Income Tax Appellate Tribunal - Pune
Universal Construction Machinery & ... vs Assessee on 10 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND Ms SUSHMA CHOWLA, JUDICIAL MEMBER
ITA Nos.1465 & 1466/PN/2013
Assessment Year: 2008-09
Universal Construction Machinery
and Equipments Ltd.,
Universal House,
Near Old Jakat Naka,
Warje, Kothrud, Pune - 411029 .... Appellant
PAN: AAACU7808B
Vs.
The Asst. Commissioner of Income Tax,
Circle - 7, Pune .... Respondent
ITA No.975/PN/2013
Assessment Year: 2009-10
Universal Construction Machinery
and Equipments Ltd.,
Universal House,
Near Old Jakat Naka,
Warje, Kothrud, Pune - 411029 .... Appellant
PAN: AAACU7808B
Vs.
The Asst. Commissioner of Income Tax,
Circle - 7, Pune .... Respondent
Appellant by : Shri Nikhil Pathak
Respondent by : Shri Rajesh Damor
Date of hearing : 04-03-2015
Date of pronouncement : 10-04-2015
ORDER
PER SUSHMA CHOWLA, JM:
Two appeals filed by the assessee are against order of CIT(A)-III, Pune, dated 01.03.2013 relating to assessment year 2008-09 against order passed under sections 143(3) and 143(3) r.w.s. 263 r.w.s. 144 of the Income Tax Act, 1961. The assessee has also filed another appeal against order of CIT(A)-III, 2 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd Pune, dated 31.10.2012 relating to assessment year 2009-10 against order passed under section 143(3) of the Income Tax Act, 1961.
2. All the appeals relating to the same assessees were heard together and are being disposed of by this consolidated order for the sake of convenience. ITA No.1465/PN/2013 :: Assessment Year 2008-09
3. In ITA No.1465/PN/2013, the assessee has raised the following grounds of appeal:-
1] The learned CIT(A) erred in confirming the addition of Rs.7,20,452/-
on account of disallowance of interest u/s 36(1)(iii) on the ground that the assessee had utilized interest bearing funds for making interest free advances to sister concerns and therefore, the interest attributable to such advances was to be disallowed while computing the business income of the assessee for this year.
2] The learned CIT(A) erred in holding that once it is borne out that the assessee had borrowed certain funds and made certain interest free advances without any business purpose, the interest attributable to such advances was to be disallowed u/s 36(1)(iii) irrespective of the fact as to whether there were sufficient own funds with the assessee or not and therefore, the disallowance made in the case of the assessee was justified.
3] The learned CIT(A) erred in not appreciating that the A.O. had not proved any nexus between the funds borrowed by the assessee and making of interest free advances to sister concerns and hence, there was no reason to make any disallowance in respect of the interest attributable to such advances on presumptive basis.
4] Without prejudice to the above ground, the assessee submits that the own funds available with the assessee were far more than the interest free advances made by the assessee and thus, the disallowance of interest u/s ought to have been deleted.
5] The learned CIT(A) erred in confirming the adhoc disallowance of Rs.3,14,540/-, being 5% of the total sales promotion expenses without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and therefore, the adhoc disallowance made in respect of the same was not justified.
6] The learned CIT(A) erred in confirming the adhoc disallowance of Rs.4,23,768/- being 5% of the total legal and professional fees without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and therefore, the adhoc disallowance made in respect of the same was not justified.3 ITA No.975/PN/2013
ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd 7] The learned CIT(A) erred in confirming the adhoc disallowance of Rs.8,26,814/- being 5% of the total travelling and conveyance expenses without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and therefore, the adhoc disallowance made in respect of the same was not justified.
8] The learned CIT(A) erred in confirming the adhoc disallowance of Rs.3,19,810/- being 5% of the total communication expenses without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and therefore, the adhoc disallowance made in respect of the same was not justified.
9] The learned CIT(A) erred confirming the adhoc disallowance of Rs.5,00,508/- being 5% of the total administrative expenses without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and therefore, the adhoc disallowance made in respect of the same was not justified.
10] Without prejudice to the above grounds, the assessee submits that the disallowance made in respect of sales promotion expenses, legal and professional fees, travelling and conveyance expenses, communication expenses and other administrative expenses is very high and the same may be reduced substantially.
11] The learned CIT(A) erred in enhancing the income of the assessee company without giving any notice to the assessee and hence, the enhancement made by the learned CIT(A) was not justified in law.
11.1] The learned CIT(A) erred in enhancing the disallowance made in respect of DC fees to Rs.4,50,000/- on the ground that the said expenditure was capital in nature and hence, the same could not be allowed as a business deduction u/s 37(1) of the Act.
11.2] Without prejudice to the above ground, the assessee submits that the expenditure incurred towards payment of ROC fees was allowable as a deduction u/s 35D of the Act and hence, the learned CIT(A) was not justified in enhancing the addition by disallowing the entire amount of ROC fees in this year.
12] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
4. The issue in grounds of appeal No.1 to 4 is against the disallowance under section 36(1)(iii) of the Act at Rs.7,20,452/-.
5. The issue in grounds of appeal No.5 to 10 is against the adhoc disallowance out of various heads of expenditure.
4ITA No.975/PN/2013
ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd
6. The grounds of appeal No.11 to 11.2 are not pressed and hence, the same are dismissed as not pressed.
7. The brief facts relating to the issue of disallowance under section 36(1)(iii) of the Act are that the Assessing Officer from the perusal of details submitted in Form No.3CD noted that sum of Rs.48,00,000/- was shown as unsecured loans given to M/s. Universal Construction Project. On the other hand, the assessee had debited interest expenditure of Rs.4.03 crores during the year. The assessee was asked to explain as to why notional interest should not be added to total income as per the provisions of section 36(1)(iii) of the Act. In reply, the assessee submitted that the said amount was not in terms of loans perse, but were just payments made on behalf of the said parties and it was further explained that the outstanding balance at the end of the year was Rs.40,12,563/- It was further noted by the Assessing Officer that the assessee had also advanced Rs.76,09,303/- to M/s. Universal Civil Infracon Pvt. Ltd. and Rs.41,56,370/- to M/s. Universal Sales Corporation. The explanation of the assessee in this regard was that these were out of business transactions with the said parties. The Assessing Officer rejecting the explanation of the assessee observed that where interest bearing funds were diverted as interest free loans to sister concern, interest @ 12% needs to be added on such loans / advances. The Assessing Officer worked out the disallowance under section 36(1)(iii) of the Act at Rs.19,87,880/-.
8. The CIT(A) in respect of loan advanced to M/s. Universal Construction Project, observed that though the plea of the assessee was that the said concern was in the construction business, whereas the assessee was the manufacturer of the construction equipment and the said amount was advanced to a prospective customer, was not accepted by the CIT(A). The CIT(A) further observed that the amounts advanced to the said concern were for non-business purpose and the 5 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd interest attributable to such advances could not be allowed as expenditure under section 36(1)(iii) of the Act. The CIT(A) re-worked the interest attributable to the advances on the basis of date(s) of advances made during the year and restricted the disallowance to Rs.2,21,688/- as against the disallowance of Rs.5,76,000/- made by the Assessing Officer.
9. In respect of second advance made to M/s. Universal Civil Infracon Pvt. Ltd. of Rs.76,09,303/-, the CIT(A) held the same to be a business advance and the disallowance of interest expenditure of Rs.9,13,116/- was deleted by the CIT(A).
10. Further, in respect of the advance to M/s. Universal Sales Corporation, the contention of the assessee that it had agency relationship with the said party was rejected in the absence of any evidence filed by the assessee and consequently, the disallowance of interest expenditure of Rs.4,98,764/- was upheld by the CIT(A).
11. The assessee is in appeal against the partial confirmation of disallowance under section 36(1)(iii) of the Act.
12. The learned Authorized Representative for the assessee pointed out that the advances had been made to the sister concern were out of own funds, which were interest free. Our attention was drawn to the copy of Balance Sheet placed at page 10 of the Paper Book, which reflected the surplus interest free funds available with the assessee. Further, reliance was placed by the learned Authorized Representative for the assessee on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) and the Pune Bench of the Tribunal in Trinity India Limited Vs. DCIT in ITA No.666/PN/2012 relating to assessment year 2008-09 vide order dated 28.08.2013.
6ITA No.975/PN/2013
ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd
13. The learned Departmental Representative for the Revenue placed reliance on the order of CIT(A).
14. We have heard the rival contentions and perused the record. In the facts of the present case, admittedly, the assessee had made certain interest free advances to two of its concerns i.e. Rs.40,12,563/- to M/s. Universal Construction Project and Rs.41,56,370/- to M/s. Universal Sales Corporation. The assessee had made the said interest free advances to its sister concerns and on the other hand, had incurred interest expenditure of Rs.4.03 crores during the year under consideration. The authorities below had disallowed part of the interest expenditure under section 36(1)(iii) of the Act on the proposition that the advances made to the sister concerns were for non-business purposes and interest attributable to such advances could not be allowed as expenditure under section 36(1)(iii) of the Act. However, the claim of the assessee before us was that in view of judgment of Hon'ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (supra), wherein it had been held that where the assessee had made interest free advances to its sister concern, presumption could be drawn that the funds advanced to the sister concern were out of interest free funds available with the assessee. In this regard, the assessee had pointed out that the total interest free funds available with it namely, the share capital and the reserves and surpluses were sufficient to cover impugned interest free funds made to the sister concern. The perusal of Balance Sheet placed at page 10 of the Paper Book reflects that the opening share capital and free reserves were enough to cover interest free advances made to the sister concerns. The profit for the year under consideration after depreciation and interest expenditure was Rs.3,66,80,769/-, which itself is enough to cover the impugned advancement of interest free loans to the sister concerns. In view of the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (supra), where the interest free funds available with the assessee were sufficient to cover 7 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd interest free advances made to sister concern, then in cases where both the interest bearing and interest free funds are available with the assessee, the presumption is that the impugned interest free advances have been made to the sister concern out of interest free funds. In view thereof, there is no merit in disallowance of any part of the interest expenditure made by the Assessing Officer and partially upheld by the CIT(A) while working out day-to-day basis, the advances made.
15. The CIT(A) vide para 6.3.2 had not found it fit to apply the said proposition laid down by the Hon'ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (supra) to the facts of the present case. As per the CIT(A), the said proposition laid down by the Hon'ble Bombay High Court is applicable where the investments are made with a view to build long term business prospects and where the advances were made for investment in the related energy sector and were not made to sister concern. In such scenario, the finding of CIT(A) was that the Hon'ble Bombay High Court held that there were interest free funds available with the said assessee to meet its investments and at the same time where the assessee has raised loan, it could be presumed that the investments were made from interest free funds available. The CIT(A) distinguished the facts of the present case and observed that the amounts were advanced to two sister concerns for non-business purposes and there was no benefit to the assessee from such advances either directly or indirectly and therefore, the case stood on different footing.
16. We find that similar aspect and proposition made by the CIT(A) were considered by the Tribunal in Trinity India Limited Vs. DCIT (supra) and it was observed as under:-
"6. We have carefully considered the rival submissions. Ostensibly, in this case, it was found that assessee had advanced interest-free funds of Rs.2,44,74,710/- to two sister-concerns as on 31.03.2008. The opening balance of such advances as on 01.04.2007 was Rs.23,09,460/- and the 8 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd balance of Rs.2,21,65,250/- was advanced during the year under consideration. On the other hand, assessee incurred interest expenditure of Rs.2,85,38,397/- on borrowings. The Revenue has disallowed the interest proportionate to the impugned interest-free advances by invoking Section 36(1)(iii) of the Act professing that the same is for non-business purposes. That such advances are for non-business purposes is not an issue for consideration before us inasmuch as the assessee has not disputed the position arrived at by the CIT(A) that such advances are for non-business purposes. However, before us, the disallowance has been sought to be resisted on the basis of the proposition emerging from the judgement of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) whereby it can be said that where an assessee has advanced interest-free funds to the sister concerns and the assessee has both interest bearing and interest free funds, and if the interest free funds are sufficient to cover the advances to sister concerns, a presumption can be drawn that funds advanced to the sister concerns are out of interest-free funds available with the assessee. In this connection, the appellant has sought to point out that the total interest-free funds available with it, namely, Share Capital plus Free Reserves are sufficient to cover the impugned interest-free advances made to the sister concerns. In this connection, Balance-sheet as on 31.03.2008 has been referred to, which is placed in the Paper Book. Factually speaking, it is seen that as on 01.04.2007 i.e. at the beginning of the year the funds available with the assessee by way of Share Capital and Reserves & Surplus was enough to cover the said impugned interest-free advances to the sister concerns. In-fact, as per the Profit and Loss account for year ending 31.03.2008 the profit for the year after depreciation and tax is to the extent of Rs.5,14,84002/-, which alone is enough to cover the impugned interest-free advances. In our considered opinion, the parity of reasoning laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) is clearly applicable in the present case inasmuch as there are funds available with the assessee both interest-free and interest bearing, and the Interest-free funds available with the assessee are sufficient to cover the impugned interest-free advances made to the sister concerns, then the presumption is that the impugned interest-free advances made to the sister concerns are out of interest-free funds. In such a situation, following the judgement of the Hon'ble Bombay High Court the disallowance of interest expenditure made by the Assessing Officer becomes untenable.
7. In-fact, the factual aspects of the said proposition have not been faulted by the CIT(A), though he has not found it fit to apply the said proposition to the assessee's case. As per the discussion made by the CIT(A) in para 5.3.2 it emerges that according to the CIT(A) the aforesaid proposition laid down by the Hon'ble Bombay High Court is applicable only in a situation where the advances/investments are made for business purposes alone. As per the CIT(A) where advances to sister concerns are for non-business purposes, the aforesaid proposition laid down by the Hon'ble Bombay High Court is not applicable. In our considered opinion, the interpretation placed by the CIT(A) on the judgement of the Hon'ble Bombay High Court is quite misplaced. In-fact, to say that the proposition that where there are funds available both interest-free and interest bearing, then a presumption would arise that investments are out of interest-free only if interest-free are sufficient to cover the investment is a proposition which is available only in a situation where the investments are for business purposes, is wrong. We say so for the reason that if the 9 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd investments/advances to the sister concerns were for business purposes then the question of disallowance under Section 36(1)(iii) would not arise at all, as Section 36(1)(iii) explicitly permits deduction for the amount of interest paid in respect of capital borrowed for the purposes of business or profession. Once interest is paid in respect of funds used for purposes of business there is no question of its disallowance under Section 36(1)(iii) of the Act and there would not be a necessity to see as to whether the funds advanced to sister concern are out of interest-bearing borrowings or not. In our view, the CIT(A) erred in not appreciating the judgement of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) in its proper respective. Accordingly, on this ground the order of the CIT(A) is set-aside and the Assessing Officer is directed to delete the addition of Rs.29,36,965/- made under Section 36(1)(iii) of the Act. On this Ground assessee succeeds."
17. Following the same proposition laid down by the Tribunal, where the investments / advances were made to sister concern for business purposes, then there is no question of any disallowance under section 36(1)(iii) of the Act and there would be no necessity to see as to whether the advances made to the sister concern were out of interest bearing borrowings or not. In view thereof, we find no merit in the order of CIT(A) in this regard and the same is set-aside and the Assessing Officer is directed to delete the addition of Rs.12,67,428/-.
18. The assessee vide grounds of appeal No.5 to 10 has raised the issue against the disallowance made out of following expenses:-
i) Sales promotion expenses : Rs.3,14,540/-
ii) Legal and professional fees : Rs.4,23,768/-
iii) Travelling and conveyance expenses : Rs.8,26,814/-
iv) Communication Expenses : Rs.3,19,810/-
v) ROC Fees : Rs.3,74,920/-
vi) Other administrative expenses : Rs.5,00,508/-
19. The Assessing Officer had made the said disallowances being excessive and also in some cases, expenditure having not been incurred exclusively for the purpose of business. In respect of the disallowance out of communication expenses, the said disallowance was made for personal use by the assessee. The Assessing Officer disallowed 5% of the expenses in respect of item Nos. (i) to (iv) and 80% in respect of ROC Fess and 10% out of other administrative 10 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd expenses. The CIT(A) confirmed the disallowances made in respect of the said items.
20. The assessee is not in appeal in respect of ROC Fees expenses and is in appeal against the balance expenditure.
21. The first item of expenditure to be considered is sales promotion expenses and it was pointed out by the learned Authorized Representative for the assessee that FBT has been paid on the said expenditure and there was no merit in the said disallowance. We are of the view that where the expenditure has been subjected to fringe benefit tax, the nature of expenditure stands established and the same is to be allowed as business expenditure. In view thereof, there is no merit in making any disallowance out of sales promotion expenditure. Similarly, no disallowance was warranted out of travelling and conveyance expenses, communication expenses as the assessee had paid FBT against the said expenses. We also find no merit in the order of Assessing Officer in disallowing any part of the said expenditure for personal use in the hands of the assessee company being a private limited concern. Further disallowance of 10% out of legal and professional fees paid by the assessee in the absence of any finding that the expenditure has not been incurred for the purpose of business, there is no merit in the said disallowance and the same is deleted. The last head of expenditure is other administrative expenses which include office expenses and other miscellaneous expenses being routine business expenses. The Assessing Officer had made disallowance @ 10% out of the said expenditure, which was restricted to 5% by CIT(A). The expenditure has been disallowed since certain evidences were in the form of self-made vouchers. We uphold the order of CIT(A) to restrict the disallowance to 5% of the total expenditure. Accordingly, the grounds of appeal No.5 to 8 are allowed and grounds of appeal No.9 and 10 are partly allowed.
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ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd ITA No.1466/PN/2013 :: Assessment Year 2008-09
22. The present appeal is filed by the assessee against the order passed under section 143(3) r.w.s. 263 of the Act.
23. The learned Authorized Representative for the assessee pointed out that the order passed by the Commissioner under section 263 of the Act has been quashed by the Tribunal in ITA No.199/PN/2012, relating to assessment year 2008-09, vide order dated 12.08.2013 and consequently, there is no merit in the impugned assessment order passed under section 143(3) r.w.s. 263 of the Act and the appeal filed by the assessee is against the order of CIT(A) in upholding the addition on merits should be allowed. We find merit in the said plea of the assessee as pursuant to quashing of 263 proceedings in the hands of the assessee by the Tribunal, the consequent order passed by the Assessing Officer under section 143(3) r.w.s. 263 of the Act, does not survive and the same is hereby cancelled. The appeal of the assessee is thus, allowed. ITA No.975/PN/2013 :: Assessment Year 2009-10
24. In ITA No.975/PN/2013, the assessee has raised the following grounds of appeal:-
1] The learned CIT(A) erred in confirming the addition of Rs.56,16,000/-made by the learned A.O. on account of unexplained investment in land purchased from Shri Raju Tungatkar without appreciating that the total consideration actually paid by the appellant was recorded in the books and no such addition was justified.
2] The learned CIT(A) erred in holding that the total consideration paid by the appellant to Shri Raju Tungatkar against purchase of land was Rs. 2,80,80,000/- as per the MOU and the seized paper found during the survey as against the actual consideration paid of Rs.2,24,64,000/- as per the registered sale deed.
3] The learned CIT(A) failed to appreciate that - 12 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013
Universal Construction Machinery and Equipment Pvt Ltd a. The appellant had not paid any consideration over and above the amount of Rs.2,24,64,000/- which was recorded in the registered sale deed and hence, the addition made was not justified.
b. Subsequent to the MOU, the appellant and the vendor had agreed that a part of land which was found to be earmarked for private forestation and hence, the amount of Rs.56,16,000/- was to be paid only after the vendor got the required clearance for this part of land and therefore, no such payment was made by the appellant to the vendor.
c. The above understanding was duly confirmed by the vendor, Shri Tungatkar and hence, there was no reason to make any addition on account of unexplained investment in land.
4] The learned CIT(A) erred in confirming a total disallowance of Rs.
1,23,83,286/- out of the following items of expenditure -
i. Travelling and conveyance expenses - Rs.43,98,650/-
ii. Labour charges - Rs.61,47,485/-
iii. Advertisement Expenses - Rs.14,17,312/-
iv. Guest house expenses - Rs.4,19,839/-
5] The learned CIT(A) failed to appreciate that -
a. The expenses were properly vouched and therefore, there
was no reason for making any disallowance.
b. The expenses had increased during the year as the
business and the turnover also had increased and
considering the volume of business, the expenditure was reasonable.
c. There was no reason for disallowance of these expenses when they were supported by vouchers and it was not proved by the A.O. that any personal expenditure was debited by the appellant under these heads.
6] The appellant requests for admission of additional evidences if any required during the course of appeal hearing.
7] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
25. The issue in the grounds of appeal No.1 to 3 is against the addition of Rs.56,16,000/- on account of unexplained investment in the land purchased by the assessee.
26. The brief facts relating to the issue are that during the course of Survey under section 133A of the Act on 14.10.2011 a document was found, under 13 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd which the assessee had entered into an agreement with Shri Raju Tungatkar for sum of Rs.2,80,80,000/- vide agreement dated 09.06.2008. However, the registered sale deed was executed on 12.09.2008 for Rs.2,24,64,000/- only. The survey team asked the managing director of the assessee company to clarify the difference of Rs.56,16,000/-, particularly with reference to page 91 of Universal Box File, wherein the bifurcation payment by cheque and cash in the ratio of 80:20 had been mentioned. In reply, he agreed that the transaction for Shivare land was for Rs.2.80 crores, as per MoU. However, since part of the said land was for private forestation, it was decided that balance amount would be paid only after the possession of clear land would be given. He promised to produce Shri R.N. Tungatkar before the Assessing Officer within 7 days, but he failed to produce the said person. In view thereof, the Assessing Officer treated sum of Rs.56,16,000/- as unexplained investment under section 69 of the Act.
27. The CIT(A) upheld the order of Assessing Officer, in view of the evidence found during the course of survey and also in view of the fact that the notification for private forestation was issued much earlier i.e. before entering into MoU and the assessee was aware of such restriction on a portion of land and then only he agreed to pay the consideration of Rs.52,00,000/- per acre. The CIT(A) also noted that only the cash component of 20% in the sale consideration was claimed to have been withheld and rejecting the explanation of the assessee, the CIT(A) upheld the order of Assessing Officer.
28. The assessee is in appeal against the order of CIT(A).
29. The learned Authorized Representative for the assessee pointed out that the said amount was withheld in view of the restriction on portion of land and the amount as per the sale deed was the amount paid to the seller. 14 ITA No.975/PN/2013
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30. The learned Departmental Representative for the Revenue placed reliance on the order of CIT(A).
31. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the unexplained investment in the Shivare land purchased by the assessee from Shri Raju Tungatkar. During the course of survey at the premises of the assessee conducted on 14.10.2011 certain documents were found from the possession of assessee, under which it had entered into agreement with Shri Raju Tungatkar for purchase of land for sum of Rs.2.80 crores through a Deed of Agreement dated 09.06.2008. However, against the said agreement of sale, the sale deed executed on 12.09.2009 reflected the consideration at Rs.2,24,64,000/-. Another document was also found from the possession of the assessee for making the payment for purchase of the said land in cheque and cash in the ratio of 80:20. When confronted with the said evidence, the explanation of the assessee was that part of the consideration was withheld because of certain restrictions on a portion of land. The assessee failed to produce the seller before the Assessing Officer and consequently, the difference was added in the hands of the assessee. Before the CIT(A), the assessee furnished a letter from the seller pleading that the same may be admitted as an additional evidence. The said additional evidence furnished by the assessee was forwarded to the Assessing Officer, who in turn submitted his report vide letter dated 11.09.2012. The statement of seller was also recorded by the Assessing Officer. The CIT(A) thereafter, referred to the contents of MoU executed on 09.06.2008 and the subsequent sale deed executed on 12.09.2008 and observed as under:-
"4.4 The submissions of the learned counsel for the appellant are examined with reference to the contents of the MOU dated 09th June 2003 and subsequent sale deed dated 12/09/2008 and correction deed dated 18/02/2011. To resolve the issue, it Is essential to refer to the following clauses in the MOU, which have bearing on the issue:-15 ITA No.975/PN/2013
ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd "..The first party and the second party have friendly relations with each other. The second party was in search of the landed property and met first party. As the first party is need of money for satisfying his legal meets, due negotiations took place between the parties of sale of the said property and rate of Rs.52,00,000/- ( Rupees fifty two lacs only) per acre is agreed between the parties. Thus the total consideration agreed between the parties is of Rs. 2,80,80,000/- (Rupees two crores, eighty lacs eighty thousand only) and as per this MOU the terms and conditions agreed between the parties are as under-
A) "The first party has agreed to sell and transfer the said property to the second part for the total consideration agreed between the parties is of Rs.2,80,80,000/- (Rupees two crores, eighty lacs eighty thousand only) B) The second party has paid an amount of Rs.70,00,000/-
(Rupees seventy lacs) to the first party on the execution of this MOU vide two cheques No.276435 of Rs.50,00,000/- and No. 276435 of Rs.20,00,000/- dated 11106/2008 drawn on SBI. C) It is agreed between the parties that the second party shall pay an amount of Rs.50,00,000/- (Rupees fifty lacs) to the first party at the time of the Sale Deed.
D) It is agreed between the parties as per this MOU that the second party shall pay 50% of the remaining amount after deducting the amounts paid as per Clauses A, B, C hereinabove by cheque of third month to the first party at the time of the Sale Deed. E) It is agreed between the parties as per this MOU that the second party shall pay there after deducting the amount paid as per Clause D hereinabove by cheque of sixth month to the first party at the time of the Sale Deed.
F) The said property is absolutely free and marketable. The said property is not encumbered by way of mortgage with any bank or by way of gift. The first party will hand over 7/12 extracts, search report by advocate for last thirty years and all documents referred to above essential for registered indenture prior to Sale Deed. G) The first party has given permission by this MOU to publish public notice in the local news paper in respect of the said property and to put up board on the said property.
H] The first party has assured that there is 20 feet access road to the said property from the National Highway No.4.
3] The second party shall have right for specific performance through court in case the first party avoids to execute Sale Deed in spite of the fact that the second party is ready to get executed Sale Deed within above referred stipulated time limit. The first party shall be personally liable to bear the cost of such suit.
4) It is agreed between the parties that after the execution of this MOU the first party shall show the boundaries of the said property 16 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd as per this MOU. It is agreed between the parties as per this MOU that the second party at its own cost get the Government Demarcation done of die said property before Sale Deed.
5) The expenses of the registered indenture like stamp duty, registration charges, advocate fees, other incidental shall be borne by the second party."
32. The copy of the said MoU was also made available to the assessee during the course of appellate proceedings. The CIT(A) thereafter, held as under:-
"4.4.2 The next claim of the appellant in the written submissions is that the appellant has paid only Rs,2,24,64,000/- only out of total consideration of Rs.2,80,80,000/- shown In the MOU and the balance amount of Rs.56,16,000/- was never paid to the vendor and in support of its contention, the appellant also filed a letter dated 25/10/2011 from the vendor, namely, Mr. Raju Tungatkar. In the letter, it was stated that there were few disputes regarding the measurement of land and classification of a part the area as private forestation land and therefore, they agreed to hold 20% of the contract value i.e. Rs,56,16,000/- till the time the land is deforested and all the disputes are resolved. The claim of the appellant is not well founded. It may be noticed from the above recitals in the MOU, after due negotiations that had taken place between the parties of the Sale, the rate of Rs.52,00,000/- 'per acre and the total consideration of Rs.2,80,80,000/- for the entire land was agreed upon between the parties. The MOU also provides the payment schedule for the total consideration of Rs.2,80,00,000/- vide clauses A to E of paragraph 2 of the MOU. As per clause E, the appellant shall pay the final installment to the vendor at the time of execution of sale deed. It is also stated in paragraph 4 of the MOU that it was agreed between the parties that after the execution of the MOU, the first party would show the boundaries of the said property as per the said MOU. It was further agreed between the parties that the second party would at its own cost get the Government Demarcation done of the said property before the sale deed is executed. Clause 7 of the MOU also states that the vendor has taken all the f responsibility as per the MOU of giving signatures, consents, affidavits required for obtaining necessary permission as per provision of 63(1)(a) of Bombay Tenancy & Agricultural Lands Act, 1948 as the buyer is purchasing the said property in the name of the company, It is also mentioned thereafter that the vendor shall execute the sale deed of the property in favor of the buyer after forthwith clearing up the legal objections of any person, if any, by the vendor received as a result of public notice published in respect of the said property. All these clauses in the MOU clearly indicate that the vendor had taken the complete responsibility for obtaining necessary permissions as per the provisions of the Bombay Tenancy and Agricultural Act, 1998 and the vendor shall execute the sale deed in favor of the appellant after forthwith clearing all the objections of any person if, any, by the vendor. Subsequently, as mentioned earlier the sale deed was executed on 12/09/2008 which clearly shows that all the Issues relating to the title of the property, and private forestation zone etc. were cleared or deemed to have been cleared as on the date of execution of the sale deed. Therefore, it is not correct to say that even, after the execution of the sale deed, the remaining amount of Rs.56,16,000/- was to be paid to the vendor and was not paid as on date. In fact, as stated in the assessment 17 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd order, page No.91 of the Universal Box File impounded during the survey clearly gives the bifurcation of the payment to be made by cheque and cash in the ratio of 80:20. Accordingly, the cash portion of the consideration was Rs.56,16,000/- and since the sale deed was already executed during the year, the appellant would have paid the cash component also before or at least at the time of execution of the sale deed. With regard to the letter furnished by vendor Shri R.N.Tungatkar, such letters and affidavits are only self serving letters and affidavits as both the persons are interested persons in the transactions and no credence can be given to such self-serving letters.
4.4.3 The evidence unearthed during the survey in the form of MOU and the page No. 91 of the Universal Box File found during the survey clearly show that the consideration agreed upon was Rs.2,80,80,000/- by cheque and cash In the of 80:20 respectively and the amount was to be paid on or before the execution of the sale deed. In the absence of any corroborative evidences to the contrary, the self serving letter now filed by the appellant in support of its claim that the part of the consideration agreed upon as per the MOU was not actually paid is only an afterthought and cannot be accepted. It is also common knowledge that no person would execute the sale deed without receiving the full sale consideration agreed upon as per the agreement or MOU. Moreover, from the details placed on record, it is also observed that the notification for private forestation was issued much earlier i.e. before entering into the MOU and the appellant was aware of such restrictions on a portion of the land and then only appellant agreed for the consideration of Rs.52,00,000/- per acre. It is also interesting to note that it is only the cash component of 20% in the safe consideration that was claimed to have been withheld till the time the land is deforested and all the disputes are resolved.
33. The learned Authorized Representative for the assessee has failed to controvert the findings of the CIT(A) in this regard and consequently, we find no merit in the grounds of appeal Nos.1 to 3 raised by the assessee and dismissing the same, we uphold the addition of Rs.56,16,000/-.
34. The issue in grounds of appeal No.4 and 5 is with regard to the disallowance of Rs.1,23,83,286/- out of the following items of expenditure:-
i. Travelling and conveyance expenses - Rs.43,98,650/-
ii. Labour charges - Rs.61,47,485/-
iii. Advertisement Expenses - Rs.14,17,312/-
iv. Guest house expenses - Rs.4,19,839/-
35. The Assessing Officer had disallowed the above said expenditure in view of the disproportionate increase in overall expenditure compared to the increase in the turnover and also in view of the ratio of expenditure compared to the 18 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd preceding year. The disallowance worked out by the Assessing Officer, which was upheld by the CIT(A) were as under:-
Sr. Item of expenditure Expenditure % increase in % of increase Excess No. claimed (Rs) the expenditure disallowed expenditure (d-14%)* disallowed*
(a) (b) (c) (d) (e) (f)
1. travelling and 2,32,52,401 40.6% 26.6% 43,98,650 conveyance expenses
3. Labour charges 4,96,97,347 30.1% 16.1% 61,47,485
4. Advertisement 64,05,865 46.4% 32.4% 14,17,312 expenses
5. Guest House 7,85,264 145% 131% 4,19,839 expenses Total 1,23,83,286 * Over last year's corresponding expenditure.
36. The claim of the assessee before us was that the expenditure had been incurred in the course of carrying on the business and 90% of the payments in respect thereof were made by cheque. Further, complete vouchers were maintained by the assessee in this regard and there was no merit in disallowing 25% out of the said expenditure. The assessee before us is a private limited company and was engaged in manufacturing of construction machinery and equipment. The impugned expenditure under reference had been incurred by the assessee while carrying on its business. The Assessing Officer had accepted the plea of the assessee that the said expenditure was incurred in the course of business carried on by the assessee by allowing major portion of the expenditure. However, disallowance was made in the hands of the assessee because of increase in ratio of expenditure vis-à-vis turnover. We find no merit in the said stand of the Assessing Officer in the absence of any evidence found to prove that the expenditure is not relatable to the business of assessee. Merely because there is an increase in the quantum of expenditure does not merit the disallowance in the hands of the assessee. We find no merit in the adhoc disallowance made by the Assessing Officer in the absence of any evidence brought on record to substantiate the disallowance. Accordingly, we reverse the 19 ITA No.975/PN/2013 ITA Nos.1465 & 1466/PN/2013 Universal Construction Machinery and Equipment Pvt Ltd order of CIT(A) and direct the Assessing Officer to allow the said expenditure in entirety. The grounds of appeal No.4 and 5 raised by the assessee are thus, allowed.
37. In the result, the appeal of the assessee vide ITA No.1465/PN/2013 is partly allowed and the other two appeals of the assessee vide ITA No.1466/PN/2013 and ITA No.975/PN/2013 are allowed.
Order pronounced on this 10th day of April, 2015.
Sd/- Sd/-
(G.S. PANNU) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 10 th April, 2015
GCVSR
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-III, Pune;
4) The CIT-III, Pune;
5) The DR "A" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune