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TMI Blog2012 (5) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... AC by reducing the closing WIP of Navsonarbala Project to that extent. Your appellant, therefore, prays that said disallowance be deleted and consequently, the closing WIP of the project be enhanced by Rs.8,36,3321-. 3. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the disallowance of Rs.22,72,9561- out of the interest payments of Rs.88,90,467/. The learned CIT(A) erred in holding that interest free advances were made out interest bearing borrowings, despite the fact that your appellant had sufficient interest free funds. Your appellant, therefore, prays that said disallowance be deleted. 4. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the levy of interest of Rs.10,58,844/- u/s. 234B, of Rs.66,4271- u/s. 234C, and of Rs.29,4181- u/s 234D of the Act. Your appellant, therefore, prays that consequential relief be granted. 2. Ground No.1: After hearing both the parties we find that during the assessment proceedings AO noticed that claim for bad debt included a sum of Rs.8,09,835/- due from M/s Hiranandani Associates. On enquiry assessee expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the aforesaid sum of Rs.8,09,835/- as bad debt written off in its PandL account. However, on security, it was found that the said sum has been paid to "Hiranandani Associates" towards the usage of the excess land space in respect of the development rights granted to the appellant firm for its Gangotri and Yamnotri Projects at Mahavirnagar in the year 1998 to 2000 for which the profitability has already been determined in the FY 2000-01. Thereafter, as the aforesaid sum has been paid to them, it was claimed as expenditure incurred for the business of the appellant firm u/s 37(1) of the Income tax Act. During the course of the assessment proceedings, for the claim of the said amount of Rs.8,09,835/-, relevant copies of account of Hiranandani Associates right from FY 1998 till 2005 has been produced to the AO based on that the appellant firm has justified its claim for the allowance of the said expenditure. Comments: The fact is that the conditions u/s.36(i) (vii) have not been satisfied as this amount has not been offered as income in any earlier year, the same is not a trading debt. As per the assessee this represents the payment made for utilization extraspace in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for payment of such amount has been filed and it was merely stated that a oral mutual understanding was reached in this regard. We fail to understand as to how the extra space was detected after five years and that too without any claim being lodged by M/s Hiranandani Associates. Since no evidence is there for this claim, we reject this alternate contention also. 7. Ground No.2: After hearing both the parties, we find that during the assessment proceedings AO noticed that assessee had borrowed a sum of Rs.10 crores from M/s.Thakur Finvest Pvt. Ltd. in the project Narsonar Bala. This loan amount was deposited in the Kotak Mahindra Bank. It was noted from the bank pass book that some money has been lent to the sister concern without interest. On enquiry that why interest should not be disallowed on this amount, it was stated as under: "The assessee firm has borrowed Rs. 10 crores on 9.11.2004 from Thakur Finvest Pvt. Ltd which was deposited into the Kotak Mahindra Bank account of the firm. Against the aforesaid amount, the firm has transferred the following amount to its associates firms as under: 24.11.2004 Angel developers Rs 72,56,815 2.12.2004 orbit venture Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest was not charged, as during the relevant time, there were no payments required to be made out of the aforesaid funds borrowed for Navsonarbala Project. In view of the, transfer of the funds to the sister concerns and associate companies as a temporary advances, the learned AO has considered it as non-utilisation of the funds to such an extent of an amount of Rs.1,34,91,115/- as non business purposes. Therefore notional interest @ 18% per annum on the transfer of amount of Rs.1.34 crores of Rs.8,36,332/- has been disallowed out of the total interest expenditure of Rs,88,90,467/-. Comments: The fact is that assessee has taken loan of Rs.10 crores from Thakur Finvest. The assessee has taken a loan of Rs.10 crores from Thakur Finvest for investing in project Navsonar Bala. During the course of the assessment, the assessee submitted bank book from which it is observed that out of the total amount of 10 crores the assessee has diverted substantial amount to his sister concerns to the tune of Rs. 1,34,91,115/-. It is seen that in the profit and loss account, the interest debited to Thakur Finvest is Rs.60,00,000/-. From the bank book it is clear that the amount transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Kotak Mahindra Bank. Admittedly, the money has been given out of such loan to the sister concern. Therefore, there is a direct nexus between the interest bearing loan and the interest free advances granted to the sister concern. The Ld. Counsel for the assessee made a general submission that in Narsonar Bala project funds of more than Rs.10 crores were used but he has not given any source of such funds or any evidence that assessee was having some interest free funds which were used in this project. Therefore, we find nothing wrong in the order of the ld. CIT(A) and confirm the same. 12. Ground No.3: After hearing both the parties, we find that during the assessment proceedings AO further noticed that assessee had given interest free advances to the sister concern out of interest bearing borrowings. Therefore, he issued a show cause notice as to why interest u/s.36[1][iii] should not be disallowed. In response, assessee replied as under: (a) the firm had paid interest of Rs. 88,90,468/-(net) and claimed as expenditure towards various projects completed and under construction. The summary of interest debited to profit and loss account is furnished herewith for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proportion with total interest free loans and advances given. The complete chart of calculation is given on page-JO of the assessment order. The learned AO has also stated that the interest bearing loans given has exceeded the amount of interest bearing loans taken which does not prove that the funds are not diverted for the non business purposes. The appellant firm has not shown any nexus with the business and the analysis of the aforesaid chart shows that out of the total funds available with the appellant firm of Rs.16.49 crores, the appellant firm has given interest free advances of Rs. 10.44 crores and as the appellant firm has failed to prove the nexus for all the interest bearing loans utilized for the purposes of the business, amount of Rs.31,91,288/- on the basis of average cost of funds is disallowed u/s 36(1)(iii,) of the Act. Comments: The fact is that assessee has advanced money out of its borrowed funds to other concerns and claimed deduction of interest paid u/s.36(1)(iii). The money so advanced can't be said to be for the purpose of assessee's business. Apart from this assessee's contention that interest bearing loans given exceeds the amount of interest be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionate interest out of the interest expenditure claimed in the PandL A/c. The AO has, however, already considered a sum of Rs.8,36,332/- as expenditure disallowable out of fund borrowed from M/s Thakur Finvest Pvt. Ltd. which is also a part of the total funds available to the assessee. Accordingly, the AO is directed to reduce a sum of Rs.8,36,332/- already disallowed and confirmed above in para 7.2 out of the total disallowance made of Rs.31,09,288/-. The assessee, therefore, gets a relief of Rs.8,36,332/- and remaining expenditure out of interest to the extent of Rs.22,72,956/- is confirmed. The ground of appeal is partly allowed." 14. Before us, Ld. Counsel for the assessee submitted that assessee had substantial amount of interest free funds and in this regard he referred to page-9 of the paper book which is a copy of the balance sheet. He pointed out that assessee had current liabilities of Rs.30,96,89,103/- as per Schedule "G. then he referred to Schedule G at page 18 of the paper book and pointed out that though most of the funds are on account of expenses, but at least advances received for the flat bookings amounting to Rs.12.86 crores should be considered as inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree 103,410,964 141,342,539 The above clearly shows that interest free funds available with the assessee were only Rs.3,76,14,953/-. Now, if we go back to the calculation of the disallowance of interest which we have produced earlier and would like to extract again as under: Total fund available 16,49,68,360 Total interest paid 88,90,467 Average cost of funds 5.389% Total advances given interest free 10,34,10,964 Less interest free loans 3,76,14,952 Less partners capital 80,99,064 Net interest free advance out of borrowed funds 5,76,96,948 Interest cost of this amount (@5.389%) 31,09,288 The above clearly shows that the AO has already reduced the amount of interest free loans and even partners capital has been reduced from the total advances given while calculating the disallowance. The Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Powers Ltd. [supra] held as under: Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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