Income Tax Appellate Tribunal - Pune
Pharande Developers,, Pune vs Deputy Commissioner Of Income-Tax,, on 11 November, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
SMC BENCH, PUNE
ी आर. के. पांडा, लेखा सद य के सम
BEFORE SHRI R.K. PANDA, AM
आयकर अपील सं. / ITA No.1879/PN/2014
नधारण वष / Assessment Year : 2010-11
Pharande Developers, .......... अपीलाथ /
Room No.115, B.O. Bhavan, Appellant
S.No.47, Plot No.1,
Pune Satara Road,
Pune - 411009
PAN AAFFP3023R
बनाम v/s
DCIT, Circle-8, Pune .......... यथ /
Respondent
अपीलाथ क ओर से / Appellant by : Shri Sunil Ganoo
यथ क ओर से / Respondent by : Shri Yogesh Kamat
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing :10.11.2016 Date of Pronouncement: 11.11.2016
आदे श / ORDER
PER R.K.PANDA, AM :
This appeal filed by the assessee is directed against the order dated 18-08-2014 of the CIT(A)-V, Pune relating to Assessment Year 2010-11.
2. Disallowance of interest of Rs.1,77,787/- u/s.36(1)(iii) is the only issued raised by the assessee in the grounds of appeal.
3. Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of Developers and Builders. It filed its return of income on 12-10-2010 declaring total income of Rs.29,69,860/-. During the course of assessment proceedings the Assessing Officer noted that the assessee has diverted interest bearing funds amounting to Rs.1,75,82,462/- to its sister concerns for other 2 ITA No.1879/PN/2014 than business purposes. He observed that the assessee firm has claimed total interest expenditure of Rs.24,45,823/-. He, therefore, asked the assessee to explain as to why proportionate interest should not be disallowed. It was submitted by the assessee that it was having interest free advances from various flat holders amounting to Rs.1,90,50,434/-, interest free unsecured loan from friends and relatives at Rs.29,90,000/- and interest free deposits from other sister concerns amounting to Rs.1,14,15,159/-. The total of the above 3 amounts aggregate to Rs.3,34,55,593/- whereas the advances given to sister concerns free of interest is only Rs.1,75,82,462/-. It was accordingly argued that no disallowance is called for on account of diversion of interest free funds to sister concerns.
4. However, the Assessing Officer was not satisfied with the explanation given by the assessee. According to him, the assessee could not establish the entry wise nexus between interest free fund received and interest free advances made. He, therefore, asked the assessee to furnish the details in this regard and establish direct nexus between interest free funds and interest free advances. The assessee filed a statement showing interest free funds received from flat holders as well as other sister concerns and submitted that the funds transferred was out of such receipts. On verification with the relevant bank statement the Assessing Officer noticed that interest free funds as well as interest bearing funds both are routed through mainly one bank account. Therefore, it is difficult to treat that the interest free funds were actually transferred towards interest free advances or for other purpose. Rejecting the various explanations given by the assessee and in absence of entry wise nexus for the year under consideration and earlier years, the Assessing Officer treated 50% interest free advances as out of 3 ITA No.1879/PN/2014 interest free funds available with the assessee and considered the balance 50%, ie.. Rs.87,91,231/- as interest free advances out of total assets. The Assessing Officer accordingly computed the proportionate disallowance of interest 36(1)(iii) at Rs.4,91,760/-.
5. In appeal the Ld.CIT(A) restricted such disallowance to Rs.1,77,787/-. While doing so, he observed that the booking amount paid by the flat holders are on the basis of such completion certificate by the architect and therefore it cannot be said that the said amount was available with the assessee. He accordingly rejected the claim of interest free funds of Rs.1,90,50,434/- on account of booking advance of flats as available towards granting interest free advances to sister concerns. He however accepted the balance 2 amounts, i.e. interest free advances from group concerns and unsecured loans from relatives and friends both totaling to Rs.1,44,04,159/- as available to the assessee for giving interest free advances to sister concerns and accordingly restricted the disallowance to Rs.1,77,787/-.
6. Aggrieved with such order of the CIT(A) the assessee is in appeal before the Tribunal.
7. The Ld. Counsel for the assessee referring to the profit and loss account of the assessee firm for the year ending 31-03-2010, copy of which is placed at page 14 of the paper book drew the attention of the Bench to the total interest debited to the profit and loss account at Rs.24,45,823/- which includes :
i. interest on capital at Rs.5,55,370/-
ii. Interest on GIC loan Rs.5,93,194/-
iii. Interest on loan Rs.12,97,259/-
4
ITA No.1879/PN/2014
He submitted that the interest on capital of partners is an appropriation of profit and is not an expenditure. Referring to the decision of the Pune Bench of the Tribunal in the case of Quality Industries Vs. JCIT reported in 73 taxmann.com 363 he submitted that the Tribunal in the said decision has held that interest paid by assessee firm on its partner's capital cannot be regarded as an expenditure amenable to section 14A. Referring to the decision of the Hyderabad Bench of the Tribunal in the case of Addl.CIT Vs. Hill Country Properties Ltd. reported in 57 taxmann.com 400 he submitted that the Tribunal in the said decision has held that where assessee was having enough own funds in form of share capital, reserves and surplus, interest free advance from customers and deposits to give interest free advances to subsidiaries, no disallowance could be made out of interest paid by the assessee on borrowed funds. Referring to the copy of the balance sheet, copy of which is placed at page 13 of the paper book, he submitted that the lower authorities while computing the interest free funds available have not considered the capital of the assessee firm which stood at Rs.71,42,805/- as on 31-03-2010. He submitted that if the capital account of the partners and the unsecured loans, advances from group concerns and booking advances received from flat holders are considered, then the same is much more than the amount advanced to sister concerns free of interest. Therefore, no disallowance is called for.
8. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). He submitted that the assessee has not proved that interest bearing funds have not been diverted to sister concerns free of interest. Since a part of the interest bearing fund has been diverted to sister concerns without charging any interest, therefore, the CIT(A) was fully justified in sustaining the addition of Rs.1,77,787/- 5 ITA No.1879/PN/2014 out of the total disallowance of Rs.4,91,760/- by the Assessing Officer. Since the order of the CIT(A) is a reasoned one, therefore, the same should be upheld and the ground raised by the assessee should be dismissed.
9. I have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find the Assessing Officer disallowed an amount of Rs.4,91,760/- being proportionate interest on 50% of the advances given to sister concerns free of interest on the ground that a part of the interest bearing fund has been diverted to sister concerns free of interest. I find in appeal the Ld.CIT(A) was of the opinion that the amount received from flat holders for booking cannot be available to the assessee as interest free advances since the same is received by the assessee from the customers on the basis of proportionate completion of the flats. He, however, held that the unsecured loan received from friends and relatives at Rs.29,90,000/- and the advances from group concerns and friends at Rs.1,14,15,159/- is available to the assessee are free of interest. The total of the above 2 comes to Rs.1.44 crores whereas the assessee has given interest free advances to sister concerns on which no interest has been charged stands at Rs.1,75,85,462/-. He accordingly restricted the disallowance to Rs.1,77,787/-. It is the submission of the Ld. Counsel for the assessee that such interest expenditure which is debited to the profit and loss account includes interest to partners at Rs.5,55,370/- which is appropriation of profit and cannot be regarded as the expenditure for the purpose of computation of provisions of section 14A.
6ITA No.1879/PN/2014
10. I find force in the above argument of the Ld. Counsel for the assessee. The Pune Bench of the Tribunal in the case of Quality Industries (Supra) while deciding an identical issue has held that interest paid by the assessee firm on its partners capital cannot be regarded as an expenditure amenable to section 14A. The Tribunal in the said decision has held that interest paid to partners cannot be treated at par with other interest payable to outside parties. In view of the decision of the Coordinate Bench of the Tribunal on this very issue and in absence of any contrary material brought to my notice, I agree with the contention of the Ld. Counsel for the assessee that interest paid by the assessee firm to the partners on their capital cannot be regarded as expenditure amenable to section 14A.
11. So far as the argument of the Ld. Counsel for the assessee that the partners capital and the unsecured loan and advances from group concerns combined together is more than the interest free advance given to sister concerns, I find the same is not verifiable from the balance sheet filed by the assessee. It is noticed that the capital account of the partners stands at Rs.71,42,805/- and the unsecured loan is shown at Rs.29,90,000/-. However the advance from group concerns and friends shown at Rs.1,14,15,159/- is not verifiable from the balance sheet. Under these circumstances, I restore the issue to the file of the Assessing Officer with a direction to verify the same and if the assessee is able to prove that the capital of the partners, unsecured loan from relatives and friends and the interest free advances from group concerns is more than the interest free advances given to sister concerns, then in that case no disallowance is called for. If the assessee is unable to prove then the Assessing Officer is directed to recompute the disallowance of interest by considering the interest expenditure at Rs.18,90,453/- as 7 ITA No.1879/PN/2014 against Rs.24,45,823/- taken by him. In other words, the interest paid to partners on their capital has to be excluded for the purpose of computation of disallowance u/s.36(1)(iii). I hold and direct accordingly. Ground raised by the assessee is allowed for statistical purposes.
12. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 11-11-2016.
Sd/-
(R.K. PANDA) ACCOUNTANT MEMBER पण ु े Pune; दनांक Dated : 11 November, 2016.
th सतीश आदे श क त"ल#प अ$े#षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-5, Pune
4. The Pr.CIT,-4, Pune
5. $वभागीय %त%न*ध, आयकर अपील य अ*धकरण, "SMC Bench" पण ु े / DR, ITAT, "SMC Bench" Pune;
6. गाड2 फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, या$पत %त / True Copy // // True Copy // व&र'ठ %नजी स*चव / Sr. Private Secretary आयकर अपील य अ*धकरण, पुणे / ITAT, Pune