ITO, NEW DELHI vs. SHRI NANAK RAM JAISINGHANI, NEW DELHI

The present appeals filed by the Revenue arise from the order dated 23.08.2012 passed by Ld. CIT(A) XVI, New Delhi for the Assessment Years 2007-08 & 2008-09 on the following grounds of appeals: A. Assessment Year : 2007-08:

1. Whether on the facts & in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs.86,06,481/- made u/s 43B(e) by 2 I.T.A.Nos.5806, 5807/Del/2012 accepting additional evidence without providing an opportunity to the A.O. to examine the same.

2. Whether on the facts & in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs.47,62,462/- made on account of interest income on interest free loans given by M/s J's Inn, proprietorship firm of the assessee, are much higher than the interest free loans taken by it.

Briefly stated, the facts of the case are as under: 2. Ground No.1: 2.1 The assessee is engaged in the business of running a guest house under the name of M/s. J’s Inn. The assessee filed its return of income on 31st Oct., 2007 declaring loss of Rs.6,23,57,553/-. The case was processed u/s 143(1) of the Act and subsequently, it was selected for scrutiny. Notices u/s 143(2)/142(1) were issued. Ld. Assessing Officer during the assessment proceedings observed that the assessee has claimed deduction of Rs.7,15,52,676/- u/s 43B(e) in respect of interest paid on term loan to Punjab & Sindh Bank. It was submitted by the assessee that the interest on term loan has been debited to P & L account on actual basis though the amount of Rs.7,15,52,676/- is claimed on the payment basis as per the provisions of Section 43B of the Act. The assessee has submitted the bank certificate / bank statement called for by the Ld. A.O. Ld. A.O. allowed the outstanding interest for the year under consideration amounting to Rs.6,29,46,195/- and disallowed a sum of Rs.86,06,481/- u/s 43B(e) of the Act.

3 I.T.A.Nos.5806, 5807/Del/2012 2.2 Ld. A.O. further observed that the assessee had advanced interest free loans to an extent of Rs.29,47,500/-. Ld. A.O. disallowed the same by holding that the assessee had taken secured loans from Punjab & Sindh Bank, on which interest @ 14.25% was being paid. The A.O., therefore, added notional interest in the hands of assessee. 2.3 Aggrieved by order of the Ld. A.O., the assessee preferred appeal before Ld. CIT(A). 2.4 Ld. CIT(A) after examining all the relevant facts and material on record, deleted the addition made by the Ld. A.O. u/s 43B(e) and the notional interest of Rs.47,62,462/-. Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us now. 2.5 Ld. D.R. submitted that the bank certificate issued by the bank are hand written and this cannot be relied upon. He further submitted that the assessee has not substantiated its claim by proper evidence. The assessee has also failed to furnish the details of assessment year wise from Assessment Year 2000-01 to 2008-09 in respect of amount of interest charged by the bank date- wise/quarter wise vis- a – vis amount of interest accounted for by assessee in its books of accounts. He submitted that the details called for by Assessing Officer has not been filed by the assessee to the satisfaction and therefore, the claim of the assessee should not be allowed.

4 I.T.A.Nos.5806, 5807/Del/2012 2.6 On the contrary, the Ld. A.R. strongly objected into the findings of the Ld. A.O. in calculating the disallowance of Rs.86,06,481/-. Ld. A.R. submitted that the assessee had taken term loan from Punjab & Sindh Bank in the year 1999 for Rs.5 crores @ 14.25% p.a. He submitted that the assessee had been very irregular in making payment of interest. However, the assessee was debiting the interest in its P & L account every year up to 31.03.2004. Ld. A.R. submitted that the claim of deduction u/s 43B(e), made by assessee was limited to the extent, the interest was actually paid during the year and the balance interest that remained unpaid, was disallowed. The details of interest debited, claimed as deduction and self disallowance is place in the Paper Book by way of a chart placed at page 29. Ld. A.R. has also submitted that the Assessing Officer has not disputed the following payments of interest: Debited in books on 01.04.2006 relating to Assessment Year 2005-06 & 2006-07 Rs.3,29,46,581/- Debited in the books of F.Y.2006-07 Relating to Assessment Year 2007-08 Rs.2,28,23,024/- Rs.5,57,69,605/- Disallowance in Assessment Year 2004-05 Rs. 72,00,000/- Rs.6,29,69,605/- Total payment made (01.04.2006 to 15.06.2007) Rs.12,64,00,000/- Less: Litigation charges recovered by the bank from appellant Rs.5,36,264/- Interest relating to period 01.04.2007 To 15.06.2007) (i.e. A.Y. 08-09 Therefore not relating up to A.Y.2007.08 Rs.43,11,060/- Repayment of Principal loan amount Rs.5,00,00,000/- Rs.5,48,47,324/-

5 I.T.A.Nos.5806, 5807/Del/2012

Rs.7,15,52,676/- Net interest payment 2.7 He thus, submitted that, the claim of assessee should be allowed and the order passed by Ld. CIT(A) should be upheld. 2.8 We have perused the orders passed by authorities below and the arguments advanced by both the parties. The facts as narrated in the order of Ld. CIT(A) have not been disputed by the Revenue. It is an admitted position that the assessee has disallowed the interest that has not been paid during the year in its computation of income. The Assessing Officer while rejecting the claim of assessee relating to earlier year, has placed reliance upon the chart filed by the assessee, placed at page 28 of the Paper Book. As per the A.O., the situation emanates at page 28 can never arise since the disallowance cannot be made more than the expenses claimed. In this regard, the Ld. A.R. submitted that there was consequential error in the figures which is ascertained form the documents. The interest of Rs.14,55,944 out of which Rs.3,00,000/- were paid and balance Rs.11,55,949/- was added u/s 43B(e), is apparent from the computation for the Assessment Year 2003-04 which is placed at page 32-33 of the Paper Book. 2.9 The crux of above is that the assessee has undisputedly paid a sum of Rs.12.64 crores to the bank. As per Ld. A.R., Rs.12.64 crores constitutes the interest payment to the extent of Rs.7,15,52,676/- for the interest relating up to 31.03.2007, which has been paid during the 6 I.T.A.Nos.5806, 5807/Del/2012 relevant financial year. The account with the bank was finally settled by making complete payment of interest, principal and reimbursement to the bank for litigation charges on 15.06.2007 i.e. much prior to the date of filing of return for the year under consideration, which is 31.10.2007. The working of interest payment as claimed by the assessee is as under: Total payment made (01.04.2006 to 15.06.2007) Rs.12,64,00,000/- Less: Litigation charges recovered By the bank from assessee Rs.5,36,264/- Interest relating to period 01.04.2007 to 15.06.2007 (i.e. Assessment Year 2008-09. Therefore not relating upto Assessment Year 2007-08) Rs.43,11,060/- Repayment of principal loan Rs.5,00,00,000/- Rs.5,48,47,324/- Net interest payment Rs.7,15,52,676/- 2.10 It is further observed that the assessee has submitted all the necessary supporting documents like bank certificate / bank statement as called for by the Assessing Officer. Merely because these documents / evidences were hand written, cannot be a reason to reject, which can prove the claim raised by the assessee. For allowing the claim of assessee u/s 43B(e), the requirement under law is that the assessee should have made actual payment of interest during the year under consideration. The assessee has field the details of payments made to the bank during the year as well as bank certificate shows the payments received by the bank which are as under:

7 I.T.A.Nos.5806, 5807/Del/2012 From 01.04.2006 to 31.03.2007 Rs.1,03,00,000/- From 01.04.2007 to 16.06.2007 Rs.11,61,00,000/- Total Rs.12,64,00,000/- Now, the constituents of payment of Rs.12,64,00,000/- are as under: Repayment of principal Rs.5,00,00,000/- Litigation charges recovered by bank Rs.5,36,264/- Interest relating to the period 01.04.2007 to 15.06.2007 Rs.43,11,060/- Rs.5,48,47,324/- Balance amount of interest Rs.7,15,52,676/- Total Rs.12,64,00,000/- 2.11 We therefore, do not find any infirmity with the findings of Ld. CIT(A) and are not inclined to interfere with the same. Accordingly, this ground of appeal raised by the Revenue stands dismissed.

3. Ground NO.2: During the year under consideration, Ld. A.O. observed that the assessee has advanced interest free loan of Rs.3,34,20,787/- from the following accounts: From bank of J’s Inn (sole proprietary firm) Rs.98,87,500/- From Nanak Raj Jain Rs.2,35,33,287/- Total Rs.3,34,20,787/- 3.1 The Assessing Officer held that the assessee has taken secured loan from Punjab & Sindh Bank on which interests @ 14.25% was being paid. The Assessing Officer calculated the rate of interest paid by the assessee to the bank on the interest free loan advanced by the assessee. He thus made addition ofRs.47,62,462/- as notional interest. 3.2 Aggrieved by the order of Assessing Officer, assessee preferred the appeal before Ld. CIT(A).

8 I.T.A.Nos.5806, 5807/Del/2012 3.3 Ld. CIT(A) after going through the submissions made by the assessee, deleted the addition on the basis that such interest has always been allowed in the past and accepting that the same has been used for the purpose of business. 3.4 Aggrieved by order of Ld. CIT(A), the Revenue is now in appeal before us. 3.5 Ld. D.R. submitted that when the assessee had surplus funds, there was no need for an additional term loan taken by the assessee. He argued that the assessee has taken secured loan from Punjab & Sindh Bank and has advanced interest free loan to various parties as listed in the assessment order. He submitted that as the bank was charging interest @ 14.25%, the Assessing Officer has rightly applied the same to the interest free advances. He thus submitted for the addition being confirmed. 3.6 Ld. A.R. submitted that he inference drawn by the Assessing Officer is not sustainable as the term loan of Rs. 5 crores was taken by the assessee from Punjab & Sindh Bank in the year 1999, which was used exclusively for the purpose of business and the interest thereon was always allowed by the Assessing Officer during Assessment Year 2006-07. He submitted that this term loan was not utilized for any other purpose. He further submitted that the assessee has not taken any interest bearing loan thereafter. He argued that the assessee was having interest free loan and advances as well as he had 9 I.T.A.Nos.5806, 5807/Del/2012 given interest free loans and advances, details of which are as under: In J’s In Nanak Total PG.No. Inn Ram Intt. Free advances 3480000 1526000 5006000 26 & 27 taken During the year Intt. Free advances 3850000 (902500) 2947500 24 & 25 given during the year 3.7 He submitted that the interest free funds available with the assessee are more than the interest free advances given. He relied upon various judicial pronouncements before Ld. CIT(A) wherein it has been held that if interest free funds available are more than interest free advances given, no disallowance of interest can be made. Ld. A.R. contended that the notional interest charged by the Assessing Officer does not have any basis, as such kind of addition has never been made by Assessing Officer in the hands of assessee in the preceding years. 3.8 We have perused the orders passed by the authorities below and the arguments advanced by both the parties. It is an undisputed fact that the interest had been allowed in the past on the term loan, accepting the same as being used for business purposes. Further, is also not disputed that the assessee has not taken any further loan from the bank. In such a scenario, there cannot be an assumption that, non-interest bearing funds have been diverted as interest free loans and advances. On perusal of various documents, relied upon by the 10 I.T.A.Nos.5806, 5807/Del/2012 assessee in the Paper Book, there is actually no nexus of interest bearing funds being utilized for giving interest free loans and advances. For disallowing any claim of interest, it is necessary that the nexus between interest bearing funds being utilized for interest free loan and advances stands established. I is observed that a large number of interest free loans have been given based on opening balance from the chart reproduced hereinabove. No addition / disallowance on account of these opening balances have been made in the earlier Assessment Years. There being no change in the books of accounts so far as these opening balances are concerned in respect of the years under consideration, no interest can be calculated on such opening balances for the years under consideration. It is also observed that the interest free loans taken during the year amounting to Rs.50.06 lacs while the interest free advances given during the year are Rs.29.47 lacs. This itself shows that interest free loans given during the year are less than interest free loans received during the year. Hence, no interest can be calculated for the interest free loans given during the year. Thus, in our considered opinion, on the basis of above discussion, we delete the addition made by the Assessing Officer. This ground raised by the Revenue stands dismissed. Accordingly, the appeal filed by the Revenue for the Assessment Year 2007-08 stands dismissed.

11 I.T.A.Nos.5806, 5807/Del/2012 B. Assessment Year 2008-09: “1. Whether on the facts & in the circumstances of the case, the learned CIT(A) has erred in deleting the entire disallowance of Rs.6,11,973/- out of electricity expenses, whereas as per her own working the electricity expenses pertaining to the relevant year were Rs.12,12,532/- and not Rs.12,59,233/- as claimed by the assessee.

12 I.T.A.Nos.5806, 5807/Del/2012 receipt for guests house namely ‘J’s Inn’. The Ld. A.O. called for the details of bills. He noted from the bills that for the month of January 2008, Rs.19,75,734/- was shown as miscellaneous debit / credit amount, which the Ld. A.O. considered to be of penal nature. He thus disallowed an amount of Rs.6,11,973/-. 4.1 Aggrieved by the order of the Ld. A.O., the assessee preferred appeal before Ld. CIT(A). Before Ld. CIT(A), the assessee submitted documents by way of additional evidence which were legible copies of electricity bills. Ld. CIT(A) referred the same to the Assessing Officer for his report. The Ld. A.O. in remand report has also stated that the arrear amount and the previous year's surcharge should not be allowed as these are in the nature of prior period expenses. In respect of additional evidence being BSES Rajdhani Power Ltd's letter dated 22.01.2008, the AO has stated that it is on account of electricity charges for the period from 31.08.2005 to 01.12.2007. Therefore, it also contains the period prior to F. Y. 2007 - 08 i.e. A.Y. 2008 - 09 which is under consideration and the expenses relating to the period A.Y. 2008 - 09 cannot be allowed being in the nature of prior period expenses. 4.2 From the remand report, it can be ascertained that the expenses on electricity bills amounting to Rs.12,59,233/- for the year under consideration was not disputed, which is evident from the electricity bills. Ld.

13 I.T.A.Nos.5806, 5807/Del/2012 CIT(A) thus allowed the claim of the assessee after relying upon various details filed by the assessee. 4.3 Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before us now. 4.4 Ld. D.R. submitted that the issue needs to be sent back to the Assessing Officer for verification whether the assessee has claimed any bills relating to the prior period in the year under consideration. 4.6 On the contrary, Ld. A.R. relied upon the findings of Ld. CIT(A). 4.7 We have perused the details and the arguments advanced by both the parties. It is observed that Ld. CIT(A) has dealt with the issue as under: “3.5 The appellant furnished submissions dated 07.08.2012 in reply to AO's remand report dated 11.07.2012. These submissions have already been abstracted above. In brief, in reply to remand report it has been stated that the payment of electricity bills of Rs. 12,59,233/- during the year is not in dispute since, it is evident from the electricity receipted bills. It has been submitted that the query of the AO was to file the photocopies of electricity bills in support of claim of Rs. 12,59,233/-. Accordingly, the appellant furnished copies of such bills on which payment of Rs.12,59,233/- was acknowledged. These bills were 8 in number as is mentioned in the chart in Asstt. Order. Thereafter, the AO made his working on the basis of these 8 bills only without confronting any issue relating to electricity expenses claimed made by the appellant. The appellant was thus never asked to furnish bills for all months. Incidentally, the remaining bills which were for the months of September 2007, October 2007 and December 2007 were also not available and were not properly maintained since,

14 I.T.A.Nos.5806, 5807/Del/2012 these bills were not acknowledging any payment and it is a common knowledge that whatever arrear remains, the same stands included in the subsequent bills. Thus, it is only on receipt of the Asstt. Order that it was noticed that the AO had allowed only the current charges as per 8 bills filed. Therefore, to calculate the current charges for whole year, the need arose for tracing and filing the bills for balance 3 months, which could be traced out and has been filed during appeal as additional evidences. Hence, it has been pleaded that there has been a reasonable cause for not filing these bills during Asstt., which should now be admitted. The Ld. AR also submitted that although in remand report the AO has not given any reason for not admitting the additional evidence being Rajdhani BSES Ltd's letter dated 22.01.2008, however, it has been pleaded that this document also needs to be admitted. In this regard, it has been submitted that during Asstt., the AO never put any query for disallowing arrears etc. and there was no occasion to file this letter. Now, on receipt of Asstt. Order, it has been noticed that the arrears are not being allowed, hence, for explaining the nature of these arrears, the need arose to furnish these documents. In view of this, it has been pleaded that all the four additional evidences should be admitted, also because these are in the nature of statutory documents being issued by BSES Rajdhani Ltd.

3.6 I have carefully considered the issue of admission of additional evidences. The Assessing Officer, during Asstt. asked the appellant to file the electricity bills in support of electricity payments of Rs.12,59,233/-. The appellant filed all the bills which showed this payment. In Asstt. Order, the AO made disallowance also for the reason that the arrears etc. cannot be allowed. No query regarding arrears has been raised during Asstt. Proceedings. Hence, these 3 bills were not filed by the appellant. The appellant also submitted that these were also not maintained and available at that time as there was really no 15 I.T.A.Nos.5806, 5807/Del/2012 necessity to keep them safe since the arrears are automatically included in subsequent bills. Under these circumstances, I am of the considered opinion that these 3 bills should be admitted as additional evidences. Now, regarding additional evidence namely Rajdhani BSES Ltd.'s letter dated. 22.01.2008, I find myself in agreement with the contention of the Ld. AR that since, no query was raised regarding allowability of arrears / nature of arrears, therefore, there was no occasion / need to file the said letter during Asstt. In any case, all the 4 documents are in the nature of statutory documents being issued by Rajdhani BSES. Hence, for above mentioned reasons I am inclined to admit the same. 3.7 The submissions of the Ld. AR on this issue have already been abstracted above. The facts, submissions and other material have been carefully considered by me. In this case, the appellant has been claiming electricity expenses on payment basis. The premises namely B - 14, Vasant Vihar, New Delhi is being partly used for non - business and mainly used for business purposes. The total payment of electricity expenses were of Rs.12,59,233/-. The appellant self disallowed 10% for non - business purposes, therefore claimed only balance as business expense amounting to Rs. 11,33,310/-. The AO asked the appellant to file evidence for payment of Rs.12,59,233/-. The appellant filed 8 bills showing receipted payments for Rs. 12,59,233/-. The AO however, noticed that these bills contain current energy charges as well as arrears. The AO also noticed that in the bill for January 2008, Rs.19,75,734/- was also shown as Misc. Dr. 1 Cr. amount which the AO thought may be of some penal nature. The AO also noticed that there is decline in business receipts while the claim of electricity - expenses has increased from Rs.8,92,958/- from last year to Rs. 12,59,233/- during the year under consideration. Hence, the AO allowed only the current year charges of Rs. 5,21,331/- and disallowed the balance.

16 I.T.A.Nos.5806, 5807/Del/2012

The AO has allowed only current year charges. On examining the additional evidence i.e. bills for September 2007, October 2007 and December 2007, the total of current year charges for these 3 months calculates at Rs.1,05,798/- as per the details given in appellant's submissions abstracted above. Hence, even on allowing, only current year charges, the correct amount calculates at Rs.6,27,129/-. Now, the bill received for January 2008 shows an amount of Rs. 19,75,734/- as Misc. Dr. / Cr. The AO has stated in the Asstt. order it may be of some penal nature. The appellant has filed BSES Rajdhani letter dated 22.01.2008 along with an annexure. This letter is dated 22.01.2008 received during the year and the demand of Rs. 19,75,734/- has been created for the first time during this year. This letter and annexure explains the nature of this demand. It relates to the period from 31.08.2005 to 01.12.2007. It mentions as under:-

"It is bringing to your attention that multiplying factor of the new meter is 40/ 1 while it was billed on the basis of 20/1. Hence we have debited an amount of Rs.1975733.68/- on account of under billed units of 386376 in your Jan-2008 bill. You are requested to make the payment within due date which is already extended till 11.02.2008. Calculation sheet of such amount of Rs. 1975733.68 is enclosed for your reference & record. "

From this letter, it is clear that BSES has been applying multiplying factor as 20/ 1. However, it applied factor of 40 / 1 for the bills raised during 31.08.2005 to 01.12.2007 for the first time alongwith January 2008 bill and created a demand of Rs.19,75,734/-. Thus, the demand has been created for the first time during this year. Prior to this, there was no such demand created. Hence" this liability is not of prior period since, created for the first time during the year under consideration. There was no 17 I.T.A.Nos.5806, 5807/Del/2012 liability on the appellant for this liability prior to receipt of bill which was received during the year. Hence, it is not in the nature of some penalty. Accordingly, I hold that it is a liability which pertains to the year under consideration and not a penalty and accordingly, fully allowable subject to and to the extent of payments made. It is also not in dispute that in the case of the appellant the electricity expenses have always been allowed on payment basis. Hence, the disallowance on account of electricity is unwarranted. There is one more angle of this issue as argued by the Ld. AR. This liability of Rs.19,75,734/- relates to the period from 31.08.2005 to 01.12.2007 i.e. 27 months. These 27 months include 8 months of the year under consideration commencing from 01.04.2007 to 01.12.2007. Now, if the proportionate liability for 8 months stands calculated, it will calculate at Rs.5,85,403/-. This amount, if taken as current year's liability, then the total current year's claim shall calculate at Rs.12, 12,532/- (521331 + 105798 + 585403). Against this the appellant has claimed expenses of Rs.12,59,233/-. Therefore, even if the allowance is calculated on current year's liability basis, the gross claim will calculate at Rs.12,12,532/. The observation of the AO that the electricity expense has increased disproportionately if compared with earlier years, is of no relevance under the facts of the case, since, in this case, electricity expenses are being claimed as a deduction in the year of payment.

Therefore, there is no logic in comparing the electricity claim made during the year with business receipts. It is to be remembered that the total payment made during the year of Rs. 12,59,233/- is not in dispute at all. In view of above discussion, we delete the disallowance of Rs. 6,11,973/-.”

18 I.T.A.Nos.5806, 5807/Del/2012 4.8 We do not find any infirmity in the findings of Ld. CIT(A). Accordingly, we decline to interfere with it. We thus dismiss this ground of Revenue’s appeal.