ASST. C.I.T. vs. BARODA PROPERTIES P. LTD.

O/TAXAP/203/2000 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 203 of 2000

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE KS JHAVERI

and HONOURABLE MR.JUSTICE K.J.THAKER

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ ASST. C.I.T.....Appellant(s) Versus BARODA PROPERTIES P. LTD.....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MR RK PATEL, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 8

O/TAXAP/203/2000 JUDGMENT

Date : 10/11/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE K.J.THAKER) 1. By way of this appeal, the appellant-Revenue has challenged the order dated 1.5.2000 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench ‘SMS’ in ITA No. 6071/Ahd/1994 for Assessment Year 1991-92. 2. While admitting the appeal on 15.1.2001, this Court has framed the following substantial question of law for consideration, as follows: “Whether on the facts and in the circumstances of the case, the Income- tax Appellate Tribunal has substantially erred in law in confirming the allowance of interest of Rs. 4,22,557/- ?” 3. The brief facts of the present case are that the assessee company was incorporated a private limited company and main object is to carry on business as organizer and developers of land, estate cooperative housing society and to deal with and improve property either as a owner or as an agent. During the accounting period relevant for A.Y. 1991-92 the assessee has continued the work as per agreement with Payal Co-operative Page 2 of 8

O/TAXAP/203/2000 JUDGMENT Housing Society Ltd. for the development of land by construction of shops, offices and flats for its members. The development rights has been sold and transferred by a deed of assignment dated 1.10.1990 to P & P property Pvt. Ltd. The return of income for AY 1991-92 has been filed on 31.3.1991 declaring total income of Rs. 19,170/-. The return was processed u/s. 143(1) on 31.1.1992 and notice u/s. 143(2) was issued on 24.11.1992 upon the assessee which was served on 26.11.1992. 4. That during the year under consideration the assessee company has shown receipts of service charges of Rs. 16,650/- and compensation for assignment of development rights at 8 lacs. The service charges are received from Payal Co-op. Housing Society Ltd for the construction and development work as per the agreement. For A.Y. 1990-91, assessee company is to receive an amount of 7-1/2 of the total cost of the scheme for development work as mentioned. The assessee has claimed expenses of Rs. 4,22,557/- as financial charges which consist of Rs. 4,16,250/- being the interest paid to Bank and Rs. 6,307/- being Bank Charges. From the facts of the case, it is seen that expenditure of Rs. 4,22,557/- incurred in respect of interest and bank charges are not for the puropse of business and assessee is not entitled for deduction of this expenditure from its business income. The assessee has obtained loan from Dena Bank on which interest of Rs. Page 3 of 8

O/TAXAP/203/2000 JUDGMENT 3,29,273/- has been paid. The interest of Rs. 86,977/- was paid to the other creditors. The assessee was requested to explain why this amount should not be disallowed as same was not a business expenditure. The assessee company has filed its reply by letter dated 10.2.1994 and 18.2.1994 and submitted that the same are made in the assessment proceeding for A.Y. 1990-91. As mentioned in the assessment order for A.Y. 190- 91, the assessee company has used the amount of bank loan and other loan for the purpose of making advances to Payal Co-Op. Housing Society Ltd. and other associated concern. The payment was made for land purchase for society towards land documents and reimbursement of expenses of its sister concern. As per clause 11 of the agreement dated 12.8.1988, the assessee company was to recover the cost of the scheme from the prospective

members/purchasers

the shops/offices/flats. This clause includes the cost of arranging finance also. Thus, the assessee is entitled to reimbursement of interest payment of finance arranged by the company. 5. After considering the material on record, ultimately the assessment order came to be passed. Against the said order of assessment, the assessee has preferred an appeal before the CIT(A) which was allowed. Against the said order of CIT(A), the department has preferred an appeal before the ITAT which was dismissed. Hence, the Page 4 of 8

O/TAXAP/203/2000 JUDGMENT present Tax Appeal by the Revenue. 6. Having heard both the sides, we find that there is considerable force in the submission of the assessee. The first appellate authority after examining the facts of the case came to the conclusion that the advances were given by the assessee for the purpose of business. The nexus was not established by the revenue to the effect that the interest bearing fund was diverted for non-business purpose. Further we find that in similar circumstances, disallowance of interest was deleted by the first appellate authority in the subsequent years. Therefore, considering the entire circumstances of the case, the finding recorded by the CIT(A) is upheld. Mr. Parikh learned advocate appearing for the appellant- Revenue has submitted that the question has to be answered in favour of the revenue. He has taken us through the finding of facts recorded by the CIT(A), which reads as under: “I have considered the submissions made on behalf of the appellant. The issues for consideration are whether the expenditure was incurred for the business purposes. Secondly, whether it was a totally business proposition with an intention to earn profit. It is observed that as per the terms of the contract, the appellant was required to Page 5 of 8

O/TAXAP/203/2000 JUDGMENT arrange finances for the business and therefore, the advance of loan by the appellant was in accordance with the provisions of the contract. Looking to the over all profit received by the appellant in the form of compensation, it is obvious that net result of the total project was a profit, however small, and it cannot be alleged that the appellant incurred losses to give an ultimate benefit to any other concern. This is not the case of Assessing officer that the whole arrangement was collusive with the intention of reducing the profits of the appellant. In view of the above facts, and respectfully following the decision of my predecessor in the case of M/s. S & M Builders Pvt. Ltd. for A.Y. 1989-90 referred above, the A.O. Is directed to allow the claim of the appellant regarding the deduction of interest.” 7. Thus, while allowing the appeal, the CIT(A) has given elaborate reasons. According to the Assessing Officer, the assessee has taken loan from the Bank on which the interest was charged by the Bank. The ITAT while deciding the case of the Payal Co-op. Housing Society, the arrangement was made pursuant to the agreement entered into Page 6 of 8

O/TAXAP/203/2000 JUDGMENT between the assessee and the society. It is a finding of fact which has been reiterated by the ITAT. It was the assessee who was supposed to arrange for the finance scheme, and therefore, the appeal was dismissed and the order of CIT(A) was confirmed. The Tribunal, in paras- 3 & 4 has observed as under: “3. At the out set the ld. Counsel on behalf of the assesseee has submitted before me that in the case of M/s. S.N. Builders Pvt. Ltd., where identical fact is involved,the issue came up before the Tribunal and the Tribunal upheld the finding recorded by the Ld. CIT(A). Copy of the order of the Tribunal in ITA No. 907/Ahd/1993 has been filed alongwith the paper-book. The Ld. DR however, supported the order passed by the Assessing Officer. 4. Having heard both the sides, I find that identical fact is involved in all the appeals. The assessee had taken loan form the bank and paid to Payal Co-op. Housing Soc. Ltd. for purchase of land. This arrangement was made pursuant to the agreement entered into between the assessee and the society. According to the terms of the agreement, the assessee was supposed to arrange finance for the Page 7 of 8

O/TAXAP/203/2000 JUDGMENT scheme. Similar fact has been found in the case of M/s. S.N. Builders Pvt. Ltd. where the Tribunal upheld the finding recorded by the Ld. CIT(A). Considering the above circumstances, I am not inclined to interfere with the finding recorded by the Ld. CIT(A).” 8. We are unable to persuade ourselves to take a different view than that taken by the ITAT. In that view of the matter, we answer the question against the revenue and in favour of the assessee. This Tax Appeal is dismissed. (K.S.JHAVERI, J.) (K.J.THAKER, J) mandora Page 8 of 8