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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Shri P.M. Jagtap & Shri Siddhartha Nautiyal
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH (Conducted Through Virtual Court) Before: Shri P.M. Jagtap, Vice President And Shri Siddhartha Nautiyal, Judicial Member ITA No. 1793/Ahd/2018 Assessment Year 2014-15
Kadam Reality Pvt. Ltd., ITO, Ward-2(1)(2), 401, Kadamb Complex, CU Shah Building, Judges Bunglow Road, Vs Off Ashram Road, Bodakdev, Ahmedabad Ahmedabad PAN: AADCK0211F (Respondent) (Appellant)
Assessee by: Shri S.N. Divatia, A.R. Revenue by: Shri C.S. Sharma, Sr. D.R.
Date of hearing : 16-02-2022 Date of pronouncement : 27-04-2022 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-10, Ahmedabad in Appeal no. CIT(A)-10/ITO Ward-2(1)(2)/10084/17-18 vide order dated 29/06/2018 passed for the Assessment Year 2014-15.
The assessee has raised following grounds of appeal:- “1.1 The order passed u/s 250 on 29-06-2018 for A.Y.2014-15 by CIT(A)-10, Abad, upholding the disallowance of interest expenses of
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Rs. 18, 84,000/- is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the explanations furnished and the evidence produced by the appellant.
2.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding that the amount of Rs. 1,76,78,048/- due from Kadamb was not outstanding sale price but loans & advances so that interest to the extent of Rs.18,84,000/- was incurred for non-business purposes and as such it was not admissible.
2.2 That in the facts and circumstances of the case as well as in law, the ld. CIT(A) has grievously erred in upholding the interest disallowance of Rs. 18,84,000/-.
It is therefore prayed that the disallowance of to the tune of Rs.18,84,000/- made by the AO and upheld by CIT(A) should be deleted.”
The brief facts of the case are that the assessee is a company engaged in the business of construction and realty. The assessee filed return of income for A.Y.2014-15 on 26-09-2014 showing nil income. During the course of assessment proceedings for the captioned year, the ld. Assessing Officer noted that during the year, the assessee company had given interest free loans and advances totaling to Rs. 3,94,96,510/- to various parties. Further, the ld. Assessing Officer noticed that the assessee company had taken interest bearing loans from the various parties as well, on which interest to the tune of Rs. 1,04,68,848/- was paid during the year. In view of the above, the ld. Assessing Officer requested the assessee to explain why it should not be presumed that the interest bearing funds have been utilized to
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advance interest free loans and accordingly why corresponding interest accordingly should not be disallowed u/s. 36(1)(iii) of the Act. The assessee submitted response to above query of Ld. Assessing Officer and on perusal of the same, the ld. Assessing Officer observed that in the case of advance given to Kadam of Rs. 1,76,78,048/-, the assessee has submitted that this amount represents the sale of Kadam Residency in the FY 2012-13, in respect of which, the assessee received Rs. 20 lakhs only but the assessee has not received the balance amount and the sale agreement is pending. The assessee further submitted that this amount actually represents ‘debtor’ but inadvertently shown as ‘loan and advances’ and hence the assessee did not charge any interest. The ld. Assessing Officer noted that assessee has not submitted that any supporting evidence in this regard to show that the above amount shown as ‘loans and advances’ to Kadam is actually a ‘debtor’ towards sale of Kadam Residency and inadvertently shown under the head ‘loans and advances’ and therefore the claim of the assessee cannot be accepted. The ld. Assessing Officer accordingly held that assessee has diverted interest bearing funds for giving interest free advance of Rs. 1,76,78,048/- and therefore disallowed a sum of Rs. 18,84,000/- for interest @ 12% on the opening balance of these advances u/s. 36(1)(iii) of Act and added the same to the income of the assessee.
In appeal before ld. CIT(A), the appellant submitted that the outstanding amount of Rs. 1,76,78,048/- as on 31.03.2014 was the unpaid sale price of land sold in the earlier years. However, while grouping for the purpose of Schedule to the Balance Sheet, the said balance was inadvertently shown under the head “loans and advances (debit)” instead of “trade
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receivables”. Therefore, there is no question of charging interest on the said amount. The appellant also submitted that from the ledger account of the party "Kadam" enclosed for the period from 01.04.2012 to 31.03.2014 that the assessee originally received Rs.20 lakhs by cheque on 28.03.2013 and the sale price of land of Rs.1.77 cr. was debited to its account on 31.03.2013. Thereafter, the expenses towards hardware, steel, electricity etc. aggregating to Rs. 19,78,048/- has been debited to his account and as a result, the amount outstanding as on 31.03.2014 was Rs. 1,76,78,048/-. Thus, there was no cash outflow to this party and as such there was no question of utilizing borrowed funds for this purpose. The assessee further submitted that since `the transaction of Rs.1.77 cr. had taken place in the earlier financial year and there was no fresh advance by way of cash flow in this year, the question of charging interest did not arise. The ld. CIT(A) dismissed the appeal of the assessee holding that the expenditure u/s. 36(1)(iii) of the Act is allowable if the borrowed fund is utilized for the purpose of business. In the present facts, since the assessee has been paying interest @ 12% on loans accepted, interest expenses in proportion to the funds diverted for non-business purposes amounting to Rs. 18,84,000/- was correctly disallowed and added to the income of the assessee by the Assessing Officer u/s. 36(1)(iii) of the Act since the same is not incurred wholly and exclusively for the purpose of business. While dismissing assessee’s appeal, Ld. CIT(A) observed as below: “3.4. The appellant has stated that the outstanding amount of Rs.1,76,78,048/- as on 31.03.2014'was the unpaid sale price of land sold in the year 2010-11. The appellant also submitted that from the ledger account of the party "Kadam" enclosed for the period from
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01.04.2012 to 31.03.2014 that originally he had received Rs.20 lakhs by cheque on 28.03.2013 and the sale price of land of Rs. 1.77 cr. was debited to its account on 31.03.2013. Thereafter, the expenses towards hardware, steel, electricity etc. aggregating to Rs. 19,78,048/- has been debited to his account and as a result, the amount outstanding as on 31.03.2014 was Rs.1,76,78,048/-. Thus, there was no cash outflow to this party and as such there was no question of utilizing borrowed funds for this purpose (ii) since, the transaction of Rs.1.77 cr. had taken place in the earlier financial year and there was no fresh advance by way of cash flow in this year, the question of charging interest did not arisen. The AO has also failed to appreciate that out of the interest expenses, the private parties were paid interest of Rs.12,34,478/- whereas institution towards vehicle/ windmill etc.
3.5. It is to be noted that appellant is having mixed funds and is not able to demonstrate the flow of the funds. The assessee has not utilized the interest bearing fund for its business purpose but advanced the same as interest free made by the assessee to the loan obtained from others. Moreover, the appellant has also not established the fact that same has been given from the interest free surpluses. Where the money borrowed was diverted for giving interest free loans, the proportionate interest attributable to such loans could be legitimately disallowed by the Assessing Officer. It was so held in S.A. Builders Ltd. v. CIT(2004) 269 ITR 535 (P&H). Further, this view was accepted in CIT v. H.R. Sugar Factory Pvt. Ltd. [1971] 187
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ITR 363 (All) in a case, where money was borrowed for purposes of business, but advanced at a concessional rate to its directors, so that the High Court upheld the inference of the Revenue to disallow the amount to the extent of difference in interest rates, though the Revenue was not able to establish the identity of the funds allegedly diverted. This aspect is also confirmed in the case of Patel Filter Ltd. vs. CIT [2003] 264 ITR 21 (Guj.).
3.6. To sum up, the case laws cited by the appellant are on different facts and footings and that cannot be applied in the case of the appellant. If the advances are made without any business purpose and out of borrowed funds then the proportionate interest paid or payable on such funds shall be disallowed. The appellant has thus not charged the interest from the advances given to the parties as discussed in para 3.3 of this order. The appellant was to charge the interest on the above advances. Since the assessee has been paying interest @ 12% on loans accepted, therefore, interest expenses in proportion to the funds diverted for non business purpose amounting to Rs.18,84,000/- was disallowed and added to the total income of the assessee by the AO. The expenditure u/s. 36(1))(iii) of the Act is allowable if the borrowed fund are utilized for the purpose of business. In view of the above, Rs.18,84,000/- disallowed u/s.36(1)(iii) of the I.T. Act, treating the same is not incurred wholly and exclusively for the purpose of business, is confirmed. The ground of the appellant is dismissed.
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Before us, the assessee has reiterated the submissions made before the ld. CIT(A). The assessee submitted that there is no question of charging interest on outstanding amount of 1.76 crores as it was unpaid sale price of land sold in earlier year and inadvertently shown under "Loans & Advances" instead of "trade receivables". Further, the appellant had received only Rs.20 lakhs through cheque and the balance was debited to his account being sale proceeds of land followed by expenses towards hardware, steel, electricity etc. In brief, there was no cash outflow, inter alia, to that extent and there was mere journal entry passed. Ld. Counsel for the assessee invited our attention to pages page 39, 50 and 53 of the Paper-Book in support of his contention that the said amount was a mere journal entry and further subsequently, the said property was sold to third parties since Kadam could not pay the balance agreed consideration and initial sale arrangement had to be recalled. In response, Ld. Departmental Representative relied on the observations of order passed by Ld. CIT(A) and Ld. Assessing Officer.
We have heard the rival contentions and perused the material on record. Ld. Counsel for the assessee has submitted that for section 36(1)(iii) to be invoked to disallow interest payments, it is a pre-requisite that interest free advances have to be given in the first instance. If no interest free advances have been given, then there is no room of disallowance of interest under section 36(1)(iii) of the Act. Mere mistake in accounting entries cannot be basis for disallowing interest under section 36(1)(iii) of the Act. Ld. Counsel for the assessee has invited our attention to Page 39 of Paper- Book wherein he has pointed out that a sum of Rs. 20,0,000/- was received from Kadam through banking channels from sale of land on 28-030-2013.
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Thereafter, on 31-03-2013, a journal entry was passed on 31-03-2103 in Kadam’s ledger account, debiting a sum of Rs. 1,77,00,000/- on account of sale of Kadam Residency. The Ld. Assessing Officer has disallowed a sum of Rs.18,84,000/- u/s.36(1)(iii) of the Act computed @12% of the closing balance as on 31-03-2013 of Rs. 1,57,00,000/- in Kadam’s ledger account (opening balance as on 01-04-2013). In view of the facts stated above, in our view, in the present facts, no disallowance is called for since from the ledger account, it is evident that no interest free advance has been given to Kadam, and merely on account of mistake in accounting treatment by mistakenly showing the above sum under the head “loans and advances” instead of “trade receivables”, section 36(1)(iii) of the Act cannot be invoked. We note that Ld. CIT(A) has not at all discussed or analyzed on this aspect of the issue in his order, despite the assessee having argued on these lines. However, we also note that the Ld. Counsel for the assessee has not been able to bring any evidence on record to substantiate that the earlier sum of Rs. 20,0,000/- was received on account of sale of Kadam Residency (either before us or before the Ld. Assessing Officer or Ld. CIT(A) during the course of assessment / appellate proceedings). The Ld. Counsel for the assessee has only relied on the ledger account of Kadam in the assessee’s books to explain the entire transaction with Kadam. The Ld. Counsel for the assessee has submitted that the afore-said sale got forfeited since Kadam did not pay the balance amount and the property in question was later sold to third party. However, no correspondence in this regard has been produced to enable us to understand the chain of events with Kadam and whether the said party Kadam claimed refund of afore-said amount, whether the above amount was refunded to Kadam or whether the same was forfeited. The
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assessee has not placed on record any ‘agreement for sale’ entered with Kadam or any further correspondences in support of his averments. While, in principle, we are in agreement with Ld. Counsel for the assessee that if no amount has been advanced to Kadam, then merely on basis of mistakenly showing the above sum under the head “loans and advances” instead of “trade receivables”, section 36(1)(iii) of the Act cannot be invoked. However, in absence of supporting documents, we are inclined, in the interests of justice, to restore the file to Ld. Assessing Officer to verify whether in the present case, the assessee has in fact, not advanced any money to Kadam as asserted and the sum merely represents a mere journal entry, which has been incorrectly reflected under the head “loan and advances”, while it should have been accounted for as “Trade Receivables”. And if that be the case, then in our view, no disallowance of interest u/s 36(1)(iii) of the Act is called for, merely on account of mistaken accounting treatment, when on facts, no advance has been given.
In the result, appeal of the assessee is allowed with directions as above.
Order pronounced in the open court on 27-04-2022
Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 27/04/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:-
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Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद