TaxTMI 
TaxTMI 
2022 (3) TMI 1422
X X X X Extracts X X X X
X X X X Extracts X X X X
..... ORDER Per S. S. Godara, J.M. The instant batch of thirty four appeals pertains to thirteen assessees. All relevant particulars thereof are stated as under : Sl.No. & Appellant ITA No. Asst. Year Order under challenge Order under challenge and case No. Proceedings under section 1. Dakshin Infrastructures Private Limited, Hyderabad. 651/Hyd/2020 2012-13 CIT(A)-12, Hyderabad 10301/2019-20 dt.18.09.2020 143(3) r.w.s 153A 2. Kapil Property Developers Limited, Hanumakonda. 652/Hyd/2020 2013-14 -do- 10243/2019-20 dt.18.09.2020 143(3) r.w.s 147 3. Kapil Foods and Structures Private Limited, Warangal. 653/Hyd/2020 2012-13 -do- 10239/2019-20 dt.18.09.2020 -do- 654/Hyd/2020 2013-14 10255/2019-20 dt.18.09.2020 -do- 4. Nalgonda Realtors Private Limited, Secunderabad. 655/Hyd/2020 2012-13 -do- 10241/2019-20 dt.18.09.2020 -do- 656/Hyd/2020 2013-14 10253/2019-20 dt.18.09.2020 -do- 657/Hyd/2020 2017-18 10355/2019-20 dt.18.09.2020 -do- 5. Ujwala Publications and Developers Pvt. Ltd., Warangal. 658/Hyd/2020 2012-13 -do- 10244/2019-20 dt.18.09.2020 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....first and foremost assessee Dakshin Infrastructures Pvt. Ltd's appeal ITA 651/Hyd/2020 for A.Y. 2012-13. Its sole substantive ground raised herein seeks to reverse both the lower authorities' action disallowing section 36(1)(iii) interest expenditure alleging diversion of interest bearing funds for non business purposes to the tune of Rs.19,95,429/- as affirmed in the CIT(A)'s order as follows : ....xxxx - Space left blank intentionally - - Space left blank intentionally - 3. We have given our thoughtful consideration to rival submissions and find no reason to accept either parties' stand in entirety. This is for the clinching reason that both the learned lower authorities appear to have placed reliance on alleged concession made by the group concern M/s. Indur Developers and Agencies Pvt. Ltd wherein there is no clarity as to whether the same specifically covered all other group activities or the said assessee only which are specifically assessed; or not. 4. Coupled with this, the assessee's stand all along is that the impugned advances by way of non-current investments nowhere carried out any interest-bearing funds at all. The Revenue's contentions on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "8. Interest on redeemable Debentures: During the course of assessment proceedings, it is observed that the assessee company has invested in redeemable debentures as under ...............................On being asked the sources for the investments in debentures, the assessee stated that the sources are from investment sold during the year and proceeds from issue of redeemable debentures. However, the assessee did not substantiate its claim with any evidences. Further, the interest on redeemable debentures is taxable income. The assessee did not show the interest on redeemable debentures in its computation. Hence, the interest on redeemable debentures is calculated @ 14% which is worked out to RS.7,81,900/-. Addition:Rs.7,81,900/-". 8.2. The appellant has contested the said disallowance, and in support of his claim, the following submissions have been made by the appellant's AR: "Since debentures were not allotted to our company, our company has regrouped / re-c1assified the previous years debit balance amount of Rs.55,85,000/- by deducting it from the credit balance amount of Rs.27,25,25,090/- received, as advance for Sale of Plots and disclosed th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3(3) regular assessment on 18.03.2015 followed by his impugned action initiated section 148 proceedings vide notice dt.29.03.2019 on account of the following reasons recorded : 12. Learned departmental representative would hardly rebut the clinching fact that the Assessing Officer had initiated the impugned proceedings after a lapse of more than 4 years from the end of the relevant assessment year without recording any reason that the assessee had not disclosed all the relevant particulars "fully" and "truly" in light of section 147 1st proviso. We make it clear that there is hardly any scope for addition or deletion or substitution in such reopening reasons in light of hon'ble Bombay high court's landmark decision in Hindustan Lever Ltd Vs. R.B. Wadkar (2004) 268 ITR 332 (Bom) holding that re-opening reasons recorded by the Assessing Officer have to be read on standalone basis only. We thus quash the impugned reopening for this sole reason. All other pleadings on merits are rendered academic. 13. This assessee's appeal ITA 653/Hyd/2020 is allowed. 14. Coming to its next appeal ITA 654/Hyd/2020 for A.Y. 2013-14, assessee's first and foremost substantive grievance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....raphs. These twin appeals ITA Nos.656 and 657/Hyd/2020 are partly allowed for statistical purposes. 18. We now proceed to deal with the next assessee M/s. Ujwala Publications and Developers Private Limited's twin appeals i.e. ITA Nos.658 & 659/Hyd/2020 for A.Y. 2012-13 and 2013-14, respectively. 19. There is hardly any dispute that its first and foremost substantive ground challenging validity of re-opening stands on the same footing decided in the preceding paragraphs that section 147 / 148 mechanism set into motion by the Assessing Officer is not based on any seized material found during the course of search. The impugned re-opening is accordingly upheld therefore. Its latter substantive ground seeking to delete finance cost disallowance of Rs.15,37,601/- is restored back to the Assessing Officer in light of the foregoing detailed discussion in its group entity cases. This appeal ITA No.658/Hyd/2020 is partly allowed for statistical purposes in very terms. 20. We now advert to ITA No.659/Hyd/2020 involving A.Y. 2013-14. We note qua the assessee's legal ground challenging validity of the impugned re-opening that the Assessing Officer had framed his section 143(3)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ur detailed discussion in preceding paragraphs to quash both these re-assessments in ITA Nos.668 and 669/Hyd/2020. These appeals are accepted. 25. This assessee's third appeal ITA No.691/Hyd/2020 seeking to delete finance cost disallowance of Rs.8,315,248/- made in both the lower authorities is restored back to the Assessing Officer in light of our detailed discussion in preceding paragraphs allowed for statistical purposes. 26. Next assessee M/s. Indur Developers and Agencies Private Limited filed three appeals ITA No.670 to 672/Hyd/2020 for A.Y.s 2012-13, 2013-14 and 2016-17; respectively. Suffice to say, its first and foremost appeal herein i.e. ITA No.670/Hyd/2020 has arisen on account of section 148 proceedings initiated on 28.03.2019 for re-opening a regular assessment framed on 09.03.2015 in A.Y. 2012-13. We thus invoke section 147 1st proviso in light of our detailed discussion in preceding paragraphs to accept the assessee's arguments challenging validity of the impugned re-opening. All other pleadings are rendered academic. This assessee's appeal ITA No.670/Hyd/2020 is allowed. 27. Same order to follow in this assessee's latter appeal ITA No.671/Hyd/2020 involvin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and foremost appeal that the Assessing Officer had framed his section 143(3) assessment dt.12.10.2015 followed by section 148 notice issued on 28.03.2019 i.e. beyond a period of 4 years from the end of the relevant assessment year. We thus quote section 147 first proviso in light of our foregoing detailed discussion to quash the impugned re-opening. This appeal ITA No.678/Hyd/2020 is allowed. 36. We next find its second appeal ITA No.679/Hyd/2020 that the impugned re-opening notice dt.30.03.2019 is very well with 4 years from the end of the relevant assessment year 2014-15. We therefore placed reliance on our preceding detailed discussion to uphold validity of the impugned re-opening. The assessee's latter substantive ground raising issue of difference of interest credited to the profit and loss account and interest on light of Form 26AS is more found to be requiring more a reconciliation at the Assessing Officer's end than any substantive adjudication. The same stands restored back to the learned assessed authority for his consequential factual verification. This appeal ITA No.679/ Hyd/2020 is partly allowed for statistical purposes. 37. We now come to ITA No.680/Hyd/2020 ra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vant assessment year. We thus quote section 147 first proviso in light of our detailed discussion in preceding paragraphs to quash the impugned reopening. All other pleadings on merits are rendered academic. 42. This assessee's latter appeal ITA No.687/Hyd/2020 is allowed in above terms. 43. The last assessee herein is M/s.Preethi Foods and Villas Private Limited in ITA Nos.688 to 690/Hyd/2020 for A.Y.s 2012-13, 2013-14 and 2017-18; respectively. 44. Suffice to say, the Assessing Officer has framed his regular assessments herein on 09.03.2015 and 10.03.2016 in the former instant twin appeals; respectively followed by his section 148 notice dt.27.03.2019 issued beyond a period of 4 years from the end of the relevant assessment year in light of section 147 first proviso. We thus quash the impugned re-opening proceedings in light of our preceding detailed discussion. These former twin appeals ITA Nos.688 & 689/Hyd/2020 are allowed. 45. We are now left with ITA Nos.690/Hyd/2020 for A.Y. 2017-18 raising the sole substantive grievance of finance cost amounting to Rs.99,42,325/- upheld in the CIT(A)'s order which is restored back to the Assessing Officer for his afresh factual....
X X X X Extracts X X X X
X X X X Extracts X X X X
....zianagaram in Andhra Pradesh. The appellant company identifies potential sub-urban areas and converts the agricultural land to non agricultural lands as per the regulations of land administration and town planning departments of the State government. They then make lay outs of plots by taking approval of the concerned authorities and sell the plots to the customers. During the year, appellant has claimed lay out development expenditure of Rs.6,67,87,672/-. The bifurcation of the lay out development expenses is as under Land Development Expenses Marketing Expenses Finance Cost Total Rs. 21,44.500 Rs. 86,86,365 Rs.1,46,85,348 Rs.4,12,67,459 Rs.6,67,83,672 5.7 The Assessing Officer in the assessment proceedings sought justification for finance cost of Rs.4.12.67,459/- debited under the head lay out development expenses. The appellant explained that to unlock the funds invested in purchase of land and development of lay outs, tre company has offered to sell the land in its possession to various persons as per the written agreement/MoU executed between company and potential buyers/applicants. The company has entered into ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the interest payable on advance paid almost matches the balance consideration receivable from the potential customers. The AO pointed out that it is unusual to keep the funds locked in from one to four years without registration owing to the option given to the customers to conclude the purchase of the plot by way of the registration or receiving the sale advance with interest ranging from 10% to 14% per annum. The Assessing Officer went on to conclude that the sale advance is more analogous to term deposit from the potential customer with a promise of fixed return higher than bank deposits and an option to purchase a plot of the assessee company at a price fixed at the time of receipt of sale advance. It was also stated that the unique attractive feature of the appellant scheme of high interest on sales advance for fixed period with an option to register the plot as a security has attracted substantial funds from potential customers which is evident from the closing balance of advances for sale of plots amounting to Rs.396896616/- for the current year. The payment on the advances for sale of plots in the current year amounted to Rs.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the chit subscribers in furnishing sufficient surety and collecting the advances from those chit subscribers in the guise of advances for sale of undividend share of land and keeping lien on advances collected towards the future liability of the chit subscribers to the Chit fund company. 5.12 The Assessing Officer has also issued notices u/s.133(6) to several subscribers and concluded that majority of the applicants/subscribers are long standing subscribers with appellants Chit fund companies (Kapil group) and the investment is kept as a surety towards future payables of the prized chit. He has also observed that majority of the applicants whose sample MoU's were examined by him have invested the amount out of prize chit amount for want of surety towards future payables for prize chit subscription. After detailed analysis of the unique modus operandi of raising funds being followed in Kapil Group Real Estate companies, the Assessing Officer concluded that the finance cost is not linked to the appellant business and therefore sought the same to be confirmed. The appellant has given its counter comments (reproduced at para 5.5 above) and c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hrough sale advances/trade payables are essentially deployed for the purposes of business by the appellant. 5.15 The Assessing Officer in the assessment order and the remand report has assailed the business model of raising funds by the appellant. Essentially he pointed out that paying interest on sale advances is in the nature of finance transactions and the appellant has leveraged its chit fund customer base to raise these funds. The Assessing Officer has also mentioned that this is a unique model of raising funds which is not adopted in the Real estate business. I agree with the AO that the method adopted by the appellant in raising funds by way of an MoU for sale of undivided share of plots with an assured interest payment component on such advances is an unique method of raising funds for business. However, there is no illegality or prohibition in adopting unique methods for raising funds. The business man is expected to be innovative and creative and take calculated risks to earn profits. It depends on the risk appetite of the businessman & the applicants who have trusted the unique scheme and have invested therein. Leveraging of its chi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain reading of the Balance sheet that the funds were essentially deployed for the purpose of business, namely, inventories, trade receivables, cash & bank balances and short term loans and advances (i.e., including advances given for purchase of land). It is also seen that no part of the funds were utilized for the purchase of fixed assets. Without the trade payables / sale advances, it is evident from the Balance sheet that the appellant could not have carried on the business of real estate. Therefore, it can be safely concluded that the funds raised through sale advances/trade payables are essentially deployed for the purposes of business by the appellant. 5.15 The Assessing Officer in the assessment order and the remand report has assailed the business model of raising funds by the appellant. Essentially he pointed out that paying interest on sale advances is in the nature of finance transactions and the appellant has leveraged its chit fund customer base to raise these funds. The Assessing Officer has also mentioned that this is a unique model of raising funds which is not adopted in the Real estate business. I agree with the AO that the m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company has complied with the conditions laid down u/s.37 and has Document 8 holding period i.e., from 12 months to 48 months. It is therefore fair & reasonable to adopt average interest rate at 12% to work out the interest cost on diverted funds. Accordingly, the interest cost on diverted funds of Rs.2,09,65,921/- works out to Rs.25,15,910/- (12% of Rs.2,09,65,921/-). Therefore, the disallowance of finance cost to the extent of Rs.25,15,910/- is confirmed and the balance amount of Rs.3,87,51,549/- (Rs.4,12,67,459 - Rs.25,15,910) is directed to be deleted. Accordingly, all the grounds related to this issue are PARTLY ALLOWED. 6. In the result, the appeal of the appellant for the A.Y:2016-17 is PARTLY ALLOWED". Document 9 The facts in the case of M/s.Indur Developers and Agencies Private Limited for AY 2016-17 which is a group concern of M/s. Kapil Group are identical to the facts in the present case on this issue. In this case, it was held by the Ld CIT(A) that certain portion of sale advances were diverted to non business purposes & the finance cost on such diverted funds was disallowed on pro-rata basis. This pro-rata disallowance of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tential customers by entering into Memorandum of Understanding with them. As per the MoU, the potential customers pay 80% of the sale consideration as advance towards the purchase of plot and they were given option either to get the plot registered by paying the balance 20% consideration within the agreed period (of about 5 years) or get back the advance with interest as high as 15%. As per the assessee's A.R., most of the potential customers did not get the plots registered but had taken their advance towards purchase of plots with interest as per MoU. Document 11 The assessee has strategically misrepresenting such interest paid on advances towards unfructified sale of plots under Land/Lay-out Development Expenditure The funds raised as advances for sale of plots were being diverted to the other Kapil group companies under guise of Share Capital / Advances for purchase of property/ Inter Corporate Deposits etc., which are essentially earning no income to the assessee. Some of these Kapil Group of companies to which funds are diverted are in losses. Thus, the assessee is claiming the inflated expenditure under the head Land/Lay-out Developme....