Income Tax Appellate Tribunal - Mumbai
Victoria Systems P.Ltd, Mumbai vs Ito Wd 10(1)(4), Mumbai on 17 May, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" BENCH, MUMBAI
BEFORE SHRI D.T GARASIA, JUDICIAL MEMBER AND
SHRI G. MANJUNATHA , ACCOUNTANT MEMBER
ITA no.2494/Mum./2014
(Assessment Year: 2009-10)
Victoria Systems P. Ltd,
9th Floor Vaihav Chambers, Bandra Kurla
Complex, Bandra (E) Mumbai 400051 ................ Appellant
PAN AAACP9563A
v/s
ITO, Ward 10(1)(4)
Aayakar Bhavan. M.K. Road ................ Respondent
Mumbai 400020
Assessee by : Shri. K. Shivaram
Revenue by : Ms. S Padma
Date of Hearing -17.05.2017 Date of Order -14.06.2017
ORDER
PER: G. MANJUNATHA This appeal filed by the assessee is directed against order of the CIT-10, Mumbai, u/s.263 I.T Act, 1961 for the assessment year 2009-10.
Victoria Systems P. Ltd, ITA no.2494/Mum./2014
2. The brief facts of the case are that the assessee company is engaged in the business of builders and developers, filed its return of income for the assessment year 2009-10 on 13.09.2009 declaring total income of Rs.8,20,402/-. The assessment was completed u/s. 143(3) on 29.12.2011, determining the total income at Rs.24,74,902/-, inter alia making additions towards disallowance of commission expenses of Rs.16,54,500/-.
3. The CIT-10, Mumbai issued a show cause notice dated 24.12.2013 and asked to explain as to why the assessment order passed by the A.O u/s 143(3) of the Act, dated 29.12.2011 shall not be revised under the provision of Section 263 of the Act. The CIT, proposed to revise the assessment order for the reason that on examination of assessment records, certain omission and commission were noticed which rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue. The CIT, in the said show cause, observed that the A.O has not verified expenses incurred by the assessee towards purchase of TDR of 'Asha Kiran' project and also failed to examine disallowance of interest paid on loans for diversion of interest bearing funds to group concerns without charging any interest. The A.O, without examining the above issues completed assessment, which rendered the assessment order passed by the A.O, erroneous in so far as it is 2 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 prejudicial to the interest of the revenue. The A.O not only failed to examine the issues, but also failed to apply his mind to the facts of the case, which caused prejudice to the interest of the revenue, therefore opined that the assessment order passed by the A.O needs to be revised u/s. 263 of the Act.
4. In response to show cause notice, the assessee submitted that the assessment order passed by the A.O u/s. 143(3) of the Act, dated 29.12.2011, neither erroneous nor prejudicial to the interest of the revenue, as the A.O has examined two issues pointed out in the show cause notice at the time of completion of assessment. The assessee further submitted that the A.O has called for necessary details of project expenses of Asha Kiran including agreements with the parties and after satisfied with the explanation of the assessee regarding its obligation to load TDR on the project accepted the explanation and completed assessment. As regards interest on loans, it was submitted that the assessee has advanced loans to its group concern in the normal course of business and which has been repaid in the subsequent financial year. The A.O has verified the details filed by the assessee and after satisfied with the explanation, dropped rectification proceedings initiated u/s. 154 of the Act, for specific purpose of disallowance of interest paid on loan for diversion of interest bearing funds to sister concerns. Therefore, the 3 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 assessment order passed by the A.O u/s. 143(3) cannot be called as erroneous in so far as it is prejudicial to the interest of the revenue.
5. The CIT, after considering explanation of the assessee, held that the assessment order passed by the A.O u/s. 143(3) dated 29.12.2011 is erroneous in so far as it is prejudicial to the interest of the revenue, as the A.O failed to examine the issue of purchase of TDR for 'Asha Kiran', even though the records indicate the purchase of TDR by M/s. Kamanwala Construction Ltd., directly from M/s. Eversmile Construction Ltd. The CIT, further, observed that the assessee company has advanced interest free loans of at least Rs.2,37,58,057/-, out of interest bearing funds and the A.O has not made any disallowance out of interest paid on loans. Therefore, opined that the A.O has completed assessment u/s. 143(3) without conducting proper enquiry and also applied his mind to the facts of the case on the established procedure of law to come to the conclusion that expenditure incurred by the assessee towards purchase TDS is allowable deduction. Similarly, the A.O has failed to apply his mind to disallowance of interest paid on loans for diversion of interest bearing fund, even though the audit report specifically states that the assessee has diverted interest bearing funds to, sister concern without charging any interest. The CIT rejected argument of the assessee, by stating that conditions laid down in 4 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 the provision of Section 263 are not satisfied to invoke the revisional powers cannot be accepted on the facts and merits of the case. The CIT, further, observed that the assessment order passed by the A.O is brief and cryptic and doesn't contain a single word about examination of the about two issues at the time of assessment. There is no whisper in the assessment order for having called for necessary details, verified the details and applied his mind on the details filed by the assessee before concluded the assessment which rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue.
6. In so far as merits of the issues are concerned, the CIT observed that as per the records available on record, the assessee is only a facilitator between the flat owners of 'Asha kiran' and the builder for loading TDR. The agreement for purchase of TDR between M/s. Eversmile Construction Ltd. and M/s. Kamanwala Lakshchandi Todays Developers, indicates that M/s. Kamanwala Lakshchandi Todays Developers has purchased TDR directly from Eversmile Construction Co. Ltd., therefore, there is no merits in the argument of the assessee that it has purchased TDR from M/s. Eversmile Construction Co. Ltd. In view of the above, it was not liability of the assessee company to purchase TDR and transfer the same to M/s. Kamanwala Lakshchandi Todays Developers as 5 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 claimed by the assessee. The A.O has not verified these facts and has not applied his mind, therefore expenditure of Rs.1,42,03,098/- on account of TDR purchases has been erroneously allowed by the A.O which caused prejudice to the interest of the revenue. As regards interest on loan for diversion of interest bearing fund, the CIT observed that the assessee has taken interest bearing loan and paid interest of Rs.31,09,526/-. It is also seen that the assessee has granted interest free loan of Rs.2,37,58,057/-.Since, the assessee has diverted interest bearing fund, without charging any interest, the A.O ought to have disallowed proportionate interest on interest free loan given to others, however failed to disallow any interest, even though the audit reports specifically indicates that the assessee has advanced interest free loans. The A.O has not examined this issue in its proper prospective and not applied his mind in order to disallow proportionate interest on interest free advances. Further the arguments of the assessee company, that commercial expediency has no force, as it has been held by Hon'ble Supreme Court, in the case of ACIT vs. Tulip Star Hotels Ltd. (SLP) 7140 of 2012 dated 30.04.2012, that the decision of S.A Builder (288 ITR 1) needed reconsideration and issued notice on the SLP. The facts and circumstances of the case of the assessee are similar to the facts of the case before Hon'ble Supreme Court, in the case 6 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 of Tulip Stars Hotels Ltd. In view of the above, the order passed by the A.O u/s. 143(3), dated 29.12.2011 is held to be erroneous and prejudicial to the interest of the revenue. Accordingly, set aside the assessment to be made afresh by the A.O on the above points following the directions given hear in above paragraphs. Aggrieved by the CIT order, the assessee is in appeal before us.
7. The ld. A.R for the assessee, submitted that Ld. CIT erred in passing order u/s. 263, even though the assessment order passed by the A.O was neither erroneous nor prejudicial to the interest of the revenue. The CIT, not appreciating that the order u/s. 143(3) was after due consideration and verification of claim of expenditure incurred of purchase TDR and claim of deduction of interest u/s. 36(1)(iii). The CIT, failed to appreciate that under the agreement, the liability of purchase of TDR and transferring the same to Kamanwala Housing Construction Co. was that of the assessee. In so far as second issue of disallowance of proportionate interest paid on loans, the A.O himself had considered and accepted the fact that the advances given by the assessee company were during the normal course of its business and entirely out of commercial expediency and hence, disallowance of interest is not warranted. The Ld. A.R referring to the show cause notice issued by CIT u/s. 263 of the Act, and order passed by the CIT u/s.263 of the Act, 7 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 submitted that the CIT issued show cause notice on one issue and passed revision order on different issue which is not permissible u/s. 263 of the Act. The observations of the CIT are contrary to the intention of the parties manifested in the MOU particularly with reference to TDR. As per Clause (c) of the recital and Clause (2)(d) it is clear that arranging TDR was responsibility of the assessee for which total consideration payable was to Rs. 4.5 crores. The CIT, ignoring all the evidences observed that it was not liability of the assessee to purchase TDR without understanding the terms and condition of agreement. The A.R further submitted that revenue cannot substitute the terms of the contract agreed between the parties and set aside the said terms. It is for the businessman to deal in its matters considering their relevancy or otherwise of incurring expenditure. In this case, the assessee has received consideration of Rs.4.5 crore for transfer of TDR for which it has spend Rs1.42 crore for purchases and this fact was not disputed by the CIT, which is evident from the fact that the CIT in his order at paragraph 4.1 has specifically accepted that the assessee received consideration of Rs.4.5 crore for transfer of TDR.
8. In so far as interest disallowance, the A.O has examined the issue in the proceedings u/s. 154 of the Act. The A.O has initiated rectification proceedings u/s. 154 of the Act, by issuing notice dated 8 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 09.03.2013 and stated that interest of Rs.31,09,526/- paid on unsecured loan of Rs.6,57,35,000/-, whereas no interest was charged on loans and advances of Rs.2,37,58,057/-, thereby interest of Rs.30,69,541/- to be disallowed. Though, the A.O initiated proceedings, after satisfied with the explanation of the assessee that the loan and advances are not a loans, but a normal advances to sister concerns which has been repaid in the subsequent period has dropped rectification proceedings without their being any disallowance of proportionate interest. Once, the A.O has considered the issues, it is the general presumption that the A.O has considered the issue and applied his mind before allowing such expenses, therefore the CIT cannot initiate revision proceedings on the same issue on the guise that the A.O has not conducted proper enquiry of issue.
9. The Ld. D.R, on the other hand strongly supported order of the CIT. The D.R further submitted that the order passed by the A.O u/s. 143(3) is brief and cryptic without any discussion as to verification of two issues discussed by the CIT in his order u/s.263, therefore the order passed by the A.O is erroneous in so far as it is prejudicial to the interest of the revenue. The D.R further submitted that the CIT has rightly brought out the facts to the effect that the liability to purchase TDR was not on the assessee. As per the 9 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 agreement between the parties it is very clear that M/s. Kamanwala Housing Construction Co. has directly purchased TDR from M/s. Eversmile Construction Co. P. Ltd. and also paid consideration for TDR. It was further observed that the MOU between the assessee and M/s. Kamanwala Construction Co. indicates that the assessee is only a facilitator between the flat owners of Asha Kiran and the developer, but all expenses has to be borne by M/s. Kamanwala Construction Co. Ltd. In so far as interest disallowance, even though the audit report clearly specifies that the assessee has advanced interest free loan to its sister concerns, the A.O failed to disallow proportionate interest paid on unsecured loans. The A.O passed assessment order without proper enquiry and also applying his mind which caused prejudice to the interest of the revenue on these two counts. Therefore, the CIT has rightly invoked jurisdiction u/s. 263 to set aside the order passed by the A.O and CIT, order should be upheld.
10. We have heard both the parties, perused the material available on records and gone through the orders of the authorities below. The CIT invoked jurisdiction to revise the assessment order u/s. 263 for the reason that the A.O has not conducted proper enquiry before completion of assessment, thereby the assessment order passed by the A.O u/s. 143(3) dated 29.12.2011 is erroneous in so far as it is 10 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 prejudicial to the interest of the revenue. The CIT revised assessment order on two counts, i.e expenses incurred for purchase of TDR and disallowance of proportionate interest paid on loans for diversion of interest bearing funds. The CIT was of the opinion that the A.O has completed the assessment without verifying documents in proper prospective which caused prejudice to the interest of the revenue. The CIT, further, was of the opinion that document furnished by the assessee indicates that the liability for purchase of TDR was not on the assessee, as it was directly purchased by M/s. Kamanwala Housing Construction Co. from M/s. Eversmile Construction Co. P. Ltd. The MOU between the assessee and M/s. Kamanwala Construction Co. indicates that the assessee is only a facilitator between the flat owners of Asha Kiran and M/s. Kamanwala Housing Construction Co., except this the assessee was not under obligation to incur any expenditure towards purchase of TDR. As regards interest on loans, even though records clearly indicates that the assessee has paid interest on loans and also diverted interest bearing funds without charging any interest, the A.O failed to disallow proportionate interests for diversion of interest bearing fund. The AO has completed the assessment without conducting proper enquiry of the above two issues which caused prejudice to the interest of the revenue. Therefore, opined that the 11 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 order passed by the A.O is erroneous and it is prejudicial to the interest of the revenue.
11. It is the contention of the assessee that the A.O has examined issues pointed out by the CIT, in the show cause issue notice before completion of assessment u/s. 143(3), which is evident from the fact that he had issued a show cause notice on various dates, called for various details in respect of expenses incurred for purchase of TDR as well as loans and advances and interest payment thereon. The A.O issued show cause notice on three occasions. The assessee has filed its reply vide letter dated 16.09.2011, 10.10.2011 and 19.10.2011 and furnished details of project including land purchases, details of work in progress of Asha Kiran project, MOU for Rs. 4.5 crore, agreement for purchase of TDR between M/s. Kamanwala Construction Co. and M/s. Eversmile Construction Co. P. Ltd. and also details of unsecured loans along with confirmations from the parties. The A.O after satisfied with details filed by the assessee, has completed assessment, therefore, the assessment order passed by the A.O cannot be called as erroneous by alleging that there is a lack of enquiry on the part of the A.O for examination of above two issues.
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Victoria Systems P. Ltd, ITA no.2494/Mum./2014
12. Having heard both the sides, we find merits in the arguments of the assessee for the reason that, the A.O had issued show cause notices on various dates and called for necessary details in respect of Asha Kiran project and loan and advances. The assessee has a filed paper book containing details filed before the A.O. On perusal of paper book filed by the assessee, we find that the assessee filed three letters on 16.09.2011, 10.10.2011 and 19.10.2011 and furnished various details in respect of expenditure incurred for TDR purchase as well as interest paid on loans. The assesse has filed copies of MOU between the assessee and M/s. Kamanwala Construction Co. and also agreement for purchase of TDR between M/s. Kamanwala Construction Co. and M/s. Eversmile Construction Co. P. Ltd. On perusal of MOU filed by the assessee, we find that as per Clause (c) and (2)(d) of MOU, the assessee has arrived at an understanding with the society and members and with developer for redevelopment of the said property after demolishing existing structure and cause loading transferable developer rights thereon as permitted under municipal rules. The MOU further states that the assessee shall facilitate loading on the project 100% TDR. We further observed from the MOU, M/s. Kamanwala Construction Co. has paid a sum of Rs. 4,50,00,000/- for the assessee for the said purpose which has not been disputed by the CIT, which is evident 13 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 from the fact from his order at paragraph 4.1. Therefore, from the perusal of the above documents, it is very much clear that the assessee had entered into a MOU with M/s. Kamanwala Lakshchandi Todays Developers to facilitate development of project and also to load 100% TDR on the project, for which the assessee was paid consideration of Rs.4.50 crore. The CIT, without appreciating the facts, observed that the liability was not on the assessee to purchase TDR and came to the conclusion that the A.O has erroneously allowed expenditure on TDR, which is not otherwise allowable to the assessee.
13. As regards disallowance of interest for diversion of interest bearing funds, the assessee claims that it had advanced fund to its sister concern, in the normal course of its business, but not as a loans and advances. The assessee further contended that there is a commercial expediency in advancing loans to its sister concerns which cannot be considered as loans and advances. It was further argued that the A.O has examined the issue at the time of 143(3) assessments and also initiated rectification proceedings under section 154 of the Act, for the specific purpose of disallowance of proportionate interest paid on loans for diversion of interest bearing funds to group concerns. However, after satisfied with the explanation given by the assessee dropped 154 proceedings, 14 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 therefore the CIT was incorrect in observing that there is a lack of enquiry on the part of the A.O in examining the issue of disallowance of interest. We find force in the arguments of the assessee, for the reason that although the audit reports states that the assessee has advanced interest free loans, the assessee categorically proved that the loan is advanced out of commercial expediency in the normal course its business which has been repaid over a period of time. The assessee further proved that once loan is advanced in the normal course of business out of commercial expediency, then interest cannot be disallowed merely on the ground that the assessee has paid interest on loans. Though, the assessee case squarely covered by the ratio of Hon'ble Supreme Court, in the case of S.A Builder vs CIT (2007) 288 ITR 1, the CIT, ignored the law laid down by the apex court, merely because special leave petition has been admitted in the case of Tulip Star Hotels Ltd. In fact, the Supreme Court, in Hero Cycle P. Ltd. vs CIT (2015) 379 ITR 347 has affirmed the decision of S.A Builders Ltd. (supra), therefore, the law laid down by the Hon'ble Supreme Court still prevails and also binding on lower authorities. The A.O has followed the ratio of the Hon'ble Supreme Court to decide the issue of disallowance of interest which cannot be said to be erroneous and also prejudicial to the interest of the revenue. Therefore, we are of 15 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 the considered view that the order passed by the A.O is neither erroneous nor prejudicial to the interest of the revenue.
14. The CIT is empowered with suo motto revision of assessment order u/s 263 of the Act, if he finds that the order of passed by the A.O is erroneous in so far as it is prejudicial to the interest of the revenue. But, to invoke the provision of section 263 of the Act, twin conditions must be satisfied, i.e. (i) the order of the A.O is erroneous, and (ii) further it must be prejudicial to the interest of the revenue. Unless, both conditions are satisfied, the CIT cannot assume jurisdiction to revise the assessment order. It is not necessary that every order which is erroneous may be prejudicial to the interest of the revenue or vice versa. In some cases, the order passed by the AO may be erroneous, but it may not be prejudicial to the interest of the revenue or vice versa. Unless both conditions are satisfied put together, the CIT cannot revise the assessment order, this is because twin conditions, i.e. the order is erroneous and it is prejudicial to the interest of the revenue are coexist. In the present case on hand, the order passed the AO is not erroneous, as the AO has examined the issues and also had applied his mind to the issues pointed out by the CIT, which is evident from the fact that the AO has called for necessary details required for completion of assessment. The CIT, on perusal of records might be of opinion that 16 Victoria Systems P. Ltd, ITA no.2494/Mum./2014 the enquiries conducted by the AO is inadequate and it requires further examination, but the CIT cannot invoke jurisdiction of section 263, merely because enquiries conducted by the AO is inadequate or there is a lack of enquiry by the AO on the issues pointed out by the CIT in his proceedings.
15. The order passed by the AO is not prejudicial to the interest of the revenue, as the expenditure incurred for purchase of TDR was necessarily incurred by the assessee in terms of agreement between the assessee and M/s. Kamanwala Lakshchandi Todays Developers. Once the parties have reduced their terms in writing by way of agreement, the CIT cannot rewrite the terms of the agreement, or cannot dictate the terms to do a business in a particular manner. In this case, the evidences filed by the assessee clearly indicates that the assessee has incurred expenditure for purchase of TDR which is necessarily to be incurred as per the terms of the agreement between the parties. Therefore, there is no prejudice is caused to the revenue. As regards interest on loans, the issue is squarely covered by the decision of Hon'ble Supreme Court, in the case of S.A Builders Ltd. (Supra) and the A.O has chosen to follow the decision of Hon'ble Supreme Court to decide the issue which cannot be called as prejudicial to the interest of the revenue. 17
Victoria Systems P. Ltd, ITA no.2494/Mum./2014
16. Considering facts and circumstances of the case, we are of the view that the order passed by the AO u/s. 143(3) dated 29.12.2011 is neither erroneous nor prejudicial to the interest of the revenue and hence, we quashed order passed by the CIT u/s. 263 of the Act, and restored the assessment order passed by the A.O u/s. 143 (3) of the Act.
17. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Open Court on 14.06.2017
Sd/- Sd/-
D.T. GARASIA G. MANJUNATHA
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, DATED: 14.06.2017
Copy of the order forwarded to:
(1) The Assessee;
(2) The Revenue;
(3) The CIT(A);
(4) The CIT, Mumbai City concerned;
(5) The DR, ITAT, Mumbai;
(6) Guard file.
By Order
Nishant Verma
Sr. Private Secretary
(Dy./Asstt.Registrar)
ITAT, Mumbai
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Victoria Systems P. Ltd,
ITA no.2494/Mum./2014
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