M/S NAV BHARAT BUILDCON P.LTD vs. THE D C I T INV CIRCLE AJMER and

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ITA/81/2006HC RajasthanRJHC02032868200615 November 20163 pages
AI SummaryDismissed

What did the High Court hold?

The High Court agreed with the view taken by the Income Tax Appellate Tribunal (ITAT). The Tribunal had partly allowed the Revenue's ground and dismissed the assessee's ground concerning the disallowance of interest on advances to family concerns. The ITAT directed the disallowance of interest at 12% per annum for seven months on Rs. 17,55,874/- advanced to family concerns, holding that it was not for business purposes due to non-business consideration and lack of explanation from the assessee. This decision provided relief to the assessee from the AO's order. Regarding the income from trailers, the Tribunal found merit in the assessee's arguments that the trailers were seized by the financer, one was not in working condition, and the other was sold. The Tribunal was convinced that the AO had wrongly estimated the net income of Rs. 40,000/- from trailers and upheld the CIT(A)'s deletion of this addition. Consequently, the Tribunal dismissed the Revenue's ground and allowed the assessee's ground on this issue. The High Court found no reason to interfere with the Tribunal's findings.

What were the facts?

The assessee, M/s Nav Bharat Buildcon (P) Ltd., filed an appeal against the order of the Income Tax Appellate Tribunal (ITAT). The ITAT had partly allowed the department's appeal and partly allowed the assessee's appeal. The High Court admitted the matter and framed a specific question for consideration. The dispute involved interest paid to third parties and its admissibility as a business expenditure when estimating net profit. The ITAT, in its order, noted that the assessee had borrowed money due to financial stringencies and paid substantial interest. However, the Revenue's grievance was that either no interest or a very low rate of interest was charged on advances made to family concerns. The ITAT directed disallowance of interest at 12% per annum for seven months on a specific amount advanced to family concerns, deeming it not for business purposes.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in not allowing interest paid to third parties as business expenditure while estimating the net profit? (Question of law) Assessee's Contentions: - The assessee argued that the ITAT erred in confirming the addition made by the Assessing Officer (AO) on account of income from trailers amounting to Rs. 40,000/-, and that the Commissioner of Income Tax (Appeals) [CIT(A)] was proper in principle. - Regarding the interest disallowance, the assessee's argument is implicitly that the interest paid should be allowed as a business expenditure. Revenue's Contentions: - The Revenue's grievance was that the CIT(A) erred in deleting the addition made by the AO on account of income from trailers, arguing that such deletion cannot be made once the books have been rejected by the AO. - The Revenue contended that the assessee had raised loans and paid interest, but forwarded the same for non-business consideration. Specifically, on advances of Rs. 32,91,561/- to family concerns, interest was charged on only Rs. 4,71,293/- and Rs. 10,64,394/-, while no interest was charged on the remaining Rs. 17,55,874/-. Therefore, interest on the latter amount could not be allowed as business expenditure under Section 37 of the Income Tax Act, 1961, due to non-business consideration, in the absence of explanation or evidence.

Which sections of the Income-tax Act were involved?

Section 37

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH JAIPUR DB Income Tax Appeal No.81/2006 DB Income Tax Appeal No.83/2006 APPELLANT M/s Nav Bharat Buildcon (P) Ltd., Jaipur Road, Madanganj, Kishangarh VERSUS RESPONDENTS 1. The D.C.I.T.Inv. Circle, Ajmer 2. The Commissioner of Income Tax Ajmer.

Date of Order : 15.11.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE MAHENDRA MAHESHWARI Mr. P.K. Kasliwal for the appellant. Mrs. Parinitoo Jain for the respondents.

1.

By way of this appeal, the appellant has assailed the judgment & order of the Tribunal whereby the Tribunal has partly allowed the appeal preferred by the department and also assessee's appeal.

2.

This Court while admitting the matter framed the following question which reads as under:- “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in not allowing interest paid to third party as business expenditure while estimating the net profit ?”

3.

Heard Mr. P.K. Kasliwal counsel for the appellant and Mrs. Parinitoo Jain counsel for the respondents.

4.

In view of the fact that the tribunal while considering the paragraph 15, 16 & 19 observed

2 that the interest which is paid is not admissible and held as under:- “15.We have heard the rival submissions

and perused

the materials available on record. As argued by the ld. DR that due to acute financial stringencies, the assessee had to borrow money from the banks and the market and substantial had to pay by way of interest on those borrowings and in this regard, the ld. AR has referred to Award by Court of ADJ, Dungarpur, PB 65-71. the main grievance of the Revenue is that either no interest or very low rate of interest has been charged from family concerns on advances of Rs. 32,91,561/-. the assessee has raised loans and paid interest and forwarded the same for non-business consideration

out

of Rs. 32,91,561/- advanced to family concerns, interest on amount of Rs. 4,71,293/- and 10,64,394/- is being charged by the assessee but no interest on the remaining amount of Rs. 17,55,874/- is being charged by the assessee are therefore, the interest from the said amount cannot be allowed as business expenditure u/s 37 of the Act being for non-business consideration, in the absence of any explanation or evidences by the assessee in support of his claim. The AO has charged the interest @ 18% p.a for seven months i.e. till the firm was closed/converted into a Private Limited Company, which is on higher side. Therefore, the AO is directed to disallow the interst @ 12% p.a. for seven months on Rs.17,55,874/- on product basis being the interest not for the purpose of business. Thus, the assessee gets the relief from the order of the AO accordingly. Hence, this ground of the Revenue is partly allowed and that of the assessee is dismissed.

16.

Ground No.5 of the assessee and Ground No.1(3) of the Revenue. The main grievance of the assessee in its ground is that the ld. CIT(A) erred in confirming the addition by the AO on account of income from Trailer amounting to Rs. 40,000/- and is proper in principle and the grievance of the Revenue is that 3 the ld. CIT(A) erred in deleting the said addition made by the AO which cannot be made once the books have been rejected by the AO.

19.

We heard the rival submissions and perused the materials available on record. As per the arguments of the ld. AR that both the Trailers were caught and seized by the Financier's M/s Ashok Ley Land Finance Ltd. and one of the trailer was released after 4 to 5 months which was not in working conditions and heavy expenditure had to be incurred to make it moveable on road and the second trailer was not released and was sold off by the Financer after about 2 years. The necessary repossession Memo (PB 70- 73) and the above facts were available before the AO has been argued by the ld. AR. Since no specific defect in the accounts on account of loss on the income from the trailers have been found out by the AO and we are convinced with the arguments of the ld. AR and on perusal of the documents, we find that the AO has wrongly estimated the net income of Rs. 40,000/- as income from Trailers. Therefore, we find no reason to interfere with the order of the ld. CIT(A) in deleting the addition on this account and the same is hereby upheld for the reasons mentioned above. Therefore, the groundn of the Revenue is dismissed and that of the assessee is allowed.”

5.

We are in complete agreement with the view taken by the Tribunal. The issue is answered in favour of the department against the assessee.

6.

Both the appeals are accordingly dismissed. A copy of this order be placed in each file. (MAHENDRA MAHESHWARI),J. (K.S.JHAVERI),J. A.Sharma/114-115

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