M/S. BHOOMI CONSTRUCTION PROJECTS ,MUMBAI vs. ASSTT. CIT WARD-28(1), MUMBAI

O R D E R PER ABY T. VARKEY, JM: These are appeals preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-26, Mumbai dated 04.10.2019 and 30.08.2019 for AY. 2012-13 and AY.2013-14 respectively. 2. At the outset, the Ld. AR of the assessee Ms. Ritika Agarwal submitted that she is not pressing the appeal for AY. 2013-14. Therefore, assessee’s appeal ( ) stands dismissed as withdrawn. 3. Coming to the for AY. 2012-13, the sole ground of appeal

of the assessee is against the action of the Ld. CIT(A) upholding estimated disallowance of interest u/s 36(1)(iii) of the Income Tax Act, 1961(hereinafter “the Act”) to the tune of Rs.15,74,700/- on the loan given to M/s. Sarjak of Rs.1,19,55,000/- and M/s. N. G. Group of Rs.11,67,501/-. & 1829/Mum/2020 A.Y. 2013-14 & 2012-13 Bhoomi Construction Projects

4. Brief facts is that the assessee is a partnership firm engaged in the business of real estate development. In the year under consideration, the assessee had filed return of income declaring total income at Rs. Nil. Later on, the case was selected for scrutiny. And the AO noted from perusal of the balance-sheet of the assessee that the assessee has given loans/advance to certain entities on which no interest has been charged. Therefore, he asked the assessee to submit the details of such loans given without charging any interest. After collecting the details from the assessee in this regard, the AO noted that the assessee has given interest free advances to three (3) parties (i) M/s. Konark Enterprises to the tune of Rs.50,00,000/- (ii) M/s. N. G. Group to the tune of Rs.11,67,501/- & (iii) M/s. Sarjak to the tune of Rs.1,19,55,000/-. Thus total of Rs. 1,81,22,501/- has been given to these three (3) parties. According to the AO, the assessee has given interest free advances to these three (3) aforementioned parties for non-business purpose and therefore, according to him, the proportionate interest paid on the interest bearing funds of the assessee to the extent of Rs.1,81,22,501/- is to be disallowed u/s 36(1)(iii) of the Act. In this context he also noted from the profit and loss account of the assessee that the assessee had debited an amount of Rs.3,89,98,142/- as interest on bank loan and the effective rate of interest paid by the assessee is at 12% on it. Therefore, he computed 12% of Rs.1,81,22,501/- which was disallowed u/s 36(1)(iii) of the Act and added to the total income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to take note by this Tribunal’s decision in assessee’s own case for AYs. 2008- & 1829/Mum/2020 A.Y. 2013-14 & 2012-13 Bhoomi Construction Projects 09 & 2009-10 wherein the Tribunal held that the advance/loan to M/s. Konark Enterprises was for business purposes and therefore interest disallowance made by AO in respect of M/s. Konark Enterprises to the tune of Rs.6 Lakhs was deleted. However, regarding the other two parties, the Ld. CIT(A) was of the opinion that the assessee failed to substantiate the claim with supporting evidence that the loan was given for business purpose to them (i.e, M/s. N. G. Group & M/s. Sarjak). And therefore, he confirmed the balance disallowance of interest to the tune of Rs.15,74,700/-. Aggrieved by the aforesaid action of the Ld. CIT(A), the assessee is before us.

5. Assailing the action of the Ld. CIT(A), the Ld. AR of the assessee submitted that the no disallowance of the interest expenditure ought to have been made by AO/CIT(A) since the assessee has provided the interest free advances/loans from its own interest-free funds available with it. For buttressing her argument, she drew our attention to paper book wherein the ledger account of M/s. N. G. Group has been found placed for the period from 25.02.2012 to 31.03.2012 (refer page no. 12 of the P.B). She also drew our attention to the extract of bank-book highlighting the entries of M/s. N. G. Group showing interest free funds utilized for giving interest free advance to it (M/s. N. G. Group, refer page no. 13 to 15 of the P.B) which fact according to her is corroborated on perusal of the extract of bank-statement highlighting the same (refer page no. 16 to 17 of the P.B). Coming to the advances given to M/s. Sarjak to the tune of Rs.1,19,55,000/-, the Ld. AR, brought to our notice that for AY. 2010- 11, the Tribunal in the assessee’s own case while dealing with similar & 1829/Mum/2020 A.Y. 2013-14 & 2012-13 Bhoomi Construction Projects disallowance of interest made by the AO in respect of loan given to M/s. Sarjak was pleased to delete the same by holding that the interest free advance/loan was given to M/s. Sarjak out of interest free funds available to the assessee and for ready reference the Tribunal’s view is reproduced as under: - “7. We have considered rival submissions and perused the material on record. As could be seen, the AO has made disallowance under section 36(1)(iii) of the Act alleging that interest free loans and advances were given to 8 parties. However, in course of appellate proceedings, learned Commissioner (Appeals) has deleted the interest disallowance made in respect of alleged interest free loans and advances to all the parties, except, Ellora Realities Pvt. Ltd. and Sarjak, considering the fact that in the remand report the AO has stated that only in respect of aforesaid two parties the assessee could not establish that these advances were for business purposes. Thus, the disallowance to the extent of Rs. 3, 33,722/- was sustained. However, from various documents placed before us including copy of ledger account, bank statements etc., we find that the interest free loans and advances given to Ellora Realities Pvt. Ltd. and Sarjak were out of interest free funds available with the assessee. No contrary evidence has been brought on record by the revenue to demonstrate that any of part of the borrowed funds was utilized for providing interest free loans and advances to the aforesaid two parties. Therefore, when interest free loans and advances were provided out of interest free funds available with the assessee, no disallowance out of interest expenditure can be made under section 36(1)(iii) of the Act. Accordingly, we delete the disallowance of Rs. 3,33,722/-. Grounds are allowed.”

6. Therefore, according to her, the disallowance of interest was not warranted in respect of both parties and the Ld. CIT(A) erred in & 1829/Mum/2020 A.Y. 2013-14 & 2012-13 Bhoomi Construction Projects confirming the disallowance in respect of aforesaid two parties (M/s N. G. Group & M/s. Sarjak).

7. Per contra, the Ld. DR supported the action of the AO and the Ld. CIT(A). According to him, the interest free loans were given to related parties when assessee is claiming heavy interest expenditure. So AO/CIT(A) rightly disallowed proportionate interest expenditure; and so he does not want us to interfere with the order of the Ld. CIT(A).

8. We have considered the submissions of both the parties and perused the records. We note that the AO had made disallowance of interest expenditure to the tune of Rs.21,74,700/- being 12% of Rs.1,81,22,501/- u/s 36(1)(iii) of the Act, which according to the AO has been given by assessee as interest free advance/loan to three (3) concerns named (supra). On appeal, the Ld. CIT(A) taking note of the Tribunal decisions for AYs 2008-09 & 2009-10 was pleased to note that the advance given to M/s. Konark Enterprises was for business purpose and has given partial relief to the assessee to the extent of Rs. 6 Lakhs. However, he confirmed Rs. 15,74,700/- in respect of the other two (2) parties. Before us, the Ld. AR brought to our notice that this Tribunal for AY. 2010-11 has considered similar disallowance made in respect of advance/loan given to M/s. Sarjak and held that the same was provided out of interest free funds available with assessee. And therefore according to us, no disallowance is warranted u/s 36(1)(iii) of the Act in respect of loan advanced to M/s. Sarjak. Therefore, only issue remaining is in respect of disallowance of interest pertaining to interest-free loan/advance given to M/s. N. G. & 1829/Mum/2020 A.Y. 2013-14 & 2012-13 Bhoomi Construction Projects Group to the tune of Rs.11,67,501/-. In this regard, we note from documents produced before us i.e. ledger account placed at page no. 12 of the P.B, bank statement placed at page no. 16 to 17 of the P.B and the extract of the bank book highlighting the entries of M/s. N. G. Group showing interest free funds utilized for giving interest free advance to M/s. N. G. Group placed at page no. 13 to 15 of the P.B, we find that the interest free loan/advance given to M/s. N. G. Group was out of interest free funds available with the assessee. Since this fact could not be controverted by Ld. DR representing the revenue, we are of the considered opinion that interest free loan and advance were provided to M/s. N. G. Group out of interest free funds available with the assessee. So no disallowance out of interest expenditure need to be made u/s 36(1)(iii) of the Act. Therefore, we direct deletion of the disallowance sustained to the tune of Rs.15,74,700/-. Thus, the appeal of the assessee is allowed.

9. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on this 28/06/2022. Sd/- Sd/- (PRAMOD KUMAR) (ABY T. VARKEY) VICE PRESIDENT JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 28/06/2022. Vijay Pal Singh, (Sr. PS)