ITO 9(2)(2), MUMBAI vs. KANAKIA GRUHNIRMAN P.LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) Per Rajendra, A.M.लेखा सद�य राजे�� के अनुसारः Challenging the order dated 7.11.2012 of the CIT(A)-20,Mumbai,the Assessing Officer (AO) has filed the present appeal. Assessee-company ,engaged in the business of construction/development of properties,filed its return of income on 9.9.10 declaring total income at Rs.Nil.The AO completed the assessment u/.s 143 of the Act on 30.3.2011 determining the income of the assessee at Rs.4.24 crores. 2.First two Grounds of appeal deal with taxing the rental income under the head income from house property as against income from other sources as well as allowance of interest expendi - ture of Rs.3.26 crores.During the assessment proceedings,the AO found that vide agreement, dated 11.8.2006,the assessee had acquired development rights in respect of a plot of land situated at Govandi,Chembur, that an irrevocable general power of attorney was also executed in respect of the said land,that the plot of land was reserved for construction of school and play ground,that approval in respect of the said property was received on 10.1.2007 in the name of the original owner,that the assessee negotiated with Babubhai Kanakia Foundation(BKF)for giving school building on rental basis,that the Government (Govt.) of Maharashtra issued an NOC for starting IB school at Chembur, hat it requested for amendment in the approved plan and the same was approved on 8.3.2007,that it started construction of the building in AY 2007- 08, that on 07.06.07 it entered into formal lease agreement with BKFfor giving school building on rental basis,that in July 2007 part possession of the school building i.e. upto second floor was given to the said trust,that at that time it was decided to charge rent of Rs.2.00 lacs per month for 9 months,that the assessee had shown rental income,amounting to Rs.18.00 lacs under the head income from house property u/s.22 of the Act,that the assessee had taken secured loans as well as unsecured loans for construction of school building, that during the AY.08-09,it had paid interest of Rs.1.45 crores on secured loans and Rs.1.78 crores on unsecured loans/deposits,that out of the total interest of Rs.3.24 crores, proportionate interest upto second floor,Rs.1.34 crores was claimed u/s. 24 of the Act against the income from house property and the balance interest of Rs.1.89 crores was capitalised to work-in-progress (WIP) account,that the assessee applied for amending IOD in the name of the trust and the same was issued on 22.11.2007,that the amended IOD,in the name of trust,was in continuation of original approval of 10.1.2007,that the amended Commencement Certificate (CC) dated 28.12.2007 was in continuation of the original CC dated 24.4.07,that vide its letter dt.23.1.2008 it applied for Occupation Certificate(OC)in respect of the school building,that the assessee received Rs. 4.13 crores from the trust,that it paid interest of Rs.1.49 crores on secured loans and Rs.2.85 crores on unsecured loans,that out of total interest of Rs.4.35 crores it capitalised proportionate interest for three months of Rs.1.08 crores to WIP and balance interest for nine months of Rs. 3.26 crores was claimed u/s. 24 against income from house property. After considering the above facts,he asked the assessee to substantiate that the project of school building was completed before 31.3.2009.The assessee, vide its letter dated 12.10.2008, filed an explanation in that regard.The AO held that the OC was not granted till 31.3.2009, that the building did not exist on that date, that the assessee was granted permission to develop the school premises much later than the rent agreement with BKF was entered into, that the constructed building area mentioned in the agreement was much more than the actual proposed plan, that IOD was issued in the name of the original land holder, that IOD dt.22.11.2007 was not the permission for development unless it was clubbed with the CC, that certificates issued by the architect of the building were fabricated and were an afterthought to accommodate the assessee’s plan to show that the building completed before July 2008, that it had not produced any evidence about admission of students for conducting of classes, copies of admission forms, that instead of occupying the building the assessee might have utilized some other premises for school activities, that no certificate was taken from appropriate authority to operate the school, that no major expenses were capitalized with the building, that labour charges were incurred before 31.7.2008, that same were found to be spread over throughout the year.Finally, he held that the income arising to the assessee was to be taxed under the head income from other sources.He also held that the interest amounting to Rs.3.26 crores was not allowed. 2.1.Aggrieved by the assessment order the assessee filed an appeal before the First Appellate Authority(FAA).Before him extensive submissions were made with regard to head of the income under which the income had to be assessed and the interest payment.After considering the assessment order and submission of the assessee,the FAA held that the appellant started construction of the school building for AY 2007-08,that the expenses were entered into books of account and were shown as WIP,that the total expenses incurred including for the plot of land till 31.3.2007 was Rs.10.53 crores,that the P&L A/c.as on 31.3.2008 showed further expenses incurred till 31.3.2008,that the file number of approvals such as IOD, CC remained the same throughout,that the contention of the AO with regard to invalidity of IOD and CC was not correct,that the certificate of architecture proved that as on 12.4.2004 work up to the 2nd floor of the school was completed in all aspects and RCC work upto 7th Floor was also complete.The FAA perused the number of students of the school in AYs 08-09 to10-11, sample copies of admission forms,academic report of student of each standard and held that these documents were of the address of same place i.e. Chembur, that NOC issued by the Govt. of Maharashtra dt.24.1.2007,proved that permission was given to start school at Chembur, that the assessment,order passed u/s.143(3) of the Act in case of BKF for AY 08-09 and 09-10 confirmed that the trust was engaged in educational activities in Chembur and was conducting school at Chembur,that there was no basis to hold that school might have functioned from other building,that the details about the students, results, correspondence, deduction of tax at source etc.proved that the school had started functioning during the year under consideration, that the income received by the assessee was to be taxed under the head income from house property.He also held that proportionate interest of Rs.3.26 crores u/s. 24 of the Act,claimed by the assessee was to be allowed. 2.2.Before us,the Departmental Representative(DR) relied upon the order of the AO and the Authorised Representative(AR)referred to the submissions made before the FAA during the appellate proceedings. 2.3.We have heard the rival submissions and perused the material before us.We find that the AO had given six to seven reasons for holding the view that building was not completed during 2 the year under consideration and for making disallowance of interest of Rs.3.26 crores.We find that in this case IOD was issued in relation to the plan that was put up on 25.8.2006 i.e. after entering into the development agreement.The fact is confirmed from the IOD dated 10.1.2007 and CC dt.24.4.2007. It is found that amended plan was put up on 21.2.2007 and was approved on 8.3.2007,that construction work started in earlier assessment year and expenses were shown in the books of account from that year,that total expenditure incurred till 31.3.2007 was of Rs.10,53,44,733/-,that further expenses were incurred in the subsequent year and showed in the books of account,that the assessee had given details of the constructed area and the availability of certain areas free of FSI, that the certificate of the architect indicates that 3rd to7th floors were constructed later on, that the statement of the architect were not provided to the assessee though the same were relied upon by the AO,that as on 12.4.2008 two floors of the school building were complete. It is also found that in the case of BKF the AO has mentioned that the trust was conducting schools at Mira Road and Chembur,that there is no doubt that BKF was deducting tax at source on payment of rent to the Assessee.The AO has mentioned that instead of occupying the building the assessee might have utilised some other premises for running the school.We do not find any reason fir arriving at the said inference.The evidences produced before the FAA about admission of students and their report cards for 3 academic years clearly prove that the school had commenced its activities in the year under consideration.We do not find any legal infirmity with the order of the FAA who had held that income could not be taxed as income from other sources and that interest paid, amounting to Rs.3,26,25,374/- had to be allowed u/s.24 of the Act.Therefore,confirming his order,we decide Gr. No.1 and 2 against the AO. 3.Ground No.3 is about allowing the expense of Rs.1.92 crores on account of improvement of leased premises. During the assessment proceedings,the AO found that as per the lease agreement the cost of improvement such as furniture and fixture and basic infrastructure to run the school were required to be incurred by the school, that it was the responsibility of the school to purchase and install the same so as to make it operational, that cost of airconditioners,computers, printers, generators etc. were no to be incurred by the assessee, it was the liability of the BKF, that as per working of WIP as on 31.3.2008 the assessee had added Rs.1.88 crores to the cost of school building project.He held that the installation of furniture and fixture was nothing,but ancillary expenses in addition to school building, that it had claimed expenditure for installing TVs that the assessee had claimed it in its books and had capitalised the same, that both the additions amounting to Rs.1.92 crores (1.88cr+3.97 lacs) had been capitalised in the AY.09-10, that same had to be reduced from the capital investment,thus,he fixed revised capital investment at Rs.40.17 crores. He disallowed proportionate interest of Rs.19,72,594/- also. 3.1.Before the FAA,the assessee contended that only dispute was regarding the requirement of the assessee to incur the expenditure, that there was delay in completion of the project,that the school was occupied by the lessee party,that it was mutually agreed that the assessee would provide all the items, that the ownership of those item would remain with the assessee. After considering the submission of the assessee and the assessment order,the FAA held that the disallowance of capitalisation of school building was not appropriate, that the items were installed as per the mutual agreement between the parties,that the AO was not justified in disallowing the interest related with the expenditure.He also held that expenditure was not reduced from the taxable income,that the rental income was to be assessed under the head income from house property, that the capitalisation would not make any difference.Finally, he allowed the appeal filed by the assessee. 3.2.Before us, the DR supported the order of the AO and the AR supported the order of the FAA.

We have heard the rival submissions and perused the material before us.We find that the assessee had installed various items as per the mutual agreement entered into with the lessee, that the amount was capitalised.We have,in the earlier part of the order,held that rental income was to be assessed u/s.22 of the Act. Therefore, we agree with the observation of the FAA that capitalisation will not make any difference.Upholding the above,we decide ground No.3 against the AO. 4.Next Ground of appeal deals with allowing expenses of Rs.2.80 crores on account of bogus purchases and proportionate interest expenditure of Rs.28.77 lacs. During the assessment proceeding,the AO found that an action u/s. 132(1) of the Act was carried out in the Kanakia Group of cases on 29.3.2011, that enquiries conducted after the search operation revealed that it had taken accommodation bills, that Kanakia group had declared an amount Rs.42 crores towards bogus purchases for the AYs 2006-07, 2011-12 u/s. 132(4) of the Act,that the said disclosure was made in the hands of four group companies.The AO during the assessment proceedings,recorded statement of Girish Sangani u/s. 131 of the Act and held that search had taken place at his house also as in case of Kanakia group, that he admitted that he had issued accommodation entries to Kanakia Space Pvt. Ltd. worth Rs.4.5 crores,that the assessee had purchased goods worth Rs.2.8 crores,that were not genuine,that the same was to be disallowed from capitalisation from WIP.He also disallowed proportionate interest with regard to alleged accommodation entries. 4.1.In the appellate proceedings,the assessee argued that the AO had not provided a copy of the statement of Girish Sangani that was relied upon by him to make the addition,that Girish Sanganihad nowhere referred its name when statements were recorded, that no accommodation entries were provided to the assessee,that the statement of Rakesh Kanakia who had made admission u/s.132(4)also did not refer the name of the assessee, that it had filed entire details of transaction alongwith the bills and supporting evidence to prove that purchase were genuine, that it filed confirmation of accounts along with reconciliation statements. After considering the available material,the FAA held that the name of the assessee company was not mentioned by Girish Sangani or Rakesh Kanakia in their statements,that their statement should be treated as correct or were required to be rejected,that supporting document filed by the assessee were uncontroversial,that the evidence on record proved that the suppliers had sold goods worth Rs.67.96 crores to four entities,that out of such total purchase of goods worth Rs.6.38 crores were admitted to be bogus both by the purchaser and the seller, that the rest of the purchases were found to be genuine,that the search party had also not pointed about anything wrong with the purchases made with the assessee,that without some concete evidence the AO was not justified in disallowing the purchase. 4.2.Before us ,the DR and the AR supported the order of AO and the FAA respectively. We find that the AO had made the disallowance on the basis of statements of Girish Sangani and Rajesh Kanakia,that both of them had admitted of accommodation entries and had made admission u/s. 132(4) of the Act with regard to these sale/purchases, that both of them had not alleged that the assessee had taken accommodation entries, that documentary evidences were produced regarding purchase of goods and same were not rebutted by the AO. In our opinion, the addition had to be restricted to the four entities who had taken the accommodation entries. As the AO has not brought on record that purchases made by the assessee were part of bogus bill transactions,so we are of the opinion that FAA was justified in deleting the addition with regard to addition made under the head bogus purchases as well as the proportionate interest disallowance.Upholding his order,Ground No.4 is decided against the AO. 5.Next ground is about deleting the addition made on account of accommodation entries amounting to Rs.11.51 lacs.The AO found that during the year the assessee had booked an amount of Rs.11,51,771/- as part of WIP.He held that it was part of the bogus purchase and it 4 had to be taxed as unexplained expenditure u/s.69B of the Act for the year under consideration. The FAA referring to his order,with regard to accommodation entries/bogus bills,held that following the same the purchase made by the assessee had to be considered as genuine ones. 5.1.The DR left the issue to the discretion of the bench and the AR supported the order of the FAA. While deciding ground no.4,we have held that the AO was not justified in making the addition for alleged accommodation entries in case of the assessee.Following the same we uphold the order of the FAA and dismiss Ground No.5,filed by the AO. 6.Last ground of appeal is about allowing the proportionate interest expenses of Rs.80,69,115/- related to advances made towards Juhu land. During the assessment proceeding AO found that the assessee had advanced Rs.8.46 crores towards Juhu property,that Rs.1.50 crores was advanced during last AY.and balance amount i.e.Rs.6.96 crores were advanced during the year under consideration.He held that the expenditure was not incurred for the property in question which was leased out,that the assessee had incurred expenditure on borrowed funds and had claimed interest expenditure of such funds and total interest expenses incurred for the year under appeal was Rs.4.36 crores, that Rs.1.09 crores was capitalised by it,that Rs.3.26 crores was debited to the P&L account. He reworked the interest expenditure and disallowed the interest portion. 6.1.Before the FAA,it was argued that the source of payment was not the borrowed fund, that no interest was paid on the loan received that were utilised for purchasing the Juhu property, that no part of interest could be disallowed on notional basis.The FAA held that the advances were given from amount received from Kanakia Spaces Pvt. Ltd., that the amount received did not bear interest,that no interest bearing fund was diverted for interest free advances, that the assessee was in the business of development of properties, that investment in purchase of Juhu property was for business purposes, that payment of interest could not be disallowed without any valid basis. 6.2.Before us,the DR supported the order of the AO and AR relied upon the order of the FAA. We find that FAA has given a categorical finding of fact that no interest bearing fund was utilised for purchasing the property in question,that the advances were given out of the funds received by the assessee from one of the group concerns namely Kanakia Spaces Pvt. Ltd., and it did not charge any interest from the assessee.Therefore, in our opinion disallowance was rightly deleted by the FAA.Confirming his order Ground No.6 is decided against the AO.