DCIT 12(2), MUMBAI V. KAMDAR CONSTRUCTIONS, MUMBAI

ITA 965/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7908 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-12-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 12-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ASHIMA GUPTA
• Keywords: Business income; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT ASHA VIJAYARAGHA VAN (JM) ITA NO. 965/MUM/2009 (ASSESSMENT YEAR-2005-06) THE DY. C.I.T. 12(2), AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. KAMDAR CONSTRUCTIONS, 102, KRISHNA CHAMBERS, 59, NEW MARINE LINES, MUMBAI-400 020 PAN-AAFFK2338C (APPELLANT) (RESPONDENT) APPELLANT BY: MRS. ASHIMA GUPTA RESPONDENT BY: NONE O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)-XII, MUMBAI DATED 5.11.2008 FOR THE A.Y. 2005-06. 2. NONE APPEARED ON BEHALF OF THE ASSESSEE THEREFOR E WE HEARD THE LD. DEPARTMENTAL REPRESENTATIVE AND SHALL DISPOSE OF TH IS MATTER EX PARTE ON MERIT. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS DEBITED INTEREST EXPENSES OF RS.15542167/-. THE MAJOR SOURCES OF FUN DS AS ON 31.3.2005 ARE AS UNDER : SECURED LOANS RS.8,98,25,758/- UNSECURED LOANS RS.12,26,07,691/- PARTNERS CAPITAL RS.1,95,18,124/- 4. AS PER SCHEDULE V TO THE BALANCE SHEET, THE BREA K UP OF SUNDRY DEBTORS OF RS.160599008/- HAS BEEN FURNISHED BY THE ASSESSEE WITH THE RETURN OF INCOME. PERUSAL OF THE SAME ALONG WITH DE TAILS FILED VIDE ITA NO. 965/M/09 2 SUBMISSION DT 18.12.07 SHOWS THAT IN RESPECT OF THE FOLLOWING PARTIES SUBSTANTIAL BALANCES HAVE REMAINED OUTSTANDING FOR MORE THAN 180 DAYS. NAME OF THE PARTY OUTSTANDING FOR MORE THAN 180 D AYS KUMARI SANGHAVI GUNDECHA RS.31,27,000 KEVIN PROPERTIES RS.6,14,75,94 KUMAR MAYFAIR RS.1,61,25,210 ------------------ RS.2,53,99,804 ------------------ ------------------ 5. THE LD. CIT(A) OBSERVED AS FOLLOWS: ASSESSEE HAS NOT OFFERED ANY EXPLANATION FOR THE D ELAY IN COLLECTING THE OUTSTANDING AMOUNTS DUE TO IT FROM T HE THREE PARTIES MENTIONED ABOVE. IT IS A FACT THAT REGARDLESS OF TH E NON-PAYMENT OF DUES OR PROLONGED DELAYS IN RECEIVING SOME PAYMENTS ONLY , ASSESSEE WENT ON EXECUTING THE WORK AND RAISING THE BILLS. THE DELAY IN RECOVERING THE DUES FROM THESE PARTIES NO DOUBT HAS INCREASE THE F INANCIAL COSTS TO THE ASSESSEE AND ERODED ITS PROFIT MARGIN. THE BORROWED FUNDS AND CAPITAL OF THE FIRM BEARING THE INTEREST HAS BEEN UTILIZED FOR EXECUTION OF WORK OF THESE PARTIES. CONSEQUENTLY, THE BORROWED FUNDS UTI LIZED FOR THIS PURPOSE CANNOT BE CONSIDERED AS EXPENSED IN CONNECT ION WITH THE BUSINESS EXPEDIENCY AND THE DEDUCTION CLAIMED FOR I NTEREST PAID ON IT IS NOT ALLOWABLE U/S.36(1)(III). THE ASSESSEE HAS BORR OWED SUBSTANTIAL MONEY FROM BANKS AND ASSOCIATE CONCERNS. AT THE SAM E TIME IT HAS NOT PURSUED PAYMENT OF ITS OUTSTANDING FROM THE ASSOCIA TE CONCERNS. HENCE, IT IS HELD THAT THE INTEREST ATTRIBUTABLE TO THE BO RROWED FUNDS UTILIZED FOR NON-RECOVERY OF DEBTORS, IN UNDULY DELAYED ACCOUNTS MENTIONED EARLIER IS TO BE CONSIDERED AS NON-BUSINESS EXPEDIENCY AND NEEDS TO BE DISALLOWED. THE INTEREST IS CALCULATED AT 14.25% ON RS.25399804/- BEING THE AVERAGE RATE OF INTEREST CHARGED BY ICIC BANK. THE SAME, WHICH WORKS OUT TO RS.3619472/- WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE. 6. THE AR OF THE ASSESSEE SUBMITTED AS FOLLOWS: THE ASSESSEE FIRM HAS PAID INTEREST OF RS.1,55,42, 167/- ON MONEYS BORROWED FROM BANK AND OTHERS. THE FIRM H AD BORROWED THE MONEY FROM THE BANK AND OTHERS FOR BUS INESS PURPOSES AND HAS UTILIZED THE SAME IN ITS BUSINESS ONLY. WE REQUEST YOUR HONOR TO NOTE THAT THE AO HAS NOT DISP UTED THIS FACT. ITA NO. 965/M/09 3 THE AO HAS SOUGHT TO MAKE THIS ADDITION OF RS.36,19 ,472/- ON ACCOUNT OF INTEREST ON THE AMOUNTS RECEIVABLE FROM DEBTORS VIZ, (I) KUMAR SANGHVI GUNDESHA, (II) KEVIN PROPERTIES AND ( III) KUMAR MAYFAIR WHICH WERE OUTSTANDING FOR MORE THAN 180 DA YS. WHILE MAKING ADDITION THE AO ARGUED AS FOLLOWS: .. IT IS A FACT THAT REGARDLESS OF THE NON PAYME NT OF DUES OR PROLONGED DELAYS IN RECEIVING SOME PAYMENTS ONLY, A SSESSEE WENT ON EXECUTING THE WORK AND RAISING THE BILLS . THE BORROWED FUNDS AND THE CAPITAL OF THE FIRM BEARING THE INTEREST HAS BEEN UTILIZED FOR EXECUTION OF WORK OF THESE PA RTIES.. . IT IS CLEAR FROM THE ABOVE OBSERVATION OF THE A O THAT THE ASSESSEE HAS USED THE FUNDS BORROWED ON WHICH I NTEREST HAS BEEN PAID, FOR THE PURPOSES OF BUSINESS OF THE ASSE SSEE. IN ADDITION, BY EXECUTING THE WORK AND RAISING BILLS, THE ASSESSEE HAS EARNED INCOME WHICH IT OFFERED TO TAX. THE AO H AS ALSO MADE AN ADDITION OF RS.93,47,030/- ON ACCOUNT OF INCOME FROM PROJECTS. WHEN INCOME HAS BEEN EARNED AND BROUGHT TO TAX, ANY EXPENDITURE INCURRED FOR EARNING THE SAID INCOME HA S TO BE ALLOWED AS DEDUCTION. THE ASSESSEE FURTHER CONTENDED THAT THESE PARTIES A RE ITS BUSINESS CUSTOMERS AND CONSIDERING THE BUSINESS EXI GENCIES AND FUTURE BUSINESS PROSPECTS, THE ASSESSEE HAS NOT CHA RGED INTEREST TO THESE PARTIES. HOWEVER, THE ASSESSEE HAS EARNED INCOME BY EXECUTING THE WORK OF THESE PARTIES BY UTILIZING TH E BORROWED FUNDS. IN THIS CONNECTION, THE ASSESSEE FIRM HAS NOT PAID ANY INTEREST DURING THE YEAR TO ITS PARTNERS ON THEIR C APITAL ACCOUNT. THE NET ADDITION TO PARTNERS CAPITAL ACCOUNT DURING THE YEAR AMOUNTED TO RS.1,95,08,504/- IT MEANS THAT THE ASSE SSEE HAS BROUGHT IN AND UTILIZED INTEREST FREE FUNDS IN TO T HE BUSINESS DURING THE YEAR TO THE EXTENT OF RS.1,95,08,504/-. THE AO HAS NEGLECTED THIS FACT. THE AO HAS ALSO FAILED TO APPRECIATE THAT THE ASSES SEE HAS NOT PAID ANY INTEREST ON AMOUNT OUTSTANDING TO ITS TRADE CREDITORS TO THE TUNE OF RS.3,55,07,305/- INCLUDING RETENTION AMOUNT PAYABLE TO CONTRACTORS OF RS.22,48,456/-. THIS IS I N ADDITION TO PARTNERS CAPITAL ACCOUNTS A MENTIONED ABOVE. THE AS SESSEE FURTHER CONTENDED THAT APPLYING THE SIMILAR LOGIC O F RECOVERING INTEREST FROM DEBTORS, THE ASSESSEE BE ALLOWED A DE DUCTION ON ACCOUNT OF INTEREST AT THE SAME RATE ON THESE OUTST ANDING AMOUNTS IN CASE THE ADDITION MADE BY THE AO ON THIS GROUND IS UPHELD. ITA NO. 965/M/09 4 THE ASSESSEE THEREFORE FEELS THAT THE AO HAS THUS A SSUMED A CHARGE OF A DECISION MAKER AS TO HOW TO UTILIZE T HE FUNDS IN THE BUSINESS WHICH WE THINK IS EXCLUSIVE PREROGATIVE OF ANY BUSINESSMAN. THE AO SHOULD NOT STEP IN TO THE SHOES OF THE BUSINESSMAN. WHAT AO HAS TO ASCERTAIN IS WHETHER OR NOT THE FUNDS HAVE BEEN USED IN AND FOR THE PURPOSES OF BUS INESS ONLY. LASTLY THE AO HAS DISALLOWED INTEREST U/S.36(1)(III ). THE ASSESSEE CONTENDED THAT THE FUNDS HAVE BEEN BORROWE D TO MEET ITS WORKING CAPITAL REQUIREMENTS AND THAT THEY HAVE BEEN SPENT ON ONGOING PROJECT OF THE ASSESSEE, INCOME FROM WHI CH IS TAXABLE AS BUSINESS INCOME AND HENCE INTEREST PAID ON SUCH BORROWING IS ALLOWABLE U/S.36(1)(III) OF THE INCOME TAX ACT, 196 1. THE PROVISIONS OF SEC.36(1)(III) READ AS UNDER DEDUCT ION IN RESPECT OF THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL B ORROWED FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHALL BE ALLO WED IN COMPUTING THE INCOME REFERRED TO IN SECTION 28. IT IS THEREFORE ESSENTIAL TO ESTABLISH WHETHER THE PROVISIONS OF TH IS SECTION HAVE BEEN FULFILLED BEFORE MAKING ANY DISALLOWANCE UNDER THIS SECTION. IN COMMISSIONER OF INCOME TAX V. INDO KOPP LTD. (20 08) 167 TAXMAN 172 (DEL) HIGH COURT OF DELHI IT WAS HEL D THAT .. CONSIDERATION FOR PAYING INTEREST TO TRADE CREDITOR S AND FOR NOT CHARGING INTEREST FROM TRADE DEBTORS CAN BE DIFFERE NT, AND THEREFORE, JUST BECAUSE THE ASSESSEE HAS NOT CHARGE D INTEREST FROM ITS TRADE DEBTORS, INTEREST PAID BY IT TO ITS TRADE CREDITORS COULD NOT BE DISALLOWED AS A DEDUCTION ESPECIALLY W HEN THERE IS NO DISPUTE ABOUT THE GENUINENESS OF THE PAYMENT. 7. THE AR OF THE ASSESSEE RELIED ON THE FOLLOWING C ASE LAWS: I) D & H SECHERON ELECTRODES PVT. LTD. VS CIT 35 CTR ( MP) 41 II) CIT VS PREMIER AUTO FINANCE PVT. LTD. 18 CTR (DEL) 295(HC) III) MADHAV PRASAD JATIA VS CIT (10 CTR (SC) 375 IV) CIT VS INDO KOPP LTD. (2008) 167 TAXMAN 172 (DEL) V) CIT VS RAM LAL RAJARAM (1999) 157 CTR (ALL) 119 (HC ) 8. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS MADE FOR THE APP ELLANT AS WELL AS THE ASSTT. ORDER. IT IS NOT DISPUTED THAT T HE INTEREST OF RS.15542167/- PAID BY THE APPELLANT WAS NOT ON ACCO UNT OF BUSINESS CARRIED OUT BY THE APPELLANT. IT IS ALSO NOT DISPUT ED THAT THE INTEREST ITA NO. 965/M/09 5 PAID IS EXCESSIVE. IT IS ALSO NOT DISPUTED THAT THE SUNDRY DEBTORS WERE ON ACCOUNT OF CONTRACT WORK BUSINESS CARRIED ON BY THE APPELLANT AND THAT THE INCOME ARISING THEREOF HAD BEEN OFFERED TO TAX. IT IS ALSO NOT THE CASE THAT THE APPELLANT HAD BORROWED FUNDS AND ADVA NCED INTEREST FREE LOANS. WHATEVER IS OUTSTANDING AND REFLECTED AS DEB TORS IN THE BALANCE SHEET PERTAINS TO THE AMOUNTS RECEIVABLE BY THE APP ELLANT FROM THE ABOVE SAID PARTIES FOR WORKS CARRIED OUT FOR THEM. THE LEDGER ACCOUNTS OF THE PARTIES BEARS TESTIMONY TO THE FACT THERE WE RE OUTSTANDING BALANCE AT THE BEGINNING OF THE YEAR, THERE WERE TR ANSACTIONS PERTAINING TO RECEIPTS AND PAYMENTS DURING THE YEAR AND THAT T HE BALANCE OUTSTANDING IS THE RESIDUAL OF WHAT HAS BEEN CONTIN UOUSLY TRANSACTED. IT IS NOT A CASE THAT THE TRANSACTIONS WITH THE FOUR P ARTIES HAD COMPLETERLY STOPPED AND THAT AND THE AMOUNT OUTSTANDING WERE FO R A LONG PERIOD OF TIME. THE TRANSACTIONS WITH THE FOUR PARTIES ARE ON GOING BUSINESS PROCESS. AS TO THE BUSINESS EXIGENCIES AND COMMERCI AL EXPEDIENCY BEHIND NOT RECEIVING THE OUTSTANDING AMOUNTS ON TIM E OR NOT CHARGING INTEREST THEREOF, AS DESIRED BY THE ASSESSING OFFIC ER, IT IS THE PREROGATIVE OF THE APPELLANT AND NO ADVERSE PRESUMPTIONS CAN BE DRAWN ON IT. WHEREVER MONEY HAS BEEN ADVANCED, THE APPELLANT HAD CHARGED INTEREST THEREON. THERE WERE TRADE CREDITORS AMOUNT ING TO RS.35507305/-. THE FACT THAT NO INTEREST HAD BEEN P AID ON THE SAID CREDIT BALANCE ALSO DOES NOT JUSTIFY THE COMPUTATIO N OF NOTIONAL INTEREST ON THE DEBTORS. THE ASSESSING OFFICER IS NOT JUSTIF IED IN CALCULATING THE NOTIONAL INTEREST BY ASSUMING THAT INTEREST OUGHT T O HAVE BEEN CHARGED FROM THE ABOVE THREE TRADE DEBTORS. THE ASSESSING O FFICER HAD NOT BROUGHT ANY MATERIALS TO SHOW THAT THE BORROWED FUN DS WERE NOT UTILIZED IN THE CONSTRUCTION BUSINESS. IN SUCH A SI TUATION, THE AMOUNT OUTSTANDING FROM THE TRADE DEBTORS CANNOT BE HELD A S AMOUNTS GIVEN ON LOAN. NO MATERIALS HAVE BEEN BROUGHT BY THE ASSESSI NG OFFICER TO IMPUTE THAT THE DELAY IN RECEIVING THE OUTSTANDING BALANCE AMOUNTS FROM THE THREE DEBTORS WERE ON ACCOUNT OF DELIBERATE ACT OF THE APPELLANT. 9. WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT (A). UNDER SECTION 36(1)(III) TO SUSTAIN A CLAIM FOR DEDUCTION OF THE AMOUNT OF INTEREST, ALL THAT IS NECESSARY IS THAT THE CAPITAL MUST HAVE BEEN BORROW ED BY THE ASSESSEE, IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION OF THE ASSESSEE AND THIRDLY, THAT THE ASSESSEE SHOULD HAVE PAID THAT AMOUNT BY WAY OF INTEREST. CONSIDERATION FOR PAYING INTEREST TO TRADE CREDITORS AND FOR NOT CHARGING INTEREST FROM TRADE DEBTORS CAN BE DIF FERENT, AND THEREFORE, JUST BECAUSE THE ASSESSEE HAS NOT CHARGED INTEREST FROM ITS TRADE DEBTORS, INTEREST PAID BY IT TO ITS TRADE CREDITORS COULD NO T BE DISALLOWED AS A DEDUCTION ESPECIALLY WHEN THERE IS NO DISPUTE ABOUT THE GENUINENESS OF THE PAYMENT. THEREFORE WE CONFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THE DEPARTMENTAL APPEAL. ITA NO. 965/M/09 6 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 25 TH DAY OF MARCH, 2011 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI, DATED 25 TH MARCH, 2011. RJ COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR A BENCH TRUE COPY BY ORDER ASST. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 965/M/09 7 DATE INITIALS 1 DRAFT DICTATED ON: 9.03.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 14.03.2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: ______ 9 DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER: ______