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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI S. S. GODARA & SHRI INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE BEFORE SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER आयकर अपील सं. / ITA Nos.1323 & 357/PUN/2018 िनधा�रण वष� / Assessment Years: 2012-13 & 2013-14 Kumar Urban Development Vs. DCIT, Circle-4, Pune. Pvt. Ltd., (Pune Mumbai Reality Private Limited merged with River View Properties Pvt. Ltd. and River View Properties Pvt. Ltd. merged with Kumar Urban Development Pvt. Ltd.) 10th Floor, Kumar Business Center, CTS No.29, Bund Garden Road, Pune-411001. PAN : AADCP8622M Appellant Respondent Assessee by : Shri Nikhil Pathak Revenue by : Shri B. Koteswararao Date of hearing : 08.09.2022 Date of pronouncement : 28.09.2022 आदेश / ORDER PER INTURI RAMA RAO, AM: These are the appeals filed by the assessee directed against the different orders of ld. Commissioner of Income Tax (Appeals)-2 and 3, Pune [‘the CIT(A)’] dated 15.05.2017 and 08.11.2017 for the assessment years 2012-13 and 2013-14 respectively. 2. First, we shall take up the appeal in ITA No.1323/PUN/2018 for A.Y. 2012-13 for adjudication.
2 ITA Nos.1323 & 357/PUN/2018 ITA No.1323/PUN/2018, A.Y. 2012-13 : 3. The appellant raised the following grounds of appeal :- “1] The assessee requests for condonation of delay in filing the appeal since there was a reasonable cause on its part in not filing the appeal within the stipulated time limit. 2] The learned CIT(A) erred in confirming disallowance of interest of Rs.3,65,22,941/- on account of interest free funds advanced by the assessee to its sister concerns without appreciating that no disallowance of interest was warranted. 3] The learned CIT(A) failed to appreciate that the disallowance of interest was not warranted since it had sufficient interest free funds available with it to advance funds to the sister concerns. 4] The learned CIT(A) erred in not specifically deleting the addition made of Rs.1,38,19,166/- u/s 41(1) of the Act and erred in directing the A.O. to decide the issue in line of the directions given by Hon'ble ITAT in the assessee’s own case for A.Y. 2008-09. 5] The learned CIT(A) erred in confirming the disallowance of commission expenditure of Rs.31,54,244/- paid to L. K. Jain (HUF) on the ground that the assessee company had failed to prove that any services were rendered by the said entity. 6] The appellant craves leave to add, alter, amend or delete any of the above grounds of anneal.” 4. Briefly, the facts of the case are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of developers and dealing in land. The return of income for the assessment year 2012-13 was filed on 29.09.2012 declaring total income of Rs.5,92,98,897/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-4, Pune (hereinafter called ‘the Assessing Officer’) vide order dated 31.03.2015 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at total income
3 ITA Nos.1323 & 357/PUN/2018 of Rs.11,39,61,711/- after making the disallowance of interest u/s 36(1)(iii) of Rs.3,65,22,941/-, disallowance u/s 41(1)(a) of Rs.1,38,19,166/- and disallowance on account of commission paid to L.K. Jain (HUF) of Rs.43,20,707/-. Out of the above disallowances, we are concerned with the disallowance of interest u/s 36(1)(iii) of the Act. The factual background of the above disallowance u/s 36(1)(iii) is as under :- During the course of assessment proceedings, the Assessing Officer observed that the appellant company made interest free loans of Rs.24,34,86,276/- to various parties. The assessee also incurred interest expenditure on borrowed funds of Rs.9,96,52,457/-. The Assessing Officer was of the opinion that the interest bearing funds had been diverted for giving interest free loans to various parties and advances were not made for the business purposes. Therefore, he was of the opinion that the proportionate interest cannot be allowed as deduction u/s 36(1)(iii) of the Act. On appeal before the ld. CIT(A), it is contended that no disallowance of interest is required to be made as the interest free funds far exceeds the loans and advances given to the sister concerns placing reliance on the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Prem Heavy Engg. Works (P.)
4 ITA Nos.1323 & 357/PUN/2018 Ltd., 150 Taxman 90 (All.) and the decision of the Hon’ble Delhi High Court in the case of CIT vs. Tin Box Co., 135 Taxman 145 (Delhi). However, the said contention was rejected by the ld. CIT(A) by holding that the appellant had failed to demonstrate the business expediency for advancing the interest free loans to related parties for making such advances by way of cash flow statement. 5. Being aggrieved, the appellant is in appeal before us in the present appeal. 6. At the outset, there is a delay in filing the present appeal by 393 days. The appellant filed a petition praying for condonation of delay through an affidavit dated 28.06.2022 stating that the delay had occurred due to the mistake committed by the Accounts Assistant, namely, Shri Kalpesh Pingle by not intimating the receipt of the order of the ld. CIT(A) to the concerned person. The order of the ld. CIT(A) was lying with the Accounts Assistant who noticed while clearing his cupboard and thereafter, he immediately informed to the concerned person, who in turn taken necessary steps for filing the appeal. Thus, it was explained that the delay of 393 days was occurred on account of factors which are beyond the control of the appellant. 7. On the other hand, ld. CIT-DR opposed the condonation of delay.
5 ITA Nos.1323 & 357/PUN/2018 8. Having heard the rival submissions and perused the averments made in the affidavit, we find that it is not the case of CIT-DR that the appellant had deliberately delayed filing of the appeal. Therefore, keeping in view of the decision of the Hon’ble Supreme Court in the case of N. Balakrishnan v. M. Krishnamurthy, 7 SCC 123 (SC) wherein, it was held as follows :- “the primary function of a Court is to adjudicate the dispute between the parties and to advance substantial justice; and that rules of limitation are not meant to destroy the right of parties, but they are meant to see that parties do not resort to dilatory tactics, but seek their remedy promptly. It held that there is no presumption that delay in approaching the Court is always deliberate, and the words "sufficient cause" under section 5 of the Limitation Act should receive a liberal construction so as to advance substantial justice. It held that in every case of delay there can be some lapse on the part of the litigant concerned, but that alone is not enough to turn down his plea and to shut the door against him; and if the explanation does not smack of mala fides or it is not put forth as part of a dilatory strategy, the Court must show utmost consideration to the suitor. It also observed that if the delay is deliberate, then the Court should not accept the explanation. It held that while condoning the delay, the Court should compensate the opposite party with costs.” 9. The above principles have been followed by the Hon’ble Telangana High Court in the case of Thunuguntla Jagan Mohan Rao vs. DCIT, 427 ITR 204 (Telangana). Applying the above principles laid down in the above case to the present case, we are of the considered opinion that in the facts and circumstances of the case the explanation offered by the appellant cannot said to be smack of mala-fides nor can it be said that the appellant adopted a dilatory practice in filing the appeal. Therefore, it is fit case for condonation
6 ITA Nos.1323 & 357/PUN/2018 of delay of 393 days. Accordingly, we condone the delay and admit the appeal for adjudication. 10. The ld. AR taking us through the order of ld. CIT(A) submits that the interest free funds in the form of shares capital, reserves & surplus, advance against Development Agreement, loan from Pune Technopolis Development Pvt. Ltd,, advance from Subsidiary-River View Properties stood at Rs.55,08,18,101/- as against the interest free loans and advances made to the sister concerns or related parties of Rs.24,34,86,276/- placing reliance on the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Prem Heavy Engg. Works (P.) Ltd., 150 Taxman 90 (All.) and the decision of the Hon’ble Delhi High Court in the case of CIT vs. Tin Box Co., 135 Taxman 145 (Delhi), submits that where mixed funds were utilized for the purpose of making advance to sister concern, the presumption has to be drawn that the interest free loans were made out of the interest free funds available with the assessee and no disallowance of proportionate interest is required to be made. In support of this contention, he placed reliance on the decision of the Hon’ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT, 130 taxmann.com 178 (SC) and the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.).
7 ITA Nos.1323 & 357/PUN/2018 11. On the other hand, ld. CIT-DR submits that in the absence of nexus between the interest free funds available with the assessee and loans & advances given to the sister concerns, the submission of the appellant cannot be accepted. 12. We heard the rival submissions and perused the material on record. The issue in the ground of appeal no.2 and 3 relates to the disallowance of interest u/s 36(1)(iii) on the ground that the interest bearing funds had been diverted for the purpose of making loans and advances to the sister concerns or related parties. The Assessing Officer was of the opinion that the appellant company had diverted the interest bearing funds for the purpose of advancing interest free loans to the promoters and directors or related parties, therefore, the AO had resorted to the proportionate disallowance of interest u/s 36(1)(iii). Even on appeal before the ld. CIT(A), the ld. CIT(A) had negatived the claim of the appellant. We find from material on record that the interest free funds available with the appellant company as on 31.03.2012 stood at Rs.55,08,18,101/- as against the interest free loans made to related parties at Rs.24,34,86,276/-. Therefore, the presumption has to be drawn that the interest free loans were made out of the interest free funds in terms of the law laid down by the Hon’ble Allahabad High Court in the case of CIT vs. Prem Heavy Engg. Works (P.) Ltd., 150
8 ITA Nos.1323 & 357/PUN/2018 Taxman 90 (All.) and the Hon’ble Delhi High Court in the case of CIT vs. Tin Box Co., 135 Taxman 145 (Delhi). Thus, once the presumption is drawn that the appellant made interest free loans to the related parties, no disallowance of interest u/s 36(1)(iii) is warranted. Similar view was taken by the Hon’ble Jurisdictional High Court in the case of CIT vs. Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.). The view of the Hon’ble Jurisdiction High Court in the case of Reliance Utilities & Power Ltd. are confirmed by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT, 130 taxmann.com 178 (SC). In view of the above discussion, we direct the Assessing Officer to delete the addition of Rs.3,65,22,941/- made u/s 36(1)(iii) of the Act. Accordingly, the grounds of appeal no.2 and 3 filed by the appellant stand allowed. 13. Grounds of appeal no.4 and 5 were not pressed during the course of hearing of appeal, hence, the same are dismissed as not pressed. 14. Additional ground of appeal : In the present appeal, the assessee raised the additional ground of appeal, which reads as under :- “The assessee submits that the amount of Rs.42,38,000/- being receipts of Ms. Kruti Jain on sale of land at S. No. 243, Sus, Pune to Shri Pramod Dhariwal was wrongly included as sales by the assessee company and hence, the said amount should be reduced while computing the income of the assessee.”
9 ITA Nos.1323 & 357/PUN/2018 15. Through this additional ground of appeal, the assessee seeking the exclusion of a sum of Rs.48,38,000/- shown in the Profit & Loss Account as part of sales, offered to tax, on the ground that this income does not belong to the appellant. The factual background of the case is as under :- During the previous year relevant to the assessment year under consideration, the appellant sold a property admeasuring 0H. 20 Ares from and out of land bearing Survey No.243 totally admeasuring 9 H. 39 Ares for consideration of Rs.90,00,000/- along with one Mr. Kruti Jain. Out of the above sale consideration, share of Kruti Jain was Rs.42,38,000/-. It was claimed that the entire sale consideration was offered to tax wrongly in the hands of the appellant company. Even though the share of the appellant company is only Rs.47,62,000/- out of total consideration of Rs.90,00,000/- entire consideration was offered to tax. Thus, it was submitted that an amount of Rs.42,38,000/- was wrongly offered to tax in the hands of the appellant. The appellant is seeking the exclusion of the said sum from the returned income. Thus, it was submitted that the same amount was taxed twice once in the hands of the appellant and again in the hands of Mr. Kruti Jain.
10 ITA Nos.1323 & 357/PUN/2018 16. On the other hand, ld. CIT-DR submits that the additional ground of appeal cannot be admitted as no such claim was made in the return of income. 17. We heard the rival submissions and perused the material on record. The case of the appellant is based on the principle that no income can be taxed merely because the appellant had wrongly offered to tax. The taxing authorities cannot levy tax unless or otherwise, the income is plainly taxable in the hands of an assessee. In the present case, the case of the appellant is that the income is wrongly offered to tax which belongs to Mr. Kruti Jain and offered to tax in the hands of said Mr. Kruti Jain. Keeping in view the principle that no income can be taxed, even if the income was offered to tax by mistake, the additional ground of appeal is admitted. However, we remand this additional ground of appeal to the file of the Assessing Officer with the direction that the same may be deleted in the hands of the appellant on due verification, it is found that the same income was offered to tax in the hands of Mr. Kruti Jain and income had not accrued to the appellant. Thus, the additional ground of appeal filed by the assessee stands partly allowed. 18. In the result, the appeal of the assessee in ITA No.1323/PUN/2018 for A.Y. 2012-13 stands partly allowed.
11 ITA Nos.1323 & 357/PUN/2018 19. Now, we shall take up the appeal of the assessee in ITA No.357/PUN/2018 for A.Y. 2013-14 for adjudication. ITA No.357/PUN/2018, A.Y. 2013-14 : 20. Briefly, the facts of the case are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of developers and dealing in land. The return of income for the assessment year 2013-14 was filed o 24.09.2013 declaring total income of Rs.3,19,443/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dated 28.03.2016 passed u/s 143(3) of the Act at total income of Rs.17,49,26,262/-. While doing so, the Assessing Officer made addition on account of difference in the valuation of closing stock of Rs.16,60,06,720/-, addition on account of reversal entries of Rs.84,76,000/- and addition on account of interest receivable of Rs.1,24,102/-. The factual background of addition on account of difference of valuation of closing stock with which we are concerned, is as under : During the previous year relevant to the assessment year under consideration, the Assessing Officer noticed that there was a negative balance in the work in progress of Rs.16,60,06,720/-. On query by the Assessing Officer, the appellant company had clarified that the work in progress had resulted into negative balance on
12 ITA Nos.1323 & 357/PUN/2018 account of re-classification of inventory i.e. advance for property i.e. the money advanced for acquisition of properties included as a part of inventory in the financial year 2011-12. The appellant company had filed a detailed explanation which was set out by the Assessing Officer vide para 4 of the assessment order. The appellant further made a submission that while computing the taxable income only the cost of construction was claimed as deduction which means that the value of opening stock and the closing stock had non-bearing in the computation of taxable income. However, the Assessing Officer was of the opinion that it resulted in distortion of taxable income. He further held that opening stock as well as closing stock should be valued by adopting the same method and principles. As a result of removal of value of the advance for land from closing stock, there was a understatement of taxable income and, accordingly, he made the addition of Rs.16,60,06,720/- to returned income. Even on appeal before the ld. CIT(A), the findings of the Assessing Officer had been confirmed by holding that closing balance of stock of preceding year, should be adopted as opening balance of the current year and the valuation of opening and closing balances should be done, adopting the same method of accounting and principles.
13 ITA Nos.1323 & 357/PUN/2018 21. Being aggrieved, the appellant is in appeal before us in the present appeal. 22. The ld. AR submits that for the purpose of computing the taxable income, the appellant company adopted a methodology whereby the values of opening stock and the closing stock were not considered what was claimed as deduction was only the cost of construction. He also filed the copies of the return of income, statement of computation of total income as part of the Paper Book. He further submits that mere entries in the books of accounts does not determine the taxability or otherwise. 23. On the other hand, ld. CIT-DR placing reliance on the decision of the ld. CIT(A) submits that the order of the ld. CIT(A) does not require any interference. He also reiterates the valuation of closing stock has material bearing on the computation of taxable income. 24. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the addition on account of difference in valuation of closing stock. The undisputed facts of the case are that the appellant during the previous year relevant to the assessment year under consideration had excluded the value of advance given for purchase of land from the closing inventory, in the immediate preceding year this item was shown as
14 ITA Nos.1323 & 357/PUN/2018 part of closing inventory. No doubt, valuation of closing stock of raw material, finished goods at close of accounting period is necessary part of determining taxable income for that period as held by the Hon’ble Supreme Court in the case of Chainrup Sampatram vs. CIT, 24 ITR 485 (SC). But the bone of contention between the assessee and the department does not revolve around the valuation of the closing inventory. But it is question of whether such advances forms part of inventory or not. There is no assumption that every advance given for purchase of land would necessarily get materialized into purchase of land. Therefore, the advance given purchase of land cannot form part of the inventory till materialization of purchase in the case of assessee who deals in land. Therefore, any advance given for purchase of property cannot form part of the inventory either at the beginning of the previous year or at the end of the previous year for the purpose of determining the taxable income for the year. Admittedly, in the present case the appellant company had corrected the wrong treatment given in the books of accounts in the earlier years by not including the value of advance given for purchase of land both from opening and closing inventory. As a result of altering the valuation of closing stock alone by the AO without a corresponding change at the other end i.e. in the
15 ITA Nos.1323 & 357/PUN/2018 beginning of the previous year, there would be distortion of profits and true profits would not be reflected as held by the Privy Council in CIT vs. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56. The Hon’ble Delhi High Court in the case of CIT vs. Mahavir Alluminium Ltd., 297 ITR 77 (Delhi) following the ratio laid down in the Ahmedabad New Cotton Mills Co. Ltd. (supra) held that where the Assessing Officer alters the valuation of the closing stock, is bound to alter the valuation of opening stock on the same basis in order to avoid distortion of the taxable income for the year under consideration. The action of the AO in the present case, by altering the valuation of the closing stock alone runs contrary to the rationale of the decision, referred to supra. Further, it would also result in the inflated hypothetical income. It is settled principle of law that it is real income alone which is taxable under the provisions of the Income Tax Act as held by the Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas vs. CIT, 46 ITR 194 (SC) and reiterated again CIT vs. Birla Gwalior, 89 ITR 266 (SC) Further, the Department has not controverted the submissions of the appellant company that for the purpose of computing the taxable income, the cost of construction of the flats alone was considered, claimed as deduction, which means that the value of opening inventory or closing inventory had no bearing in
16 ITA Nos.1323 & 357/PUN/2018 determination of the taxable income for the year. In other words, the value of advance given for purchase of land was never claimed as deduction. There is no bar under law to correct the state of affairs to real picture. The Hon’ble Supreme Court in the case of CIT vs. British Paints India Ltd., 188 ITR 44 (SC) held that there is no estoppel on the part of the Assessing Officer to follow the method in the earlier years and further held that it is not only the right but duty of the Assessing Officer to consider whether or not books of account disclosed true state of accounts and correct income can be deduced therefrom. Therefore, the action of the Assessing Officer by bringing to tax the amount by altering the valuation of the closing stock alone is against the settled principle of law and accounting principles. Therefore, in the light of above discussion on the facts of the present case and the law governing the issue on hand, we are of the considered opinion that there is neither suppression of income nor distortion of chargeable taxable income for the year under consideration on account of omission to include the value of advance given to purchase of land as a part of closing inventory for the reason stated above.
17 ITA Nos.1323 & 357/PUN/2018 Therefore, we reverse the findings of the lower authorities on this issue and direct the AO to delete the addition on account of alleged difference valuation of closing stock of Rs.16,60,06,720/-. Thus, this ground of appeal no.1 stands allowed. 25. Grounds of appeal no.2 and 3 were not pressed during the course of hearing of appeal, hence, the same are dismissed as not pressed. 26. In the result, the appeal of the assessee in ITA No.357/PUN/2018 for A.Y. 2013-14 stands partly allowed. 27. To sum up, both the above appeals of the assessee stands partly allowed. Order pronounced on this 28th day of September, 2022. Sd/- Sd/- (S. S. GODARA) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 28th September, 2022. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A)-2/3, Pune. 4. The Pr. CIT-2, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “A” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.