2020 (8) TMI 94 - AT - Income Tax

Addition u/s 56(2)(vii) - difference between the purchase price shown by the assessee and the DLC rate of the land in the area - HELD THAT - When the properties in question are undisputedly shown in the books of account of the assessee as stock-in-trade and part of the closing stock, then the same would not fall in the ambit of the property as defined in explanation to section 56(2)(vii) and consequently the provisions of section 56(2)(vii) will not be applicable in the case of the assessee. Hence we do not find any error or illegality in the impugned order of the ld. LD. CIT (A). As regards the contention of the CIT D/R this is only a paper transaction, we note that the AO has not doubted the transaction either during the course of assessment proceedings or during the course of remand proceedings. Therefore, such a plea cannot be considered or accepted which is contrary to the stand of the AO. Even otherwise, the LD. CIT D/R can only support the order of the AO and cannot improve the same. Further, if the transaction itself is not a genuine transaction, then the question of applying the provisions of section 56(2)(vii) does not arise. Addition u/s 40A - disallowance of interest on account of diversion of interest bearing funds to the related party - HELD THAT - Without going into the controversy of commercial transaction as well as the related party transaction, at the outset we note that the interest expenditure debited by the assessee in the Profit Loss account is towards the secured loans and, therefore, it is unlikely to use the secured loans other than the purposes for which the loan was taken. Further, as per the Balance Sheet, assessee is having ₹ 7.66 crores as interest free loans under the head Unsecured Loan from the Karta of the HUF and member of the HUF. Once the unsecured interest free loan amount is more than the alleged amount of advance given to these parties, then the disallowance of interest is not justified. Disallowance confirmed by the LD. CIT (A) on account of interest expenditure is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of deletion of addition under section 56(2)(vii)(b)(ii) of the IT Act.
2. Disallowance of interest expenses due to diversion of interest-bearing funds to related parties.

Detailed Analysis:

1. Justification of Deletion of Addition under Section 56(2)(vii)(b)(ii):
The primary issue in the revenue's appeal was the deletion of an addition of ?3,15,70,809/- made by the AO under section 56(2)(vii)(b)(ii) of the IT Act. The AO noted that the consideration shown by the assessee for certain immovable properties was less than the value for stamp duty purposes. The AO proposed the addition based on the difference between the purchase price and the DLC rate of the land. The assessee contended that the lands were stock-in-trade and not capital assets, thus the provisions of section 56(2)(vii) were not applicable. The CIT (A) deleted the addition, agreeing with the assessee's argument that the properties were stock-in-trade.

The tribunal upheld the CIT (A)'s decision, noting that the properties were shown as part of the closing stock in the books of account. The tribunal referred to the explanation to section 56(2)(vii), which defines "property" as a capital asset. Since stock-in-trade is excluded from the definition of "capital asset" under section 2(14), the provisions of section 56(2)(vii) were not applicable. The tribunal also referenced CBDT Circular No. 1 of 2011, which clarified that section 56(2)(vii) does not apply to stock-in-trade.

2. Disallowance of Interest Expenses:
The assessee's cross-objection involved the disallowance of ?4,51,039/- on account of diversion of interest-bearing funds to related parties. The AO disallowed the interest, arguing that the assessee had diverted funds to related parties without incurring development expenses. The CIT (A) partly confirmed the disallowance, considering the advances given to related parties under section 40A(2)(b).

The tribunal found that the assessee had sufficient interest-free funds to cover the advances given for business purposes. The tribunal noted that the interest-bearing loans were secured loans used for specific purposes, and the interest-free loans from family members were more than the advances given. The tribunal referred to the Hon'ble Jurisdictional High Court's decision in CIT vs. Vijay Solvex Ltd., which held that no disallowance of notional interest is justified if the assessee has sufficient interest-free funds. Consequently, the tribunal deleted the disallowance of interest expenditure.

Conclusion:
The tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection. The tribunal upheld the CIT (A)'s decision to delete the addition under section 56(2)(vii)(b)(ii), agreeing that the properties were stock-in-trade and not capital assets. The tribunal also deleted the disallowance of interest expenses, finding that the assessee had sufficient interest-free funds to cover the advances given for business purposes.