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2019 (6) TMI 662

..... e assessee by opening a shop at Puducherry and as per the leave and license agreement, the landlord is supposed to carry out the construction as per the specifications of the assessee and obtain necessary regulatory approvals. The assessee had to terminate the lease due to non-performance of the landlord by getting electricity connection for the subject mentioned lease premises and in that process, the assessee had to forego a regular business deposit of ₹ 30 lakhs and consequently had to write-off the same in its books and claim the same as deduction. This, in our considered opinion, would have to be construed only as a loss incidental to the regular carrying on of normal business by the assessee allowable U/s.28. See MYSORE SUGAR COMPANY LIMITED [1962 (5) TMI 3 - SUPREME COURT] - Thus loss on account of cancellation of lease should be treated as business loss of the assessee - Decided in favour of assessee Proportionate disallowance of interest on borrowed funds - HELD THAT:- One of the primary requirement of making disallowance U/s.36(1)(iii) is that the borrowed funds should have been utilized for non-business purposes. In the instant case, we have already held that the p .....

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..... quested by M/s. Nalli Trust. However on completion of the building, the owner could not obtain the power connection for the building. The owner asked the assessee to commence the business with self generator power and pay the rent. The assessee is engaged in the business where lot of customers are particularly women. The assessee did not want to commence the showroom without a proper power connection and generator as a backup. Besides running a business with a generator will not be economical and the assessee will incure heavy loss. The Assessee paid a advance of ₹ 60 Lakhs. In order to avoid a protracted litigation and legal expenses time and money, the assessee reached a compromise with owner of the property and received back ₹ 30 Lakhs out of the advance paid ₹ 60 Lakhs. Hence the balance 30 Lakhs is treated as business expenses and written off. 6. The Ld. AO after going through the reply of the assessee and on perusal of the deed for surrender of lease, observed that the assessee was planning to take the property on lease for 27 years as per the original lease deed and that the amount of lease deposit provided shall be returned back after adjusting the expendi .....

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..... ailability of electricity connection from the Government for the subject mentioned premises, and in view of the fact that the assessee could not meet the request of the landlord to run the subject mentioned premises by using generator, the assessee chose to arrive at a compromise with the landlord pursuant to which the assessee could receive only ₹ 30 lakhs out of the deposit paid to the landlord. It was pleaded that obviously the landlord had indeed incurred expenditure in the subject mentioned premises by way of construction which had to be compensated by the assessee but since the assessee would also not get any return on that amount spent either in cash or in kind, there was no asset that was left with the assessee on cancellation of lease and hence there cannot be any enduring benefit that can fall on the assessee. Hence it was argued that the lease deposit written off was incidental to the carrying on the business of the assessee in opening various showrooms at various places in India. The Ld. AR placed reliance on the decision of the Hon ble Supreme Court in the case of CIT vs. Mysore Sugar Co. Ltd., reported in 46 ITR 649 in support of his contentions. He also placed .....

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..... ar carrying on of normal business by the assessee allowable U/s.28 of the Act. In this regard, we find that the reliance placed by the Ld. AR in the decision of the Hon'ble Supreme Court in the case Mysore Sugar Co. Ltd., reported in 46 ITR 649 comes to the rescue of the assessee. The head notes of the said decision are reproduced herein under:- LOSS - CAPITAL LOSS AND TRADING LOSS - COMPANY MANUFACTURING SUGAR - ADVANCE OF SEEDLINGS, FERTILISERS AND MONEY TO SUGARCANE GROWERS TO BE ADJUSTED TOWARDS PRICE OF SUGARCANE TO BE SUPPLIED LATER - LOSS THROUGH NON-DELIVERY OF SUGARCANE - WHETHER CAPITAL LOSS OR TRADING LOSS - WHETHER ALLOWABLE - INCOME-TAX ACT, 1922, ss. 10(2)(xi), 10(2)(xv) The assessee who carried on the manufacture of sugar used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year owing to drought the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A Com .....

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..... e the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset. In the instant case, both these parameters remain unfulfilled. - Decided in favour of assessee In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the judicial precedents relied upon herein above, we held that the loss of ₹ 30 lakhs on account of cancellation of lease should be treated as business loss of the assessee and accordingly the ground Nos. 2 to 6 raised by the assessee are allowed. 9. The next issue to be decided in this appeal is to whether the Ld. CIT(A) was justified in upholding the proportionate disallowance of interest on borrowed funds to the tune of ₹ 12,98,006/- in the facts and circumstance of the case. 10. The brief facts of the issue is that the Ld. AO observed a sum of ₹ 89.51 lakhs has been included as Harvard University Remittance under the head 'Advances and Deposits' corresponding to Nalli Silk Sarees, Delhi SE. The assessee explained that the sa .....

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..... . Lavanya Ramanathan was working in Nalli before she went to USA for higher studies and continue to work for Nalli after completing her Business Management Studies in USA after working for a short period with McKinsey & Co., Consultants in USA in order to gain experience with international firm. The Ld. CIT(A) further disregarded the entire contention of the assessee and upheld the action of the Ld. AO. Aggrieved, the assessee is in appeal before us. 12. We have heard the rival submissions and perused the materials available on record. The facts stated herein above remain undisputed and hence the same are not reiterated herein for the sake of brevity. We find from the perusal of the Balance Sheet of the assessee for the year ended 31.03.2016 that it has got capital account balance of ₹ 1.51 crores and reserves of ₹ 77.32 crores. We find from the perusal of the Balance Sheet that borrowings of the assessee is close to ₹ 98 crores which is more than own funds. Hence various decisions relied by the Ld.AR in the case law compilation does not come to the rescue of the assessee. But we find that there is no dispute that Ms. Lavanya Ramanathan was a family member of .....

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