9911796707
TMI Blog2014 (1) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... llows: "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 Act, 1961 (the Act). The assessee filed a return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. PU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. 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 received and having direct nexus. (E) Balance Rs. 32,52,394/- out of which, interest free funds advanced to others from interest free funds available - Rs. 14,38,228/- (this amount plus Rs. 1,46,89,194/- totals to Rs. 1,61,27,422/- as taken in the chart in paper book pg.82) and thus balance amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed 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 bearing funds were advanced to the sister concern as interest free loans. As laid down by Hon'ble Bombay High Court the presumption should be that the interest free funds were used to give the interest free loans to the sister concern. On this ground, we are of the view that the disallowance sustained by the CIT(A) should also be deleted. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision, 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 liability. The AO however noticed that the amounts claimed as expenses on the basis of provision were later reversed in the subsequent A.Y. 04-05 and these have been shown in the last column of the chart given above. According to the AO, despite being given opportunity to explain the nature of these reversals, the assessee did not been explain the same. Accordingly, the AO disallowed the claim for dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/- 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 expenditure which id not pertain to them. The very fact that part of such expenditure has been reversed by the appellant for subsequent assessment year itself is a testimony that such expenditure were not pertaining to the expenditure to be incurred by the appellant. The provision of expenses in respect of Ashirwad project at Rs. 6,42,408/- is merely a provision and not a crystalised expenditure. Needless t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccommodation 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 amounts were recoverable from land owners which amounts were reduced from the expenses incurred in the next year. It was the plea of the Assessee that the reduction in the cost in next year has nothing to do with the expenses incurred in the impugned year. The expenses thus crystalised in the impugned year since the project is completed and since the expenses are incurred for the purpose of the business of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee is partly allowed. ITA No. 4558/MUM/2007 - REVENUE'S APPEAL: 26. Ground No.1 raised by the revenue reads as follows: "1. On the facts and in circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 23,90,747/- u/s. 40(A)(2)(b) on account of excessive payments made to M/s. Jaygopal Consultancy Service (P) Ltd." 27. The AO found that the assessee has debited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 spectrum of the facts and circumstances of the case in proper prospective. I find that the AO has proceeded on a presumption of the fact that each concern has to necessarily incur some expenditure attributable to the existence of its own. There is no legal and factual substratum of having such presumption in the limelight of the facts and circumstances of this particular case. The facts are not under dispute that the common pool compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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 in circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 96,78,967/- made u/s.40A(20(b) out of purchase of marble from M/s.Topaim Properties P. Ltd. which is sister concern of assesee." 32. While scrutinizing the detail of material consumption in respect of construction activities of various projects undertaken by the assessee company, the AO found that the total consumption of marble are shown at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 of section 40A(2)(b) holding that the rate for laying down the marble including labour cost was quoted at higher rate than the market rate by the sister concern viz. M/s. Topaim Property Pvt. Ltd. The AO disallowed a sum of Rs. 15,06,050/- in case of marbles laid in Vijaydeep project and Rs. 12,60,208/- in case of marbles laid in Ashirward project. In this way, consumption of the marble resulted into three additions i.e. Rs. 69,12,439/- , Rs. 15, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 assets and liabilities of erstwhile firm on 25/3/2003 which had WIP and the WIP stands at Rs. 10,13,48,483/- as on 25/3/2003. The following is the detail of WIP shown by the appellant (certified by a Chartered Accountant): Op. WIP as on 1/4/2002 72,313,793.98 Add: 1) Other Construction cost 21,736,140.01 (i) Laying of marble by Topaim Properties Ltd. As bill No. 10B/2002-2003 dt. 02/1/03 23,170.00 7,298,550.00 WIP as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant 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 discounted rate to the same company i.e. M/s. Topaim Properties P. Ltd. goes to prove a point undoubtedly that it deems to have always embedded in the opening WIP as well as closing WIP for the A.Y 2003-04 onwards till it was sold. It may also be important to say that the entry made in the books of account itself is not determinative of the accrual of income. One has to see the substance of the entry made and its impact on the income and not the form of the entry. Therefore, whether the amount of unutilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 year ending on 31/3/2002 in the erstwhile firm and the same was included in the WIP of the erstwhile firm as at 31/3/2002. Further cost of construction incurred in the year 2003 and cost of laying marble by Topaim was added to the opening WIP to arrive at closing WIP as at 25/3/2003 on which the firm was converted into the assessee company. Thus, the cost of purchase of marbles from Topaim was part of opening and closing WIP. The assessee was not a dealer in marbles and hence, has not shown separately as stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 interest including brokerage ranging 18% to 27%. Thus, average rate of interest worked out to more than 18% as against the finding of the AO that the Assessee borrowed from outsiders/others @ 15%. Ahuja Properties has in turn borrowed funds from outsiders and has paid interest ranging from 15% to 21%. It has charged to all the group concerns at the rate of 19.5% and from the profit and loss account of Ahuja Prop., it can be seen that it has incurred expenses for maintaining the loans and after reducing the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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