Income Tax Appellate Tribunal - Hyderabad
Pyramid Infrastructure Pvt.Ltd.,, ... vs Assessee on 12 August, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER.
ITA No. 1039/Hyd/2009
(Assessment Year - 2005-06)
Pyramid Infrastructure Pvt. Dy. Commissioner of Income-
Ltd., Hyderabad V/s tax, Circle - 16(3), Hyderabad.
(PAN/GIR No.
AACCP9650L/P-59)
(Appellant) (Respondent)
Appelllant by : Shri V. Raghavendra Rao
Department by : Shri B.V. Prasad Reddy
Date of Hearing 20/06/2012
Date of 12/07/2012
Pronouncement
O R D E R
Per Chandra Poojari, A.M.,
This appeal filed by the assessee is directed against the order of the CIT(A)-V, Hyderabad dated 12/08/2009 for the assessment year 2005-06.
2. The assessee has raised the grounds with regard to sustaining the additions made on account of the following:
i) interest on cash credit 28,42,310/-
ii) interest on hire purchase loan 5,27,429/-
iii) interest on TDS 75,147/-
Total Rs. 34,44,886/-
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3. Briefly the facts of the case are that the assessee availed loan from Central Bank of India to the tune of Rs. 2.06 crores, on which, interest of Rs. 28,42,310/- was debited to the P&L A/c and claimed as expenditure. During the year, the assessee 2 ITA No. 1039/Hyd/09 M/s Pyramid Infrastructure Pvt. Ltd.
had not done any contract work and the assessee had transferred the loan availed from the bank to its sister concern M/s Navayuga Engineering Company Ltd. Since the assessee had not carried on contract work and diverted the funds to its sister concern, the AO worked out the proportionate interest on the transferred fund to M/s Navayuga Engg. Co. ltd. at Rs. 28,42,310/- and disallowed the same. On appeal, the CIT(A) confirmed the disallowance made by the AO. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
4. Before us, the learned counsel for the assessee submitted as follows:-
4.1 As regards interest on cash credit of Rs. 28,42,310/-, the contention of the assessee is that the assessee has not diverted any fund to its sister concern, but, it has transferred the work-in-progress to the sister concern. As such, transfer of work-in-progress to the sister concern reflected in assets side of the Balance Sheet of assessee instead of work-in-progress account resulting NIL a/c. In other words, it was submitted that the assessee made the following journal entry in its books of account:
Navayug Engg. Company Dr... Rs. 2,56,32,196/-
To Work-in-progress A/c Cr....Rs. 2,56,32,196/-) According to the learned counsel, the work-in-progress, which was in semi-finished stage has been transferred to its sister concern and they have carried on the work on behalf of the assessee and the assessee received fixed percentage of commission from this contract. He contended that the AO overlooked the very vital fact that the assessee was engaged in the business of contract. The assessee is responsible in terms of the contract with the principals for quality and in time delivery of goods, etc. 3 ITA No. 1039/Hyd/09 M/s Pyramid Infrastructure Pvt. Ltd.
The learned counsel for the assessee relied upon the ratio of the decision of the AP High Court in the case of CIT Vs. Gopi Krishna Muralidhar, 47 ITR 469 to contend that there was no nexus between borrowal by the assessee which was in the preceding year and the debit balance in the account of the debtor, namely, Navayuga Engineering Co., sister concern, which was not an advance by the assessee but account transfer of the closing stock/work-in-progress, that too long after the date of cash credit facility obtained by the assessee from the Central Bank of India. The learned counsel also relied on the ratio of the decision of the Hon'ble Supreme Court in the case of CIT Vs. SA Builders, 288 ITR 1, according to which, if an advance is made for reasons of commercial expediency, disallowance of interest cannot be made even if there is nexus between the borrowal and advance to the sister concern out of the borrowals. He further submitted that the transfer of work- in-progress and machinery to its sister concern on a subcontract basis is a transaction dictated by commercial expediency because the assessee could make very little profits by executing the work itself in last year. He pointed out that there was no advance of funds by the assessee to NEC because it was only an account transfer. The learned counsel submitted that having assessed the income under the head business, the AO contracted himself in holding that there was no business done by the assessee. He allowed the entire expenditure on administrative overheads and personnel overheads and the bank charges of Rs. 1,31,425/-, which are all business expenses. In this connection, he referred to the decision of the Hon'ble Mumbai Bench of the ITAT in the case of Mafatlal Holdings Ltd. Vs. Addl. CIT, 85 TTJ 825, 839-840, held that the lower authorities contradicted themselves in allowing business expenses and then disallowing interest by holding that the assessee did not do business. The Hon'ble Bench there allowed the appeal by holding that interest on borrowal funds cannot be 4 ITA No. 1039/Hyd/09 M/s Pyramid Infrastructure Pvt. Ltd.
disallowed. As regards the case law relied upon by the CIT(A), the learned counsel submitted that the bank would not advance funds unless it is for business purposes. Further, the assessee did not advance the funds to NEC. The funds were utilized towards working capital and for deposits with contractee towards telephone deposits. Therefore, he submitted that the case law cited by the learned CIT(A) is not applicable to the facts of the case here. Finally, the learned counsel submitted that by executing the work through sub-contract, the conclusion that the assessee went out of business is not at all correct or justified. The P&L A/c and the work agreement clearly show that the assessee is in full factual and legal control and management of the execution of contract works. For this proposition, he relied on the decision of the ITAT B Bench in the case of Progressive Constructions Ltd. Vs. ACIT in ITA Nos. 482 & 557/Hyd/01, dt. 23/11/06 wherein in paras 13- 15, it was held that the main contractor is engaged in the contract business through sub contractor. The terms and conditions of the sub-contract agreement in the decided case are in pari materia with those in the work agreement here. The learned counsel, thus, submitted that neither the contention of the AO that the assessee was not engaged in the business nor the finding of the learned CIT(A) that the funds borrowed by the assessee were advanced to NEC is correct.
4.2 As regards the interest on hire purchase loans of Rs.
5,27,429/-, the learned counsel submitted that this expenditure on hire purchase finance falls u/s 37(1) and not u/s 36(1)(iii) as held by the AO and CIT(A). According to that section so long as the expenditure is for the purpose of business and neither personal nor of capital nature, it has to be allowed. The expenditure on finance charges i.e. interest has been incurred at the time of hire purchase agreement term, although it is being paid actually in the following 5 ITA No. 1039/Hyd/09 M/s Pyramid Infrastructure Pvt. Ltd.
months/years, on instalment basis. He, therefore, submitted that it is revenue expenditure being discharged in instalments. For this proposition, he relied on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Co. Vs. CIT, 325 ITR 805 clearly applies.
4.3 As regards interest on TDS of Rs. 75,147/-, the learned counsel for the assessee submitted that the CIT(A) is not justified in not granting relief although the assessee added back the amount in computation, but the AO again added the same amount without noticing the computation.
5. On the other hand, the learned DR relied upon the orders of the authorities below.
6. We have heard the arguments of the parties, perused the record and gone through the orders of the authorities below. With regard to the interest on cash credit of Rs. 28,42,310/-, the assessee's claim is that the assessee had not diverted the funds to its sister concern M/s Navayuga Engg. Co. Ltd. but transferred the work-in-progress to its sister concern to carry on the work on behalf of the assessee. According to the assessee, the work-in-progress which was in semi-finished- stage has been transferred to its sister concern and they have carried the work on behalf of the assesses and the assessee received fixed percentage of commission from this contract. Therefore, it cannot be treated that the assessee had diverted the funds. We find that there is no specific finding with respect to the said transaction in the orders of the lower authorities to establish that the assessee had diverted the Work-in-progress to its sister concern. If the work-in-progress is diverted by way of corresponding journal entries, it cannot be considered as the funds diverted and interest paid on loan cannot be disallowed. We, therefore, set aside this issue to the file of the AO to 6 ITA No. 1039/Hyd/09 M/s Pyramid Infrastructure Pvt. Ltd.
examine whether the assessee diverted the funds or work-in- progress and decide the issue afresh in accordance with law.
6.1 As regards disallowance of interest on hire purchase loan of Rs. 5,27,429/-, if this loan is availed for the purpose of acquiring the asset for the purpose of business, interest on the same should be allowed. Therefore, the AO is directed to examine the issue whether the asset on which loan is availed for the purpose of business or not and decide the issue accordingly.
6.2 Regarding disallowance of interest on TDS of Rs.75,147/-, it is observed that whether the assessee has already taken in to account the same while computing the income or not has to be examined ?. Therefore, we restore this issue also to the file of the AO with a direction to examine whether the assessee itself added back the said amount while filing the return of income or not and decide the same in accordance with law.
6.3 Needless to say the AO shall provide reasonable opportunity of hearing to the assessee in the matter.
7. In the result, appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced in the court on 12/07/2012.
Sd/- Sd/-
(Vijay Pal Rao) (Chandra Poojari)
Judicial Member Accountant Member
Hyderabad, Dt. 12 th July, 2012.
kv
7 ITA No. 1039/Hyd/09
M/s Pyramid Infrastructure Pvt. Ltd.
Copy forwarded to:
1. M/s Pyramid Infrastructure Pvt. Ltd., 6-3-652, V-A, Druvatara Apartments, Somajiguda, Hyderabad.
2. DCIT, Circle 16(3), IT Towers, 8 th Floor, AC Guards, Hyderabad.
3. Commissioner of Income-tax(Appeals)-V, Hyderabad
4. Commissioner of Income-tax-IV, Hyderabad
5. The D.R., ITAT, Hyderabad.