14% ON ADVANCES GIVEN TO SUB- CONTRACTORS FREE OF INTEREST AND CONSEQUENT DISALLO WANCE OF INTEREST EXPENDITURE OF THE ASSESSEE AND THERE BY M AKING AN ADDITION TO THE EXTENT OF RS. 4,95,15,929/-. ON PER USAL OF PARA NO. 3 OF THE ASSESSMENT ORDER IT WAS OBSERVED THAT, THE AO EXCEPT SAYING THAT THE ASSESSEE IS PAYING INTEREST ON MOBILIZATION ADVANCES RECEIVED BY THE COMPANY, HE C OULD NOT BRING ANY MATERIAL ON RECORD TO SHOW THAT THE ASSES SEE HAS PAID INTEREST ON MOBILIZATION ADVANCES, AND EVEN DI D NOT QUANTIFY THE AMOUNT OF MOBILIZATION ADVANCES RECEIV ED BY THE ASSESSEE. IT IS ALSO NOT FOUND FROM THE ASST. ORDER THE BASIS FOR CONSIDERING THE ADVANCES GIVEN TO SUB-CONTRACTO RS AS MOBILIZATION ADVANCES GIVEN TO THEM. THE AO ALSO DI D NOT DISCUSS IN HIS ASST. ORDER WHETHER THE ADVANCES GIV EN TO SUB- CONTRACTORS ARE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE OR NOT. FURTHER THE AO ALSO IGNORED TO TAK E INTO ACCOUNT THE TOTAL INTEREST FREE FUNDS AVAILABLE WIT H THE ASSESSEE AS ON 31/03/2008, WHETHER SUCH INTEREST FR EE FUNDS ARE MORE THAN OR LESS THAN THE INTEREST FREE ADVANC ES TO SUB- CONTRACTORS AND ALSO WHETHER THE INTEREST FREE ADVA NCES WERE I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 10 GIVEN DIRECTLY FROM THE MOBILIZATION ADVANCES RECEI VED BY THE ASSESSEE OR NOT. CONTRARY TO THIS SITUATION THE ASS ESSEE SUBMITTED VARIOUS FACTS THAT IT HAS INTEREST FREE M OBILIZATION ADVANCES TO THE EXTENT OF RS. 52,68,52,421/- THE OV ERALL INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, R ESERVES TO THE EXTENT OF RS. 228,15,96,016/- AS AGAINST THE IN TEREST FREE ADVANCES GIVEN TO SUB-CONTRACTORS TO THE EXTENT OF RS. 35,36,85,209/- AND OVERALL SECURED AND UNSECURED LO ANS RECEIVED BY THE ASSESSEE OF RS. 108.95 CRORES RESPE CTIVELY AS ON 31/03/2008. IT WAS ALSO SUBMITTED BY THE ASSE SSEE BY DOCUMENTARY EVIDENCE THAT, BY WAY OF SUB-CONTRACTOR S AN AMOUNT OF RS. 167.49 CRORES WAS ADDED TO THE TURNOV ER OF THE ASSESSEE DERIVING IN A MARGIN OF RS. 25.61 CRORES A FTER DEDUCTING THE SUB-CONTRACT EXPENSES TO THE EXTENT O F RS. 167.49 CRORES. THESE FACTS PROVE THAT THE ADVANCES GIVEN TO SUB-CONTRACTORS WERE FOR THE PURPOSE OF THE BUSINES S AND IN THE COURSE OF THE BUSINESS OF THE ASSESSEE WHICH IS WITHIN THE PREMISE OF BUSINESS EXPEDIENCY, BECAUSE ON FACTS TH ERE IS NO DIVERSION OF FUNDS BY THE ASSESSEE FOR ANY PURPOSE OTHER THAN ITS BUSINESS, TO CHARGE INTEREST ON SUCH ADVANCES A ND CORRESPONDING DISALLOWANCE OF INTEREST EXPENDITURE OF THE ASSESSEE. REGARDING THE OBSERVATION OF MY PREDECESS OR WITH REFERENCE TO THE JUDGMENT IN THE CASE OF ASST. CIT VS. CENTURY TOWERS, THE FACT OF THIS CASE ARE TOTALLY D IFFERENT FROM THE FACTS OF THE ASSESSEES CASE, AS OBSERVED BY ME AND UNLIKE IN THE CASE OF CENTURY TOWERS THE ASSESSEE W AS BENEFITTED BY WAY OF MARGIN OF RS. 25.61 CRORES BY GIVING INTEREST FREE ADVANCES TO SUB-CONTRACTORS. THEREFOR E, THERE IS A DIRECT NEXUS BETWEEN THE INTEREST FREE ADVANCES A ND THE BENEFIT DERIVED BY THE ASSESSEE AND THE CONCEPT OF BUSINESS EXPEDIENCY WAS FULFILLED. ON ACCOUNT OF THE VARIOUS FACTUAL SUBMISSIONS MADE BY THE ASSESSEE, AND ALSO VARIOUS CASE LAWS PRESENTED DURING THE APPEAL PROCEEDINGS BEFORE ME, I AM OF THE OPINION THAT THE ASSESSEE IS HAVING INTER EST FREE FUNDS TO COVER INTEREST FREE ADVANCES, THE ADVANCES WERE GIVEN FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE A ND THE ASSESSEE IS BENEFITTED BY GIVING SUCH ADVANCES AND THEREFORE THE INTEREST OF RS. 4,95,15,959/- CHARGED ON INTERE ST FREE ADVANCES TO SUB-CONTRACTORS IS ILLEGAL AND WITHOUT ANY BASE AND SO THE ADDITION OF SUCH INTEREST TO THE ADMITTE D INCOME OF THE ASSESSEE IS DELETED. HENCE, THE GROUND OF APPEA L ON THIS ISSUE WAS ALLOWED. 6. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 11 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AU THORITIES BELOW. AS SEEN FROM THE ORDER, THE ASSESSEE HAS RECEIVED T HE MOBILIZATION ADVANCES AS UNDER: DESCRIPTION INTEREST FREE AMOUNT (RS.) WITH INTEREST AMOUNT (RS.) TOTAL AMOUNT (RS.) MOBILISATION ADVANCE 52,68,52,421 4,00,00,000 56,68,52,421 MACHINERY ADVANCE 1,90,81,947 - 1,90,81,947 TOTAL 54,59,34,368 4,00,00,000 58,59,34,368 THE INTEREST FREE TRADE ADVANCES GIVEN ON ACCOUNT B ASIS TO SUB- CONTRACTORS IS RS. 35,36,85,209/-. 7.1 FROM THE ABOVE STATEMENTS, IT WAS CLEARLY ESTAB LISHED THAT THE INTEREST FREE MOBILIZATION ADVANCES RECEIVED BY THE ASSESSEE WERE RS.52,68,52,421/- AND, WHEREAS THE ADVANCES GI VEN TO SUB CONTRACTORS FREE OF INTEREST IS RS.35,36,85,209/-, WHICH IS MUCH LESSER THAN THE INTEREST FREE ADVANCES RECEIVED BY THE COMPANY. WHEN THERE ARE MORE INTEREST FREE ADVANCES RECEIVED THAN INTEREST FREE ADVANCES GIVEN, THE ADDITION MADE BY THE AO EV EN ON THE BASIS OF THESE FACTS IS NOT CORRECT. APART FROM TH IS, FROM THE READING OF THE BALANCE SHEET OF THE ASSESSEE AS ON 31.3.200 8 THE ASSESSEE IS HAVING THE FOLLOWING INTEREST FREE FUNDS. OVERA LL INTEREST FREE FUNDS AVAILABLE AS ON 31/03/2008 ARE AS FOLLOWS: 1. PAID UP SHARE CAPITAL RS. 28,12,34,600/- 2. RESERVES & SURPLUS RS. 198,12,79,469 3. INTEREST FREE MOBILIZATION ADVANCES RS. 52,6 8,52,421 4. MACHINERY ADVANCES RS. 1,90,81,947 TOTAL RS. 280,84,48,437/- ========== 7.2 ON A COMPARISON OF INTEREST FREE ADVANCES RECEI VED WITH INTEREST FREE ADVANCES GIVEN, THE INTEREST FREE ADV ANCES RECEIVED BY THE ASSESSEE IS MUCH HIGHER THAN THE INTEREST FREE ADVANCES GIVEN I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 12 TO SUB-CONTRACTORS. SIMILARLY ON A COMPARISON OVERA LL INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WITH INTEREST FRE E ADVANCES GIVEN, IN THIS CASE ALSO THE OVERALL INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY IS ALWAYS MUCH HIGHER THAN THE OVERALL INTEREST FREE ADVANCES GIVEN. THEREFORE, WHEN THE INTEREST FREE A DVANCES RECEIVED BY THE COMPANY ARE MORE THAN THE INTEREST FREE ADVANCES GIVEN TO SUB-CONTRACTORS THE ASSESSING OFFICER OUGH T NOT TO HAVE DISALLOWED THE INTEREST BY CHARGING INTEREST @ L4% ON THE ADVANCES GIVEN TO SUB-CONTRACTORS. ONE MORE IMPORTANT FACT T O BE NOTICED THAT THE ADVANCES RECEIVED BY THE ASSESSEE ARE MOBILIZAT ION ADVANCE AND WHEREAS THE ADVANCES GIVEN TO SUB-CONTRACTORS I S NOT A MOBILIZATION ADVANCE BUT IT IS ONLY A TRADE OR BUSI NESS ADVANCES AGAINST THE WORKS EXECUTED BUT UNCERTIFIED THE SUB- CONTRACTORS WHICH WILL BE ADJUSTED THE WORKS BILLS OF THE SUB-C ONTRACTORS. SIMILARLY THERE IS NO CONDITION IN THE AGREEMENTS W ITH SUB- CONTRACTORS TO CHARGE INTEREST ON THESE TRADE ADVAN CES. 7.3 IT IS AN ADMITTED FACT THAT THE ASSESSEE IS HAV ING ENOUGH INTEREST FREE ADVANCES TO GIVE INTEREST FREE MOBILI ZATION ADVANCES TO SUB-CONTRACTORS. THE LAW ON THIS ISSUE IS SETTLED BY THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT(A) AND ANOTHER, [2007] 288 ITR 1 (SC). THEIR LORDSHIPS HAV E HELD THAT AS LONG AS THE INTEREST FREE LOANS ARE GIVEN TO SISTER CONCERNS AS A MEASURE OF COMMERCIAL EXPEDIENCY, DISALLOWANCE CANN OT BE RESORTED ONLY ON THE GROUND THAT THE LOANS HAVE BEE N UTILIZED BY THE SISTER CONCERNS FOR ITS BUSINESS PURPOSES. WHAT IS TO BE ACTUALLY SEEN IS COMMERCIAL EXPEDIENCY OF HAVING ADVANCED TH E LOANS AND IT IS IMMATERIAL WHETHER OR NOT THE LOANS SO ADVANCED IS USED FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE OR FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE'S SISTER CONCERNS. THE COO RDINATE BENCH OF ITAT, HYDERABAD IN THE CASE OF SSPDL VS. DCIT, [ 2013] 24 ITR (TRIB) 290 (HYD.) HELD AS FOLLOWS: IF THE ASSESSEE DIVERTED ANY INTEREST BEARING FUNDS TO THE SISTER-CONCERN THEN THE BUSINESS TAKEN BY THE ASSES SEE TO I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 13 MAKE SUCH AN INVESTMENT AND EVEN IF IT IS RESULTED NO INCOME TO THE INTEREST, NOTIONAL INTEREST CANNOT BE DISALL OWED ON THE REASON THAT THE ASSESSEE SHOULD HAVE USED ITS NON-I NTEREST BEARING FUNDS FOR THE PURPOSE OF ITS OWN BUSINESS P URPOSES INSTEAD OF USING BORROWED FUNDS FOR ITS BUSINESS. T HE ASSESSING OFFICER CANNOT SIT IN THE ARMCHAIR OF BUS INESSMAN AND DECIDE WHAT THE ASSESSEE HAS TO DO TO MAXIMISE HIS PROFITS. 7.4 IN VIEW OF THE RATION LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS AND THE DECISION OF THE TRIBUNAL (SUPRA) AND HAVING REGARD TO THE FACT THAT IN THE PRESENT C ASE THE MOBILISATION ADVANCES TO SUB-CONTRACTORS WERE JUSTI FIED ON THE GROUND OF COMMERCIAL EXPEDIENCY, WE FIND NO INFIRM ITY IN THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS. 4,95, 15,929/- MADE BY THE AO BY HOLDING THAT THE SAID INTEREST CHARGED BY THE AO ON INTEREST FREE ADVANCES TO SUB-CONTRACTORS IS ILLOGI CAL AND WITHOUT ANY BASE AND SO THE ADDITION OF SUCH INTEREST TO TH E ADMITTED INCOME OF THE ASSESSEE DELETED. ACCORDINGLY WE CON FIRM THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS THE GROUNDS RAISED BY THE REVENUE ON THIS COUNT. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. C.O. NO. 38/H/13 BY THE ASSESSEE 9. THE ASSESSEE HAS RAISED THE FOLLOWING CROSS OBJE CTIONS: 1. THAT AO HAS IN VIEW OF THE FACTS AND CIRCUMSTANC ES OF THE CASE, ERRED IN LAW AND ON FACTS IN MAKING A HUGE LU MP SUM ADDITION BY DISALLOWING OF EXPENDITURE TO THE EXTEN T OF RS. 75,00,000 AND CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE SAME. 2. THE AO AND FURTHER CIT(A) HAS IN VIEW OF THE FAC TS AND CIRCUMSTANCES OF THE CASE, ERRED IN LAW AND ON FACT S IN DISALLOWING THE CLAIM OF THE COMPANY TO THE TDS CRE DIT IN THE RETURN OF INCOME TO THE EXTENT OF RS. 64,14,042/- S TATING THAT IT RELATES TO THE TDS ON ADVANCE AMOUNTS. I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 14 3. THAT THE CIT(A) AND THE AO HAS IN VIEW OF THE FA CTS AND CIRCUMSTANCES OF THE CASE, ERRED IN LAW AND ON FACT S IN TREATING THE AGRICULTURAL INCOME OF RS. 1,62,500/- 4. THE ADDITIONS MADE ARE UNJUST, ILLEGAL, BAD IN L AW, AGAINST THE PRINCIPLES OF NATURAL JUSTICE & HIGHLY EXCESSIV E. 5. THAT ASSESSEE HAS BEEN COMPLETED WITHOUT GIVING REASONABLE AND PROPER OPPORTUNITY TO THE ASSESSEE. 10. AS SEEN FROM THE ABOVE GROUNDS AND THE GRIEVANC E OF THE ASSESSEE BEFORE US IS THAT THERE IS NO PROPER OPPO RTUNITY OF HEARING GIVEN BY THE AO DURING THE COURSE OF ASSESS MENT PROCEEDINGS. ACCORDING TO THE ASSESSEE, THE AO CALL ED FOR DETAILS FROM THE ASSESSEE ON 31/12/2010 I.E. THE LAST DATE OF PASSING ASSESSMENT ORDER AND DUE TO PAUCITY OF TIME THE ASS ESSEE ON THAT DATE UNABLE TO PRODUCE THE SAME. THEREFORE, THE AO MADE THE ADDITION TOWARDS DISALLOWANCE OF EXPENDITURE OF RS. 75,00,000/- ON ADHOC BASIS. SIMILAR IS THE POSITION IN CASE OF DIS ALLOWANCE OF RS. 64,14,042/- TOWARDS TDS CREDIT AND RS. 1,62,500/- T REATING THE AGRICULTURAL INCOME AS UNEXPLAINED CASH CREDIT. 11. CONSIDERING THE PLEA OF THE ASSESSEE, WE ARE OF THE OPINION THAT TO MEET THE ENDS OF JUSTICE ONE MORE OPPORTUNI TY MAY BE GIVEN TO THE ASSESSEE TO PUT-FORTH HIS ARGUMENTS AND NECE SSARY DOCUMENTS TO SUBSTANTIATE HIS CLAIMS BEFORE THE AO. WE, ACCORDINGLY, RESTORE THESE ISSUES TO THE FILE OF TH E AO WITH A DIRECTION TO DECIDE THE ISSUES AFTER HEARING THE AS SESSEE AND EXAMINING THE EVIDENCES WHICH ARE PUT-FORTH BY THE ASSESSEE BEFORE HIM. IF THE ASSESSEE IS FAILED TO USE THE OP PORTUNITY BY NOT PROVIDING PROPER EVIDENCES BEFORE THE AO IN SUPPORT OF ITS CLAIMS, THE AO IS AT LIBERTY TO RESTORE THE ADDITIONS MADE EARLIER. 12. IN THE RESULT, C.O. FILED BY THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. I.T.A. NO. 831/HYD/2012 & C.O. 38/HYD/13 M/S KNR CONSTRUCTIONS. 15 13. TO SUM, APPEAL OF THE REVENUE IN ITA NO. 831/HY D/12 IS DISMISSED AND THE C.O. FILED BY THE ASSESSEE IN 38/ HYD/13 IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 09/01/2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 09/01/2014 KV COPY FORWARDED TO: 1. ACIT, CENTRAL CIRCLE 3, 8 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD 500 004. 2. M/S KNR CONSTRUCTIONS LTD., KNR HOUSE, 3 RD & 4 TH FLOOR, PLOT NO. 114, PHASE 1, KAVURI HILLS, HYDERABAD 33. 3. CIT(A)-III, HYDERABAD 4. CIT-II, HYDERABAD. 5. THE DR, ITAT, HYDERABAD