TaxTMI 
TaxTMI 
2021 (1) TMI 955
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....ed in upholding the observation of Ld. AO that the interest paid is not a business expenditure by ignoring the fact that assessee has proved direct nexus between the borrowed funds and its utilization in business of assessee thus the observations deserves to be ignored and excluded. 1.2 That the Ld. CIT(A) has further erred in misinterpreting the provisions of section 37(1) and thereby considering the interest paid on fresh loan taken to repay the old loan as not for business purpose, thus the said observation being based on no logic deserves to be ignored. 1.3 On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in not following the order of the Hon'ble ITAT, Jaipur Bench, Jaipur wherein addition of similar nature and in identical circumstances were deleted, therefore, following the principle of consistency addition confirmed by Ld. CIT(A) deserves to be deleted. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of an expenditure of Rs. 25,282/-, claimed on account of depreciation charged during the relevant year, arbitrarily. Appellant prays depreciati....
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....as been adjudicated by the Tribunal in assessee's own case for AY 2008-09, 2009-10 and 2011-12 vide common order dated 22.08.2016 in ITA Nos. 446/JP/2012, 764/JP/2013 & 158/JP/2015. Also in earlier years, i.e. AY 2004-05 to 2007-08 disallowance of similar nature was made, which has been deleted by the Tribunal. For AY 2004-05, i.e. first year of disallowance, the Tribunal has deleted the disallowance vide its order dated 10.12.2010 in ITA No. 282/JP/2010 by observing as under: "7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of Ld. CIT(A). The Ld. CIT(A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier years the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year unde....
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....debited by the appellant was incurred in investment of the business carried on by the appellant. Therefore, in view of the facts discussed by the AO in the assessment order in detail, I am of the considered view that the AO has rightly disallowed the interest of Rs. 4,77,36,535/-. Accordingly, the disallowance of Rs. 4,77,36,535/- made by the AO is hereby confirmed." 7. Further, our reference was drawn to the findings of the AO which read as under: "Disallowance on A/c of Financial Charges & Depreciation : 1.1 The assessee is a partnership firm came into existence in terms of partnership deed dated 31.01.1987 and constructed a commercial complex namely Laxmi Complex at Subhash Marg, M.I.Road, Jaipur. During the course of construction of the complex a dispute arose between the partners and therefore, one of the partner Smt. Sudha Yadav filed a suit in the year 1995 for rendition of accounts and dissolution of the firm and accordingly, the Hon'ble Rajasthan High Court had granted the stay in the month of March, 1996, on further sale of the offices/ shops constructed in the commercial. complex, therefore, after March, 1996 neither any sale was taken place nor ....
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....ny shops nor offices were constructed nor sold. The assessee was asked to furnish an explanation as to why interest expenses and depreciation thereof should not be disallowed. The reply of the assessee justifying his claim submitted vide letter dated 24.10.2014 Justification of payment made to person specified u/s.40A(2)(b) : During the year under consideration assessee firm has made interest payment Rs. 71,47,640/- to the relatives which are covered u/ s.40A(2)(b) Details of the same are as under : S. N Name of Person Amount Paid Rate of Interest 1. Smt. Amarao Devi Sethi 10,29,292.00 13.20% 2. Shri Nihar Kothari 6,05, 552.00 13.20% 3. Shri Sanchai Sethi 8,18,169.00 13.20% 4. Smt. Sangeeta Sethi 10,93,075.00 13.20% 5. Sh. Sohan Lal Sethi 19,18,610.00 13.20% 6. Sh. Sidharth Kothari 10, 91, 101.00 13.20% 7. Sh. Gulab Kothari 5,91,841.00 13.20% Total 71,47,640.00 During the year under consideration assessee firm has paid interest to various parties ranging between 13 to 15 percent which depends upon the interest rate prevailing in the ma....
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.... for the purpose of business. Sec. 37(1) categorically states that only that expenditure should be allowed which has been incurred wholly and exclusively for the purpose of business. Any distant or remote connection between the two is not sufficient. In this case, it is very clear that nexus of interest paid is with stock in trade and not with Sundry Debtors. Therefore, it is not to be allowed against interest income. (v) It has been held in various judicial pronouncements that the expenditure should be for the purpose of business and connection between expenditure and object must be real and not remote or illusory as held in the cases of CIT vs. Vazir sulaton Tobacco Co. Ltd ( 1978) 114 ITR 605 (Col.)- Co. (vi) The undersigned wishes to place reliance on the decision of (A) Hon'ble Kerala High Court in the case of T.M. Chacko and Partners vs. CIT (1978) 195 ITR 905 ( Ker.) Business Expenditure Condition Precedent Business must be in existence- Assessee carrying on business form 1971-72 to 1978-79 due to a legal bar-interest on kist arrears not deductible in assessment year 1976-77 Income Tax Act, 1961. The authorities as well as the Tribunal came to ....
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....l was so used, will not be allwoed P.R.M.S. Ramanathan Chettiar vs.CIT(1969) 72ITR 534 (Mad.) /M.S.P. Rajav CIT (1976)105 ITR 295 (Mad.) It is a settled state of affairs that expenditure should be incurred for the purpose of business which is carried on in the accounting year and the profits of which are under assessment. Decution can be permitted in respect of only those expenses and losses which are incurred in the relevant accounting year. Though the assessee has been stating that there is no discontinuance of the business but there is only a stay of the court, yet it is worth considering that the Period of stay has been substantial and there is no chance of its vacation considering the fact that there is dispute between the partners of the concern. Accordingly, deduction cannot be allowed for payment of interest on loans taken for paying off earlier loans & not for the purpose of the business of the assessee. Viii. It is important to mention that assessee has taken advance of Rs. 16,12,270/- in F.Y. 1995-96 since then cost of shop/offices has increased many times. Now in the perspective of increase in cost of project many times (as claimed by assessee due to o....
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.... the finding of Ld. CIT(A). The Ld. CIT(A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier years the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in considered view does not change the character of the loan taken during the year under consideration. The loan taken for the year under consideration has to be treated as taken for business purposes for the simple reason that this loan was substituted with the loans taken in past after repaying the old loans. There is a direct nexus between the fresh loans and old loans because the fresh loans have been utilized for the purpose of repaying the old loan. Now fresh loans partakes the character of loans taken for business purposes. Interest paid on o....
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....est expenses with the business of the appellant which finding is based totally on assumptions and presumptions. Facts of the case are that appellant had taken unsecured loans from various parties in F.Y. 1995-96 for its real estate business i.e. for construction of commercial complex having shops and offices. Upto A.Y. 2000-01, the interest paid on such borrowed funds was added to the cost of work in progress, however, from A.Y. 2001-02 and onwards it was decided to claim the same separately in the Profit & Loss Account as normal business expenditure and the returns filed by claiming such expenses were never doubted and processed u/s 143(1) by the department. For the first time in A.Y. 2004-05, the department has changed its stand by alleging that the assessee has taken fresh loans therefore, they loose their character of business expediency and accordingly disallowance of interest was made. While doing so, the fact that in the A.Y. 2004-05 fresh loans have been taken by the assessee firm for the purpose of repayment of old loans and the interest payment was made during the year on the said loans which were obtained and utilized wholly and exclusively for the purpose of bu....
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....elied upon by the Ld. CIT(A) who at para 3.2 in page 9 of the appellate order has observed that any temporary suspension in the business cannot last for 15 years. While observing so the Ld. AO as well as Ld. CIT(A) has failed to appreciate the fact that the business of the appellant was in temporary suspension due to the stay order on its real estate activity by the Hon'ble Rajasthan High Court vide its order dated 26.03.1996 as such the appellant was following the directions of the Hon'ble Jurisdictional High Court during the suspension of its real estate activity. In this regard, it is further submitted that there was no total discontinuance of business of the appellant as presumed by the AO and Ld. CIT(A). The appellant had earned income from "Complex maintenance charges" and interest income from sundry debtors. On the basis of same and unchanged figure of opening and closing stock, the Ld. AO concluded that during the year under consideration there was no business activity carried out and accordingly held that the interest claimed u/s 36(1)(iii) was not admissible. Further the Ld. AO alleged that the nexus of payment with stock in trade and not with sundry deb....
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....ere not doubted. Further, as stated above there was no objection with respect to administrative expenses, which means that Ld. AO has impliedly accepted that the business was very much in existence and in this scenario, there was no reason, for which interest expenses should be disallowed. Apart from this, logically, the Ld. AO has accepted that the loans old or new have been taken for the purpose of business. This fact has neither been denied nor contradicted anywhere in the assessment order. Since this is an established fact that the real estate business is always carried out on the basis of loans from various agencies and their utilization is exclusively to expand the business without in any way leading to the fact that any stoppage or a lull period would hamper the construction work. Even if, for argument sake, the findings of the Ld. AO are considered that there was no business due to stay order of the court, thus it cannot be said that the repair works, construction of passage and other allied and facility items did not continue during this period also as the stay order was purely for constructing new units and extension of the existing units. The Ld. CIT(A) at page ....
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....ve Courts. Thus, after having reached settlement as stated above, the stay order stood vacated automatically and the business of assessee firm resumed after executing a deed of retirement & reconstitution of partnership dated 17.02.2012 (APB 105-114) in terms of the settlement deed and arbitration award as mentioned above. In view of above, it is proved that business of the assessee was not discontinued rather temporarily stayed under the order of the Hon'ble Court which has been revived now by vacation of stay with effect from settlement reached between parties. It is further submitted that the suspension or discontinuation of one of the activities of business out of several such activities does not disentitle the taxpayer from deduction of interest or other expenditure incidental to the business. All the business activities taken together constitutes the business undertaking as one and so long the same remains under the common management with common resource employment and common establishment and control it cannot be said that the business activity is separate and distinct. The appellant continued its business in the relevant assessment year and the bu....
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....tter of this appeal, as under :- "7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of ld. CIT (A). The ld. CIT (A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier year the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in our considered view does not change the character of the loan taken during the year under consideration. The loan taken for the year under consideration has to be treated as taken for business purposes for the simple reason that this loan was substituted with the loans taken in past after repaying the old loans. There is a direct nexus between th....
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....ans has to be allowed as the character of loan remains the same but only change of the name of the person/institution from whom the fresh loans are taken. Therefore, the decision of Hon'ble Allahabad High Court considered by ld. CIT (A) in case of Raj Kumar Singh & Co. (supra) is directly on the issue. Therefore, we see no reason to interfere with the finding of ld. CIT (A). Accordingly, we confirm the findings of the ld. CIT (A) in respect to both the disallowances deleted by him." The facts in the year under appeal are identical as were before the Tribunal in the earlier assessment years. The revenue has not placed any contrary material on record suggesting that there is change in facts and circumstances of the case. Therefore, we are unable to sustain the finding of ld. CIT (A). Respectfully, following the decision of Coordinate Bench in assessee's own case in earlier assessment years, we direct the AO to delete the disallowance of interest expenditure. Thus the appeal of the assessee is allowed." 9. The AO in the assessment order has also stated that the issue has been decided by the Tribunal for A.Y. 2004-05, 2005-06 and 2007-08 and the reason why the same....
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....lied on the finding of the lower authorities. 14. We have heard the rival contentions and perused the material available on record. There is no finding of the AO for disallowance of depreciation and similarly, the order of the ld CIT(A) doesn't bring out the reasoning for sustenance of claim of depreciation. There is no dispute that there are assets which were acquired in the earlier years and forms part of the opening block of assets and there are fresh assets in the nature of air conditioner and open well (pump) to the tune of Rs. 62,455 which have been acquired by the assessee during the year under consideration and used for the purposes of business. Therefore, in absence of any adverse finding by the AO, the disallowance of claim of depreciation is hereby set-aside and the ground of appeal so taken by the assessee is allowed. 15. Regarding ground Nos. 3. to 3.2, the ld. AR submitted that the assessee has challenged the action of the ld. CIT(A) of arbitrarily upholding the disallowance of Rs. 11,59,34,654/- made by the ld. AO on account of expenditure in nature of exceptional items claimed u/s 36(1)(vii) of the Act by ignoring the submissions made by the assessee and the m....
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....of Rs. 11,59,34,654/- as exceptional and not considered the same as bad debts. The above observations of the AO were affirmed by the ld. CIT(A) without independent application of mind on the facts of the case. 18. It was submitted that in respect of the expenses so claimed by the assessee as exceptional items, the attention is invited to the facts of the case that have also been stated in the foregoing paras of this written submission, that during the financial year under consideration, the long pending litigation between partners stood settled through a settlement agreement dated 17.02.2012, according to which outgoing partners i.e. Smt. Sudha Yadav and Shri Prashant Kumar Yadav would be given certain built up area 5686 Ft. and 11,837 Ft. respectively on the corresponding market value. Assessee requested the Sundry Debtors to repay the outstanding due including interest accrued and debited to their accounting year to year basis and get the documents registered. However, they refused to make the payment of outstanding dues and under these circumstances, only option left with appellant was to cancel their allotment and forfeit the flats already sold to them. Accordingly ass....
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....ure. In fact, interest income was earned by the assessee from Sundry Debtors who had not made complete payments for purchase of said shops and offices. So, as per the agreement, the buyers were supposed to pay certain amount of interest as per the terms and conditions of the agreement. So, interest income was consequential to the agreement between the assessee and the buyers." Page 12 ........... ................ (2) The assessee has also failed to produce details with regard to accrued interest declared and charged to Income Tax in the earlier years. ............ ............ (5)There is nothing on record to show that amount written off was taken into account in computing Income of the assessee" In view of above, it is evident that when ld. AO admits that assessee was charging interest in respect of outstanding debtors. In fact, income for earlier Assessment Years has been assessed by ld. AO u/s 143(3), after duly including such interest income offered by assessee. Details of such interest income offered are furnished as under: A.Y. Total Income declared in Return Interest income included in Total income APB Disallowance made by AO Assesse....
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....bject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year]: [Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.] [Explanation.-For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;]" Further, section 36 (2) reads as under: "(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the....
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....tantive basis as income of the assessee firm. Now since assessee has lost all rights of recovery in respect of such debts due to cancellation, such income offered in earlier years is claimed in the Profit & Loss as "Exceptional items". Therefore, it is evident that the assessee has duly fulfilled both the conditions prescribed in the statue for allow ability of the expense. Under the circumstances the expense so claimed by the assessee deserves to be allowed. 25. Reliance in this regard is placed on the following judicial pronouncements: 1) 323 ITR 397 (SC) T.R.F. Ltd. vs Commissioner of Income Tax: Bad Debt- Law after April 1,1989- Assessee only to establish that debt was written off- Not necessary to establish that debt in fact had become irrecoverable to establish that debt in fact had become irrecoverable-Income Tax Act,1961, s.36(1)(vii). 2) 53 DTR 120 CIT &Anr. vs. Krone Communication Ltd. (Kar): Business Expenditure - Bad Debt - Debt Written off in the books - Assessee having written off certain debt, it is entitled to deduction thereof as a bad debt - There is no further requirement to prove that the debt was a trade debt or that it is....
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....elevance now more particularly when the Income Tax Act specifically provides allowability of Bad debts U/s 36(2) on fulfilling certain conditions. 29. It was further submitted that the facts and the circumstances narrated in the foregoing paras of this written submission clearly depict the wrong approach followed by the ld. CIT(A) while disposing off the appeal of the assessee without considering the submissions and the material placed before him. The appellant therefore, submit that in light of the fact that the assessee has fulfilled the conditions laid down by the statute for claiming the aforesaid expense the claim of Rs. 11,59,34,654/- may be allowed. 30. Per contra, the ld. CIT/DR relied on the finding of the lower authorities and our reference was drawn to the findings of the ld. CIT(A) which are contained at para 6.3 which read as under:- "6.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that the AO has discussed in detail at Para 4 of the assessment order has given the details reason why the deduction of Rs. 11,59,34,645/- claimed by the appellant u/s 36(1)(vii) is not admissible....
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...., (Cal.) 232 ITR 324 2. Industrial Cables (I) Ltd., Vs. ACIT (ITAT, Chd) 97 ITD 267 3. Indian Express (Madurai) (P) Ltd., Vs. DCIT (ITAT,Mad) 68 ITD 374 4. Rallis India Ltd., Vs. CIT (Cal) 246 ITR 170 5. City Financial Retail Services India Ltd., Vs. ACIT 2008-TIOL-05-ITAT-MAD In view of the above discussion, the amount of Rs. 11,59,34,654/ -shown under the Head "Exceptional Items" and as claimed by the assessee U/s.36(1)(vii) of the I.T. Act, 1961 are disallowed and added back to the total income of the assessee." 32. We have heard the rival contentions and purused the material available on record. It is the case of the assessee that it had cancelled the allotment of certain flats in its commercial complex as the allottees/debtors refused to pay the outstanding amount towards the interest, complex maintenance charges and electric installation charges and the same were reversed and written off in respective ledger accounts of the parties and claimed in its profit/loss account for the previous year relevant to impugned assessment year. It has been further submitted that such interest, complex maintenance charges and electric installati....