TMI Blog2015 (7) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 the year. The above view of the Tribunal also finds support from the decision of the Hon’ble Punjab & Haryana High Court in the case of PMS Diesels Vs. CIT reported (2015 (5) TMI 617 - PUNJAB & HARYANA HIGH COURT ). The Hon’ble High Court after considering the decision of Hon’ble Allahabad High Court in the case of Vector Shipping Services (P) Ltd. [2013 (7) TMI 622 - ALLAHABAD HIGH COURT ] and the dismissal of the SLP before Hon’ble Supreme Court has held that provisions of section 40(a)(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. 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in-progress. Only the interest not so capitalised is allowable deduction u/s.36(1)(iii). We find after such direction of the CIT(A) the Assessing Officer called for the details from the assessee and after due verification held 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, real estate, commercial and residential plot etc. The funds borrowed have been utilised for such business activity, therefore, the entire interest paid has to be allowed as deduction u/s.36(1)(iii) of the I.T. Act. The same is also borne out from the record after the order of the Assessing Officer giving appeal effect to the order of the CIT(A). - Decided in favour of assessee. - ITA No.1693/PN/2013, ITA No.1728/PN/2013 - - - Dated:- 26-6-2015 - Shri R.K. Panda and Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Enterprises reported in 266 ITR 356 which is directly on this issue held that the compounding fees paid by the assessee to the Municipal Corporation for violation of building construction norms notified by PMC is in the nature of fine or penalty for infraction of law and therefore provisions of Explanation to section 37(1) of the I.T. Act are clearly attracted to such expenditure. He accordingly upheld the action of the Assessing Officer. 6. Aggrieved with such order of the CIT(A) the assessee 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 incurred for business purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y scheme in the course of assessee s business is an allowable business expenditure. 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 excess construction as per the office Circular dated 16-06-2011. He submitted that had it been for an infraction of law the PMC would not have accepted the compounding fees and regularised the excess construction. Therefore, the amount paid to the PMC though called compounding fee is an allowable expenditure. 8.2 Referring to the decision of Hon ble Delhi High Court in the case of CIT Vs. Lokenath and Co. (Construction) reported in 147 ITR 624 he submitted that the Hon ble High Court in the said decision has upheld the decision of the Tribunal wherein the amount paid to municipality as compensation for condoni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms levied by the municipal authorities, therefore, Explanation to section 37(1) is clearly applicable. We find the Ld.CIT(A) also upheld the action of the Assessing Officer by holding that the compounding fees paid by the assessee to Municipal Corporation for violation of building construction norms notified by the PMC is in the nature of fine or penalty for infraction of law and therefore provisions of Explanation to section 37(1) of the I.T. Act are clearly attracted. While doing so, he 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 business and therefore is an allowable business expenditure. 10.2 We find the Finance (No.2) Act, 1998 had inserted Explanation to Section 37(1) of the Act with retrospective effect from 1.4.1962. The Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addi 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 (No. 2) Act, 1998, which is made retrospective effect with effect from April 1, 1962. When the section itself declares the expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure, it is not possible to take the view that the expenditure incurred for compounding of the offence should be allowed. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Maddi Venkataraman and Co. (P.) Ltd. [1998] 229 ITR 534. At page 545 of the judgment, the Supreme Court has observed thus : In the instant case, the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. The assessee's plea is that unless 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 business, it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. As was laid down by Lord Sterndale in the case of Alexander von Glehn and Co. Ltd. (1920) 12 TC 232 (CA), it was not enough that the disbursemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 for the assessee made two fold arguments. He submitted that since no amount is payable at the end of the financial year, therefore, provisions of section 40(a)(ia) are not applicable. Referring to the decision of the Mumbai Bench of the Tribunal in the case of M/s. Arcadia Share and Stock Brokers Pvt. Ltd., Vs. DCIT vide ITA No.1871/Mum/2013 order dated 22-12-2014 for A.Y. 2006-07 he submitted that the Tribunal in the said decision after considering the dismissal of the SLP filed by the Revenue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjab Haryana High Court in the case of PMS Diesels Vs. CIT reported in TS-346-HC- 2015 (P H). The Hon ble High Court after considering the decision of Hon ble Allahabad High Court in the case of Vector Shipping Services (P) Ltd. reported in 262 CTR 545 and the dismissal of the SLP before Hon ble Supreme Court has held that provisions of section 40(a)(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 acceptable. We find the Pune Bench of the Tribunal in the case of Gaurimal Mahajan and Sons (Supra) while deciding an identical issue has observed as under : 8. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 25-09-1985 (1986)(157 ITR St. 27) has clarified that the provisions of sec. 194C are wide enough to cover oral contracts also. A contract is normally reduced in writing in order to make clear the terms and conditions, obligations of the parties to the contract etc. If the conditions of contract are otherwise understood by the parties, in view of the repeated transactions, in our view, the absence of a written contract would not make any difference. In the instant case, the assessee is repeatedly given 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 perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision is different from that rendered in the case of Meryline Shipping and Transports by the Special bench. Hence, we are inclined to reject the contentions of the assessee 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 made u/s 40(a)(ia) of the Act, 7.4 The last contention of the assessee is that the second proviso to sec, 40(a)(ia) of the Act, inserted by the Finance Act, 2012 with effect from 1.4.2013 is clarificatory in nature and hence the benefit of the same should be applied retrospectively. However, the correctness of this contention has not been examined by the tax authorities. Hence, in the interest of natural justice, we are of the view that this contention of the assessee requires examination at the end of the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes. 20. The assessee has also taken two additional grounds which are as under : 1. On the facts and in the circumstances of the case CIT(A) erred in confirming the disallowance of interest of ₹ 2,02,91,840/- claimed as deduction from Income from House Property . 2. On the facts and in the circumstances of the case CIT(A) has also erred in not allowing the alternate submission that the entire interest is allowable u/s.36(1)(iii) of the Act and has further erred in holding that this interest is to be capitalised to the qualifying assets by relying on proviso to sec. 36(1)(iii) overlooking 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 considering that the facts are already on record the additional ground No.2 by the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t allowed as a deduction under the head 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 ble Bombay High Court in the case of CIT Vs. Lokandwala Construction Industries Ltd. was also brought to the notice of the Assessing Officer. 25. However, the Assessing Officer was not satisfied with the explanation given by the assessee. According to him, the assessee has taken the loan against the property and rent receivable. The interest is not paid on capital borrowed for acquiring or construction of the property within the meaning of section 24(b). As regards the claim of deduction u/s.36(a)(iii) is concerned the Assessing Officer noted that during the impugned assessment year the assessee has declared loss under the head house property, business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of trading in lands etc. It was argued that most of the loans have been used for acquisition and construction of the properties which are rented out and therefore interest to the extent of ₹ 2,02,91,840/- has been claimed as deduction u/s.24(b) under the head income from house property and the balance has been claimed as deduction from business profits. Referring to the land sanction letter from India Bulls Financial Services Ltd 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 in land and these are not the projects and therefore they cannot be termed as qualifying assets so as to attract AS-16. It was argued that the loans are taken as working capital for purchasing the lands and the interest paid thereon is an indirect expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 activities necessary to prepare the qualifying asset for its intended or sale are complete and that stage has not reached yet in the year under consideration in case of several ventures undertaken by the appellant. Thus, the Assessing Officer is justified in principle in holding that the land development ventures, the income from which is not yet recognized as on 31-03- 2009, are qualifying assets for the purpose of capitalisation of interest relatable to these projects. 31. He accordingly directed 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 inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed u/s.36(1)(iii) of the I.T. Act. He submitted that the fact that loans are taken for trading stands proved as per the copies of the final accounts wherein the lands are shown as trading assets and not held for any construction thereon. He submitted that after the order of the CIT(A) directing 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 requisite relief after the order of the CIT(A), still took this additional ground as the interest is allowable u/s.36(1)(iii) of the Act since the assessee is a trader in land and the borrowed funds have been utilised for such trading assets which are shown as stock in trade. 35. The Ld. Departmental Representative on the other hand heavily relied on the order of the Assessing Officer. 36. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 interest so computed as per Accounting Standard-16 attributable to qualifying asset shall be capitalised to form part of the cost of the work-in-progress. Only the interest not so capitalised is allowable deduction u/s.36(1)(iii). We find after such direction of the CIT(A) the Assessing Officer called for the details from the assessee and after due verification held 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, real estate, commercial and residential plot etc. The funds borrowed have been utilised for such business activity, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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