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Income Tax Appellate Tribunal, HYDERABAD BENCH ‘B, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, AM: This appeal filed by the assessee is directed against the order of CIT(A) – 11, Hyderabad, dated, 25/05/2018 for AY 2015-16.
Brief facts of the case are, assessee company, engaged in the business of constructions filed its return of income for the AY 2015-16 on 12/09/2015 declaring income at Rs. NIL. Subsequently, the case was selected for scrutiny under CASS and notice was issued u/s 143(2) and also notice u/s 142(1) was issued. In response to the said notices, the AR of the assessee furnished the required information.
2.1 The AO observed that it is seen from the P&L A/c, the assessee had shown closing work-in-progress at Rs. 15,55,11,303/- and capitalized the same which included interest on loans of Rs. 1,14,26,168/- pertaining to M/s
2 I.T.A. No. 1555/Hyd/18 Amsri Homes Pvt. Ltd., Sec’bad.
Innovador Realtors Pvt. Ltd. However, AO noticed from the Note 11(b) of the Annual report, the assessee company gave interest free loans/advances to related concerns as under:
Name of the concern Outstanding balance as on 31/03/2015 M/s Amsri Builders 7,60,48,335 M/s Amsri Builders Pvt. Ltd. 22,29,673 M/s Amsri Realtors Pvt. Ltd. 29,50,000 M/s Amsri Infra Projects Pvt. Ltd. 36,40,000 M/s Amsri Constructions Pvt. Ltd. 1,73,50,000 M/s Amsri Developers Pvt. Ltd. 91,50,000 M/s Amsri Properties & Township 53,00,000 Pvt. Ltd.
2.2 On verification of the assessment records of preceding years of the assessee, the AO noticed that interest claim of the assessee was disallowed and reduced from the closing work-in-progress from AYs 2008-09 to 2014-15. When the AO asked the assessee as to why proportionate interest attributable to interest free loans/advances given to related concerns should not be disallowed as per the stand adopted by the revenue in the previous AYs, the assessee submitted as under: " We here by submit that the loans were borrowed during the financial year 2006-07 for the purpose of acquiring the lands which is main business of the company. In pursuance of its business objectives and based on business expediencies, the company has borrowed the loans and acquired the lands and given trade advances to the other real estate companies. In fact, the loans were borrowed during the financial year 2006-07. The said initial loan was repaid by borrowing loans from another company as per the terms and conditions of the loan from time to time. The company has been accruing the interest on the loan but the interest was not paid. The said interest has been capitalized consistently to work in progress and carried forward the same.
3 I.T.A. No. 1555/Hyd/18 Amsri Homes Pvt. Ltd., Sec’bad.
In addition to the above we enclose the ledger account copy of lender, M/s. Innovador Realtors Pot Ltd for the financial year 2014-15. It is very pertinent to mention that for the assessment year 2007-08 there was no proportionate interest expenditure disallowance by the assessing officer even though there was interest expenditure during that year. In fact the loans were initially borrowed and advanced to the other real estate concerns. In subsequent years the company is just borrowing to repay the existing loans due to standstill in its business activities."
2.3 Rejecting the contentions of the assessee, the AO concluded that there is no business expediency in taking the loans and thus the assessee would not be entitled for deduction of interest expenditure. He, therefore, disallowed the entire interest expense claim of Rs. 1,14,26,128/- as the interest chargeable at prevailing market rate on amounts advanced to M/s Amsri Builders and other related concerns is on higher side. Since the assessee did not claim interest expenditure in the profit & loss account and capitalized the same as work-in- progress, the sum of Rs. 1,14,26,168/- was reduced from capital work-in-progress.
When the assessee preferred an appeal before the CIT(A), the CIT(A) following the decision of his predecessor in assessee’s own case for AY 2007-08, restricted the disallowance to 50%.
Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal: “1. The order of the Hon’ble CIT(A) is erroneous in law as well as facts of the case. 2. The Hon’ble CIT(A) ought to have deleted the disallowance made by the AO in respect of interest
4 I.T.A. No. 1555/Hyd/18 Amsri Homes Pvt. Ltd., Sec’bad.
claim of Rs. 1,14,26,168/- without restricting the same to 50%. 3. The Hon’ble CIT(A) ought to have observed that the AO erred in reducing the capital work in progress by Rs. 1,14,26,168/- and therefore ought to have deleted the entire disallowance instead of restricting the same to 50%. 4. Any other ground will be raised at the time of hearing.
Considered the rival submissions and perused the material on record. We noticed that assessee has not commenced its operation and has not offered any income nor claimed any expenditure in its return of income. However, it has taken loans from unsecured sources and paid interest. During assessment proceedings, AO has observed that assessee has diverted the funds to its sister concern without any interest, but, incurred huge interest payment and the same was capitalized even though the relevant funds were not applied for the purpose of business. In our considered view, since the assessee has not commenced its business and it has not claimed any expenditure this year in its return of income, AO cannot make any disallowance in the capital work- in-progress. AO can initiate any action only when the assessee completes the installation and starts claiming deduction u/s 32 of the Act. Without there being any claim from the assessee, AO cannot make any modification in the records submitted before him.
7.1 We do agree that in the assessment proceedings, AO may notice certain issues which require attention in the subsequent assessments, AO can resort to red flag those findings either in the assessment record or can be part of assessment order itself, but, without making any adjustment. It is for the AO to consider. Therefore, in this AY, the adjustment
5 I.T.A. No. 1555/Hyd/18 Amsri Homes Pvt. Ltd., Sec’bad.
made by AO is uncalled for. Accordingly, grounds raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
Pronounced in the open court on 12th June, 2019.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 12th June, 2019. kv Copy forwarded to: 1. M/s Amsri Homes Pvt. Ltd., Hyderabad – 500 001 2. DCIT, Central Circle – 1(2), Hyd. 3. CIT(A) - 1, Hyderabad 4. Pr. CIT (Central), Hyderabad 5. The DR, ITAT, Hyderabad 6. Guard File Description Date Intls S.No. 1. Draft dictated on Sr.P.S./P.S 2. Draft placed before author Sr.P.S/PS Draft proposed & placed JM/AM 3. before the second Member 4. Draft discussed/approved by JM/AM second Member 5. Approved Draft comes to the Sr.P.S./P.S Sr.P.S./PS 6. Kept for pronouncement on Sr. P.S./P.S. 7. File sent to the Bench Clerk Sr.P.S./P.S 8. Date on which file goes to the Head Clerk 9. Date of Dispatch of order