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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: JUSTICE SHRI P. P. BHATT & SHRI PRADIP KUMAR KEDIA
आदेश/O R D E R
PER PRADIP KUMAR KEDIA - AM:
The captioned appeals have been filed at the instance of the assessee concerning AY 2009-10 and by Revenue for AY 2010-11 against the orders of the Commissioner of Income Tax (Appeals)-VIII & 2, Ahmedabad (‘CIT(A)’ in short), dated 30.11.2012 & 16.01.2015 arising in the assessment orders dated 22.12.2011 & 28.03.2013 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act); respectively.
ITA No. 439/Ahd/2013 (Assessee’s appeal)- AY 2009-10
As per its grounds of appeal, the assessee has challenged the order of the CIT(A) in upholding the disallowance of deduction of interest expenditure of Rs.1,69,20,490/- made by the AO.
Briefly stated, the assessee filed its return of income for AY 2009-10 at Nil and has not shown to have undertaken any business activity during the year. In the year under assessment, the assessee company is stated to be in the process of acquiring land for its real estate development project and has not declared any revenue/sales. In the course of scrutiny assessment, AO noticed that the assessee has debited an amount of Rs.2,76,87,898/- being interest paid on unsecured loans. It was also observed that the assessee has made interest free advances of Rs.15,04,03,277/- to one M/s. Shrikant Broking Pvt. Ltd. (Shrikant Broking). The AO observed that huge loan provided to Shrikant Broking could not be supported to be for business purposes. The AO accordingly observed that the assessee has failed to prove that the advance of Rs.15,04,03,277/- given to Shrikant
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 3 -
Broking is for the purposes of business. The aforesaid party could not be produced by the assessee for verification. The claim of the assessee that the advance given to Shrikant Broking was for purchase of land was not found to be bonafide by the AO. The AO accordingly invoked provision of Section 36(1)(iii) and interest attributable to such interest free advance of Rs.15,04,03,277/- was treated to be non- business purposes. The interest on such advance was quantified at Rs.1,69,20,486/- (by applying 12% interest rate) which was held to be not incurred wholly and exclusively for the purpose of business. The AO accordingly disallowed the aforesaid amount of Rs.1,69,20,486/- claimed under s.36(1)(iii) of the Act.
Aggrieved by the denial of deduction of interest under s.36(1)(iii) of the Act, the assessee preferred appeal before the CIT(A).
The CIT(A) however did not find any merit in the case of assessee and thus refused to grant any relief from such additions. The relevant operative para of the order of the CIT(A) is reproduced hereunder:
“3.5 The assessment order and the submission of the appellant have been seen carefully. I have considered the order of the A.O. and the above contentions made on behalf of the appellant. It is noticed that the appellant has debited interest of Rs.2,76,87,898/- as part of work in progress for the work carried out by them. At the same time they have given interest free advance of Rs.15,04,03,277/- to Shrikant Broking Pvt. Ltd. At the address given by the appellant to the A.Q. it was found by the A.O. that the said entity was not available. The appellant had claimed that the amount was provided to the said entity for the purchase of land and title clearance for the appellant company. The appellant had in response to further query from the A.O. about non-availability of the said entity not produced the principal officer of the said Shrikant Broking Pvt. Ltd. The A.O, therefore held that the appellant's contention that it was given for the purpose of business is rejected. Accordingly the A.O. has calculated interest of Rs.1,69,20,4867- at the rate of 12% on such advance which is disallowed u/s. 36(1)(iii).
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 4 -
At the time of appellate proceedings the appellant has requested that proper opportunity has not been provided to cross examine the party to whom the interest free advance to Shrikant Broking Pvt. Ltd is given. The same has been sent to the AO to enquire, investigate and arrive at the proper findings in this case in the form of Remand Report which was essential to arrive at the decision on this issue. In the remand proceedings also the said Shrikant Broking Pvt. Ltd. did not respond to the A.O.'s notice or did not provide any of the details called for by the A.O. The appellant had also not produced the said entity. Thus the appellant's explanation that the amount was given for business is not substantiated. However, it is also contention of appellant that the interest of Rs.2.76 crores stated by the A,0. has not been debited to the P & L Account but has been transferred to work in progress Account. It is seen that the appellant has not earned any income by way of sale from the project. The work in progress has been carried forward to the subsequent year. The appellant has, therefore claimed that the disallowance, if any, out of the expenses which are not claimed in the Profit & Loss Account cannot be added to the returned income. I agree with this contention of the appellant that when expenditure is not debited to the Profit & Loss Account i.e, not claimed by way of deduction in the Profit & Loss Account but is capitalized as work in progress and carried forward to the subsequent year, the disallowance of the same cannot be added to the returned income unless the corresponding debit is considered in Profit & Loss account. The work in progress would be forming part of the deduction against the income of the subsequent period as opening stock. The allowability of expenditure by way of interest with reference to the interest free advances having not been established, the debit there of to the work in progress has to be excluded from value of work in progress in view of the decision of the Bombay ITAT referred to in preceding para i.e. in the case of- i) Savala Associates vs. ITO. ITA No.4441 (Mumbai) 2008 (35 SOT 148 ii) Shanti Investment being ITA No.5806/Mumbai/2008 Following the ratio of the said decisions the disallowance made by Assessing Officer for Rs.1,69,20,486/- u/s 36(1)(iii) is confirmed subject to directions specified herein above.”
Further aggrieved, the assessee preferred appeal before the Tribunal.
The learned AR for the assessee submitted at the outset that the assessee has not claimed any deduction under s. 36(1)(iii) of the Act at all and therefore, the question of disallowing deduction partly or wholly does not simply arise. It was contended that disallowance can be effected only when allowance of deduction is claimed. Without prejudice to the aforesaid, it was further submitted that adverse
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 5 -
inference against the assessee in regard to dealing with Shrikant Broking has been unjustifiably drawn in the assessment order without giving any reasonable opportunity to the assessee. The learned AR for the assessee pointed out from the records placed before the lower authorities that the funds were provided to Shrikant Broking for purchase of land through banking channel and purpose of the payment is also corroborated by agreement/banakhat owing to which the payment was made. The current address of the recipient M/s. Shrikant Broking was also provided. Coming to the facts in connection with payments of money to Shrikant Broking, the learned AR submitted that land could not be registered in the name of the assessee and the development project could not be started in the year under consideration and therefore the interest expenditure incurred was capitalized in the balance sheet under the appropriate head and not claimed as revenue expenditure. The learned AR accordingly submitted that when no deduction is claimed at all, the disallowance of a non-existent claim is outside the authority of law.
The learned DR, on the other hand, relied upon the order of the CIT(A).
We have carefully considered the rival submissions. The maintainability of disallowance of interest under s.36(1)(iii) of the Act is in question. From the case records, we notice at the outset that assessee has not claimed any deduction of interest expenditure while computing its taxable income. This being so, it is beyond anybody’s understanding as to how disallowance can be effected in the absence of very claim. The case of the Revenue falls flat on this simple premise alone. Therefore, the purpose of advance and genuineness of transaction with Shrikant Broking Pvt. Ltd. does not require consideration for the purposes of issue before us. Besides, we also
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 6 -
take note of the fact that the transactions were routed through banking channel. The observation of the CIT(A) that interest cost would go on to increase the cost of inventory eventually and is thus a revenue item is without any force. The cost towards interest capitalised on the inventory has not effect to the profitability of the current year and therefore, such interest cost has no impact on taxability for the year under consideration. Secondly, it is a matter of record that ‘Shrikant’ has extended its service for purchase of land by assessee in the subsequent assessment year albeit for lower value of land. Thirdly, the CIT(A) in AY 2010-11 himself has endorsed the advance to be out business expediency. Therefore, the order of the CIT(A) is liable to be set aside. The AO is directed to delete the disallowance on interest made on this score.
In the result, appeal of the assessee is allowed.
ITA No. 884/Ahd/2015 (Revenue’s appeal)- AY 2010-11
The solitary grievance of the Revenue in its appeal reads as under:
“1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of interest amounting to 1,15,14,962/- u/s 36(1)(iii) of the IT Act made by AO when assessee falls to prove with supporting document that why the interest free advance for amount of Rs.15,04,03,277/- was given for the land which was subsequently purchased by assessee only for Rs.6,77,00,000/- and that too after 4 years of advance given.”
Briefly stated, the AO noticed that assessee has debited an amount of Rs.1,15,14,962/- towards interest paid on unsecured loan, which was utilized for giving advance to Shrikant Broking to the extent of Rs.15.04 Crore as noticed in the AY 2009-10 (supra). The AO followed the predecessor AO for AY 2009-10 and computed the disallowance to the extent of Rs.1,15,14,962/- on account of interest expenditure.
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 7 -
Aggrieved, the assessee preferred appeal before the CIT(A) for the similar disallowance made in this year.
The CIT(A) in this year concerning AY 2010-11 revisited the facts of the case and observed that the money given by the assessee to Shrikant Broking was a business advance in departure with the observations made in appellate proceedings by the first appellant authority concerning AY 2009-10. The CIT(A) accordingly deleted the additions so made by the AO for the AY 2010-11. The relevant operative para of the order of the CIT(A) is reproduced hereunder:
“4.3 Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed interest paid on unsecured loan as the appellant had given interest free advances of Rs. 15.04 crores to Shrikant Broking Private Limited. It has been observed by the AO that during the A.Y.2009-10, it was held that the advances to Shrikant Broking Private Limited was not for the purpose of appellant's business and accordingly, the disallowance was made. The AO has also discussed that the land for which the advances was given, was purchased at a price of Rs. 6.77 crores whereas, the amount of advance was very high. At the time of advance the land in question was agricultural land and the appellant company could not have purchased the land. The appellant on the other hand has submitted that the AO has not fully appreciated the evidence. It has been submitted that sufficient documentary evidence in support of the claim that the advance was .given for purchase of land and the land has also been subsequently purchased by way of a registered deed. It has been submitted that the value of the land was more than Rs. 21 crores which included two rights. First right was the legal ownership right which was vesting with the owner and others and the second right was Banakhat right which was with Shrikant Broking Private Limited. The appellant had to pay for the Banakhat right and the ownership right and therefore, the payments were made. All the payments were duly accounted for and have been made through cheque. On a careful consideration of entire facts of the case, if is noted that the appellant had executed a Banakhat (agreement) on 02/05/2008 and paid Rs. 15.04 crores to Shrikant Broking Private Limited. The land was initially agricultural land and was subsequently converted to non- agricultural. The land was initially booked for purchase from the original owners namely Hanubhai Ramjibhai Sangani and others by Shrikant Broking Private Limited by way of a Banakhat executed on 15/06/2007. Subsequently, Shrikant Broking further executed a Banakhat with the
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 8 -
appellant for selling the same land. Thereafter, the sale deed was executed and registered between the appellant and the original owner. All the facts related to the Banakhat agreements between various arsons have been mentioned in the sale deed which has been registered before the registrar. For the sake of clarity, the relevant extracts from the submission given by the appellant which explains the sequence of events are reproduced here under:-
“(a) Agricultural land bearing Survey No.17] of Bodakdev originally belonged to S/Shri Hanuman Raujibhai Sanghani, Shitalkumar Desai and Vyomesh B Patel (The original land owner).
(b) As per bhanakhat executed on 15/6/2007 (duly notarized! the said land owners agreed to sell this land for Rs.4,44,00,0001- to Shnkant Broking company and Rs.5 lakhs were paid by the company as bhanakat money to the owners of the land. [Clause 7].
(c) On 2/5/2008, a bhanakhat karar got executed and duly notarized between M/s. Shrikant Broking (P) Limited and Gala Infrastructure P. Limited, by which the assessee company got rights to purchase the referred land from Shrikant Broking for an agreed amount of Rs. 17,55,13,522/-. In terms of this karar the assessee company paid Rs. 15,04,03,277/- as consideration for releasing right in the referred land to M/s. Shrikant Broking (P) Limited. And, in lieu of having received total amount of Rs. 1,92,95,4381- by the original land owners (now sellers) from M/s, Shrikant Broking (P} Limited, the sellers agreed to get this amount adjusted against total sale consideration as having received from appellant company while making final sale deed [Clause 7.1]
(d) On 1/3/2012, an agreement (samjauti karar) got executed for payment of further amount of Rs.33 lakhs as price escalation by assessee company to the seller. Accordingly, total amount of Rs.6,77,00,000/- was fixed a full consideration. [Clause 8]
(e) Further, as per banakhat dated 2/5/2008, the amount receivable by M/s. Shrikant Broking (P) Limited and in turn, they having paid total amount of Rs. 192,95,438/- to the 'sellers', the 'sellers', confirmed as having received total amount from assessee company.[Clause 9]”
(f) On 7/3/2012, the land got converted into non-agricultural land vide Collector's letter No.SR/GCH.K.43/Bodakdev/ SR333 and recorded at entry No.99/6 in Revenue Record. (g) On 7/5/20/2, final sale deed was executed and registered at Srl.No.2603 with the Sub-Registrar Ahmedabad between the assessee and the original land owners (as referred to in (a) above.)"
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 9 -
The above details clearly show that the money given by the appellant company was a business advance. The finding of the AO that the appellant company could not have purchased agricultural land is not out of place but is without any use. The appellant had not purchased any agricultural land. It had only executed an agreement for purchase of land only, when the same was converted to non-agriculture and their agreement for purchase was executed. The payment for registration of the land and the total payment made by the appellant was different as the appellant had to pay for the purchase right to Shrikant Broking. It is noted that all the payments made to Shrikant Broking were through banking channel and are recorded in the books of accounts of the appellant. The payment made by Shrikant Broking to the original owner at the time of an agreement for purchase of land has also been adjusted by the appellant in the purchase consideration and the same is evident from the registered deed. It is also noted that the CIT(A) had upheld the addition in the immediately preceding year however at that the registration deed for purchase of land was not brought to the justice of CIT(A) and only limited facts were available on the basis of which the decision must have been taken at the time. Presently all the facts have now become clear. The land has been ultimately purchased by the appellant for its business purposes. It has therefore been established beyond doubt that the advance was given to Shrikant Broking by the appellant in earlier year was for the purpose of business. In view of above facts, I am of the considered opinion that the disallowance of interest under section 36(1)(iii) made by the AO was not justified. The same is therefore, directed to be deleted.”
In parity with the findings given concerning AY 2009-10, we find no justification in the action of the AO for making additions under s.36(1)(iii) of the Act at the first place. Besides, the CIT(A) in AY 2010-11 has clearly found that the money was advanced to Shrikant Broking for arranging the purchase of land by the assessee from land owners was in the nature of business advance on reappraisal of the facts and evidences placed before him. The claim of the Revenue that the purchases made by the assessee through Shrikant Broking were only to the extent of Rs.6.77 Crores in fact admits the fact that the advance was made for the purpose of acquisition of land. The purchase was made for lesser amount and after a gap of certain
ITA Nos. 439/Ahd/13 & 884/Ahd/15 [ITO vs. Gala Infrastructure Pvt. Ltd.] A.Ys. 2009-10 & 2010-11 - 10 -
number of years is irrelevant in our opinion for determination of nature of advance. The assessee has neither claimed expenditure nor was the advance found to be for the purposes unconnected to business. It is quite probable in such deals that the purchase of land parcel were materialized for a lesser value. Such fact will not change the nature of transaction. We thus find no infirmity in the order of CIT(A). We thus decline to interfere.
The appeal of the Revenue in ITA No. 884/Ahd/2014 is dismissed.
In the combined result, appeal of the assessee is allowed and appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 09/04/2019
Sd/- Sd/- (JUSTICE P. P. BHATT) (PRADIP KUMAR KEDIA) PRESIDENT ACCOUNTANT MEMBER Ahmedabad: Dated /04/2019 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 ।