Income Tax Appellate Tribunal - Mumbai
Virtuous Finance Ltd , Mumbai vs Assessee
1
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "F", MUMBAI
Before Shri D.K. Agarwal, Judicial Member
and Shri J. Sudhakar Reddy, Accountant Member
I.T.A. Nos. 4482, 4483 & 4484/Mum/2007
Assessment Years : 2000-01, 2001-02 & 2002-03.
I.T.A. Nos. 7349, 7350/Mum/2007
Assessment Years : 2003-04 & 2004-05
I.T.A. Nos. 4956 & 6330/Mum/2008
Assessment Years : 2005-06 & 2006-07.
Virtuous Finance Ltd., Dy. Commissioner of
3, Narayan Building , Vs. Income-tax, Central Circle-32,
23, L.N. Road, Dadar(E), Mumbai.
Mumbai - 400 014.
PAN AABCV1887A.
Appellant Respondent.
I.T.A. Nos. 4307, 4308 & 4309/Mum/2007
Assessment Years : 2000-01, 2001-02 & 2002-03.
I.T.A. Nos. 6837 & 6838/Mum/2007
Assessment Years : 2003-04 & 2004-05.
Dy. Commissioner of Virtuous Finance Ltd.
Income-tax, Central Circle-32, Vs. Mumbai.
Mumbai.
Appellant. Respondent.
Assessee by : S/Shri Rajan Vora & Nimesh Vora.
Department by : Shri Amol Kamal.
2
ORDER
Per J. Sudhakar Reddy, A.M. :
All these appeals have been filed by the assessee and the department against the order of CIT(A) in the respective assessment years. Since, the issues are common, all these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.
ITA NO 4482/M/07 (Assessee's appeal - A.Y. 2000-01) ITA NO 4307/M/07 (Department's appeal - 2000-01)
2. These cross appeals filed by the assessee and the department are against the order of Commissioner of Income-tax (Appeals) - VIII, Mumbai dated 23 March 2007 for the AY 2000-01.
3. The facts in brief are that the assessee is engaged in the business of investment, finance, trading in shares, hire purchase, leasing activities apart from the trading of materials. It is registered as Non-Banking Finance Company with RBI. The assessee filed the return of income for AY 2000-01 on 30.11.2000 showing returned income of Rs. 3,55,520/- as computed u/s 115JA of the Income-tax Act, 1961 ('the Act'). The AO passed an order u/s 143(3) on 31 March 2003 assessing an income of Rs. 2,14,18,452/-. While doing so the AO, inter alia made the following disallowances / additions: -
i. Deemed dividend u/s 2(22)(e) of Rs. 8,86,812 ii. Disallowance of interest expenses of Rs. 1,02,17,287 iii. Accrual of interest income of Rs. 28,54,368 3 iv. Brokerage disallowed Rs. 2,50,000 v. Expenses incurred for business of other group companies of Rs.
2,00,000
vi. Disallowance on account of section 14A of Rs. 83,81,774
vii. Speculation loss of Rs. 21,408
4. Aggrieved by the same, the assessee carried the matter in appeal.
The first appellate authority granted part relief. On the issues where the first appellate authority has not granted relief, the assessee filed appeal in ITA No. 4482/M/07 and on issues where the first appellate authority has granted relief, the Revenue has filed appeal in ITA No. 4307/M/07.
5. Paper book containing 215 pages was filed by the assessee. Detailed charts, factsheets and decisions were also filed.
6. We have heard Mr. Amol Kamat and Ms. Ashima Gupta, the learned Sr. ARs on behalf of the Revenue and Rajan Vora on behalf of the assessee. On a careful consideration of rival contentions and on a perusal of the papers on record, we proceed to dispose of the appeals as follows: -
ITA No. 4307/M/07 (Departmental Appeal):-7. We first take up the Department appeal in ITA No. 4307/M/07. Ground No. 1 is on the issue of deemed dividend of Rs. 8,86,812. The assessee has taken loans in the current year from the following companies.
4i. Tejaskiran Pharmachem Industries Pvt. Ltd.
ii. Quality Investment Pvt. Ltd.
iii. Viditi Investment Pvt. Ltd.
iv. Family Investment Pvt. Ltd.
7.1. The AO examined the shareholding pattern of the assessee as well as that of these companies from whom the assessee has accepted the loans in current year. The AO observed that all companies are closely held companies and some of the beneficial shareholders in these companies, holding not less than 10% of the voting power, are shareholders of the assessee company holding not less than 20% voting rights in the assessee company. These facts are not in dispute.
7.2 The AO also noted that the amount received by the assessee has not been received in the ordinary course of the business of these companies. According to the AO, the assessee's case satisfied all the conditions specified in the section 2(22)(e) of the Act and therefore, treated the advances received by the assessee from these four companies to the extent of accumulated reserves as deemed dividend income in the hands of the assesee.
7.3 The CIT(A) held that deemed dividend is not taxable in the hands of assessee as it is not holding more than 10% in any of the lender companies and held that deemed dividend can be taxed only in the hands of the shareholders relying on the decision of Mumbai Tribunal in the case of Seamist Properties (P) Ltd. (95 TTJ 201). The learned CIT(A), however, did not adjudicate the plea that the provisions of Sec 2(22)(e) shall not apply to the transactions between assessee and four lending 5 Companies since it falls under the exception where substantial part of the business is of lending of money, for which the asseessee is in appeal (Ground No. 1) and has also has filed an additional ground on this issue.
7.4 Our attention was also invited and reliance was placed on the decision of the Special Bench of the Mumbai Tribunal in the case of Bhaumik Colour Pvt. Ltd. (118 ITD 1)(Mum SB) wherein the Tribunal has held as follows:
"In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person."
7.5 It was also informed that the jurisdictional High Court in the case of Universal Medicare (324 ITR 263) affirming the decision of the Special Bench has held that even assuming that the advances amount to dividend, the deemed dividend would have to be taxed not in the hands of the assessee but in the hands of the shareholder.
7.6 The issue in question is covered in favour of the assessee and against the Revenue by the order of the Special Bench of the Tribunal in 6 the case of Bhaumik Colour Pvt. Ltd. 118 ITD 1 (Mum) (SB) (supra) and by the judgment of the jurisdictional High Court in the case of Universal Medicare (supra). Respectfully following the same, we uphold the order of the CIT(Appeals) and dismiss ground No. 1 of the Revenue.
7.7 The assessee in its appeal raised additional ground Nos. 1 and 2 on the very same issue of addition made u/s 2(22)(e). As we upheld the order of the first appellate authority on this very issue, adjudicating these additional grounds raised by the assessee, would be an academic exercise. Thus we dismiss the same.
8. Ground no. 2 in Department appeal in ITA No. 4307/M/07 is against the deletion of disallowance of interest of Rs. 1,02,17,287/- added by the AO on the ground that the advances were given to some of the parties out of borrowed funds and that no interest has charged. Ground No. 2(a) to (b) in Assessee's appeal in ITA No. 4482/M/07 is against the addition made on account of accrual of interest income on the advances given by the assessee. As the issues in department appeal and asseesse appeal are inter-connected, the same are disposed together.
8.1 The assesee has paid interest on borrowings of Rs. 6,11,72,834 during the year under consideration. The majority of the interest was paid to related concerns of the assessee. AO made disallowance of interest as the assessee had made certain loans / advances allegedly out of borrowed funds on which, no interest has been charged. Further, the AO also held, in respect of advances given to some of the parties, that interest should 7 have accrued to the assessee and made addition to the total income. The parties are as follows.
Sr. No. Party Name
1. Acme Sthapati Ltd.
2. Amity Interlink Steels Pvt. Ltd.
3. Gujarat Lyka Organics Ltd.
4. Jeevanrekha Investrade Pvt. Ltd.
5. Package Investrade Pvt. Ltd.
6. M J Exports Ltd.
7. Oxford - 21st Century Services Pvt. Ltd.
8. Sun Fastfin Services
9. Sholapur Organics Pvt. Ltd.
10. B B Parekh
11. Bharat Kanakia
12. Dolphin Laboratories
13. Jaykumar Mahajan
14. Kanakia Enterprises
15. Raj Investments
16. Sagar Enterprises
17. Sai Shiv Developers
18. Shastriji Constructions
19. Yogesh B Parekh
20. Akruti Nirman Pvt. Ltd.
21. Meherchand Dadha
22. Monarch Land Developers
23. Mont Blanc Builders
24. Thakur Estate Development Pvt. Ltd.
8
25. Azzilfi Finlease & Investment Pvt. Ltd.
26. Joshuha Investment Pvt. Ltd.
27. Lakshadeep Investment Pvt. Ltd.
28. Sun Pharma Exports
29. Sunahmi Finlease & Investment Pvt. Ltd.
30. Tejaskiran Pharmachem Ind. Pvt. Ltd.
8.2 Out of the above parties, except those at Sr. No. 18,23 and 24, the AO disallowed interest paid as on the ground that interest free advances were made out of interest bearing borrowings. In the case of remaining three parties at Sr. No. 18, 23 and 24, addition was made on the ground that interest did accrue on advances given by the assessee. The reasons for doing so are extracted below from the assessment order:
"I have considered the above submission of the assessee but the same cannot be accepted. The parties at Sr. No. 2, 6, 7, 10, 11, 12, 15, 19, 25, 26, 27 and 29 are the same as in AY 1999-00. Issues related to all these parties have been suitably addressed in the block assessment order and also in the AY 1999-00. After considering the similar submissions at that time the interest paid equivalent to these advances was disallowed. As there is no material change in facts, following the same discussion in block assessment order, the interest @ 14% is disallowed on the interest free loans / advances made to these parties.
Further, as regards the party at Sr. No. 1 it is seen that the assessee has provided for the interest till last financial year. The assessee has not given any proof of conversion of this advance against booking of premises. It may be mentioned over here that the assessee is entering into such type of 9 transactions as discussed in the succeeding paragraph wherein the properties the properties are kept as security for advancing the amounts and in case of failure to pay by the parties, the properties are acquired. The assessee has not taken possession of these properties. Further, the assessee has not given the details of price at which the booking has been vis-à-vis the market price of these properties. The gain of interest in terms of booking at a lesser price of these properties compared to the market price cannot be ruled out. In these circumstances the interest @ 14% on the amount outstanding to this party is disallowed out of the total interest paid and added back to the total income of the assessee.
The assessee has not given any reasons for the advances at Sr. No. 3, 4, 5, 21 and 30. As far as the explanation for loan to party at Sr. No. 13 is concerned, it is seen that the assessee has provided for interest upto 31.03.1998. In the absence of any legal proceedings against the above said party for recovery, the possibility of charging the interest in cash or receiving some other benefit in lieu of interest cannot be ruled out. In these circumstances, interest @ 14 % on this amount is disallowed out of the interest paid by the assessee considering this loan to be for non business purposes.
As far as the party at Sr. No. 14 is concerned, it is seen that the assessee has recovered sums including interest from other two members of the group i.e. Shri Ashok Kanakia and Smt. Mina Kanakia. This party is related to one of the directors of the company also. The assessee company has provided interest upto 31.03.1999. The market report indicates that the financial position of Kanakia group is not bad, that it could not honour its financial commitments and the assessee has not put any proof for the same. In these 10 circumstances, interest @ 14 % on this amount is disallowed out of the interest paid by the assessee considering this loan to be for non business purposes.
As far as the parties at Sr. No. 11, 16 and 28 are concerned, the assessee's plea that these are the interests outstanding and hence no interest has been charged on these interests cannot be accepted as certain repayments of loan have taken place during the year and in a commercial business transaction the loan amount is recovered before the principal amount. Further, there is no bar on charging of interest on outstanding balance either on account of principle or on account of interest. In these circumstances, interest @ 14% on this amount is disallowed out of the interest paid by the assessee considering this outstanding amount to be for non business purposes.
As far as the parties at Sr. No. 17, 20 and 22 are concerned, the assessee has taken the plea that these advances were advances for property. The assessee has himself contended w.r.t. party at Sr. 17 that since the property could not be delivered the party has started paying interest from 01.04.2000. It is pertinent to mention over here that the assessee has been investing in properties with the terms & conditions of returns @ 24% p.a. or 50% of profits whichever is higher. These transactions are basically finance transactions which are fully secured against market risks. In fact, the assessee has itself exposed the nature of transaction by explanation to the loan for party at Sr. No. 17. Therefore, the plea of the assessee, that these are advances from property cannot be accepted and these are advances from property cannot be accepted and these are considered commercial transactions on which interest need to be charged / provided. In these circumstances, interest @ 14 % on this amount is disallowed out of the interest paid by the 11 assessee considering this loan to be for non business purposes.
Accordingly, a sum of Rs. 1,02,17,287 being interest at the rate of 14% is disallowed and added back to the total income of the assessee.
Interest Accrued but not accounted in the books of accounts Parties at Sr. No. 18, 23 and 24 are the same as in AY 1999- 00 and considered in block assessment on the basis of seized material. Issues related to all these parties have been suitably addressed to in the block assessment order and also in the assessment year 1999-00. As there is no material change in the facts since block assessment, following the same discussion in block assessment order, the interest accrued to the assessee for the FY 1999-00 but not accounted in the books of accounts on account of such advances is added back to the total income of the assessee. Accordingly, interest accrued @ 24% on these advances amounting to Rs. 28,54,368 is added to the total income of the assessee. "
8.3 The CIT(A) deleted the addition made by the AO on disallowance of interest paid on borrowed funds for the use of interest-free advances given to the above parties. The relevant extract is as follows:-
" 2.23 I have considered the submissions of the appellant. The appellant is basically an investment and finance company having major source of income by way of interest on advancing loans. The appellant has advanced all the loans during the course of its business. The question 12 involved in the present ground of appeal is whether any part of the interest expense of the appellant can be disallowed on the ground that the appellant has not used the borrowed capital for its own business. The issue of accrual of interest income is also involved. As per the provisions of section 36(1)(iii) of the Income-tax Act, 1961 the interest expense can be disallowed only if it is found that the appellant has diverted borrowed funds for non-business purpose and it has not used for the purpose of its own business. In the present case, the assessing officer has not established any link between the interest bearing funds of the appellant and the loans and advances given by the appellant. The total amount of funds advanced by the appellant are Rs. 14.86 crores whereas the interest-free funds available with the appellant as on the last date of the previous year are to the tune of Rs. 49.28 crores. Thus, it is seen that interest-free funds available with the appellant are much more than the amounts advanced and, therefore, unless nexus is established between the loans advanced with the interest- bearing funds, no part of the interest expenses of the appellant can be disallowed.
2.24 However, whether interest income has accrued or not to the appellant as per oral/written agreement between the appellant and the parties is also involved in the present case. This question has to be decided by taking into consideration all the relevant facts of each loan and advance given by the appellant. If it is found after considering all the relevant fact that income has accrued to the appellant it is taxable in the hands of the appellant even if the appellant has not shown the same in the books of accounts."
8.4 The CIT(A), deleting the disallowance of the interest expense, however held that the interest has "accrued" to the assessee in respect of 13 10 parties as these were business advances. The relevant extract is as follows:
"2.27 Based on these decisions, income, which has accrued to the appellant, is taxable in the hand of the appellant regardless of the fact that the appellant has not accounted for the same in its books of accounts. The appellant is a finance and investment company. The appellant has itself admitted that all the advances are made in the course of its business of finance and initially most of the advances given are with a view to charge interest. The appellant however claimed that later on due to financial difficulties in some cases, interest is no recovered. Therefore, it is to be examined in each and every case whether, on the basis of legal principles laid down by the aforesaid decisions, it can be said that interest income in reality has accrued to the appellant or not.
a. Acme Sthapati Limited :- The appellant has advanced a loan of Rs. 1 crore to Acme Sthapati Limited in AY 1999-
00. Interest of Rs. 12,40,750 was charged by the appellant on this loan in the AY 1999-00. In this year, the appellant is claiming that this party is in the business of real-estate development and since this industry was undergoing tremendous recession and liquidity pressure, the party indicated its difficulty to repay the loan. The appellant claimed that the amount advanced was treated as advance given for booking of premises. The appellant claimed that, therefore, there was no question of charging of interest on this amount in the current year. It was claimed that decision to convert loan given to advance for booking of premises was takne on account of commercial expediency and, for booking of premises was taken on account of commercial expediency and, therefore, no interest income has accrued to the appellant in the current year. These contentions of the appellant are not acceptable and rightly rejected by the AO. Though the appellant has filed letter dated 31.3.1999 written by Acme Sthapati Limited, during the 14 course of appellate proceedings, but on going through the same, it was noticed that premises offered by Acme Sthapati Limited was in reality a security for the amount of the appellant lying with that party. Even as per this letter, Acme Sthapati Limited was bound to pay to the appellant interest @ 10% if the appellant does not exercise option to convert the money givne into advance for purchase of property. The appellant has filed no evidence that it has exercised the option. This letter produced by the appellant in appellate proceedings was not filed before the assessing officer and no reason was given for not producing the same before the AO. This piece of additional evidence thus is not admissible as per provision of Rule 46A(3) of the Income-tax Rules. The appellant has filed copy of the account of this concern as appearing in its books of account upto FY 2004-05. It is noticed that in the AY 2004-05, the appellant has shown receipt of Rs. 74,22,033/- on account of compensation. The appellant has charged the compensation at the rate of 18% on the amount due from this party. These facts show that the amount advanced by the appellant continued to be interest-bearing and therefore interest @ 18% which comes to Rs. 20,23,335/- has accrued to the appellant in the current year.
b. Amity Interlink Steels Pvt. Ltd. :- The appellant has given money of Rs. 1 crore in the earlier financial year and Rs. 20 lakhs has been advanced during the year under consideration. The appellant is claiming that the amount has been given to this party as share application money. On going through the copy of this party as appearing in the books of account of the appellant, it is found that the appellant has received interest of Rs. 11,29,970/- in the financial year 2000-01 and an interest of Rs. 7,89,028/- in the financial year 2002-03. Similarly, the appellant has received interest of Rs. 6,23,331/- in the FY 2003-04. In the appellate proceedings, the appellant has filed a letter dated 12.8.1998 issued by Amity Interlink Steels Pvt. Limited to prove that the amount advanced to this party is towards share application money. But the appellant could not explain why the payment to third party was made on four 15 occasions when it is claiming that amount paid to this party is on account of share application. No details have been filed as to when the shares were applief for. The appellant has filed another letter dated 25.3.2000. On going through this letter, it appears that appellant has made a request to this company for conversion of share application money into loan. The copy of this letter was neither filed before the AO. If money paid to this party is for purchase of shares and that party was not allotting shares, it is no understood why the appellant advanced a further amount of Rs. 20 lakhs to the party in the current year. Therefore, the claim of the appellant that money advanced to this party was share application money is not acceptable. The appellant has charged interest in the subsequent years. These facts show that at the time of advancing of money, there was agreement between the appellant and the party to charge interest and, therefore, the right to charge interest was available with the appellant. The appellant has charged interest @ 12 % from this party in the AY 2000-01 and on this basis, addition of Rs. 14,20,000/- is required to be made to the income of the appellant in the current year. The action of the assessing officer on this ground is upheld.
c. Gujarat Lyka Organics Limited:- The payment has been made to Gujarat Lyka Organics Limited on the last day of previous year and, therefore, no addition can be made on account of accrual of interest in this year.
d. Jeevan Rekha Investrade Pvt. Limited and Package Investrade Pvt. Limited:- The amount advanced to Jeevan Rekha Investrade Pvt. Ltd. and to Package Investrade Pvt. Limited are small amounts. Moreover, there is no evidence that there was any agreement between the appellant and these parties to charge interest. Therefore, no addition on account of accrual of interest can be made in these cases.
e. M J Exports Limited:- The amount due from this party is outstanding balance of the earlier years. There is no new transaction carried out by this party in the current year.16
The addition made by the AO on this account in the AY 1999-00 was deleted by the CIT(A) in its order dt. 31.12.2003 in appeal No. IT-73/02-03. Therefore, following the decision of CIT(A) in the cae of the appellant in the AY 1999-00, no addition can be made to the income of the appellant.
f. Oxford 21st Century Services Pvt. Ltd. :- A sum of Rs. 3,24,483/- is due from Oxfor 21st Century. The amount has been advanced in the earlier year. There is no transaction with this party in the current year. Copy of account filed by the appellant shows that the appellant has written off this amount in the AY 2004-05. The appellant is claiming that the funds were lent to this party during 1997-98 and 1998-99 at interest of 26% - 27%. This company belongs to the Ketan Parekh Group (stock borker) of companies. Later this party turned out to be defaulter. The appellant submitted that it managed to recover most of the principal, but the outstanding interest already charged earlier could not be recovered. It also submitted that this party is not in any way related or associated with the assessee. It stated that there was no understanding to charge interest on interest. In view of these facts, interest income cannot be taxed in the hands of the appellant on accrual basis.
g. Sun fastfin Services Pvt. Limited and Sholapur Organic Pvt. Ltd. :- the amounts advanced to these parties are small amounts. The AO is not justified in making any disallowance on account of these advance dmade in view of the fact that the appellant has huge own interest free funds. Similar disallowance made in earlier year was not upheld.
h. Mr. B. B. Parekh :- The amount given to Mr. B B Parekh is for looking after the legal matters related to the companyfor the acquisition of shares of Ambalal Sarabhai Enterprises. The amount was advanced in the earlier years. No new transaction was carried out in the current year. The disallowance made in the AY 1999-00 and earlier years was not upheld by the CIT(A).17
Therefore, no disallowance of the interest can be made in this year also.
i. Shri Bharat Kanakia:- A sum of Rs. 5,74,565/- was due to the appellant from Shri Bharat Kanakia. The appellant has received back Rs. 5 lakhs on 16.4.1999 and the balance amount has been written off in the AY 2004-05. The addition made on this account was not upheld in the AY 1999-00 by the CIT(A). Following the decision of my predecessor, no disallowance of interest can be made in this year also.
j. Dolphin Laboratories :- The money was advanced to this party in the earlier years. The appellant carried no new transaction with this party in the current year. Disallowance of interest made was not upheld by the CIT(A) in the case of the appellant in AY 1999-00. In view of this, no disallowance is required to be made on account of money advanced to this party.
k. Jay Kumar Mahajan:- No new transaction was carried out with this party in the current year. The appellant is claiming that this party is not paying any interest from 31.3.1998. The amount due from this party is only Rs. 94,826/-. The appellant has written off this amount in the AY 2004-05. In view of these facts, it cannot be said that any interest income has accrued to the appellant. The amount is too small to consider for the same for any disallowance of interest. Therefore, no adjustment to taxable income of the appellant on account of this advance made by the appellant is called for.
l. Kanakia Enterprises:- The amount due from this party as on 1.4.1999 was Rs. 1,21,37,671/-. No fresh amount was advanced. The appellant has claimed that the loan was given to this party for a short period of time. The appellant claimed that the loan was given to this party for a short period of time. The appellant claimed that due to recession in the real estate market and their internal liquidity problems, the party refused to honour their 18 commitments. The loans were given to the party in January, 1999. Interest for the broken period upto 31.3.1999 was charged and offered as income. However, even before the interest was due, the party expressed their inability to honour their commitments. Fearing complete default, the appellant was constrained to agree in the month of March, 1999 that no interest will be charged to ensure that the principal is recovered. Ultimately, the principal amount was recovered after an interval of more than 15 months. Since, even the principal amount was not sure of recovery, the assessee was compelled to agree to these terms. The appellant further submitted that this party is not in any way related or associated with the assessee. The decision not to charge interest was purely out of commercial expediency and in the larger interest of protecting the assets of the company.
These contentions of the appellant are not acceptable. The appellant has filed no evidence to show that the financial condition of this concern has gone so bad that it can be held that in realty no interest income has accrued. On going through the copy of account of the party, it is found that this party has been returning regularly money to the appellant and at the end of the year, the amount due is only Rs. 36,27,171/- as against the amount due of Rs. 1,21,37,671/- as on 1.4.1999. Thus the appellant has been able to recover a large part of money. The appellant has also charged interest of Rs. 73,829/- on 28.7.2000. These facts show that the appellant has not forgone its right to charge interest. In view of these facts, interest income has accrued to the appellant which the appellant has not accounted for. Interest income at the rate of 14% on this amount is required to be taken in the hands of the appellant. Therefore, interest income is required to be included in the taxable income of the appellant on accrual basis. The AO will compute the interest that is taxable in the hands of the appellant.19
m. Raj Investments :- The amount due from this party is Rs. 7,04,186/- which is amount due in the earlier years. The appellant has charged interest from this party in the earlier year, but no interest is charged in the current year on the ground that it is unable to recover the amount due from this party. The appellant in the AY 2002-03 has recovered the amount due. The appellant has filed no evidence that financial condition of this party is bad and there is no hope of recovery of interest. Therefore, interest income has accrued to the appellant on advances given to this party. The amount of interest income @ 14% comes to Rs. 98,586/- This amounts is taxable as income in the hands of the appellant on accrual basis.
n. Sagar Enterprises:- The amount due from this party was Rs. 2 lakhs as on 1.4.1999. The amount has been received back by the appellant in the month of April - May 1999. The facts shows that the appellant has received interest of Rs. 2,21,721/- in the month of April, 1999. These facts show that interest is required to be charged by the appellant till the date of payment. Therefore, on this issue, the action of the AO is upheld.
o. Sai Shiv Developers:- The appellant has advanced Rs. 50 lakhs to this party in the current year. The appellant is claiming that the money was paid for the purchase of property. The appellant is claiming that since this party could not deliver the property, interest was charged in the next financial year. This contention of the appellant is not acceptable. The appellant has neither given description of the property which the appellant intended to purchase nor the appellant has filed any other evidence in the form of agreement of purchase to prove that the money given to this party is really for purchase of property. The appellant has filed copy of accounts of this party as appearing in the books of account of the appellant which show that the appellant has charged interest at the rate of 18% in the Assessment year 2001-
02. These facts show that there was an agreement between the appellant has charged interest at the rate of 20 18% in the AY 2001-02. These facts show that there was an agreement between the appellant and this party to charge interest. Therefore, interest income at the rate of 18% has accrued to the appellant in the current year. The AO is directed to compute the interest accrued to the appellant and treat the same as income of the appellant for this year.
p. Shastriji Constructions:- The amount was given to this party in the earlier years. The appellant is claiming that the amount was given for the purchase of property at Pramukh Plaza, Chakala, Andheri. The appellant is claiming that it has also filed a suit for recovery. Additions was also made in the case of the appellant on the same issue in the AY 1999-00 and the same was not upheld by CIT(A) in that year. Following the same, it is held that no addition is called for in the current year.
q. Jogesh Parekh:- The amount due as on 1.4.1999 is only Rs. 75,491/-. The appellant has advanced a sum of Rs. 3 lakhs on 3.1.2000. The appellant has received interest of Rs. 4509/- on 6.9.2000. The facts show that the money was advanced to this party with understanding to charge interest. Therefore, interest at the rate of 12% is required to be charged. Addition of Rs. 18,058/- is required to be made to the income of the appellant.
r. Akruti Nirman Pvt. Ltd.:- The outstanding amount of Rs. 20 lakhs was received by the appellant on 7.5.1999. The appellant is claiming that the amount was advanced for the purchase of property. There is no evidence that amount was advanced for the purchase of property. No agreement to purchase or any other evidence was filed. In view of this, it is held that interest income @ 14% has accrued to the appellant. The AO will compute the amount of interest taxable in the hands of the appellant.
s. Meher Singh Dada:- The appellant has advanced a sum of Rs. 35,00,000/- in the month of January and February 2000 and the same has been received back by the 21 appellant in the month of March, 2000. The Appellant is claiming that the amount given to this party is advance for purchase of property but no evidence for the same was filed. Therefore, it is held that the amount given to this party is on interest and interest income @ 14% is includible in the income of the appellant on account of accrual of interest. The AO will compute the amount of interest taxable in the hands of the appellant.
t. Monarch Land Developers:- The amount due from this party is the debit balance of the earlier years. The appellant has received the entire amount in the current year. Disallowance made by the AO in the earlier years was not upheld by the CIT(A). In view of this no disallowance is required to be made.
u. Mont Blanc Builders:- The entire amount due is outstanding balance of the earlier years. The appellant has received no amount in the current year. The appellant is claiming that this amount is an advance for the purchase of property. The addition made on this account was deleted by the CIT(A) in the AY 1999-00. Following the same, it is held that no disallowance of interest is called for in the current year.
v. Thakur Estate Developments Pvt. Ltd. :- The entire amount due is outstanding balance of the earlier years. The appellant has received no amount in the current year. The appellant is claiming that this amount is an advance for the purchase of property. The addition made on this account was deleted by the CIT(A) in the AY 1999-00. Following the same, it is held that no disallowance of interest is called for in the current year.
w. (i) Azzilfi Finlease & Investments:
(ii) Joshua Investment Pvt. Ltd:
(iii) Lakshadep Investment & Fin. Ltd.:22
In these cases, the appellant has received back money outstanding in the earlier years. There is no new transactions with these parties. The appellant in the year had claimed that it has given money to these parties for the purchase of shares of Ambalal Sarabhai Enterprise Ltd. for the purpose of business. The additions made by the AO in the AY 1999-00 were deleted by the CIT(A) in appeal. The AO has made the addition on the basis that disallowance of interest was made in these cases in the earlier years. Following the decisions of my predecessor in the case of the appellant for the earlier year, it is held that no disallowance of interest is called for. Addition made is deleted.
x. Sun Pharma Exports:-
The amount due from this party is Rs. 43,30,046/- as on 1.4.1999. The amount has been received by the appellant on 31.8.1999. The appellant is claiming that the amount due is on account of interest for the period 1998-99. The appellant has filed no evidence that no interest is chargable on amount due on account of interest. The amount due is not a small amount. Therefore, the action of the AO in making addition on this issue is upheld.
y. Sunahmi Finlease & Investment Pvt. Ltd. :-
The amount due from this party is Rs. 2,24,72,000/-. The amount has been received by the appellant in the current year. The appellant has stated that no interest was charged as the advance was given for the purpose of shares of Ambalal Sarabhai Enterprises Ltd. Addition on this issue made by the AO was deleted by the CIT(A) in the AY 1999-00. No fresh transaction except return of money took place in this year. Therefore, following the decision of my predecessor for the AY 1999-00, the addition made is deleted.23
z. Tejaskiran Pharmaceutical Pvt. Ltd.:-
The amount due from this party as on 1.4.1999 is Rs. 4,29,270/-. The same has been received by the appellant in the month of July, 1999. The disallowance of interest made by the AO on this loan was not upheld by the CIT(A) in the AY 1999-00. Following the decision of my predecessor, the addition made is deleted.
2.28 It may be clarified here that the addition is upheld not on the issue of disallowance of interest, but on the issue that interest income has accrued to the appellant. Based on above discussion, the AO is directed to compute the total amount of interest that is required to be taxed as income in the hands of the appellant on accrual basis. The balance addition made by the AO is deleted."
8.5 Thus CIT(A) deleted interest disallowance in respect of 20 parties and held that interest shall be taxed on accrual basis in respect of 10 parties.
8.6 The AO and CIT(A), while passing the order, relied on the orders of AO and CIT(A) for block assessment years and AY 1996-97 to 1999-
00. The learned AR at the outset mentioned that ITAT has passed a consolidated order for the said block period and AY 1996-97 to 1999-00 whereby CIT(A)'s orders giving relief in earlier years were confirmed by ITAT.
9. The learned AR argued that the above advances granted by the assessee were for the purpose of business which can be broadly classified into three categories as under:24
- Pure advances on which interest were earned, (which are not in dispute before us)
- Advances to builders / for investment in properties Advances towards share application money which were returned or shares allotted after some time.
9.1 As regard Acme Sthapati Ltd. ( Sr.No.1), it was submitted that on account of slump in the real estate market, it was not certain whether the assessee would get back even the minimum guaranteed amount. Though interest was charged up to A.Y.1999-00, in March 1999, when the party indicated its inability to repay the loan, it gave option to buy a property in lieu of the advance. If the option was not exercised, the party was ready to pay compensation. In this connection, a letter dt.31.3.1999 written by the borrower is placed on record as additional evidence. Ultimately, the borrower paid compensation of Rs.74.20 lakhs, the entire amount of which was offered for tax in A.Y.2004-05. It was therefore, contended that the addition be deleted. Alternatively, it was contended that if at all addition as to be sustained. Since all years are before Hon'ble Tribunal, the AO may be directed to spread the amount of compensation over a period of five years and relief should be granted in AY 2004-05 whereby entire interest by way of compensation is offered to tax. The learned AR filed the details of the interest addition made by the CIT(A) which are as follows:
AY Amt (Rs.)
2000-01 20,23,335
25
2001-02 14,05,094
2002-03 13,34,708
2003-04 9,95,510
2004-05. 8,98,296
Total 66,60,943/-
9.2 As regards to party at Sr. No. 14 Kanakia Enterprises, the learned AR submitted that the advances were given in earlier year and interest was charged for year ending 31 March 1999 (i.e. AY 1999-00).
Thereafter in March 1999, the party indicated their inability to clear the loan due to liquidity pressures. To protect the recovery of the principal, the appellant was compelled to forgo the interest. Out of opening balance of Rs. 121.37 lakhs as on 1 April 1999, the assessee could recover Rs. 85.10 lakhs during AY 2000-01 leaving balance recoverable 36.27 lakhs as on 31 March 2000. This balance was recovered in July 2000 (i.e. AY 2001-02) along with interest charged of Rs. 73,829 on 28 July 2000. Thus, when actual interest levied is only Rs. 73,829, no interest income can be said to have accrued specially when there is no allegation of receipt of interest outside books of accounts. Without prejudice, it was submitted that if ITAT is of the view that interest has accrued to the Appellant, which is actually not received, same should be allowed as business loss u/s 28 r.w.s. 37(1) of the Act, in the year when the account was settled i.e. in AY 2001-02, in this case.
9.3 As regards party at Sr. No. 20 Akruti Nirman Pvt Ltd, the learned AR submitted that the advance of Rs. 20 lakhs was given for purchase of property in December 1998. Interest was charged and recovered on 31 March 1999 (i.e. AY 1999-00). The opening outstanding of Rs. 20 lakhs 26 was received on 7 May 1999 and thus no interest was charged for 5 weeks of AY 2000-01. Without prejudice, it was submitted that if ITAT is of the view that interest has accrued to the Appellant, which is actually not received, same should be allowed as business loss u/s 28 r.w.s. 37(1) of the Act, in the year when the account was settled i.e. in AY 2000-01, in this case.
9.4 As regards party at Sr. No. 17 Sai Shiv Developers, the learned AR submitted that advance was given for purchase of property in August and September 1999. Subsequently, when the deal did not materialize, the interest was charged for AY 2001-02 onwards. Thus, it was a business decision to start charging interest when property could not be given by the builder. This fact cannot be made as a base to take a view that interest should have been charged for earlier period also. Without prejudice, it was submitted that if ITAT is of the view that interest has accrued to the Appellant, which is actually not received, same should be allowed as business loss u/s 28 r.w.s. 37(1) of the Act, in the year when the account was settled i.e. in AY 2005-06, in this case.
9.5 As regards party at Sr. No. 21 Meherchand Dadha, the learned AR submitted that the advance of Rs. 35 lakhs was given for purchase of property in January 2000 and was received back in March 2000 and no interest was charged for this 2 months. Without prejudice, it was submitted that if ITAT is of the view that interest has accrued to the Appellant, which is actually not received, same should be allowed as business loss u/s 28 r.w.s. 37(1) of the Act, in the year when the account is settled i.e. in AY 2000-01, in this case.
10. The arguments of the learned AR with respect to the department's appeal for the disallowance of interest are as follows:
10.1 As regards party at Sr. No. 18 Shastriji Construction, the learned AR submitted that due to bad financial position of the builders, recovery 27 of principal itself was doubtful. There is no question of taxing any interest at all. A suit was filed for the recovery of the same. Out of the outstanding amount of 57.75 lakhs, the party has paid major portion amounting to Rs. 51 lakhs in AY 2006-07 and no addition was made by the Department in AY 2006-07. Further, after filing the suit, the Court has passed an order awarding the compensation of Rs. 19,25,000 which is offered to tax in AY 2008-09.
10.2 As regards party at Sr. No. 22 Monarch Land Developers, the learned AR submitted that the amount due was of earlier years and the entire amount was received during the current year. Hence, there should be no disallowance. Further, CIT(A) deleted the disallowance in AY 1999-00.
10.3 As regards party at Sr. No. 23 Mont Blanc Builders, the learned AR submitted that the Tribunal has deleted the disallowance of notional interest since the assessee has its own funds. Further, the amount is an advance for the purchase of property, which is for business purpose. 10.4 As regards party at Sr. No. 24 Thakur Estate Developments Pvt Ltd, the learned AR submitted that the amount was given to purchase property for the purpose of business and the Tribunal in earlier years has deleted the disallowance of interest on the ground that the Appellant has sufficient own funds and advances are given for business purposes.
11. The learned AR also pointed out that the above advances are for the purpose of business and where the assessee has sufficient own funds, the ground of the department for the disallowance of interest paid should be dismissed. It was also pointed out that against such finding of CIT(A) that advances are for business purpose, the department is not in appeal.
11.1 The learned AR, for the above advances i.e Sr. No. 1, 14, 18, 20, 21, 22, 23, 24, relied on the following decisions wherein it was held that the if income does not result at all, irrespective of method of accounting 28 whether mercantile or cash, then income cannot be taxed on accrual basis. It was also held that the contracting parties can lawfully change their stipulation by mutual agreement whereby no income can accrue when terms of contract is modified.
• E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC) • Sri Keval Chand Bagri vs CIT (180 ITR 207)(Cal HC) • CIT v Shoorji Vallabhdas & Co. (46 ITR 144) (SC) • Godhra Electricity Co. Ltd v CIT (225 ITR 746) (SC) • CIT v Bokaro Steel Ltd. (236 ITR 315)(SC) • CIT v Sarabhai Holdings Pvt. Ltd. (307 ITR 89)(SC) • ACIT vs Travancore Titanium Products Ltd. (121 ITD
513)(Cochin)(TM) • India Finance and Construction Co. Pvt. (200 ITR
710)(Bom) 11.2 The learned AR also relied on the decision in the assessee's own case for the block period, AY 1996-97 to 1999-00 wherein the addition on account of disallowance of interest and accrual of interest was deleted by the Tribunal in case of various builders and parties for the purchase of property.
The relevant extract of the ITAT order for block assessment year and AY 1996-97 to 1999-00 is as follows:
"6. In GR.No.6 the Revenue challenges the action of the CIT (A) in deleting the notional accrual of interest by the AO and treating it as part of the undisclosed income. The brief facts are, the Appellant has been investing in real estate. For this purpose, advances have been given to various builders on certain terms and conditions. On the basis of seized papers showing investment, the AO held that the interest of Rs.28.25 lakhs though accrued on these advances, has not been accounted by the 29 appellant and therefore, the same is undisclosed income. It was submitted before CIT (A) as under:
"The appellant company used to invest in real estates. It was advancing funds to builders at time of commencement of projects. Due to entry in initial phase, it was able to bargain the prices in its favor. The arrangements with the builders normally were in the form of minimum guaranteed return plus profit either to be shared with builders or for the appellant exclusively. Against this investment, it would take letter of allotments or enter into agreements wherein the understandings were spelt out and properties were identified.
Real estate market suffered a big setback. Due to this it was not possible to ascertain whether minimum guaranteed return can be received or not. Sale price came down considerably. It was not possible to decide on the profitability. In view of these factors no return was provided for in the books. There is no allegation that the amount of reward is received in cash. Hence there cannot be any undisclosed income on account of this item of advances / investments. Moreover this type of disallowances was considered in A. Y. 1997-98 & 1996-97 in regular assessment. The block assessment is related to unaccounted transactions. As per explanation to Section 158BA, the b lock assessment is in addition to regular assessment and it is not in place of regular assessment. If an officer starts disallowing from regular books (if they are found in the search), there will be no need for regular assessments. This is not so, Legal disallowances and matters arising from regular books should be dealt with in the regular assessments only. The word "Undisclosed" by itself suggest something which is not disclosed. If one has to discuss about reasons for charging or not charging of interest on amounts entered in regular books, the real platform is the regular assessment & not the block assessment. As against this if interest is received out of books 30 and noting for such receipt is found in the search, then the role of the block assessment starts since that income is "Undisclosed" in regular books. This aspect of investments was handled by Shri Sudhir Valia and this paper was prepared before he was consulted. He was aware about the case of the learned Assessing Officer that the other parties have provided for interest liability but the appellant has not provided for income from interest.
Hence the disallowance of Rs.28.25 lakhs should be cancelled."
The assessee also submitted the details of each of the advances given to the following concerns and how it was for the purpose of business:
NAME Advance Interest Treated As
Given Accrued
Shastriji Rs.65 lakhs Rs.13.70 lakhs
Con
stru
ctio
n
Elegant Builders Rs.11,22,500 Rs.1.84 lakhs Rashesh kanakia Rs. Rs.5.76 lakhs 32,01,698 Elegant Rs.2.68 lakhs Inve stm ents Neela Mehta Rs. 25.67 Rs.4.27 lakhs lakhs Adv. For Rs.28.25 lakhs 31 pro pert ies Jitendra Sheth Rs. 4.62 lakhs Raj Investments Rs.3.25 lakhs Total Rs.36.13 lakhs It was submitted that advances for properties were with the specific understanding and actual of income was on the specific understanding and accrual of income was on the happening of certain events. Unless such event happened, income could not be said to have accrued to the assessee. As regards advances to Jitendra Sheth, it was pointed out that in view of the bad financial position of the party, there was no hope of the principal being received therefore, there was no question of interest being received. As regards Raj Investments, it was submitted that it was only brought forward figure and no interest can be presumed on the same. It was also submitted that all these transactions were reflected in the books therefore, there is no question of treating the same as undisclosed transactions, treating it as part of block assessment. After considering the detailed submission, on the facts as well as on legal grounds, the CIT(A) has deleted the addition made as undisclosed income.
6.1 The revenue is in appeal against such deletion made by the CIT (A). The learned Departmental Representative strongly supported the order of the Assessing Officer and relied on the findings in the block assessment. On the other hand, the learned Authorized Representative of the assessee relied on the various submissions made before the CIT (A) as well as the details submitted in the Paper Book to support his contention. It was reiterated that no income can be deemed to have accrued unless the terms of the advance so desires. In any case, if the transactions are recorded in the books, the same cannot be treated as undisclosed income. It was therefore, submitted that the CIT (A)'s 32 order may kindly be upheld and the Revenue's appeal on this ground may kindly be rejected.
7. After going through rival submissions and after perusing the material available on record, we find that the authorities below have extensively dealt with each of the advance given by the assessee and how the income cannot be notionally assessed in hands of the assessee. The learned Departmental Representative has relied heavily on the order of the assessing officer and submitted that the order of CIT (A) on this ground may kindly be vacated. He has, however, not been able to point out any specific mistake in the order of the CIT (A) or on factual submissions made by the assessee before the CIT (A) . We are, therefore, of the opinion that income cannot be notionally taxed in the hands of assessee on various advances referred above. The assessee cannot be taxed on notional income which he has not actually earned. If the advances are given for the purpose of business or if there is precondition for accrual income, unless such conditions are satisfied or such contingency arises, income cannot be treated as accrued to the Assessee. We are therefore, of the view that the CIT (A) was correct in deleting the addition of Rs.28.25 lakhs on this point. We accordingly, reject gr.no.6 of the Revenue."
11.3 Further, the relevant para 35 of the ITAT order for block assessment year and AY 1996-07 to 1999-00 -00 is as follows:
"35. The next issue is against the decision made on account of the interest of Rs.36,09,535/- alleging that interest had accrued to the assessee on advances given to the builders. The Assessing Officer made addition of Rs.36,09,535/- as interest rate of 24% per annum in respect of the advances made to the following parties:
a) M/s Shastriji Construction
b) M/s Mont Blanc Builders
c) M/s Thakur Estate Developers Pvt. Ltd.33
The assessee has submitted that with regard to first party, the matter has already been considered by the CIT (A) while dealing with appeal related to block assessment. The CIT (A) has deleted the additions made in the block assessments. Since the matter was considered by CIT (A) in the block assessment is similar as that raised by the Assessing Officer, the alleged addition interest made in respect of M/s Shastriji Construction needs to be deleted. In addition, the assessee submitted that as the principal amount was not coming up the assessee thought it fit to pressurize the party through filing a suit in the Court. As it happens in all cases the pressure is further built-up by claiming interest on the outstanding. Mere claim of interest in the suit does not lead to accrual of interest. Due to financial position of party, it was decided long back to recover only the principal amount. In fact, amount not to be recovered till long period, the assessee ahs even debited Court charges to their account. In view of this it is correct to state that the interest still accrues. The assessee also submitted that the investment was the investment in property and the rate of interest was not the main purpose. This has been already considered in earlier appeals i.e. in block assessment of the assessment 1997-98. As regards the other two parties, the Assessing Officer has presumed that the transaction is the same as that in respect of M/s Shastriji Construction Ltd., considering the explanation given above, the addition made to the alleged interest in respect of other two parties needs also to be deleted."
"35.2 After going through the rival submissions and perusing the material available on record, we are of considered opinion that the assessee has its own funds as well as non-interest bearing funds, the notional interest cannot be deemed to have been received on the business advances. It has been established that income respectfully following the ratio laid down in the said decisions, we uphold the order of the CIT (A) in deleting the notional income deemed to have been accrued of Rs.36,09,535/-."34
11.4 Secondly, the learned AR, dealt with the parties for whom advances were given for the purpose of share application money for which the assessee is in appeal i.e. Sr. No. 2 Amity Interlink Steels Pvt Ltd. In this respect, the learned AR submitted that the amount was paid towards share application money. But no shares were allotted and interest at 12% p. a. was received in AY 2001-02 to 03-04. Similar disallowance from this party is deleted by the ITAT at para 34 in ITAT order for block period AY 1996-07 to 1999-00 at page 137 of PB. The relevant extract of the same is as follows:
"34.1 The CIT (A), following his order in block assessment for the assessment years 1996-97 and 1997-98, held that the advances were given out of own funds of the assessee. The capital reserves and surplus and other interest-free funds available with the assessee amounted to Rs.6020 lakhs which is more than interest free advances of Rs.1486 lakhs. It was also submitted before CIT (A) that the advances granted are for the purpose of business of the assessee and, hence, no disallowance of interest can be made. It is also submitted that in respect of the new loans given to M/s. Amity Interlink Steels Pvt. Ltd. of Rs. 100 lakhs, the same was towards share application-money and thereby no disallowance of interest on this point can be made. In any case, when the company decided that it could not issue the shares to the assessee, the assessee company has charged and received interest at the rate of 12% per annum on outstanding amount from the assessment years 2001-02 to 2003-04. In respect of advances given to Unimed Technologies Ltd., it was submitted that the same was advanced on 29.3.1999, 30.3.1999 and 31.3.1999 and thus, no interest could have been said to have accrue to assessee for this period. In view of the above facts, it was submitted that the order of the CIT (A) in deleting the disallowance is correct and needs to be upheld. The Learned Departmental Representative relied on the order of Assessing Officer and submissions made for earlier years, while the learned Assessing Representative of the assessee relied on the submissions for the assessment years 1996-997 to 1998-99.35
34.2 After going through the rival submissions and perusing the material available on record including the various submissions made by the assessee. As the facts of the year under consideration are the same as in the earlier years i.e. in the assessment years 1996-97 to 1998-99 and block assessment years, we hold that the Appellant has not diverted any funds for non business purposes. Therefore, disallowance of interest made of Rs.90,30,464/- made by the CIT (A) is hereby confirmed."
11.5 With respect to the department's appeal for the disallowance of interest, the learned AR submitted that the advance to the parties at Sr. No. 25, 26, 27 and 29 are made for the purchase of shares of Ambalal Sarabhai Enterprise Ltd. for the purpose of business. The learned AR also submitted that the disallowance in respect of these parties were deleted by the ITAT for block period and AY 1996-97 to 1999-00. The relevant extract of the same is as follows:
"15.1 The learned Authorized Representative of the Assessee has submitted by that all the advances on which interest is not charged are the business advances and in any case, it had sufficient capital plus reserves plus interest free advances. Therefore, there was no justification for making notional disallowance. The assessee also submitted the explanation for each and every advance and pointed out that these advances were for the purpose of business. The Assessing Officer did not accept the contention of the assessee was that granting of interest-free advance cannot be treated as for the purpose of business and applying the ratio of Phalton Sugar Works Ltd. 208 ITR 909 (BOM), Doctor & Co. 180 ITR 627 (BOM) and M/s Venkateshwaran 222 ITR 163 (MAD). Accordingly, the Assessing Officer held that payment of interest by the assessee to the extent it relates to interest-free advances is not for the purpose of the 36 assessee's business and therefore, disallowed sum of Rs.1,56,92,000/- at an average rate of 21% out of borrowed funds in respect of such advances. In appeal, it was submitted by the assessee that the explanation for party-wise advances given and how it was for the purpose of business. The CIT (A) has reproduced the explanation given by assessee in the body of order at Para-12. He has also referred to the fund flow provided by the assessee to slow that it has sufficient funds of its own to give the advances. The details of which as under
Sr. No. Name Of the Balance Reasons for such advances Company as on 31.3.97 (Rs in lakhs)
a) MJPL 335.47 MGPL was company having US FDA approval for manufacturing bulk drugs etc. the appellant company had purchased the shares worth 2.29 cr. i.e. 20.27% of the voting rights. For further acquiring shares jointly with SPIL, it had made public offer. In the meantime, in the order to improve liquidity, as per the understanding, some interest-free advances were given to the company and therefore, this advance was for the purpose of business of the company and no part could have been disallowed.
b) Joshua 47.83 This is a company with which the Appellant company has regular transactions and the shares are purchased and sold to this company.
37This account is in the nature of current account. Therefore, there is no question of charging of interest.
In any case, the company had sufficient interest free advances available and therefore, no interest could have been disallowed.
c) Lakshadeep 47.80 This is a company with which the Appellant Company has regular transactions and the shares are purchased and sold of this company.
This account is in the nature of current account. Therefore, there is no question of charging of interest.
In any case, the company had sufficient interest free advances available and therefore, no interest could have been disallowed.
d) Tejaskiran 24.49 Interest of Rs.19.85 lakhs was charged and therefore, it was not correct that on interest was charged on advance to this company. Details of accounts and interest charged were filed with the AO and before the CIT (A).
e) VSIPL 10.89 Interest of Rs.0.53 lakhs was charged and therefore, it was not correct that on interest was charged on advance to this company. Details of accounts and interest charged were filed.
f) Quality 3.41 Interest of Rs.17.22 lakhs was charged and therefore, it was not correct that on interest was charged on advance to this company. Details 38 of accounts and interest charged were filed.
g) Allied 280.39 This was advance given to Allied Shares and Securities, share broking company for purchase of shares of Ambalal Sarabhai Enterprises.
These shares were purchased with the business purpose of acquiring the said company out of the business consideration therefore; advance given to allied for the purchase of shares cannot be treated as interest free advance given.
h) B. Parikh 20.00 This was advance given to the Advocate who was arguing the legal matters of the Appellant related to ASE dispute. Therefore, it cannot be treated as non business advances.
Details of expenses incurred by him for legal matter etc. were received in the subsequent year.
i) M. J. Exports 100.00 J. M. Shah was holding shares in M. J. Pharma and M. J. Exports. The Appellant was interested in purchasing the shares of MGPL from J. M. Shah. As per the understanding between J. M. Shah, M. J. Exports and the Appellant, advance was to be given to M. J.
Exports. Therefore, this advanced was for the purpose of business.
Since there was delay in receipt of approval from SEBI, the amount paid continued as advance.
However, it could not be treated as 39 non business advance.
"15.6 We have considered the rival submissions. We have also perused the submissions made by the assessee as well as the submissions of authority below. The CIT (A) has dealt with each of the advances given by the assessee-company and has also considered the fund flow statement. The CIT (A) has accepted that various funds advanced by the appellant were for the purpose of business and that remaining funds were out of interest free funds available with the appellant. Our attention was also drawn specially to the order of Ahmadabad Bench of the Tribunal in the case of Aditya Medisales wherein the advance given by Aditya Medisales and Sun Pharma as well as charging lesser rate of interest by them to Appellant Company was held to be for business purpose. Considering the overall facts as well as finding of the CIT (A) and keeping in mind the ratio laid down by the Supreme Court in S. A. builders case, we are of the considered opinion that the deletion of disallowance of Rs.1,57,92,000/- made by the CIT (A) is factually and legally correct. For coming to this conclusion we also refer to the observation made while passing the block assessment order. Accordingly, the Revenue's Ground Nos.1 & 2 is hereby rejected."
11.6 For the balance advances, the learned AR has submitted as follows:
11.7 The advances outstanding against the parties at Sr. No. 16, 11, 28 and 30 are only the outstanding interest charged earlier. The same has been received in later years except in case of Sr. No. 11 which has been written off as irrecoverable in AY 2004-05.
11.8 The learned AR also pointed out that in case of parties at Sr. No. 15, 6, 10, 12, there is no fresh advance during the year. The ITAT has deleted the disallowance in respect of these parties in the block assessment and the facts under consideration are the same as in block 40 assessment. The relevant extract of the ITAT order for block assessment year and AY 1996-07 to 1999-00 is as under:
"4. Grounds Nos. 3, 4 &5 raised by the Revenue challenges the action of the CIT (A) in deleting the disallowance of interest of Rs. 1,36,59,481/-. In the block assessment order, the assessing Officer has referred to pg. nos.20 to 23 of Annexure A - 3 of the Panchnama dated 22.12.1998 wherein details of the parties to whom interest has not been charged has been mentioned. He also referred to Annexure A/6 of the Panchnama which showed payment of substantial amounts on which no interest was charged. On the basis of these papers, the Assessing Officer arrived at the conclusion that the Appellant is diverting interest bearing funds for non interest bearing purposes. The Assessing Officer also observed that the assessee-group is indulging in passing of entries in the books in the manner that the true profits earned by a particular appellant in the Group are inflated or deflated by making adjustment so that actual tax liability of the Group as whole is evaded. Accordingly, the Assessing officer disallowed the interest expenditure aggregating to Rs. 1, 36, 59,481/- holding that the interest bearing funds are diverted for non business purposes and held that this is incorrect claim. Therefore, according to him, such disallowance represented undisclosed income of the assessee under Ch.XIVB of the IT Act. Details of party-wise disallowance of interest worked out by the AO are as under.
COMPANY AMOUNT OF
DISALLOWANCE(Rs.
)
TPDL merger 79,77,446
Ambalal Sarabhai 19,50,194
M. J. Exports 18,00,000
Other Parties
Doilphin Lan
41
Ashok Kanakia 72,197
B. B. Parekh
Sun Petrochemicals Pvt. 4,10,547
Ltd.
3,59,901
Virtous Share Investment
Pvt. Ltd. 78,141
-2000 (Broken Period)
2,61,668
7,51,387
Total Disallowance 1,36,59,481
11.9 The relevant extract of the conclusion of the ITAT in block assessment year and AY 1996-07 to 1999-00 at para 5.4 is as follows:
"5.4 We have gone through the rival submissions and perused the material available on the record. We find that orders of the AO, CIT (A) as well as the Remand Report by Assessing Officer and the assessee's reply on the same. From the facts it is clear that even after excluding revaluation reserve, the assessee has owned sufficient funds for giving advances. The fund flow chart filed by the Appellant clearly brings out of which, advances were given. This fact has been carefully and in detail discussed by the CIT (A). The learned Departmental representative has not been able to pinpoint any mistake in calculation or he has not been able to establish how the findings given by the CIT (A) on the facts are not correct. We are therefore, of the opinion that the disallowance of interest made by the Assessing officer of Rs. 1,36,00,000/- is not justified. The CIT (A) has also dealt with each of the advance given and how it was for the purpose of business. He has also referred to advances given for obtaining controlling interest of taking over businesses. Therefore once it is established that the advances were for the purpose of business, there is no question of disallowance of interest. The learned Departmental Representative has mainly placed his reliance on the observation of Assessing officer in the assessment order and has relied on the decisions in the case of Phaltan Sugasr, H. R. Sugar, Venkatareshwarn which are referred 42 in Para 24 above. However, as has been rightly pointed out, the ratio laid down in these decisions has to be now considered keeping in mind the ratio laid down by Supreme Court in S. A. Builder's case 288 ITR 1. The Hon'ble Supreme Court has dealt in detail when the advances could be treated for the purpose of business. The Supreme Court has categorically reserved the decision of Phaltan Sugar and other cases. Therefore, we are of the view that on the facts as well as on the legal prepositions it cannot be said that the Assessee has diverted interest bearing funds for non business advances or for giving interest free advances. Accordingly we uphold the order of the CIT (A) deleting the disallowances of Rs. 1,36,59,481/- and reject gr.nos.3 to 5 of the Revenue."
11.10 The learned AR, with respect to the parties at Sr. No. 7 and 13, submits that no new advances were given to these parties during the year. The assessee has not been able to recover the amount from the parties and the same has been written off as irrecoverable in AY 2004-05. The learned AR also pointed out that the party at Sr. No. 7 belongs to Ketan Parekh Group of companies. The assessee managed to recover most of the principal amount, but the outstanding interest charged earlier could not be recovered.
11.11 With respect to party at Sr. No. 3, the learned AR submitted that the advance was given on the last day of the year so the question of disallowing the interest does not arise. Further, the AR pointed out that the company was merged with Sun Pharmaceuticals Ltd. w.e.f. 1.4.2000 and from whom the assessee has taken loans and the assessee is paying the interest.
11.12 The balance party at Sr. No. 19, 4, 5, 8, 9 are the small advances given for business purposes and hence no disallowance of interest should be made on the same.
43The Bench put a specific query to the learned AR that whether the assessee, being NBFC, has been following the prudential norms specified by the RBI for the recognition of income or not and how the decision of Supreme Court in the case of Southern Technologies Ltd v JCIT 320 ITR 577 is not applicable to the facts of the assessee. The learned AR replied that the requirements of recognition of income and provisions for NPA under RBI directions (prudential norms), 1998 are applicable to the NBFC, accepting public deposits. The AR, further, replied that the assessee has not accepted any public deposits and hence the RBI Directions (Prudential Norms), 1998 regarding income recognition and provision for NPA are not applicable to the assessee. The AR also filed a copy of the prudential norms published by the RBI. The AR, also submitted that the decision of Supreme Court in the case of Southern Technologies Ltd v JCIT 320 ITR 577 is not applicable to the facts of the case as the issue before the Supreme Court was whether the provision made against Non Performing Assets (NPA) and debited to Profit and Loss A/c is allowable as deduction u/s 36(1)(vii)/ 37(1) of the Act. In that case the appellant was a NBFC and was required to follow RBI Directions, 1998 (Prudential norms). Hence, there is no issue of claim of deduction of NPA u/s 36(1)(iii) in appeal and hence said Supreme Court decision is not applicable.
12. The learned DR, On the other hand, submitted that, as far as accrual of income is concerned, the CIT(Appeals) had dealt at length party-wise in its order and only in cases where the assessee has failed to substantiate its claim that what was given was only for acquisition of property/investment in shares etc. and not a loan, it was held that what was given was nothing but a loan by NBFC and income accrues on time basis, unless proved to the contrary. He submitted that the interest should 44 be taken as income and in case there is difficulty in recovery, the same may be written off by way of bad debts. The learned DR took this Bench through the analysis given by the CIT(Appeals) from pages 14 to 21 of the order. In the case of Acme Sthapati Ltd., he pointed out that the assessee claimed that the amount was treated as advance given for booking of premises and hence the question of charging interest does not arise. He pointed out that the assessee has advanced an amount of Rs.1 crore during the assessment year 1999-2000 and interest charged was amounting to Rs.12,40,750/-, While so, this year the assessee claims that this loan for which interest was already collected in the earlier year, was nothing but an amount given as an advance for booking of premises. It was also claimed that the decision to convert loan given to advance for booking of premises was taken on account of commercial expediency, as real estate sector was undergoing tremendous recession and liquidity pressures. The evidence filed by the assessee to prove the conversion, was nothing but an offer of security by M/s Acme Sthapati Ltd. Even in this letter the Acme Sthapati Ltd. was bound to pay to the appellant interest at the rate of 10% if the assessee does not exercise option to convert the money given, into advance for purchase of property. The CIT(Appeals), he pointed out, has not admitted the additional evidence as per Rule 46A(3). On these facts, he argued that the CIT(Appeals) was right in holding that there was accrual of income in the current year.
12.1 Similarly in the case of Amity Interlink Steels Pvt. Ltd., the learned DR referred to page 15 of clause (b) of CIT(Appeals)' order and pointed out that an amount of Rs.1 crore was given in the earlier financial year and Rs.20 lakhs advanced this year and the assessee had received interest of Rs.11,29,970/- for financial year 2000-01 and interest of Rs.7,89,020/- in the financial year 2002-03 and Rs.6,23,331/- in financial year 2003-04.
45He pointed out that in between, in this year the assessee attempted to explain the payment as that which is made towards share application money. The learned DR referred to the facts of each loan and justified the decision of the CIT(Appeals) ; he took this bench through the finding of the CIT(Appeals) in the case of:
Kanakia Enterprises at page 17 para 'i', Raj Investment Investments in para 'm' and Sagar Enterprises para 'n' and Sai Shiv Developers, Jogesh Parekh para----, Akruti Nirman P. Ltd.para -------
Sun Pharma Exports, Tejaskiran Pharmaceutical Pvt. Ltd.para----
The thrust of the entire argument, as in the earlier cases, is that the assessee has not produced any evidence to substantiate its claim that income has not accrued. Coming to the Revenue appeal on the issue of deletion of disallowance of interest, the learned DR, though not leaving his ground, admitted that the Tribunal in the earlier years has taken a view against the Revenue. He prayed that the order of the first appellate authority be upheld on the issue of accrual interest.
12.2 Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.
13. We first take up the issue of disallowance of interest u/s 36(1)(iii).
The Tribunal in the assessee's own case in the block assessment year had held that the assessee has not diverted any funds for non business purposes. It held that the advances were made by the assessee for the purpose of business. It further held that the remaining funds were advanced by the assessee out of interest free funds available with it. The 46 Tribunal applied the decision of the Hon'ble Supreme Court in the case of S.A. Builders and upheld the deletion of disallowance of interest made by the CIT(Appeals). Respectfully following the same, consistent with the view taken by the coordinate bench of the Tribunal, we uphold the order of the CIT(Appeals) and uphold the deletion of disallowance of interest.
13.1 The other issue that arises in the assessee's appeal is the question whether income accrued to the assessee or not in each of these advances. The assessee claims that the advances were made as investments or for the purchase of property or to the purchase of shares. The CIT(Appeals) has taken the relevant facts of each loan and advance given by the assessee and arrived at a conclusion as to whether interest income can be said to have accrued or not. At para 2.24 page 12 and 13, the CIT(Appeals) held as follows :
"2.24 However, whether interest income has accrued or not to the appellant as per oral/written agreement between the appellant and the parties is also involved in the present case. This question has to be decided by taking into consideration all the relevant facts of each loan and advance given by the appellant. If it is found after considering all the relevant facts that income has accrued to the appellant it is taxable in the hand of the appellant even if the appellant has not shown the same in the books of accounts."
13.2 After considering the decision of the Hon'ble Supreme Court in the cases of CIT vs. Shoorji Vallabhdas and Co. 46 ITR 144, H.M. Kashiparekh and Co. Ltd. vs. CIT 39 ITR 706, CIT vs. Birla Gwallor (P) Ltd. 89 ITR 266, Morvi Industries Ltd. vs. CIT 82 ITR 835 (SC) and the case of Poona Electric Supply Co. Ltd. vs. CIT 57 ITR 521, the CIT(Appeals) at para 2.27, held as follows:
"Based on these decisions, income, which has accrued to the appellant, is taxable in the hand of the appellant regardless of the 47 fact that the appellant has not accounted for the same in its books of accounts. The appellant is a finance and investment company. The appellant has itself admitted that all the advances are made in the course of its business of finance and initially most of the advances given are with a view to charge interest. The appellant however claimed that later on due to financial difficulties in some cases, interest is not received. Therefore, it is to be examined in each and every case whether, on the basis of legal principles laid down by the abovesaid decisions, it can be said that interest income in reality has accrued to the appellant or not."
13.3 The assessee's contention is that income does not result at all irrespective of the method of accounting followed by the assessee on the facts and circumstances of the case. Reliance was placed on the judgment of the Supreme Court in the cases of E.D. Sasson & Co. vs. CIT 26 ITR 27(SC), Godhra Electricity Co. Ltd. vs. CIT 225 ITR 746, CIT vs. Bokaro Steel Ltd. 236 ITR 315 and other case laws. Reliance is also placed on the decision of the Tribunal on these issues in the block assessment. It is also submitted that the income as and when accrued, has been offered to tax in the subsequent assessment years.
13.4 In our considered opinion, the sole issue to be decided is the year of taxability. In other words, the dispute boils down to the point as to whether the income in question has accrued in the current year or at a later year, when the assessee has settled the issue with the party and offered the amount received as compensation to tax. The Hon'ble Supreme Court in the case of Berger Paints India Ltd. vs. CIT 266 ITR 99 approved the finding of the Special Bench of the ITAT in the case of Indian Communication Net Work P. Ltd., and held as follows :
" In addition to these three High Court judgments, it appears that, noticing the conflicting views taken by the Tribunals a Special Bench of the Income-tax Appellate Tribunal was constituted to resolve the issue. In Indian Communication Network Pvt. Ltd. v.48
IAC of I.T..994] 206 ITR (AT) 96 (Delhi), the Special Bench of the Tribunal considered all the conflicting judgments and the judgment in Lakhanpal National Ltd.'s case [1986] 162 ITR 240 (Guj) as also its own order in the case of the appellant-assessee reported in Berger Paints India Ltd. v. CIT [1993] 44 ITD 573 (ITAT) (Cal.). After noticing all the conflicting view, and the attempt made by the Tribunal in Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 (ITAT) (Delhi), to distinguish the observations made in Lakhanpal National Ltd.'s case [1986] 162 ITR 240 (Guj), the Special Bench of the Tribunal made the following observations at [1994] 206 ITR (AT) 96, at page 114:
"We would like to make it absolutely clear that the removal of the amount in question from the figure of closing stock is not tantamount to a 'tinkering' of the closing stock but allowing to the assessee the effective deduction to which it is entitled under section 43B. We would also like to emphasise that in the subsequent assessment year, the assessee's opening stock would stand reduced by a corresponding figure since it cannot avail of a 'double deduction'".
It was further observed by the Special Bench at page 114 that:
"Before we part with this ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost." (Emphasis ours) It is specifically asserted in the written submissions of the appellant-assessee that this decision of the Special Bench of the Income-tax Appellate Tribunal in Indian Communication Network Pvt. Ltd.'s case [1994] 206 ITR (AT) 96 (Delhi) has also not been challenged, This fact is also not disputed by the Revenue."49
Applying the propositions laid down to the facts of the case, we examine each of the advances made .
i) In the case of Acme Sthapati Ltd., the assessee has offered to tax compensation of Rs.74.20 lakhs during the assessment year 2004-05 and the assessee brought the same to tax. The CIT(Appeals) refused to admit the additional evidence in the form of a letter from a party that the assessee had an option to convert the loan into an advance for booking of premises. Nevertheless the CIT(Appeals) discussed the nature of the evidence. The order of the CIT(Appeals) is correct on the principle that income accrues when, what is advanced is a loan. But at the same time, when the person taking the loan is not in a position to repay the principal the question of charging interest and showing the same as income does not arise. When the reduction of the principal is in doubt, real income theory applies and interest income can not be brought to tax on accrual basis. Even otherwise, as the assessee had disclosed the entire income in the year of settlement of the case, i.e. assessment year 2004-05, we uphold the contentions of the assessee that no real income accrued to it in the earlier year and that it accrued only in the year of receipt and delete the addition as confirmed by the CIT(Appeals). Upholding the addition would tantamount the double taxation. The Revenue should not have assessed this income to tax in the assessment year 2004-05, if it wanted to tax the same income in the earlier year. We find that the income was assessed as substantive basis and not protectively.
In the result, this addition is deleted.
ii) Coming to the case of Kanakia Enterprises, the facts show that the assessee was forced to forego accrued interest, due to inability of the party to pay the amount. The Hon'ble Madras High Court in the case of CIT vs. India Equipment Leasing Ltd. 293 ITR 350 held as follows :
50"Held, dismissing the appeals, that interest on "sticky" loans not being brought into the profit and loss account but being taken to the suspense account was an accepted mode of treatment of notional income in accounting practice. The fact that the assessee, although generally using a mercantile system of accounting, kept such interest amount in a suspense account and did not bring those amounts to the profit and loss account, showed that the assessee was following a mixed system of accounting by which such interest was included in its income only when it was actually received. The CBDT circular permitted such interest to be excluded from income if for three years such interest was not actually received. Thereafter interest would be added as income only when actually received."
The facts show that the account was settled in the year 2001-02 and the interest ultimately received, is less than what is sought to be brought to tax as accrued interest income. The assessee pleads that in case the amount is brought to tax on accrual basis, deduction should be allowed in the assessment year 2001-02 when. On settlement, interest was not received and the assessee had to forgo it. We find justification in this argument. Applying the ratio laid down by the Hon'ble Madras High Court in the case of CIT vs. India Equipment Leasing Ltd. (supra), we uphold the contention of the assessee that no interest accrued to it as real income theory and delete the addition made on account of interest accrued.
ii) Similarly, in the case of Akruti Nirman Pvt. Ltd., though on the first look it appears that the assessee should have charged interest for five weeks in 2000-01, on final settlement it is clear that no interest was actually received. There is no point in bringing to tax the interest on accrual basis in the year 2000-01 and thereafter allowing the same as business loss..
51iii) Similar are the facts in the case of Sai Shiv Developers and Meher Singh Dada. In these cases also if interest is held to be accrued, then on settlement of account, as on facts this interest has not been received at all, it should be allowed as an expenditure. As far as the other parties are concerned, taxing them on accrual would amount to double taxation as in the earlier cases. The Revenue has not brought to tax the income in later years on a protective basis. The same income cannot be brought to tax twice on substantive basis. Thus the addition has to be deleted.
13.5 The Tribunal in the block assessment order for the assessment years 1996-97 to 1999-2000, deleted the additions made on the ground that there is accrual of interest in the cases of Shastriji Construction, Elegant Builders, Rashesh Kankia, Elegant Investments, Neela Mehta, Jitendra Sheth and Raj Investments. The Tribunal deleted the additions of accrued income on the ground that income cannot be brought to tax notionally. The facts are identical and in fact the parties are the same in some cases.We respectfully follow the coordinate bench decision on the very same issue in the block assessment and allow ground No. 2 of the assessee and dismiss ground No. 2 of the Revenue.
14. Ground No. 3 in assessee's appeal, ITA No. 4482/M/07, relates to disallowance of brokerage of Rs. 2,50,000/- paid by the assessee and claimed as deduction from the annual letting value. The AO held that since the brokerage paid is for letting out of the property and the income is assessed as income from House Property, these expenses cannot be allowed as business expenses u/s 37. The CIT(A) upheld the disallowance on the ground that the ALV is not to be disturbed which is coming out as a result of computation as per formula u/s 23.
5215. The learned AR, before us, has relied on various decisions including the decision of Mumbai ITAT in the case of Govind S Singhania vs ITO (ITA No.4581/M/06 dt. 3.4.2008) (Mum Trib) filed at Pg No. 211 to 216 of the paperbook. The relevant extract of the same is as under:
"We have considered the submissions made by both the sides as well as the orders of the authorities below. As far as incurring all these expenses is not in dispute. It is also noted that without incurring these expenses, the assessee would not have earned the rental income. It is further noted that the annual letting value in this case has been arrived at u/s 23(1)(b) of the Act. Hence, rental income so received or receivable by the owner has to be taken into consideration and in our view such rent has to be net of these expenses and these expenses have to be deducted from the very beginning because whatever comes in the hands of the assessee is the net amount. We also find substantial force in the argument of the assessee that had these expenses been borne by the tenant and only rent would have been paid by the tenant then only the amount of net no rent would have been the annual letting value within the meaning of the provisions of section 23(1)(b) of the Act. Further, the case laws relied on by the assessee also support this view. In this view of the matter, we hold that the annual letting value should be taken net on stamp duty and brokerage paid by the assessee. Accordingly, we accept this ground of the assessee."
16. The learned DR argued that the ALV cannot be disturbed except by standard deductions available u/s 24 of the Act. No expenses should be allowed for deduction while computing the ALV.
17. After considering the rival submissions, we find that the first appellate authority has not accepted the claim of the assessee that the payment of brokerage, is in the nature of deduction of rent at source. At pages 22-23, para 3.3, the CIT(Appeals) held as follows :
53"3.3 I have considered the submission of the appellant. The issue to be decide in the present case whether in computation of income from house property, annual value should be reduced by the amount of brokerage paid. For facility of reference, I reproduce hereunder the relevant portion of clause 23(1):-
"23(1) For the purposes of section 22, the annual value of any property shall be deemed to be-
(a)the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable."
From plain reading of the above, I do not find any express provision regarding allowance of any expenditure, brokerage, and commission or by any other name, for determining ALV of the property. Rental income from property is assessed under the head 'Income from house property'. It will be pertinent to mention here that computation of income from different sources is done and taxed under five heads, i.e. (i) income from salary; (ii) income from business; (iii) capital gains; (iv) income from house property; and (v) income from any other sources. There are express provisions in each head for computation of income. Under the business head, actual expenditure is allowed as cash or mercantile basis, as per sections 28 to 43, while under the head 'salary' only standard deduction is allowed. Likewise, under 'house property', only standard deduction is allowed under section 24. Under the head 'Income from house property', ALV is computed on the basis of deemed rent, as per set formula enshrined in section 23 and thereafter standard deduction is allowed under section 24, as specifically provided under the Act. For computation of ALV, a formula has been enshrined in section 23. Combined reading of clauses (a) and (b) lead to the inference about the words used actual rent received or receivable. To distinguish expected rent, which is deemed in clause (a), words 'actual rent received or receivable' have been put in clause (b) and to infer that actual rent means net rent means net rent after allowance of expenditure in connection with rent will lead to only absurd conclusion contrary to the object of the Legislature. What is not expressly provided in the statute should not be thrust in own inference. More so, the 54 statute does not empower the assessing authority or the assessee either to add or subtract anything from the ALV. In the case of CIT v. Gwalior Commercial Co. Ltd. [1983] 141 ITR 930 (Cal.), it was held that no account should be taken of the expenditure incurred in connection with Air-conditioner, furniture, etc. Conversely, it can be inferred that ALV is not to be disturbed which is coming out as a result of computation, as per formula under section 23. It is up to the assessee whether he needs the services of a broker or not. There is a difference between an amount, which a person is obliged to pay out of his income and an amount, which by the nature of the obligation cannot be said to be a part of the income of the assessee. Hence, the plea of the appellant fails and for this reliance is also placed on the decision of the ITAT Chandigarh bench in the case of Piccadily Hotels private Limited 97 ITD 564 wherein the ITAT has not allowed the similar expenditure. Accordingly I hold that the appellant is not entitled to any deduction from the ALV on account of brokerage paid by the appellant. The ground of appeal stands not allowed."
We fully agree with these findings. Reliance placed by the learned counsel for the assessee on the decision in the case of Govind S. Singhania in ITA No. 4581/M/06, order dated 3-4-2008, in our considered opinion, does not apply as ALV was held to be determined after taking into consideration the stamp duty and brokerage. In this case there is no stamp duty. On the other hand, the Chandigarh Bench of the Tribunal in the case of Piccadily Hotels Private Limited 97 ITD 564 held that income while computing income from house property, annual letting value should not be reduced by an amount of brokerage paid. It held that the statute does not empower the assessing authority or the assessee either to add or subtract anything from the ALV. We respectfully follow this decision and dismiss ground No. 3 of the assessee's appeal.
18. Ground No. 4 in assessee's appeal, ITA No. 4482/M/07, relates to disallowance u/s 14A of the Act. The assessee has received dividend of Rs. 2.04 crore during the year. The AO held that the assessee has mixed 55 account where in interest bearing funds and the non interest bearing funds cannot be bifurcated towards a particular asset. The AO, for working out the cost incurred for earning dividend, allocated the expenses on the basis of funds employed in the investments to total funds employed and disallowed Rs. 83,81,774/-. The CIT(A) has upheld the disallowance of the expense u/s 14A of the Act.
19. The learned AR agreed that the issue may be set aside to the file of AO that with a specific direction to keep in view of the decision of the Bombay High Court in the case of Godrej and Boyce Mfg Co Ltd 328 ITR 81.
20. The learned DR also agreed to the same.
21. In view of the decision of the Hon'ble Bombay High court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), we set aside the issue to the file of the AO for fresh adjudication in accordance with law.
21.1 Thus ground No. 4 of the assessee's appeal is allowed for statistical purposes.
21.2 In the result, the Revenue's appeal is dismissed and the assessee's appeal is allowed in part.
ITA NO 4483/M/07 (Assessee's appeal - 2001-02) ITA NO 4308/M/07 (Department's appeal - 2001-02)
22. These cross appeals are for the AY 2001-02. The AO made disallowance of interest on the ground that assessee had made interest- free advances out of interest-bearing borrowings. The disallowance are on the same lines as in AY 2000-01. The parties for the AY 2001-02 are as follows:
56 Sr. No. Party Name
1. Acme Sthapati Ltd.
2. M J Exports Ltd.
3. Oxford - 21st Century Services Pvt. Ltd.
4. Sun Fastfin Services
5. B B Parekh
6. Bharat Kanakia
7. Jaykumar Mahajan
8. Raj Investments
9. Shastriji Constructions
10. Sun Speciality Chemicals Pvt. Ltd.
11. Naresh Garodia
12. Amal Finance Pvt. Limited
13. Virtuous Securities & Broking Pvt. Ltd.
14. Virtuous Share Investments Pvt. Ltd.
15. Dolphin Laboratories
16. Sagar Enterprises
17. Sholapur Organics Pvt. Limited
23. The parties at Sr. no. 1 to 9 and 15 to 17 are the parties covered by AY 2000-01 and the same has been discussed above while deciding for AY 2000-01. The AO disallowed the interest paid with respect of the parties at Sr. No. 10 to 14.The relevant extract is as follows:
"I have considered the above submission of the assessee but the same cannot be accepted excepting for Sun Speciality Chemicals Pvt. Ltd. (Sr. No. 10) and Sagar Enterprises (Sr. No. 16).
Parties at Sr. no. 1,2,3,4,5,6,7,8,15 and 17 are the same as in AY 2000-01. Issues related to all these parties have been suitably 57 discussed and addressed to in the block assessment order / assessment year 1999-00 assessment order / assessment year 2000- 01 assessment order. During those assessments, after considering the similar submissions, the interest paid by the assessee, equivalent to the interest calculated on these interest free loans & advances give, was disallowed and added back to the income of the assessee. Since there is no material change in the facts during the year under consideration, following the same discussion as in the above mentioned assessment orders the interest paid by the assessee, equivalent to the interest calculated @ 12.50% on the interest free loans / advances made to these parties, is disallowed and added back to the income of the assessee.
As regards interest free advances given to Naresh Goradia (Sr. No.
11), the assessee has replied that the advances were paid for purchase of property. During the block and earlier assessments, it was observed that the assessee enters in to financing transactions wherein the properties are kept as security for advancing the amounts and in case of parties to whom loans are given fails to repay, then the properties are acquired by the assessee. In this case also the assessee has not taken possession of the property and the entire amount is refunded back to the assessee in the next assessment year. In this circumstances the plea of the assessee cannot be accepted and interest paid by the assessee, equivalent to the interest calculated @ 12% on the interest free advances made to this party, is disallowed and added back to the income of the assessee."
24. The CIT(A) deleted the disallowance of interest paid, however, made addition on account of accrual of income by following his earlier year order in AY 2000-01. For the advances to parties at Sr. No. 10 to 14 held as follows:
"2.20 The party at Sr. No. 11 is Shri Naresh Garodia. The appellant has claimed that interest is given to this party for purchase of property. The appellant has itself admitted that interest was charged from this party in the AY 2002-03. The appellant has 58 filed no evidence in the form of agreement to purchase or any other evidence to show that the money advanced to this party is for the purchase of property. These facts show that amount was given with the understanding that interest will be charged. In view of these facts the action of the AO in making addition on account of accrued interest on advances given to this party is upheld.
2.21. The appellant has also advanced money to the party at Sr. no. 12, 13 and 14 in the current year. The money advanced to party at Sr. No. 12 is only Rs. 600/-. The money advanced to other party is Rs. 43,000/- to Virtuous Securities and Broking Pvt. Ltd. and Rs. 25,000/- to Virtuous Share Investment Pvt. Ltd. The appellant has not give any reasons for giving money to this party without charging interest except stating that these are wholly owned subsidiaries of the appellant. No commercial expediency has been shown and, therefore, in view of the decision of SC in the case of S A Builders Ltd. (288 ITR 1), the amount of interest relating to these advances made to these parties can be disallowed. In view of these facts, the action of the AO is upheld"
25. The learned AR prayed for considering the submissions made for AY 2000-01 with regard to the common parties. The learned AR, as regards to party at Sr. No. 10, submitted that the advance totaling to Rs. 23.70 lakhs was given as share application money in February and March 2001. The party has allotted shares worth of Rs. 16.20 lakhs during the year in March 2001 and balance shares allotted in next year in March 2002 i.e. in AY 2002-03. The learned AR also pointed out that no addition has been made by the Department in respect to this party in AY 2002-03. The learned AR also pointed out that similar disallowance was deleted by the ITAT in the block assessment.
5925.1 The learned AR, as regards to party at Sr. No. 11 submitted that the advance was given for purchase of property. The transaction did not materialize and hence, interest charged subsequently was offered to tax for AY 2002-03 and advances were recovered.
25.2 The learned AR, as regards to party at Sr. No. 13 and 14, submitted that the advances were given for the purpose of business and the same are in the nature of current account transactions. Also, it was pointed out that these parties are the wholly owned subsidiaries of the assessee and for the same reason, no addition is called for. As regards to party at Sr. No. 12, the amount of advance is only Rs. 600.
25.3 In addition, the learned AR, relied on the legal submissions submitted for AY 2000-01.
25.4 Consistent with the view taken by us while disposing of both the assessee's appeal as well as the Revenue's appeal for the assessment year 2000-01, we uphold the contentions of the assessee and allow the ground raised by it and dismiss the ground raised by the Revenue.
26. Ground No. 2 in assessee's appeal, ITA No. 4483/M/07, relates to disallowance u/s 14A of the Act. The assessee has received dividend of Rs. 34.32 lakhs during the year. The AO made disallowance of Rs. 20,67,369/-. The CIT(A) has upheld the disallowance of the expense u/s 14A of the Act following his earlier year order for AY 2000-01. The learned AR agreed that the issue may be set aside to the file of AO with a specific direction to keep in view the Bombay High Court decision in the case of Godrej and Boyce Mfg Co Ltd 328 ITR 81.The learned DR also agreed to the same.
6027. We set aside the issue to the file of the AO for fresh adjudication in view of the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra)
28. Ground No. 3 of the assessee's appeal, ITA No. 4483/M/2007, deals with charging of interest u/s 234D. The assessee was granted interest u/s 244A of Rs. 6,90,217/- on the amount of refund of Rs. 39,21,686/-. The refund was granted in the month of March 2003. AO charged interest for the period of nine months. The CIT(A) held that the interest u/s 234D should be charged on the refund granted.
28.1 The learned AR, before us, has pointed out that the refund was granted prior to the insertion of the section 234D i.e. in the month of March 2003. The learned AR argued that the interest u/s 234D cannot be made applicable to assessment year prior to AY 2004-05. This proposition has been upheld by the Delhi Special Bench in the case of Ekta Promoters (113 ITD 719)(Del SB) which is recently approved by the Delhi High Court in the case of DIT vs Jacabs Civil Incorporated, Mitsubishi Corpn. and Ors. (330 ITR 578) (Del HC). The DR relied on the order of the CIT(A).
28.2 In view of the decision of the Special Bench of the Tribunal in the case of Ekta Pramotors 113 ITD 719 (Del)(SB), we allow this ground of the assessee.
28.3 In the result, the Revenue's appeal is dismissed and the assessee's appeal is allowed in part.
61ITA NO 4484/M/07 (Assessee's appeal - A.Y. 2002-03) ITA NO 4309/M/07 (Department's appeal - A.Y. 2002-03)
29. These cross appeals are for AY 2002-03. The AO made disallowance for the reason that the assessee had allegedly made interest- free loans / advances out of borrowed funds on which, interest had been paid by the asseessee. The disallowance was on the same lines as in AY 2000-01 The parties for the AY 2002-03 are as follows:
Sr. No. Party Name
1. Acme Sthapati Ltd.
2. M J Exports Ltd.
3. Oxford - 21st Century Services Pvt. Ltd.
4. Acent Associates
5. B B Parekh
6. Bharat Kanakia
7. Jaykumar Mahajan
8. Shastriji Constructions
9. Amal Finance Pvt. Limited
10. Jeevanrekha Investrade Pvt. Ltd.
11. Joshuha Investments Pvt. Ltd.
12. Sunhami Finlease & Investment Pvt. Ltd.
13. Virtuous Securities & Broking Pvt. Ltd.
14. Virtuous Share Investments Pvt. Ltd.
30. The parties at Sr. no. 1 to 14 are the parties covered by AY 2000- 01 and AY 2001-02 and the same have been discussed above while deciding the appeals for AY 2000-01 and AY 2001-02. For all the parties 62 at Sr. No. 1 to 14, the AO and CIT(A) made the addition to the total income based on the earlier year orders respectively.
30.1 The submissions of both the parties are similar to the submissions made while arguing the appeals in the earlier assessment years. Consistent with the view taken therein, we allow the grounds raised by the assessee and dismiss the grounds raised by the Revenue.
31. Ground No. 2 in assessee's appeal, ITA No. 4483/M/07, relates to disallowance u/s 14A of the Act. The assessee has received dividend of Rs. 1.27 crore during the year. The AO made disallowance of Rs. 51,60,654/-. The CIT(A) has upheld the disallowance of the expense u/s 14A of the Act following his earlier year order for AY 2000-01. The learned AR agreed that the issue may be set aside to the file of AO with a specific direction to keep in view of the Bombay High Court decision in the case of Godrej and Boyce Mfg Co Ltd 328 ITR 81. The learned DR also agreed to the same.
31.1 In view of the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. (supra), we set aside the issue to the file of the AO for fresh adjudication.
31.2 In the result, the Revenue's appeal is dismissed and the assessee's appeal is allowed in part.
ITA NO 7349/M/07 (Assessee's appeal - A.Y.2003-04) ITA NO 6837/M/07 (Department's appeal - A.Y.2003-04)
32. These cross appeals relate to AY 2003-04. AO made disallowance of interest alleging that the assessee had made interes-free advances out of interest-bearing borrowings. The disallowance was on the same lines as in AY 2000-01. The parties for the AY 2003-04 are as follows:
63 Sr. No. Party Name
1. B B Parekh
2. M J Exports Ltd.
3. Acme Sthapati Ltd.
4. Acent Associates
5. Shastriji Constructions
6. Rakesh Caijla
7. Jaykumar Mahajan
8. Oxford - 21st Century Services Pvt. Ltd.
9. Virtuous Securities & Broking Pvt. Ltd.
10. Virtuous Share Investments Pvt. Ltd.
33. The parties at Sr. no. 1 to 10 are the parties covered by AY 2000- 01, 2001-02 and 2002-03 and the same have been discussed above while deciding the appeal for AY 2000-01 and AY 2001-02. For all the parties, the AO and CIT(A) made the addition to the total income based on their respective orders for earlier years.
33.1 The learned DR, at the outset, reiterated the submissions made for these parties in earlier years. For party at Sr. No. 6, the learned AR submitted that the outstanding amount is only Rs. 7500. The amount is payable on account of professional fees for sales tax assessment and not in the nature of loans and advances and no disallowance was made by the department for subsequent years.
33.2 Consistent with the view taken while disposing of the appeals for assessment year 2000-01, we allow all the grounds raised by the assessee and dismiss the grounds raised by the Revenue.
6434. Ground No. 2 of the Assessee's appeal, ITA No. 7349/M/2007, is against the disallowance of bad debts written off claimed as a deduction. The assessee has written off the amount receivable from Bharat Kanakia to the extent of Rs. 74,565 which was found irrecoverable and said amount represents interest and processing charges. The CIT(A) has upheld the disallowance only on the reason that the confirmation of the party was not filed before the AO.
35.1 Before us, the learned AR submitted the income was offered to tax in AY 2000-01 which could not be recovered and hence written off during the year. The learned AR has relied on the decision of Supreme Court in the case of TRF Ltd. (323 ITR 397)(SC) and the decision of Bombay High Court in the case of Oman International Bank (313 ITR
128)(Bom). The learned DR supported the order of the CIT(A).
35.2 In view of the decision of the Hon'ble Supreme Court in the case of TRF Limited (supra), the amount written off has to be allowed during the year. Thus ground No. 2 is hereby allowed.
36. Ground No. 3 of the Assessee's appeal, ITA No. 7349/M/2007, is against the disallowance of deduction u/s 80M of the Act. The assessee had claimed deduction u/s 80M of Rs. 1,21,95,220. The same was accepted by the AO. The CIT(A), after issuing enhancement notice, allocated proportionate interest expenditure and administrative expenses towards earning of dividend income which worked out to Rs. 1.74 crore and thereby disallowed the entire claim of deduction u/s 80M of the Act.
36.1 The learned AR furnished fund flow statement for the year under consideration. It is submitted that after reducing revaluation reserve from Reserves and Investments, total share investment of the assessee is Rs.
6525.50 crore as against own funds of Rs. 25 crore. Thus, when own funds are almost equal to investment made, in view of the following decisions, it is to be presumed that investments are out of own funds and hence no disallowance of interest should be made. For this proposition, the learned AR, relied on the following decisions:
Reliance Utilities And Power Limited (313 ITR 340) (Bom) The relevant extract of the same is as under:
"10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen.. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments.66
In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T."
Ashok Commercial Enterprises [ITA No. 2985 of 2009 (Bom)]
37. The learned AR also submitted that what is to be deducted from the gross dividend is only the actual expenditure incurred for the purpose of earning of the dividend income. For this purpose, the AR relied on the following decisions.
Punjab State Industrial Development Corporation Ltd. vs DCIT (102 ITD 1)(Chd)(SB). The relevant extract of the same is as under:
"Therefore, the following propositions would emerge:
...
(iv) the actual expenditure incurred is to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction u/s 80M;"
CIT vs Central Bank of India (264 ITR 522)(Bom HC) 37.1 The learned AR, without prejudice, submitted that disallowance of interest, if any shall be restricted only on difference between own funds and investment i.e. Rs. 50 lakhs. The learned DR argued that CIT(A) has correctly made the disallowance and hence should be upheld. He also relied on the decision of United General Trust Ltd. (201 ITR 488).
37.2 The assessee has furnished a Fund Flow Statement to demonstrate that non interest bearing funds or own funds are available for investment in shares. It was argued that as no interest bearing funds have been diverted for investment in shares, expenditure cannot be proportionate interest expenditure cannot be reduced from the claim made for deduction u/s 80M.
6737.3 The Special Bench of the Tribunal in the case of Punjab Industrial Development Corporation (supra) has held that only actual expenditure incurred, is to be taken into consideration while computing deduction u/s 80M. Similar is the view of the jurisdictional High Court in the case of Central Bank of India (supra). Admittedly the CIT(Appeals) has not made a disallowance based on actual expenditure. The disallowance was made based on allocation of proportionate expenditure. This, in our considered view, cannot be upheld as it is against the proposition laid down by the jurisdictional High Court.
37.4 Thus, ground No. 3 of the assessee's appeal is allowed.
37.5 In the result, the Revenue's appeal is dismissed and assessee's appeal is allowed.
ITA NO 7350/M/07 (Assessee's appeal - A.Y. 2004-05) ITA NO 6838/M/07 (Department's appeal - A.Y. 2004-05)
38. These are the cross appeals for AY 2004-05. The AO made disallowance of interest on the ground that assessee had utilized intrest- bearing borrowings to make interest-free advances. The disallowance was on the same lines as in AY 2000-01. The parties for the AY 2004-05 are as follows:
Sr. No. Party Name
1. B B Parekh
2. M J Exports Ltd.
3. Shanu Deep Pvt. Ltd.
4. Acme Sthapati Ltd.
5. Shastriji Constructions
68
The parties at Sr. no. 1 to 5 (except party at Sr. No. 3) are the parties covered by AY 2000-01, 2001-02 and 2002-03 and the same have been discussed above while deciding the appeals for AY 2000-01 and AY 2001-02. For the parties at Sr. No. 1, 2 and 5, the AO and CIT(A) made the addition to the total income based their respective orders for earlier years. As regards party no. 4 Acme Sthapati Ltd., the outstanding amount as on 31 March 2004 is only the compensation offered to tax in AY 2004- 05 which was received subsequently in August 2004. The AO charged interest at 12 % on outstanding balance on daily basis while CIT(A) enhanced it at 18%. The learned AR reiterated the submission in respect of this party in earlier years and also pointed out that the addition upheld by the CIT(A) was without appreciating the fact that the only amount outstanding on 31 March was the interest charged by way of compensation.
As regards for the party at Sr. No. 3, the AO observed that the amount of Rs. 1.33 crores was advanced to Shanudeep Pvt. Ltd. on 9 March 2004 and was received back in the month of May 2004. The CIT(A) held as follows:
"As regards interest paid to Ms/ Shanudeep Pvt. Ltd., the appellant is claiming that it has issued three pay orders to that party which were never encashed. This explanation of the appellant is contrary to the explanation filed by the appellant before the AO. Before the assessing officer, the appellant had claimed that the amount was advanced on 9 March 2004 and received back in the month of May, 2004. However, the filed necessary evidence to support this claim. Since the appellant has prepared the pay orders, the same were also given to M/s Shanudeep Pvt. Ltd. merely because the pay orders were not encashed by M/s Shanudeep Pvt. Ltd., it cannot be said that no interest has accrued to the appellant. The appellant has not claimed that amount given was without any condition of charging of interest. In view of this, the interest income is required to be 69 computed and taxed in the hands of the appellant at the rate of 12% on accrual basis. Addition of Rs. 1,09,047/- made by the AO is upheld."
38.1 The learned DR, at the outset, reiterated the submissions made for these parties in earlier years. For the party at Sr. No. 3 i.e. Shanu Deep Pvt. Ltd., the learned AR submitted that since pay orders were not encashed, the party has not received any funds and hence, there is no question of charging of any interest to them. The copy of correspondence with bank for cancellation of draft and bank statement showing the same were filed at the time of hearing.
38.2 As far as accrual of income to M/s B.B. Parekh, M.J. Exports Ltd., Acme Sthapati Ltd. and Shastriji Constructions are concerned, in view of the discussion in the earlier year, we uphold the contentions of the assessee. Coming to the case of Shanu Deep Pvt. Ltd., it is peculiar that the assessee had issued three pay orders but the same were never encashed. But at the same time, we find that the Revenue has not made any enquiry to arrive at a conclusion that the assessee has in fact earned income from M/s Shanu Deep Pvt. Ltd. The claim of the assessee cannot be dismissed without collecting evidence. Thus for the reason that no investigation is done or evidence collected, the addition made on account of accrual of income from Shanu Deep Pvt. Ltd. is hereby deleted.
39. Ground No. 2 in assessee's appeal, ITA No. 7350/M/07, relates to disallowance u/s 14A of the Act. The assessee has received dividend of Rs. 2.65 crore during the year. The CIT(A) has made an addition of Rs. 75,86,405/- after sending enhancement notice. The learned AR agreed that the issue may be set aside to the file of AO with a specific direction to keep in view the Bombay High Court decision in the case of Godrej 70 and Boyce Mfg Co Ltd 328 ITR 81. The learned DR also agreed to the same.
39.1 The issue is set aside to the file of the AO for fresh adjudication in the line of the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. 234 ITA (Bom) 1.
39.2 In the result, the appeal of the assessee is allowed in part and the appeal of the Revenue is dismissed.
ITA NO 4956/M/08 (Assessee's appeal - A.Y. 2005-06)
40. The appeal is filed by the assessee for the AY 2005-06. The AO made disallowance of interest for the reason that the assessee had made interest-free advances out of interest-bearing borrowings. The disallowance is on the same lines as in AY 2000-01. The parties for the AY 2005-06 are as follows:
Sr. No. Party Name
1. B B Parekh
2. M J Exports Ltd.
3. Shanu Deep Pvt. Ltd.
4. Acme Sthapati Ltd.
5. Shastriji Constructions
The parties at Sr. no. 1 to 5 are the parties covered by AY 2000-01, 2001- 02, 2002-03 and AY 2004-05 and the same have been discussed above while deciding for AY 2000-01 to AY 2004-05. Further, as regards party no. 4 Acme Sthapati Ltd., the only outstanding amount is the compensation offered to tax in AY 2004-05 which was received during the year in August 2004. The AO charged interest at 12 % on outstanding 71 balance on daily basis till date of receipt which is confirmed by CIT(A). The learned AR reiterated the submission in respect of this party in earlier years and also pointed out that the addition upheld by the CIT(A) was without appreciating the fact that the only amount outstanding on 1 April was the interest charged by way of compensation.
40.1 Consistent with the view taken by us in the earlier assessment years, we delete the addition in question and allow this ground of the assessee.
41. Ground No. 2 in assessee's appeal, ITA No. 4956/M/08, relates to disallowance u/s 14A of the Act. The assessee has received dividend of Rs. 2.30 crore during the year. The AO made disallowance of Rs. 11,80,013/-. The CIT(A) applying Rule 8D has made a disallowance of Rs. 19,70,950/-. The learned AR agreed that the issue may be set aside to the file of AO that with a specific direction in view of the Bombay High Court decision in the case of Godrej and Boyce Mfg Co Ltd 328 ITR 81. The learned DR also agreed to the same.
41.1 We set aside this issue to the file of the AO for fresh adjudication in the line of the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra) ITA NO 6330/M/08 (Assessee's appeal - A.Y. 2006-07)
42. The appeal is filed by the assessee for the AY 2006-07. The only issue in appeal relates to disallowance u/s 14A of the Act. The assessee has received dividend of Rs. 3.69 crore during the year. The AO made disallowance of Rs. 13,92,343/- applying Rule 8D. The CIT(A) has upheld the disallowance and given a direction to work out the disallowance as per Rule 8D. The learned AR agreed that the issue may be set aside to the file of AO that with a specific direction to keep in view 72 the Bombay High Court decision in the case of Godrej and Boyce Mfg Co Ltd 328 ITR 81. The learned DR also agreed to the same.
42.1 After hearing the parties, we set aside this issue to the file of the AO for fresh adjudication in the line of the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra) 42.2 In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open court on 31st March , 2011.
Sd/- Sd/-
(D.K. Agarwal) (J. Sudhakar Reddy)
Judicial Member. Accountant Member
Mumbai,
Dated: 31st March, 2011.
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, F-Bench
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai.
Wakode.