ACIT, CIRCLE 4(2), NEW DELHI vs. M/S BHAYANA BUILDERS PVT LTD, NEW DELHI

The revenue has raised the following grounds before us:-

With regard to proportionate disallowance of interest under Section 36(1)(iii) of the Act, the Learned AO noted that Assessee had paid interest on its borrowings but on the other hand had given capital advance of Rs. 2,50,00,000 towards purchase of property which amounts to diversion of borrowed funds for non-business purposes and accordingly proceeded to make proportionate disallowance of interest under Section 36(1)(iii) of the Act in the sum of Rs. 6,81,825. The Assessee submitted that it had given advance for purchase of flat to Mr. Kamal Kumar in the sum of Rs. 2,50,00,000. The Assessee submitted the agreements, power of attorney and court documents proving that purchase and sale of flats formed part of its regular business and the property constituted stock in trade. The Assessee filed a suit against Mr. Kamal Kumar who declined to transfer the flat against the advanced amount and the sale agreement executed together with the power of attorney thereon. It was submitted that the advance given for purchase of property was only meant for the purpose of business of the Assessee. The suit is pending before the Hon’ble Delhi High Court and outcome was awaited. Accordingly, it was pleaded before the Learned CITA that no diversion of borrowed funds had been made by the Assessee company and hence no disallowance of interest under Section 36(1)(iii) of the Act could be made on a proportionate basis. These facts were duly clarified by the Assessee vide letter dated 9-12-2019 before the Learned AO by furnishing all the requisite documents thereon including the court documents. Hence, we hold that there is absolutely no additional evidence filed by the Assessee in this regard. The Learned CITA duly appreciated the contentions of the Assessee which are duly supported by the documentary evidences and held that the advance for purchase of property was meant for business purposes and hence it cannot be treated as diversion of borrowed funds warranting any disallowance under Section 36(1)(iii) of the Act. Accordingly, the Learned CITA had resorted to delete the disallowance of interest under Section 36(1)(iii) of the Act in the sum of Rs 6,81,825. We do not find any infirmity in the said order of the Learned CITA as the factual finding recorded therein and the supporting documents filed both before the Learned AO and the Learned CITA could not be controverted by the revenue before us by bringing on record contrary evidences. Hence, the Ground no. 2 raised by the revenue is dismissed.

With regard to claim of deduction of Rs 35,74,479 on account of provisions written back, we find that the Assessee in the course of assessment proceedings was asked to justify the said claim of deduction. In response thereto, the Assessee vide letter dated 9-12-2019 filed before the Learned AO submitted that the same represent provision for decrease in value of inventory written back of Rs 34,86,833 and payment of gratuity to employees during the year on separation in the sum of Rs 1,05,646. It was submitted that the Assessee had made provision for decrease in value of inventory for Rs 17,17,073 and Rs 17,51,760 during the Assessment Years 2014-15 and 2016-17 respectively and the same amount was disallowed in the respective returns . During the year under consideration, the Assessee had written back the said provision and since it was already offered to tax in earlier years, the Assessee claimed deduction for the same in the computation of income in Assessment Year 2017-18. Similarly the Assessee made provision for gratuity of Rs 1,05,646 in earlier year and voluntarily disallowed the same in the return of income as it was not paid before the due date of filing the return. The said gratuity was paid during the Assessment Year 2017-18 and claimed as deduction in the return on payment basis. Despite this explanation, the Learned AO proceeded to make the disallowance of Rs 35,74,479 in the assessment. The explanation given by the Assessee was found to be correct by the Learned CITA and disallowance stood deleted by the Learned CITA. We do not find any infirmity as the Learned CITA had rightly deleted the disallowance in order to avoid double taxation of the same sums. The Ground No. 3 raised by the revenue is dismissed.

With regard to addition made under section 68 of the Act in the sum of Rs 2,10,28,550 is concerned, the same represent loan reeived from Shri Nitin Bhayana (Director of the Assessee company). The Assessee furnished income tax returns of lender, bank statements of lender, ledger account of lender and confirmation of the lender in the assessment proceedings to prove the three ingredients of section 68 of the Act. It was also submitted that the loan account of the Director is in the nature of current account in which loans are received and repaid in a very short span of time as evident from the copy of loan ledger account of Mr Nitin Bhayana in the books of the assessee company. It was submitted that the outstanding balance of loan was only Rs 9,85,000.43 and that in the natural course of business, the Director provided short term loans to the Assessee company to temporarily smoothen the cash flow of the business from time to time. The Assessee company also furnished the details of income declared by the Director as under:-

The Ground No. 4 raised by the revenue is general in nature.

In the result, the appeal of the revenue is dismissed.