Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA
The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-4, Vadodara, (‘CIT(A)’ in short), dated 27.09.2017 arising in the assessment order dated 28.12.2016 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2014-15.
[M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 2 - 2. The grounds of appeal raised by the assessee read as under:
“1. The learned Commissioner of Income Tax (Appeals) - 4, Vadodara ["the C1T(A)"] erred in fact and in law in confirming the action of the learned Deputy Commissioner of Income Tax, Circle-l(2), Vadodara ("the AO") in computing the income of the Appellant at Rs.2,89,75,000/- 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO in concluding that the amount of Rs.2,89,75,000/- represented deemed income and therefore no claim of expenditure was available from the said income.
3. Without prejudice to the above, the learned CIT(A) erred in fact and in law in confirming the action of the AO in not allowing the carry forward of business expenses incurred during the year.
4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in invoking the provisions of Section 40A(2)(b) of the Income Tax Act, 1961 ("the Act") and making disallowance of Rs. 52,57,142/-.”
The assessee is an Association of Person (AOP) engaged in business of transactions in immovable properties. A survey operation was conducted on 30.08.2013 in the case of the assessee by the Investigation Wing of Income Tax Department. During the course of survey proceedings, the assessee declared an amount of Rs.2,89,75,000/- as its undisclosed income for the FY 2013-14 relevant to AY 2014-15. The assessee honoured the said disclosure and included the aforesaid amount in the turnover i.e. under the head ‘sale of land/plots’ while preparing the P&L account and filing consequent return of income. The assessee eventually declared total income at Rs.20,80,830/- in the hands of the assessee. The return so filed by the assessee was subjected to scrutiny assessment. The AO in the course of the assessment held that income declared during the course of survey is ‘deemed income’ and therefore no set off of expenses incurred or set off of losses arising under other heads would be allowable out of admitted undisclosed income. The AO accordingly denied claim of expenses/loss under other heads from being set off against ‘deemed income’ arising on account of unrecorded income so declared. The AO also observed that source of unaccounted income is [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 3 - obscure and undisclosed. It was also alleged that said undisclosed income was utilized by the assessee for unrecorded investments in insurance policies of its members. The AO accordingly assessed aforesaid amount of Rs.2,89,75,000/- disclosed in survey separately and added the same to the total income of the assessee.
With reference to other controversy, the AO observed that assessee has claimed interest expenditure of Rs.2,81,97,399/- on loan taken from its associate concern M/s. Neptune Realty Pvt. Ltd. The AO noticed that the interest was paid on loans @14.75% per annum. It was further noticed that loan taken from the associate concern has been invested in land as well as in advances/investment which is its prime business. In justification of the rate of interest on funds borrowed in a related party transaction, it was contended on behalf of the assessee that lender M/s. Neptune Realty Pvt. Ltd. has also procured loan at a similar rate of interest of 14.75% per annum and consequently, the money has been lent to the assessee at the same rate which is to be recorded as market rate and thus no disallowance should be made by applying the provisions of Section 40A(2) of the Act. The AO however did not find merit in the justification advanced by the assessee for higher rate of interest. The AO observed that rate of interest defers from bank to bank and there was no justification to borrow money from associate concern at higher rate instead of borrowal of money at lower rate from other armed length parties/banks. The AO accordingly adopted interest at 12% per annum to be justified and consequently, found an amount of Rs.52,57,142/- incurred towards interest to be excessive or unreasonable having regard to the Fair Market Value (FMV) of the facility and having regard to the legitimate needs of the business or professions of the assessee. Besides, the AO also justified the invocation of provisions of Section 40A(2) of the Act on the ground that addition on the same issue was made in AY 2013-14 as well which disallowance remained unagitated by the assessee before the CIT(A). [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 4 - The AO accordingly restricted the claim of interest expenditure @ 12% per annum and accordingly disallowed Rs.52,57,142/- under s.40A(2) of the Act.
Aggrieved by the order of the AO on both counts, the assessee preferred appeal before the CIT(A). Having recorded the submissions made on behalf of the assessee in defending its position, the CIT(A) refused its indulgence on both points.
Aggrieved by the denial of relief sought before the CIT(A), the assessee preferred appeal before the Tribunal.
When the matter was called for hearing before the Tribunal, the learned AR for the assessee first adverted to the issue concerning deductibility of expenses/set off of losses etc. from the income declared in the course of survey. It was submitted by the learned AR that the assessee has duly abided by the declarations made in the course of the survey and it is not a case where income declared in the course of the survey was not shown in the return of income. The assessee has duly credited undisclosed income of Rs.289.75 Lakhs in the turnover / receipt and thus took the same into account while computing the net profit.
7.1 It was submitted that the core controversy is on the point as to whether the assessee would be entitled to claim deduction of regular expenses incurred in the course of carrying on of its business activities and/or set off of losses arising under other heads of income while determining the taxable income. The learned AR for the assessee harped that the income disclosed was business income of the assessee which was generated from various transactions carried out in Real Estate wherein the assessee merely worked as an intermediary. The income so declared was business income of the AOP and therefore all the consequences of deduction/set off etc. would prevail with full [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 5 - force in accordance with law. It was next pointed out that the AO has curiously treated the same as ‘deemed income’ of the assessee. In this regard, it was asserted that while the income so declared in survey was treated as ‘deemed income’, such income has to be necessarily classified under one or other head of income notified under s.14 of the Act. It was submitted that the deemed income cannot fall under the sixth head of income other than five heads legislated under s.14 of the Act. The learned AR thus submitted that the taxability of an income falling under one head or the other has to be determined after giving full effect to the provisions of law as applicable at the relevant time. The Revenue authorities cannot deny deduction of expenses and set off of losses legitimately available to the assessee under various heads by artificially deeming the income declared under survey as a separate category or to be a distinct stream of income. The learned AR thereafter submitted that the income declared was business income of the assessee derived in the course of the property transactions and no material has been brought on record to controvert the source of income declared by AOP.
7.2 The learned AR submitted that the issue in hands is squarely covered in favour of the assessee by the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Shilpa Dyeing & Printing Mills (P.) Ltd. [2013] 219 Taxman 279 (Guj). The learned AR also relied upon the decision of the co-ordinate bench of Tribunal in the case of M/s. Fashion World vs. ACIT Swastik Textiles vs. ITO [2003] 1 SOT 327 (Jodhpur) and Jyoti Prasad Mittal (HUF) vs. ACIT [2004] 3 SOT 787 (Agra Trib.) for the proposition that income declared in survey has to fall under one or other head of income under s.14 of the Act and cannot be taxed separately and similarly, current year’s loss can be set off against undisclosed income declared in survey. [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 6 - 7.3 The learned AR submitted that the Revenue authorities have proceeded on misconception of law and have wrongly applied observations of Hon’ble Gujarat High Court in the case of Fakir Mohmed Haji Hasan vs. CIT [2001] 247 ITR 290 (Guj).
7.4 To buttress its stand of allowability of expenditure against income declared in survey, the assessee referred to the provisions of Section 115BBE of the Act substituted by Taxation Laws (second amendment) Act, 2016 w.e.f. AY 2017-18 AY 2017-18. It was pointed out that in view of substituted provisions of Section 115BBE(2) of the Act, the assessee is not entitled to claim any deduction in respect of any expenditure or allowance or set off of any loss while computing the income assessed under s.68, 69, 69A of the Act etc. as provided in Section 115BBE(1) of the Act. The learned AR submitted that as a corollary to such amendment applicable prospectively from AY 2017- 18, any legislative embargo in respect of earlier assessment years cannot be inferred in denying the legitimate claims of deductions.
7.5 The learned AR thus submitted that the relief claimed by the assessee on this score requires to be allowed without any demur in so far as AY 2014-15 is concerned and the order of the CIT(A) requires to be reversed.
Adverting to second issue, the learned AR submitted that the assessee has reimbursed the interest expenditure @ 14.75% per annum at which associate concern had obtained the funds. Thus, the entire transactions was at arm length and the interest expenditure incurred by assessee did not result in any benefit to the associate concern. It was submitted that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Sarjan Realities Ltd. [2014] 50 taxmann.com 52 (Gujarat), Pr.CIT vs. Cama Hotels Ltd. [2016] 68 taxmann.com 153 (Gujarat) and CIT vs. Ashok J. Patel [2014] 43 taxmann.com 227 (Guj). The learned AR [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 7 - submitted that there is an apparent fallacy in the plea of the AO that assessee could have borrowed funds at cheaper rate from outside parties. It was submitted that Section 40A(2) of the Act does not provide dictate to the assessee for the manner in which the assessee should conduct its business. It was for the AO to assess fair market price and give comparative instances to establish unreasonableness or excessiveness in the rate of interest. The AO has only acted upon conjunctures and surmises which action cannot be upheld in law. The learned AR thus submitted that relief as sought on the issue is justified both on law and on facts.
The learned DR for the Revenue, on the other hand, relied upon the orders of the lower authorities.
We have carefully considered the rival submissions.
As per its grounds of appeal, the assessee has agitated the order of the lower authorities on two counts; (i) admissibility of deduction of expenses/set off of losses against undeclared income admitted in survey proceedings and (ii) applicability of provisions of Section 40A(2) of the Act owing to relationship between the lender associate concern and the borrower assessee.
We shall first address ourselves on the first objection raised on behalf of the assessee towards deductibility of expenditure/set off losses out of admitted income in survey proceedings.
12.1 As noted in the preceding paras, the assessee is in AOP engaged in the business of transaction in immovable properties. The assessee has declared an amount of Rs.2,89,75,000/- as its undisclosed income in the course of survey under s.133A of the Act and claimed that the aforesaid income arose out of transactions carried in immovable properties as intermediary. While including the aforesaid undisclosed [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 8 - income, in the return of income, the assessee has also simultaneously claimed certain expenditures against various streams of income declared including undisclosed income. The AO, however, refused to grant deduction of any expenditure incurred against income declared in survey. The AO further denied set off of losses arising under other heads against such income conceded in survey. For doing so, the AO treated the admitted income of Rs.289.75 Lakhs as ‘deemed income’ of the assessee and reliance was placed on the decision of the Hon’ble Gujarat High Court in the case of Fakir Mohmed Haji Hasan vs. CIT [2001] 247 ITR 290 (Guj).
12.2 In this regard, we clearly find merit in the plea on behalf of the assessee that the assessee is entitled to claim expenditure incurred as well as set off of losses. The case of assessee for deductibility of expenses finds support by the decision of the Hon’ble Gujarat High Court in Shilpa Dyeing & Printing Mills (P.) Ltd. (supra) wherein the decision of the Hon’ble Gujarat High Court in Fakir Mohmed Haji Hasan (supra) was duly considered. The co-ordinate bench of Tribunal in M/s. Fashion World (supra), Swastik Textiles (supra) and Jyoti Prasad Mittal (HUF) (supra) have also ruled in favour of the assessee in similar circumstances.
12.3 The case made out by the revenue authorities that the income declared in survey is to be regarded as ‘deemed income’ falling under separate category other than the heads of income prescribed under s.14 of the Act as prima facie unsustainable. The income conceded in survey has to necessarily fall under one head or the other as provided in Section 14 of the Act and consequently, all other provisions of the Act will come into play in ordinary manner while determining the taxable income of the assessee. The Hon’ble Gujarat High Court in Shilpa Dyeing & Printing Mills (P.) Ltd. (supra) has clearly held that current year losses can be set off against undisclosed income declared in survey. We further find support for such plea from the provisions [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 9 - of Section 115BBE(2) of the Act which clearly debars the assessee from claiming deduction in respect of any expenditure or allowance or set off of any loss against such ‘deemed income’. However, such provision has been inserted prospectively w.e.f. AY 2017-18 and thus not applicable to AY 2014-15 in question. The plea for deductibility of expenses is thus vindicated by the subsequent amendment in Section 115BBE(2) of the Act as well.
12.4 The CIT(A) in our view has mis-directed himself in law in not allowing the set off of expenses / losses against such income accounted for in the regular books after survey. We thus find merit in the issue raised by the assessee. The order of the CIT(A) is accordingly set aside and the AO is directed to grant claim of deduction of expenses and set off of losses, if any, against various income together with income conceded during survey as per the provisions of the Act.
Ground Nos. 1 & 2 concerning the issue are thus allowed.
Ground No.3 being alternative to Ground Nos. 1 & 2 does not require to adjudication.
Ground No.4 concerns disallowance of interest expenditure by invoking the provisions of Section 40A(2)(b) of the Act.
As noted, the assessee has borrowed money from its sister concern on which interest has been paid @ 14.75% per annum which is at par with the rate at which the sister concern, in turn, had borrowed money from other parties/banks. The AO has considered the interest rate of 12% to be reasonable and balance interest paid was considered to be excessive or unreasonable having regard to the FMV of services/facility. We see total lack of justification in such action of the Revenue authorities. The assessee, in the instant case, has clearly [M/s. Neptune Associates vs. DCIT] A.Y. 2014-15 - 10 - proved justification for payment of interest @ 14.75% per annum which is the cost incurred by the lender as well. The sister concern has not per se profited from such arrangement. The transactions are thus apparently arm length. The issue is squarely covered in favour of the assessee by the decision of the Hon’ble Gujarat High Court in Sarjan Realities Ltd. (supra). We thus reverse the action of the lower authorities and direct the AO to delete the addition on this score.
In the result, the appeal filed by the assessee is allowed.
This Order pronounced in Open Court on 20/01/2020
Sd/- Sd/- (MADHUMITA ROY) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 20/01/2020 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।