2015 (7) TMI 120 - AT - Income Tax

Disallowance of expenditure paid to Pune Municipal Corporation(PMC) for regularizing the excess area constructed for a building called MODI MALL by invoking the Explanation to sec 37(1) - Held that - Compounding fee paid by the assessee to the Municipal Corporation on account of deviations from original sanctioned plan is in the nature of penalty and therefore would not be allowable as deduction in view of provisions of Explanation to section 37(1) of the I.T. Act. The above view of ours also finds support from the decision of Nahar Spinning Mills Vs. CIT reported in (2014 (11) TMI 898 - PUNJAB & HARYANA HIGH COURT ) and the decision of Millennia Developers Pvt. Ltd. Vs. DCIT reported (2010 (1) TMI 223 - KARNATAKA HIGH COURT - Decided against assessee. Disallowance of payment of interest u/s 40(a)(ia) - Whether the interest is payable to the NBFC s which are granted exemption for no IDS u/s 194A(3)(iii)(f) and also the entire interest has been paid in the previous year as submitted by assessee - Held that - So far as the argument of the Ld. Counsel for the assessee that no disallowance u/s.40(a)(ia) is required since no amount is payable at the end of the year, we find the Pune Benches of the Tribunal following the decisions of Hon ble Gujarat High Court and Hon ble Calcutta High Court are taking the consistent view that provisions of section 40(a)(ia) are applicable for TDS default even if no amount is payable at the end of the year. The above view of the Tribunal also finds support from the decision of the Hon ble Punjab & Haryana High Court in the case of PMS Diesels Vs. CIT reported (2015 (5) TMI 617 - PUNJAB & HARYANA HIGH COURT ). The Hon ble High Court after considering the decision of Hon ble Allahabad High Court in the case of Vector Shipping Services (P) Ltd. 2013 (7) TMI 622 - ALLAHABAD HIGH COURT and the dismissal of the SLP before Hon ble Supreme Court has held that provisions of section 40(a)(ia) are applicable even if no amount is payable at the end of the year. Therefore, the first limb of argument of the Ld. Counsel has to be rejected. So far as the alternate argument of the Ld. Counsel for the assessee that disallowance u/s.40(a)(ia) could not be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act whereof the payees have filed the return showing such income in the return of income, we find the same is acceptable.However, the assessee has made a new legal argument that the Finance Act, 2010 has amended the first proviso to section 40(a)(ia) w.e.f. 01-04-2010 and it has been held by various judicial authorities that such amendment is retrospective in nature. It is the submission of the Ld. Counsel for the assessee that the second proviso to section 40(a)(ia) was inserted by the Finance Act, 2012 w.e.f. 01-04-2013 wherein it is stated that disallowance u/s.40(a)(ia) of the Act need not be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the I.T. Act., therefore, this should also be held as retrospective since it has been introduced to eliminate unintended consequences which may cause undue hardship to the tax payers.Since the above arguments are being advanced before the Tribunal for the first time and the correctness of the contention has not been examined by the tax authorities, therefore restore this issue to the file of the Assessing Officer with a direction to examine the above contention of the assessee - Decided in favour of assessee for statistical purposes. Interest to be capitalized to the qualifying assets by relying on proviso to sec. 36(1)(iii) - whether the said proviso is applicable to the capital assets and to the current assets ? - AO disallowed the interest claimed u/s.24(b) on the ground that such interest has not been used for construction of the property on which rent is received. The alternate contention of the assessee that such interest has been utilised for business and therefore allowable u/s.36(1)(iii) was also rejected by the Assessing Officer by referring to the Accounting Standard-16 - Held that - Ld.CIT(A) upheld the action of the Assessing Officer so far as the disallowance u/s.24(b) is concerned. As regards the alternate claim that such interest should be allowed u/s.36(1)(iii) he gave certain directions to the Assessing Officer to find out the qualifying assets and compute the interest attributable to such qualifying assets in terms of paragraphs 12 of the Accounting Standard-16 according to which the interest so computed as per Accounting Standard-16 attributable to qualifying asset shall be capitalised to form part of the cost of the work-in-progress. Only the interest not so capitalised is allowable deduction u/s.36(1)(iii). We find after such direction of the CIT(A) the Assessing Officer called for the details from the assessee and after due verification held that there is no qualifying asset as per Accounting Standard-16 and the entire interest is allowable. A copy of the order of the Assessing Officer giving effect to such direction of the CIT(A) is placed at page 23 of the paper book. We find the Assessing Officer has allowed relief of ₹ 2,02,91,840/- being interest which was earlier claimed as deduction from house property income. Even otherwise also, the business of the assessee is that of purchase and sale of land, investment in land, real estate, commercial and residential plot etc. The funds borrowed have been utilised for such business activity, therefore, the entire interest paid has to be allowed as deduction u/s.36(1)(iii) of the I.T. Act. The same is also borne out from the record after the order of the Assessing Officer giving appeal effect to the order of the CIT(A). - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure paid to Pune Municipal Corporation (PMC) for regularizing excess area constructed.
2. Disallowance of interest payment for non-deduction of TDS under section 40(a)(ia).
3. Disallowance of interest on unsecured loans.
4. Deduction of interest from "Income from House Property."

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Paid to PMC:
The assessee, a partnership firm engaged in land development and leasing, claimed a deduction for Rs. 6,60,000 paid to PMC for regularizing excess construction. The Assessing Officer (AO) disallowed this expenditure under Explanation to Section 37(1), considering it a penalty for violating municipal norms. The CIT(A) upheld the AO's decision, citing the Karnataka High Court's ruling in CIT Vs. Mamta Enterprises, which treated such fees as fines for legal infractions.

The assessee argued that the compounding fee was not a penalty but a business expenditure, referencing the Supreme Court's decision in CIT Vs. Ahmedabad Cotton Manufacturing Co. Ltd., which allowed such payments as business expenses. However, the Tribunal noted that the Explanation to Section 37(1) inserted by the Finance Act, 1998, with retrospective effect, explicitly disallows deductions for expenditures incurred for purposes that are offenses or prohibited by law. The Tribunal upheld the disallowance, agreeing with the Karnataka High Court's interpretation that compounding fees for regularizing illegal constructions are penalties and not deductible.

2. Disallowance of Interest Payment for Non-Deduction of TDS:
The AO disallowed Rs. 55,85,717 under Section 40(a)(ia) for non-deduction of TDS on interest payments to NBFCs. The CIT(A) upheld this disallowance. The assessee contended that the provisions of Section 40(a)(ia) apply only to amounts payable at the end of the year, not to amounts already paid, citing the Mumbai Tribunal's decision in Arcadia Share and Stock Brokers Pvt. Ltd. However, the Tribunal noted that the Pune Benches consistently follow the Gujarat and Calcutta High Courts' rulings, which apply Section 40(a)(ia) even if no amount is payable at year-end.

The Tribunal accepted the assessee's alternate argument that disallowance under Section 40(a)(ia) is not warranted if the payees have filed returns showing the interest receipt, as per the first proviso to Section 201(1). The issue was restored to the AO for fresh adjudication based on this proviso.

3. Disallowance of Interest on Unsecured Loans:
The AO disallowed Rs. 5,85,000 in interest paid on unsecured loans under Section 40(a)(ia) for non-deduction of TDS. The CIT(A) upheld this disallowance. The Tribunal restored this issue to the AO for fresh adjudication, following the same rationale as in Issue 2, regarding the applicability of the first proviso to Section 201(1).

4. Deduction of Interest from "Income from House Property":
The AO disallowed Rs. 2,02,91,840 claimed as a deduction under Section 24(b) for interest on loans, arguing that the loans were not used for acquiring or constructing the property generating rental income. The CIT(A) upheld this disallowance, directing the AO to compute allowable interest under Section 36(1)(iii) by identifying qualifying assets and capitalizing interest as per Accounting Standard-16.

The Tribunal noted that the partnership deed allowed the firm to engage in land trading, and the borrowed funds were used for such business activities. The AO, upon verification, found no qualifying assets, allowing the entire interest as a deduction. The Tribunal concluded that the interest was allowable under Section 36(1)(iii) as the funds were used for business purposes, dismissing the Revenue's appeal and allowing the assessee's additional ground.

Conclusion:
The Tribunal upheld the disallowance of the compounding fee paid to PMC as a penalty, restored the issues of interest disallowance under Section 40(a)(ia) to the AO for fresh adjudication based on the first proviso to Section 201(1), and allowed the interest deduction under Section 36(1)(iii) for business purposes. The Revenue's appeal was dismissed, and the assessee's appeal was partly allowed.