TMI Blog2021 (1) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... amount towards the interest, complex maintenance charges and electric installation charges and the same were reversed and written off in respective ledger accounts of the parties and claimed in its profit/loss account for the previous year relevant to impugned assessment year. As further submitted that such interest, complex maintenance charges and electric installation charges were duly offered to tax in previous assessment years and the return for those years have been assessed u/s 143(3) wherein such charges have been brought to tax and accepted by the Assessing officer. We find force in the contentions so advanced on behalf of the assessee and agree with the same. It is a settled legal position as laid down by the Hon ble Supreme Court in case of TRF Ltd [ 2010 (2) TMI 211 - SUPREME COURT] and also accepted by the CBDT as communicated vide circular no. 12/2016 dated 30.05.2016 that claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of section 36 i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n business of assessee thus the observations deserves to be ignored and excluded. 1.2 That the Ld. CIT(A) has further erred in misinterpreting the provisions of section 37(1) and thereby considering the interest paid on fresh loan taken to repay the old loan as not for business purpose, thus the said observation being based on no logic deserves to be ignored. 1.3 On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in not following the order of the Hon'ble ITAT, Jaipur Bench, Jaipur wherein addition of similar nature and in identical circumstances were deleted, therefore, following the principle of consistency addition confirmed by Ld. CIT(A) deserves to be deleted. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of an expenditure of ₹ 25,282/-, claimed on account of depreciation charged during the relevant year, arbitrarily. Appellant prays depreciation is a statutory allowance and deserves to be allowed. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of the expenditure of ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years, i.e. AY 2004-05 to 2007-08 disallowance of similar nature was made, which has been deleted by the Tribunal. For AY 2004-05, i.e. first year of disallowance, the Tribunal has deleted the disallowance vide its order dated 10.12.2010 in ITA No. 282/JP/2010 by observing as under: 7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of Ld. CIT(A). The Ld. CIT(A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier years the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in our considered view does not change the character of the loan taken during the year under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered view that the AO has rightly disallowed the interest of ₹ 4,77,36,535/-. Accordingly, the disallowance of ₹ 4,77,36,535/- made by the AO is hereby confirmed. 7. Further, our reference was drawn to the findings of the AO which read as under: Disallowance on A/c of Financial Charges Depreciation : 1.1 The assessee is a partnership firm came into existence in terms of partnership deed dated 31.01.1987 and constructed a commercial complex namely Laxmi Complex at Subhash Marg, M.I.Road, Jaipur. During the course of construction of the complex a dispute arose between the partners and therefore, one of the partner Smt. Sudha Yadav filed a suit in the year 1995 for rendition of accounts and dissolution of the firm and accordingly, the Hon'ble Rajasthan High Court had granted the stay in the month of March, 1996, on further sale of the offices/ shops constructed in the commercial. complex, therefore, after March, 1996 neither any sale was taken place nor any construction activity was carried out and the portion left undeveloped as on the date of stay remained in its original position. 1.2 During the year under consideration, two partners namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifying his claim submitted vide letter dated 24.10.2014 Justification of payment made to person specified u/s.40A(2)(b) : During the year under consideration assessee firm has made interest payment ₹ 71,47,640/- to the relatives which are covered u/ s.40A(2)(b) Details of the same are as under : S. N Name of Person Amount Paid Rate of Interest 1. Smt. Amarao Devi Sethi 10,29,292.00 13.20% 2. Shri Nihar Kothari 6,05, 552.00 13.20% 3. Shri Sanchai Sethi 8,18,169.00 13.20% 4. Smt. Sangeeta Sethi 10,93,075.00 13.20% 5. Sh. Sohan Lal Sethi 19,18,610.00 13.20% 6. Sh. Sidharth Kothari 10, 91, 101.00 13.20% 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for tire purpose of business of Real Estate i.e. for constructing shops and offices in a commercial complex. Every year the assessee take up fresh loans but not for the purpose of business of Real Estate and sale of Shops and offices, but to repay the old loans. These loans are taken up just to repay the old loans. So, , the expenditure has been incurred not for the purpose of business. Sec. 37(1) categorically states that only that expenditure should be allowed which has been incurred wholly and exclusively for the purpose of business. Any distant or remote connection between the two is not sufficient. In this case, it is very clear that nexus of interest paid is with stock in trade and not with Sundry Debtors. Therefore, it is not to be allowed against interest income. (v) It has been held in various judicial pronouncements that the expenditure should be for the purpose of business and connection between expenditure and object must be real and not remote or illusory as held in the cases of CIT vs. Vazir sulaton Tobacco Co. Ltd ( 1978) 114 ITR 605 (Col.)- Co. (vi) The undersigned wishes to place reliance on the decision of (A) Hon'ble Kerala High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited to interest on the part of capital which is used for the purpose of business- Interest paid on borrowed capital will be allowed as deduction only if the capital was borrowed and used for the purpose of business and that if it is used for a purpose other than that of business, then interest to the extent to which the capital was so used, will not be allwoed P.R.M.S. Ramanathan Chettiar vs.CIT(1969) 72ITR 534 (Mad.) /M.S.P. Rajav CIT (1976)105 ITR 295 (Mad.) It is a settled state of affairs that expenditure should be incurred for the purpose of business which is carried on in the accounting year and the profits of which are under assessment. Decution can be permitted in respect of only those expenses and losses which are incurred in the relevant accounting year. Though the assessee has been stating that there is no discontinuance of the business but there is only a stay of the court, yet it is worth considering that the Period of stay has been substantial and there is no chance of its vacation considering the fact that there is dispute between the partners of the concern. Accordingly, deduction cannot be allowed for payment of interest on loans taken for paying off earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (APB 39-41). The relevant observation of Hon ble Bench in order for A.Y.2004-05 at page 5 in para 7 are reproduced herein below for ready reference (APB 41). 7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of Ld. CIT(A). The Ld. CIT(A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier years the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in considered view does not change the character of the loan taken during the year under consideration. The loan taken for the year under consideration has to be treated as taken for business purposes for the simple reason that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 16 17 at para 4.7 of the order. In the aforesaid context, it is submitted that the Ld. AO had disallowed the interest expenses of ₹ 2,51,64,779/- paid on borrowed funds, on the ground that no business activity was carried on during the assessment year under appeal and there is no direct nexus of interest expenses with the business of the appellant which finding is based totally on assumptions and presumptions. Facts of the case are that appellant had taken unsecured loans from various parties in F.Y. 1995-96 for its real estate business i.e. for construction of commercial complex having shops and offices. Upto A.Y. 2000-01, the interest paid on such borrowed funds was added to the cost of work in progress, however, from A.Y. 2001-02 and onwards it was decided to claim the same separately in the Profit Loss Account as normal business expenditure and the returns filed by claiming such expenses were never doubted and processed u/s 143(1) by the department. For the first time in A.Y. 2004-05, the department has changed its stand by alleging that the assessee has taken fresh loans therefore, they loose their character of business expediency and accordingly disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further while making disallowance of the expenditure claimed u/s 36(1)(iii) on account of interest on borrowed funds by the appellant, the Ld. AO alleged that the business of the assessee company was discontinued which was further mentioned in the remand report which had been relied upon by the Ld. CIT(A) who at para 3.2 in page 9 of the appellate order has observed that any temporary suspension in the business cannot last for 15 years. While observing so the Ld. AO as well as Ld. CIT(A) has failed to appreciate the fact that the business of the appellant was in temporary suspension due to the stay order on its real estate activity by the Hon ble Rajasthan High Court vide its order dated 26.03.1996 as such the appellant was following the directions of the Hon ble Jurisdictional High Court during the suspension of its real estate activity. In this regard, it is further submitted that there was no total discontinuance of business of the appellant as presumed by the AO and Ld. CIT(A). The appellant had earned income from Complex maintenance charges and interest income from sundry debtors. On the basis of same and unchanged figure of opening and closing stock, the Ld. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch certain minimum expenses, mostly in the nature of administrative expenses have to be incurred. In the instant case also, business of the assessee remained suspended due to stay order of court and funds were borrowed to discharge loans already taken for the purpose of business, which were not doubted. Further, as stated above there was no objection with respect to administrative expenses, which means that Ld. AO has impliedly accepted that the business was very much in existence and in this scenario, there was no reason, for which interest expenses should be disallowed. Apart from this, logically, the Ld. AO has accepted that the loans old or new have been taken for the purpose of business. This fact has neither been denied nor contradicted anywhere in the assessment order. Since this is an established fact that the real estate business is always carried out on the basis of loans from various agencies and their utilization is exclusively to expand the business without in any way leading to the fact that any stoppage or a lull period would hamper the construction work. Even if, for argument sake, the findings of the Ld. AO are considered that there was no business due to stay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongoing dispute came to an end. Subsequently, the sole arbitrator passed an award in accordance with the terms of the settlement deed and the proceedings pending before the District Court as well as the High Court were sought to be withdrawn which were allowed so by the respective Courts. Thus, after having reached settlement as stated above, the stay order stood vacated automatically and the business of assessee firm resumed after executing a deed of retirement reconstitution of partnership dated 17.02.2012 (APB 105-114) in terms of the settlement deed and arbitration award as mentioned above. In view of above, it is proved that business of the assessee was not discontinued rather temporarily stayed under the order of the Hon ble Court which has been revived now by vacation of stay with effect from settlement reached between parties. It is further submitted that the suspension or discontinuation of one of the activities of business out of several such activities does not disentitle the taxpayer from deduction of interest or other expenditure incidental to the business. All the business activities taken together constitutes the business undertaking as one and so l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ress in favour of the assessee. Further, the Coordinate Bench of the Tribunal in assessee s own case in ITA No. 282/JP/2010 pertaining to assessment year 2004-05, in para 7 of its order has decided the issue which is also subject matter of this appeal, as under :- 7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of ld. CIT (A). The ld. CIT (A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier year the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in our considered view does not change the character of the loan taken during the year under consideration. The loan taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n utilized for the purpose of repaying the old loan. Now fresh loans partakes the character of loans taken for business purposes. Interest paid on old loans was held as allowable, therefore, interest paid on fresh loans has to be allowed as the character of loan remains the same but only change of the name of the person/institution from whom the fresh loans are taken. Therefore, the decision of Hon ble Allahabad High Court considered by ld. CIT (A) in case of Raj Kumar Singh Co. (supra) is directly on the issue. Therefore, we see no reason to interfere with the finding of ld. CIT (A). Accordingly, we confirm the findings of the ld. CIT (A) in respect to both the disallowances deleted by him. The facts in the year under appeal are identical as were before the Tribunal in the earlier assessment years. The revenue has not placed any contrary material on record suggesting that there is change in facts and circumstances of the case. Therefore, we are unable to sustain the finding of ld. CIT (A). Respectfully, following the decision of Coordinate Bench in assessee s own case in earlier assessment years, we direct the AO to delete the disallowance of interest expenditure. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der or by the ld. CIT(A) in the appellate order. Under the circumstances it was submitted that expenditure claimed by the assessee on account of depreciation may be allowed 13. Per contra, the ld. CIT/DR relied on the finding of the lower authorities. 14. We have heard the rival contentions and perused the material available on record. There is no finding of the AO for disallowance of depreciation and similarly, the order of the ld CIT(A) doesn t bring out the reasoning for sustenance of claim of depreciation. There is no dispute that there are assets which were acquired in the earlier years and forms part of the opening block of assets and there are fresh assets in the nature of air conditioner and open well (pump) to the tune of ₹ 62,455 which have been acquired by the assessee during the year under consideration and used for the purposes of business. Therefore, in absence of any adverse finding by the AO, the disallowance of claim of depreciation is hereby set-aside and the ground of appeal so taken by the assessee is allowed. 15. Regarding ground Nos. 3. to 3.2, the ld. AR submitted that the assessee has challenged the action of the ld. CIT(A) of arbitrarily upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee; (2) That there was nothing on record to show that the amount claimed as bad debts was taken into consideration in computing the income of previous years and that the assessee failed to form a firm opinion that the debts had in fact become bad; (3) That there was no documentary proof that the assessee had proceeded against such debtors; (4) That the auditor in the audit report had only categorized the amount of ₹ 11,59,34,654/- as exceptional and not considered the same as bad debts. The above observations of the AO were affirmed by the ld. CIT(A) without independent application of mind on the facts of the case. 18. It was submitted that in respect of the expenses so claimed by the assessee as exceptional items, the attention is invited to the facts of the case that have also been stated in the foregoing paras of this written submission, that during the financial year under consideration, the long pending litigation between partners stood settled through a settlement agreement dated 17.02.2012, according to which outgoing partners i.e. Smt. Sudha Yadav and Shri Prashant Kumar Yadav would be given certain built up area 5686 Ft. and 11,837 Ft. respectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , whereas while deciding the issue of allowability of irrecoverable outstanding balance of debtors has conveniently ignored such fact. Such self contradictory observations of AO are reproduced hereunder: Page 4 .. .. (iii)With regards to interest expenditure, the assessee could not furnish any document/evidence so as to claim that there is nexus between the interest income and interest expenditure. In fact, interest income was earned by the assessee from Sundry Debtors who had not made complete payments for purchase of said shops and offices. So, as per the agreement, the buyers were supposed to pay certain amount of interest as per the terms and conditions of the agreement. So, interest income was consequential to the agreement between the assessee and the buyers. Page 12 .. . (2) The assessee has also failed to produce details with regard to accrued interest declared and charged to Income Tax in the earlier years. (5)There is nothing on record to show that amount written off was taken into account in computing Income of the assessee In view of above, it is evident that when ld. AO admits that assessee was charging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red would have been lower to this extent. In this scenario, when interest income on outstanding debtors has already been taxed by ld. AO, same deserves to be allowed in the captioned Assessment Year on being irrecoverable. 21. Further, in respect of the observation of ld.AO that the auditor had merely classified the expense as an exceptional item in the audit report and not explicitly considered the same as bad debts it is submitted that such nomenclature was used by auditor for the presentation of financial statements. Since, the quantum of bad debt is quite high, had the same been merged with other expenses of routine nature, the same would have resulted into reduction in profits from ordinary activities substantially, which is not true in the present case. Further, the nomenclature of expense does not decide the allowability or otherwise of a particular expenses, rather it is the substance of the transaction that matters. 22. In this regard, the attention is invited to the provisions of section 36(1)((vii) which is reproduced as under for ready reference: 36. (1)The deductions provided for in the following clauses shall be allowed in respect of the matters dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply; (v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.] 23. On perusal of the provisions reproduced above, it is evident that the deduction u/s 36(1)(vii) is available on fulfillment of the conditions prescribed under sub section (2) to section 36 which are: (i) amount is actually written off in the books of accounts and (ii) such amount was offered for taxation in current or any earlier years. 24. In the assessee s case, the interest, complex maintenance charges and electric installation charges were offered for taxation in all the preceding assessment years and stood declared in the returns of income of the assessee filed in all the preceding assessment years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act. 6. Accordingly, no appeals may henceforth be filed on this ground and appeals already filed, if any, on this issue before various Courts/Tribunals may be withdrawn/not pressed upon. 27. The assessee further submits that the observation of the AO that assessee had failed to form a firm opinion upon whether the debts had become bad it is submitted that the submissions made by assessee are very clear about its claim of bad debts and such observations of AO are completely baseless. It is also submitted that the assessee had submitted all primary details called for by the AO during the assessment proceedings thereby discharging its onus. In absence of any specific query being raised by the AO, submission of details sought for by him was not possible by the assessee at any stretch of imagination. 28. Further, the AO has placed reliance on few judgments, which were passed before Apex Court judgment cited abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the earlier years. (3) In absence of complete details of the parties/persons in whose cases, a huge amount of ₹ 11,59,34,654/- has been shown as bad debts, it is not possible to verify its genuineness. (4) The Auditor. in his Audit Report has categorized the amount of ₹ 11,59,34,654/- as Exceptional Items and has not considered it as bad debts. (5) There is nothing on record to show that amount written off was taken into account in computing Income of the assessee. (6) The assessee failed to file any documentary evidence which prove, that the assessee proceeded further against such debtors. (7) In fact, the assessee has failed to form its firm opinion that the debt has become bad debts. (8) It is also of relevant to mention here that under section 101, 102, and 106, of the Evidence Act, the onus lies upon the assessee to prove all the expenses to the satisfaction of the Assessing Officer, which was not discharged by the assessee as it failed to produce the list of parties from whom accrued interest has been shown as bad debt. In this regard reliance is also placed on the following Judicial Pronouncements: 1. CIT Vs. Coates of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reversal of these outstanding charges during the previous year relevant to impugned assessment year, and such charges have been duly offered in the earlier years and all these details in terms of journal vouchers, ledgers and entries in the books of accounts, copies of returns of income for past assessment years were duly submitted before the AO as well as the ld CIT(A). The AO has however disputed the same holding that the claim of the assessee couldn t be examined in absence of complete details. To our mind, all the AO has to examine is whether the amount of aforesaid charges so recoverable have been actually reversed in respective ledger accounts of individual allottees/debtors and written off in the books of accounts of the assessee during the previous year relevant to impugned assessment year or not. Further, the AO has to examine whether such charges which have not been claimed as irrecoverable and written off were forming part of income and offered to tax in the previous assessment years or not. Given that these details have been claimed to be on record and in absence of findings of the AO, we are constrained to remand the matter to the file of the AO. Therefore, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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