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TMI Blog2015 (7) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... ng out commercial and residential property. It filed its return of income on 31-10-2009 declaring total income of Rs. 12,26,71,670/-. During the course of assessment proceedings the Assessing Officer noted that assessee firm has debited an amount of Rs. 6,60,000/- under the head direct expenses towards penalty charges for completion certificate to the profit and loss account. On being questioned by the Assessing Officer it was submitted that the same has been paid to PMC for regularising the excess area that had been constructed than it was sanctioned. It was argued that the impugned payment represented Tadjod fee paid to PMC and was not in the nature of penalty or fine. 4. However, the Assessing Officer was not satisfied with the explanation given by the assessee. He observed that the assessee has violated the norms levied by the Municipal authorities while constructing the MODI MALL due to which the PMC has levied penalty of Rs. 6,60,000/-. According to the Assessing Officer as per Explanation to section 37(1) any expenditure incurred by an assessee for a purpose which is an offence or which is prohibited by law will not be deemed to have been incurred for the purpose of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat payments, though referred to as penalty, but in fact made in exercise of option available under statutory scheme, in the course of assessee's business is an allowable expenditure. He submitted that in that case the assessee being a manufacturer of cotton textiles had to comply with the directions issued from time to time by the Textile Commissioner under the provisions of Cotton Textiles (Control order), 1948. The assessee instead of producing and packing the minimum quantity of specified type as required by the aforesaid directions of the Textile Commissioner paid to the Textile Commissioner to Rs. 1,70,766/- in exercise of the option available to it under clause 21C(1)(b) of the Control order. The assessee claimed the amounts as deduction from its profit which was disallowed by the Assessing Officer on the ground that the said amounts paid by the assessee to the Textile Commissioner were not deductions which can be allowed as items of business expenditure. The AAC allowed the claim. The appeal filed by the Revenue before the Tribunal was dismissed. A Division Bench of the Hon'ble Gujarat High Court decided the issue against the Revenue and in favour of the assessee. On furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be rewarded for an illegal act. 9.1 So far as the decision of Hon'ble Delhi High Court in the case of Lokenath and Co. (Supra) is concerned he submitted that the order is dated 13-01-1984 and the Explanation to section 37(1) was incorporated by Finance No.2 Act, 1998 with retrospective effect from 01-04-1962. Therefore, the Explanation to section 37(1) was not before the Hon'ble Delhi High Court. Therefore, the same cannot be followed. As regards various other decisions relied on by Ld. Counsel for the assessee are concerned, he submitted that they are on different issues and are distinguishable. He accordingly submitted that the order of the CIT(A) should be upheld and the ground raised by the assessee should be dismissed. 10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute to be adjudicated in the impugned ground is regarding allowability of compounding fees of Rs. 6,60,000/- paid by the assessee to PMC for regularising the excess area constructed as deductible expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 37(1) as compounding of such an offence by paying compounding fine did not wipe out the offence or infraction of law committed by the assessee under the relevant Corporation Act. 10.4 The decision of the Hon'ble Supreme Court in the case of Ahmedabad Cotton Mfg. Co. Ltd. and others (Supra) and the decision of Hon'ble Delhi High Court in the case of Lokenath and Co. (Supra) were prior to the insertion of Explanation to section 37(1) of the I.T. Act. Therefore, the above decisions in our opinion are not applicable to the facts of the present case. 10.5 So far as the decision of Mumbai Bench of the Tribunal in the case of Bharat C. Gandhi (Supra) is concerned we find, the issue in that case is regarding settlement fees paid under Motor Vehicle Act. The issue in the case of Transport Corporation of India (Supra) was secret commission paid to promote its business. Therefore, the decisions relied on by the Ld. Counsel for the assessee are not applicable to the facts of the present case. 10.6 We find the Hon'ble Karnataka High Court in the case of Mamta Enterprises (Supra) distinguishing the decision of Hon'ble Delhi High Court in the case of Lokenath and Co. (Supra) and follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. . . . In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid out for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the decision of Hon'ble Karnataka High Court in the case of Millennia Developers Pvt. Ltd. Vs. DCIT reported in 188 Taxmann 388 (Kar.) In view of the above discussion Ground of appeal No.1 by the assessee is dismissed. 11. Ground of appeal No.2 by the assessee reads as under : "2. On the facts and in the circumstances of the case, the CIT(A) has erred in sustaining the disallowance of payment of interest of Rs. 55,85,717/- by invoking the provisions of sec 40(a) (ia) overlooking the fact that the interest is payable to the NBFC's which are granted exemption for no IDS u/s 194A(3)(iii)(f) and also overlooking the fact that the entire interest has been paid in the previous year." 12. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that assessee has not deducted TDS from the following payments : a City Financial Rs.7,31,374/- b City Finance (Eduljee) Rs.26,83,156/- c India Bulls Rs.21,71,187/- TOTAL Rs.55,85,717/- He therefore disallowed the above amount u/s.40(a)(ia) of the I.T. Act. 13. Before CIT(A) it was argued that no amount is outstanding and provisions of section 40(a)(ia) are applicable only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing the decision of the Hon'ble Gujarat High Court and Hon'ble Calcutta High Court that provisions of section 40(a)(ia) are applicable even if no amount is payable at the year end where TDS has not been deducted from such payments. Therefore, the issue has to be decided against the assessee. So far as the alternate argument of the assessee is concerned, the Ld. Departmental Representative submitted that such argument was never taken before the lower authorities. However, he left it to the Bench. 17. We have considered the rival arguments made by both the sides. 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 in TS-346-HC- 2015 (P&H). The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8.2 We find some force in the above argument of the Ld. Counsel for the assessee. We find the Cochin Bench of the Tribunal in the case of Antony D. Mundackal (Supra) relied on by Ld. Counsel for the assessee, had an occasion to decide an issue in the light of the above argument and has restored the issue to the file of the Assessing Officer with certain directions. The relevant observation of the Tribunal at Para 7 of the order read as under: "7. We have heard the rival contentions and carefully perused the record. According to the assessee, there is no written contract between him and the persons doing polishing works. Accordingly, the assessee has contended before us that the provisions of sec. 194C shall not apply to the polishing charges. However, we notice that the assessing officer has given a clear finding that essential ingredients of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of profit element in the polishing works does not make any difference. 7.2 The Ld Counsel, by placing reliance on the decision of special bench in the case of Meryline Shipping and transports (supra) contended that the provisions of sec. 40(a)(ia) shall apply only to amount payable and not to the amount paid. However, the Hon'ble Gujarat High Court in the case of CIT Vs. Sikandar Khan N Tunvar (357 ITR 312) and the Hon'ble Calcutta High Court in the case of CIT Vs. Crescent Export Syndicate (ITAT 20 of 2013) have held that the decision rendered by the Special Bench in the case of Meryline Shipping & Transports is not a good law. The Ld A.R, however, placed reliance on the decision of Hon'ble Allahabad High Court in the case of Vector Shipping Services (357 ITR 642). On a careful perusal of the decision given by Hon'ble Allahabad High Court, we notice that the High Court has decided the issue referred to it on a different footing and has made a passing comment about the decision rendered by the Special Bench. Thus, the ratio of the said decision is different from that rendered in the case of Meryline Shipping and Transports by the Special bench. Hence, we are inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is accordingly allowed for statistical purposes. 18. Ground of appeal No.3 by the assessee reads as under : "3. On the facts and in the circumstances of the case, the C1T(A) has erred in sustaining the disallowance of interest of Rs. 5,85,000/- paid on unsecured loans by invoking the provision of section 40(a)(ia) overlooking the fact that the appellant has duly deducted the tax at source and deposited in time." 19. After hearing both the sides, we find invoking the provisions of section 40(a)(ia) the Assessing Officer disallowed an amount of Rs. 5,85,000/- being interest paid to unsecured loan creditors which has been upheld by the CIT(A). Both the sides agreed that this issue is identical to ground of appeal No.2 above. Therefore, following the ratio laid down in Ground of appeal No.2, we restore this issue to the file of the Assessing Officer for deciding the issue afresh in the light of the observations given while adjudicating ground of appeal No.2. This ground by the assessee is accordingly allowed for statistical purposes. 20. The assessee has also taken two additional grounds which are as under : "1. On the facts and in the circumstances of the case CIT(A) er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before the ITAT." Therefore, additional ground No.2 by the assessee and the grounds raised by the Revenue are being adjudicated together. 24. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted that assessee has claimed loss of Rs. 45,56,360/- under the head income from house property after claiming deduction u/s.24 being interest on loan to the extent of Rs. 2,02,91,840/-. The interest was claimed against rent received from Krishna Sahakari Bank Rs. 18,75,284/- and LNB Textiles Pvt. Ltd., Rs. 1,84,05,556/. According to the Assessing Officer the said deduction is allowable where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. He therefore asked the assessee to explain the allowability of the same. It was submitted that loan has been utilised partly for purchase of plot, construction of mall, purchase of other stock. It was argued that the interest paid on the above loan if not allowed as a deduction under the head income from house property u/s.24 should be allowed as deduction under the head income from business or profession u/s.36(1)(iii) since such interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of lands amounting to Rs. 20.76 crores shown as closing stock and also advance for purchase of land at Rs. 15.22 crores. Since only profit from sale of Kharadi plot has been declared during the year the deduction claimed for interest paid against the profit has to be disallowed as per Accounting Standard-16. He also brought to the notice of the assessee the provisions of AS-16. Rejecting the various explanations given by the assessee and relying on various decisions the Assessing Officer held that interest amounting to Rs. 2,64,62,557/- has to be disallowed. While doing so, he also observed that an amount of Rs. 55,85,717/- out of the above amount of Rs. 2,64,62,557/- paid to NBFCs is also liable to be disallowed u/s.40(a)(ia) as no tax has been deducted at source. 26. Before CIT(A) it was submitted that the bank loans were undisputedly utilised for construction of the building, lay out as well as for their on-going business of trading in lands etc. It was argued that most of the loans have been used for acquisition and construction of the properties which are rented out and therefore interest to the extent of Rs. 2,02,91,840/- has been claimed as deduction u/s.24(b) under the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st can be allowed as deduction u/s.36(1)(iii) is concerned the Ld.CIT(A) observed at para 3.3.2.8 as under : "3.3.2.8 To sum up the interest on the capital borrowed generally, which was also used for the purpose of incomplete ongoing ventures and development of new ventures projects shall be hit by the proviso to sec.36(1)(iii) and interest, beginning from the date on which the capital was borrowed for the acquisition of these assets till the date on which such assets were ready for its intended use or sale, i.e. first put to use, cannot be allowed as deduction. In other words, the finance cost relatable to these ventures/projects cannot be allowed as deduction under sec.36(1)(iii) in this year. This position is also in line with the Accounting Standard-16, which is extracted hereinabove, and the projects of this nature fall within the definition of qualifying assets. As per the definition, a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The borrowing cost relatable to qualifying asset, i.e. land development projects are required to be capitalised and added to the cost or WIP of such projects. Capitalisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase, sale, lease/rent, development, investment in Land, Real estate, Commercial and Residential plot and act as commission agent and all other allied activities. B] The partners may vary the nature of business and do any additional type of business with their mutual consents from time to time." 34. He accordingly submitted that the assessee is engaged in the business of land trading. These lands are held as stock in trade and current assets and as such the interest is certainly allowable as deduction u/s.36(1)(iii) of the I.T. Act. Referring to the copy of the order giving effect to the order of the CIT(A) the Ld. Counsel for the assessee submitted that there are no qualifying assets. Therefore, the question of capitalising the interest to those qualifying assets does not arise. Therefore, the entire interest of Rs. 2,64,62,557/- claimed by the assessee has to be allowed u/s.36(1)(iii) of the I.T. Act. He submitted that the fact that loans are taken for trading stands proved as per the copies of the final accounts wherein the lands are shown as trading assets and not held for any construction thereon. He submitted that after the order of the CIT(A) directing the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on unsecured loans at Rs. 5,85,000/- on the ground that such interest should have also been capitalised to the closing stock of land. Thus, in effect, the Assessing Officer disallowed interest of Rs. 2,64,62,557/- on the ground that such interest needs to be capitalised and added to the cost of the asset and cannot be claimed as Revenue expenditure. 37. The Assessing Officer further held that the amount of Rs. 61,70,717/- mentioned above includes interest of Rs. 55,85,717/- paid to NBFCs on which no tax has been deducted, therefore, the same is otherwise also not allowable u/s.40(a)(ia). 38. We find in appeal the 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. Onl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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