VIJAYNATH ROOF AND WALL CLADDING SYSTEM PVT LTD,MUMBAI vs. DCIT 8(3)(2), , MUMBAI

The assessee is a private limited company engaged in the business of taking on contract basis turnkey project of metallic roofing and cladding and some times ceiling works. The assessee filed the return of income for AY 2015-16 on 30.09.2015 declaring a total income of Rs. 1,87,71,750/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer (AO) completed the assessment by making various additions assessing the income of the assessee at Rs. 5,16,30,000/-. On further appeal, the CIT(A) gave partial relief to the assessee. The assessee is in appeal before the Tribunal against the order of the CIT(A). During the course of hearing, the ld. AR submitted that ground no. 2, 5 & 8 are not pressed and therefore, these grounds are dismissed as not pressed.

On perusal of the balance-sheet the Assessing Officer (AO) noticed that an amount of Rs. 29,69,920/- has been shown as capital advances. The AO further noticed that the assessee has borrowed funds on which interest is paid and claimed as a deduction to the tune of Rs. 1,29,39,493/-. The AO called on the assessee to furnish details and to show-cause as to why the proportionate interest attributable to capital advances cannot be disallowed. Since the assessee did not file any reply, the AO calculated the proportionate disallowance of Rs. 1,78,322/- and made addition accordingly. The CIT(A) reduced the disallowance by Rs. 67,110/-.

We heard the parties and perused the material on record. During the course of hearing our attention was drawn to the financial statements of the assessee (page 12 to 49 of Paper Book). From the perusal of the balance-sheet we notice that as of 31.03.2015 the own funds of the assessee is at – Share Capital Rs. 1,00,00,000/- Reserves & Surplus Rs. 17,22,77,043/- Total Rs. 18,22,77,043/-

We further notice that the borrowings of the assessee as at 31.03.2015 is at Rs. 3,32,20,802/- and the capital advance given by the assessee as stated by the AO is at Rs. 29,69,920/-. Therefore, we see merit in the submission of the ld. AR that the capital advance is given out of own funds and therefore, the interest paid by the assessee on borrowings cannot be disallowed. In our considered view when interest free own funds are available with the assessee no disallowance towards interest can be made towards interest unless it is established that the assessee has utilized the loan funds to give capital advance. In the given case the AO has done the proportionate disallowance without bringing any material to substantiate that the capital advance is given out of borrowed fund. Accordingly, we direct the AO to delete the proportionate disallowance made towards interest.

The AO has also made a disallowance of Rs. 10,81,838/- towards interest claimed by the assessee for the reason that the assessee has given loan of Rs. 1,45,12,369/- to Directors and other related parties on which no interest is charged and that an amount of Rs. 51,85,000/- is outstanding against loans and advances to others for which the assessee has not explained the purpose. Therefore, the AO made a proportionate disallowance against the total finance cost of Rs. 1,29,39,493/-. The CIT(A) confirmed the said disallowance.

We heard the parties and perused the material on record. From the perusal of the facts as emanated above, it is clear that the loans and advances given by the assessee to Directors and others is less than the own funds available with the assessee which is at Rs. 18.22 crores (refer table above). We have in the earlier paragraph held that when interest free own funds are available with the assessee no disallowance towards interest can be made towards interest unless it is established that the assessee has utilized the loan funds to give capital advance / interest free loans. Therefore, we direct the AO to delete the proportionate disallowance made towards interest. Ground raised by the assessee is allowed.

During the assessment proceedings, the assessee furnished details before the AO in respect of loan obtained for the purchase of vehicle and machinery. On perusal of the said details, the AO noticed that a sum of Rs. 19,035/- and Rs. 3,09,795/- has been paid to Kotak Mahindra Prime Ltd. and Dailmer Financial Services (I) Pvt. Ltd. which are NBFCs and that the assessee has not deducted TDS on the interest paid. Since the assessee did not furnish any further details, the AO disallowed the entire amount of interest under section 40(a)(ia) of the Act.

The ld. AR submitted that the loan parties to whom the interest paid are reputed NBFCs and they would have been included the interest income received from the assessee as part of their taxable income while filing the return. Accordingly, the AR submitted that the 2nd proviso to section 40(a)(ia) would be applicable in assessee's case and no disallowance is warranted.

We heard the parties and perused the material on record. It is an admitted position that the assessee has not deducted tax on the impugned interest paid to NBFCs. The only contention of the assessee is that the NBFCs would have included the interest paid by the assessee as part of the income and offered the same to tax. Therefore we direct the AO to delete the disallowance made under section 40(a)(ia) once the assessee is able to substantiate the claim that the payees have included the interest as their income while filing their tax return. It is ordered accordingly.

On perusal of the fixed assets schedule the AO noticed that the assessee has shown a sum of Rs. 1,50,02,510/- as sale of land & building during the year under consideration. Since the assessee has not offered any capital gains the AO called on the assessee to furnish details pertaining to the same. The assessee submitted that the assets that purchased in the name of the directors were wrongly capitalized as assets of the company in earlier years and that during the year under consideration the same was reversed to be transferred as loan to directors. Accordingly, the assessee submitted that the amount reflected in the fixed assets schedule is not the actual sale but reversal of erroneous entry passed in the earlier year. The AO however, did not accept the submissions of the assessee and made an addition towards capital gains by holding that “5.7.3: The submission made by the assessee is considered and the same is not tenable. On perusal of the loans & advances to related parties it is seen that total loan & advances to directors as well as related parties is shown at Rs. 1,45,12,369/-, whereas the amount reduced from the fixed assets is to the extent of Rs. 1,50,02,510/-. Moreover the assessee company had already taken the depreciation on the amounts shown under buildings in previous years. The assessee has not correlated the figures of amounts reduced from fixed assets with that of corresponding figures of loan to director and therefore the submission made by the assessee is not acceptable. Further the assessee company is a corporate entity whose accounts are audited by a chartered accountant regularly year on year basis. Therefore amounts of lean gun directors could not have been clubbed with the fixed assets, as the auditor is required to verify the addition to fixed assets at the time of audit As such the arguments given by the assessee are rejected summarily and the entire amount of sale consideration of Rs. 1,50,02,510/- is treated as short term capital gains and added to the total income of the assessee. Penalty proceedings u/s 271(1)(c) of the Act are separately initiated for concealing particulars of Income.”

We heard the parties and perused the material on record. The ld. AR reiterated the submissions made before the AO and in this regard drew our attention to the journal entries passed and the ledger copies of the land & building (page 55 to 60 of the PB). It is a contention of the assessee that in earlier year two assets namely Shirval (Pune) Plot and Sanghvi (Pune) flats were purchased in the name of directors by the company and that the same is erroneously capitalized as assets of the company. During the year under consideration the entry in the books are corrected by reversing the above capitalization and therefore the amount reflected in the fixed assets schedule is not actual sales. It is also submitted that the reversal entry is passed for the original cost without any profit margin and there is no capital gain arising out of the entire transaction. It is relevant to mention here that the assessee did not bring anything on record to evidence the cost at which the assets were erroneously capitalized in the earlier years and whether any depreciation has been claimed on the same. We notice that the assessee did not submit any documentary evidences supporting the above claim before the AO or the CIT(A). In view of this discussion, we are of the considered view that the issue should go back to the AO for factual examination of the claims of the assessee. The assessee is directed to file the necessary details as may be call for by the AO and co-operate with the assessment proceedings. It is ordered accordingly. Disallowance of sundry balances written off – Ground No.7.

The AO during the course of assessment noticed that the assessee has claimed a sum of Rs. 23,65,595/- towards sundry balances written off. The AO called on the assessee to furnish evidence in respect of the fact that income on account of these balances have been offered to tax in earlier years. However, the assessee did not file any details evidencing the said fact. Therefore, the AO disallowed the amount written off against sundry balances.

We heard the parties and perused the material on record. From the perusal of records we notice that the assessee has not submitted the relevant details or any documentary evidences in support of the write off of the sundry balances and whether the same was part of income offered to tax in earlier years. The ld. AR during the course of hearing fairly conceded that the assessee could not furnish the relevant details before the lower authorities and prayed for one more opportunity. Considering the facts of the present case and in the interest of natural justice, we are inclined to give one more opportunity to the assessee to produce the relevant details before the lower authority. Therefore, we remit the issue back to the AO to consider the issue afresh. The assessee is directed to file the necessary details as may be call for by the AO and co-operate with the assessment proceedings. It is ordered accordingly.

In the result, the appeal of the assessee is partly allowed.