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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: Ms SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
PER MAKARAND V. MAHADEOKAR, AM: These three appeals - two appeals by the assessee and one appeal by the Revenue - are directed against two separate orders passed by the Commissioner of Income Tax (Appeals)-12, Ahmedabad [hereinafter referred to as “the CIT(A)”] dated 26.04.2023 for Assessment Year (A.Y.) 2013-14 and dated 27.04.2023 for A.Y. 2014-15, arising out of assessment orders passed under section 143(3) of the Income-tax Act, 1961 [hereinafter referred to as "the Act"] by the Deputy/Assistant Commissioner of Income Tax, Circle-2(1)(2), Baroda [hereinafter referred to as “the Assessing Officer” or “AO”]. As the issues involved in these appeals are interlinked, they were heard together and are being disposed of by way of this consolidated order for the sake of convenience and brevity. Facts of the Case
The assessee, a company engaged in the business of construction and development of residential premises under different residential project names, filed its return of income under section 139(1) of the Act for the respective assessment years declaring income as per particulars tabulated below. The cases were selected for scrutiny and notices under section 143(2) were issued and duly served. The Assessing Officer, after examining the material placed on record, made various disallowances and additions under different heads, determining the assessed income for each year as set out below. The Assessing Office completed the assessment by passing order u/s 143(3) of the Act. The details of the assessment and the additions are tabulated below: Sr Particulars Α.Υ. 2013-14 Α.Υ. 2014- 15 1 Date of filing return u/s 139(1) 30.09.2013 30.11.2014 2 Returned Income in Rs. 13,49,70,010 1,85,84,840 3 Notice u/s 143(2) 04.09.2014 28.08.2015 4 Date of Order u/s 143(3) 28.03.2016 28.11.2016 5 Disallowance u/s 14A in Rs. 9,33,104 19,06,383 6 Addition - Notional Interest on advance 26,65,085 given to related party in Rs. 5,95,000 7 Addition - Notional Interest on advance 8,26,981 8,04,000 given for land in Rs. 8 Disallowance on account of Cost of 15,16,966 Land in Rs. 9 Disallowance u/s 80G - Donation Claim 1,71,000 in Rs. 10 Disallowance of Site Development in Rs. 6,90,620 13,47,839 11 Addition on account of Capital 78,82,000 Expenditure in Site Development Expenses in Rs. 12 Addition on account of Trade Payable in 1,49,349 Rs. 13 Addition on account Excess 9,01,000 9,37,897 Depreciation in Rs. 14 Addition u/s 68 on account of 10,92,603 Unsecured Loans in Rs. 15 Addition on account of Late Payment of 1,13,381 1,47,612 EPF in Rs. 16 Addition on account of cancellation of 1,56,75,889 2,40,40,604 booking in Rs. 17 Addition on account of Interest on 18,29,853 Service Tax and VAT in Rs. 18 Income Assessed in RS. 16,86,29,640 4,83,64,380 19 Assessed Bokk Profit u/s 115JB 13,25,60,818
In case of both the years the assessee preferred appeals before CIT(A), the learned CIT(A) partly allowed the assessee's claim by restricting certain disallowances, deleting others, and confirming the balance.
Both the Revenue and the assessee are in appeal before us for A.Y. 2013-14, whereas for A.Y. 2014-15 only the assessee is in appeal. The grounds of appeal, as raised by the respective parties, are reproduced below for the sake of completeness: In Assessee's Appeal ITA No. 477/Ahd/2023
The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance u/s 14A of Rs.7,81,819/-.
The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance u/s 36(i)(ii) of Rs.26,65,085/- despite the fact that the advances were given for business purposes only.
The Learned Commissioner of Income Tax (Appeals) erred in confirming addition of Rs.8,26,981/- being proportionate interest disallowing on account of advances given for business purposes.
The Learned Commissioner of Income Tax (Appeals) erred in confirming addition of Rs.15,16,966/- being expenditure incurred towards purchase of land which is supported by cheques etc.
The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.6,90,620/- on adhoc out of site development expenses.
The Learned Commissioner of Income Tax (Appeals) erred in confirming addition of Rs.7,88,200/- out of soil filling expenses on adhoc basis on the premises that proper documentation were not available.
The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.1,49,349/- u/s 68 of the Act.
The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of 49,48,271/- out of cancelled booking.
The appellant company craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal. In Assessee's Appeal ITA No. 478/Ahd/2023
The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance u/s 14A of Rs.16,21,240/-.
The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance u/s 36(i)(iii) of Rs.5,95,000/- despite the fact that the advances were given for business purposes only.
The Learned Commissioner of Income Tax (Appeals) erred in confirming addition of Rs.8,04,000/- being notional interest advances or rent given for business purposes.
The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of site expenses at 10% on adhoc basis of Rs.13,45,838/-.
The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition out of advances towards cancelled booking amounting to Rs. 1,29,77,163/-
The appellant company craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal. In Revenue's Appeal ITA No. 529/Ahd/2023
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition to Rs.7,81,819/- as against addition of Rs.9,33,104/- made by the AO u/s 14A r.w. rule 8D of the IT. Rule excluding the interest related to car loan/Vehicle loan etc. for calculation of disallowance under rule 8D of the I.T. Rule despite the fact that in the rule it is provided that total value of expenditure by way of interest not directly attributable to any particular income or receipts.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.9,33,104/- made by the AO u/s 14A r.w. rule 8D of the I.T. Rule while computing book profit u/s 115JB of the IT. Act despite there being no specific provision enabling such an interpretation.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition to Rs.15,00,000/- as against addition of Rs.15,16,966/- made by the AO on account of difference in cost of land relying upon the receipt of revenue dehorse provisions of Rule 46A of IT. Rules and despite the fact that the assessee has failed to prove that the claim of expenses of Rs.16,966/- was not included in the cost of land of Rs.2,14,92,990/- shown in the ledger account adduced during the course of assessment proceedings.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,71,000/- made by the AO on account of disallowances of claim u/s 80GGB of the IT. Act despite the fact that during the course of assessment proceedings or during the course of appellate proceedings the assessee has not submitted receipt of the political party.
In addition to the ground No.4, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,71,000/- made by the AO on account of disallowances of claim u/s 80GGB of the I.T. Act on the basis of fresh and additional evidences in the form of bank statements submitted by the assessee, dehorse provisions of Rule 46A of I.T. Rules and without calling remand report.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition of Rs.78,82,000/- made by the AO on account of site development expenses (soil filling expenses) to Rs.7,88,200/- holding that the expenditure is not capital in nature but revenue in nature and observing that estimated 10% of total site expenses are not verifiable despite the fact that the land development expenses are capital in nature or should be included in the value of WIP and at the time of sale of property only such claim could be allowed to the assessee.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.9,01,100/- made by the AO on account of claim of depreciation observing that the cars were purchased by the Company by arranging loan from Bank and the beneficial owner of the cars is the company despite the fact that the cars in question were registered in the name of the directors of the assessee Company and further no evidence of there being used for the purpose of business of the assessee could be verifiable.
In addition to the ground No.7, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.9,01,100/- made by the AO on account of claim of excess depreciation relying upon the additional evidences/documents which were not submitted by the assessee before the AO dehorse provisions of Rule 46A of I.T. Rules and without calling remand report.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.10,00,000/- made by the AO on account of unexplained unsecured loan and Rs.92,603/- on account of claim of interest on such loan despite the facts that the assessee has not submitted any details during the course of the assessment proceedings and the CIT(A) has decided the issue on the basis of additional evidences dehorse provisions of Rule 46A of I.T. Rules and without calling remand report.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition to Rs.49,48,271/- as against addition of Rs.1,56,75,889/- made by the AO u/s 68 of the I.T. Act as credited in the books on account of cancellation of bookings despite the facts that the assessee has failed to prove Identity and credit worthiness of the so called depositors and genuineness of the transactions during the course of assessment proceedings.
In addition to ground no. 10, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition to Rs.49,48,271/- as against addition of Rs.1,56,75,889/- made by the AO u/s 68 of the I.T. Act as credited in the books on account of cancellation of bookings on the basis of additional evidences submitted by the assessee, dehorse provisions of Rule 46A of I.T.Rules and without calling remand report.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.18,29,853/-made by the AO on account of interest on delayed payment of service tax/VAT despite the facts that the interest on late deposit of service_tax/VAT being penal in nature is not an allowable expense as per section 37 of the IT. Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have upheld the order of the Assessing Officer.
It is, therefore, prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
The appellant craves to add, amend, alter, substitute, modify the above ground of appeal, raise any new ground of appeal, if necessary, either before or during the course of the hearing of the appeal on the basis of submissions to be made.
We shall now proceed to deal with each of the issues arising in these appeals, one by one, taking up the relevant grounds of both the assessee and the Revenue together wherever the subject matter is common. Issue 1 - Disallowance u/s 14A r.w. Rule 8D Α.Υ. 2013-14
The assessee company had claimed exempt income aggregating to Rs. 38,73,426/- as share of profit from partnership firms and Rs.45,012/- as dividend. During the assessment proceedings, the Assessing Officer observed that the assessee had made substantial investments in non-current investments of Rs.3,46,70,624/- and current investments of Rs.1,02,321/- as on 31.03.2013. A specific query was raised vide notice under section 142(1) dated 12.06.2015 as to why disallowance under section 14A read with Rule 8D should not be made, considering the nature of investments and exempt income earned therefrom. In response, the assessee submitted details of non-current investments and ledger accounts but did not furnish specific details of current investments or evidence demonstrating that such investments were made entirely out of its own funds. From the balance sheet, the AO noted that while the assessee had own funds in the form of share capital, reserves and surplus, it also had outstanding borrowings on which interest was paid. The assessee did not establish any nexus between its own funds and the investments generating exempt income. The AO held that, in such circumstances, it was beyond doubt that investments were made, at least in part, from interest-bearing borrowed funds.
The AO also observed that the assessee was not in the business of making investments, and therefore certain indirect expenditure, such as administrative and financial expenses, was necessarily incurred in relation to earning exempt income. Relying on the provisions of section 14A(2) and the prescribed method under Rule 8D of the Income-tax Rules, 1962, the AO computed the disallowance as follows: Rule 8D(2)(i): Direct expenditure relating to exempt income – Nil. Rule 8D(2)(ii): Interest expenditure not directly attributable to any particular income or receipt – Rs.7,59,826/- Rule 8D(2)(iii): 0.5% of average value of investments – Rs.1,73,278/-.
The total disallowance thus worked out to Rs.9,33,104/-, which was added to the total income. The AO further made a similar adjustment to the book profits computed under section 115JB.
Before the CIT(A), the assessee submitted that certain interest expenses considered by the AO under Rule 8D(2)(ii) pertained to car loans, late payment of TDS, and late payment of taxes aggregating to Rs. 34,56,637/-, which were directly related to specific assets or statutory liabilities and had no nexus with earning exempt income. The CIT(A) accepted this contention and directed that such interest should be excluded from the computation under Rule 8D(2)(ii). On re-computation, the interest disallowance under Rule 8D(2)(ii) stood reduced from Rs.7,59,826/- to Rs. 6,08,541/-, while the disallowance under Rule 8D(2)(iii) of Rs.1,73,278/- was confirmed. Accordingly, the total disallowance sustained was Rs. 7,81,819/-.
On the issue of adjustment to book profit under section 115JB, the CIT(A) followed the Special Bench decision in ACIT v. Vireet Investment (P.) Ltd. [165 ITD 27 (Del) (SB)] and held that disallowance computed under section 14A could not be added while computing book profit under section 115JB, since there is no specific provision in the Act permitting such an adjustment. The addition under section 115JB was therefore deleted by the CIT(A). Α.Υ. 2014-15
The assessee earned exempt income of Rs.49,98,203/- as share of profit from partnership firms during the year and had claimed interest and finance cost of Rs.2,78,49,714/- in the profit and loss account. The AO noted that the assessee had investments in the capital of partnership firms aggregating to Rs.5,02,83,769/- as on 31.03.2014 (previous year: Rs. 3,41,07,274/-), in addition to other investments generating exempt income. A show cause notice was issued requiring the assessee to explain why disallowance under section 14A read with Rule 8D should not be made. In reply, the assessee submitted a breakup of interest expenses and claimed that investments yielding exempt income were made from its own funds, thus attracting no disallowance under section 14A.
The AO found that the assessee had not furnished evidence establishing a one-to-one nexus between own funds and the investments in question. The AO reiterated that the assessee was not in the investment business and that expenditure, both direct and indirect, was necessarily incurred to earn exempt income. Applying Rule 8D, the AO computed the disallowance as under: Rule 8D(2)(i): Direct expenditure – Nil. Rule 8D(2)(ii): Interest expenditure apportioned – Rs.1,69,259/- Rule 8D(2)(iii): 0.5% of average value of investments – Rs.2,13,794/-.
The total disallowance of Rs.1,90,06,383/- was added to the total income.
The CIT(A) again accepted the assessee's argument that certain interest costs relating to car loans and statutory payments should be excluded from the Rule 8D(2)(ii) computation. After excluding these, the proportionate interest disallowance under Rule 8D(2)(ii) was recomputed at Rs.14,07,446/-. Together with the 0.5% disallowance under Rule 8D(2)(iii) of Rs.2,13,794/-, the total disallowance sustained was Rs.16,21,240/-, resulting in partial relief to the assessee.
During the course of hearing, the learned Authorised Representative (AR) for the assessee submitted that the assessee had earned share of profit from its partnership firm, Shreenath Incorporated, amounting to Rs. 38,73,426/- for A.Y. 2013-14 and Rs.47,51,469/- for A.Y. 2014–15. It was contended that the investments in the said firm and other firms were made entirely out of the assessee's own funds, which were substantially higher than the amounts invested, and hence no disallowance under section 14A of the Act was warranted.
The AR placed reliance on following judicial precedents: South Indian Bank Ltd. Vs. CIT - [2022] 130 taxmann.com 178] (SC) CIT Vs. UTI Bank Ltd. - [2022] 142 taxmann.com 136 (SC) [2024] 166 taxmann.com 348 (ITAT Ahmedabad)
The AR also drew our attention to the relevant financial statements forming part of the paper book and furnished a summary of key figures as under: Particulars Α.Υ. 2013-14 (Rs.) Α.Υ. 2014-15 (Rs.) Investment in Shreenath Incorporated (Partnership firm) 61,50,284/- 1,74,01,754/- Own Funds: a. Share Capital 2,57,14,200/- 2,57,14,200/- b. Reserves & Surplus 16,94,95,635/- 18,19,68,995/- Total Own Funds (a + b) 19,52,09,835/- 20,76,83,195/-
It was thus urged that, in view of the availability of substantial own funds and the binding judicial precedents, the disallowance sustained by the CIT(A) under section 14A ought to be deleted in full.
With regard to the disallowance of administrative expenses under Rule 8D(2)(iii), the Bench specifically asked the learned AR whether the judicial precedents relied upon also cover such disallowance. In reply, the learned AR submitted that the ratio of the decisions of the Hon'ble Supreme Court, when applied in the present factual matrix where sufficient own funds are available, would equally negate any disallowance under Rule 8D(2)(iii), as no part of the administrative expenditure can be said to have been incurred for earning the exempt income in such circumstances.
The learned Departmental Representative (DR), on the other hand, supported the order of the Assessing Officer and submitted that the assessee had failed to furnish the requisite details of its own funds before the AO as well as before the CIT(A), and hence the authorities below were justified in applying Rule 8D.
We have considered the rival submissions, perused the orders of the Assessing Officer and the CIT(A), and examined the material placed on record including the financial statements for the relevant assessment years. The assessee has earned exempt income in the form of share of profit from the partnership firm Shreenath Incorporated amounting to Rs.38,73,426/- in A.Y. 2013-14 and Rs.47,51,469/- in A.Y. 2014–15, and also dividend income. The investments in the partnership firm stood at Rs.61,50,284/- in A.Y. 2013-14 and Rs.1,74,01,754/- in A.Y. 2014–15. 22. The financial statements show that the assessee's own funds (share capital plus reserves and surplus) were Rs.19,52,09,835/- in A.Y. 2013–14 and Rs.20,76,83,195/- in A.Y. 2014–15, which are substantially higher than the investments yielding exempt income. Applying the ratio laid down by the Hon'ble Supreme Court in South Indian Bank Ltd. v. CIT [2022] 130 taxmann.com 178 and CIT v. UTI Bank Ltd. [2022] 142 taxmann.com 136, as well as the coordinate bench decision in Axis Bank Ltd. v. ACIT [2024] 166 taxmann.com 348 (Ahmedabad - Trib.), when interest-free own funds exceed the value of investments yielding exempt income, it is to be presumed that the investments are made out of such own funds, and no disallowance of interest under Rule 8D(2)(ii) is warranted.
We have given our thoughtful consideration to the rival submissions and perused the material available on record. It is an admitted position that in the case of Axis Bank Ltd. (supra), as referred to by the assessee, the ground relating to disallowance under Rule 8D(2)(iii) was not pressed before the Tribunal and, therefore, was not adjudicated on merits. Consequently, the said decision cannot be construed as laying down any proposition on the applicability or otherwise of Rule 8D(2)(iii).
We also note that none of the judicial precedents relied upon by the assessee specifically address the issue of disallowance relatable to administrative expenses under Rule 8D(2)(iii). The ratio of such decisions primarily concerns the disallowance of interest expenditure under Rule 8D(2)(ii), particularly in the context of the assessee having sufficient own funds to cover the investments. Those pronouncements do not contain any categorical finding to the effect that administrative expenditure is outside the ambit of section 14A read with Rule 8D(2)(iii) in cases where exempt income is earned.
In the present case, the assessee has not made any suo-motu disallowance in respect of administrative expenditure incurred in relation to the earning of exempt income. The onus was on the assessee to demonstrate, with cogent evidence, that no part of its administrative set-up, including personnel, infrastructure, and other common resources, was deployed in the activity of making, holding, or managing investments that yielded exempt income. No such evidence has been brought on record. In the absence of any segregation or allocation of expenditure, it cannot be accepted that the investment activity, which admittedly yielded exempt income, either exempt share of profit or dividends, during the year, did not entail the use of any element of administrative apparatus of the assessee.
The statutory prescription contained in Rule 8D(2)(iii) provides for determination of administrative expenditure in such cases on a presumptive basis, being 0.5% of the average value of investments, once it is found that the assessee has incurred expenditure in relation to earning exempt income and no reliable mechanism is furnished by the assessee for quantifying such expenditure. In view of the factual matrix of the case and the failure of the assessee to rebut the applicability of the said provision with credible evidence, we hold that the disallowance made by the Assessing Officer under Rule 8D(2)(iii) is in accordance with law.
In view of the above, and following the settled legal position on interest disallowance, we direct deletion of the disallowance made under Rule 8D(2)(ii) in all three appeals. However, the disallowance made under Rule 8D(2)(iii) towards administrative expenses is upheld.
As regards the Revenue's ground challenging the deletion of disallowance under section 14A while computing book profits under section 115JB, we find that there are several judicial precedents holding that section 115JB is a complete code in itself and the computation mechanism therein can be altered only to the extent expressly provided in the Explanation to the section. Since there is no specific clause in the Explanation to section 115JB providing for addition of expenditure relatable to exempt income, no such addition is warranted. We, therefore, concur with the finding of the CIT(A) in deleting the adjustment made by the Assessing Officer.
The ground on this issue is thus partly allowed in the assessee's appeals and dismissed in the Revenue's appeal to the extent indicated above. Issue 2 - Charging of Notional interest on advances given to related parties / disallowance under section 36(1)(iii)
For A.Y. 2013–14, the Assessing Officer noted from the books of account and details furnished that the assessee had advanced sums without charging interest to the following parties: (i) Godiji Realty Pvt. Ltd. – Rs. 2,45,00,000/-, (ii) Venugopal Infrastructure Rs.35,00,000/-, (iii) Pawan Infraspace Pvt. Ltd. – Rs.85,55,000/-, and (iv) Pawan Infrahome Pvt. Ltd. – Rs.1,08,13,407/-. It was further observed that the assessee was simultaneously paying interest on borrowed funds, and no material was produced to establish that the said advances were given for the purposes of the assessee's business. Despite lapse of over three years from the date of advancing these sums, no explanation or evidence was furnished to substantiate the business expediency or commercial necessity of such advances. The Assessing Officer, therefore, computed proportionate interest at the rate of 12% on the interest-free advances, working out the disallowance at Rs.26,65,085/- and added the same to the total income.
In appellate proceedings, the assessee submitted that the concerns to whom advances were made were engaged in real estate and construction- related activities, and the advances represented business transactions. However, in respect of Godiji Realty Pvt. Ltd. and Venugopal Infrastructure, no documentation was produced to evidence the nature of the transactions or the business compulsion for advancing funds. Regarding Pawan Infraspace Pvt. Ltd. and Pawan Infrahome Pvt. Ltd., it was claimed that the advances were booking advances for purchase of units and that the recipients had shown the amounts as income in their books under the project completion method. The learned CIT(A) observed that no corroborative evidence, such as agreements, ledger narrations identifying projects, or confirmations from the recipients, was placed on record to substantiate this plea. In the absence of any credible evidence to establish the business nexus of the advances, the learned CIT(A) held that the Assessing Officer was justified in disallowing proportionate interest and confirmed the addition of Rs.26,65,085/-.
For A.Y. 2014–15, the Assessing Officer observed that the assessee had given interest-free advances of Rs.35,00,000/- to Venugopal Infrastructure for the entire year and Rs.25,00,000/- to Smt. Induben R. Patel for a period of 7 months and 21 days. The assessee had claimed interest expenditure of Rs.2,78,49,714/- on borrowed funds during the year. It was noted that except for ledger accounts, the assessee had not furnished any other material to substantiate the commercial expediency of advancing these sums. The Assessing Officer held that once funds are mixed in a common pool, their source cannot be earmarked and, therefore, it is to be presumed that interest-bearing funds have been utilised for making such advances, unless proved otherwise. Reliance was placed on the judgment of the Hon'ble Punjab & Haryana High Court in CIT v. Abhishek Industries Ltd. and the decision of the Delhi ITAT in Punjab Stainless Steel Industries v. ACIT [128 ITD 12 (Delhi)] to hold that even the availability of own funds does not absolve the assessee from establishing business necessity. In the absence of any explanation or supporting evidence, proportionate interest at 12% was computed, resulting in disallowance of Rs.5,95,000/-, which was added to the total income.
Before the learned CIT(A), the assessee reiterated that the advances were given in the normal course of business. However, no documentary evidence was produced to establish commercial expediency or business necessity in relation to Venugopal Infrastructure or Smt. Induben R. Patel. The learned CIT(A), therefore, held that the assessee had failed to rebut the presumption that interest-bearing funds had been diverted for non-business purposes and confirmed the disallowance of Rs.5,95,000/-.
During the course of hearing, for both the years the learned AR of the assessee submitted that the assessee had sufficient own funds to make the impugned advances and, therefore, no disallowance of interest under section 36(1)(iii) was warranted. In respect of two non-related parties, namely, (i) Godiji Realty Pvt. Ltd. – Rs.2,45,00,000/-, and (ii) Venugopal Infrastructure – Rs.35,00,000/-, it was explained that the amount advanced to Godiji Realty Pvt. Ltd. had been subsequently returned, whereas in the case of Venugopal Infrastructure, the deal was cancelled as the assessee could not advance further funds, and the amount already given was not returned by the party. The AR submitted that both transactions represented business decisions taken in the normal course of business. As regards the advances to (iii) Pawan Infraspace Pvt. Ltd. Rs.85,55,000/-, and (iv) Pawan Infrahome Pvt. Ltd. Rs.1,08,13,407/-, it was stated that these concerns were subsidiary or associate concerns of the assessee and, therefore, no interest was charged on the amounts advanced. In support of the contention, reliance was placed on the decision of the Co-ordinate Bench in Assistant Commissioner of Income-tax v. Jewel Consumer Care (P.) Ltd. [2023] 157 taxmann.com 643, wherein it was held that where an assessee-company had sufficient own funds for giving interest-free loans or advances to its associate concerns, no disallowance of interest under section 36(1)(iii) could be made.
The learned DR, on the other hand, supported the order of lower authorities.
We have carefully considered the rival submissions and perused the material placed on record. The factual matrix for each year has already been discussed in the earlier part of this order. The core issue is whether the interest-free advances made by the assessee to certain parties were for purposes of business and, if not, whether the interest claimed on borrowed funds to that extent is liable to be disallowed under section 36(1)(iii).
It is an undisputed position that the assessee had substantial own funds in the form of share capital and reserves far in excess of the aggregate of the impugned advances. In so far as the advances to Pawan Infraspace Pvt. Ltd. and Pawan Infrahome Pvt. Ltd. are concerned, these are admittedly subsidiary/associate concerns of the assessee. In view of the judicial ratio laid down in ACIT v. Jewel Consumer Care (P.) Ltd. [2023] 157 taxmann.com 643 (ITAT – Ahmedabad), where it was held that no disallowance under section 36(1)(iii) is warranted if sufficient own funds are available to cover interest-free advances to associate concerns, we hold that the disallowance in respect of these two parties is not sustainable.
As regards Godiji Realty Pvt. Ltd., we note from the submissions that the advance of Rs.2,45,00,000/- given during A.Y. 2013-14 was subsequently received back by the assessee. Once the amount is returned and there is no continuing diversion of borrowed funds, no proportionate interest disallowance is warranted. We, therefore, direct deletion of the disallowance to that extent.
However, in so far as the interest-free advances made to Venugopal Infrastructure (Rs.35,00,000/- for A.Ys.2013-14 and 2014-15) and Smt. Induben R. Patel (Rs.25,00,000/- for A.Y. 2014-15) are concerned, we find that the assessee has not discharged the initial onus cast upon it to establish the business nexus of such advances. It is trite law, as held by the Hon'ble Supreme Court in S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC), that interest on borrowed capital is allowable under section 36(1)(iii) if the assessee is able to demonstrate that the funds have been advanced to a sister concern or a third party as a measure of commercial expediency. The expression "commercial expediency" has been judicially interpreted to encompass such advances as are motivated by considerations of business advantage, even if no direct commercial return is shown in the same year.
In the present case, apart from a bald assertion that the advances were made in the normal course of business, the assessee has not furnished any documentary evidence such as agreements, memoranda of understanding, board resolutions, correspondence, confirmations from the recipients, or any contemporaneous record to substantiate the claim that these sums were advanced wholly and exclusively for the purposes of business. The mere production of ledger accounts, without any narrative or supporting documentation, is insufficient to establish the nexus required under section 36(1)(iii).
In the case of Jewel Consumer Care (P.) Ltd. [2023] 157 taxmann.com 643 (Ahmedabad - Trib.), the Co-ordinate Bench deleted a disallowance under section 36(1)(iii) because (i) the interest-free loans/advances were made to an associate concern, (ii) the assessee had demonstrated sufficient own interest-free funds to cover such advances, and (iii) the advances were supported by evidence of commercial expediency - specifically, that the associate concern was an ancillary unit engaged in job work for the assessee and the funding decision was in furtherance of the assessee's business interests.
The present case is distinguishable on facts. For Venugopal Infrastructure and Smt. Induben R. Patel, the assessee has neither shown that these entities were associate or subsidiary concerns, nor furnished any credible material to establish that the advances were given in the course of business or out of commercial necessity. There is no evidence akin to that in Jewel Consumer Care-such as agreements for business arrangements, confirmations, or correspondence-linking the advances to the assessee's operational requirements. Thus, unlike in Jewel Consumer Care, the essential factual foundation to claim commercial expediency is absent here, and the presumption of diversion of interest-bearing funds for non-business purposes remains unrebutted.
It is well settled by the Hon'ble Punjab & Haryana High Court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H) that once it is demonstrated that the assessee has incurred interest expenditure on borrowed funds and has, during the same period, advanced funds interest- free to other parties without establishing business necessity, a presumption arises that such advances have been made out of borrowed funds. This presumption can be rebutted only by cogent evidence showing that the advances were either made from non-interest-bearing funds or were for purposes of commercial expediency. The Hon'ble Delhi High Court in Punjab Stainless Steel Industries v. ACIT [2011] 324 ITR 396 (Del) has also emphasised that even the availability of sufficient own funds does not, by itself, absolve the assessee from establishing the business purpose of the advances; the element of commercial expediency must be affirmatively proved. In fact, the learned CIT(A) has rightly placed reliance on the ratio laid down by these judicial precedents.
In the instant case, the assessee has not placed on record any material to rebut the presumption arising against it. The explanation that in the case of Venugopal Infrastructure, the amount was not returned by the recipient on account of the assessee's inability to advance further funds, is merely an ex post facto justification and does not establish that the initial advance was made for business purposes. Similarly, no evidence has been brought to show that the advance to Smt. Induben R. Patel had any nexus with the assessee's real estate or construction activities or that it was otherwise dictated by commercial expediency.
In the absence of any credible or contemporaneous evidence to substantiate the business purpose of these advances and applying the ratio laid down in Abhishek Industries Ltd. (supra) and Punjab Stainless Steel Industries (supra), we are unable to accept the assessee's contention. The burden of proof under section 36(1)(iii) squarely rests upon the assessee, and in the facts of the present case, that burden has not been discharged. Accordingly, we find no infirmity in the orders of the lower authorities in sustaining the disallowance of proportionate interest in respect of the above parties for the relevant years.
In view of the foregoing discussion, we partly allow the assessee's grounds for both the assessment years. The disallowance under section 36(1)(iii) in respect of advances to (i) Pawan Infraspace Pvt. Ltd. and (ii) Pawan Infrahome Pvt. Ltd. is deleted in full, as these were advances to associate concerns duly covered by sufficient own interest-free funds. The disallowance in respect of the advance to Godiji Realty Pvt. Ltd. (A.Y. 2013– 14) is also deleted, as the amount was subsequently received back, negating any continuing diversion of borrowed funds.
However, in respect of advances to Venugopal Infrastructure (Rs. 35,00,000/- for A.Ys.2013-14 and 2014-15) and Smt. Induben R. Patel (Rs. 25,00,000/- for A.Y. 2014-15), we find that the assessee has merely relied on judicial precedents without producing any contemporaneous documentary evidence to establish that these advances were made out of commercial expediency or were wholly and exclusively for the purposes of business. Reliance on case law, without substantiating the factual foundation through agreements, correspondence, confirmations, or other primary evidence, cannot by itself discharge the onus under section 36(1)(iii).
We, therefore, restore this limited aspect to the file of the Assessing Officer, with a direction to grant the assessee one final opportunity to furnish any cogent evidence to substantiate the business nexus of these advances. The Assessing Officer shall examine such evidence, if filed, and recompute the disallowance under section 36(1)(iii) in accordance with law and in line with our observations above. In case the assessee fails to produce credible evidence, the disallowance as sustained by the CIT(A) shall stand confirmed. Issue – 3 – Addition on account of Notional interest on advances/rent
For A.Y. 2013–14, the Assessing Officer noted from the financial statements that the assessee had shown advances for land aggregating to Rs. 67,00,000/- as on 31.03.2013, comprising Rs.12,00,000/- to Shri Shailesh S. Parikh for land at Navagam, Ankleshwar, and Rs.55,00,000/- to M/s Satyam Associates for land at Bapod, Vadodara. The assessee was called upon to furnish documentary evidence such as registered sale deeds, ledger accounts and explanations regarding the nature of these advances and whether they were connected with purchase of land, as well as to explain why proportionate interest should not be disallowed following the disallowance made in the earlier year in respect of similar transactions. In the case of Shri Shailesh S. Parikh, the AO observed from the ledger that Rs. 15,00,000/- was the opening balance as on 01.04.2012, out of which Rs. 3,00,000/- was repaid on 19.11.2012, leaving a closing balance of Rs. 12,00,000/-. In respect of M/s Satyam Associates, the assessee relied upon a notarized Banakhat dated 01.06.2010 showing a token payment of Rs. 50,00,000/-. The AO also recorded contradictions in the assessee's stand, at one stage claiming that Satyam Associates had executed registered deeds with the assessee and at another stage claiming that it was a tripartite arrangement with M/s Rajni Builders Pvt. Ltd. as confirming party. The AO held that interest-bearing funds had been diverted for non-business purposes and computed proportionate interest @ 12% on the amounts advanced, working out the disallowance at Rs.1,66,981/- in the case of Shri Shailesh S. Parikh and Rs.6,60,000/- in the case of M/s Satyam Associates, aggregating to Rs.8,26,981/-, which was added to the total income.
In appellate proceedings, the assessee submitted that the advances were for business purposes in connection with purchase of land, and hence the disallowance was unjustified. In the case of M/s Satyam Associates, a letter of confirmation was submitted along with copy of agreement, and it was stated that the original agreement to sell could not be submitted as it was not traceable. It was contended that rejection of such confirmation on presumptions was not justified. Reliance was placed on the decision of the Delhi Bench of the Tribunal in Ashok Kumar Aggarwal v. ITO [38 TTJ 189] for the proposition that additions cannot be made on the basis of suspicion, conjectures or surmises. It was also argued that the AO had not established that borrowed funds were diverted for non-business purposes and had not conducted any independent inquiry. The learned CIT(A) observed that except for a copy of the ledger in the case of Shri Shailesh S. Parikh, no agreement, bank statement or corroborative evidence was filed. As regards M/s Satyam Associates, the notarized Banakhat was found defective and lacking probative value. No evidence of actual payment by cheque was filed, and the Banakhat was unsigned on several pages and bore no attesting witness signatures. The learned CIT(A) held that the assessee had failed to substantiate the business purpose of these advances and confirmed the proportionate interest disallowance of Rs.8,26,981/-.
For A.Y. 2014-15, the AO noted similar advances outstanding as on 31.03.2014, namely Rs.55,00,000/- to M/s Satyam Associates (opening balance carried forward) and Rs.12,00,000/- to Shri Shailesh S. Parikh. It was recorded that the assessee had not submitted ledger accounts, repayment details or proof of land purchase, and no evidence of payment was furnished. Following the earlier year's findings, proportionate interest @ 12% on Rs.67,00,000/- amounting to Rs.8,04,000/- was disallowed and added to the total income. In appellate proceedings, the assessee reiterated submissions similar to those made in A.Y. 2013-14, relying upon the alleged agreement to sell and contending that the advances were for business purposes and that the AO had proceeded merely on suspicion. The learned CIT(A) followed the reasoning given in A.Y. 2013–14, noted the absence of credible evidence and defects in the Banakhat, and concluded that the assessee had failed to establish the business nexus of these advances. The interest disallowance of Rs.8,04,000/- was accordingly confirmed and the grounds of appeal were dismissed.
The learned DR, on the other hand, supported the order of lower authorities.
We have carefully considered the rival submissions and gone through the orders of the lower authorities as well as the material placed on record. The undisputed facts for both the assessment years are that the assessee has advanced sums of Rs.12,00,000/- to Shri Shailesh S. Parikh and Rs. 55,00,000/- to M/s Satyam Associates, which have been treated by the assessee as advances for land. The Assessing Officer has disallowed proportionate interest thereon, amounting to Rs.8,26,981/- for A.Y. 2013-14 and Rs.8,04,000/- for A.Y. 2014-15, holding that the assessee failed to establish the business nexus of such advances. The learned CIT(A) has confirmed the disallowances essentially on the ground that the supporting agreements and other evidences were either defective or absent, and no proof of payment or business necessity was furnished.
We find that neither the Assessing Officer nor the learned CIT(A) has examined an important aspect, namely, the subsequent fate of these advances. There is no finding in the impugned orders as to whether these amounts were repaid, written off, or otherwise adjusted in the accounts in later years. Considering the nature of the assessee's business, it is possible that such advances could have been made in the ordinary course of business with the intention of acquiring land for projects, and that the business purpose may be discernible from subsequent conduct. If the purpose for which the amounts were advanced was not achieved, the manner in which these advances were treated in subsequent years assumes significance. In our considered view, in the case of advances claimed to be for business purposes, the substance of the transaction should be gathered not merely from the contemporaneous documentation but also from the assessee's later conduct and accounting treatment. If the assessee continued to show these amounts as advances in subsequent years, or if they were recovered, written back, or otherwise dealt with, such events would be relevant for determining whether the original advance had a nexus with the business.
In these circumstances, we are of the view that the matter requires verification. We, therefore, set aside the orders of the lower authorities on this issue for both the years and restore the matter to the file of the Assessing Officer with the direction to ascertain from the subsequent years' records the status of the advances in question, verify whether the amounts were recovered, written off, or otherwise adjusted, and examine the nature of the transactions in light of the assessee's business operations. The assessee shall be afforded reasonable opportunity to produce all relevant evidence, including subsequent years' accounts and any supporting documents to establish the business purpose of the advances.
If on such verification it is found that the advances were in fact recovered, adjusted against business transactions, or otherwise demonstrated to have been made for the purposes of the assessee's business, then the very foundation for the proportionate interest disallowance under section 36(1)(iii) would cease to exist, since there would be no continuing diversion of borrowed funds for non-business purposes. In that event, the disallowances made for the impugned years would not survive and shall be deleted. Conversely, if it is established that the amounts had no business nexus and continued to remain diverted for non- business purposes, the disallowance may be sustained in accordance with law.
Accordingly, the related ground of assessee in case of both the years are allowed for statistical purposes. Issue – 4 Cost of land / purchase of land Rs.15,16,966/- Α.Υ. 2013-14. 58. During the assessment proceedings, vide notice under section 142(1) dated 07.03.2016, the assessee was called upon to produce details with evidence regarding the cost of land of Rs.2,30,09,656/-. In response, the assessee produced only a ledger copy of the cost of land without supporting evidence. Accordingly, vide order sheet entry, the assessee was asked to show cause why the cost of land taken at Rs.2,30,09,956/- should not be disallowed and added to the total income in the absence of proof. In response, the assessee produced evidence in respect of land at Vincenza-51 amounting to Rs.2,14,92,990/-. Consequently, the AO required the assessee, vide order sheet entry dated 15.03.2016, to explain the balance amount of Rs.15,16,966/- for which no evidence was produced. As neither the assessee nor its Authorised Representative could produce any satisfactory details or evidence explaining the credit entry of Rs.15,16,966/- in the books, the AO disallowed the same and added it to the total income. The AO also recorded that despite giving multiple opportunities, the assessee could not substantiate the entry with supporting documents, thereby furnishing inaccurate particulars of income. Penalty proceedings under section 271(1)(c) read with section 274 of the Act were separately initiated on this issue.
In appeal, the assessee contended before the CIT(A) that the amount of Rs.15,16,966/- comprised three elements (i) land expense of Rs. 2,14,92,990/-, (ii) revenue tax of Rs.16,960/-, and (iii) Rs.15,00,000/- paid to Shri Mahesh Karsanbhai to avoid litigation in respect of acquisition of certain land. It was explained that the land in question was acquired in the preceding year and the payment to Shri Mahesh Karsanbhai was in the nature of compensation to prevent him from filing any court case. In support, the assessee produced the receipt for revenue tax and copies of the Talati record regarding land in Village Kalali, Tal. Vadodara. The CIT(A) accepted the evidence relating to the revenue tax payment of Rs.16,966/- and allowed this portion. However, as regards the payment of Rs. 15,00,000/- to Shri Mahesh Karsanbhai, the CIT(A) noted that the assessee had not produced any registered document reflecting the removal of encumbrance or a valid agreement explaining the purpose of payment. Although certain bank statements and hand-written ledgers showing withdrawals in parts were produced, the CIT(A) held that no cogent explanation was offered as to how this payment related to the cost of land. In the absence of documentary proof establishing the nexus of this payment to acquisition of land, the CIT(A) upheld the addition of Rs.15,00,000/- as unexplained expenditure.
In this issue, the assessee is in appeal against the CIT(A)'s confirmation of Rs.15,00,000/- as unexplained expenditure on land purchase, while the Revenue challenges the CIT(A)'s restriction of the AO's addition from Rs.15,16,966/- to Rs.15,00,000/-, alleging violation of Rule 46A and lack of proof for Rs.16,966/-.
During the course of hearing before us, the learned AR for the assessee submitted that the sum of Rs.15,00,000/- represented payments made to settle a legal dispute relating to the purchase of land, and that these payments were not part of the recorded cost of land as per the books. Out of the total amount, Rs.5,00,000/- had been paid in the immediately preceding year, while the balance was paid during the relevant year under appeal. The AR explained this position by referring to the ledger account extracts placed at pages 66-70 of the paper book, which, according to him, clearly recorded the payments along with the names of the payees. It was further submitted that these amounts had been paid by account-payee cheques, and the relevant entries had been traced and tallied with the assessee's bank statements to establish their genuineness. The AR argued that the nature of the payment was compensatory and intended solely to resolve the dispute, thereby enabling the assessee to perfect title over the land and proceed with its intended use for the purposes of its business.
On the other hand, the learned DR relied upon the order of the Assessing Officer, pointing out that despite being specifically asked during the assessment proceedings, the assessee had failed to produce any contemporaneous agreement, settlement deed, or other documentary evidence to substantiate the claim that the payments were made pursuant to a legal dispute.
We have considered the rival submissions and perused the material on record. In land-related transactions, especially where there is a pre- existing dispute regarding ownership, possession, or title, it is not uncommon for parties to enter into settlement arrangements to resolve the matter and enable unhindered use of the property. Such settlements often involve payments to third parties, claimants, or intermediaries, and can be a legitimate business necessity.
However, in the present case, while the assessee has claimed that the payment of Rs.15,00,000/- was made towards settlement of a legal dispute in connection with the land purchase, there is no contemporaneous settlement agreement, confirmation from the counter-party, or other primary document on record evidencing the nature and basis of the settlement. This absence of supporting documentation is unusual, particularly given the significance of the amount and the nature of the claim.
It is also noted that out of the total sum of Rs.15,00,000/-, Rs. 5,00,000/- was paid in the preceding year. Nevertheless, the assessee has debited the entire sum to the profit and loss account in the current year. Therefore, for the purpose of examining the allowability or otherwise of the expenditure, the full amount needs to be considered in the present year.
Further, since the Revenue has specifically raised a ground regarding violation of Rule 46A of the Income-tax Rules, alleging that additional evidence was considered by the CIT(A) without affording the Assessing Officer an opportunity to examine the same, it is appropriate, in the interest of justice, to restore the matter to the file of the Assessing Officer. The Assessing Officer shall verify the genuineness and nature of the impugned expenditure, and the assessee is directed to furnish any legal agreement, settlement deed, or confirmation from the concerned parties in support of its claim. The AO shall decide the issue afresh after giving reasonable opportunity to the assessee to present its case.
Both the Revenue's and the assessee's appeals on this issue are allowed for statistical purposes and the matter is restored to the file of the Assessing Officer for fresh verification in accordance with the above directions after giving the assessee adequate opportunity to produce supporting evidence. Issue 5 - Disallowance of Site development expenses / soil filling expenses
For A.Y. 2013–14, the assessee had claimed total site development expenses of Rs.1,47,88,197/- in its profit and loss account. On verification of the details, the Assessing Officer noticed that out of this amount, expenditure of Rs.78,82,000/- pertained to capital/WIP in nature, as discussed separately. Out of the balance amount of Rs.69,06,197/-, it was observed that a substantial portion of the expenses were paid in cash and supported only by self-made internal vouchers, which were not capable of independent verification. The Assessing Officer held that the genuineness of such expenses could not be established, and further, there existed a possibility of a personal or non-business element being embedded in such claims. Accordingly, on an ad hoc basis, 10% of the balance site development expenses amounting to Rs.6,90,620/- was disallowed and added to the total income. In addition, with respect to soil filling expenses of Rs.78,82,000/-, the Assessing Officer made a separate disallowance treating the same as capital in nature. In first appeal, the learned CIT(A) restricted this disallowance to Rs.7,88,200/- on the ground of lack of supporting documentation, against which the Revenue is in appeal contending that the entire amount of Rs.78,82,000/- should have been disallowed as being capital/WIP in nature.
For A.Y. 2014–15, the assessee claimed site expenses of Rs.60,02,993/- and site development expenses of Rs.74,55,393/-. During the assessment proceedings, the Assessing Officer issued a specific show cause notice seeking ledger accounts and third-party documentary evidences in support of these claims. In response, the assessee furnished certain ledger accounts and sample bills/vouchers. Upon examination, the Assessing Officer found that most of the expenses were paid in cash and supported by self-made vouchers, which were not amenable to independent verification. Relying upon judicial precedents including the decisions of the Hon'ble Allahabad High Court in Sabalgarh Industries Ltd. v. CIT (46 ITR 978), the Hon'ble Gujarat High Court in CIT v. Chandravilas Hotel (164 ITR 102), and the Hon'ble Bombay High Court in Amrit Lal & Co. (108 ITR 719) and Ciba Dyes Ltd. v. CIT (25 ITR 102), the Assessing Officer concluded that the mere production of vouchers was insufficient to discharge the burden of proof under section 37(1) of the Act, particularly when the genuineness of expenditure was in doubt. It was held that the possibility of a personal or non-business element in such expenditure could not be ruled out. Consequently, 10% of the aggregate amount of site and site development expenses, i.e., Rs.13,47,839/-, was disallowed and added to the total income.
For A.Y. 2013–14, the assessee has challenged the ad hoc disallowance of Rs.6,90,620/- made out of site development expenses (Ground No. 5) and Rs.7,88,200/- made out of soil filling expenses (Ground No. 6) on the ground of lack of documentation. The Revenue, on the other hand, has challenged the CIT(A)'s action of restricting the disallowance of site development expenses to Rs.7,88,200/- as against Rs.78,82,000/- made by the AO, contending that such expenses are capital/WIP in nature (Ground No. 6). For A.Y. 2014–15, the assessee is in appeal (Ground No. 4) against the ad hoc disallowance of Rs.13,45,838/- made at 10% out of site expenses. During the course of hearing before us, the learned AR submitted that the disallowance out of site development expenses and soil filling expenses has been made purely on an ad hoc basis, without pointing out any specific defect in the supporting records except for the fact that some of the payments were made in cash. It was contended that the assessee had furnished complete project-wise details of total expenditure of Rs. 1,47,88,197/- for the relevant assessment year, along with ledger accounts, bills, and invoices, which included the claimed site development expenses of Rs.78,82,000/-. The AR argued that the AO had neither disputed the genusineness of the projects nor examined the evidences in detail before resorting to a percentage-based disallowance.
Reliance was placed on the decision of the Co-ordinate Bench in Baba Farid Public Welfare Society v. ITO (Exemptions) [2022] 145 taxmann.com 233 (Amritsar - Trib.) wherein it was held that where the Assessing Officer had made an ad hoc disallowance of 10% of total expenses without specifying any particular lacuna in the evidences, such disallowance was not sustainable in law and deserved to be deleted. The learned DR, on the other hand, relied on the reasoning given by the AO, emphasising that the assessee had made substantial cash payments and that certain vouchers lacked full details, thereby justifying an estimated disallowance. The learned DR further submitted that, in so far as the site development expenditure of Rs.78,82,000/- is concerned, the AO had originally treated it as capital in nature forming part of work-in-progress, whereas the CIT(A) had not adjudicated this specific nature-of-expenditure issue on merits. Instead, the CIT(A) restricted the disallowance merely on an ad hoc basis without determining whether the expenditure was revenue or capital in character. The DR contended that this omission requires the matter to be restored for a categorical finding on the allowability of the expenditure in light of its nature and supporting evidence.
We have considered the rival contentions, the orders of the lower authorities, and the material placed on record. In both assessment years under consideration, the Assessing Officer has made ad hoc disallowances out of site development expenses and soil filling expenses, primarily on the ground that certain payments were made in cash and that complete documentation was not produced in support of all the expenses. The CIT(A) has granted partial relief in A.Y. 2013–14 by restricting the disallowance in part, but retained a portion on an ad hoc basis; for A.Y. 2014–15, the CIT(A) has confirmed a similar ad hoc disallowance at 10%.
During the course of hearing, the learned AR addressed the issue with reference to A.Y. 2013-14 in detail, explaining the nature of the expenses, projectwise expenditure statements, and supporting ledger accounts along with bills and invoices. He relied on the decision of the Co- ordinate Bench in Baba Farid Public Welfare Society v. ITO (Exemptions) [ITA No. 93/Asr/2019, order dated 18.11.2019], where it was held that ad hoc disallowance is not justified in the absence of identification of specific defects or non-genuine expenditure. The AR submitted that the issue for A.Y. 2014–15 is identical and the same reasoning applies.
We note that in the present case, except for general remarks about cash payments and partial non-availability of documents, the Assessing Officer has not identified any specific expenditure as non-genuine or bogus. In line with the precedent relied upon, we hold that the ad hoc disallowances for both years cannot be sustained, and the same are deleted.
As regards the Revenue's contention that the expenditure of Rs.78,82,000/- in A.Y. 2013–14 is capital in nature, we observe that these costs pertain to site development and soil filling, which are integral to the assessee's real estate project. Given the nature of business, all such costs are embedded in the project's work-in-progress until completion and revenue recognition. Since the assessee has recognised work-in-progress, the matching principle ensures that these costs are allocated against future revenue, leaving no scope for their separate treatment as capital expenditure. Moreover, no independent capital asset apart from the project has come into existence from such expenditure.
Accordingly, the ad hoc disallowances sustained by the CIT(A) in both A.Y. 2013–14 and A.Y. 2014–15 are deleted. The Revenue's ground on capitalisation is rejected, with a direction that the expenditure be treated as revenue expenditure accordance with accepted accounting and taxation principles. Thus, the assessee's grounds for both years are allowed and the Revenue's grounds are dismissed. Issue – 6 - Deduction of Rs.1,71,000/-under section 80GGB for the A.Y. 2013-14
Ground No. 4 of the Revenue's appeal relates to the action of the learned CIT(A) in deleting the disallowance of Rs.1,71,000/- claimed by the assessee as deduction under section 80GGB of the Income-tax Act, 1961, in respect of contribution made to a political party. The Assessing Officer had disallowed the claim for the reason that the assessee failed to produce the original receipt from the political party either during the assessment proceedings or before the first appellate authority. The learned CIT(A), however, on the basis of bank statements evidencing payment by cheque to the Bharatiya Janata Party, held the contribution to be duly proved and allowable under section 80GGB, and accordingly directed the Assessing Officer to grant the deduction.
We have considered the grounds raised by the Revenue and perused the orders of the lower authorities. No specific arguments were advanced by either party on this issue. We have given our thoughtful consideration to the matter. Section 80GGB of the Act allows deduction in respect of any sum contributed by an Indian company to any political party, provided such sum is not paid in cash. In the present case, the payment has been made through account payee cheques, as reflected in the bank statement, and the identity of the donee as a registered political party is not in dispute. The provision does not prescribe that the claim must necessarily be supported by the original receipt from the political party if other credible primary evidence is available to establish the payment and the mode thereof. The bank statement placed on record clearly demonstrates the outflow of funds from the assessee's account in favour of the political party, and the Revenue has not brought any material to controvert this factual position. In these circumstances, we find no infirmity in the conclusion of the learned CIT(A) that the assessee is entitled to deduction of Rs.1,71,000/- under section 80GGB. We, therefore, uphold the impugned order on this issue, and the ground of appeal raised by the Revenue is dismissed. Issue – 7 – Diallowance of Depreciation on Motor Cars amounting to Rs. 9,00,100/- for A.Y. 2013-14
Ground Nos.7 and 8 of the Revenue's appeal relate to the deletion by the learned CIT(A) of the addition of Rs.9,01,100/- made by the Assessing Officer on account of claim of depreciation on motor cars. The Assessing Officer had disallowed the claim holding that the motor cars were registered in the names of the directors of the assessee company, that no evidence was furnished to establish their use for the purposes of the assessee's business, and therefore the conditions of section 32 of the Act, were not fulfilled. In Ground No. 8, the Revenue has further assailed the impugned order on the ground that the learned CIT(A) deleted the addition by relying upon additional evidence in the form of documents and explanations, which were not filed before the Assessing Officer, without affording an opportunity to the Assessing Officer for examination in terms of Rule 46A of the Income-tax Rules, 1962. 79. We note that before the learned CIT(A), the assessee submitted that although the vehicles in question were registered in the individual names of the company's directors, they were purchased for and used in the business of the company. The purchase consideration for the vehicles was financed through loans obtained from banks in the name of the assessee-company, which were duly recorded in its books of account. The vehicles themselves were reflected as assets in the company's balance sheet and the loan liabilities were also recorded therein. The assessee contended that it was the beneficial owner of the vehicles, having domain and control over them, and they were used wholly and exclusively for its business purposes. Reliance was placed on the judgment of the Hon'ble Gujarat High Court in Sayaji Iron & Engineering Co. (253 ITR 749) for the proposition that for the purpose of section 32, registration in the assessee's own name is not mandatory if beneficial ownership and business use are established.
On this issue, the learned AR placed reliance on the findings of the learned CIT(A), whereas the learned DR supported the order of the Assessing Officer and emphasised that the learned CIT(A) had relied upon additional evidence without calling for a remand report from the Assessing Officer, thereby violating the provisions of Rule 46A of the Income-tax Rules, 1962. The short controversy before us, therefore, is twofold first, whether the assessee is entitled to claim depreciation under section 32 on motor cars registered in the names of its directors, and second, whether the learned CIT(A) was justified in admitting and acting upon additional evidence without following the procedure prescribed under Rule 46A.
We have carefully considered the rival submissions, perused the material available on record, and examined the findings of the learned CIT(A) in light of the judicial precedents cited. The issue pertains to the allowability of depreciation of Rs.9,01,100/- on motor cars, which were registered in the names of the company's directors but reflected in the company's balance sheet as its assets, with loan liabilities and instalment payments recorded therein.
The assessee's case, as noted by the learned CIT(A), is that the funds for acquisition of the cars were provided by the company, instalments of the loans were serviced by the company, and the vehicles were used wholly for the purposes of the business. The assessee placed reliance on several judicial authorities to contend that legal registration in the name of the assessee is not a sine qua non for the purpose of claiming depreciation if the assessee is the beneficial owner and the asset is used for business purposes. Reliance was placed on various judicial precedents. The consistent judicial ratio emerging from these authorities is that for the purpose of depreciation, the term "owner" includes a person who has dominion over the asset, bears the risks and rewards of ownership, and uses it for the purposes of business, even if legal title or registration stands in another's name.
The learned CIT(A) also relied upon the decision of the Juri ictional ITAT, Ahmedabad in ITO v. Bajaj Herbals P. Ltd. [2021] 130 taxmann.com 258, wherein it was held that depreciation is allowable on a car registered in the director's name if the funds for purchase are provided by the company, the asset is reflected in the company's balance sheet, and it is used for the company's business. Following the ratio of these judicial precedents, the learned CIT(A) found that the assessee had established beneficial ownership and business use of the vehicles. Necessary documents, including the bank statement showing instalment payments by the company, were adduced and perused. No contrary material was brought on record by the Revenue to rebut these findings.
In view of the above factual matrix and the binding precedents, we find no infirmity in the decision of the learned CIT(A) in directing deletion of the disallowance of Rs.9,01,100/-. We, therefore, uphold the order of the CIT(A) and dismiss the Revenue's grounds. Issue - 8 - Addition on account of Trade Payable of Rs.1,49,349/- in A.Y. 2013-14
The addition of Rs.1,49,349/- has been made by the Assessing Officer under section 68 of the Act on the ground that the assessee failed to substantiate the genuineness of trade payables of Rs.30,646/- in the name of M/s Sujal Advertisers and Rs.1,18,703/- in the name of Shivam Transport. The AO observed that the assessee, during the course of assessment proceedings, accepted that no payment had been made to these parties in the subsequent year and could not furnish any evidence to substantiate the liability. Consequently, the AO concluded that the said liabilities were not genuine and added the same to the total income.
During the course of appellate proceedings before the CIT(A), the assessee explained that the amount of Rs.1,18,703/- payable to Shivam Transport had been written off and credited to the Kasar (discount) account in the subsequent year, and that in respect of Sujal Advertisers, out of the opening balance of Rs.30,646/-, an amount of Rs.20,000/- had been paid and Rs.10,646/- remained outstanding even as on 31.03.2023. The assessee furnished ledger accounts to substantiate these facts. However, the CIT(A) rejected the explanation on the ground that no corresponding bank statements or cheque details had been filed to corroborate the entries and, in the case of Sujal Advertisers, the ledger produced covered an unduly long period from 01.04.2011 to 31.03.2023, casting doubt on its authenticity. The addition was therefore confirmed.
Before us, the learned AR reiterated that the amounts were not unexplained cash credits within the meaning of section 68 but represented trade liabilities arising out of business transactions duly recorded in the books. In the case of Shivam Transport, the liability had been written off and offered to tax in the subsequent year, while in the case of Sujal Advertisers, payment was partly made and the balance continued as an outstanding liability. The AR placed reliance on the ledger accounts of the subsequent years forming part of the paper book to substantiate the claim.
The learned DR, on the other hand, supported the order of the CIT(A), contending that the assessee had failed to substantiate its claims with proper primary evidence such as bank statements or proof of payment, and that the ledger accounts filed at the appellate stage could not be accepted at face value without independent verification.
We have considered the rival submissions, the relevant material placed in the paper book, the orders of the authorities below, and the ledger accounts produced before us. The addition of Rs.1,49,349/- comprises two components, Rs.1,18,703/- in the name of Shivam Transport Co. and Rs. 30,646/- in the name of Sujal Advertisers Pvt. Ltd.
In case of Shivam Transport Co., it is the assessee's case that the liability of Rs.1,18,703/- was written off in the subsequent year and duly offered to tax in F.Y. 2015–16 relevant to A.Y. 2016–17. The ledger account placed on record confirms that the amount was transferred to “Kasar (Discount)" account on 31.03.2016. The Revenue has not disputed this factual position nor brought any material to show that the amount was not so offered to tax. Once the sum has already been taxed in the subsequent year, sustaining the same in the impugned year would lead to double taxation, which is impermissible. We, therefore, direct deletion of this addition.
In case of Sujal Advertisers Pvt. Ltd, the ledger account for the period 01.04.2011 to 31.03.2023 shows a credit balance of Rs.30,646/- brought forward. The assessee claims that most of the payment has been made through banking channels in F.Y. 2014-15, with a small balance of Rs. 10,646/- still outstanding as on 31.03.2023. We note that the ledger contains a credit entry of Rs.2,00,000/- from Pawan Enterprises and a debit of Rs. 20,000/- towards TDS, which are not self-explanatory from the record before us. Since the assessee's claim regarding bank payments and the nature of these entries requires factual verification, we consider it appropriate to remit this issue back to the file of the Assessing Officer. The AO shall verify, from the bank statements and supporting vouchers, whether the payments to Sujal Advertisers were indeed made, and if the balance of Rs.10,646/- continues to remain payable and has not been offered to tax in any other year, the necessary addition may be made to that extent.
The addition of Rs.1,18,703/- in respect of Shivam Transport Co. is deleted. The addition of Rs.30,646/- in respect of Sujal Advertisers is set aside to the file of the AO for verification in the manner indicated above. The assessee's ground is partly allowed for statistical purposes. Issue - 9 - Addition on account of unsecured Loans of Rs.10,92,603/-
In the course of assessment proceedings, the Assessing Officer noted that the assessee had shown an outstanding unsecured loan of Rs.10,00,000 from one Shri Vishva Jayesh Shah, together with interest of Rs.92,603/-. The assessee submitted copy of confirmation of account and return of income of the party. On verification, it was found that in the return of income filed by the said lender, total income of only Rs.38,270/- was disclosed. The Assessing Officer issued a show cause notice as to why the loan and the related interest should not be treated as unexplained cash credit under section 68 of the Act. The assessee could not produce the bank statement of the party. The Assessing Officer was not satisfied and held that the identity, creditworthiness, and genuineness of the transaction had not been proved. He treated the loan of Rs.10,00,000/-as unexplained cash credits us/ 68 of the Act, making an addition of Rs.10,92,603/- to the total income including disallowance on account of interest paid of Rs.92,603/-.
In appeal, the assessee reiterated that the impugned loan had been received in an earlier year (F.Y. 2010-11) and was reflected in the balance sheet as opening balance in the year under consideration. The assessee also stated that the said loan was repaid during the year under consideration. It was argued that provisions of section 68 apply only to credits found in the books during the relevant previous year and not to brought forward balances. The assessee further relied on the confirmations, bank statements, and income-tax returns of the creditor, and submitted that the interest payment had been made through banking channels after deduction of TDS, for which TDS returns had been filed.
The CIT(A) observed that the assessee had reflected an opening balance of unsecured loan from the said creditor at Rs.11,68,953/- as on 01.04.2012. During the relevant previous year, a sum of Rs.10,00,000/- was repaid by cheque, along with an interest payment of Rs.92,603/- for the year. The assessee also claimed to have paid Rs.2,00,000/- as part of the principal repayment. On verification of the bank statement and ledger, the CIT(A) found that after this repayment, a closing balance of Rs.60,666/- remained outstanding as on 31.03.2014. He concluded that there was no fresh unsecured loan taken during the year and the transactions pertained only to repayment of an earlier year's loan and related interest. Since the source of repayment was explained through banking channels, he deleted the addition of Rs.10,00,000/- made under section 68 and also deleted the related disallowance of Rs.92,603/- towards interest.
The Revenue is in appeal, contending that the Ld. CIT(A) erred in deleting the addition on the basis of additional evidence without affording any opportunity to the Assessing Officer, thereby violating the provisions of Rule 46A of the Income-tax Rules, 1962. 97. The learned AR submitted that, as evident from Annexures 5A and 5B of Form 3CD, in the paper book, there was no fresh unsecured loan accepted during the year. The only credit in the account was a sum of Rs. 83,343/- representing interest net of TDS. It was further explained that the original loan of Rs.10,00,000/- was fully repaid during the year, and both the repayment and the interest credit could be corroborated from the bank statements and the lender's ledger. The AR emphasised that the impugned amount did not constitute a new loan attracting section 68. 98. The learned DR submitted that the Ld. CIT(A) deleted the impugned addition based on additional evidence furnished by the assessee without calling for any remand report from the Assessing Officer.
From the order of the Ld. CIT(A), it emerges that before him the assessee furnished specific details including bank statement of lender, as recorded in the last paragraph of the impugned appellate order, to explain the nature of the impugned credit. These details were supported by the entries in the books and confirmations from the lender. During the hearing before us, the Ld. AR took us through Annexures 5A and 5B of Form 3CD (Tax Audit Report), which clearly reflect that no fresh loan was accepted during the relevant previous year. The only credit in the lender's account during the year was a sum of Rs.83,343/- being interest credited net of TDS. The principal amount of Rs.10,00,000/- stood brought forward from earlier years and was repaid during the year through banking channels.
It is thus evident from the material on record that the impugned sum does not represent any fresh unsecured loan during the year, and therefore the primary condition for addition under section 68 of the Act is not satisfied. The Ld. CIT(A), having co-terminous powers with that of the Assessing Officer, was justified in examining the evidence and recording a finding that the loan was old and repaid during the year. We, therefore, find no infirmity in the action of the Ld. CIT(A) in deleting the impugned addition. The Revenue's objection regarding violation of Rule 46A is without merit in the facts of the present case, as the evidence relied upon is part of statutory records (Form 3CD) and books of account, which form part of the assessment proceedings. Ground No. 9 of the Revenue's appeal is dismissed. Issue – 10 – Addition on account of amount payable towards Cancellation of Booking
The next common issue arising in the appeals of both the assessee and the Revenue for A.Ys.2013-14 and 2014-15 relates to the taxability of advances received towards booking of units which were subsequently cancelled. The Assessing Officer made additions of Rs.1,56,75,889/- for A.Y. 2013-14 and Rs.1,29,77,163/- for A.Y. 2014–15. On appeal, the Ld. CIT(A) restricted the addition for A.Y. 2013–14 to Rs.49,48,271/- and sustained the entire addition for A.Y. 2014-15, primarily on the basis of additional evidences furnished by the assessee during appellate proceedings.
Aggrieved, the assessee is in appeal challenging the sustenance/restriction of additions, whereas the Revenue is in appeal challenging the relief granted by the Ld. CIT(A), inter alia, alleging violation of Rule 46A of the Income-tax Rules, 1962.
During the course of assessment proceedings for A.Y. 2013–14, the Assessing Officer noted from the assessee's balance sheet that a sum of Rs. 1,56,75,889/- was shown as liability under the head advances towards cancelled bookings. The AO required the assessee to explain the nature of the liability, furnish the list of persons from whom such advances had been received, and establish the identity, creditworthiness, and genuineness of the transactions.
In response, the assessee submitted that these advances represented booking amounts received from customers in earlier years for allotment of units/plots, which were later cancelled. The assessee contended that the amounts remained payable to the respective customers pending refund. The AO, however, observed the following: The assessee did not submit a complete list of parties along with their addresses, confirmations, and PANs. The assessee failed to discharge the onus to prove the identity of the persons, their creditworthiness, and the genuineness of the advances. On verification, the AO found that many advances were outstanding for several years without any refund having been made, which according to the AO indicated that the liability was not genuine. The assessee did not produce agreements or booking forms evidencing the original transactions.
Since the amounts had remained unpaid for a long period and no evidence of repayment was furnished, the AO concluded that the liability had ceased. Based on the above findings, the AO treated the entire amount of Rs.1,56,75,889/- as unexplained cash credit under section 68 of the Act and added it to the total income.
For A.Y. 2014-15, the AO, following the same reasoning, made an addition of Rs.2,40,40,604/- on account of advances towards cancelled booking outstanding as on the balance sheet date. The AO again held that the assessee had failed to substantiate the identity, creditworthiness, and genuineness of the parties from whom such advances had been received, and added the amount to the total income under section 68.
During appellate proceedings for A.Y. 2013-14, the assessee contended that the amount of Rs.1,56,75,889/- included opening balances and amounts refunded during the year. It submitted charts (Annexure-8) evidencing that Rs.1,18,48,271/- was received during the year and Rs. 12,91,892/- was repaid, leaving the net new receipts. It was further contended that Rs.38,27,618/- represented the opening balance as on 01.04.2012, and Rs.68,09,000/- was refunded in the subsequent year, supported by bank statements (Annexure-9). Therefore, the addition was claimed to be unsustainable. The CIT(A), after examining the AO's order, assessee's submissions, and supporting evidence, accepted that Rs. 38,27,618/- was the opening balance and Rs.68,09,000/- was refunded in the subsequent year. These two amounts aggregating to Rs.1,07,27,618/- were directed to be deleted from the addition. However, in respect of the remaining amount of Rs.49,48,271/-, the assessee could not furnish any explanation. The CIT(A) thus confirmed the addition to this extent, partly allowing the grounds.
Before CIT(A),in case of appellate proceedings for A.Y. 2014-15, the assessee submitted that the addition of Rs.2,40,40,604/- was incorrect. It was explained that the company had been booking units in various projects and received an aggregate amount of Rs.15,13,71,715/- during the year. The opening balance of Rs.15,67,58,881/- as on 01.04.2013 included Rs. 68,09,000/- which was refunded during the year. Against the above, receipts of Rs.15,13,71,715/- were recorded, and further amounts aggregating to Rs.1,29,17,163/- were refunded in subsequent years. It was submitted that the impugned addition included sums already repaid, duly supported by bank statements, and therefore ought to be deleted.
The CIT(A) examined the assessment order, the assessee's submissions, and the material placed on record. It was noted that the total sum under dispute represented advances received from various parties for booking of units. Out of this, Rs.49,48,271/- formed part of the opening balance for the year and could not be treated as fresh receipts. The assessee had also refunded Rs.61,15,170/- during the subsequent financial year, which was corroborated by bank statements. These amounts, aggregating to Rs.1,10,63,441/-, were therefore directed to be deleted from the addition. However, for the remaining sum of Rs.1,29,77,163/-, the assessee failed to provide any explanation or evidence regarding identity, capacity, or genuineness of the creditors. In fact, the assessee fairly conceded that these sums were to be treated as income. Consequently, the same was confirmed as unexplained cash credits under section 68 of the Act.
During the course of hearing before us, the learned AR of the assessee submitted that the amounts in question had been repaid in subsequent financial years. In support of this contention, the AR produced certain ledger accounts and copies of relevant bank statements, demonstrating the outflow of funds to the concerned parties. It was urged that, in view of these repayments, the addition sustained by the CIT(A) under section 68 was unwarranted to that extent.
In response, the learned DR submitted that the learned CIT(A) had deleted part of the addition without calling for a remand report from the Assessing Officer on the evidence now relied upon by the assessee. It was contended that the aspect of repayment required factual verification at the assessment stage, which had not been done, and therefore, the matter may be restored to the file of the Assessing Officer for necessary examination.
We have carefully considered the rival submissions and perused the material available on record. Before us, the learned AR reiterated that the amounts in dispute had been repaid and produced certain ledger accounts and bank statements in support. The learned DR, on the other hand, contended that these repayments had not been subjected to verification by the Assessing Officer, and that the matter required reconciliation and confirmation from the concerned parties. On a perusal of the record, we find that the issue involves multiple components, including identification of creditors, tracing of repayments to specific liabilities, and reconciliation of opening and closing balances with the amounts received and repaid during the year. The verification of these aspects necessarily requires examination of the primary records and confirmations from the parties concerned, which can be effectively carried out only at the assessment stage. The evidences now placed before us are voluminous and require cross-verification with the assessee's books of account, bank statements, and third-party confirmations.
In these circumstances, and in the interest of substantial justice, we deem it fit and proper to restore this issue to the file of the Assessing Officer for the limited purpose of carrying out a detailed verification of the assessee's claim of repayment. The Assessing Officer shall examine the relevant books of account, bank statements, and other evidences, and may call for confirmations from the parties to whom repayments are stated to have been made. The assessee shall extend full cooperation and furnish all requisite details and documents to facilitate such verification.
We make it clear that we have not expressed any conclusive view on the merits of the addition and all issues are left open to be adjudicated afresh by the Assessing Officer in accordance with law after providing adequate opportunity of being heard to the assessee. Accordingly, the impugned orders of the CIT(A) on this issue are set aside, and the matter is remitted to the file of the Assessing Officer for the above limited purpose. The related grounds of appeal of both the assessee and the Revenue on this issue are allowed for statistical purposes. Issue - 11 - Disallowance on account of amount of Rs.18,29,853/- paid towards Interest on delayed payment of service tax/VAT A.Y. 2013-14
The Assessing Officer disallowed a sum of Rs.18,29,853/- comprising Rs.12,70,342/- towards interest on late payment of service tax and Rs. 5,59,511/- towards interest on late payment of VAT, holding the same to be penal in nature and therefore not allowable under section 37(1) of the Act. The AO observed that these payments arose due to the assessee's failure to adhere to the prescribed timelines under the relevant statutes and hence could not be said to be incurred wholly and exclusively for the purpose of business.
During the appellate proceedings, the assessee submitted that the disallowance of Rs.18,29,853/- made by the Assessing Officer on account of interest on late payment of Service Tax and VAT was unjustified, contending that such payments were compensatory in nature and therefore allowable under section 37(1) of the Act. It was stated that the amount of Rs. 5,59,511/- did not pertain to interest on VAT but represented interest on late payment of TDS, which had already been disallowed by the assessee in the computation of income, and hence its further disallowance would result in double taxation. It was further claimed that the amount of interest relatable to Service Tax was Rs.12,28,844/- (comprising Rs.12,28,984/- on service tax and Rs.54,860/- on VAT), and not Rs.12,70,342/- as considered by the Assessing Officer. The assessee argued that the interest on delayed payment of Service Tax and VAT was compensatory in nature, having the same character as the underlying statutory dues, and thus allowable as deduction under section 37(1) of the Act. Reliance was placed on various judicial precedents, including the decision of the Hon'ble Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT (123 ITR 429), and decisions of coordinate benches holding that such interest is allowable being compensatory in nature.
After considering the submissions and judicial precedents cited, the CIT(A) held that interest on late payment of Service Tax and VAT is compensatory in nature and, therefore, allowable as deduction under section 37(1). It was further noted from the computation sheet that interest on TDS of Rs.5,59,511/- had already been added back, and disallowing it again would result in double taxation. The CIT(A) accordingly directed the AO to delete the disallowance of Rs.12,83,844/- relating to interest on Service Tax and VAT and also to verify the position in respect of interest on TDS to avoid double addition.
The learned DR relied upon the assessment order, supporting the disallowance made by the Assessing Officer. In response, the learned AR supported the relief granted by the learned CIT(A) and placed reliance on the decision of the co-ordinate bench in the case of Stylam Industries Ltd. [2024] 166 taxmann.com 733 (Chandigarh - Trib.) wherein it was held that even penalty levied under the VAT Act is compensatory in nature and, therefore, allowable as a deduction under section 37(1) of the Act.
We have carefully considered the rival submissions, perused the orders of the lower authorities, and examined the judicial precedents relied upon by the assessee. The Hon'ble Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC) has held that interest paid for delayed payment of cess is compensatory in nature, intended to compensate the exchequer for the loss of use of money, and not penal. Following this principle, co-ordinate benches have consistently held that interest for delayed payment of statutory dues, including VAT and service tax, is compensatory and hence allowable under section 37(1). In Stylam Industries Ltd. v. ACIT (ITA No. 363/Chd/2018, order dated 26.11.2020), the Co- ordinate Bench, held that even “VAT penalty” described under the relevant VAT Act, when compensatory in nature, would be an allowable deduction.
In the present case, the Revenue has not brought any material to demonstrate that the interest paid on delayed deposit of service tax/VAT was levied as a punitive measure for infraction of law. On the contrary, the nature of such levy, as per the governing statutes, is compensatory, intended to offset the delay in remittance of Government dues.
Respectfully following the binding precedent of the Hon'ble Supreme Court in Mahalakshmi Sugar Mills Co. (supra) and the co-ordinate bench decision in Stylam Industries Ltd. (supra), we uphold the order of the CIT(A) deleting the disallowance. Related Revenue's ground is dismissed.
In the combined result all three appeals are partly allowed for statistical reasons. Order pronounced in the Open Court on 20th August, 2025 at Ahmedabad. (SUCHITRA KAMBLE) JUDICIAL MEMBER (MAKARAND V.MAHADEOKAR) ACCOUNTANT MEMBERAhmedabad, Dated 20/08/2025 Manish, Sr. PS", "summary": { "facts": "The appeals concern the disallowance of expenses under Section 14A, notional interest on advances, cost of land, site development expenses, deduction under Section 80GGB, depreciation on motor cars, trade payables, unsecured loans, cancellation of bookings, and interest on delayed payment of service tax/VAT for Assessment Years 2013-14 and 2014-15.", "held": "The Tribunal partly allowed the appeals. Disallowances under Section 14A related to administrative expenses were upheld, while interest disallowances were deleted. Advances to associate concerns were allowed, while those to unrelated parties were remanded. Some disallowances related to land purchase and site development were deleted or restored for verification. Deductions under Section 80GGB were allowed. Depreciation on motor cars was allowed. Trade payables and unsecured loans were partly deleted or restored for verification. Additions related to cancelled bookings were partly deleted or restored for verification. Interest on delayed payment of service tax/VAT was allowed.", "result": "Partly Allowed", "sections": [ "14A", "36(1)(iii)", "139(1)", "143(3)", "143(2)", "80GGB", "32", "68", "37(1)", "115JB" ], "issues": "The primary issues revolve around the allowability of various expenses and disallowances, including those related to investment income, advances, land purchase, site development, depreciation, trade payables, unsecured loans, cancelled bookings, and interest on statutory dues, with a recurring theme of whether the assessee discharged its burden of proof and provided adequate substantiation for the claims." } }