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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI C.N. PRASAD, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeal by revenue for Assessment Year [AY] 2011-12 assails the order of the Ld. Commissioner of Income-Tax (Appeals)-24 [CIT(A)], Mumbai, Appeal No.CIT(A)-22/DCIT-10(3)/IT-288/13-14 dated 27/11/2015 by raising the following effective grounds of appeal:-
Pushpanjali Realtors Private Limited Assessment Year 2011-12 1. On the facts and circumstances of the case in law, the Ld. CIT(A) erred in allowing capitalization of interest expenses of Rs.2,94,31,532/- without allowing opportunity to AO and without verifying that the loan has been taken to invest in capital asset.
Without prejudice to above, the Ld. CIT(A) failed to appreciate the fact that rate of interest claimed is also exorbitant i.e.@32% p.a. which was not for the purpose of business.
3. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer is restored.
The assessment for impugned AY was framed u/s 143(3) by Ld. Deputy Commissioner of Income Tax Officer-10(3), Mumbai [AO] on 10/01/2014. 2.1 Facts leading to the same are that the assesse being resident corporate assessee engaged in the business of real-estate was assessed u/s 143(3) at Rs.‘Nil’ as against returned loss of Rs.2,94,73,439/- e-filed by the assessee on 19/09/2011. During assessment proceedings, it was noted that the assessee claimed expenses of Rs.2,94,73,439/- including finance expenses of Rs.2,94,31,532/-. The interest was paid by the assessee to lenders @32% p.a. The assessee did not reflected any sales or closing stock during the year but reflected advances for purchase of flats under the head Current Assets in the Balance Sheet. The Ld. AO opined that since no business activity was being carried out by the assessee, the said expenditure was not allowable to the assessee. Accordingly, he disallowed the entire expenditure as claimed by the assessee and completed the assessment. 2.2 Aggrieved, the assessee contested the stand of Ld. AO with partial success before Ld. CIT(A) vide impugned order dated 27/11/2015, where Pushpanjali Realtors Private Limited Assessment Year 2011-12 Ld. CIT(A) concurred with the alternative claim of the assessee and concluded the matter in the following manner:- 2.4 I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. 2.4.1 Ground Nos.1 to 3 are against the disallowance of entire business income of Rs.2,94,73,439/- on the ground that there is no business activity during the year under consideration since there was no sale. Ground No.4 is a without prejudice statement seeking capitalization of interest expenses and allowance of small administration expenses for running the company. Ld. AO observed that the appellant was stated to be involved in trading of flats and during the year under consideration had shown NIL sales and NIL stock-in-trade at year end against which expenses of Rs.2,94,73,439/- were claimed in the Profit and Loss account which included finance expenses of Rs.2,94,31,532/-. He found that the appellant had shown Rs.13.20 crore as advance for purchase of flat under the head ‘current assets.’ It was further observed that the funding for purchase of flats was received from two companies to whom the appellant had paid interest @32% p.a. However, as the Ld. AO found that there was no business activity during the year, the appellant should have shown the profits invested as stock-in- trade to claim benefit of interest expenses which has not been done and hence, the interest expenditure claimed in the Profit and Loss account was not justified. Ld. AO further observed that there was no business activity in the earlier year i.e. A.Y.2010-11 and hence, even the claim of expenditure for that year was not stated to be incurred for the purpose of business. 2.4.2 Per Contra, it has been stated by the appellant that it was engaged in the business of real estate development and trading in immovable property and had purchased/booked total 23 flats at Sewa Nagar Society, Khar(W), Mumbai for which total fund of more than Rs.12 crore was deployed. It was further stated that the agreements for purchase of the said flats were duly registered and these facts were not in dispute. However, due to court litigations the project in which the appellant had purchased the flats was stayed and the flats purchased remained under constructed. It was for these reasons they were not shown as stock-in-trade nor were they shown as work-in-progress since it was not the appellant who was developing the said project. It was further stated that as per the Memorandum of Association trading in immovable property was one of the objects of the appellant and, hence, business activities commenced once the flats were purchased and payments were made. It was further submitted that for carrying out the said business activity, the appellant had borrowed funds and utilized the same for purchase of flats, a fact which has not been controverted by Ld. AO. I also find that the appellant has raised Ground No.4 which is a ‘without prejudice’ ground by stating that even if for any reason the purchases of flats was not considered as its business activity, in that case, the interest expenses incurred towards the same amounting to Rs.2,94,31,532/- ought to have been capitalized and the balance expenses allowed as deduction in the nature of maintenance of status as a company. On appreciation of the entire facts, whereas I find that the appellant was working more as an investor rather than a trader of flats and, therefore, there is considerable force in the arguments of Ld.
Pushpanjali Realtors Private Limited Assessment Year 2011-12 AO that there was no business activity per se in making an investment in purchase of flats. What the appellant was doing was perhaps using his knowledge and skill to make bookings in flats which were in construction and obviously been purchased at lesser rate for reaping maximum investment value at the time of its transfer However, the fact remains that the appellant had incurred interest expenses for borrowing the fund to make investment in the said properties. Even the same is not held to be eligible under the head ‘Business’, there is no infirmity in the ‘without prejudice’ claim that the same should have been allowed to be capitalized. Accordingly, paying heed to the ‘without prejudice’. Ground of the appellant, vide Ground No.4, whereas Ground Nos. 1 to 3 are dismissed, Ground No.4 is allowed as far as interest expenses of Rs.2,94,31,532/- is concerned. As regards the balance amount of Rs 41,900/- the same appears to be on account of maintenance of the appellant company which ought to be allowed for running of the said company.
Aggrieved, the revenue is in further appeal before us.
The Ld. Departmental Representative [DR] supported the stand of Ld. AO whereas Ld. Counsel for Assessee [AR] pointed out that if the expenditure was not allowable as revenue expenditure then alternatively, the same should be allowed to be capitalized and therefore, the stand of Ld. CIT(A) was quite fair and logical.
We have heard the rival contentions and perused relevant material on record. After going through the same, we concur with the stand of Ld. first appellate authority since we have noted that Ld. CIT(A) has only upheld the stand of Ld. AO. From the impugned order, it is quite evident that the Ld. CIT(A) has only accepted the alternative claim of the assessee and allowed capitalization of interest expenditure since no business activity was carried out by the assessee during impugned AY. The Ld. AO, in paragraph 3.2 of the quantum assessment order has also expressed similar view. Regarding rate of interest of 32%, the revenue could not point out how the same was excessive or unreasonable in the circumstances. The other expenditure of Pushpanjali Realtors Private Limited Assessment Year 2011-12 Rs.41,900/-, being administrative in nature and incurred to maintain the corporate identity has rightly been allowed as revenue expenditure. Therefore, finding no strength in revenue’s appeal, we dismiss the same.
Resultantly, the revenue’s appeal stands dismissed.
Order pronounced in the open court on 17th January, 2018.