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Facts
The Revenue appealed against three separate orders of the CIT(A) concerning A.Ys 2004-05 to 2006-07. The appeals involved issues related to the disallowance of interest expenses, finance costs for loans to policyholders, common management expenses, and land development expenditures.
Held
The Tribunal upheld the CIT(A)'s decision in deleting the disallowance of interest expenditure, finance costs, and management expenses, finding them to be allowable business expenditures. The disallowance of land development expenditure was also deleted by the CIT(A) and upheld by the Tribunal.
Key Issues
Whether interest expenses, finance costs, and management expenses are allowable business expenditures when incurred for business activities. Whether disallowance of land development expenditure based on non-production of a third-party service provider is justified.
Sections Cited
36(1)(iii), 37(1)
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Income Tax Appellate Tribunal, DELHI ‘F’ BENCH,
Before: SHRI SATBEER SINGH GODARA, & SHRI NAVEEN CHANDRA
The above captioned three appeals by the Revenue are directed against three separate orders of the ld. CIT(A)-III, New Delhi dated 16.02.2010 for A.Ys 2004-05 to 2006-07 respectively.
Page 1 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07]
Since these three appeals pertaining to same assessee and involve common issues, they were heard together they are disposed of by this common order for the sake of convenience and brevity. [A.Y. 2004-05]
Ground No. 1 pertains to deletion of disallowance of Rs. 2,93,08,907/- made by the Assessing Officer by allocating the said amount on account of interest income to be capitalized to the joint venture accounts.
The ld. counsel for the assessee heavily relied on the CIT(A) while the ld. DR relied on the orders of the authorities below.
We have heard the rival submissions and have perused the relevant material on record. We find that the CIT(A) has arrived at his decision as under:
4.3 I have carefully considered the facts of the case and the submissions made by the Counsel of the appellant. The appellant is engaged in multi facet businesses like real estate, commercial land, timber, spices etc. The funds used for the business are sourced from the investors to whom on an average yield of 14.1% is paid by the company. ***** It is clear from the submissions that funds for dealing in real estate, commercial land, timber and spices have been sourced
Page 2 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] from the investors. It is observed that the Vappellant had debited total interest of Rs. 55,68,17,999/- to the Profit & loss account and out of this interest of Rs. 2,93,08,907/- is claimed to be paid for the purpose of business in real estate, commercial land and spices etc. @ 10%. Whereas the fact is that the investors are paid at average rate of 14.1%.
The CIT(A), relying on the decision of the Hon'ble Supreme Court in the case of S.A. Builders reported in 288 ITR 001 held that :
4.3 Adverting back to the facts of the case, it is clear from the submissions made by the appellant before the A.O. that borrowed funds have been used for business purposes and income therefrom has been offered for the taxation. The appellant had worked out interest of Rs. 2,93,08,907/- directly attributable to the business activities. The A.O. had not rebutted the contention of the appellant which was summarily rejected. In view of the totality of facts and circumstances, it is held that interest of Rs. 2,93,08,907/- is expended for the business activity and rightly claimed as deduction u/s 36(1)(iii) of the Act. The A.O. is directed to allow the claim of the interest.”
We have heard the rival submissions made and have carefully perused the materials on record. It is an admitted fact that the assessee is engaged in various activities like real estate, commercial land, spices etc for which he has procured funds from various investors at an average cost of 14.1%. The assessee has worked out the interest on proportionate basis at Rs 2,93,08,907/- on the funds borrowed for this particular business activity. We find that the same is directly related to the Page 3 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] business activity of the assessee and is allowable under 36(1)(iii) of the Income Tax Act. We are therefore not inclined to interfere with the decision of the CIT(A). Ground 1 of the Revenue is dismissed.
Ground No. 2 pertains to the deletion of disallowance of expenditure of Rs. 62,22,908/- made by the Assessing Officer by disallowing finance cost of advancing loan to policy holder. The assessee had earned interest of Rs. 1,02,61,763/- on loan extended to policy holders and offered the same as income for the year under consideration. However, the Assessing Officer rejected the finance cost of Rs 62,22,908/- claimed by the assessee for borrowing the funds given on loan to policy holders. When the assessee went in appeal before the ld. CIT(A), he held the same as an allowable expenditure u/s 36(1)(iii) of the Act and directed the Assessing Officer to allow the claim of interest of Rs. 62,22,908/- on loan to joint venture.
Aggrieved, the Revenue is in appeal against the action of the ld. CIT(A).
We have heard the rival submissions and have perused the relevant material on record. We find that the assessee has offered the interest
Page 4 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] of Rs. 1,02,61,763/- earned on loan extended to the policy holders for the year under consideration. We find that the Assessing Officer disallowed the finance cost for the borrowed funds used for the purpose of advancing the loan to the policy holders, without assigning any reasons. We find that the ld. CIT(A) allowed the claim of the assessee as an allowable expenditure u/s 36(1)(iii) of the Act. We are of the considered view that in the instant factual matrix, the ld. CIT(A) was justified in holding that the finance cost was incurred to earn interest and the Assessing Officer rejected the claim of the assessee summarily without rebutting the details filed during the assessment proceedings.
We, therefore, do not find any flaw in the findings of the ld. CIT(A).
Ground No. 2. Is dismissed.
Ground No. 3 pertains to the deletion of disallowance of Rs. 4,01,44,183/- on account of common management expenses. Briefly, the facts are that the assessee had incurred a sum of Rs. 28,59,43,123/- as management and other expenses which included direct and indirect expenses. However, the Assessing Officer while allocating management expenses, disallowed the indirect management expenditure of Rs. 4,01,44,183/-.
Page 5 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07]
When the assessee went in appeal before the ld. CIT(A), the ld. CIT(A) relying on the decision of the Hon'ble Delhi High Court in the case of Dalmia Cement 121 Taxmann 706, allowed the appeal of the assessee holding as under:
“6.3 I have carefully considered the facts of the case and the submissions made by the Counsel of the appellant. It is observed that during the year under consideration the appellant had incurred management expenditure of Rs. 28,59,43,123/-. The Assessing Officer disallowed the indirect expenditure of Rs. 401,44,183/- allocated to the business activity where taxable income has been earned and offered for the taxation. The Assessing Officer had considered the expenditure on the basis of sales. It is verified from the submissions that the Joint venture activity was not in operation during the year. This fact is even admitted by the A.O. in her order in para 16. It is further observed that during the year the appellant had started dealing in new activity of purchase and sale of land. The appellant for this purpose had collected Rs. 801,17,15,813/- from the investors and purchased the land at various locations. During the year sales worth Rs. 109,15,84,576/- of the land have been made to the customers. It is not the case of the A.O. that the expenditure incurred by the appellant is not genuine. The submissions made before the A.O. make it clear that the expenditure made by the appellant clearly falls in the purview of section 37(1) of the Act as incurred wholly and exclusively for the purpose of business”.
Aggrieved, the Revenue is in appeal before us.
We have heard the rival submissions and have perused the relevant material on record. We are of the considered view that the ld. CIT(A)
Page 6 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] was justified in holding that the indirect management expenditure was made by the assessee wholly and exclusively for the purpose of business and direct the Assessing Officer to allow the claim of indirect management expenditure of Rs. 4,01,44,183/-. We, therefore, decline to interfere with the findings of the ld. CIT(A). Ground No. 3 is dismissed.
Ground No. 4 relates to the action of the ld. CIT(A) in deleting the disallowance of Rs. 2,52,36,513/- made by the Assessing Officer against the land development expenditure claim of the company. Briefly the facts are the assessee has paid Rs. 2,52,36,513/- to M/s A.I. Estates to carryout work as specified in agreement between the assessee and M/s A.I. Estates which included land survey and levelling; fencing; installation of diesel pumps/motors; construction of motorable road etc.
The said company provided all these services and received payment for services rendered as per agreement dated 21st April 2003.
The Assessing Officer during the course of assessment proceedings, required the assessee to furnish the details of payment and other details like nature of services rendered by AI Estates. The assessing officer held that the assessee is located in Delhi while the services were performed
Page 7 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] at Tamilnadu and therefore the same is doubtful. Accordingly, the assessing officer required the assessee to produce the said party for verification. As the assessee could not produce the party, the Assessing Officer disallowed the expenditure amounting to Rs. 2,52,316.513/- and added the same to the income of the assessee.
Aggrieved, the assessee went in appeal before the ld. CIT(A) who deleted the disallowance made by the Assessing Officer.
Now the aggrieved Revenue is in appeal before us.
We have heard the rival submissions and have perused the relevant material on record. We find that the Assessing Officer disallowed the payment of Rs. 2,52,36,513/- for non-production of A.I. Estates for examination. It is the say of the ld. counsel for the assessee that the said party could not be produced due to the short notice of 7 days. We find that the company is having office in Delhi whereas the services were rendered in Tamil Nadu. We further find that the ld. CIT(A) observed that the services were provided by the company and payment for the services rendered was made as per the agreement and the bills were raised by the concerned company. Therefore, there is no scope for Page 8 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] doubt or suspicion regarding the services rendered. We also find that the Assessing Officer has not brought any positive material or evidence to indicate that there is no services rendered. The ld. CIT(A) is quite justified in holding that merely because of the subjective satisfaction that the company is based in Delhi and not capable of providing services in Tamil Nadu would not give jurisdiction under the peculiar facts of the case to disallow the genuine expenditure. In view of the above discussion, we uphold the findings of the ld. CIT(A) and dismiss Ground No. 4.
Ground No. 5 is general.
As a result, the appeal of the Revenue is dismissed.
Ground No. 1 pertaining to disallowance of finance cost of advancing loan to policy holders has been discussed and decided by us while dealing with Ground No. 2 hereinabove in A.Y 2004-05. In light of our discussion and decision thereon, we dismiss Ground No 1.
Page 9 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07]
Ground No. 2 pertaining to disallowance of land development expenditure claim of the company has been discussed and decided by us while dealing with Ground No. 4 hereinabove in A.Y 2004-05. In light of our discussion and decision thereon, we dismiss Ground No 2.
Ground No. 3 pertains to disallowance of Rs. 1,49,35,377/- on account of financial cost to earn late fee from customers. The Assessing Officer considered the receipt of late fee from joint venturers as business income as per the directions of the ITAT in A.Y 1998-99.
However, the Assessing Officer did not allow financial cost to earn late fees from policy holders.
Aggrieved the assessee went in appeal before the ld. CIT(A) who directed the Assessing Officer to allow the claim of interest of Rs. 1,49,35,377/-.
Now the revenue is aggrieved and has come in appeal before us.
After considering the facts and circumstances, we find that the amount of Rs. 2,01,25,285/- is credited as business receipt whereas the payment of interest on deposits received by the company has not been Page 10 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07] considered by the Assessing Officer. The Assessing Officer has not given any specific finding for the said disallowance. We, therefore, are of the considered view that the ld. CIT(A) was justified in allowing the claim of interest and decline to interfere with his order. Ground No. 3 of the Revenue is dismissed.
Ground No. 4 is general.
As a result, the appeal of the Revenue is dismissed. (AY 2006-07)
Ground No. 1 pertains to deletion of disallowance of Rs. 13,10,05,000/- made by the Assessing Officer by allocating and capitalizing the same to the joint venture accounts. This issue has been discussed and decided by us while dealing with Ground No. 1 hereinabove in A.Y 2004-05. In light of our discussion and decision thereon, we dismiss Ground No 1.
Ground Nos. 2 and 3 are general in nature.
Page 11 of 13 to 2137 /DEL/2010 M/s PGF Ltd [A.Y 2004-05 to 2006-07]
As a result, the appeal of the Revenue is dismissed.
In the result, appeals of Revenue in 2136 and 2137/DEL/2024 stand dismissed.
Order pronounced in open court on 27.06.2025.