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2015 (7) TMI 120 - ITAT PUNE

2015 (7) TMI 120 - ITAT PUNE - TMI - Disallowance of expenditure paid to Pune Municipal Corporation(PMC) for regularizing the excess area constructed for a building called "MODI MALL" by invoking the Explanation to sec 37(1) - Held that:- Compounding fee paid by the assessee to the Municipal Corporation on account of deviations from original sanctioned plan is in the nature of penalty and therefore would not be allowable as deduction in view of provisions of Explanation to section 37(1) of the I .....

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as been paid in the previous year as submitted by assessee - Held that:- So far as the argument of the Ld. Counsel for the assessee that no disallowance u/s.40(a)(ia) is required since no amount is payable at the end of the year, we find the Pune Benches of the Tribunal following the decisions of Hon’ble Gujarat High Court and Hon’ble Calcutta High Court are taking the consistent view that provisions of section 40(a)(ia) are applicable for TDS default even if no amount is payable at the end of t .....

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applicable even if no amount is payable at the end of the year. Therefore, the first limb of argument of the Ld. Counsel has to be rejected.

So far as the alternate argument of the Ld. Counsel for the assessee that disallowance u/s.40(a)(ia) could not be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act whereof the payees have filed the return showing such income in the return of income, we find the same is acceptable .....

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ssee is not deemed to be an assessee in default under the first proviso to section 201(1) of the I.T. Act., therefore, this should also be held as retrospective since it has been introduced to eliminate unintended consequences which may cause undue hardship to the tax payers.Since the above arguments are being advanced before the Tribunal for the first time and the correctness of the contention has not been examined by the tax authorities, therefore restore this issue to the file of the Assessin .....

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contention of the assessee that such interest has been utilised for business and therefore allowable u/s.36(1)(iii) was also rejected by the Assessing Officer by referring to the Accounting Standard-16 - Held that:- Ld.CIT(A) upheld the action of the Assessing Officer so far as the disallowance u/s.24(b) is concerned. As regards the alternate claim that such interest should be allowed u/s.36(1)(iii) he gave certain directions to the Assessing Officer to find out the qualifying assets and compute .....

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that there is no qualifying asset as per Accounting Standard-16 and the entire interest is allowable. A copy of the order of the Assessing Officer giving effect to such direction of the CIT(A) is placed at page 23 of the paper book. We find the Assessing Officer has allowed relief of ₹ 2,02,91,840/- being interest which was earlier claimed as deduction from house property income. Even otherwise also, the business of the assessee is that of purchase and sale of land, investment in land, re .....

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llant : Shri S.N. Doshi For The Respondent : Smt. Anuradha Ravi ORDER PER R.K. PANDA, AM : These are cross appeals. The first one is filed by the assessee and the second one filed by the Revenue and are directed against the order dated 19-10-2012 of the CIT(A)-III, Pune relating to Assessment Year 2009-10. For the sake of convenience, these were heard together and are being disposed of by this common order. ITA No.1693/PN/2013 : 2. Ground of appeal No.1 by the assessee reads as under : 1. On the .....

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return of income on 31-10-2009 declaring total income of ₹ 12,26,71,670/-. During the course of assessment proceedings the Assessing Officer noted that assessee firm has debited an amount of ₹ 6,60,000/- under the head direct expenses towards penalty charges for completion certificate to the profit and loss account. On being questioned by the Assessing Officer it was submitted that the same has been paid to PMC for regularising the excess area that had been constructed than it was s .....

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incurred by an assessee for a purpose which is an offence or which is prohibited by law will not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance will be made in respect of such expenditure. He accordingly disallowed the amount of ₹ 6,60,000/- claimed by the assessee and added back the same to the total income of the assessee. 5. In appeal the Ld.CIT(A) following the decision of Hon ble Karnataka High Court in the case of CIT Vs. Mamta .....

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is in appeal before us. 7. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A). He submitted that this compounding fees cannot be treated as an expenditure incurred for a purpose which is an offence or which is prohibited by law. According to him the term offence connotes an illegal act which is against the public policy. Such offence is not pardonable or compoundable. He submitted that the explanation comes into play only when it is proved that the expenditure though in .....

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cope of deeming provision has to be restricted to what is expressly stated in such a provision. 8. So far as the decision of Hon ble Karnataka High Court in the case of Mamta Enterprises (Supra) is concerned he submitted that the Hon ble Karnataka High Court has not considered the decision of Hon ble Supreme Court in the case of CIT Vs. Ahmedabad Cotton Manufacturing Company Ltd. and others reported in 205 ITR 163. Referring to the above decision of the Hon ble Supreme Court he submitted that th .....

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ducing and packing the minimum quantity of specified type as required by the aforesaid directions of the Textile Commissioner paid to the Textile Commissioner to ₹ 1,70,766/- in exercise of the option available to it under clause 21C(1)(b) of the Control order. The assessee claimed the amounts as deduction from its profit which was disallowed by the Assessing Officer on the ground that the said amounts paid by the assessee to the Textile Commissioner were not deductions which can be allowe .....

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ure. 8.1 He submitted that in the instant case also it is known as compounding fees. However, it is for commercial expediency. He submitted that assessee is in the business of land developers and builders, leasing of commercial and residential properties etc. as per clause 4 of the partnership deed. It constructed the building called Modi Mall . The PMC found that excess area had been constructed by the assessee than the sanctioned area. On payment of compounding fees the PMC regularised the exc .....

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cision has upheld the decision of the Tribunal wherein the amount paid to municipality as compensation for condoning deviations from original sanction and accepting revised plan of construction was allowed as deductible business expenditure by holding that it is not penalty for infraction of law. He also relied on the decision of the Mumbai Bench of the Tribunal in the case of DCIT Vs. Bharat C. Gandhi reported in 46 SOT 258 and the decision of the Hon ble Andhra Pradesh High Court in the case o .....

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a) had decided the issue which is directly on this issue. He submitted that there is no commercial expediency in violating municipality law and the assessee cannot be rewarded for an illegal act. 9.1 So far as the decision of Hon ble Delhi High Court in the case of Lokenath and Co. (Supra) is concerned he submitted that the order is dated 13-01-1984 and the Explanation to section 37(1) was incorporated by Finance No.2 Act, 1998 with retrospective effect from 01-04-1962. Therefore, the Explanatio .....

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Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute to be adjudicated in the impugned ground is regarding allowability of compounding fees of ₹ 6,60,000/- paid by the assessee to PMC for regularising the excess area constructed as deductible expenditure. We find the Assessing Officer disallowed the claim of expenditure on the ground that the penalty paid to the PMC was for violation of t .....

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followed the decision of the Hon ble Karnataka High Court in the case of Mamta Enterprises (Supra). 10.1 It is the submission of the Ld. Counsel for the assessee that the Hon ble Karnataka High Court has not considered the decision of the Hon ble Supreme Court in the case of Ahmedabad Cotton Mfg. Co. Ltd. and others (Supra). Further, according to him the payment though referred to as penalty but in fact made in exercise of option available under statutory scheme in the course of assessee s busin .....

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n or allowance shall be made in respect of such expenditure." According to the explanation, expenditure incurred for any purpose which is an offence or which is prohibited by law, is not entitled for deduction. Thus, the amount paid on account of compounding fee as compensation for condoning deviations from original sanctioned plan in view of the Explanation to Section 37(1) of the Act in our opinion would not be an admissible deduction. 10.3 We find the Hon ble Karnataka High Court in the .....

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he case of Ahmedabad Cotton Mfg. Co. Ltd. and others (Supra) and the decision of Hon ble Delhi High Court in the case of Lokenath and Co. (Supra) were prior to the insertion of Explanation to section 37(1) of the I.T. Act. Therefore, the above decisions in our opinion are not applicable to the facts of the present case. 10.5 So far as the decision of Mumbai Bench of the Tribunal in the case of Bharat C. Gandhi (Supra) is concerned we find, the issue in that case is regarding settlement fees paid .....

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t in the case of Haji Aziz & Abdul Shakoor Bros.reported in 41 ITR 350 and in the case of Maddi Venkataraman & Co. Pvt. Ltd. Vs. CIT reported in 229 ITR 534 has observed as under : 8. In our view, the above observation made by the Delhi High Court cannot be of any assistance to learned counsel for the respondent to support his case as the said decision was rendered prior to the amendment to section 37 of the Act by incorporating the Explanation referred to above by means of the Finance ( .....

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When the section is clear and unambiguous, it is not permissible for the courts to stretch the meaning attached to the provision of law to extend the benefit to a person who violates the law or the regulations/rules made by the corporation or the municipal authorities with impunity. Under these circumstances, the expenditure incurred to pay the penalty cannot be treated as loss in business to get the benefit. In our view, the penalty paid has enured to the benefit of the assessee to save the add .....

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n conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disburs .....

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ot if they are merely connected with the business. . . . In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid out for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a comme .....

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less it entered into such a transaction, it would have been unable to dispose of the unsold stock of inferior quality of tobacco. In other words, the assessee would have incurred a loss. Spur of loss cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If the assessee contravenes the provisions of the FERA to cut down its losses or to make larger profits while carrying on the b .....

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ul purpose." 9. Therefore, we are clearly of the opinion that deduction permitted by the Commissioner as well as the Tribunal is totally unsustainable in law. Therefore, in the light of the above conclusion reached by us, the question referred to us by the Tribunal is required to be answered against the assessee and in favour of the Revenue. Accordingly, it is answered and this reference case is disposed of. However, no order is made as to costs. 10.7 In view of the above, we are of the con .....

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Hon ble Karnataka High Court in the case of Millennia Developers Pvt. Ltd. Vs. DCIT reported in 188 Taxmann 388 (Kar.) In view of the above discussion Ground of appeal No.1 by the assessee is dismissed. 11. Ground of appeal No.2 by the assessee reads as under : 2. On the facts and in the circumstances of the case, the CIT(A) has erred in sustaining the disallowance of payment of interest of ₹ 55,85,717/- by invoking the provisions of sec 40(a) (ia) overlooking the fact that the interest is .....

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nt u/s.40(a)(ia) of the I.T. Act. 13. Before CIT(A) it was argued that no amount is outstanding and provisions of section 40(a)(ia) are applicable only if the interest amount is payable and outstanding as on 31st of March of the relevant year. Rejecting the various submissions made by the assessee and distinguishing the various decisions cited before him the Ld.CIT(A) upheld the action of the AO. 14 Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 15. The Ld. Counsel .....

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in the case of Vector Shipping Services Pvt. Ltd. has held that provisions of section 40(a)(ia) are not applicable to a case where no amount is payable at the end of the year and which has already been paid. He accordingly submitted that although the Pune Benches of the Tribunal are taking the view which is against the assessee, however, in view of the latest decision of the Mumbai Bench of the Tribunal no disallowance u/s.40(a)(ia) is called for when admittedly no amount is payable on account o .....

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Act if the payers have filed the return of income showing the interest receipt. He submitted that although this argument was not advanced before the lower authorities, however, in view of the decision of the Tribunal, this argument of the assessee should be accepted and he has no objection if the issue is restored to the file of the AO for fresh adjudication. 16. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). He submitted that the Pune Bench of .....

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wer authorities. However, he left it to the Bench. 17. We have considered the rival arguments made by both the sides. So far as the argument of the Ld. Counsel for the assessee that no disallowance u/s.40(a)(ia) is required since no amount is payable at the end of the year, we find the Pune Benches of the Tribunal following the decisions of Hon ble Gujarat High Court and Hon ble Calcutta High Court are taking the consistent view that provisions of section 40(a)(ia) are applicable for TDS default .....

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)(ia) are applicable even if no amount is payable at the end of the year. Therefore, the first limb of argument of the Ld. Counsel has to be rejected. 17.1 So far as the alternate argument of the Ld. Counsel for the assessee that disallowance u/s.40(a)(ia) could not be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act whereof the payees have filed the return showing such income in the return of income, we find the same is accepta .....

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f ₹ 58,81,847/- for which the Assessing Officer applying the provisions of section 40(a)(ia) made addition of the above amount. We find the Ld.CIT(A) deleted the addition made by the Assessing Officer on the ground that provisions of section 40(a)(ia) are not applicable since no amount is payable at the end of the year. While doing so, he relied upon the decision of the Special Bench of the Tribunal in the case of Merilyn Shipping and Transport (Supra). The Coordinate Bench in the case of .....

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Ld. Counsel for the assessee that the second proviso to section 40(a)(ia) was inserted by the Finance Act, 2012 w.e.f. 01-04-2013 wherein it is stated that disallowance u/s.40(a)(ia) of the Act need not be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the I.T. Act., therefore, this should also be held as retrospective since it has been introduced to eliminate unintended consequences which may cause undue hardship to the tax payers. 8 .....

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erused the record. According to the assessee, there is no written contract between him and the persons doing polishing works. Accordingly, the assessee has contended before us that the provisions of sec. 194C shall not apply to the polishing charges. However, we notice that the assessing officer has given a clear finding that essential ingredients of a contract are very much available in the polishing works entrusted by the assessee. Further we notice that the CBDT, vide circular No.433 dated 25 .....

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iven works to the polishing people and hence the terms and conditions of the work would be clearly understood by both the parties. Accordingly, we reject this contention of the assessee and hold that the provisions of sec. 194C shall apply to the polishing works given by the assessee. 7.1 According to Ld A.R, the assessee has acted as a conduit pipe in connection with the polishing works between the customers and the person doing polishing job. Accordingly, it was submitted that there is no prof .....

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he many business techniques normally adopted by a business man to improve his sales, since it will be very difficult for customers to identify the polishing people and get the work done by themselves. Hence, we are of the view that it may not be correct to argue that the contract existed between the customers and the polishing people. In fact, the customer may not have any contact with the polishing people in this type of transactions. Hence, it is hard to believe the claim of the assessee that .....

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) shall apply only to amount payable and not to the amount paid. However, the Hon'ble Gujarat High Court in the case of CIT Vs. Sikandar Khan N Tunvar (357 ITR 312) and the Hon'ble Calcutta High Court in the case of CIT Vs. Crescent Export Syndicate (ITAT 20 of 2013) have held that the decision rendered by the Special Bench in the case of Meryline Shipping & Transports is not a good law. The Ld A.R, however, placed reliance on the decision of Hon'ble Allahabad High Court in the c .....

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e on this point also. 7.3 The assessee placed reliance on the decision of Hon'ble Supreme Court in the case of Hindustan Coco-Cola beverages Ltd (supra) in order to contend that the revenue is not entitled to recover taxes, if the recipient has declared the payments in his return of income. We notice that the above said decision was rendered in the context of the provisions of sec. 201(1) and hence, we are of the view that the ratio of the said decision cannot be applied to the disallowance .....

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end of the assessing officer. Accordingly, we modify the order of the Ld.CIT(A) and set aside this ground to the file of the Assessing Officer with the direction to examine the above said contention of the assessee and decide the same in accordance with law, after affording necessary opportunity of being heard. We make it clear that we have, in effect, rejected all the contentions of the assessee except the ground relating to applicability of the second proviso to sec.40(a)(ia) of the Act to th .....

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with law. Needless to say, the Assessing Officer shall give due opportunity of being heard to the assessee. We hold and direct accordingly. 17.2 Following the above decision we deem it proper to restore the issue to the file of the AO with a direction to decide the issue afresh in the light of the above decision of the Tribunal. Ground No.2 by the assessee is accordingly allowed for statistical purposes. 18. Ground of appeal No.3 by the assessee reads as under : 3. On the facts and in the circum .....

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y the CIT(A). Both the sides agreed that this issue is identical to ground of appeal No.2 above. Therefore, following the ratio laid down in Ground of appeal No.2, we restore this issue to the file of the Assessing Officer for deciding the issue afresh in the light of the observations given while adjudicating ground of appeal No.2. This ground by the assessee is accordingly allowed for statistical purposes. 20. The assessee has also taken two additional grounds which are as under : 1. On the fac .....

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ooking the fact that the said proviso is applicable to the capital assets and to the current assets . 21. The Ld. Counsel for the assessee did not press the Additional ground No.1. So far as the additional Ground No.2 is concerned he submitted that the above ground arises from the order of the CIT(A) and goes to the root of the issue involved in the appeal. Relying on various decisions he submitted that this additional ground No.2 should be admitted. 22. After hearing both the sides and consider .....

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taken against the property and rent receivable, not for acquiring or construction of the property or any others. Hence, the interest paid is not allowable for partly acquiring or construction of the property. 3. The Ld. Commissioner of Income-tax (Appeals) erred on facts and in law that under the proviso to section 36(1)(iii), the interest paid shall riot be allowed as deduction till the asset is first put to use but the assessee has partly utilized for purchased of plot, construction of mall a .....

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e assessee and the grounds raised by the Revenue are being adjudicated together. 24. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted that assessee has claimed loss of ₹ 45,56,360/- under the head income from house property after claiming deduction u/s.24 being interest on loan to the extent of ₹ 2,02,91,840/-. The interest was claimed against rent received from Krishna Sahakari Bank ₹ 18,75,284/- and LNB Textiles Pvt .....

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income from house property u/s.24 should be allowed as deduction under the head income from business or profession u/s.36(1)(iii) since such interest paid on loans were raised for business purposes. It was submitted that the interest paid on the entire loan has been debited to the P&L account in the audited profit and loss account. It was submitted that the gross total income of the firm will not be affected by allowing the interest either u/s.24 or u/s.36(i)(iii). The decision of the Hon bl .....

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(iii) is concerned the Assessing Officer noted that during the impugned assessment year the assessee has declared loss under the head house property, business income from sale of Kharadi plot at Kharadi and interest received from fixed deposits. The assessee made investment of ₹ 20,75,93,364/- in land, shops and workin- progress and ₹ 15,22,42,987/- towards advance for land and other advances. The advances include ₹ 25,05,000/- to Modi Land Developers, ₹ 10,51,98,692/- to .....

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ould not be disallowed. According to the Assessing Officer operating costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of the asset. Therefore, financial costs identifiable with a particular project have to be added to the cost of the project as any other method is going to distort the profits or sale of Kharadi plot. He observed from the accounts that interest paid to Citi Financial, Citi Finance a .....

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the various explanations given by the assessee and relying on various decisions the Assessing Officer held that interest amounting to ₹ 2,64,62,557/- has to be disallowed. While doing so, he also observed that an amount of ₹ 55,85,717/- out of the above amount of ₹ 2,64,62,557/- paid to NBFCs is also liable to be disallowed u/s.40(a)(ia) as no tax has been deducted at source. 26. Before CIT(A) it was submitted that the bank loans were undisputedly utilised for construction of .....

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it was argued that as per the sanction letter an amount of ₹ 1,97,20,828/- and ₹ 2,19,720/- respectively were directly paid to Kanishka Properties for the purchase of the property situated at 610, Sadashiv Peth, Pune. 27. As regards the reliance of Accounting Standard-16 by the Assessing Officer is concerned it was submitted that the Assessing Officer disallowed the interest expenditure on the ground that they were utilised towards the qualifying assets. However, the assessee deals .....

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essing Officer that interest paid to NBFCs to the extent of ₹ 55,85,717/- was also otherwise not admissible as deduction in the light of the provisions of section 40(a)(ia) for failure to deduct tax at source it was argued that no disallowance could have been made since the entire interest has been paid to these NBFCs. It was argued that disallowance u/s.40(a)(ia) can be made only if such interest was payable as on 31-03-2009. However, since the entire interest has been paid and no amount .....

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properties. Therefore, he held that the Assessing Officer was justified in disallowing the interest of ₹ 2,29,90,881/- claimed u/s.24 against income from house property. 30. So far as the argument of the assessee that the interest can be allowed as deduction u/s.36(1)(iii) is concerned the Ld.CIT(A) observed at para 3.3.2.8 as under : 3.3.2.8 To sum up the interest on the capital borrowed generally, which was also used for the purpose of incomplete ongoing ventures and development of new .....

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, which is extracted hereinabove, and the projects of this nature fall within the definition of qualifying assets. As per the definition, a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The borrowing cost relatable to qualifying asset, i.e. land development projects are required to be capitalised and added to the cost or WIP of such projects. Capitalisation of borrowing costs should cease when substantially all the act .....

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the Assessing Officer to compute the allowability of deduction u/s.36(1)(iii) by observing as under: 1. The Assessing Officer shall first identify the actual qualifying assets from the ventures undertaken by the appellant during the year and the earlier years, i.e. the projects which were in execution stage and not ready for intended sale as on 31-03-2009. 2. Thereafter, the Assessing Officer shall compute the interest attributable to such qualifying assets in terms of paragraph 12 of the Accou .....

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ould not exceed the amount of borrowing costs incurred during that period. 3. The interest so computed as per AS-16 and attributable to qualifying assets shall be capitalised for form part of the cost or WIP of the qualifying assets. The interest so capitalised is not an allowable deduction u/s.36(i)(iii) in the year under consideration. Subject to the above directions, the grounds raised by the appellant relating to disallowance of interest stand disposed of. 32. Aggrieved with such order of th .....

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rtners may vary the nature of business and do any additional type of business with their mutual consents from time to time. 34. He accordingly submitted that the assessee is engaged in the business of land trading. These lands are held as stock in trade and current assets and as such the interest is certainly allowable as deduction u/s.36(1)(iii) of the I.T. Act. Referring to the copy of the order giving effect to the order of the CIT(A) the Ld. Counsel for the assessee submitted that there are .....

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irecting the assessee to furnish the list of qualifying assets and the cost incurred thereon the assessee filed the requisite details before the Assessing Officer vide letter dated 05-08-2013 providing details of all such assets. After due verification the Assessing Officer on being satisfied passed the order u/s.250 of the Act on 19-08-2013 and allowed the relief stating categorically that the same is allowed following the direction by the CIT(A). He submitted that although the assessee has got .....

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and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the nature of business of the partnership is to purchase, sale, lease/rent, development, investment in land, real estate, commercial and residential plots and act as commissioning agent and other allied activities. We find the assessee claimed deduction of interest expenditure of ₹ 2,02,91,840/- as deduction towards income f .....

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the Accounting Standard-16. According to the Assessing Officer operating costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cast of that asset. He also disallowed the balance amount of ₹ 61,70,717/- being interest of ₹ 7,31,374/- paid to City Financial, ₹ 26,83,156/- paid to City Finance,Rs.21,71,187/- paid to India Bulls and interest on unsecured loans at ₹ 5,85,000/- on the grou .....

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e, the same is otherwise also not allowable u/s.40(a)(ia). 38. We find in appeal the Ld.CIT(A) upheld the action of the Assessing Officer so far as the disallowance u/s.24(b) is concerned. As regards the alternate claim that such interest should be allowed u/s.36(1)(iii) he gave certain directions to the Assessing Officer to find out the qualifying assets and compute the interest attributable to such qualifying assets in terms of paragraphs 12 of the Accounting Standard-16 according to which the .....

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