ITO 9(2)(1), MUMBAI vs. AVIVA HOMES P.LTD, MUMBAI

order dated 03/09/2013 of the CIT (A)-20,Mumbai,the Assessing Officer (AO) has filed the present appeal.Assessee-company, engaged in the business of construction develop -ment of building,filed its return of income on 07/10/2010,declaring income of Rs.583/-. The AO completed the assessment u/s.143 (3) of the Act,on 7/12/2012. 2.First ground of appeal is about deleting the disallowance of proportionate interest expenditure made by the AO.During the assessment proceedings,the AO found that assessee had purchased a plot of land at Bangalore,that in the books of accounts it was shown as project in which cost of plot together with stamp duty and interest payment on borrowed funds had been capitalised, that it had increased the project cost by Rs. 37.49 lakhs being interest on borrowed funds, that out of the total unsecured loans of Ruby 7.90 crores the assessee had invested Rs. 4.42 crores in project cost, that Rs. 3.5 and crores were advanced as interest-free loans.The AO asked the assessee to explain as to why the proportionate interest on the interest-free deposit should not be disallowed. After considering the submission of the assessee,the AO held that out of the interest-bearing from the assessee had advanced and amount of Rs. 3.51 crores to Triangle Realty Ventures Private Ltd (TRVPL),that it had diverted the interest-bearing funds for non-business activities, that the interest claimed by it was not fully allowable as business expenditure attributable to the project cost within the meaning of provisions of section 36 of the

6957/M/13(10-11) Aviva Homes Act.Finally,the AO disallowed 44% of the interest expenditure (Rs. 16.49 lakhs) and allowed the balance 56% (Rs. 20.19 lakhs) for capitalisation.

2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, the assessee stated that advances were made for business purposes only, that the AO had issued a notice u/s. 133 (6) of the Act to TRVPL,that the said party had confirmed the receipt of advance.After considering the submission of the assessee and the assessment order, the FAA held that the AO had wrongly disallow Rs. 60.49 lakhs out of total debit interest expenditure of Rs. 37.49 lakhs, that advance had been made to TRVPL for procur -ing plot of land,that the funds were utilised for business purposes,that there was no justification to presume that 44% of the advance was not for business purposes, that there was no doubt about the genuineness of the transaction, it was wrong on part of the AO to presume that assessee had not capitalised the advance to the project.Finally,he deleted the addition made by the AO.

2.2.Before us,the Departmental Representative (DR) stated that matter could be decided on merits. The Authorised Representative (AR) stated that assessee was carrying on only one business of construction and development of plot of land at Bangalore during the year under appeal, that it had given some of Rs. 3.51 crores to TRVPL for development of land purchased, that the party had admitted of receiving the advance.

2.3.We have heard the rival submissions.We find that out of interest-bearing funds of Rs.7.57 crores the assessee had capitalised and amount of Rs. 4.21 crores, that it had advanced an amount of Rs. 3.51 crores to TRVPL,that in response to the notice issued by the AO TRVPL had admitted receiving the advance from the assessee, that both the parties are not related,that the AO had not brought any evidence on record to prove that advance was not for business purposes. It is a simple business transaction related with plot of land purchased at Bangalore by the assessee. Therefore,in our opinion,the FAA had rightly held that business expenditure incurred by the assessee during the year was of revenue nature and had to be allowed in full.There is no justification in disallowing any part of the interest expenditure.So,confirming his order,we dismiss the first ground of appeal.

3.Deletion of disallowance made u/s.40A(3) of the Act is the subject matter of second ground of appeal.During the assessment proceedings, the AO found that the assessee had claimed 2

6957/M/13(10-11) Aviva Homes total project cost at Rs.4.42 crores, that the majority of payments were towards land cost and stamp duty expenses. Notice u/s. 133 (6) was issued to TRVPL with regard to expenses incurred by the assessee through it. It was gathered that payments amounting to Rs. 2.80 crores were made by TRVPL on behalf of the assessee towards stamp duty and land cost.It was further found that the assessee had accounted for these expenses to Journal entries in its books of accounts. The AO held that payments made by the assessee was clear violation of provisions of 40(A)(3).After considering the submissions of the assessee in that regard,a disallowance of Rs. 2.80 crore was made.

3.1.During the appellate proceedings before the FAA,the assessee made submissions stating that there was no violation of 40(A)(3), that there was no doubt about incurring of the expenditure in question.After considering the available material, the F AA held that the assessee had made payment through account payee cheques to TRVPL,that TRVPL further made the payment through banking channel to the land-owners,that no cash was paid for purchasing the plot of land, that genuineness of the transaction and payment through account payee cheque is not in dispute,that on the ground that assessee had made Journal entry for onward payment cannot be considered as cash transaction,that the AO had wrongly applied the section 40(A)(3)of the Act in respect of the disputed amount.

3.2.The DR left the issue to the discretion of the bench. The AR supported the order of the FAA.We find that there is no doubt that the assessee had not made any cash payment to anybody during the year under consideration, that it had paid Rs. 2.80 crore to TRVPL through banking channels, that TRVPL in turn made payment to the land-owners for purchasing the plot of land and to the Registrar for purchasing stamp papers.The payment to the landowners and the Registrar was made through cheques/demand draft.Thus,there is no evidence of cash payment in the whole transaction.We are unable to understand as to how the provisions of 40(A)(3) of the Act can be invoked in such circumstances. It appears that the AO had not understood the purpose and intent of introducing the 40(A)(3) by the Legislature,while determining the income of the assessee. Journal entries cannot be basis for invoking the provisions of 40(A)(3),when there is no evidence of any cash payment.The FAA has given a categorical finding of fact that all the payments in question were through banking channels.In spite of such a clear-cut finding of fact,why the second appeal was preferred before the Tribunal, is beyond our comprehension.As we see no reason to interfere with the order of the FAA,so,confirming the same,we decide ground number two against the AO. 3