Income Tax Appellate Tribunal - Chandigarh
Premier Electrical Industries, ... vs Assessee on 11 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIG ARH BENCH 'B', CHANDIG ARH
BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND
Ms. SUSHMA CHOWLA, JUDICI AL MEMBER
ITA No. 77/Chd/2013
Assessment Years : 2009-10
M/s Premier Electrical Vs. A.C.I.T. Circle 2(1)
Industries Chandigarh
H No. 99-GF, Sec 28-A
Chandigarh
AABFP 0329C
(Appellant) (Respondent)
Appellant by: Shri Vineet Krishan
Respondent by: Shri Amarveer Singh
Date of hearing 7.4.2014
Date of Pronouncement 30.5.2014
O R D E R
PER T.R. SOOD, A.M
This appeal is directed against the order dated 11.10.2012 of the Ld CIT(A), Chandigarh.
2. In this appeal the assessee has raised the following grounds:
"1 That the order passed u/s 250(6) of Income -tax Act, 1961 by the Ld. CIT(A), Chandigarh in appeal No. 545/11-12 dated 11.10.2012 is contrary to law and facts of the case.
2 That the facts and circumstances of the case the Ld. CIT(A) gravely erred in upholding the disallowance made by the Assessing officer of an amount of Rs. 50,10,055/- on account of interest payment claimed u/s 24(b) of Income -tax Act, 1961.
3 That the facts and circumstances of the case the Ld. CIT(A) gravely erred in upholding the disallowance made by the Assessing officer of an amount of Rs. 15, 84,706/-- on account of interest paid to M/s Sarovar Hotel in respect of deduction u/s 24(b) of Income -tax Act, 1961.
4 That without prejudice to the above the disallowances sustained are highly excessive.
5 That the Ld. CIT(A) gravely erred in upholding charging of interest u/s 234B and 234C of Income -tax Act, 1961 which in any case is excessive."2
3 Grounds No. 1 to 4 - After hearing both the parties we find that during the course of assessment proceedings the Assessing officer noticed that the assessee has claimed deduction u/s 24(b) of the Income -tax Act, 1961 amounting to Rs. 65,94,760/-. It was further noticed that the assessee had paid a sum of Rs. 50,10,055/- as interest on conversion charges (CLU) to the Estate Office, Chandigarh Administration and Rs. 15,84,706/- was paid to Sarovar Hotel, Mumbai. The Assessing officer noted that the assessee has offered income from house property and claimed deduction for payment of interest u/s 24(b) of the Act. The assessee was asked to explain how such interest was allowable. In response it was stated vide letter dated 30.11.2011 as under:
"You would further pointed out that why the interest paid to the Estate Office be not disallowed. The two options were available to the assessee either to pay the entire amount to the Estate Office or the same may be payable on the basis of yearly installments, alongwith interest. It is submitted that un0paid price is debt incurred by the assessee for acquiring the property. The asset passed into the hands of the assessee in the form for which it can be used other than industrial purposes, as such it enhanced the cost of the property. The payment on installment basis does give rise to the relationship of lender and borrowed between the Estate Office and the assessee firm and accordingly the interest paid on unpaid price is an admissible deduction u/s 24(i)(vi) of the Income
-tax Act, 1961.
Your kind attention is invited to Sec 2(28A) according to which interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. Accordingly it is an allowable expenditure.
In this connection your kind attention is invited to Hon'ble Punjab and Haryana High Court judgment in case of CIT Vs. Sunil Kumar Sharma, 122 Taxman 159 has gone to the extent that in respect of house property where a buyer, instead of raising a loan from a third person, enters into an arrangement with a seller to pay sale price in installments alongwith interest due thereon, by such arrangement seller becomes lender qua unpaid purchase price and purchaser becomes borrower- Held yes - whether in such a case unpaid purchase price can be treated as capital borrowed for 3 acquiring property and interest paid thereon be allowed as deduction u/s 24(1)(vi) - Held yes."
After examining the submissions the Assessing officer was of the opinion that the decision of Hon'ble Punjab and Haryana High Court in case of CIT Vs. Sunil Kumar Sharma (supra) was distinguishable on facts because in that case the assessee had constructed a building on commercial site purchased by the assessee whereas in the present case the property had already been purchased by the assessee long ago. The payment of interest was with reference to conversion charges which could not be considered as payment for acquisition, construction, repair, renewal or reconstruction u/s 24(b) of the Act. Accordingly the interest paid to the Chandigarh Administration amounting to Rs. 50,10,055/- was disallowed. 4 As far as claim for deduction of Rs. 15,84,706/- u/s 24(b) on account of interest paid to Sarovar Hotel is concerned, it was observed that this payment had no nexus with the interest payment for the property. Moreover the assessee had raised unsecured loans and advanced the same to the partners and the balances in the accounts of the partners were negative, therefore this interest payment was also disallowed. 5 On appeal before the Ld. CIT(A), the submissions made before the Assessing officer were reiterated. The Ld. CIT(A) after examining the submissions referred to the provisions of section 24(b) and observed that deduction was possible in respect of interest expenditure on the capital borrowed for acquisition, construction, repair, renewal or reconstruction of the property. In the instant case the assessee had paid only 4 fees for change of land use from "industrial" to "commercial". Chandigarh Administration had given the option to pay the entire amount of conversion fee or pay a sum by way of installments. According to him the interest paid for conversion charges was not covered by Sec 24(b) and he upheld the disallowance of Rs. 50,10,055/-. In respect of interest paid to Sarovar Hotel he confirmed the finding of Assessing officer because same had no nexus with the interest payment for the property and accordingly confirmed the disallowance of the interest of Rs. 15,84,706/-.
6 Before us. the Ld. Counsel for the assessee submitted that the assessee was allotted an industrial site by the then Govt under the Capital of Punjab (Development and Regulation) Act, 1952 on 2.5.1959. The property was allotted for the purpose of manufacturing Electrical Appliances. Since the property was allotted for a specific industry and as per Capital of Punjab (Development and Regulation) Act, 1952 no commercial activity could be carried out in an industrial area. Since the industry in the city of Chandigarh were no working properly the Chandigarh Administration came out with a scheme for conversion of industrial land into commercial activity under the caption "Chandigarh conversion of land use of industrial site into commercial activity in Industrial Area, Phase I and Phase II, Chandigarh Scheme - 2005". The assessee applied for this and ultimately Estate Office issued no objection. The assessee did not have requisite funds and therefore opted for installments scheme. On such installments an interest amounting to Rs. 50,10,055/- was to be paid 5 annually. In this regard he referred to various documents including no objection certificate issued by the Chandigarh Housing Board which specifies the amount of installments. It was pointed out that since Chandigarh Administration was charging reasonable interest @ 8.25% and therefore there was no logic in borrowing the money on higher rate from outside. Adverting to the issue of deduction u/s 24(b) the Ld. Counsel for the assessee emphasized that this section has also used the expression "renewed". He then referred to the definition of "property" and "renewal" in the Oxford dictionary Black's Law Dictionary and pointed out that the conversion of industrial property into commercial property would definitely come under the expression "renewal of property". He also referred to various definitions of expression "acquired" "acquisition"
"renewal" and "property" in the Law Lexicon as well as Black's Law Dictionary. He contended that though the assessee has already acquired this property but the possession of this property was for a limited purpose and utilization of property has been extended after conversion of the same into commercial property also. He contended that Sec 24(b) cannot be restricted only for acquisition of the property and some meaning has to be given for renewal of property also. He also referred to the decision of Hon'ble Punjab and Haryana High Court in case of CIT Vs. Sunil Kumar Sharma (supra) wherein it was held that interest paid on unpaid consideration is allowable deduction u/s 24(i)(vi). Similar view was taken by the Chandigarh Bench in case of Master Sukhwant Singh Vs. ITO, 61 TTJ (Chd) 643 (copy of decision filed) which has later been confirmed by Hon'ble Punjab and Haryana High Court in case 6 of CIT Vs. Master Sukhwant Singh, 196 CTR 122 (PH): 155 Taxman 153 (PH).
7 As far as interest paid to Sarovar Hotel is concerned, it was pointed out that the assessee had taken two types of securities from M/s Sarovar Hotel Pvt Ltd. In this regard he referred to the Financial Assistance Agreement entered into by the assessee with Sarovar Hotel on 12.3.2007 which has been placed in the paper book at page 43 to 51. A sum of Rs. 1,28,52,000/- was interest free security. Another amount of Rs. 1,28,52,000/- was taken as interest bearing advance @ 9% interest. This amount was taken for the purpose of making payment for conversion charges to Chandigarh Administration. He further pointed out that as per lease deed dated 12.3.2007 the assessee was to receive rental income of Rs. 1,28,52,000 every year subject to increase after every three years. However, as per clause2.4 rent was to be received in advance at the end of present value after discounting the same on the prevalent interest rate of State Bank of India for one year fixed deposit, therefore some element of interest was involved in respect of annual rent. This amount was approximately Rs. 5 lakhs. He submitted that this amount was used for payment of conversion charges and therefore this interest should be allowed but in any case the assessee has claimed only a sum of Rs. 60,18,199 against rental income which becomes clear from the computation of income (copy of which is placed at page 9 to 11 of the paper book). Therefore disallowance of Rs. 65,94,761/- was made then this would amount to double disallowance to the extent of approximately Rs. 5 lakhs. 7 8 On the other hand, the Ld. D.R. for the Revenue strongly supported the order of the Ld. CIT(A) and emphasized that improvement in title of the property would not be covered by various clauses provided u/s 24(b) and therefore this interest cannot be allowed.
9 W e have gone through the rival submissions carefully and find that the assessee has filed return declaring total income of Rs. 31,87,110 which includes rental income of Rs. 32,13,220. The rental income has been shown at Rs. 1,32,12,118 from this Municipal tax amounting to Rs. 24376 has been reduced and annual value has been declared at Rs. 1.31.87.742. Thereafter 30% deduction u/s 24(a) has been reduced and further deduction u/s 24(b) in respect of interest on borrowings amounting to Rs. 60,18,199 has been made. The assessee was allotted an industrial shed for electrical industry somewhere in 1959. Since the industry was not running smoothly and therefore Chandigarh Administration announced a scheme for conversion of industrial shed into commercial property. The assessee has also applied for the same and the Chandigarh Housing Board which seems to be a operating agent for this scheme, issued a NOC for conversion of assessee's property. Since the assessee opted to pay the conversion charges in installments assessee had to pay interest also on such installments. The installments have been worked out as under
vide para 4 of letter dated 26.3.2007 (see page 15 of paper book).
"In view of your option to make payment of the fee in ten annual installments, a sum of Rs.73,28,281 is payment along with application and balance amount of Rs. 1,06,68,014 is payable in nine annual installments with interest @ 8.25% p.a. compounded 8 annually. The schedule of payment of annual equated installment6 is as under:
Installment No Amount (In Rs.) Due Date 1st 73,28,281 Alongwith application 2nd 1,06,68,014 14.3.2008 3rd 1,06,68.014 14.3.2009 4th 1,06,68.014 14.3.2010 5th 1,06,68.014 14.3.2011 6th 1,06,68.014 14.3.2012 7th 1,06,68.014 14.3.2013 8th 1,06,68.014 14.3.2014 9th 1,06,68.014 14.3.2015 10th 1,06,68.014 14.3.2016
The interest on the above works out for the year at Rs. 50,10,055. This amount is not disputed. Now the question is whether the interest paid against the installments of such conversion charges would be covered by Sec 24(b) or not? Section 24(b) reads as under:
"24 Income chargeable under the head "Income from house property" shall be computed after making the following deductions, namely :-
(a)----------------------
(b ) wh e re th e p ro p e r ty h a s b een a cq u i red , co n st ru c ted , rep a i r ed , ren e wed o r reco n s tru ct ed wi th b o r r o wed ca p ita l, th e a mo u n t o f a n y in te re st p a ya b le o n su ch ca p i ta l ".
Plain reading of the above provision would show that interest can be deducted if same has been paid for acquisition or construction or repair of the property. One more expression has been used i.e. "renewed". In our opinion, "renewed" is not related to the acquisition, construction or repair and some meaning has to be assigned to this expression also. The Ld. Counsel for the assessee has referred to definition of the expression "acquired" "acquisition" "renewal" from the Blacks Law Dictionary which are as under:
"acquire. Vb. To gain possession or control of to get or obtain 9 Acquisition 1. The gaining of possession or control over something, acquisition of the target company's asset 2. Something acquired , a valuable acquisition Renewal - The act of restoring or reestablishing. 2. The recreation of a legal relationship or the replacement of an old contract with a new contract, as opposed to the mere extension of a previous relationship or contract."
The meaning given at Sl No. 2 for renewal would definitely take in its stride the conversion charges also because the dictionary clearly states that recreation of legal relationship or replacement of old contract with a new contract is covered by the definition of renewal. This means in the case of the assessee when the original contract for the property was for industrial shed and after charging the conversion charges the contract would be for commercial property. In our opinion, this would be definitely covered by the expression 'renewal". In practical terms the assessee could not have used the property except for running the industry in electrical items but now the assessee has been allowed to use the same in commercial terms and i.e. why the assessee has been able to exploit the same by giving commercial site on rent for the purpose of running a hotel. This is because of the renewal made by the Chandigarh Administration by changing the usage of the property.
10 Now as far as the contention that where the interest is paid to the Chandigarh Administration for acquisition of property is concerned, the same is no more res-integra because Hon'ble Punjab and Haryana High Court has clearly held in case of CIT Vs. Sunil Kumar Sharma (supra). In that case it was held as under:
10
"It is evident that if a property is acquired by raising a loan, interest paid on such borrowing is an admissible deduction. If that is so, it is not understood as to what difference can it make if a bu yer instead of raising a loan from a third person enters into an arrangement with a seller to pay the sale price in installments along with interest due thereon. The moment such an arrangement is entered into the seller becomes the lender qua the unpaid purchase price and the purchaser becomes the borrower. It is because of this reason that the installments carry interest from the date of sale to the date of sale to the date of paym ent. Sec 24 (1)(vi_) providing deduction of interest on borrowed capital is an incentive to promote construction of building. It cannot be interpreted narrowly so as to defeat the very purpose for which it is enacted. Thus, the unpaid purchase price has to be treated as a borrowed capital within the meaning of Sec 24(1)(vi). Therefore the Ld. CIT(A) and the Tribunal were justified in holding that the interest portion of the purchase price included in the installments was allowable as deduction u/s 24(1)(vi). There is thus no infirmity in the view taken by the Tribunal - CIT Vs. R.P. Goenka & J.P. Goenka (1999) 152 CTR 156 (Calculation ): 233 ITR 123 (Calculation ): TC S 40 3579 relied on, Bombay Steam Bavugatuib Co. (P) Ltd. Vs. CIT, 56 ITR 52 (S.C): TC 16 R 881, CIT Vs. Four Fields (P) Ltd, 144 CTR 676 (PH), 2312 ITR 262 (PH): TC s 40, 3577 AND Metro Theatre Bombay Ltd Vs. CIT, 14 ITR 638 (Bom):
TC 17R 1506 distinguished."
Similar view has been taken by Hon'ble High Court in case of CIT Vs. Master Sukhwant Singh (supra).
11 Therefore in view of above legal situation, in our opinion, the assessee is definitely entitled to claim the deduction for interest paid to Chandigarh Administration amounting to Rs. 50,10,055 and accordingly we set aside the order of the Ld. CIT(A) and direct the Assessing officer to allow deduction of this interest.
12 As far addition on account of interest paid to other parties amounting to Rs. 15,84,076 is concerned, first of all it has to be noticed that this consist of two parts. First part is basically the interest reduced by the lessee i.e. Sarovar Hotel Pvt Ltd. This becomes clear from lease deed. Clause 2.4 reads as under:
"Subject to clause 2.5 below, for the first 10 years from the commencement of this lease, the lease rental shall be paid annually in advance at net present value (NPV). This NPV shall be arrived by discounting the annual lease rental amount by the prevalent interest rate of State Bank of India for one year Fixed Deposit Receipt applicable at the time payment is made and 11 relevant to the amount of payment and for the remaining period of 40 years the lease rental shall be paid monthly in advance by the th 7 of every scheduled month. The advance annual payment of the lease rental at NPV for the first ten years shall be made 15 days prior to the due date of payment of the installment by the lessor for conversion of land use (CLU) in terms of clause 4.1 below."
The above clearly show that payment of rent was given in advance to the assessee for further payment of conversion charges of land use. The assessee could have reduced this amount from gross rent difference but the same has not been done, therefore the assessee should be entitled to reduce this discount or interest which is again directly used for the purpose of payment of conversion charges.
13 No doubt the assessee has raised further funds, therefore Sarovar Hotel Pvt Ltd by way of interest bearing securities but the same has not been shown to be paid for payment of conversion charges. In fact we had asked the Ld. Counsel to file the copies of partner's capital account because the Assessing officer has given a finding that there was a negative balance in the partner's capital account. These were filed and perusal of the same clearly show that there is negative balance in the partner's capital account. Even the balance sheet clearly show that partner's capital account had a negative balance. Therefore clearly the further borrowing have gone towards the payment to the partners and same are not related to the conversion charges. To this extent the Assessing officer is right that the disallowance has to be maintained. We may clarify that this contention is quite right because in the computation the assessee has claimed interest of only Rs. 60,18,199 and the income has been computed by the Assessing 12 officer on the basis of computation filed by the assessee. However, we again clarify that this disallowance has to be restricted at Rs. 10,08,144. This has been worked out as under:
Interest claimed in the computation Of income Rs. 60,18,199 Less: Interest paid to the Chandigarh Administration for which separate deduction has been allowed Rs. 50,10,055 Balance which has to be disallowed Rs. 10,08,000
14 In view of the above we set aside the order of the Ld. CIT(A) and direct the Assessing officer to allow deduction of interest paid to Chandigarh Administration amounting to Rs. 50,10,055/-. Further he should disallow of a sum of Rs. 10,08,000/-on account of interest paid to others because there is no nexus between borrowings and conversion charges and the amount has been paid to the partners and partner's capital account show negative balance.
15. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 30.5.2014 Sd/- Sd/-
(SUSHMA CHOWLA) (T.R. SOOD)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated: 30.5.2014
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR 13