Income Tax Appellate Tribunal - Ahmedabad
Yadunandan Corporation, Surat vs Department Of Income Tax on 24 November, 2011
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IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before S/Shri D.K.Tyagi, JM and A.K. Garodia, AM.
ITA No.92/AHD/2009
Asst. Year :2005-06
Income Tax Officer, Vs. M/s. Yadunandan
Ward 3(1), Corporation,
Ayakar Bhavan, 148-149 City Light
Majura Gate, Road, Bhavgati
Surat. Ashish Apartment,
Surat.
(Appellant) (Respondent)
..
PAN : AAAFY 2524 R
Appellant by :- Shri B.L. Yadav, D.R.
Respondent by:- Shri Rajesh M. Upadhyay.
Date of hearing : 24/11/2011
Date of pronouncement : 30/11/11.
ORDER
Per D. K. Tyagi, Judicial Member.
This appeal is filed by the Revenue against the order passed by Ld. CIT(A) -II, Surat in appeal No.CAS/II/263/07-08 dated 27-10-2008 for the Assessment Year 2005-06. The Revenue raised following grounds in its appeal:
"1. On the facts and circumstances of the case and in law, the Ld. CIT (A), Surat has erred in deleting the addition of Rs. 13,02,923/- on account of impact fee paid to Surat Municipal Corporation in violation and infraction of provisions of law
2. ITA No.92/AHD/2009 Asst. Year 2005-06.
to Surat Municipal Corporation which is not an eligible for deduction under Section 37 of the Act.
2. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting disallowance of interest on account of utilization of interest bearing funds in advancing interest free loans to specified persons under Sec. 40A(2)(b) of the Act holding that no direct nexus is proved by the A.O., ignoring the material facts that the assessee had paid interest free advances to specified persons through cheque and the assessee had always debit balance in its bank accounts which itself prove that the interest bearing funds had utilized by the assessee in advancing interest free loans.
3. On the facts and in the circumstances of the case, the Ld. CIT (A) ought to have upheld the order of the Assessing Officer on this issue.
4. It is, therefore, prayed that the order of the CIT (A) be set aside and that the Order of the Assessing Officer be restored."
2. The assessee has filed its return of income on 31-10-2005 declaring total income of Rs.3,75,467/- and the assessment was completed on 31- 12-2007 assessing the total income at Rs.20,29,350/- thereby making an addition on counts:-
(1) On account of Impact Fee Rs. 13,02,923/-
(2) On account of Interest paid
on unsecured loans. Rs. 16,53,883/-
3. The assessee filed appeal before the CIT (A) against the above additions. Before the CIT (A) the A.R. of the assessee submitted that impact fee and the balcony cover charges were business expenses. They were neither capital nor personal in nature. the government of Gujarat had framed a Scheme in the year 2001 called 'The Gujarat Regulation of Unauthorised Development Act, 2001' under which rules were framed for regularizing unauthorized constructions on the payment of stipulated fees.
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For this purpose, the concerned authorities, in this case the SMC, was to be notified by the concerned parties wanting to take advantage of such Rules. The Rules also specified the fees to be paid. It was the argument of the AR that the payment made to the SMC under the said Scheme was an expenditure which was incurred wholly and exclusively for the Assessee's construction business. The AR sought to distinguish the case of Maddi Venkatraman & Co. Pvt. Ltd. (229 ITR 534) which had been relied upon by the A.O., on the ground that the facts of the two cases were not the same. According to the AR, the very nature of the expenditure i.e. of 'Impact Fees' and 'Balcony Charges' itself suggested that such payments were in the nature of 'fees' and not penalty. The AR placed reliance on several cases-laws of his own, and submitted that on similar set of facts and circumstances, the DCIT Circle-3, Surat allowed the Assessee's claim of Balcony Cover Charges of Rs.3 lakhs, in the assessment year 2004-05.
4. On appeal, the Ld. CIT (A) deleted the additions by observing as under:-
"6. I have carefully considered the view taken by the AO, and the written submissions of the AR. From the facts of the case, it is clear that the Impact Fees and the Balcony Cover Charges were paid by the assessee for contravening the plan originally sanctioned in respect of the two projects Bhagwati Ashish -1 and Bhagwati Ashish-2, developed, promoted and constructed by the assessee. The contravention was of the by-laws of the SMC; this has been accepted by the AO. The nature of contravention has also been certified by the Executive Engineer, South-West Zone, (Athwa), SMC. In the case of CIT vs .Syndicate Bank, 261 ITR 528 the Hon'ble Karnataka High Court held that if a penalty is levied for infraction of law then it cannot be allowed as deduction.
However, if it is in the nature of compensatory payment, it may be allowed as deduction. On the basis of such observation, the Hon'ble High Court sustained the penalty levied on the said bank by the RBI u/s.24 of the RBI Act, for failing to maintain a 3
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percentage of the asset of the bank in the manner provided therein. However, in an earlier case of CIT, Delhi -IV vs. Lokenath and Co. (Construction), the assessee had violated the sanction of a plan for construction of a building of 13 storied by the NMDC. According to the bye-laws of the NMDC, the second floor of the building could cover only 35%, while the assessee had covered 50%, thereby exceeding permissible limit laid down by the bye- laws. Time for revalidation of the plan having expired, the assessee applied for the sanction of a revised plan of the building with only 12 storey on the ground that there had been excess construction in the second floor. The revised plan was sanctioned condoning the additional coverage and the other irregularities, on the condition that the assessee paid an adhoc of Rs. 4 lakhs. The Hon'ble Delhi High Court, affirming the decision of the ITAT, held that the said sum of Rs.4 lakhs was an allowable deduction.
6.1. The facts of our assessee's case are almost similar to that of M/s. Loknath & Co. (supra) as seen from the order of the Executive Engineer dated 19-10-2005. What was unauthorized was extra use of FSI, covering of projections and change of use from residential to commercial, the total area being 1457.44 sq. mtrs. For which the total amount was Rs. 17,89,959/-. It is also clearly mentioned in the said order that the contravention was to the permission granted by the SMC vide their letter No.SWZ/Out/5976 dated 24- 10-2000 and which was now regularized under the provisions of sub-section (3) of Section-4 of the Gujarat Regularisation of Unauthorised Development Act, 2001 (GRUDA). Thus there was only a violation of the sanction, and not any "infraction of any law". Further, it must be also appreciated that the contravention was not something which the SMC had detected and had levied penalty for such contravention. It was voluntarily intimated to the SMC under the GRUDA which was a Scheme for regularizing unauthorized constructions. The payment made for such regularization was therefore clearly in the nature of a 'compensatory payment' as explained by the Hon'ble Karnataka High Court in the case of Syndicate Bank (supra).Under such Scheme, a revised plan would have to be submitted showing the extra coverage and extra use of FSI. The charges being in nature of Impact Fees and Balcony Cover Charges were levied at the time of the revised plan being sanctioned; as in the case of Loknath and Co. (supra). Therefore, it cannot be said that it was a penalty levied for the infraction of any law, as in the case of Syndicate Bank. Being in the nature of a compensatory payment under the 4
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Scheme floated by the Gujarat Government, the fees/charges paid by the assessee were clearly allowable as permissible deductions. The A.O. is directed to delete the addition o f Rs. 13,02,923/-."
5. Against this deletion of addition, the Revenue is in appeal before us. At the time of hearing the DR relied on the order of the Assessing Officer. Whereas the A.R. relied on the order of the Ld. CIT (A) and the Tribunal's order in ITA Nos.968/Ahd/2007 & 1029/Ahd/2007 Asst. Year 2003-04 in the case of ACIT, Circle-6,Surat vs. M/s Nanavati Motors & M/s Nanavati Motors vs. ITO Ward 4(1), Surat.
6. After hearing both the parties and perusing the record, we find that the ld. CIT(A)'s order is in conformity with the order passed by the Tribunal in the case of ACIT, Circle-6,Surat vs. M/s Nanavati Motors & M/s Nanavati Motors vs. ITO Ward 4(1), Surat (supra) wherein following was held :-
"16. We have heard both the sides. We have perused the facts of the case in the light of the decision of Respected Co-ordinate Bench Mumbai in the case of Kaira Can Co. Ltd. vs. DCIT reported as 32 DTR 485 (Mum) (Trib). On perusal of the explanation to section 37(1), if an expenditure is incurred which is either an offence or prohibited by the law, then should not be allowed. In the present case, the impact fee does not appear to be levied in respect of any breach or violation of law.
However, it appears that a facility was provided by the Municipal Corporation to the building owners to change the usage of the property. Moreover, the term 'fees' itself do not demonstrate that prima facie it was a levy of 'penalty'. How and why it was considered by the Revenue an infraction of law did not borne out from the facts of the case. In view of this, we hereby direct to allow the claim."
In view of the above, the order of ld. CIT(A) is confirmed. This ground of Revenue is dismissed.
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7. As regards ground No.2 of the appeal, the A.O. made the disallowance on account of interest paid on unsecured loans. The AR of the assessee stated that the assessee claimed interest of Rs.3,50,960/- having paid only on the opening balances of the loans of three parties. On the other hand, the advances given were all new, except to M/s. Pranay Traders of Rs.7 lakhs and a part of the advance given to M/s. Jay Ambe Corporation of Rs. 1,27,1210/-. Therefore, there was no diversion of any interest-bearing fund for non-business purposes. Payments made to M/s. Pranay Traders and M/s. Jay Ambe Corporation were for supply of building materials which however subsequently did not materialize, and the assessee had not been able to recover the said amounts. These parties were not covered u/s. 40A(2)(b). It has been further submitted that the assessee had total unsecured loans of Rs.1,06,70,477/- out of which only Rs.22,49,729/- was on interest as stated by the AO himself. In the earlier year, the interests on the deposits were fully allowed on the ground of business expediency, the AR has placed reliance on several other case- laws. The Ld. CIT (A) after considering the submissions of the A.R. has deleted the addition.
Aggrieved by this order of ld. CIT(A), the Revenue is in appeal before us.
8. At the time of hearing the ld. DR reiterated the contentions of AO while the ld. AR relied on the order of ld. CIT(A).
9. After hearing both the parties, we find that the ld. CIT(A) has given relief to the assessee by observing as under :-
"10. I find that the AO had failed to examine the issue in its entirety. She only confined herself to the interest-bearing borrowings and the interest free advances given, without examining or bringing on record the fact that the assessee could have had other funds at its disposal. From the details furnished by 6
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the assessee, it is clear that the assessee had unsecured loans much in excess of Rs.22,49,729/- which, according to the AO, had been taken on interest. She also failed to notice that there were no borrowings on interest during the year under consideration, and the interest had been paid only on the brought forward balance of three parties. Finally, she had failed to prove a direct nexus between the interest bearing loans and the interest-free advances given, and had failed to note that at least two of the parties to whom advances had allegedly been given were firstly, not covered by the provisions of section 40A(2)(b) and secondly, the advances were given for supply of building materials and not simply for earning interest.
11. Given such facts and circumstances of the case, I have no other option but to direct the AO to delete the addition of Rs.3,50,960/-."
Since the above finding of the ld. CIT(A) remained uncontroverted by the Revenue, we feel no need to interfere with the order passed by him and the same is hereby confirmed. This ground of Revenue is dismissed.
10. In the result, the appeal filed by the Revenue is dismissed.
Order was pronounced in open Court on 30/11/11.
Sd/- Sd/-
(A.K. Garodia) (D.K. Tyagi)
Accountant Member Judicial Member
Ahmedabad,
Mahata/-
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Asst. Year 2005-06.
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-II, Surat.
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
1.Date of dictation 24/11/2010.
2.Date on which the typed draft is placed before the Dictating Member................Other Member 28/11/2011
3.Date on which the approved draft comes to the Sr.P.S./P.S.............
4.Date on which the fair order is placed before the Dictating Member for pronouncement..............
5.Date on which the fair order comes back to the Sr.P.S./P.S...............
6.Date on which the file goes to the Bench Clerk...........
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................
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