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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आयकर अपीलीय अिधकरण, पुणे �यायपीठ “ए” पुणे म� IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE सु�ी सुषमा चावला, �याियक सद�य एवं �ी डी. क�णाकरा राव, लेखा सद�य के सम� BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM आयकर अपील सं. / ITA No.132/PUN/2016 िनधा�रण वष� / Assessment Year : 2008-09 Patel Goyal Associates, 501, Fortune House, Prabhat Road, Erandwane, Pune-411004. अपीलाथ�/Appellant PAN : AAHFP0519N …. Vs. ITO, Judicial (HQ), …. ��यथ� / Respondent Pune. अपीलाथ� क� ओर से / Appellant by : Shri Nikhil Pathak & Shri Kailash Agarwal ��थ� की ओर से / Respondent by : Shri Sanjeev Ghai सुनवाई क� तारीख / घोषणा क� तारीख / Date of Hearing : 24.01.2019 Date of Pronouncement: 20.03.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM : This appeal is filed by the assessee against the order of CIT(A)-3, Pune dated 24.11.2015 for the Assessment Year 2008-09. 2. The grounds raised by the assessee are as under :- “1. Disallowance of interest of Rs.29,65,196/- u/s 57(iii) In the facts and circumstances of the case the learned CIT(A) erred in confirming the disallowance of interest u/s 57(iii). 2. In the facts and circumstances of the case, interest paid ought to have been allowed u/s 57(iii). For that learned CIT(A) failed to appreciate that when the learned A.O. has recorded a clear cut finding in the assessment order and affirmed the position taken by the appellant in return of income that when interest is not claimed and also not allowable u/s 36(1)(iii), it has to be allowed u/s 57(iii). 3. For that in the facts and circumstances of the case, the learned CIT(A) failed to appreciate the fact that when borrowed funds were not required for business purposes due to availability of surplus funds in regular business, interest is paid only to earn interest income and hence interest cannot be disallowed u/s 57(iii).
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In the facts and circumstances of the case the learned CIT(A) erred even in not allowing the nature and quantum of interest which was allowed by learned A.O. and implicitly confirmed by the learned CIT(A) in the preceding year A.Y. 2007-08. She ought to have held that at least to that extent nexus is accepted by the revenue for allowability u/s 57(iii). Following the rule consistency as against “res-judicata principal” interest needs to be allowed. 5. In the facts and circumstances of the case the learned CIT(A) erred in concluding that when interest is paid to customers of Rs.24,25,826/- (Inadvertently mentioned as Rs.10,56,546/- in the order of CIT(A) from the order of A.Y. 07-08) that means it cannot form part of section 57(iii). For that it is submitted that allowability depends upon quality of expenditure and not on payees’ status and therefore CIT(A)’s order is erroneous. 6. The learned CIT(A) erred in confirming inconsistent stand of assessing authorities. She failed to reconcile between the stand of CIT u/s 263 that interest is deductible u/s 36(1)(iii) and AO's stand that it is neither allowable u/s 36(1)(iii) nor under section 57(iii). Her order is vitiated for not giving conclusive finding. 7. For that the appellant’s returned income by restored. 8. The appellant craves leave to add, alter modify, delete all or any of the grounds of appeal on or before hearing.” 3. Briefly stated the relevant facts include that the assessee is a builder/property developer. The assessee filed the return of income declaring total income of Rs.1,22,63,150/- after claiming deduction of Rs.12.78 crores (rounded off) u/s 80IB(10) of the Act. In the revised returned of income, the said claim of deduction u/s 80IB(10) of the Act was restricted to Rs.12.04 crores (rounded off) only. The revised return of income was accepted in the regular assessment proceedings made on 18.12.2010 u/s 143(3) of the Act. 4. The said order was the subject-matter of revision u/s 263 of the Act. The disallowance of interest expenditure of Rs.29,65,196/- qua the claim of deduction u/s 80IB(10) of the Act was the subject-matter of issue raised before the 263 proceedings. There is no dispute on the said revisional order made u/s 263 of the Act and the same was accepted by the assessee. In the proceedings u/s 263 of the Act, the CIT raised the issue relating to interest expenses qua the business operation of the assessee. The
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background facts relating to this interest income include that the assessee booked term loans and advances on which the assessee paid a sum of Rs.29,65,196/- towards interest expenses. The said amount of Rs.29,65,196/- included Rs.24,25,826/- on account of interest paid on advance payment and Rs.5,39,370/- on account of interest on term loans. Further, it is also a fact that the assessee received interest from various sources amounting to Rs.1,25,51,917/- and the details are shown in the Schedule “L” of the Profit & Loss Account and the same are extracted hereunder :- Interest Received Interest on delay payment : 85,058/- Interest on FDR : 100,754/- Interest on IT refund : 50,383/- Interest on loan amount : 1,23,15,722/- 1,25,51,917/- 5. In the return of income, the said interest expenditure of Rs.29,65,196/- was shown as a ‘business expenditure’. The assessee reduced the said expenditure out of the interest receipts earned by the assessee. The balance amount of interest income of Rs.95,86,721/- is credited to Profit & Loss Account. However, while calculating the allowability deduction u/s 80IB(10) of the Act, the assessee reduced the interest income credited to the Profit & Loss Account and the deduction u/s 80IB(10) of the Act was made on the reduced profits. 6. In the fresh assessment proceedings giving effect to the revisional order of the PCIT, (i) the allowability of the said interest expenditure as business expenditure and (ii) netting of the same against the interest income of Rs.95,86,721/- which was offered as ‘income from other sources’ were the subject-matter of dispute. The Assessing Officer opined that the assessee is not engaged in the money-lending business. Consequently, the
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interest expenditure incurred on interest payment does not constitute interest business expenditure. As per the Assessing Officer, the interest expenditure need not be set of against the interest income. Therefore, the said expenditure should be debited to the business expenditure relating to the eligible housing project. Thus, it is the case of the Assessing Officer that the assessee inflated the deduction to the extent of interest expenditure of Rs.29,65,196/-. In this regard, the Assessing Officer, in para 9 of the assessment order, gave the following conclusion :- “9. ……….. Therefore, the interest expenses of Rs.29,65,196/- was required to be debited in the P&L A/c as the project expenses and the gross interest receipt of Rs.1,25,51,917/- should have been credited as ‘income from other sources’, which the assessee failed to do. By doing so, the assessee has inflated the income of the eligible project on which deduction u/s 80IB(10) was computable and reducing the income of other sources amounting to Rs.29,65,196/-.” 7. Referring to the interest payment of Rs.5,39,370/- paid to the banks in connection with the term loans, the Assessing Officer mentioned that the assessee paid a sum of Rs.24,25,826/- to the flat owners, from whom the assessee took the advances. The Assessing Officer commented that the assessee took interest bearing advances from the flat buyers on one side and the partners of the firm withdrawn the amount from their capital accounts by way of heavy withdrawals, which resulted in generating negative balance of their respective capital accounts. Rs.8.36 crores (rounded off) is the size of such negative balances. Therefore, as per the Assessing Officer, denying the netting benefit, the interest payments to the tune of Rs.29,65,196/- should be taxed u/s 56 of the Act. In effect, the benefit of deduction under clause (iii) of section 57 of the Act was denied. Eventually, the Assessing Officer made this fresh assessment determining the total income of Rs.1,52,28,346/- against the returned/assessed income of Rs.1,22,63,150/-.
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Aggrieved with the above order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). Before the CIT(A) 9. Before the CIT(A), the assessee elaborated submissions in writing and the same are extracted in para 4 of the order of the first appellate authority. On considering the said submissions of the assessee, the CIT(A) dismissed the relevant grounds of the assessee as per discussion given in para 4.1 and 4.3 of the order of the first appellate authority. In the said paragraphs, the CIT(A) analyzed the details of the interest payments to the banks as well as to the flat buyers, analyzed the withdrawals position by the partners of the firm from their capital accounts and gave his finding separately on the interest payments to term loans as well as the interest payments to the flat buyers. So far as the “interest payments of Rs.5,39,370/-” is concerned, 10. the CIT(A) discussed the fact about the similar claim of the assessee in the preceding assessment year 2007-08 where the assessee paid the interest of Rs.55,06,360/- and the CIT(A) dismissed the claim against the interest income and confirmed the addition of Rs.43,31,360/- in the assessment year 2007-08. Speaking about the claim in the current year, the CIT(A) analyzed the nexus between the earning of the interest income and the term loans received by the assessee, on which the interest is paid, and examined the same in the context of the provisions of clause (iii) of section 57 of the Act. The said clause demonstrates that the requirement of the nexus between the interest income and the interest expenditure. The CIT(A) held that the assessee failed to establish the required nexus between
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the interest income and interest expenditure and decided the issue against the assessee. For the sake of completeness, the relevant lines from para 4.2.2 of the order of the CIT(A) is extracted hereunder :- “4.2.2 .......... Thus, the condition which needs to be fulfilled wherein section 57(iii) can be applied is that the expenditure must have been incurred solely and exclusively for the purpose of earning or making income and there must be a clear nexus between the expenditure incurred and income sought to be earned. These conditions emerge from the decisions rendered in Seth R. Dalmia Vs. CIT (1977) 110 ITR 644 (SC) and the Bombay High Court decision in the case of Smt. Zubedabai Vs. CIT (1984) 148 ITR 104 (Bom), among others. Thus, it is the purpose of the expenditure that is relevant in determining the applicability u/s. 57(iii) which is making or earning of income. The appellant has not been able to justify its claim of having established the nexus of utilization of the term loan towards earning of interest income by way of making advances to its sister concern and has also not brought any such material which could prove the stand taken by him. The case laws relied upon by the appellant are in a different context hence not applicable to the fact of the present case hence are distinguishable. Thus, deduction for expenses are admissible against income from other sources to the content such expenses are wholly and exclusively incurred for the purposes of earning the relevant income. The appellant in the present case has not been able to demonstrate the aforesaid fact with respect to the utilization of the term loan for earning interest income on the advances made to its sister concerns directly.” Further, with reference to the “interest payment made to the flat 11. buyers and their advances” to the assessee, the CIT(A) analyzed the said issue in para 4.2.3 of the order of the CIT(A) and decided the issue against the assessee by mentioning that the interest payments made to the flat buyers is unconnected interest expenditure. The first appellate authority held that the conditions laid down in section 57(iii) of the Act are not met by the assessee. The CIT(A) also held that the decision of the Assessing Officer in the earlier assessment year 2007-08 in favour of the assessee does not help the assessee in the present assessment year under consideration. The CIT(A) discussed that the said interest expenditure is not eligible for netting off under clause (iii) of section 57 of the Act on one side and also not claimable under the head ‘profits and gains of business or profession’.
7 ITA No.132/PUN/2016 12. Aggrieved with the above decision of the CIT(A), the assessee is in appeal before the Tribunal with the grounds mentioned above. Argument of ld. AR before us 13. Bringing our attention to the ground nos.1 to 5, ld. Counsel for the assessee submitted that the assessee is entitled to claim of deduction u/s 80IB(10) of the Act against the interest income as it qualifies the benefit of netting off under clause (iii) of section 57 of the Act. He further submitted that the sum of Rs.95,86,721/- was offered as ‘income from other sources’ and the expenditure of Rs.29,65,196/- was claimed as an expenditure u/s 57(iii) of the Act. Further, he relied on the argumentative grounds raised in the present appeal. Mentioning that the similar deductions were claimed in the past on account of interest payment and claimed netting of the said interest income of Rs.68,33,448/- against the interest income of Rs.1,29,98,198/-. Ld. Counsel mentioned that in the assessment year 2007-08, no interest income of Rs.61,64,750/- was claimed in the return of income by the assessee. Against the said claim, the Assessing Officer in the re-assessment proceedings u/s 148 of the Act for the assessment year 2007-08 partly allowed to the extent of interest paid to other loans taken and also interest paid to the advances to the flat buyers. The Assessing Officer confirmed the entire interest paid to the term loans as not allowable u/s 57(iii) of the Act. Taking through the same analogy in favour of the concessions of confirming the interest of Rs.5,39,370/- paid on the term loans to the banks and commencing on the interest paid on the flat buyers, ld. AR submitted that a part of which may be allowed after considering the mixed nature of accounts. The relevant table comparing the interest payments for the assessment years 2007-08 and 2008-09 are supplied and the same is extracted hereunder :-
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“Patel Goyal Associates AY 2007-08 AY 2008-09 Particulars As per return 143(3) As per 143(3) rws r.ws.148 return 263 Interest income a 1,29,98,198 1,29,98,198 1,25,51,917 1,25,51,917 Less Interest paid On Term Loan (55,06,360) (11,75,000) (5,39,370) 0 On other loan taken (2,70,542) 2,70,542) On Advance from (10,56,546) (10,56,546) (24,25,826) 0 flatholders b (68,33,448) (25,02,088) 29,65,196) - Net Interest Income a-b 61,64,750 1,04,96,110 95,86,721 1,25,51,917 Disallowance of interest 43,31,360 29,65,196”
Argument of ld. DR before us 14. Replying to the ld. AR’s arguments, ld. DR for the Revenue, on the other hand, relied heavily on the orders of the Assessing Officer and the CIT(A). The gist of the ld. DR’s arguments includes that the loans taken from flat buyers and the interest paid thereon is unconnected to the interest income earned by the assessee, which is taxable under the head ‘income from other sources’. However, ld. DR has nothing to state on the concessions given by the Assessing Officer in the preceding assessment year 2007-08. He merely stated that the principle of res-judicata does not apply to the income tax proceedings. Decision of the Tribunal 15. We have heard both the parties and perused the orders of the Revenue authorities and the Paper book filed before the Tribunal. The limited issue to be adjudicated by us is the “allowability of the benefit of netting of the interest expenditure of Rs.29,65,196/- against the interest income of Rs.1,25,51,917/-” earned by the assessee and taxation of the entire such interest income u/s 56 of the Act. As per the
9 ITA No.132/PUN/2016 data/table furnished by the assessee and extracted by us in the preceding paragraphs of this order, we find that the assessee earned interest income from various heads such as (i) Interest on delay payment of Rs.85,058/-; (ii) Interest of FDRs of Rs.100,754/-; (iii) Interest on IT refund of Rs.50,383/-; and (iv) Interest on loan amounting to Rs.1,23,15,722/-. There is no dispute on this. Further, other undisputed fact is that the assessee incurred expenditure by way of interest payment (i) in connection with the term loans and (ii) also in connection with payment of interest on the advances received from the customers for buying the flats. Thus, there is dispute on genuineness of both interest expenditure and interest receipts. However, there is dispute exists on the issue of netting of the said expenditure against the interest income. Considering the language used in section 57(iii) of the Act, we find that only certain expenditure is allowable against the interest income offered for taxation u/s 56 of the Act. The expenditure incurred by the assessee wholly and exclusively for earning of such income is only allowable under clause (iii) of section 57 of the Act. However, it is also a fact that the assessee follows the pattern of maintenance of mixed account and thus, the funds are inter-mixed. Hence, the assessee has a difficulty in establishing the nexus of the interest earning qua the interest payments. Further, taking a cue from the Assessing Officer’s order in the assessment year 2007-08 and also the cash of mixed funds, the ld. Counsel for the assessee submitted that 50% of the entire interest expenditure incurred may be disallowed. 16. Therefore, considering the above factual matrix of the present case, we are of the opinion, like in the past assessment year 2007-08, the interest paid on term loans is not an allowable deduction against the
10 ITA No.132/PUN/2016 interest income taxed u/s 56 of the Act. As such the term loans are not meant for financing business. Regarding the interest expenditure relatable to flat buyers, we find it relevant to grant some ad-hoc benefit to assessee appreciating the reasoning given by the assessee. Accordingly, the Assessing Officer is directed to allow 50% of the interest income paid to the flat buyers against the interest receipts. Thus, to sum up, the interest expenditure relatable “term loan” (Rs.5,39,370/-) is not an allowable deduction fully. Further, 50% of term loans linked interest expenditure of Rs.24,25,826/- is an allowable deduction u/s 57(iii) of the act. Accordingly, we order. 17. In the result, the appeal of the assessee is partly allowed. Order pronounced on this 20th day of March, 2019. Sd/- Sd/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 20th March, 2019. Sujeet आदेश क� �ितिलिप अ�ेिषत/Copy of the Order is forwarded to : अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-3, Pune; 4. The Pr. CCIT, Pune; िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “ए” / DR ‘A’, 5. ITAT, Pune; गाड� फाईल / Guard file. 6. // True Copy // आदेशानुसार/ BY ORDER, स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune