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DB Properties Private Limited Versus The Addl. Commissioner of Income Tax, Mumbai

2016 (5) TMI 415 - ITAT MUMBAI

Penalty u/s 271(1)(c) - withdrawal of claim for deduction of interest expenditure / financial charges - Held that:- The complete terms and conditions along with copies of loan agreements, of the loans so obtained by the holding company which are stated to be at the behest and on behalf of the assessee company should have been brought on record with the Revenue along with details of terms of cancellation( deed of cancellation ) of the MOU with the said HDIL as the loans have been obtained by hold .....

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case will not be allowed to be carried forward and set off in subsequent years in view of provisions of Section 79 of the Act of 1961 as the holding company has divested its shareholding in the assessee company in the year 2011 while return of income in which said claim of allowance of interest/ financial charges expenditure was made , was filed on 22.09.2009 , so it is incumbent on the part of the assessee company to explain that the claim of the allowance of interest / financial charges expen .....

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aim of allowance of interest/financial charges expenditure was bona-fide and legitimate, the matter is now hereby set aside to the file of the A.O. to decide the issue of leviability of penalty u/s 271(1)(c ) of the Act , de-novo after considering all the relevant facts and evidences to be filed by the assessee company in its defense , after affording adequate opportunity to the assessee company of being heard. - Decided in favour of assessee for statistical purpose. - I.T.A. No. 6339/Mum/2012 - .....

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d by the assessee company in the memo of appeal filed with the Tribunal reads as under:- 1. On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) ought to have held that no penalty is leviable on the appellant U/s. 271(1)(c) of the Act in relation to withdrawal of claim for deduction of interest expenditure / financial charges of ₹ 14,98,08,096/ - in assessment of its income for assessment year 2009-2010 and accordingly, ought to have direc .....

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u/s 143(3) read with Section 143(2) of the Income Tax Act,1961 (hereinafter called the Act ) , on 15-07-2011 , the assessee company was asked by learned assessing officer(Hereinafter called the AO ) to explain why not the interest claimed in the Profit & Loss A/c of ₹ 14,91,61,322/- be disallowed as there are interest free advances out of the borrowed funds. In response there-of, the assessee company submitted its reply dated 16.07.2011 on 20.07.2011 and also filed a revised computati .....

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mputation of income with the AO. The revised computation of income filed by the assessee company was considered and found acceptable by the AO.. Since , the assessee company has not filed revised return of income with the Revenue and the assessee company filed revised computation of income only after issue of notice u/s.143(2) of the Act and after being cornered by the revenue whereby the AO specifically queried the assessee company on 15-07-2011 with respect to disallowance of the said claim of .....

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d by the AO u/s 143(3) of the Act. The assessee company in its reply in penalty proceedings submitted before the AO that in the course of the assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the Ms. Hetal Sangani, Taxation Manager had drew the attention of the A.O. that the assessee company shall be withdrawing its claim for allowance of interest expenditure of ₹ 14,91,61,322/- paid by it to its Holding Company (the captioned disallowance) under the following facts an .....

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as cancelled and advances so granted were recalled. (b) Keeping in view the overall utilization of funds received from the Holding Company, interest expenditure / financial charges of ₹ 14,91,61,322/- was claimed as an allowable deduction: (i) Nature of business of the assessee company, being that of development of real estate; (ii) Nature of advance so granted, being for a proposed real estate project; (iii) Principle of commercial expediency; (iv) Guiding principles laid down by the Hon. .....

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forward losses lapses and as such claim of interest expenditure / financial charges resulting into business loss has became infructuous. (e) Hence, the withdrawal of the claim is made on account of the applicability of the provisions of Section 79 of the Act as well as avoidance of protracted litigation, in the event of disallowance of such expenditure either in part or otherwise. (f) Accordingly, it was submitted not to consider the said expenditure as admissible' expenditure in assessing .....

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the provisions of Section 79 of the Act. The assessee company drew the attention of the A.O. to the following Note No.1 forming part of the computation of total income:- The Company had in the preceding previous year received funds and utilised the same for granting advances in connection with the proposed development for eviction, re-settlement and re-development of Slums on the encroached Airport Lands at Mumbai Airport at Santacruz and Sahar Mumbai. However, during the year, the Memorandum o .....

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harges have been claimed as an admissible deduction, since incurred wholly and exclusively for the purpose of the Company's business and should be allowed accordingly". Thus, the assessee company submitted that the interest bearing funds upon receipt were utilized in connection with granting of advances in relation to the proposed development for eviction, resettlement and re-development of slums on the encroached Airport lands at Mumbai Airports at Santacruz and Sahar. The advances wer .....

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in law. The assessee company relied upon the decision of the Hon ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd., reported in 322 ITR 158(SC). The assessee company also relied upon the decision of Hon ble Gujarat High Court in case of New Sorathia Engineering Co. v. CIT 282 ITR 642(Guj.) The AO, however, rejected the submissions of the assessee company and held that since this issue has come to light during the assessment proceedings and the assessee company withdrew the .....

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The A.O. held that claiming wrong or excessive deductions also amounts to concealment of income as well as furnishing of inaccurate particulars of income. The A.O. relied upon the decision of UOI v. Dharmendra Textiles Processors, [2008] 306 ITR 277 (SC). The AO held that the initial burden of discharging the onus of rebuttal is on the assessee company and the assessee company has to substantiate to prove the same to be bonafide. In view of all these facts, the A.O. came to the conclusion that t .....

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ee company is a closely-held company, incorporated with the main object of carrying on the business of real estate development. Its main stream of revenue is share of profit in the capacity as a partner, engaged in the business of real estate development. Apart from the above revenue stream, the assessee company had utilized funds obtained from the holding company in granting of advances to Housing Development & Infrastructure Ltd., (in short HDIL ) in relation to the proposed development fo .....

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,61,322/- representing recovery of financial charges referable to funds granted to the assessee company. The said charges were accounted in the Profit & Loss Account under the head "Recovery of Financial Charges in respect of Unsecured Loans". The same was claimed as admissible deduction, in returning the loss for the year in the return of income filed with the Revenue. The same charges were incurred in connection with placing of advances in terms of MOU dated 27th October, 2007, r .....

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m for deduction. The assessee company also submitted that the assessee company was a wholly owned subsidiary company of DB Realty Private Limited up to the year ended 31st March, 2011. After 31st March, 2011, the said Holding Company divested its investments in the shares of the assessee company to a third party viz. Adani Properties Pvt. Ltd., having consequential effect of attracting the applicable provisions of Section 79 of the Act, whereby the right to carry forward the losses relating to p .....

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its claim far allowance of interest expenditure of ₹ 14,91,61,322/- recovered by the Holding Company and shall be filing appropriate communication in this regard, which was filed vide letter dated 16-07-2011. The assessee company submitted that it had carried forward the said amount as unabsorbed business loss and even if the claim would have been allowed in the course of assessment proceedings, the assessee company could not have taken the benefit there against for carry forward and set-o .....

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143(3) of the Act. Consequent to this withdrawal of the interest expenditure, the A.O disallowed the same in computing the loss for the year and the penalty proceedings were initiated for filing in-accurate particulars of income. The A.O. rejected the claim of the assessee company on the ground that the assessee company did not file any revised return of income and it has filed only revised computation of income with the AO. The assessee company submitted that the observations of the A.O. are no .....

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at by that time, the AO was only collecting the information. In nutshell, the assessee company submitted that the claim in relation to the captioned charges was not an improper claim in law. There was a proper disclosure of the claim in the statement of income attached along with the return of income furnished for the year and there was a change in the shareholding pattern of the assessee company which attracted the provisions of Section 79 of the Act, resulting into disentitlement of the right .....

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terest expenditure/financial charges voluntarily cannot be equated to filing of inaccurate particulars of income. In support, the assessee company relied upon the decision of the Hon'ble Delhi Court in the case of CIT v. Nath Bros. Exim International Ltd. reported in 288 ITR 670 and the decision of the Hon'ble Apex Court in the case of CIT v. Reliance Petroproducts (P) Limited reported in 322 ITR 158 (SC). In the light of the above discussion, the assessee company prayed before the CIT(A .....

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laimed in P&L should not be disallowed as they are interest free advances out of the borrowed funds and in response to this, the assessee company submitted its reply vide letter dtd.16.07.2011 on 20.07.2011, filed a revised computation of income in which it itself withdrew the interest expenditure of ₹ 14,91,61,322/- and also made disallowance u/s.14A of the Act of ₹ 6,46, 774/-. The CIT(A) observed that one of the reasons for withdrawing this claim as stated by assessee company .....

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nted out to the assessee company during the course of assessment proceedings that the assessee s claim is not correct . The assessee company did not forward any evidence in support of its claim. It is a settled principle that onus lies on the assessee company to prove genuineness of any expenditure which is claimed as deduction in computing taxable income. The applicability of provision of section 79 of the Act and taking its shelter under that provision is also an afterthought. The onus is on t .....

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ead of furnishing any evidence just withdrew the claim after a query was raised on the issue by the A.O. . The CIT(A) held that the A.O. is right in concluding that assessee company has furnished inaccurate particulars of income and has rightly levied the penalty u/s 271(1)(c) of the Act. In support of his contention, the CIT(A) relied on the judgment of Hon ble supreme Court in the case of JCIT v. Saheli Leasing & Industries Ltd. [2010] 191 Taxman 165 wherein it was held that the penalty u/ .....

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Communication Ltd., 327 ITR 510 and also the judgment of Hon ble Supreme Court in the case of Reliance Petroproducts Pvt. Ltd. 322 ITR 158(SC). In nutshell, the CIT(A) held that the assessee company has furnished inaccurate particulars of income by claiming interest expense in its accounts and in the light of the judgments of various courts, the penalty is required to be levied in the case of the assessee company for furnishing inaccurate particulars of income leading to concealment of income of .....

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urate particulars of income leading to concealment of income whereby penalty of ₹ 4,71,89,550/- has been levied by the Revenue on the assessee company. The assessee company received funds in the preceding financial year and utilized the same for further advancing to HDIL in terms of MOU dated 27th October, 2007 which is in connection with the eviction, resettlement and redevelopment of slums on the encroached airport lands at the Mumbai Air Port at Santacruz and Sahar. The ld. Counsel for .....

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t Airport as per the said MOU with MIAL. However, during the year, the MOU entered with the HDIL in this regard was cancelled and the advances granted were recalled. Consequent to which funds received have been repaid by loan obtained by the holding company on the behest of the assessee company. The assessee company has claimed deduction of interest of ₹ 14,91,61,322/- which was recovered by the holding company for the loans obtained by the holding company at the behest of the assessee com .....

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te is placed at paper book page 52 to 57 of the paper book. In view of provisions of section 79 of the Act, the said claim is not available to the assessee company for carry forward and set-off of losses as there is change in shareholding. Notice u/s 142(1) of the Act dated 14-06-2011 was issued by the AO to the assessee company and the assessee company vide its letter dated 15-7-2011 furnished details of unsecured loan received with the name of parties, address etc. as asked by the A.O., which .....

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etter dated 15.07.2011 to explain why not the interest claimed in P&L be not disallowed as there are interest free advances out of the borrowed funds and the assessee company vide letter dated 16-07- 2011 filed on 20-07-2011 before the AO withdrew its claim for interest expenditure of ₹ 14,91,61,322/- and also revised computation of income withdrawing the said interest expenditure claimed. The ld counsel also submitted that during the course of hearing prior to the pointing by the AO o .....

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,322/- be disallowed as there are interest free advances out of the borrowed funds and therefore, once the assessee company was cornered , it withdrew the claim of interest expenditure. The applicability of provision of section 79 of the Act and taking its shelter under that provision is also an afterthought. The ld DR strongly refuted the claim of the assessee company that it voluntarily surrendered the claim of allowance of interest expenditure and submitted that rather the assessee company wa .....

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The return of income was filed on 22nd September, 2009 , while the shareholding has been transferred in the year 2011. The ld. DR submitted that the assessee company has failed to prove that the interest expenditure has been incurred wholly and exclusively for the purposes of business of the assessee company. The ld. D.R. further relied on the orders of A.O. and the CIT(A). He submitted that the advance has been given free of interest while the assessee company is paying interest on borrowed fun .....

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imited v. ACIT (2010) 39 SOT 115(Mum-Trib.). 11. The ld. Counsel for the assessee company, in the rejoinder, submitted that the MOU was cancelled in current year before closure of the previous year relevant to the assessment year 2009-10. The funds have been utilized for the purpose of business. The disclosure has been made in the computation of income. The assessee company has submitted the entire details of particulars of income and it cannot be said that the assessee company has furnished ina .....

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be cancelled in the current financial year. It is also stated that funds have been received by the assessee company and further advanced to HDIL in terms of MOU dated 27-10-2007 and in the Note attached to computation of income which is placed at paper book page No. 9, it has been stated by the assessee company that the assessee company had in the preceding previous year received funds and utilized the same for granting advances to HDIL in connection with the proposed development for eviction, .....

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holding company on the behest and on behalf of the assessee company and accordingly the holding company has recovered financial charges of ₹ 14,91,61,322/- incurred on the loan so obtained on the behalf and at the behest of the assessee company which has been claimed as an admissible deduction in the return of income filed with the Revenue and was claimed to have been incurred wholly and exclusively for the purpose s of the company s business and hence should be allowed accordingly. We ha .....

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ured loans with name, address of parties and amount involved etc.. On 15-07- 2011, the AO asked the assessee company why the claim of interest expenditure should not be disallowed .We observed that vide its letter dated 16th July, 2011 filed on 20-07-2011, the assessee company has withdrawn allowance of interest expenditure of ₹ 14,91,61,322/- which was stated to be recovered by the holding company for loans obtained on behalf and at behest of the assessee company to repay the funds receiv .....

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e/financial charges resulting into the business loss has become infructuous and, hence, the interest expenditure of ₹ 14,91,61,322/- for the assessment year under reference stand withdrawn and the computation of income to that extent be considered as modified. The assessee company stated in the said letter that the amount of loan was obtained for business purposes keeping in view commercial expediency and necessary disclosure was made vide note no 1 forming part of statement of computation .....

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A.O. in the assessment order passed u/s 143(3) dated 18th August, 2011 had accepted the contention of the assessee company withdrawing the claim of ₹ 14,91,61,322/- without any verification as the assessee company itself surrendered its claim of allowance of interest expenditure and the AO invoked the provisions of section 271(1)(c) of the Act for levying the penalty. We have also gone through the MOU entered into by the assessee company with HDIL dated 27th October, 2007 whereby it has be .....

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ion, Management and Development Agreement dated 4th April, 2006 executed between Mumbai International Airport Pvt. Ltd. and Airport Authority of India entered into for the purpose of operation, management and development of the Mumbai Airport. We further noted that under the agreement dated 15th October, 2007, the HDIL has undertaken the obligation of removal of the slum dwellers encroaching on the Airport land, resettlement of such slum dwellers on any land outside the Airport land and to hand .....

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which is described as Released Land in the said agreement amongst other such benefits as more particularly described and provided in the said agreement and upon the terms and conditions as provided in the said agreement. The assessee company has agreed to join with HDIL for the performance of the purposes and object of the said agreement dated 15th October, 2007 and to receive and obtain along with HDIL all the benefits there under and for that purpose to form a consortium along with HDIL and w .....

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of SPV , shall be brought in and arranged by the said HDIL and D.B. Properties in the ratio of 72:28 respectively and shall be entitled to interest on all amounts advanced by each one of them to the SPV to be calculated on the basis of SBI prime lending rate + 2% per annum , payable by the SPV. It is also agreed that the purchase for an on behalf of the consortium, certain lands situated at Kurla at consideration of ₹ 1,900 crores in which HDIL has also executed a term sheet pursuant to t .....

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as aforesaid to be purchased for and on behalf of the Consortium. It is agreed term of negotiation that the said Kurla Land shall be mainly used for reallocation and rehabilitation of the slum dwellers from the encroached slum dwellers land. It was also agreed that the payment of ₹ 950 Crores shall be paid by HDIL and D.B. Properties on or before 28.11.2007 in proportion of 72:28.This MOU is stated to have been cancelled during the impugned previous year relevant to assessment year 2009-10 .....

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ted the contentions of the assessee company and did not verify further whether the claim was made bona-fide at the time of filing of the return of income in 2009 as the assessee company itself surrendered and withdrew the said claim of allowance of interest expenditure. The AO invoked the penalty provisions u/s 271(1)(c) of the Act for furnishing of in-accurate particulars of income. The assessee company has not submitted complete and full details with respect to these loans and its terms and co .....

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duty bound to offer explanation which is bona-fide and to substantiate its claim made in the return of income filed with the Revenue. We have also observed that the authorities below have also stated that the assessee company has not brought on record the evidence to substantiate its claim of interest expenditure ₹ 14,91,61,322/- as a bonafide claim while filing return of income with the Revenue rather the assessee company is repeatedly contending that it is withdrawing its claim to buy p .....

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vely for the purposes of the business of the assessee company. The complete terms and conditions along with copies of loan agreements, of the loans so obtained by the holding company which are stated to be at the behest and on behalf of the assessee company should have been brought on record with the Revenue along with details of terms of cancellation( deed of cancellation ) of the MOU with the said HDIL as the loans have been obtained by holding company on behalf and at behest of the assessee c .....

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