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2016 (7) TMI 1178 - ITAT MUMBAI

2016 (7) TMI 1178 - ITAT MUMBAI - TMI - Disallowance of Interest on borrowings - Held that:- The assessee’s borrowing was for the purposes of business as the same were utilised for advancing security deposit of ₹ 2,00,00,000/- for taking on leave and license basis shop on monthly license fee by the assessee for setting up jewellery outlet as an expansion of the existing business of dealing in gold and diamond jewellery , and interest of ₹ 7,23,050/- incurred on the said borrowings is .....

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s per terms in the leave and license agreement , the assessee having coming forward with an explanation that no rent is payable as the licensor has not fulfilled the terms of leave and license agreement by delaying the construction of the layout structure of the shop , but it not conclusive enough to fasten tax liability on the assessee. It was starting point for the authorities below to start an enquiry to prove that payments have been made by the assesssee out of books and to disprove the cont .....

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o the assessee in accordance with the principles of natural justice and in accordance with law. - Decided in favour of assessee for statistical purposes. - Addition on account of expenses such as stamp duty, registration fees and other miscellaneous charges - Held that:- no enquiry has been made by the Revenue and only estimation has been made on ad-hoc basis. The stamp duty charges as appearing in the leave and license agreement being cost of stamp paper are only ₹ 2000/- and the stam .....

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e assessee nor the assessee has brought on record any evidences to support his contention that the expenses have been incurred by the licensor by way of confirmation from licensor etc. In our considered view, the matter need to be set aside and restored to the file of the AO for de-novo examination and adjudication of the issue by the AO - Decided in favour of assessee for statistical purposes. - ITA No.7679/Mum/2011 - Dated:- 27-4-2016 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, .....

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r called the AO ) u/s 143(3) of the Income Tax Act,1961(Hereinafter called the Act ). 2. The grounds raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under: Appellant By Shri Jitendra Singh Respondent By Shri B S Bist, Sr. DR 1(a) The Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Interest of ₹ 7,23,050/- on borrowings. The same may, therefore, be allowed. (b) T .....

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e that for disallowance of interest, shop does not exist and for making addition of licence fees shop exist. 2(a) The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of ₹ 4,00,000/- on account of rent. The same may therefore be deleted. (b) The Learned Commissioner of Income Tax (Appeals) failed to appreciate that there has no liability to pay the rent and appellant has not paid any rent. (c) The Learned Commissioner of Income Tax (Appeals) erred in observing .....

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appellant had paid the amount. (c) Without prejudice to above, The Learned Commissioner of Income Tax (Appeals) confirmed the addition without giving reasons. 3. The facts of the case in brief are that the assessee is engaged in the business of trading, manufacturing and export of gold jewellery. A survey was conducted by the Revenue u/s 133A of the Act on 20.07.2004 at M/s. Dhanraj Exports Jewel Arcade, Bandra (W), Mumbai, whereby it was found that the assessee did not carry any sale/purchase .....

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of loans were utilized for the purchase of shop for which deposit of ₹ 2 crores was made. The assessee did not file any purchase agreement for the shop and no depreciation on the shop was claimed. However, the assessee filed leave and license agreement dated 18.06.2004 , wherein it was stated that the place given on license basis is basically a bungalow consisting of ground plus two upper floors, situated at 157, Waterfield Road, CTS No. F/923,Plot no.107 of TPS IV, Bandra (W), Mumbai- 40 .....

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he commercial business of jewellery outlet and any lawful business auxiliary to it. As per para 4 of the said agreement it is stated that the shop premises is to be constructed on the said portion for which the licensor agreed to bear the cost of constructing the said lay out for the said shop premises against which the assessee has given the deposit and claimed interest of ₹ 7,23,000/- on borrowings made for giving said deposit of ₹ 2 crores. The AO disallowed interest expenditure o .....

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ssed by the AO u/s 143(3) of the Act. 4. Aggrieved by the assessment orders dated 24-12-2007 passed by the AO u/s 143(3) of the Act, the assessee filed first appeal with the CIT(A) and submitted that the assessee has only obtained the shop premises on leave and license basis and the security deposit of ₹ 2 crores has been given for which borrowed funds has been used. Hence, the assessee contended that the borrowing was done for business purposes and if the renovation of the shop was not co .....

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The learned counsel for the assessee submitted that the funds were borrowed for the purpose of business and the authorities have disallowed the business expenditure of ₹ 7,23,050/ being interest expenditure on borrowings for business purposes. The learned counsel submitted that the premises have not been purchased but have been taken on leave and license basis and the renovation of the shop was going on as per leave and license agreement at the cost of the licensor . He further submitted .....

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authorities below. 8. We have considered the rival contentions and perused the material on record. We have observed that the assessee is engaged in the business of dealing in gold and diamond jewellery. The financial statements along with tax-audit report for the previous year relevant to assessment year under appeal are placed on record in the paper book filed with the Tribunal at page 2-22, whereby the turnover of the assessee during the impugned assessment year was ₹ 33,78,094/- from t .....

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e and license agreement is placed in the paper-book filed with the Tribunal at pages 28-46. Thus, the said premises, which was taken on leave and license basis was not acquired on ownership basis by the assessee rather it was taken by the assessee on leave and license basis on monthly license fee of ₹ 1,00,000/-. The premises is taken on leave and license basis for expansion of the existing business of dealing in gold and diamond jewellery for setting up new jewellery outlet and other lawf .....

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ected in the books of accounts as well Balance Sheet of the assessee as it was obligation of the licensor and not the assessee to defray the cost of construction of the proposed lay out structure. Since, the cost of construction of layout of the shop is to be borne by the licensor, the resultant asset consequent to construction is also owned by the licensor as per the facts emerging from the records. The interest bearing borrowings have been raised by the assessee on which interest of ₹ 7, .....

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as revenue expenditure as the borrowings have been done for the purposes of expansion of the existing business of dealing in jewellery by setting up new jewellery outlet at the demise premises which is taken on leave and license basis on monthly license fee of ₹ 1,00,000/- , thus the said interest expenditure has to be therefore allowed as revenue expenditure. The reference is drawn to provisions of Section 3 and 4 of the Act which stipulates as under: " ["Previous year" def .....

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id financial year.]" "Charge of income-tax. 4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year [* * *] of every person : Provided that where by virtue of any provision of this Ac .....

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nce with and subject to provisions of the Act in respect of the total income of the previous year of every person. While previous year is defined to be financial year immediately preceding assessment year and in case of a business or profession newly set up or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession , or as the case may be, the date on which the source of .....

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and in order that those deductions can be allowed, the business must be carried on by the assessee. In this case it is not disputed that the business was carried on in the relevant previous year which is the financial year 1946-47, but the important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is Section 2(11) and that section defines the "previ .....

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the previous year of the business would not have commenced. We must therefore look at the decision of the Tribunal as really referring to the setting up of the business in the language of Section 2(11) and not expenses connected with the commencement of the business. Mr. Palkhiwalla says that if that be the correct approach, then the Tribunal has misdirected itself in considering the commencement of the business and not the setting up of the business. Let us try and understand whether there is a .....

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ongly relied on a judgment of Mr. Justice Rowlatt reported in Birmingham and District Cattle By-products Co. Ltd. v. Commissioners of Inland Revenue [1919] 12 Tax Cas 92. In that case the assessee company was incorporated on the 20th of June, 1913, and between that date and the 6th of October, 1913, the directors arranged for the erection of works and the purchase of plant and machinery, and entered into agreements relating to the purchase of products to be used in the business and to the sale o .....

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e pre-war standard should be based on the profits shown by revised accounts for the period 20th June, 1913, to 30th June, 1914, and Mr. Justice Rowlatt held, upholding the view of the Commissioners, that the business of the company had commenced on the 6th of October, 1913. Now, this is indeed a very strong case on facts in support of the Commissioner, because the view taken by Mr. Justice Rowlatt is that everything that had been done by the company before the installation of the plant and machi .....

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d having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products." Therefore if this case were to be applied to the present assessee, then we would be driven to the conclusion that, if anything, the Tribunal has taken a view of the case very favourable to the assessee because on the facts of this case it would seem that the Income-tax Officer was right in holding that the net expenses prior to the 1st of November, .....

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e". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced ' and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, w .....

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which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal taken into consideration. The Tribunal has as pointed out in the statement of the case, scrutinised the various details of the expenses given in the order of the Appellate Assistant Commissioner and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favorable to the assessee than the one we are giving to the expression .....

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ion which after all is a very limited jurisdiction. We will, therefore redraft the question submitted by the Tribunal as follows: "whether there was evidence before the Tribunal to hold that the assessee company set up its business as from 1st of September, 1946?" and we will answer that in the affirmative. No order as to costs." The above decision of Hon'ble Bombay High Court was approved by Hon'ble Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Limite .....

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y proviso to section 36(1)(iii) will also ,in our considered view, not be applicable. We, therefore based on the peculiar facts and circumstances of the case hold that the assessee s borrowing was for the purposes of business as the same were utilised for advancing security deposit of ₹ 2,00,00,000/- for taking on leave and license basis shop on monthly license fee by the assessee for setting up jewellery outlet as an expansion of the existing business of dealing in gold and diamond jewell .....

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of ₹ 4 lacs from December 2004 to March 2005, which has been treated as unexplained expenditure as the same has not been debited to the profit and loss account. It was observed by the AO that the assessee has taken the premises on leave and license basis on monthly license fee of ₹ 1 lac for use and occupation , consisting of bungalow consisting of ground plus two upper floors, situated at 157, Waterfield Road, CTS No. F/923,Plot no.107 of TPS IV, Bandra (W), Mumbai- 400 050. The sa .....

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he AO rejected the contention of the assessee and held that since the assessee is following mercantile system of accounting, the rent payable by the assessee should be reflected as liability in the balance sheet. The AO held that perusal of the financial statement shows that there is no such liability outstanding in the balance sheet. The AO therefore assumed it safe to conclude that the assessee has paid the rent but not accounted for it in the books of accounts and added the unexplained expend .....

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sor. He further submitted that neither rent has been paid nor deduction has been claimed under the Act, hence, there is no question of the same being treated as unexplained expenditure. The CIT(A) rejected the contention of the assessee and held that the security deposit of ₹ 2 crores has been paid for due fulfilment of the terms and conditions of the leave and license agreement dated 18.06.2004 and this agreement had not been cancelled for non-payment of rent and that the assessee is simp .....

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of jurisdiction at Mumbai, which has not been done. In such circumstances the CIT(A) rejected the contentions of the assessee that no rent has been paid and justified the additions made by the AO and confirmed the same on the basis of preponderance of probabilities , vide orders dated 30-09-2011. 11. Aggrieved by the orders dated 30-09-2011 passed by the CIT(A), the assessee is in appeal before the Tribunal. 12. The learned counsel for the assessee submitted that there is a leave and license agr .....

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and has also not claimed deduction in the books of account. The learned DR relied on the orders of the authorities below and submitted that had the rent not been paid, as per clause 29 of the agreement dispute, if any, has to be referred to the court of jurisdiction at Mumbai. As no such reference has been made, it can be safely presumed that the assessee has paid rent but not shown it in the books of account. Ld DR relied upon the orders of the authorities below. 13. We have considered rival c .....

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ee that he had not made any payment towards rent from December 2004 to March 2005 as there has been delay on the part of the licensor to construct the building and hand over the same to the assessee as per terms and conditions of leave and license agreement. The assessee has not claimed any expenses on account of such rent in the return of income filed with Revenue. As per facts as emerging from the records, the assessee has offered a plausible and bona-fide explanation but not brought on record .....

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by either AO or CIT(A) to disprove the contentions of the assessee.The powers of the CIT(A) are co-terminus with powers of the AO. The revenue is contending that the assessee has made the payment out of books. The revenue has also not brought on record any cogent incriminating material to prove that the assessee has made payment which has not been accounted for in the books of account and to dis-prove the contentions of the assessee . The addition has been made based on the clause in the leave a .....

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tended by the Revenue that as per clause 29 of the agreement ,if there is any dispute or difference between the parties , the same should have been referred to Courts in terms of leave and license agreement . In commercial parlance, it is not absolutely necessary and essential that every and any dispute or difference arising between the parties w.r.t. terms of agreement are compulsorily referred to Courts by the parties strictly in terms of the clauses in the agreement , as the parties to the ag .....

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n the books of accounts as per terms of agreement and the issue is also not referred to Courts as per terms in the leave and license agreement , the assessee having coming forward with an explanation that no rent is payable as the licensor has not fulfilled the terms of leave and license agreement by delaying the construction of the layout structure of the shop , but it not conclusive enough to fasten tax liability on the assessee. It was starting point for the authorities below to start an enqu .....

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examination and adjudication of the issue on merits after granting opportunity of being heard to the assessee in accordance with the principles of natural justice and in accordance with law. The assessee will be allowed by the AO to submit evidences/explanations to support his contentions. Ground No 2 is allowed for statistical purposes. We order accordingly. 14. The next ground relates to addition of ₹ 50,000/- to the income of the assessee on account of expenses such as stamp duty, regi .....

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of the Act . 15. Aggrieved by the assessment orders dated 24-12-2007 passed by the AO u/s. 143(3) of the Act, the assessee filed first appeal before the CIT(A) and submitted that the AO has made addition on ad-hoc basis and the stamp paper was purchased by the licensor and agreement was registered by licensor. Thus, the payment for stamp paper of ₹ 2000/- and registration charges were borne by licensor. Mere provisions in the agreement that licensee should bear the expense did not mean th .....

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curring of stamp duty and registration charges. The learned DR relied upon the orders of the authorities below. 18. We have considered the rival contentions and perused the material on records. We have observed that as per clause 27 of the agreement registration, stamp duty others and other miscellaneous expenses are to be borne by the licensee i.e. the assessee. The assessee has denied to have incurred the expenses and stated that the same were in-fact borne by the licensor which is a plausible .....

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