KAMANWALA HOUSING CONSTRUCTION LTD,MUMBAI vs. ADDL CIT 6(2), MUMBAI

4. During the course of hearing the assessee also placed on record following additional grounds:

10. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in not reducing sum of Rs.2,91,30,922/- towards interest receivable from Kamanwala Lakshachandi Todays Developers (KLTD) from A.Y. 2012-13.

11. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in not reducing sum of Rs.1,15,99,516/- towards interest receivable from Kamanwala Lakshachandi Todays Construction (KLTC) from A.Y. 2013-14.

5. Ground No.1 & Additional Grounds: In these grounds, the assessee is aggrieved with the action of the lower authorities in making addition on notional basis on account of interest accrued on the amount of capital contribution made by the assessee in the partnership firms namely Kamanwala Lakshachandi Todays Developers (KLTD) and Kamanwala Lakshachandi Todays Construction (KLTC).

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5.1. The brief background is that the AO observed during the assessment proceedings that the assessee had made investment by way of capital contribution in the aforesaid partnership firms from which no interest on capital has been offered for taxation even though the deed of partnership firm provided for the same. During the course of assessment proceedings, the assessee made submissions before the AO to argue that no interest had accrued during the year under consideration, therefore, same was not credited in the books of accounts. The AO was not satisfied with the arguments of the assessee, and therefore addition was made by the AO for an aggregate amount of Rs.4,07,30,483/- (i.e. Rs.2,91,40,922/- +1,15,99,516). 5.2. During the course of appeal before Ld. CIT(A), the assessee submitted copy of partnership deed entered with these firms and also filed terms of agreement of loan sanction letter of credit facilities dated 16.07.2008. The assessee also filed balance sheet and profit and loss account for subsequent years to show that interest income has been offered by the assessee in A.Y. 2012-13. Ld. CIT(A) examined all the submissions and evidences as were placed before him, but he was not satisfied with the argument of the assessee that the amount of interest did not accrue. Therefore he upheld the action of the AO. However, he did not adjudicate the alternative submissions of the assessee wherein it was submitted by the assessee that the impugned addition made by the AO has led to double addition of the same income in two different years.

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5.3. Being, aggrieved, the assessee filed an appeal before the Tribunal. 5.4. During the course of hearing, detailed arguments were made to contest the action of the lower authorities in holding that interest income had accrued during the year under consideration. It was alternatively submitted that the assessee would be satisfied if its alternative prayer is accepted and double addition is removed. 5.5. Per contra, Ld. DR submitted that the facts of the case clearly indicate that the interest income had accrued during the year before us, and therefore assessee should have offered the same in its return for the impugned year. However, Ld. DR fairly agreed that double addition of same income should be removed. 5.6. We have carefully gone through entire facts and circumstances of the case. The impugned interest income has been added by the AO in the impugned year on the ground that interest had accrued with the passage of time. Therefore, interest income pertaining to the year under consideration should have been offered to tax in this year itself. But, on the other hand, the assessee has offered the same to tax in assessment years 2012-13 & 2013-14. Our attention was drawn on the copy of returns and other evidences pertaining to these two year showing that impugned interest income has already been offered to tax in these two years. The same has also been accepted by the AO as part of income in A.Y. 2012- 13 & 2013-14. The detailed chart was furnished before us in support of this argument. Ld. DR did not controvert the 6 Kamanwala Housing Construction Ltd. factual assertion made by the assessee that the same interest income has already been offered to tax in A.Ys. 2012-13 & 2013-14. 5.7. Thus, admittedly and undisputedly, it is a case of double assessment of same income. Such a situation is highly unjustified and not permitted under the provisions of income tax law. Therefore, keeping in view alternative prayer of the assessee, we direct that interest income offered in the subsequent years should be excluded from total income to remove the double addition. The AO is directed to pass requisite rectification order in Assessment Years 2012-13 & 2013-14 so as to give effect to our order. The assessee is also directed to furnish requisite details and documentary evidences to the AO to show that same interest income has already been offered in A.Y. 2012-13 and 2013-14. Thus, these grounds may be treated as allowed in accordance with the aforesaid directions. Under these circumstances, we do not find it necessary to adjudicate the other issues raised by the assessee with regard to these grounds.

allowability of the said claim. In response the Assessee submitted as under: "An amount of Rs. 9,79,200/- is outstanding for more than 20 years which is due from Attar Industrial Gases Pvt. Ltd. We are supplying them Gas Cylinders on lease rent basis. The said party has now advised us that the Gas Cylinders delivered to them were defective and they cannot accept the Cylinders. Therefore no Rent is due to us. However, for recovering the said amount from them we should have taken up the matter legally against the party. But we decided not to take legal action against them for recovering the Rent due as it would cost us about Rs. 3.00 to Rs. 5.00 Lacs. So, we decided to write off the said amount. " 6.2. But, AO was not satisfied with the claim on the ground that as per law, unless and until it was established by the assessee that the impugned ‘write-off’ represented its revenue receipt and the same was offered to tax in earlier years, it cannot be allowed as Bad Debt in its hands, and since the assessee was not able to place on record requisite evidences to substantiate the nature of impugned transactions or eligibility of the said claim, it was held as not allowable. 6.3. During the course of hearing before the Ld. CIT(A), detailed arguments were made. But Ld. CIT(A) confirmed the action of AO by observing as under: “Ground of Appeal No 2 relates to the disallowance of Rs 9,79,200/- claimed as write off of sundry debtors, The appellant has not submitted, both in the assessment as well as appellate stage any evidence of claim of income offered in any earlier years. Hence I find no infirmity in the disallowance made by the Assessing officer. Hence the Ground of Appeal No 2 is dismissed.

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6.4. During the course of hearing it was submitted that the issue has not been properly adjudicated by the lower authorities. 6.5. Per contra Ld. DR also submitted that this issue can be sent back for proper verification of facts. 6.6. We have gone through the orders passed by the lower authorities. It is noted that Ld. CIT(A) has passed non- speaking order without giving proper reasoning. We find it appropriate to send this issue back to the file of the AO. The assessee shall submit on record requisite details and evidences to justify its claim. The assessee is required to show that the impugned amount has already been included in its income in earlier years so as to claim the benefit of paid debts u/s 36(1)(vii). The AO shall decide this issue again after considering all the facts and circumstances, as may be brought on record by the assessee. The assessee is also permitted to make any alternative claim as may be permitted under the law. With these directions, this ground is restored to the file of AO and may be treated as allowed for statistical purposes.

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7.2. The brief background as brought before us by Ld. Counsel is that as assessee had paid gross amount to various parties and also paid the TDS, therefore an amount aggregating to Rs.1,99,905/- was shown as recoverable from these parties. Since the assessee could not recover said amount from these parties, therefore same was written off as Bad Debt. It is noted that in this case also the disallowance has been confirmed by the lower authorities without examining facts and figures. It was shown that these amounts were recoverable from the parties on account of TDS deposited by the assessee on behalf of these parties, but the payment in full was inadvertently made to these parties. However extra amounts paid could not be recovered from the said parties. Under these circumstances, these unrecovered amounts are of nature of loss incurred during the normal course of business. Complete details were shown to us by Ld. Counsel in this regard. Nothing wrong has been pointed out by the Ld. DR in this regard. Under these circumstances, we find that disallowance made by the AO was not justified under the law. Therefore, impugned disallowance is directed to be deleted. Thus, Ground no.3 is allowed.

the flat for using the same for the purpose of business of the assessee company. Detailed replies were filed by the assessee before the AO. But, AO was of the opinion that these transactions are camouflage and not incurred for the purpose of the business of the assessee, and this was merely an arrangement to siphon off the funds in the name of rent, therefore amounts paid to these persons were disallowed. 8.2. In the appeal before the Ld. CIT(A), detailed submissions were made to justify the payment of rent to these parties. It was argued that disallowance should be deleted since the expenditure was incurred keeping in view commercial expediency. But Ld. CIT(A) was not satisfied with the argument of the assessee and confirmed the disallowance with following observations: “The appellant has not brought on record any evidence to show that the impugned premises is utilised for the business premises. And in the absence of any evidence it is held that the judicial ruling given by the appellant has no relevance to the case of the appellant. The appellant has also argued that the principle of consistency must be followed when there is absolutely no difference in the facts of the case. Perusal of the 26th and 27th Annual Report with respect to the related party transaction is reproduced as under for ready reference:- 27th Annual Report Transa Associates Joint Key Other Relative of key total ction venture Management Director managerical personal personal Rent 7,68,000 - 5,00,000(-) - 4,24,000 16,92,000 paid (7,68,000) (4,52,000) (3,56,000) (15,76,000)

26th Annual Report Transaction Associates Ke Management Other director Relatives of Total personnel key managerical personnel Rent paid 6,68,000 -- 4,52,00 3,56,000 15,76,000

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The same is carefully perused and on perusal of the above, it is clearly seen that facts of the earlier year is not same as in this year. No rent was paid to key management personnel in A.Y. 2010-11 and it was paid in A.Y. 2011-12. The copy of rent agreement of Smt Sudha Gupta reveals that leave and license period was from 1.11.2010 till 31.10.2012. i.e. during the relevant year under consideration. It is not correct to say that once the rent paid is allowed in any one assessment year and if the rent is increased or new related party is introduced, then the AO has no jurisdiction to verify the reasonableness or correctness of the expenses. It is observed that, the appellant is inferring that the assessing officer has to keep her mind and eyes closed just because the rent expenses was allowed in earlier years and so she has to statutory allow it also for this year. I do not find any merit in the argument of the appellant, as the appellant has not brought any records to substantiate that the premises taken on rent was actually utilised for the purpose of business. The general principle underlying section 37(1) is that an expenditure which is found to have been wholly and exclusively made or laid out by a businessman for purposes of his business is to be allowed. There can hardly be any dispute on the proposition that the businessman is the best Judge to determine the business expediency and, therefore, when he claims to have incurred certain expenditure for business expediency, his version should ordinarily be accepted. This principle, however, does not debar the assessing authorities to enquire and investigate as to whether such expenditure was actually incurred by the businessman and if incurred whether the same was incurred wholly and exclusively for business consideration. The doctrine that the businessman is the best Judge of business expenditure does not affect the right, nay, duty of the assessing authorities to know whether it was incurred for business purposes and not for 12 Kamanwala Housing Construction Ltd. other extraneous considerations. Hence I do not find any reason to delete the said addition. In view of the above discussion, I am of the opinion that the assessing office has correctly disallowed the rent expenses. The Ground of Appeal No 4 is dismissed. 8.3. During the course of hearing before us, it was submitted that these premises were hired for the purpose of using them as office and for holding business meetings by the executives of the assessee company with the prestigious customers and other numerous business associates. It has also been submitted that in earlier year this rent was allowed by the AO. It was also submitted that rental income has been duly assessed in the hands of these persons by the income tax department. Thus action of the AO is contradictory in as much as, on the one hand income is being assessed in the return of payees, but on the other hand, expense is being disallowed in the return of the payer (i.e. assessee). Further, without prejudice, entire amount could not have been disallowed u/s 40A(2)(b). 8.4. Per contra, Ld. DR submitted that nothing has been brought on record to show that how and in what manner these assets were used for the purpose of business of the assessee. Only bald statement has been made that too unsupported with any evidences. 8.5. We have gone through the facts and circumstances of the case as well as orders passed by the lower authorities and also the submissions made before us. Undoubtedly, the assessee is best judge to make any expenditure keeping in view commercial expediency and best interest of its business. But when a question is raised by the AO about the business

13 Kamanwala Housing Construction Ltd. necessity and genuineness of expenditure, especially when the payment has been made to related parties, there is bounden duty on the shoulders of the assessee to show that payment has been genuinely made and same has been utilized for the purpose of the business of the assessee. 8.6. The facts of this case as were brought before us show that it was claimed by the assessee that the payment was made towards rental for using 50% share of the Flats owned by these two persons. It was explained that these premises were utilized as office(s) of the assessee and for organizing strategic business meetings and carrying out other day to day functioning also from these premises. The assessee placed before the lower authorities, details and evidences in the form of confirmation, agreements, copies of income tax returns of these payees and other details to show business user of these premises as well as confirmation of transaction and genuineness of payments. Thereafter nothing was brought on record by the AO to negate these facts and details/evidences. 8.7. Further, this fact cannot be ignored that the payments made to these persons have always been allowed in past by the AO. The rental income has been assessed by the income tax department in the hands of these payees. Under these circumstances, the AO was expected to maintain consistency in his approach and should not have disallowed the claim merely on the basis of his doubts. 8.8. Further, the AO invoked provisions of section 40A(2)(b), which do not permit full disallowance of expenditure. Only that part of expenditure can be disallowed which is in excess

14 Kamanwala Housing Construction Ltd. of market rates. Before making any such disallowance, the onus is upon the AO under the law to show that amount paid to a related party is more than market rates. No such exercise has been done by the AO in the case before us. 8.9. Thus, taking into account totality of the facts and circumstances of the case, we find that the assessee has been able to discharge its onus as was envisaged under the law, whereas the AO had wrongfully invoked provisions of section 40A(2)(b) and also erred in disallowing the expenditure in full. Thus, since disallowance made by the AO is contrary to law and facts, same is therefore deleted. Ground No.4 is allowed.

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Thereafter, the said company filed a case against the assessee company before BIFR. Under these circumstances, since the assessee company considered the debt (i.e. aforesaid amount given to the aforesaid company) as doubtful, it was written off. It was also submitted that subsequently part of the sum was recovered in subsequent years and has been offered to tax. However, AO was not satisfied with the claim of the assessee. After analyzing the entire facts, it was held by him that the impugned claim was capital in nature and not revenue expenditure. Thus the claim was disallowed. 9.2. Before the Ld. CIT(A) detailed submissions were made but he was not satisfied with the same. The disallowance made by the AO was confirmed without giving reasoning in detail on facts. 9.3. Before us, Ld. Counsel made detailed arguments and drew our attention on the following evidences to justify that the claim had become bad in the year under consideration: JOINT VENTURE WITH KAMANI TUBES LIMITED ALONG WITH BIFR ORDERS LIST OF DOCUMENTS: SR.NO. PARTICULARS OF DOCUMENTS 1. Agreement for Development of the Leasehold Property between Kamani Tubes Limited And Kamanwala Housing Construction Limited dated 22.04.1995 for developing, repairing, renovation, re-constructing and/or improving of the leasehold property / building viz. Kamani Chambers (old and new) 2. Order dated 13.11 1997 by Sole Arbitrator Mr. Dakshesh B. Dhruv 3. Minutes dated 02.05.2000 by Sole Arbitrator Mr. Dakshesh B. Dhruv 4 Order of BIER Meeting dated 21.03.2006

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5 Letter dated 30.04.2007 to M/s Kamani Tubes Limited 6 Reply dated 06.06.2007 from Little & Co., Advocates & Solicitors 7 Rejoinder Letter dated 11. 07.2007 8 Public Notice dated 09.05.2007 9 Order of BIFR Meeting dated 19.01.2011 10 Copy of Arbitration Petition dated 28.03.2011 in the High Court of Judicature at Mumbai 11 Order dated 29.07.2011 of Arbitration Petition rejected 12. Minute of BIFR Meeting dated 21.04.2011 13. Minutes of BIFR Meeting dated 02.06.2011 consisting that the M/s Kamani Tubes Ltd binding to pay the dues i.e 10% of outstanding principal amount as per the sanctioned scheme.

17 Kamanwala Housing Construction Ltd. subsequent recovery and its inclusion in the income of subsequent years have also not been properly brought on the records and anlysed by the lower authorities. Under these circumstances, in the interest of justice, we find it appropriate to send this issue back to the file of the AO. The assessee shall bring on record complete facts and evidences on record and shall also place judgments in support of its claim as may be considered appropriate. The AO shall give adequate opportunity of hearing and shall decide this issue afresh after taking into account entire material as may be brought on record by the assessee. The assessee shall be free to raise all legal and factual issues in this regard. With these directions this issue is sent back to the file of the AO. This ground may be treated as allowed for statistical purposes.

Loss Account for computing income the head income from business. Further, merely because the promoter of the said company hails from the Jain family, it would not come automatically within the definition of the term relative as envisaged under the law. It was also submitted that the shares were sold as they had become paper because the investee company was closed down long back. 10.6. Per contra, Ld. DR submitted that since the assessee could not bring sufficient evidence to substantiate this claim, therefore it was rightly disallowed by the lower authorities. 10.7. We have gone through the entire facts and circumstances of the case. It is noted that section 40A(2)(b) has been applied by the lower authorities without bringing on record as to how the said transactions is covered within the ambit of these provisions. It is true that since loss has been claimed by the assessee, therefore, primary onus lies upon the shoulders of the assessee to justify the same. But, it is equally true that no claim should be disallowed on the basis of mere surmises and conjecturers. It appears that in this case also both the parties lacked in their duties in terms of discharging respective onus lied upon them under the law. Therefore, we find it appropriate to send this issue back to the file of the AO. The assessee shall bring on record all the primary evidences to justify and substantiate the said claim. The AO shall be at his liberty to verify the claim directly with the concerned parties, as may be considered appropriate by him. But, in any case, he is not allowed to make the disallowance merely for the reason of his suspicion and guess work. Further, it is clarified once

20 Kamanwala Housing Construction Ltd. again that provisions of section 40A(2)(b) are clearly not applicable upon the said transaction in the facts of this case, since neither the assessee has claimed any expenditure for computing the income under the head business nor the parties fall within the definition of relative as envisaged under the law. No such finding has been given by the AO as to how the said party is related party as has been envisaged under the law. Therefore, the AO shall examine this issue in the light of the facts of the case and the law as is applicable. This issue shall be decided only after providing adequate opportunity of hearing to the assessee and after considering entire material as may be brought on record by the assessee and by the AO. This ground may be treated as allowed for statistical purposes.

Now, we shall take up appeal filed by the Revenue in for A.Y.2011-12 on the following grounds: "

1.Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 1,51,05,130/- u/s 14A r.w.r.8D of the Income Tax Act, 1961 without considering the facts that the assessee made substantial investments in partnership firms the income form which was exempt in its hands."

2. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

11. The brief background is that the AO noted that assessee had made substantial investment in partnership firm, the income which is exempt in the hands of the assessee. But, the assessee had not made any suo motu disallowance u/s 14A. Under these circumstances, he worked out disallowance u/s 14A on account of interest for Rs.1,37,37,50/- and on account

21 Kamanwala Housing Construction Ltd. of administrative expenses for Rs.13,67,600/- aggregating to Rs.1,51,05,130/-. 11.1. During the appeal before the Ld. CIT(A) detailed submissions were made and it was vehemently submitted that no exempt income had been earned during the year. Accordingly, Ld. CIT(A) deleted the disallowance made by the AO by observing as under: It is seen that the appellant's main contention is that if there is no exempt income, then the disallowance u/s 14 is not triggered off. The appellant has given various judicial findings on the issue. The Assessing officer has not disputed the facts that the appellant has not received any exempt income during the year. I find merit in the submission of the appellant that unless and until, there is receipt of exempted income for concerned assessment years, section 14A cannot be invoked. This view has also been confirmed by Hon'ble High Court of Punjab & Haryana in the case of Lakhani Marketing Inc (49 taxmann.com 257) and Honbie High Court of Allahabad in the case of M/s Shivam Motors (P) Ltd ( 55 taxmann.com 262). Thus, the disallowance of expenses of Rs.1,51,05,130/- is deleted.

11.2. During the course of hearing before us, it was submitted that own funds of the assessee are far more than investment made in partnership firm. Thus, no disallowance on account of interest could have been made. Further, since no exempt income has been earned during the year under consideration, no disallowance could be made u/s 14A. It was also submitted that investment was made in the partnership firm for strategic reasons. Therefore, this investment should be excluded for the purpose of making any disallowance. In responses to this 22 Kamanwala Housing Construction Ltd. argument that no disallowance could be made in absence of any exempt income following judgment were relied:

1. 1. Cheminvest Limited v. CIT order dated 02.09.2015 2. CIT v. Delite Enterprises judgment dated 26.02.2009 of Bombay High Court.

3. CIT v. Corrtech Energy (P.) Ltd. 45 taxmann.com 116 (Gujarat) 4. CIT v. Shivam Motors- Judgment dated 5.5.2014 of All High Court 5. CIT v. Lakhani Marketing Incl. Judgment dated 02.04.2014 (P & H) 6. CIT v. Winsome Textile Industries Ltd. 319 ITR 203(P & H) 7. M/s. Daga Global Chemicals Pvt. Ltd. v. ACIT ITA No.5592/Mum/2012 8. ITO v. Pioneer Radio Training Services Pvt. Ltd. ITA No.4448/Del/2013 11.3. Per contra Ld. DR relied upon the order of the AO. 11.4. We have gone through the facts and circumstances of the case. It is admitted case that no exempt income has been earned during the year, therefore, Ld. CIT(A) deleted the disallowance made by the AO. It is noted that the order of Ld. CIT(A) is now supported with various judgments as have been relied upon by the Ld. counsel before us. Therefore, respectfully following these judgments it is noted that no interference is called for by us in the order passed Ld. CIT(A). Therefore, his order is upheld. We are not going into other issues at this stage.

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Now we shall take assessee’s appeal for A.Y. 2012-13 in on the following grounds:

1. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming the non reduction of the Interest Income of Rs.2,91,30,922/- from the total income of assessee, as the same is assessed in A.Y.2011-12 on the assumption of crystallization of interest in A.Y. 2011-12 against that offered by assessee in A.Y. 2012-13. 2.On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming the disallowance of Rs. 10,04,000/- paid as rent in view of section 40A(2)(b) of the I.T. Act, 1961 and addition of the same to the total income of the assessee.

3. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming the disallowance of the expenditure of Rs. 10,48,931/- in view of section 14A of the I T Act, 1961 and addition of the same to the total income of the assessee.

4. The Ld. CIT(A) erred in confirming the interest charged u/s 234B & 234C of the I. T. Act .

5. The Ld. CIT(A) erred & invoked the Penalty Provisions u/s 271(1 )(c) of the Income Tax Act.

6. The assessee craves leave to add, alter or amend the existing grounds of appeal on or before the date of hearing.

13. Ground No.1: This is same as Ground No.1 of assessee’s appeal for A.Y. 2011-12, therefore, our order for AY 2011-12 applies on this ground mutatis-mutandis on facts of this year. The AO is directed to follow our order for A.Y. 2011-12. This ground may be treated as allowed in accordance with our directions as contained in A.Y. 2011-12.

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14. Ground No.2: This is same as ground No.4 of assessee’s appeal for A.Y. 2011-12 and respectfully following our order, this ground is allowed.

year under consideration. Nothing has been brought before us that why disallowance of 0.5% of average value of investments as envisaged under rule 8D(2)(iii) should not be made in the given facts of this case. Further, nothing incorrect has been pointed out in the order passed by Ld. CIT(A) while confirming the disallowance. Under these circumstances, we have no option but to confirm the disallowance. Therefore disallowance sustained by the Ld. CIT(A) u/s 14A is hereby confirmed. This ground is deleted.

Order pronounced in the open court on 15th February, 2017.