TaxTMI 
TaxTMI 
2020 (11) TMI 735
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....g that expendi ture incurred on interest is revenue is nature ignoring the fact that assessee company is engaged in the business of developing projects and interest bearing loan are used for the capi tal purpose of developing the project and requi red to be capitalized to work in progress. 3. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored. 4. The applicant craves leave to add, amend or alter any grounds or add new grounds ,which may be necessary." 2. Briefly stated, the assessee company which is engaged in the business activities of building, developing, dealing in properties and real estate had e-filed its return of income for A.Y. 2013-14 on 26.09.2013, declaring a loss of Rs. 2,06,19,597/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings it was observed by the A.O that the assessed had claimed an expenditure of Rs. 73,59,558/- on account of finance cost in its profit and loss account for the year under ....
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.... Observing that the assessee could not substantiate the payment of the aforesaid exorbitant amount of remuneration to its directors, the A.O held a conviction that the assessee had tried to claim the aforesaid amount as an expense with an intent to book a loss during the year under consideration, which could thereafter be 'set off' against its income, if any, for the subsequent years. It was further observed by the A.O that a major portion of the directors remuneration of Rs. 2.56 crores (out of Rs. 3.60 cores ) was reflected by the assessee as an outstanding liability under the head 'directors remuneration payable' in its balance sheet for the year under consideration. Also, it was observed by the A.O that the assessee had raised unsecured loans of Rs. 6,96,00,000/- from the abovementioned directors on which it had claimed to have paid an interest amounting to Rs. 39,02,832/-. In the backdrop of his aforesaid observations, the A.O held a conviction that assessee by providing unreasonable remuneration to the directors had thereafter received back the funds by way of interest bearing loans from them, and thus, in the garb of the said transactions had tried to suppress its profits an....
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....r method of accounting that was followed by the assessee and accepted by the department in the preceding years. Further, the CIT(A) observed, that the claim of the assessee that the interest expenditure being a periodic cost was thus to be allowed as a deduction even though corresponding income was to be recognized only upon completion of the project was supported by the judgment of the Hon'ble High Court of Bombay in the case of ACIT Vs. Lokhandwala Constructions Industries Ltd. (2003) 260 ITR 579 (Bom). Also, it was observed by the CIT(A) that the ICDS issued on valuation of inventories (though relevant in subsequent years), also supported the aforesaid claim of the assessee. Accordingly, the CIT(A) finding favour with the contentions advanced by the assessee vacated the disallowance of interest expenditure of Rs. 66,72,179/- so made by the A.O. As regards the disallowance of the directors remuneration of Rs. 3.60 crores, it was observed by the CIT(A) that in earlier years also which had been subjected to scrutiny assessments viz. A.Y 2007-08 to A.Y 2012-13, the remuneration paid to the directors was allowed and no dispute had therein arisen. In fact, it was observed by the CIT(A....
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....bove, the A.O taking cognizance of the fact that the assessee did not have sufficient self-owned funds or any other source of funding, was of the view, that it had utilised its overdraft facility and also the unsecured loans so raised in its business of developing of projects. Observing, that the assessee was recognising its income/revenue as per the project completion method, the A.O was of the view that as the interest bearing borrowed funds were used by the assessee for a capital purpose, thus, the interest expenses relatable to the same being in the nature of a carrying cost was to be capitalised to the WIP of the assessee. At this stage, we may herein observe that it was the claim of the assessee before the A.O that it had fulfilled the matching concept of cost and revenue while allocating all costs to the respective projects for which they were incurred. Also, it was submitted by the assessee that as the general administrative cost and finance cost were not attributable to any specific project, therefore, they were debited as a periodic cost in the profit and loss account for the year under consideration. But then, we find that the aforesaid claim of the assessee was rejected....
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....rselves to subscribe to the deviation by the A.O from the regular method of accounting that was followed by the assessee and accepted by the department in the preceding years. We are thus of the considered view that there was no justification for the A.O to have disallowed the assessee's claim for deduction of interest expenditure as a periodic cost specifically when the same in the course of scrutiny assessment framed u/s 143(3) for A.Y 2012-13 was accepted as such. Independent of our aforesaid observations, we find that the aforesaid claim of deduction of interest expenditure by the assessee is in conformity with the Accounting Standard-2 (AS-2) issued by the ICAI on "Valuation of Inventories". AS-2 provides that "overheads other than production overheads should be included as a part of the inventory cost only to the extent that they clearly relate to putting the inventories in their present location and condition". In our considered view, as the interest costs are in the nature of periodic costs, it would thus not only be prudent but in fact fair and correct to treat them as a revenue expenditure and debit the same in the profit & loss account. Our aforesaid view is fortified by....
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....re of the expense- whether the expense was on capital account or revenue account-was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That, the utilization of the capital was irrelevant for the purposes of adjudicating the claim for deduction under s. 36(1)(iii) of the Act [see judgment of the Bombay High Court in the case of Calico Dyeing & Printing Works vs. CIT (1958) 34 ITR 265 (Bom)]. In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case." Further, we find that ICDS II issued on valuation of inventories (though relevant to the subsequent years) also supports the aforesaid claim of deduction of the assessee. In the backdrop of our aforesaid deliberations, we are of the considered view that as the interest be....
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.... reflected by the assessee as an outstanding liability under the head 'directors remuneration payable' in its balance sheet for the year under consideration. Also, it was observed by him that the assessee had raised unsecured loans of Rs. 6,96,00,000/- from its aforesaid directors on which it had claimed to have paid an interest amounting to Rs. 39,02,832/-. In the backdrop of his aforesaid observations, the A.O disallowed u/s 40A(2)(a) the entire amount of remuneration to directors amounting to Rs. 3,60,00,000/-. On appeal, the CIT(A) finding favour with the contentions advanced by the assessee had vacated the aforesaid disallowance made by the A.O. 9. We have heard the authorised representatives for both the parties on the issue under consideration, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements pressed into service by them. On a perusal of the records, we find that the assessee company had consistently been paying remuneration to its directors in the preceding years, as under: Sr. No. Assessment Year Remuneration paid to directors 1. 2008-09 Rs. 2.28 crores 2. 2009-10 Rs. 1.47 crores 3. 2010-11....
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....e paying exorbitant remuneration to its directors. Infact the vast experience of the directors who had been rendering their services to the assessee company for decades dispel any type of doubt as regards the genuineness and veracity of the remuneration paid by the assessee to them during the year under consideration. Apart from that, we find that all the directors had duly reflected their respective remunerations in their individual income-tax returns, and the said amounts had been subjected to tax at the maximum marginal rate in their hands. As such, it is neither a case of any leakage of revenue nor that of a tax evasion. At this stage, we are reminded of the CBDT Circular No. 6P(LXXVI-66) of 1968, dated 06.07.1968, wherein it was clearly stated that the provisions of Sec. 40A(2)(b) are meant for checking tax evasion and cannot be pressed into service in a manner which would cause hardships in bonafide cases. Relying on the said circular, the Hon'ble High Court of Bombay in the case of CIT Vs. Indo Saudi Services (Travel) P. Ltd. (2009) 310 ITR 306 (Bom), had observed, that no disallowance u/s 40A(2)(b) can be made in respect of payments to relatives or sister concerns when ther....
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....ed by or accruing to him therefrom. In sum and substance, the scope of the provisions of Sec. 40A(2)(a) is to disallow the excessive or unreasonable component of the expenditure incurred by the assessee in respect of which payments have been or is to be made to a related party therein specified. Apart from that, the basis for gauging the excessiveness or unreasonableness of such expenditure incurred by the assessee in respect of related parties has to be carried out in the backdrop of the fair market value of the goods, services or facilities for which the payment is made. We find that the A.O by misconstruing the scope and gamut of Sec. 40A(2)(a) had disallowed the entire amount of the directors remuneration. In our considered view, the aforesaid disallowance carried out by the A.O by pressing into service the provisions of Sec. 40A(2)(a), therein principally suffer from two serious infirmities, viz. (i). that the A.O had lost sight of the fact that the disallowance of the related party expenditure u/s 40A(2)(a) could have been made only to the extent the same was found to be excessive or unreasonable; and (ii). that as per the mandate of Sec. 40A(2)(a) the A.O remained under a st....
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....and due notice of the day so fixed shall be given on the notice board. As such, "ordinarily" the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression "ordinarily" has been used in the said rule itself. This rule was inserted as a result of directions of Hon'ble High Court in the case of Shivsagar Veg Restaurant Vs ACIT (2009) 317 ITR 433 (Bom) wherein it was inter alia, observed as under: "We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a p....
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....h June 2020". It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus "should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure...". The term 'force majeure' has been defined in Black's Law Dictionary, as 'an event or effect that can be neither anticipated nor controlled' When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an "ordinary" period. 10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force....