M/S. RANGOLI PROJECTS PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

This is an appeal filed by the assessee against the order of the ld. CIT(A)-XVIII, New Delhi dated 19.10.2012 for the assessment year 2009-10 on the following grounds :

That the impugned order passed by the Ld. CIT(A) is bad in law and against the facts of the case.”

The brief facts of the case are that the assessee company is engaged in the Real Estate business as emanated from the order of the Assessing Officer. It filed return of income declaring nil income. The case was selected for scrutiny and statutory notices were issued and served. On scrutiny of accounts, the Assessing Officer noted that there were no any purchase and sale done during the year. Only opening and closing balances have been shown during the year. A sum of Rs.33750/- has been capitalized himself towards pre-operative expenses and it has been added into the closing stock/WIP. The resultant figure of closing stock, thus, comes to Rs.12,91,42,197-50. On perusal of profit and loss account, the Assessing Officer found that the assessee has claimed expenses in the profit and loss account of director’s remuneration of Rs.3,60,000/-, interest on bank loans of Rs.96,67,557/- and processing charges on loans of Rs.25,00,000/- and administrative expenses of Rs.3,34,360/-, totaling to Rs.1,28,61,917/-. The ld. Assessing Officer disallowed these expenses stating that these expenses are not related to the business of the assessee because no any business activity has been carried by the assessee during the year.

The appellant also earned interest on FDR for a sum of Rs.43,58,380/-. As per records, this interest has been received by the assessee and the FDRs were used for the purpose of taking bank guarantee for obtaining license from HUDA. The AO noticed that the assessee had credited interest income on FDR in its profit and loss account which has been claimed as business income by the assessee. But the plea of the assessee has not been accepted by the AO treating it as income from other sources.

Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the first appellate authority who confirmed the order of the Assessing Officer and dismissed the appeal of the assessee. Aggrieved by this order of ld. CIT(A), the assessee is in appeal before ITAT.

The ld. AR of the assessee submitted that the appellant has obtained a license from HUDA for the development of certain lands. The Director of Town and Country Planning Haryana Chandigarh required 25% of bank guarantee for the internal and external development purpose for the allotted land. Therefore, the appellant has prepared fixed deposits for Rs.145.48 lacs and 347.14 lacs which were pledged with Punjab National Bank for issuing bank guarantee in favour of the aforesaid party. The interest has been received on this fixed deposit as stated above. License was granted on 21.06.2007. During the assessment year 2008-09, the appellant had incurred administrative expenses for a sum of Rs.32,33,814.58 and received interest on FDR of Rs.32,30,792/- and miscellaneous receipts of Rs.3680/-. The Assessing Officer denied these claims of assessee. The matter travelled upto the stage of Hon’ble High Court wherein Hon’ble High court has accepted the claim of the assessee vide order dated 11.12.2013 (ITA No. 506/2013) placed on paper book page 61 to 67. He, therefore contended that the authorities below are not justified to disallow the similar claim of assessee during the year under consideration. He also placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. Jaypee DSC Ventures Ltd., 335 ITR 132 (Del.) wherein it was held that the interest income earned by the assessee on FDR was business income. The FDR given for obtaining the license from HUDA as per their requirement, therefore, cannot be deemed for the purpose other than business. The interest income earned by the assessee on FDR should be netted with the interest paid by the assessee. The assessee has obtained loan for the purpose of business. Therefore, all the expenses related to the bank loan should be allowed as business expenditure. The assessee is a company registered with Registrar of Companies. It has obtained certificate of commencement of business. Therefore, the company is carrying on the business for the purpose for which it was incorporated. Therefore, the expenditure incurred by the company is business expenditure. He has relied on the decision of Bokaro Steels 236 ITR 315. With regard to disallowance u/s. 14A, the ld. AR relied on the decision of Hon’ble High Court in his own case for the assessment year 2008-09 as noted above.

The ld. DR relied on the orders of the authorities below. He further submitted that there was no any business activity on the part of the assessee during the year. On perusal of profit & loss account, it is clear that there is no any purchase or sale and only closing stock/WIP has been increased by Rs.33,750/-. Therefore, the expenditure claimed by the assessee have not been rightly treated as business expenditure and interest on FDR has also rightly been treated as income from other sources by the authorities below. Whatever expenditures have been debited in profit and loss account should be capitalized. He, therefore, urged that there is no need to interfere with the order of the ld. CIT(A).

After hearing both the parties and perusing the material available on record, we find that the ld. AR placed reliance on the order of Hon’ble jurisdictional High Court in its own case for the assessment year 2008-09, which squarely covers the issue for this year except the three heads of expenditure, which has been claimed by the assessee as new items during this year :

As regards directors remuneration debited in the profit and loss account for a sum of Rs.3,60,000/- we find that it was for the purpose of business. The directors remuneration is authorized by Article of Association of Company which is within the limit. The statutory auditor of the company has not commented against this expenditure. It is a part of administrative expenditure. Without using the services of the directors, the key decisions of the business cannot be taken. Therefore, it is essential to give remuneration as per Rules and Regulations of the company. In view of this, this expenditure is allowable as business expenditure.

In respect of interest on bank loans of Rs.96,67,557/- and processing charges on such loans of Rs.25,00,000/-, the ld. AO has disallowed these expenditure because no any business activity has been done. The appellant has claimed it as revenue expenditure and debited it into the profit and loss account. After perusal of the paper book, we find that at page 5 of the paper book, the statutory auditor of the company has given details of the loans and advances which are disclosure part of the auditor’s report u/s. 301 of the Companies Act, 1956. In Annexure-A, placed at paper book page 9, the Company has given substantial amount of advances to DD Township Ltd. of Rs.9,09,45,523.07. On paper book page 20, the DD Township Ltd. has been classified under the transaction with related parties and this company has been given advance. The appellant has taken term loan from Union Bank of India, which is clear from paper book page 21. This advance has been given to DD Township Ltd. for purchase of land. The appellant has filed before the Assessing Officer the source of loan and its utilization, in which he has clearly stated that the loan has been given for the purchase of land whereas no land has been purchased during the year. The term loan has been taken from Union Bank of India and the same has not been utilized for the purpose of business. After analyzing the balance sheet of the company, we find that there is no vast difference between the figures of balance sheet as compared to the previous year except schedule-9 relating to loans and advances (advances recoverable in cash or in kind), which has been increased by Rs.8,44,28,188/- in asset side of the balance sheet and in schedule 2, secured loans has been enhanced by Rs.8,17,55,868/- at liability side in the balance sheet. The company has paid interest & processing charges on this loan to the bank. The interest paid is allowable u/s. 36(1)(iii) of the IT Act for purchase of asset only when such assets are first put to use in the business. It is clear from the audited accounts of the company and submissions made before the lower authorities that the aforesaid term loan has been given as advance for purchase of land. However, the record reveals that no such land stood purchased by the assessee company. Therefore, once the asset in the form of land, for which the assessee is said to have given the advance, does not stand proved in possession of the assessee, there is no question of its use for the purpose of business. Only advancing the money for acquisition of asset does not qualify the deduction of interest unless the said asset is acquired by the assessee company and is put to use by it for the purpose of business. In the instant case, no such circumstances exist. Therefore, in these peculiar facts and circumstances, in our considered opinion, the assessee is not entitled to get deduction of interest and processing charges on the impugned loan as revenue expenditure. The decisions relied by the assessee in the case of Bokaro Steels (supra) and CIT vs. Sarabhai Management Corpn. Ltd. 192 ITR 151 (SC) are not applicable in the present case, having been based on different set of facts. Therefore, the same do not render any help to the assessee in the present case. Accordingly, this ground of appeal is allowed in part.