TaxTMI 
TaxTMI 
2014 (1) TMI 743
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....the revenue in its appeal, which reads as follows: "4. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance out of interest paid to M/s. Ahuja Properties P. Ltd. by holding that debit balance of amount of Rs. 1,27,46,781/- cannot be considered as loans and advances diverted for non-business purpose and is to be excluded from the Rs. 4,16,48,575/- for the purpose of determining the interest disallowable." 3. The assessee is a company. It is engaged in the business as property developer. The assessee company came into existence with effect from 26.03.2003 as a Part IX Company under the Companies Act, 1956 i.e. by conversion of M/s. Ahuja Platinum, a partnership firm into Part IX Company vide Certificate of incorporation dated 26.03.2003 issued by the ROC. By virtue of this, all the assets and all the liabilities of the erstwhile firm became the assets and liabilities of the assessee company. Shares were allotted to the partners of the erstwhile firm in proportion of their capitals in the said firm in order to fulfill the conditions as have been laid down in section 47 (xiii) r.w.s. 72A(6) of the Income Tax A....
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....g total interest free loans to the sister concern) out of the total interest expenses of Rs. 2,17,87,258/- debited in the P and L Account as interest expenses by the assessee. 5. The Assessing Officer also relied on certain judicial pronouncements for the proposition that the assessee has to establish utilization of borrowed funds for the purpose of business to claim interest expenses on borrowed capital as deduction. 6. The break-up of the non-interest bearing loans given by the Assessee was as follows: AHUJA PLATINUM PROPERTIES PVT. LTD STATEMENT OF FUND, LOANS AND ADVANCES GIVEN AS ON 31ST MARCH 2003 PARTICULARS CLOSING AMOUNT RS. NON-INTEREST BEARING FUNDS GROUP CO'S/ASSOCIATES AHUJA TRADERS 400,000.00 AHUJA HOUSING PROJECTS PVT. LTD 2,570,473.65 SHREE AHUJA PROPERTIES PVT. LTD. 12,746,781.00 BIHARI B AHUJA 150,000.00 GOUTAM AHUJA 10,000.00 KOMAL AHUJA 10,000.00 ANDANA J AHUJA 10,000.00 TOTAL (A) 15,897,254.65 OTHERS ALOK KUMAR 500,000.00 ARUNKUMAR JAMNADAS ASHAR 4,161,042.00 EAST AND WEST BUILDERS 168,162.00 KUNA....
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....available with the Assessee and therefore there was every justification for disallowing interest expenses u/s.36(1)(iii) of the Act. The CIT(A) relied on some judicial pronouncements in support of the above conclusion. We will deal with them a little later. The CIT(A) thereafter quantified the disallowance of interest expenses. The CIT(A) after noticing the break-up of interest free loans given to the sister concerns examined each of the loans. The same is as follows. 1. Interest free funds break-up made as under: (A) Rs. 83,89,733/- in respect of 3 parties i.e. East and West Builders, Skyland Const. and Saranga Agarwal. (B) Rs. 25,70,473/- in respect of Ahuja Housing Projects Pvt. Ltd. - debit balance in the partners account prior to the conversion. (C) Rs. 1,27,46,781/- in respect of Shree Ahuja Properties P. Ltd. - debit balance due to j/v. passed on 31/3/2003 towards recovery of project profits - Ashirwad project. (D) Rs. 1,46,89,194/- advanced interest free to sister concern out of interest free funds re....
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.... and interest free loans given to the sister concern. In this regard we find that the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom) had an occasion to examine the question with regard to disallowance of interest, where the assessee is in possession of both interest free funds as well as borrowed funds on which interest was paid by the assessee. The Hon'ble Bombay High Court held that if there are interest free funds available to an assessee sufficient to meet its investment (in the present case investment have to be read as interest free loans to sister concern) and at the same time assessee had raised loans it can be presumed that the investments were from the interest free funds available. In the present case we have already seen that the total interest free funds available with the assessee was about 12.88 crores, the total interest free funds advanced to the sister concern and others were only Rs. 4.16 crores. Thus prima facie interest free funds available were much more than the interest free advances given by the assessee. In such circumstances there is no basis for the Assessing Officer to presume that interest ....
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....ed in confirming the disallowances aggregating to Rs. 58,50,296/- made by the learned AO on ground that they represented "reversal" entries without appreciating the explanation offered by appellant." 15. On going through the details furnished by the assessee, the AO noticed that the Assessee had made provision for certain expenses and on the basis of such provision, the Assessee had claimed deduction of certain expenses in the profit and loss account. The particulars in this regard were as follows: S.No. Particulars Amount Debited to Cost (Rs) Amount Reversed (Rs.) 1. Provision of Expenses(For Ashirwad) 6,42,408/- 2,60,224/- 2. Earnest Money Deposits(Vijaydeep) 15,00,000/- 15,00,000/- 3. Out of Alternative Accommodation (vijaydeep) 42,55,027/- 40,90,072/- As can be seen from the above details, the project Ashirwad was completed in this year. Since income from this project was offered to tax, the anticipated expenses to be incurred in connection with this project was estimated and claimed as deduction as provision for expenses. Similarly for the project Vijaydeep also expenses were being claimed on the basis of anticipated liabil....
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....he reversal of the cost of the land without getting proper explanation from the assessee. 17. In respect of the reversal of a sum of Rs. 2,60,224/- out of Rs. 6,42,408/- being provision of expenses for Ashirwad Project, the assessee pointed out that these were expenses required to complete the project Ashirward which was provided in the books of accounts. In the following year a sum of Rs. 2,60,224/- were remained to be paid which was shown as reversal of expenses. The assessee explained that this was also wrong nomenclature used by the assessee. 18. The CIT(A) however, did not agree with the submissions of the assessee and he held as follows: "7.3 I have taken into account the facts of the case to adjudicate this particular issue. I find that the appellant has merely made certain provisions of expenditure which has been claimed in entirety in the P and L A/c. I also find that part of the amount debited in the P and L account in respect of Ashirward and Vijaydeep project has not been crystalised at all during the previous year relevant to assessment year. It is understood from the submission made by the appellant that the appellant company has debited some exp....
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....cost of the land in respect of Vijaydeep project. It has been submitted that as per the development agreement with the land owners, the appellant had to pay Rs. 15 lacs as earnest money deposit, which was part of the consideration payable to land owner as per clauses 6 and 7. It was submitted that these expenses were rightly claimed as expenses as part of cost of land. In respect of expenses on alternative accommodation in project Vijaydeep the same is also incurred for the purpose of business of the appellant and as part of the development agreement as per clause 6 whereby it was the developer responsible for incurring expenses for vacating the plot of land from the tenants and providing them with alternate accommodation in the same project or elsewhere and this cost is over and above the consideration paid to the land owners. Thus it was submitted that these expenses were incurred wholly and exclusively for the purpose of the business and rightly claimed in A.Y 2003-04 since the project was completed in that year, hence, also crystalised in the said year. It was also submitted that in the next year there were further expenses incurred in respect of Vijaydeep project and certain a....
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.... have supporting documents and were not fully vouched. An adhoc disallowance of 10% of the total expenses namely Rs. 39,50,545/- was made by the Assessing Officer. The CIT(A) was of the view that the disallowance made by the Assessing Officer was reasonable and he, therefore, confirmed the order of the Assessing Officer. 23. The ld. Counsel for the assessee submitted before us that complete details of expenses with supporting documents like bills vouchers were submitted before the Assessing Officer and no deficiency has been pointed out by the Assessing Officer except general remarks. It was also submitted that no adhoc disallowance can be made without pointing out specific defects or giving a finding that expenses were not incurred for the purpose of business. It was also argued that there was no finding that the expenses were bogus or inflated. 24. We have considered the submissions of the ld. Counsel for the assessee. We are of the view that in the given facts and circumstances of the case disallowance of 5% of the site expenses and sundry expenses would be fair and reasonable. We order accordingly. Ground No.3 is thus partly allowed. 25. In the result, appeal by the as....
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.... view that some amount of expenditure will also be required to meet the administrative and managerial expenditure of M/s. Jaygopal consultancy Services P. Ltd., to sustain its independent existence. To the extent the Assessee had reimbursed such administrative and managerial expenditure, the AO held that the same cannot be attributed as expenditure relating to constituent members. The AO seregated a portion of expenditure on estimate basis to be attributable to sustain the existence of M/s. Jaygopal Consultancy Services P. Ltd. and he held that to this extent the same cannot be allowed as expenditure in the hand of the Assessee or any of constituent members for that matter. The AO estimated 30% of expenses as reasonably attributable to the working of M/s. Jaygopal Consultancy Services P. Ltd. as an entity by itself. Accordingly, the AO computed Rs. 23,90,747/- (Rs.11,40,680/- and Rs. 12,50,067/-) as disallowable expenditure in respect of Ashirward and Vijaydeep projects. Further the AO held that the aforesaid amount was excessive to be disallowed u/s. 40A(2)(b) of the Act. 29. On appeal by the assessee CIT(A) held as follows: "3.4 I have taken into account entire....
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....A) on this issue has to be upheld. It is seen that Group concerns have entered into MOU for creation of common pool company to function on 'no profit no loss' basis in providing administrative and managerial requirement of the constituent members. Amount to be reimbursed in the proportion to the construction cost incurred by each of the constituent member. In scrutiny assessment made in the case of M/s. Jayagopal Consultancy Services Private Limited u/s. 143(3) it was accepted by the AO in that M/s. Jaygopal Consultancy Services Private Limited was functioning on 'no loss no profit basis' and no commercial activity was carried out by it except for incurring expenses on behalf of the group companies as a 'pool company'. The payments made by the Assessee and the various constituents are merely reimbursement of the actual expenses incurred and this fact is not disputed. In such circumstances, it cannot be said that the payment was not for purpose of business or was excessive or unreasonable. For the reasons stated above Ground No.1 raised by the revenue is dismissed. 31. Ground No.2 raised by the revenue reads as follows: "2. On the facts and....
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....le consumed in Vijaydeep worked out only @ 315 per sq.ft. including the labour cost for laying the marble. The work of laying down of marble was also got done by M/s. Topaim Property Pvt. Ltd. at the rate of Rs. 315/- per sq. ft. and the bill in support of the same was also filed. The AO noticed that M/s. Topaim Property Pvt. Ltd. happened to be a sister concern of the assessee company. The Assessee also submitted that the marble worth Rs. 69,12,439/- already included in the WIP as on 1-4-02 remained unused and was sold to M/s. Topaim Property Pvt. Ltd. at discounted price during the financial year 2005-06. It was submitted that this fact would go to prove that the marbles worth Rs. 69,12,439/- very much existing physically in the closing stock. The AO however held that the marble cost of Rs. 69,12,439/- was not included in the closing stock on the ground that no stock register was maintained and ultimately resulted into an addition of Rs. 69,12,439/-. 34. Remaining consumption of marble worth Rs. 72,98,550/-: With regard to the above, the AO was of the view that the payment for laying marbles by the Assessee to its sister concern was excessive. The AO also applied the provision....
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....arm's length price @ Rs. 250/- per sq. ft. Further, it is also to be understood that the onus rest on the Department to provide the material to apply the provision of Sec. 40A(2)(b) as held in the case of Shri Ram Pipes Ltd. vs. ISC reported in 39 TTJ (Del) 132. Therefore, I am unable to sustain the disallowance made by the AO u/s.40A(2)(b) at Rs. 15,06,050/- and Rs. 12,60,208/-." 37. As far as the addition of Rs. 69,12,439/- is concerned the assessee pointed out that the unutilized marbles were already included as value of WIP of the erstwhile firm and has already been shown as cost of construction. The CIT(A) held as follows: "4.3.3. I have circumspected the facts of the case. I find that the facts are not in dispute that the erstwhile firm had purchased marble worth Rs. 22,88,439/- and Rs. 46,24,000/- on 15/3/2002 and 25/3/2002 respectively from M/s. Topaim Property P. Ltd. The alleged marble was said to have embedded in W.I.P. of Vijaydeep Project as on 31/3/2002 shown at Rs. 7,23,13,793/- in the hand of erstwhile firm viz. M/s. Ahuja Platinum Properties P. Ltd. This WIP was shown as opening stock as on 1/4/2002. The appellant company has taken over the a....
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....rately. From accounting point of view the unutilized marble should have found its place in the closing stock separately and not in the WIP. Nevertheless, after it finds its place in WIP the credit side of the entry is supposed to have completed and it does not create any discrepancy as such which has got bearing on the income of the appellant. If at all, some discrepancy on this account could have been attributed , it goes back to the AY 2002-03 in the hand of the firm and not in the case of the appellant company for the A.Y 2003-04. further, the AO, after having said that the impugned stock of unutilized marble has not found its place either in opening WIP as on 1/4/2002 or in closing WIP as on 31/3/2003, he cannot choose unilaterally to add an amount of Rs. 69,12,439/- in the closing stock without giving any credit in the opening WIP or stock. The action of the AO gives rise to an absurd result in accounting parlance as the impugned amount has to be in opening WIP also. In that situation, the addition gets neutralized by having equal amount added in the opening WIP as well as closing WIP. Further, the fact that the appellant himself has sold the said unutilized marble on discount....
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....f the CIT(A), the revenue has raised Ground No.2 before the Tribunal. 39. We have heard the rival submissions. As far as the addition u/s.40A(2)(b) at Rs. 15,06,050/- and Rs. 12,60,208/- in respect of marbles laid at Vijaydeep Project and Ashirwad project respectively is concerned, we find that the cost of marble plus laying charges charged by sister concern Topaim was Rs. 315/- per sq. Ft. for Vijaydeep Project and similarly, the rate was Rs. 310/- per sq. ft. for Ashirwad Project. The cost of marble and laying thereof depends upon the quality of marble and this was demonstrated on by the Assessee by showing that for different project in the assessee company, the rate per sq. ft. varied from Rs. 280/- per sq. ft. to 315/- per sq. ft. The rate also varied for outside parties and the range was between Rs. 150 per sq. ft. to Rs. 700/- per sq. ft. No material brought on record by AO proving that rate charged by Topaim was on higher side, hence, disallowance made u/s.40A(2)(b). The addition in our view was therefore rightly deleted by the CIT(A). 40. With reference to the purchase of marble from Topaim, the assessee produced 2 bills of Topaim and the purchase of marble in the yea....
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....t was also pointed out that the rate of interest prevailing at that time was more than 18% and considering further cost and hassle involved in maintaining the loan schedule etc. interest paid to sister concern at 19.5% cannot be said to be excessive. It was submitted that the assessee company has incurred loss for the year whereas sister concern Ahuja Properties has shown profit and paid tax and hence, it can be concluded that appellant not paid any excessive interest and the disallowance deleted. The CIT(A) deleted the addition made by the AO accepting the plea of the Assessee. Aggrieved by the order of the CIT(A), the Assessee has raised Ground No.3 before the Tribunal. 44. We have heard the rival contentions. The learned D.R. relied on the order of the AO. We have considered the submission. We find that Ahuja Properties is group concern carrying on the business of financing i.e. it borrows from the market and lends to any of the group concerns in requirement of fund. Loans are mostly borrowed through brokers and hence, brokerage of 3% is charged over and above the rate of interest. In assessee's case, loans borrowed from outsiders were in majority of case at the rate of i....