TMI Blog2014 (1) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... transpired in the assessment for assessment year 2004-05 in respect of the reversal entry shown in that year - As far as this assessment year is concerned these expenses were connected with the business of the assessee and had to be allowed as deduction - The estimate of expenses to be incurred for the project Ashirward had to be allowed as deduction because the income from the said project was declared by the assessee in the previous year – also, the assessee had an obligation to pay ₹ 15 lacs to the land owners and also provide alternate accommodation to the tenants of the property which was to be developed by the assessee - These expenses were legitimate business expenses which are to be allowed as deduction - these expenses were ultimately not to be incurred by the Assessee – Thus, if the above expenses are allowed as deduction the reversal entry, if it is not properly explained will be income of AY 04-05 – order of the CIT(A) set aside and the matter remitted back to the AO to examine on the relevant reversal entries in AY 04-05. Disallowance made out of site expenses – Expenses made on ad-hoc basis – Proper justification not made by AO – Held that:- The complete de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue. Deletion made u/s 40A(2)(b) f the Act – Excessive Interest paid – Held that:- Loans borrowed from outsiders were in majority of case at the rate of interest including brokerage ranging 18% to 27% - Thus, average rate of interest worked out to more than 18% - Ahuja Properties borrowed funds from outsiders and has paid interest ranging from 15% to 21% - it has incurred expenses for maintaining the loans and after reducing the payment of interest to outsiders, has shown some profit earning on financing business and offered the same for tax and paid tax – The decision in CIT vs Amrit Soap C. [2008 (11) TMI 71 - PUNJAB AND HARYANA HIGH COURT] followed - The Assessee is a loss making company and hence, there is no avoidance of tax - In such circumstances no disallowance can be made by invoking the provisions of Sec.40A(2)(b) of the Act – Decided against Revenue. Deletion made on account of Fitness equipment and door cameras – Construction cost to be bear by Assessee – Held that:- The expenditure was incurred by the Assessee in the course of its business - The AO has not doubted the genuineness of expenses - Fitness equipment and door camera part and parcel of construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 (the Act). The assessee filed a return of income for A.Y 2003-04 declaring a loss of ₹ 2,94,95,379/-. It is not in dispute that the assessee follows project completion method of accounting for its revenue in respect of the various projects that had undertaken to construct/developed. In the profit and loss account the assessee has shown sales in respect of two of its projects, viz. Ashirwad CHSL and Vijaydeep CHSL. The other on going projects are those of Peoples Cosmopolitan CHSL, Ambercfoft CHSL, Ann Abode CHSL, Chardham CHSL and Seeta Geeta CHSL. These projects are reflected in the balance sheet as work in progress. 4. In the course of assessment proceedings the Assessing Officer noticed that the assessee had borrowed funds on which it paid interest and which was claimed as expenses in the P and L Account. The Assessing Officer also noticed that the assessee had given interest free advances to its sister concern and others. The Assessing Officer therefore, called upon the assessee to explain as to why proportionate interest debited in the P and L Account should not be disallowed on the ground that borrowed funds on which interest paid were not utilized for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 KUNAL JAIN 250,000.00 M K BHOJWANI 6,522,500.00 PRAKASH J BAROT 1,033,880.00 PISHU TOURS AND TRAVELS 500,000.00 RAJU N. PUNJABI 200,000.00 SARANGA AGARWAL 3,463,451.00 SKYLINE CONSTRUCTIONS CO. 4,758,120.00 VINOD PUNJABI 600,000.00 WELDONSPARES CORPORATION 1,800,000.00 OTHERS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.00 Total 128,864,909.00 26,380,710.00 Rate of Interest 19.50% 5,144,238.45 8. On appeal by the Assessee, the CIT(A) held that there was factually interest free funds available with the Assessee. He was however of the view that it was impossible to establish nexus between the interest free funds available with the Assessee and the interest free loan given to the sister concerns. In such an event he was of the view that even if interest free funds were available, the interest free loans to sister concern will ultimately result in depletion of funds available for business and they would stand substituted by interest free funds 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustaining the disallowance of interest expenses to the extent of ₹ 52,02,322/- the assessee has raised Ground No.1 before the Tribunal. Aggrieved by the order of the CIT(A) in deleting the disallowance of interest in respect of interest free advances to M/s. Ahuja Housing Project Pvt. Ltd. the revenue has raised ground No.4 before the Tribunal. 10. We have heard the rival submissions. The availability of interest free funds as given in the earlier part of this order is not in dispute. The Assessing Officer has proceeded on the assumption that the assessee did not establish the nexus between the interest free funds available with the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee also addressed arguments with regard to individual interest free loans which were considered for making proportionate disallowance by the Assessing Officer. In the light of the view, which we have taken, following decision of the Hon'ble Bombay High Court in the case of Reliance Utilties and Power Ltd. (supra), we have not gone into these submissions. 13. In the result, Ground No.1 raised by the assessee is allowed while Ground No.4 raised by the revenue is dismissed. 14. Ground No.2 raised by the assessee reads as follows: In the facts and circumstances of the case in law, the learned CIT(A) erred in confirming the disallowances aggregating to ₹ 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. Particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical amount debited in the cost of construction in the earlier year. It was submitted that there was no reversal of debit from the cost of land as visualized by the A.O, but a reduction of the further cost incurred by the assessee on the Vijaydeep project in the following year. It was submitted that that the entries of so called reversal did not reduce the cost of land as appearing till accounting year ended 31/3/2003 but have only reduced the expenditure of the immediate following year i.e. accounting year 2003-04 relevant assessment year 2004-05. In the said accounting year i.e. 2003-04 however assessee has not claimed any of these expenses, whereas so called reversal entries still continued to be shown in the balance sheet as recoverable from the said Gandhi Family. In view of the above, it was submitted that the AO ought not to have presumed that the said entries represented the reversal of the cost of the land without getting proper explanation from the assessee. 17. In respect of the reversal of a sum of ₹ 2,60,224/- out of ₹ 6,42,408/- being provision of expenses for Ashirwad Project, the assessee pointed out that these were expenses required to complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusively pertaining to the appellant. In fact, the appellant neither before the AO nor before the CIT(A) has given a complete details regarding as to how the appellant has incurred such expenditure for the purpose of business. 18. Aggrieved by the order of CIT(A) assessee raised Ground No.2 before the Tribunal. 19. We have heard the rival submission. As far as Provision for expenses of Ashirwad project is concerned, a sum of ₹ 6,42,408/- was provided in the books of accounts of the previous year relevant to AY 03-04. In the previous year relevant to AY 04-05 a sum of ₹ 2,60,224/- out of total provision made in AY 03-04 remained unpaid and therefore the same was shown as reversal of provision made in AY 03-04. As to whether this amount was income of the AY 04-05 is not known. Similarly as far as the sum of ₹ 15,00,000/- payable to Gandhi family is concerned, the same is claimed to be 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 ₹ 15 lacs as earnest money deposit, which was part of the consideration payable to land owner as per clauses 6 and 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se expenses were ultimately not to be incurred by the Assessee. In such event, if the above expenses are allowed as deduction the reversal entry, if it is not properly explained will be income of AY 04-05. We therefore set aside the order of CIT(A) on this issue and direct the AO to examine the issue in the light of the conclusions on the relevant reversal entries in AY 04-05. 21. Ground No.3 raised by the assessee reads as follows: 3. In the facts and circumstances of the cases and in law the learned CIT(A) erred in confirming the disallowance of ₹ 3,95,054/- made out of site expenses on adhoc basis without appreciating that there was no material brought on record by the AO to justify the disallowance. 22. The Assessing Officer disallowed a sum of ₹ 3,95,054/- on the ground that the site expenses and sundry purchase of the project Vijaydeep and Ashirward furnished by the assessee did not have supporting documents and were not fully vouched. An adhoc disallowance of 10% of the total expenses namely ₹ 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, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. Further, it was also submitted by the assessee that the common pool company viz. M/s. Jaygopal Consultancy Services Pvt. Ltd. was functioning on the principle of mutuality on no profit no loss basis to serve the administrative and managerial requirement of the constituent members. The assessee explained that the payment made at ₹ 1,23,21,028/- represented the proportionate cost of services rendered by the common pool company to the assessee company. 28. The AO was of the view that though the cost has been recovered from the constituent member of the common pool company on the basis of cost incurred in different projects belonging to different concerns wherein the common pool company has provided its administrative and managerial services, but nothing has been provided regarding the expenditure to be incurred for the survival of common pool company as a independent entity. In other words, the AO was of the 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction within the four corner of law and no part of expenditure can be disallowed u/s. 40A(2)(b). The AO has not given any finding that a part of expenditure was excessive or unreasonable having regard to the market value of services rendered u/s. 40A(2)(b). Further , I also find that absolutely, there is no scope for applying the provision of Sec. 40A (2)(b) on the factual circumstances of the case where the common pool company is functioning on no profit or no loss basis. Further, the appellant's case also gets a judicial support from the decision in the case of Glaxo Smithkline Asea (P) Ltd., ACIT, Delhi ITAT 'C' Bench 6 SOT 113 (Del) which has been referred in para 3.3 of this appellate order. Hence, the disallowance of ₹ 23,90,747/- is deleted. Hence, the appeal is allowed on this ground. 30. Before us ld. D.R relied on order of the Assessing Officer. We are of the view that the order of the CIT(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. Amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng down the marble in the Vijaydeep project which amounted only ₹ 72,98,550/-. The other component of marble cost was ₹ 69,12,439/- which remained unutilized in the form of stock included in the WIP carried forward. 33. Marble worth ₹ 69,12,439/-: The assessee further submitted that the impugned cost of marble at ₹ 69,12,439/- represented the cost of marble actually purchased on 15/3/2002 and 25/3/2002 from M/s. Topaim Property Pvt. Ltd. by the erstwhile firm which was included both in work in progress as on 1/4/2002 at ₹ 7,23,13,793/- as well as the work in progress as on 31/3/2003 show at ₹ 7,34,97,920/-. In other words, the assessee made a point that the marble cost of ₹ 69,12,439/- was lying in form of stock brought forward from the stock of erstwhile firm which formed part of opening as well as closing work in progress for the relevant assessment year. In this way, the assessee also stated that the actual cost of marble 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 ₹ 315 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble stones at Hinduja Hospital and Research Centre at ₹ 700 per sq. ft. The assessee also filed confirmation of Topaim Properties Pvt. Ltd. regarding the quality of marbles laid in the projects Vijaydeep and Ashirward. 36. On consideration of the above confirmations the CIT(A) deleted the addition made by the Assessing Officer holding as follows: 4.2.2 I have taken into account the facts of the case. I find that M/s. Topaim Property Pvt. Ltd. has quoted different rates for laying down the marble for different customers depending upon the quality of the marble used. Otherwise also, it goes without saying that the cost of the marble available in the market does not have any uniform rate. The rates of the marble available in the market does not have any uniform rate. The rates of the marble differs distinctly depending upon the utility of marble. It is not possible to bench mark the rate regarding the arm's length price unless the quality of marble is specified. I find that the AO has acted arbitrarily to take the arm's length price @ ₹ 250/- per sq. ft. Further, it is also to be understood that the onus rest on the Department to provide the material to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not. The finding of the AO is based on his observation that the appellant has not maintained any separate stock register and cost of the marble does not find place therein. Further, the AO has also observed that since the project Vijaydeep is completed the figure of WIP should not consist of unused material. AO has virtually proceeded on the presumption that the opening WIP as on 1/4/2002 as well as closing stock as on 31/3/2003 did not have the element of unused marble worth ₹ 69,12,439/-. If we look at the finding of the AO, I find that the AO had some suspicion and hunch in his mind regarding the inclusion of unused marble to have included in WIP or not because the WIP should not have an element of unused material and non-maintenance of stock register separately further compounded to the confusion. Strictly speaking from the point of accounting angle, the AO has some point to create a doubt in his mind but that itself cannot lead to an addition. The AO has to look into the totality of the facts and arrive at a conclusion which has got support of the fact and no doubts. Looking to the fact that the purchase of the marble worth ₹ 69,12,439/- was brought on record b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mains the same. Non-maintenance of stock register also cannot distort the happening accounting implication. As far as relevant assessment year is concerned, the major chunk of closing WIP has got the contribution of opening WIP at ₹ 7,23,13,793/- which is supposed to have the element of value unutilized marble stock by virtue of having got the purchase of marble on 15/3/2002 and 25/3/2002 unless proved otherwise. The AO cannot proceed to make addition only on presumption without any factual support. If the AO has got his finding that the alleged marble stock is missing both in opening WIP as on 1//4/2002 and closing WIP as on 31/3/2003 as well the correct legal course would have been to analyse the closing WIP shown by the erstwhile firm M/s. Ahuja Platinum for A.Y 2002-03 and to find whether it was correctly shown or not. In the case of any discrepancy detected, the addition would have warranted for A.Y 2002- 03 in the case of erstwhile firm. But any stretch of accounting logic, the relevant assessment year in the appellant's case cannot be slapped with addition made by the AO. Therefore, I am unable to sustain the finding of the AO both in legal prospective as well as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marbles to Topaim in A.Y 2006- 07 and the same is also accepted by the department in the scrutiny assessment for that year. Thus it proves that the marbles formed part of closing WIP in the books of the assessee company. In view of the above we are of the view that the order of the CIT(A) deserves to be upheld. We accordingly dismiss the Ground No.2 raised by the revenue. 41. Ground No.3 raised by the revenue reads as follows: On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not confirming the disallowance of ₹ 32,83,710/- made u/s. 40A(2)(b) on account of excessive interest paid to M/s. Ahuja Properties. 42. The assessee paid interest on loan to sister concern Ahuja Properties of ₹ 1,42,29,411/- at the rate of 19.50%. According to the AO, the Assessee paid interest on borrowing from others/outsiders at the rate of 15% and hence interest paid to sister concern was excessive by 4.5% and thus, the difference of interest amounting to ₹ 32,83,710/- was disallowed by the AO invoking the provisions of Sec.40A(2)(b) of the Act. 43. Before CIT(A), the Assessee pointed out that the assessee had paid interest to outsider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o interfere with the order of the CIT(A) and dismiss ground No.3 raised by the Revenue. 45. Ground No.4 has already been decided while deciding Ground No.1 raised by the assessee. For the reasons stated therein this ground of appeal of the revenue is dismissed. 46. Ground No.5 raised by the revenue reads as follows: 5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the deleting the disallowing of ₹ 5,22,696/- on account of fitness equipment and door cameras without appreciating the fact that as per MOU, in Ashirwad project, the assessee was to bear only construction cost. 47. The AO disallowed expenses incurred by the Assessee on account of fitness equipment and door cameras of ₹ 5,22,696. The AO was of the view that as per the MOU the assessee has to bear only construction cost and there was no need or business exigency to have installed fitness equipments or door cameras and therefore the expenses are not allowable. The CIT(A) deleted the addition made by the AO holding that the expenditure was wholly and exclusively for the purpose of business of the Assessee. Aggrieved by the order of the CIT(A), the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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