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Income Tax Appellate Tribunal, A BENCH, MUMBAI
Per Rahul Chaudhary, Judicial Member:
By way of the present appeal the Appellant/Assessee has challenged the order passed by the Ld. Commissioner of Income Tax (Appeals)- 9, Mumbai [hereinafter referred to as the „CIT(A)] under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟) in appeal No. CIT(A)-9/Cir.4/04 New/2016-17 for the Assessment Year 2014-15, whereby the CIT(A) had dismissed the appeal filed by the Assessee against the Assessment Order, dated 28.12.2016, passed under section 143(3) of the Act.
The assessee has raised the following grounds of appeal: “1. The Ld. CIT(A) has erred in law and in facts in confirming the action of the assessing officer in passing the assessment order u/s. 143(3) of the Act.
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 2. The Ld. CIT(A) has erred in law and in facts in confirming the disallowance of Rs. 11,63,810/- on account of interest paid of Rs. 11,63,810/- on unsecured loan taken to upgrade, renovate the property which is claimed during the assessment proceeding u/s 24 while calculating the house property income.”
Brief facts as emanating from the record are that the Appellant is a Private Limited Company, engaged in the business of renting of immovable property. During the relevant previous year, the Appellant had incurred financial cost of INR 1,41,32,997/- which included, inter alia, bank interest of INR 1,28,68,266/- and Interest Paid to Others of INR 11,63,810/-. The Appellant filed its return of income on 21.09.2014 claiming deduction of INR 12,68,68,266/- in respect of bank interest while computing income under the head Income from House Property, and deduction of INR 11,63,810/- in respect of Interest Paid to Other while computing income under the head Profits and Gains of Business.
The case of the Appellant was selected for detailed scrutiny. In response to notice dated 06.09.2016 issued under Section 142(1) of the Act, the Appellant filed reply, dated 21.10.2016, wherein in reply to Query No. 5 the Appellant stated that during the relevant previous year, the Appellant had made investment in land and building at Hinjawadi of INR 2,40,581/- and in land at Sape, Bhivandi of INR 1,03,30,160/-. Further, in response to Query No. 19, whereby the Appellant was asked to explain why deduction for total expenses claimed by the Appellant should not be disallowed as the Appellant has not earned any business income during the relevant previous year, the Appellant submitted that deduction claimed by the Appellant is in line with the provision of section 37 of the Act and should be allowed as the expenditure, which are neither capital nor personal in nature, were incurred during the relevant previous year wholly and exclusively for the purpose of business of the Appellant which had already commenced. Thereafter, in response to notice dated 01.12.2016, the Appellant filed reply (placed at page 78 of the paper book), wherein at 2
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 Serial No. 3 the break-up of the Financial Costs was provided by the Appellant. The Appellant also submitted ledger account of interest of loan of INR 11,63,810/- along with copy of debit note of INR 9,62,275/- and INR 2,01,535/- from M/s Manali Enterprises and Mr. Natwar Agarwal, respectively. While explaining the details of investment of INR 1,03,30,160/- in land, the Appellant submitted as under:-
“Reply to your query regarding Details of Investment in Land for Rs. 1,03,30,160/-
We have purchased a land at Mouje Sape, Bhiwnadi for Rs. 1,03,30,160/- on 03.06.2013 for company‟s logistics business by constructing warehouses thereon after taking various government permissions. Copy of agreement and payment details Is already submitted to your office by letter dated 24.10.2016. The land purchased is agricultural land & it is in the process of converting the same In Industrial land with appropriate authority. The income on such land cannot be generated till we get permission to construct warehouses and complete the work there on.
Please also to be noted that the company has taken advance money of Rs. 1,81,23,755/- from M/s. Manali Enterprise so far. As on date on this land no Income generated and no expenses has been provided of any nature.
Advance taken from M/s. Manali Enterprise of Rs. 1,81,23,755/- shall be adjusted against a allotment of duly constructed warehouse admeasuring 25,000 sq. ft. at consideration of Rs. 3,75,00,000/-.” (Emphasis Supplied)
Further, while replying to query regarding details of interest expenses, the Appellant made following submissions in relation to Interest Paid to Others amounting to INR 11,63,810/-:
“Our Company has paid interest on unsecured taken for hinjewadi property from M/s Manali Enterprises and Mr. Natwar Agrawal as and when required.
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 The Company has taken advance from M/s Manali Enterprise for Hinjewadi Property at interest paid during the financial year under consideration of INR 9,62,275/- on amount of INR 1,85,28,593/-.
During the year company has also taken advance from M/s Manali Enterprise for INR 1,81,23,755/- on which the company has not paid any interest during the year under consideration. As this money has been taken as advance to allot them warehouse to be constructed on Sape land.” (Emphasis Supplied)
The AO noted that the Appellant had not earned any business income during the relevant previous year and had offered to tax rental income as income from house property. Therefore, the AO disallowed deduction for interest of INR 11,63,810/-, claimed by the Appellant to be allowable under Section 37 of the Act vide reply dated 21.10.2016, and completed the assessment under Section 143(3) of the Act vide order dated 28.12.2016 whereby returned book loss of INR 27,28,255/- was assessed at INR 5,64,445/- as per the provision of Section 115JB of the Act.
In appeal before CIT(A), the Appellant changed the stand and claimed that Interest Paid to Others amounting to INR 11,63,810/- was allowable as the deduction under section 24(b) of the Act as the borrowed capital has been used for further construction, renovation and reconstruction. The Appellant filed written submissions before the CIT(A), wherein, it was submitted as under:
“The Appellant would like to submit that the following expenses has been debited in profit & loss account under the “finance costs”. Sr. Particulars Amount Remark No. 1 ….. 6 Interest paid to others 11,63,810/- Interest paid on borrowing from related parties
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 The appellant has claimed a deduction of Rs. 1,28,68,266/- being interest expenses on loan taken for invested property under section 24(b) of the IT Act, 1961. While the interest expenses of Rs. 11,63,810/- paid to others i.e. related parties, were inadvertently or accidentally left to claim under section 24(b) of the Act. ” (Emphasis Supplied)
It is admitted position that the Appellant had, for the first time, claimed deduction under Section 24(b) of the Act in respect of Interest Paid to Others amounting to INR 11,63,810/- before CIT(A). It was contended by the Appellant that the Appellant had inadvertently failed to make such claim before the AO. The CIT(A) rejected the aforesaid claim of deduction under Section 24(b) of the Act and returned the following findings:
“4.2.2. The appellant, a private limited company is engaged in the activity of renting commercial premises. The appellant shown income from renting of such premises under the head „income from house property‟. During the year under consideration, the appellant was earning rental income from a property situated in Hinjawadi. At the same time, the appellant had made investment in land at Sape for the purpose of constructing a warehouse. It is seen from the balance sheet that the funds for construction of the commercial property at Hinjawadi were mostly taken from Union Bank in the form of term „loan‟. The appellant had also shown unsecured loans in the earlier year 2012-13 as well as in the year under consideration i.e. 2013-14. The appellant while explaining the allowability of interest expenses of Rs.11,63,810/- paid to Manali Enterprises has argued that the interest expenses were on the loan taken from the Manali Enterprises for construction of the commercial property from which it is receiving rental income. It further argued that the interest expenditure was allowable u/s 24(b) of the Act since it has declared rental income from the said property under the head „income from house property‟. The appellant stated that the claim for deduction of Rs.11,63,810/- u/s 24(b) of the Act was remained to be made inadvertently while filing the return of income.
ITA. No. 602/Mum/2020 Assessment Year: 2014-15
4.2.3. I have considered the arguments made by the appellant and also the financials as well as the details submitted during the assessment proceedings as well as “appellate proceedings I find that the appellant's claim that the expenditure on interest payment of Rs.11,63 810/- was allowable u/s 24(b) of the Act is misleading and not as per the facts. A simple test to examine the appellant‟s claim is to compare the details given in the note 14 under the head „financial costs‟ annexed to the balance sheet of the appellant. It is seen that for F.Y. 12-13, the financial cost was Rs.1,22,92,442/-. lt comprised of bank interest of Rs.1,22,92,442/- and bank charges of Rs.9,688/-. Whereas the financial costs for 13-14 was Rs.1,41,32,997/-. This included payment of interest to others of Rs.11,63,810/- which is the matter of dispute. It is thus clear that payment of interest to others in F.Y. 12-13 was Nil. If we consider the fact that the loans from Manali Enterprises were standing at Rs.1,68,00,000/- in 12-13 which got increased by Rs.17,28,593/- in year 2013-14 to reach at the figure of Rs.1,85,28,593/-. Then it is clear that the unsecured loan of Rs.1,68,00,000/- from Manali Enterprises in the year 2012-13 was having Nil financial costs during F.Y. 2012-13. Thus, the funds from Manali Enterprises to the extent of Rs.1,68,00,000/- were interest free funds which were utilised for the construction of commercial premises on which house property income was declared by the appellant. It is also seen that there is no increase in the investment in the commercial property at Hinjawadi during the F.Y. 2013-14. When, at the first place the appellant had not claimed any interest expenditure on unsecured loans in connection, with the property at Hinjawadi in F.Y. 2012-13 then there was no question of claiming that the interest expenditure of Rs.11,63,810/- was having any connection with the property at Hinjawadi for F.Y. 2013-14 since same loan continued in this year also. Thus, the argument made by the appellant is factually incorrect, misleading and devoid of merits. The AO is directed to note this fact during the penal proceedings which are seen to be initiated in respect of the addition of Rs.11,63,810/- made to the total income.
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 4.2.4 In view of the above, the addition of Rs. 11,63,810/- made by the AO by disallowing the interest expenditure is confirmed. The group of appeal is dismissed.” (Emphasis Supplied) 8. Being aggrieved by the aforesaid order of the CIT(A), the Appellant has filed the present appeal. The Ld. Authorised Representative of the Appellant appearing before us took us through the financial statements of relevant previous year and the submissions filed before the lower authorities. He vehemently argued that the CIT(A) failed to appreciate that the Appellant was entitled to claim deduction under Section 24(b) of the Act as Interest Paid to Others amounting to INR 11,63,810/- pertained to loan utilized by the Appellant for upgrading/renovating property. He further submitted that the AO erred in making disallowance under Section 37 of the Act, and referred to response at serial No. 15 of the Index attached to reply dated 21.10.2016 filed before the AO and contended that the AO could have, at best, made disallowance under Section 40A(2)(b) of the Act in case the AO was of the view that Interest Paid to Others amounting to INR 11,63,810/- was excessive or unreasonable.
Per contra, Ld. Departmental Representative submitted that the CIT(A) has, in paragraph 4.2.3 of the order, correctly pointed out the fallacy in the argument raised by the Appellant. He submitted that unsecured loan of INR 1,68,00,000/- from Manali Enterprises was standing in the books of accounts of the Appellant pertaining to Assessment Year 2013-14 and the Appellant had not claimed any interest expenditure on unsecured loans in connection with property at Hinjewadi for Assessment Year 2013-14. Since, the same loan has continued in the Assessment Year 2014-15, the contention of the Appellant that the interest pertains to loan taken from Manali Enterprises and used for renovation/reconstruction of the property is factually incorrect and devoid of merits.
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 9. We have considered the factual background and the rival submissions. While the Authorised Representative of the Appellant has made multiple submissions, we note that in the grounds of appeal raised before the CIT(A) as well as before us, the Appellant has only set up claim for deduction in respect of Interest Paid to Others amounting to INR 11,63,810/- under Section 24(b) of the Act. While the Appellant claims that the interest pertains to loans utilized for upgrading/renovating the property at Hinjewadi, the contention of the Revenue is that this is factually incorrect. We have perused the balance sheet of the Appellant relevant to the Assessment Year 2013-14 forming part of the paper book filed by the Appellant. As per Note No. 8 - Investments of Notes to Accounts, Investment in land and building as on 31.03.2013 was INR 11,93,11,347/- which increased by INR 2,40,582/- and stood at INR 11,95,51,929/- as on 31.03.2014. Whereas, investment in land at Sape stood at INR 1,03,30,160/- as on 31.03.2014 as against „Nil‟ as on 31.03.2013. Thus, during the relevant previous year a further investment of INR 2,40,582/- was made as investment in land and building in respect of which rental income has been offered to tax by the Appellant. As per Note No. 4 – Long Term Borrowings Loans from Manali Enterprises stood at INR 1,68,00,000/- as on 31.03.2013 which increased to INR 3,66,52,348/- as on 31.03.2014. On perusal of reply, dated 12.12.2016, filed by the Appellant before he AO it becomes clear that the aforesaid figure of INR 3,66,52,348/- consists of (a) advance money of INR 1,81,23,755/- received from M/s Manali Enterprises in relation to land purchased by the Appellant at Sape, Bhivandi, which is to be adjusted against the allotment of duly constructed warehouse at the aforesaid land after obtaining necessary approvals, and (b) outstanding unsecured loan of INR 1,85,23,593/- in respect of which interest of INR 9,62,275/- has been incurred by the Appellant. Thus, the outstanding loan from M/s Manali Enterprises as on 31.03.2014 has increased to INR 1,85,23,593/- as against INR 1,68,00,000/- as on 31.03.2013. Thus, during the relevant previous year additional loan of INR 17,23,593/- was raised from M/s Manali
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 Enterprises. On the other hand, long-term borrowing and current liabilities of INR 6,50,000/- and INR 5,40,000/-, respectively, pertaining to Mr. Natwar Agarwal outstanding as on 31.03.2013 have been repaid in full during the relevant previous year and as on 31.03.2014, the same stand reduced to „Nil‟. An interest of INR 2,01,535/- has been paid by the Appellant to Mr. Natwar Agarwal during the relevant previous year. Thus, it is clear that loans in respect of interest have been incurred/paid by the Appellant to M/s Manali Enterprises and Mr. Natwar Agarwal were outstanding at the beginning of the relevant previous year. A perusal of Note 14 – Financial Costs shows that the finding returned by the CIT(A) that the Appellant has not claimed deduction for Interest Paid to Other for the immediately preceding Assessment Year 2013-14 is correct. Further, it is admitted position that during the relevant previous year, the Appellant had incurred only INR 2,40,581/- for repairing of building at Hinjewadi, Pune and the same stands reflected as addition to investment in land and building in Note – 8 Investment.
Having considered the factual matrix as discussed hereinabove, we conclude the Appellant has failed to establish that the loan amount in respect of which deduction of Interest Paid to Other amounting to INR 11,63,810/- has been claimed under Section 24(b) of the Act by the Appellant were actually utilized for renovation/upgrading of the property bearing rental income. Admittedly, only INR 2,40,581/- has been incurred by the Appellant for repair of building at Hinjewadi, Pune during the relevant previous year. Though the loans from M/s Manali Enterprises and Mr. Natwar Agarwal were outstanding during the immediately preceding Assessment Year 2013-14, the Appellant has not claimed deduction for Interest Paid to Other in respect of the same. The Appellant has made the claim for deduction in respect to Interest Paid to Other of amounting to INR 11,63,810/- under Section 24(b) of the Act for the first time before CIT(A) as an afterthought.
ITA. No. 602/Mum/2020 Assessment Year: 2014-15 11. In view of the above, we hold that CIT(A) was justified in confirming the disallowance of INR 11,63,810/-, being Interest Paid to Others, made by the AO. Ground No. 1 and 2 raised by the Appellant are dismissed.
In result, the present appeal is dismissed.
Order pronounced on 28.04.2022.
Sd/- Sd/- (Pramod Kumar) (Rahul Chaudhary) Vice President Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 28.04.2022 Alindra, PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.
आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सहायक पंजीकार /(Dy./Asstt. Registrar) आयकर अपीलीय अदिकरण, म ुंबई / ITAT, Mumbai