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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 ..... Shriram Bajaj for the Appellant Alexander Chandy for the Respondent ORDER T.R. Sood: In this appeal the assessee has raised the following grounds: 1. 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.8,09,835/-, made by the learned AC in respect of the payment made by the appellant to M/s Hiranandani Associates for utilization of excess land space, by considering the same as a bad debt. The learned CIT(A) failed to appreciate, and ought to have held, that the said payment was business expenditure deductible u/s 37(1). Your appellant, therefore, prays that said expenditure be fully allowed. 2. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in sustaining the disallowance of interest of Rs.8,36332/- (out of total interest payment of Rs.60000, 000I- made to M/s Thakur Finvest Pvt. Ltd.) made by the learned 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.36[1][vii] the requirement was that such debt either should have been taken into account while computing the income of the assessee in the previous year or it should be the money lent in the ordinary course of the business. Since the above condition prescribed u/s.36[2] was not fulfilled, AO disallowed this sum. 3. On appeal, it was contended that the claim was made as per the provisions of the Act. It was further submitted that the claim was rightly debited in the profit and loss account being compensation payable for use of extra land space for which the amount was mutually agreed between the assessee and M/s Hiranandani Associates. The assessee also furnished a copy of the accounts for M/s Hiranandani Associates. The ld. CIT(A) sent the same for comments of the AO. The AO made the following comments vide letter dated 13-01-2009: "4) Ground No. IV: disallowance of bad debts of Rs.8,09,835/-. The assessee contended that he had claimed 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 dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that this claim for additional space has been made in the year 2005. He contended that there was no possibility of making this claim after five years and that too after completion of the projects without any evidence. 6. We have considered the rival submissions carefully. We find that originally this amount has been claimed as bad debt before the AO and the CIT(A) and no revised grounds have been filed to make the claim u/s.37[1]. The amount has been correctly disallowed as bad debt because the conditions prescribed u/s.36[2] that either such amount should have been considered for computing the income or the amount could have been lent in the ordinary course of business, are not fulfilled. Even if assuming that assessee can raise an alternative plea before us, we find no force in the same, because no evidence has been brought on record to show that assessee had used extra space in the completed projects. No agreement 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 Hirana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of the assessee firm are furnished herewith for your kind perusal." The AO did not accept these submissions and on the basis of the calculation provided by the assessee of proportionate interest, an amount of Rs.8,36,322/- was disallowed. 8. Before the CIT(A) it was mainly submitted that the assessee had some surplus funds therefore this addition was not justified. The CIT(A) sent the same for the comments of the AO and the following comments were made by the AO: "5) Ground No. V: Disallowance of interest of Rs. 8,36,332/-. The assessee contended that during the year, the appellant firm had borrowed a sum of Rs.1O crores from Thakur Finvest Pvt. Ltd. for its Navsonarbala Project at Bandra (W) and a sum of Rs.60 lacs interest has been paid to the said party against the aforesaid loan to them. The total funds borrowed from Thakur Finvest Pvt. Ltd., has been utilized for the Navsonarbala Project. However, for a short period, the part of the funds were transferred for the temporary needs of the sister concerns and associate companies as temporary advances on which interest was not charged, as during the relevant time, there were no payments required to be made out of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern on nine temporary periods. It is, therefore, held that the assessee has diverted the interest bearing fund to its sister concern free of interest. Accordingly, interest attributable to such interest free funds to the extent of Rs.8,36,332/- was correctly disallowed by the AO. The addition made by the AO is confirmed. The ground of appeal is dismissed." 9. Before us, Ld. Counsel for the assessee submitted that though this money was given out of the bank account of Kotak Mahindra Bank in which the loan proceeds from ThakurFinvest Pvt. Ltd. were deposited, but at the same time during the year assessee had used more than Rs.10 crores on Narsonar Bala Project and, therefore, this addition was not justified. 10. On the other hand, Ld.DR strongly supported the order of the CIT(A). 11. We have considered the rival submissions carefully and are unable to agree with the submissions of the Ld. Counsel. The AO has made his case very clear that a specific amount was borrowed for the purpose of Narsonar Bala project and the loan proceeds were deposited in Kotak Mahindra Bank. Admittedly, the money has been given out of such loan to the sister concern. Therefore, there is a direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese contentions. He considered various case laws and worked out the disallowance of interest 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 13. Before the CIT(A) it was mainly contended that addition is unwarranted as the funds borrowed free of interest were more than the advances given free of interest and in this regard certain documents were produced. The ld. CIT(A) send the same for the remand report and AO gave the following comments: Ground No. VI: disallowance of interest on loan u/s 36(i)(iii) of Rs.31,09,288/-. The assessee submitted that the learned AO has disallowed sum of Rs.31,09,288/- on the basis of the average cost of funds calculated on the basis of the total funds available and total interest paid in proportion with total interest free loans and advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of Rs.60 lakhs paid to M/s Thakur Finvest Pvt. Ltd. on the loan of Rs.10 crores. It is further seen that interest to the extent of Rs.38,92,239/- is claimed on unsecured loans obtained by the assessee during the year and debited to the PandL A/c. Thus after reduction of interest received of Rs.13,59,460/-, total expenditure on interest paid is claimed and debited to PandL A/c at Rs.88,90,468/- which includes the interest paid on funds borrowed on secured loan from M/s Thakur Finvest Pvt. Ltd. as discussed above. The assessee, however, has failed to elaborate the exact nexus of funds borrowed and utilized for business purpose. The assessee itself had admitted during the assessment proceedings about the complexity of the project implemented and borrowal of the funds as also advances out of common kitty during the year. The assessee at no point of time has proved the nexus of interest free loans which were claimed to have been given as interest free advances. In view of these facts on the records as discussed by the AO in the order, in principle, I agree to the calculation made by the AO for disallowance of proportionate interest out of the interest expenditure claimed in the Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further becomes clear from the copy of the bank account. The Ld. Counsel for the assessee had cited examples for receipts of payments from Ketan Jayesh Garodia amounting to Rs.6,50,000/- and a sum of Rs.10 lakhs from Haresh P. and Asha Bhatia, but at the same time against these receipts various payments have been made on account of various expenses, e.g., office electricity expenses, payment for cement work, payment to Gujarat Ambuja Cement etc. These payments clearly show that advances received from customers were mainly for the purpose of the constructions which have been accordingly used and, therefore, such funds cannot be construed as interest free funds available to the assessee. At page 113 of the paper book, according to the break of the loan filed by the assessee, the details of total loans are as under: Particulars Amount Amount Secured loans 100,025,823 Unsecured Loans Interest Bearing 19,228,521 Interest Free 37,614,953 56,843,474 1 56,869,297 Advances Given Interest Bearing 37,931,57 ..... 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