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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI ARUN KUMAR GARODIA
Assessment Appeal No. Appellant Respondent Year M/s. Bangalore Housing Development & Investments, The Assistant Commissioner No. 10/1, Income Tax, Lakshminarayana 2014-15 425/Bang/2018 Circle – 1 (2) (1), Complex, Bangalore. Palace Road, Bangalore – 560 052. PAN: AAGFB0819A ITA No. M/s. Bangalore Housing 2013-14 556/Bang/2018 The Deputy Development & Investments, Commissioner of No. 10/1, Lakshminarayana Income Tax, Complex, ITA No. Circle – 1 (2) (1), 2014-15 Palace Road, 557/Bang/2018 Bangalore. Bangalore – 560 052. PAN: AAGFB0819A Assessee by : Shri R. Ramakrishna, CA Revenue by : Dr. P.V. Pradeep Kumar, Addl. CIT (DR) Date of hearing : 12.10.2018 Date of Pronouncement : 07.11.2018 O R D E R Per Shri A.K. Garodia, Accountant Member Out of bunch of these three appeals, there is one appeal of revenue for Assessment Year 2013-14 and there are two cross appeals of revenue and assessee for Assessment Year 2014-15 and these appeals are directed against two separate orders of ld. CIT(A)-1, Bangalore both dated 24.10.2017. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
The grounds raised
by therevenue for Assessment Year 2013-14 in are as under.
1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The Ld. CIT(A) has not appreciated the fact that the assessee year after year has posted meager income from business and claimed large amounts as expenses, even though there is no business activity being carried out by the assessee.
3. The Ld. CIT (A) has ignored the fact that the assessee has not satisfied conditions laid out u/s 37(1) of the IT Act to claim certain amount as business expenses. 4. The Ld. CIT (A) has relied on the CIT (Appeals)-111, Bengaluru order for A.Y.2008-09 without appreciating the facts and circumstances for A.Y.2013-14 and A.Y.2008-OY are entirely different. 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored. 6. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.”
The grounds raised
by the revenue for Assessment Year 2014-15 in are as under. “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The Ld. CIT(A) has not appreciated the fact that the assessee year after year has posted meager income from business and claimed large amounts as expenses, even though there is no business activity being carried out by the assessee.
3. The Ld. CIT (A) has ignored the fact that the assessee has not satisfied conditions laid out u/s 37(1) of the IT Act to claim certain amount as business expenses.
4. The Ld. CIT (A) has relied on the CIT (Appeals)-111, Bengaluru order for A.Y.2008-09 without appreciating the facts and circumstances for A.Y.2013-14 and A.Y.2008-09 are entirely different.
5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored.
The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.” 4. The grounds raised
by the assessee for Assessment Year 2014-15 in are as under. “1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, fact and circumstances of the case.
2. The learned CIT (A) has erred by upholding the order of the learned AO regarding the disallowance of the interest paid on loan in proportion to the funds advanced to the sister concerns/related parties without considering the facts and details submitted by the appellant BEFORE THE Assessing Officer and the Appellate Authority.
3. The authorities below ought to have noted from the Balance Sheet as at 31/03/2014 of the appellant that it had a net-owned funds of Rs.35.17 Crores as against the investments made in the above mentioned sister concerns/related parties for business purposes aggregating to Rs.30.87 Crores. Hence the question of disallowing the interest on pro-rata basis does not arise.
4. The Hon'ble CIT(A), though gave a relief to the appellant by allowing the other expenses aggregating to Rs.1,36,24,401, has wrongly ordered for the proportionate disallowance on the interest debited (Rs.6,25,35,687) to the P&L account of the appellant with respect to the amounts advanced to the sister concerns/related parties.
5. The authorities below ought to have considered that the funds advanced to the sister concerns/related parties are ONLY for the purpose of the business of the appellant being in common Real Estate business.
6. The authorities below without considering the above facts on record WRONGLY concluded to disallow a pro-rata interest on the amount advanced which is now prayed by the appellant for allowing as deduction.
7. For the above and other grounds that may be urged and presented at the time of hearing of the appeal, the appellant humbly prays that the appeal may be allowed and justice rendered.”
5. Brief facts are that the AO has noted in the assessment order for Assessment Year 2013-14 that the assessee firm derives income on account of rental income amounting to Rs. 698.40 Lakhs in addition to commission income of Rs. 5,11,008/- and income from other sources of Rs. 4,12,158/-. Thereafter the AO has reproduced the P&L account of the assessee for the year ending as on 31.03.2013, as per which, it is seen that the assessee has debited various expenses such as processing fees, professional fees, corporation tax, Simple Mortgage Deed Expenses, interest on loan and several other expenses and worked out the net profit at Rs. 2,04,74,372/-. The AO has noted that two expenses i.e. corporation tax of Rs. 1,20,50,990/- and insurance paid of Rs. 1,90,802/- total of Rs. 1,22,41,792/- has to be disallowed and in this manner, he computed total income of Rs. 3,27,16,164/- and from that, he reduced income from house property credited to P&L account of Rs. 698.40 Lakhs and in this manner, he worked out business loss at Rs. (-)3,71,23,836/-. This is the objection of the AO that the assessee has attempted to claim business expenditure of Rs. 3,71,23,836/- u/s. 37 of IT Act against a meagre commission income of Rs. 5,11,008/- with an intention to avoid tax liability as per the P&L account. The AO has particularly noted the following expenses i.e. Loan processing charges of Rs. 28.59 Lakhs, Interest on late payment of Corporation tax of Rs. 20,57,670/- and interest on loan on working capital of Rs. 2,76,71,229/-. The AO has observed on page no. 6 of the assessment order that these expenses have not been incurred wholly and exclusively for the purpose of earning commission and brokerage income and in any way, the same cannot be allowed against the rental income assessed under the head income from house property and after making these observations, he made disallowance of Rs. 3,71,23,836/- and assessed the taxable income at Rs. 4,04,52,310/- as against income as per return of income of Rs. 33,28,470/-. Being aggrieved, the assessee carried the matter in appeal before CIT (A) who deleted the disallowance on the basis of the order of CIT (A) in assessee’s own case in Assessment Year 2009-10 with a categorical finding that the AO has not adduced sufficient reasons to assert that the assessee was not engaged in business activities. He has further noted that in Assessment Year 2008-09, as per CIT (A)’s order, the AO’s conclusion is based on this fact that there is no business income declared and he has further held that this fact that sale of the property did not take place due to various reasons during the year cannot automatically imply that no business is carried on. For the sake of ready reference, we reproduce the relevant paras of the order of CIT(A) for Assessment Year 2008-09 being paras 4.1.3 and 4.1.4 which has been reproduced by CIT(A) in the order for Assessment Year 2013-14 on pages 9 and 10 of its order. The same are as under. “4.1.3 On an appraisal of the facts of the case, I am of the view that of the AO has not made out a strong case for holding that the appellant is not involved in business of the appellant as 'Real Estate' but at the same time not controverted the appellant's contention that it is engaged in the business of property development and sale. It had raised large loans the bank and developed a constructed are of 2,00,000 sq. ft. of commercial space though there was no sale during the year since there was a dispute with the development partner, M/s. IBC Knowledge Park. It is pertinent to note that with respect to this property, the appellant has also claimed legal expenses arid security charges, which were disallowed by the AO on the ground that though the constructed area appeared on the balance sheet, no income other than rental income was shown in the profit and loss account. It is the appellant's contention that there was a genuine dispute with regard to the joint development arrangement which necessitated these expenses which were related to securing its rights over its portion o the disputed property and furthering its business. I have to note that the AO has not disputed the fact of the legal dispute, but has questioned the expenditure on security with respect to the development of the security personnel on the disputed portion of the joint development rather than on the owned portion. On this point the appellant argues that it is the disputed portion that needs to be secured more than the owned portion since it is the former which is more vulnerable. 4.1.4 On a careful consideration of the issues, as mentioned above, I find that the AO has not adduced sufficient reasons to assert that the appellant was not engaged in business activities. Whereas he has base his conclusion on the fact that no business income was declared, the fact that the sale of the property did not take place due to various reasons during the year cannot automatically imply that no business is carried on. This is particularly true of a case where a legal dispute exists. The appellant is a partnership based on a registered deed which is part of the record. Business assets exist in the balance sheet and bank loans support these assets. There is a registered Development Agreement dated 26.12.2003 for the development of the property measuring 2,00,000 sq. ft. A legal dispute exists which has affected the business, but which has not been doubted on genuineness by the AO. In the circumstances, it is not inconceivable that a situation like this can cause a genuine business loss. For the immediately preceding year in appeal before it on similar grounds, the Ld. ITAT Bangalore Bench has fund that the appellant did engage in business activity. It is inconceivable that a businessman can be engaged in business activities in an intermittent manner from year to year, when the sale of operations and quantum of loans raised by the appellant are considered. In view of the above, I have to conclude that the appellant is actually engaged in the business of development and sale of real estate, and that the expenses on the premium payments are allowable u/s 37(1). Similar issue has been decided by me in my order dated 03-02-2012 in the appellant's own case for the AY 2007-08 wherein after discussing this issue at length, I have directed the AO to allow the expenses on the premium payments paid u/s 37(1). I, therefore, direct the AO to allow this expenditure and the ground of appeal succeeds.”
6. After reproducing these two paras from the order of CIT (A) in Assessment Year 2008-09, the CIT (A) has decided the issue in Assessment Year 2013- 14 also in favour of the assessee on this basis that in Assessment Year 2009-10 also, similar view was taken and in the present year also, the facts are same.
7. Similarly in Assessment Year 2014-15, the AO made similar disallowance of business expenses to the extent of Rs. 7,61,60,088/- with the same reasoning and in this year also, the assessee carried the matter in appeal before CIT(A). In Assessment Year 2014-15, the ld. CIT(A) has held that in this year also, the business expenses should be allowed but he further noted on the penultimate page of his order for Assessment Year 2014-15 that it is seen from the balance sheet of the assessee that substantial amounts of borrowed money was advanced to the sister concerns / related parties, viz., Century Carbel – Rs. 20.12 Crores, Century Astral – Rs. 7.40 Crores and Canara Housing Development Company – Rs. 3.35 Crores. He held that proportionate interest on the said amounts advanced to sister concerns without interest has to be disallowed out of the total interest debited to P&L account. He directed the AO in this year to obtain the cost of the borrowed funds from the assessee or else the average interest cost debited may have to be apportioned on pro-rata basis and the same may be disallowed. Now the revenue is in appeal before us in respect of relief allowed by CIT(A) and the assessee is in appeal before us in respect of disallowance of interest confirmed by CIT(A). In respect of appeal of the assessee regarding disallowance of interest confirmed by CIT(A), the ld. AR of assessee submitted that as per the balance sheet of the assessee as on 31.03.2014, own funds of the assessee being partner’s capital is of Rs. 3517.36 Lakhs as against the advance given by the assessee firm to three companies i.e. Century Corbel of Rs. 2012 Lakhs, Century Austral Rs. 740 Lakhs and Canara Housing Development Company of Rs. 335 Lakhs total of Rs. 3087 Lakhs. It was submitted that this is settled position of law by now that in case of mixed funds, it should be presumed that advances given to sister concern is out of interest free funds if the interest free funds available with the assessee is sufficient to cover interest free advances given by the assessee. In particular, reliance was placed on a judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Reliance Utilities and Power Ltd. as reported in 313 ITR 340 (Bom.) and also on a judgment of Hon’ble Karnataka High Court rendered in the case of CIT vs. Brindavan Beverages Pvt. Ltd. as reported in 393 ITR 261.
8. Regarding the issue raised by the revenue in its appeal in both years, he submitted that in Assessment Years 2007-08 and 2008-09 similar issue was decided by CIT(A) in favour of the assessee and for those two years, revenue has although filed appeal before the Tribunal in & 811/Bang/2012 dated 20.03.2013 but this issue was not raised by revenue before the Tribunal in these years and the only issue raised in the appeals filed by the revenue before the Tribunal in these two years was regarding the allowability of insurance premium in the nature of keyman insurance premia. He submitted a copy of the Tribunal order in assessee’s own case for Assessment Years 2007-08 and 2008-09.
As against this, the ld. DR of revenue supported the assessment order in both years and reliance was placed by him on the following judicial pronouncements. a) CIT Vs. Transport Corpn. India Ltd., 123 Taxman 806 (Andhra Pradesh) b) Bharat Commerce & Industries Ltd. Vs. CIT, 98 Taxman 151 (SC) c) CIT Vs. U. Manohar Rao, 325 ITR 402 (Karnataka) 10. We have considered the rival submissions. We find that we have to decide two issues. The first issue involved in the appeals of the revenue is this as to whether in the facts of present case, various business expenses debited by assessee in the P&L account is allowable as business expenses in view of this fact that only a meagre income has been offered by assessee as business income being commission income of Rs. 5,11,008/- in Assessment Year 2013-14 and Rs. 4,48,106/- in Assessment Year 2014-15. On this issue, we find that the decision of ld. CIT(A) in Assessment Year 2013-14 is contained on pages 9 and 10 of his order in which he has also reproduced the finding of ld. CIT(A) in assessee’s own case for Assessment Year 2008- 09. Hence these paras are reproduced hereinbelow from pages 9 and 10 of the order of CIT(A) for Assessment Year 2013-14. “Grounds No. 5 to 9 are raised against the action of the Assessing officer in disallowing the expenses claimed in the return of income from the income from business in the assessment order passed u/s 143(3) of the Income tax Act, 1961. In this regard, the appellant has made detailed submissions arguing that the appellant is a partnership firm doing its business for more than a decade in the real estate sector. It is submitted that the projects of the appellant were locked up in litigation & arbitration and hence to cut down the cost the appellant has downscaled its activity to bear minimum to reduce the losses. It has also submitted that the legal proceedings were being actively pursued during the year and which as on today (subsequent years) have culminated in getting a favourable order from the arbitration on 13.12.2014 in the subsequent Asst. years. Further, a copy of the said order was obtained by the undersigned to examine the facts which are found to be true. Further, the appellant has stated that it has re-started its activity and has borrowed huge amount of fresh loans during the financial year 2013-14 from Jammu & Kashmir Bank Ltd amounting to Rs. 58 crore for further use in its business. Further, it has borrowed an additional sum of nearly Rs. 4 crores from the LIC of India during the year, thus, taking the total outstanding to Rs 6,28,44,567. From the above, the appellant has argued that it has indeed continued its business and were relying on the plethora of case laws and argued that temporary downscaling of the activities can not amount to closure of the business. In this regard, the appellant has relied on the appellate orders passed by the then Commissioner of Income tax (Appeals)-III, Bengaluru in the appellant's own case for the Asst. year 2008-09 under the similar circumstances wherein the CIT (Appeals) has held as under: “4.1.3 On an appraisal of the facts of the case, I am of the view that of the AO has not made out a strong case for holding that the appellant is not involved in business of the appellant as 'Real Estate' but at the same time not controverted the appellant's contention that it is engaged in the business of property development and sale. It had raised large loans the bank and developed a constructed are of 2,00,000 sq. ft. of commercial space though there was no sale during the year since there was a dispute with the development partner, M/s. IBC Knowledge Park. It is pertinent to note that with respect to this property, the appellant has also claimed legal expenses arid security charges, which were disallowed by the AO on the ground that though the constructed area appeared on the balance sheet, no income other than rental income was shown in the profit and loss account. It is the appellant's contention that there was a genuine dispute with regard to the joint development arrangement which necessitated these expenses which were related to securing its rights over its portion o the disputed property and furthering its business. I have to note that the AO has not disputed the fact of the legal dispute, but has questioned the expenditure on security with respect to the development of the security personnel on the disputed portion of the joint development rather than on the owned portion. On this point the appellant argues that it is the disputed portion that needs to be secured more than the owned portion since it is the former which is more vulnerable. 4.1.4 On a careful consideration of the issues, as mentioned above, I find that the AO has not adduced sufficient reasons to assert that the appellant was not engaged in business activities. Whereas he has base his conclusion on the fact that no business income was declared, the fact that the sale of the property did not take place due to various reasons during the year cannot automatically imply hat no business is carried on. This is particularly true of a case where a legal dispute exists. The appellant is a partnership based on a registered deed which is part of the record. Business assets exist in the balance sheet and bank loans support these assets. There is a registered Development Agreement dated 26.12.2003 for the development of the property measuring 2,00,000 sq. ft. A legal dispute exists which has affected the business, but which has not been doubted on genuineness by the AO. In the circumstances, it is not inconceivable that a situation like this can cause a genuine business loss. For the immediately preceding year in appeal before it on similar grounds, the Ld. ITAT Bangalore Bench has fund that the appellant did engage in business activity. It is inconceivable that a businessman can be engaged in business activities in an intermittent manner from year to year, when the sale of operations and quantum of loans raised by the appellant are considered. In view of the above, I have to conclude that the appellant is actually engaged in the business of development and sale of real estate, and that the expenses on the premium payments are allowable u/s 37(1). Similar issue has been decided by me in my order dated 03- 02-2012 in the appellant's own case for the AY 2007-08 wherein after discussing this issue at length, I have directed the AO to allow the expenses on the premium payments paid u/s 37(1). I, therefore, direct the AO to allow this expenditure and the ground of appeal succeeds.” In view of the above facts of the case for the current year and also considering the position taken by my predecessor, to be consistent, I have taken an identical view of the matter for the Asst Year 20-9-10. Therefore, as the facts being same during the current year, I am inclined to agree with the submissions made by the appellant in this regard. I accordingly direct the AO to allow the entire expenditure.
Thus, these grounds of appeal are allowed.”
11. Similarly in Assessment Year 2014-15 also, the ld. CIT(A) has reproduced the same paras 4.1.3 and 4.1.4 from the order of CIT(A) in Assessment Year 2008-09 and decided the issue in favour of the assessee except confirming the disallowance in respect of interest on interest free advances to three sister concerns i.e. Century Carbel – Rs. 20.12 Crores, Century Astral – Rs. 7.40 Crores and Canara Housing Development Company – Rs. 3.35 Crores. Before us, the ld. DR of revenue could not point out any difference in facts in the present two years and in Assessment Year 2008- 09 because the ld. CIT(A) in the present two years has followed the order of CIT(A) in Assessment Year 2008-09. In Assessment Year 2008-09, the revenue has filed an appeal before the Tribunal also which has been decided by Tribunal in & 811/Bang/2012 dated 20.03.2013 and we find that in these two appeals of revenue, the only issue raised by revenue is regarding allowability of partnership insurance premium of Rs. 187 Lakhs and Rs. 506.04 Lakhs for these two years paid by the firm being the insurance premium in the nature of keyman insurance premia and regarding allowability of expenditure issue, no ground has been raised by revenue in the these two appeals filed before Tribunal for these two years. Since no difference in facts has been pointed out by ld. DR of revenue in present two years i.e. Assessment Years 2013-14 and 2014-15, in our considered opinion, in view of the principle of consistency, the order of CIT(A) does not contain any infirmity on this issue in both these years and hence, we decline to interfere in the order of CIT(A) on this issue in both the years.
12. Before parting, we examine the applicability of various judgements cited by ld. DR of revenue. The first judgement cited by him is the judgement of Hon’ble High Court of Andhra Pradesh rendered in the case of CIT Vs. Transport Corpn. India Ltd. (supra). In that case, the issue involved was regarding allowability of payment of secret commission by the assessee company to the employees of customers. In the present case, the facts are different and therefore, this judgment is not applicable.
13. The second judgement cited by ld. DR of revenue is the judgement of Hon’ble Apex Court rendered in the case of Bharat Commerce & Industries Ltd. Vs. CIT (supra). In this case, the issue involved was regarding allowability of interest paid on delayed payment of advance tax and this was the stand of the revenue in that case that this could not be considered as wholly and exclusively for business and is not allowable as business expenditure and it was held that the same is not allowable. In the present case, this judgment is also not applicable because the facts are different.
14. The next judgement cited by ld. DR of revenue is the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs. U. Manohar Rao (supra). In this case, it was held that penalty for late filing of return on account of non-payment of tax was just and proper. Since the issue involved in present case is different, this judgment is also not applicable in the present case.
Hence it is seen that none of the judgements cited by ld. DR of revenue is rendering any help to revenue in the present case.
Both the appeals of the revenue are dismissed.
Now we take up the appeal of the assessee. We find that in Assessment Year 2014-15, although the CIT(A) has deleted the disallowance made by the AO regarding various expenses but he has directed the AO to make disallowance out of interest expenditure on proportionate basis in respect of interest free advances given by the assessee to three sister concerns. a) Century Corbel of Rs. 2012 Lakhs b) Century Austral of Rs. 740 Lakhs and c) Canara Housing Development Company of Rs. 335 Lakhs Total of Rs. 30.87 Crores 18. The Balance Sheet of the assessee firm for the year ending as on 31.03.2014 is available on record and as per the same, we find that the assessee’s own interest free funds in the form of partners’ capital as on 31.03.2014 was to the extent of Rs. 35,17,36,566/- and hence, it is seen that the interest free funds available with the assessee is much more than the interest free advances given by assessee firm to its sister concerns. In the light of these facts, we examine the applicability of the judgments of Hon’ble Bombay High Court rendered in the case of CIT vs. Reliance Utilities and Power Ltd. (supra) and of Hon’ble Karnataka High Court rendered in the case of CIT vs. Brindavan Beverages Pvt. Ltd. (supra). As per para 10 of this judgment of Hon’ble Bombay High Court, it is held that if interest free funds available with assessee is sufficient to meet its investments and at the same time, the assessee has raised a loan, it can be presumed that the investments were from the interest free funds available and in that situation, no disallowance can be made out of interest expenditure. Hon’ble Karnataka High Court has considered this judgment of Hon’ble Bombay High Court and held that no substantial question of law arises because the tribunal order is on the same line as held by Hon’ble Bombay High Court. Respectfully following these two judgments of Hon’ble Bombay High Court and Hon’ble Karnataka High Court, we hold that ld. CIT(A) was not justified in making disallowance out of interest expenditure in respect of interest free advances given by the assessee firm to its three sister concerns because the interest free funds available with the assessee as on 31.03.2014 of Rs. 35.17 Crores is higher than the interest free advances given by the assessee firm to its three sister concerns to the extent of Rs. 30.87 Crores. Hence we delete this interest disallowance.
In the result, the appeal filed by the assessee is allowed.
In the combined result, both the appeals of revenue are dismissed and the appeal of the assessee is allowed. Order pronounced in the open court on the date mentioned on the captionpage.