2016 (1) TMI 113 - AT - Income Tax

Deduction being the interest paid representing late payment of interest on the monies admittedly borrowed - whether as allowable deduction while computing the income from property as was utilized for acquiring the property whose income was assessed to tax? - Held that - The claimed deduction has been denied on the basis that the same was not allowable as it was not an interest paid on the capital borrowed from HDFC Bank. There is no dispute that for purchasing the property at Munirka for a consideration of ₹ 9,37,33,600, the assessee had taken loan from HDFC Bank for ₹ 6.50 crores on which the authorities below have allowed the interest paid by the assessee. The property was acquired from Lal Bhai Reality Finance Pvt. Ltd. and ₹ 2,21,879 as interest was paid on the delayed payment of the amount out of the sale consideration to Lal Bhai Reality Finance Pvt. Ltd. The said delayed payment out of the consideration was made on 10.2.2006. Thus, in our view, the interest paid at ₹ 2,21,879 cannot be treated differently in comparison to the interest paid to the HDFC Bank as the very purpose for both the interest was to facilitate the payment of amount in consideration for acquisition of the property. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to compute the interest of ₹ 2,21,879 claimed as allowable while computing income from property as provided under sec. 24(b) of the Act. - Decided in favour of assessee Non commencement of business in the real estate - Held that - It is an established position of law that any expenditure incurred after the date of setting up of the business is allowable deduction and it is an unrebutted fact of the present case that in the preceding assessment years, as submitted by the Learned AR hereinabove, the expenditure incurred and as debited in profit and loss account like in the year under consideration, has been fully and wholly allowed as deduction. The Learned CIT(Appeals) has himself held at page No. 26 para No. 7.13 of the First Appellate Order that admittedly the loan amount was used as working capital in its real estates business. Under these facts, we are of the view that the Learned CIT(Appeals) was not justified in arriving at a conclusion that the assessee company has not commenced the business of real estates. This conclusion of the Learned CIT(Appeals) is set aside with this finding that during the year the assessee had commenced the business of real estates - Decided in favour of assessee Nature of land - whether the land held and owned by the assessee in Village Bhondsi measuring 38.09 hector is an agricultural land despite the fact that the same was shown in the balance sheet, under the head stock in trade ? - Held that - As contended by the assessee that it had set up the business when it had purchased the land. Otherwise also, as the land was part of the stock in trade since the aforesaid land had been acquired in the course of its business which is an admitted fact and so admitted by when it had been contended by the assessee that it is a developer in real estates and as such in our opinion the said land was a stock in trade. The approach of the assessee is apparently contradictory which cannot be upheld. Thus, in our view, the Learned CIT(Appeals) was right both on facts and in law in not holding that the said land was not a stock in trade as has been contended by the assessee. The assessee has also taken the ground as an alternative contention and was without prejudice as the Revenue had taken the stand that the assessee has not commenced the business in real estates. In view of our findings hereinabove on the issues raised in ground No.3 and the admitted position by the Revenue in the preceding years that the assessee had not only set up the business but had also commenced the same, the contention raised in support of ground No.4 as discussed above does not stand and the same is accordingly rejected, with this finding that the land in question was actually stock-in-trade. Disallowance out of interest paid to HDFC Bank and the bank charges - Held that - when Learned CIT(Appeals) himself has admitted that funds have been utilized as working capital of the real estates business in his finding in para No. 7.13 at page No. 26 of the order, he was not justified in denying the claimed deduction of interest payments on the borrowed amounts for the investment made in stock in trade. The Learned CIT(Appeals) has disallowed the claimed interest payment on the basis that the business for the purpose of which loan was raised and interest was paid was not commenced. We have decided this issue hereinabove in ground No. 3 that keeping in view the facts and circumstances of the case and the approach of the Assessing Officer in preceding assessment years in allowing the claimed expenditure, the Learned CIT(Appeals) was not justified in coming to the conclusion that the real estates business had not commenced. We thus while setting aside orders of the authorities below direct the Assessing Officer to delete the disallowance of ₹ 39,31,938 claimed on account of interest and bank charges paid against the loan raised for investment in the acquisition of the property - Decided in favour of assessee Disallowance sustained under the head employees cost - Held that - It is a trite law that after the business has been set up, the expenditure incurred is an allowable deduction. The Assessing Officer has disallowed the claim on proportionate basis on an erroneous assumption that there is no income from business of real estates as such, only expenses to that extent there is business income which is allowable. He accordingly computed the disallowance. Besides, there is no material on record to support the allegations of the authorities below that assessee had not incurred the claimed expenditure for the purpose of its business. In absence of such evidence and especially when in the preceding years, similar expenditure has been allowed, we are of the view that there was no justification on the part of the authorities below to make and uphold the disallowance out of the claimed expenditure. We thus while setting aside orders of the authorities below in this regard, direct the Assessing Officer to delete the disallowance - Decided in favour of assessee. Disallowance of expenditure on conveyance and travelling - Held that - We find substance in the contention of the Learned AR that a disallowance of the claimed expenditure cannot be made on the basis that no prudent businessman would have incurred expenses on travelling and conveyance to the tune of ₹ 11.78 lacs to earn receipts of ₹ 22.36 lacs, especially when no fault has been found in the vouchers and bills furnished in support of the claimed expenditure nor is there any dispute regarding the genuineness of the expenditure of the assessee. We thus while setting aside orders of the authorities below in this regard direct the Assessing Officer to delete the disallowance - Decided in favour of assessee. Treatment to interest income - Business income or income from other sources - Held that - The business is continuing process and merely because there may not be any income from all resources, of course, which is not the case herein, does not by itself mean that the assessee is not engaged in the business and is not carrying on business activities in that year. Under these facts and circumstances, we are of the view that the Assessing Officer was not justified in treating the interest incomeas income from other sources against the claimed income from business. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to accept the claimed income in question as business income - Decided in favour of assessee. Disallowance u/s 14A - Held that - As making disallowance under sec. 14A read with Rule 8D, it is a pre-condition for the Assessing Officer to record his satisfaction that the submissions made by the assessee in relation to the expenditure if any incurred for earning the exempt income is not correct. In absence of recording of such satisfaction by the Assessing Officer, the only option available with the Learned CIT(Appeals) was to delete the disallowance.- Decided in favour of assessee.

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Incorrect computation of income from property.
3. Commencement of business in real estate.
4. Classification of land as agricultural or stock-in-trade.
5. Disallowance of interest and bank charges.
6. Disallowance of employee costs.
7. Disallowance of travel and conveyance expenses.
8. Classification of interest income as business income or income from other sources.
9. Disallowance under section 14A.
10. Charging of interest under section 234B.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee contended that the assessment framed by the Assessing Officer (AO) violated principles of natural justice and should be quashed. However, this ground was general and did not need independent adjudication.

2. Incorrect Computation of Income from Property:
The assessee argued that the AO incorrectly computed income from property and disallowed the deduction of Rs. 2,21,879 for interest paid on borrowed funds. The tribunal found that the interest paid on delayed payment of the purchase amount was for facilitating the acquisition of the property and should be allowed under section 24(b) of the Act. The AO was directed to compute this interest as allowable.

3. Commencement of Business in Real Estate:
The assessee claimed that it had commenced its real estate business, but the AO disagreed. The tribunal noted that the assessee had been engaged in various business activities, including real estate, and had given advances for property purchases during the year. The tribunal concluded that the business had commenced and directed the AO to allow the claimed deduction of interest and bank charges.

4. Classification of Land as Agricultural or Stock-in-Trade:
The assessee argued that the land in Bhondsi Village should be classified as stock-in-trade, not agricultural land. The tribunal found that the land was part of the stock-in-trade as it was acquired in the course of business. The tribunal rejected the contention that the land was agricultural, supporting the CIT(A)'s classification as stock-in-trade.

5. Disallowance of Interest and Bank Charges:
The AO disallowed interest and bank charges totaling Rs. 39,37,932. The tribunal found that the CIT(A) had admitted the funds were used as working capital for the real estate business. The tribunal directed the AO to delete the disallowance, as the business had commenced, and the interest and bank charges were for business purposes.

6. Disallowance of Employee Costs:
The AO disallowed Rs. 9,80,103 out of Rs. 12,31,084 claimed as employee costs. The tribunal noted that similar expenditures had been allowed in previous years and found no justification for the disallowance. The tribunal directed the AO to delete the disallowance.

7. Disallowance of Travel and Conveyance Expenses:
The AO disallowed 50% of travel and conveyance expenses, amounting to Rs. 5,89,433. The tribunal found no fault in the vouchers and bills and noted that the expenses were incurred for business purposes. The tribunal directed the AO to delete the disallowance.

8. Classification of Interest Income as Business Income or Income from Other Sources:
The AO classified interest income of Rs. 83,65,124 as income from other sources. The tribunal noted that in previous years, similar interest income was accepted as business income. The tribunal directed the AO to treat the interest income as business income, following the principle of consistency.

9. Disallowance under Section 14A:
The AO made a disallowance of Rs. 1,36,798 under section 14A. The tribunal noted that the AO had not recorded any satisfaction that the expenditure was incurred to earn exempt income. The tribunal found the disallowance unjustified and set aside the CIT(A)'s order remanding the issue to the AO.

10. Charging of Interest under Section 234B:
The assessee questioned the validity of charging interest under section 234B. The tribunal noted that this issue was consequential and did not need independent adjudication.

Conclusion:
- Appeals ITA Nos. 2538/Del/2010 and 1146/Del/2012 were allowed.
- Appeal ITA No. 3052/Del/2010 was dismissed.