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M/s. West Palm Development Pvt. Ltd. Versus Joint Commissioner of Income-tax Circle 12 (5) Bangalore

Allowability of interest expenditure incurred on amount of borrowings from the Union bank of India - Held that:- Satisfaction of the first conditions viz., whether incurred wholly and exclusively for the purpose of earning income has to be examined in the light of the facts surrounding the present case. According to the assessee-company, money was borrowed from Union bank of India only for the purpose of purchasing the land from its sister concern viz., PEP for its business purpose. Therefore, b .....

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e Supreme Court also explained that the expenditure should have been incurred for the purpose of making or earning such income shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. In the light of legal provisions, the claim cannot be allowed under the provisions of sec.57(iii) of the Act. It is not only the excess of expenditure but entire interest expenditure incurred on borrowings made from Union bank of India is not allowab .....

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of business. The contention of the assessee that the borrowings were made for the purpose of purchasing land for its business purpose from its sister concern i.e. PEP was disbelieved by the AO. The fact that the payments were made to sister concern and the amounts were advanced even before verification of the title deeds of the assessee-company raises eye-brows about veracity of the claim. The assessee-company had failed to controvert the suspicion entertained by the AO with evidence. Therefore, .....

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see - ITA No.1668/Bang/2013 - Dated:- 24-6-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri Padamchand Khincha, CA For The Respondent : Shri Sunil Kumar Agarwala, JCIT(DR) ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee directed against the order of the CIT(A)-II, Bangalore, dated 23/09/2013 for the assessment year 2009-10. 2. The assessee raised the following grounds of appeal: 1. The impugned order passed by .....

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1,951426/- should be fully allowed as deduction in computing the total income. 3. The learned assessing officer has erred in levying interest under section 23413 of the Act. On facts and in the circumstances of the case and law applicable, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B of the Act. 4. In view of the above and other grounds to be adduced at the time of hearing, appellant prays that the order passed by the learned .....

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the return of income u/s 143(1) of the Income-tax Act, 1961 [ the Act for short], the case was selected for scrutiny by issuing statutory notice u/s 143(2) of the Act and finally the assessment was completed u/s 143(3) vide order dated 30/11/2011 at a total income of Rs,6,16,18,764/-. While doing so, the Assessing Officer [AO] disallowed a sum of ₹ 81,95,42/6 being excess of interest expenditure over interest earned on the loans procured from Union Bank of India on the ground that interest .....

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ave been borrowed from the bank for business purpose the same is allowable as deduction. The contentions of the assesseecompany were rejected by the ld. CIT(A) in paragraphs.3.5 to 4 of his order as under: 3.5 I have carefully considered the appellant's submissions and also perused the assessment order. Reference may be made to the relevant portions of the assessment order i.e. paragraphs 2.4 to 2.6 where the AO has analysed the issue threadbare and drawn appropriate inference. The relevant .....

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3,50,03333 - 30/10/2008 Received from PEPPL 2,50,00,000/- 30/10/2008 Received from PEPPL 2,50,00,000/- 33,50,00,000/- 33,50,00,000/- 2.5 As it can be seen from the above, the assessee claimed that it had paid a sum of ₹ 33.50 crores to M/s PEPPL as advances for purchase of a property. The Authorised Representative was asked to furnish the agreement with M/s PEPPL in support of its claim that the above advances were given for purchase of the property only. In reply, the Authorised Represent .....

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are enclosing herewith our cheque bearing nos.163251 & 163252, drawn on the Union Bank, dated 30/09/2008 and 13/10/2008, for ₹ 18,50,00,000/- and ₹ 15,00,00,000/-respectively, totalling to ₹ 33,50,00,000/- as advance pending finalization of sale value and completing the due diligence with respect to the said property. Once we mutually agree on the final sale value and after we are satisfied with your title to the same, the above amount may be treated as part payment of the .....

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os.160, 157/Ps and 42 of Pattandur Agrahara village and request you to commence due diligence on the same and let us know.' Letter, dtd. 13/10/2008, from M/s West Palm Developments Pvt. Ltd. to Prestige Estates Pvt. Ltd. We are in receipt of your letter dated 03/10/2008. Considering the present market conditions out (read 'our') board has decided not to go ahead with the transaction and we would like to therefore withdraw from the transaction. We request you to kindly refund the amou .....

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g No.779051 dated 29/10/2008 for ₹ 13, 50,00,000/- c) Cheque bearing No.779349 dated 29/10/2008 for ₹ 2,50,00,000/-. d) Cheque bearing No.779350 dated 29/10/2008 for ₹ 2,50,00,000/- all drawn on the ABN Amro Bank totaling to ₹ 33,50,00,000/- (Rupees Thirty Three crores Fifty Lakhs Only) towards refund of' amount paid by you in ful l settlement , the receipt of which may kindly be acknowledged. It is seen from the letter, written by M/s PEPPL to the assessee, the advan .....

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o the shareholder M/s PEPPL who has substantial interest in the assessee Company. The correspondence mentioned in para 2.5 is clearly an afterthought and the assessee has attempted to make a colourable device that the advances were given for the purchase of the property. when the assessee vehemently argued that the loss had arisen due (to) timing difference in the accrual of income and accrual of interest payment on bank loan, it is silent on the interest free loan given to M/s PEPPL; had the as .....

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ess. Hence this sum is disallowed u/s 37 of IT Act and the same is added back to the total income. (Addition: ₹ 81,95,426/-)" 3.6 It is clear from the sequence of events marshalled by the AO that the whole exercise of advancing money to M/s PEPPL for the ostensible purpose of purchase of property and getting back the money on ie ground that it was not economical to acquire the property in view of the slump in the real estate market was to create a facade. As observed by the AO, what i .....

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lusions of the AO in this regard in that the whole exercise on the part of the appellant to depict the advance given to M/s PEPPL for the purpose of acquiring an immovable property was make-believe. The appellant has substantial interest in the company M/s PEPPL. The appellant's authorised representative, during his arguments before me, has also basically laid emphasis on the -Fact that it has later earned substantial interest and the loss was due to time lag and has argued that it has not g .....

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uld be allowed as a business loss cannot be accepted in that the appellant has not produced any evidence in support of its contention that the loan taken by it and advance given to M/s.PEPPL was for the purpose of appellant's business. Hence, I have no hesitation in upholding the action of the AO and in confirming the disallowance of interest amounting to ₹ 81,95,426/- attributable to the advance given to M/s.PEPPL as not relating to appellant's business. 4. In the result, the appe .....

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d by it. However, the transaction did not materialise, the same was returned by PEP and this amount was then utilised for the purpose of lending to shareholders at higher rate of interest than the rate charged by the banks. He submitted that the AO has rejected the correspondence between the assessee-company and PEP on mere surmises and conjectures. He submitted that loss has arisen due to timing difference from the date of borrowal from the bank to the date of lending to shareholders. He submit .....

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ng. Therefore, he placed reliance upon the orders of the lower authorities and prayed for sustenance of the disallowance. 5. We heard rival submissions and perused material on record. The issue in the present appeal is about allowability of interest expenditure incurred on amount of borrowings from the Union bank of India. The claim for deduction was made under the provisions of section 57(iii) of the Act. Initially, the purpose of borrowing, as per the version of the assessee-company, was to us .....

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s advance was a sham transaction and the correspondence produce in support of the theory canvassed by the assessee-company was disbelieved as afterthought and self-serving. The claim was made under the provisions of sec.57(iii). Alternatively, the claim was also made for deduction under the provisions of sec.36(1)(iii) of the Act. Therefore, at first instance, we shall adjudicate the claim under the provisions of sec.57(iii) of the Act. The relevant provisions of sec.57(iii) read as under: 57. T .....

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ng such income. The courts have also laid down that no expenditure under sub-clause (iii) of sec.57 can be allowed as deduction unless the following conditions are satisfied: i. Expenditure should be incurred wholly and exclusively for the purpose of making or earning income. ii. It should not be in the nature of capital expenditure. iii. It should not be in the nature of personal expenses of the assessee. iv. It should be incurred in the accounting year and not in any prior or subsequent year. .....

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ere made only for the purpose of business. Therefore, it is clear that the borrowings were not made for the purpose of earning interest income in the form of loans advanced to directors of the company. The Hon ble Supreme Court in the case of Vijay Laxmi Sugar Mills Ltd. Vs. CIT (191 ITR 641) had laid down that for allowance of an expenditure under the provisions of sec.57(iii), the expenditure should have been incurred for the purpose of earning such income. The Hon ble Supreme Court also expla .....

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