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TMI Blog2016 (1) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer, the only option available with the Learned CIT(Appeals) was to delete the disallowance.- Decided in favour of assessee. - ITA No. 2538/Del/2010, ITA No.1146/Del/2012 - - - Dated:- 14-8-2015 - SHRI I.C. SUDHIR AND SHRI INTURI RAMA RAO For The Appellant by: S/Shri CS Aggarwal, RP Mall, Adv. and DB Jain, CA For The Respondent by: Shri Tarun Seem, Senior DR ORDER PER I.C. SUDHIR: JUDICIAL MEMBER ITA No.2538/Del/2010: The assessee has questioned First Appellate Order on the following grounds: 1. That the Learned CIT(Appeals) has failed to appreciate that since the assessment framed by the Assessing Officer was in violation of principles of natural justice, the order of assessment had to be quashed or annulled. 2. That without prejudice and in the alternative, the Learned CIT(Appeals) ought to have restored such of the matters to the Assessing Officer to decide those issues, in respect of which additions had been made and were been made admittedly in violation of principles of natural justice i.e., without providing any opportunity whatsoever of being heard e.g. income under the head income from property. 2.1That the Learned CIT(Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an of agricultural land held at village Bhondsi. 5. That the Learned CIT(Appeals) has further erred in upholding the disallowance of interest and bank charges of a. (i) ₹ 26,86,143 Representing interest on (ii) ₹ 3,88,138 monies borrowed for the (iii)Rs.2,21,879 purposes of business and (iv) ₹ 10,815 and utilized for the same b. ( v) ₹ 8,63,651 representing bank charges. All aggregating to ₹ 41,70,626, while computing or determining the total income of the assessee company. 6. That in any case and without prejudice there was absolutely no justification to disallow a further amount of ₹ 9,80,103 purported to be proportionate employee cost, on an assumption that such expenses could be held to be capital expenditure. In doing so the Learned CIT(Appeals) has failed to appreciate that, the income may be computable, head wise, yet it is the total income of the assessee which has to be computed and as such the expenditure incurred on the employment of employees and had been employed in the business had to be allowed as a deduction and there can be no proportionate disallowance made on an assumed basis. 7. That the Learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 27,67,500 from another property owned by the assessee company. Thus, the aggregate rent received amounted to ₹ 87,13,025 which was duly reflected in the profit and loss account. The assessee claimed deduction of interest paid by the assessee to Lal Bhai Reality Finance Pvt. Ltd. from whom the assessee had acquired the property and paid the consideration for purchase thereof. The Assessing Officer disallowed the same, which has been upheld by the Learned CIT(Appeals) at ₹ 2,21,879. 7. In support of the ground, the Learned AR submitted that the disallowance was made by the Assessing Officer without application of mind as he proceeded to compute income on the basis of profit and loss account and not on the basis of computation of income filed by the assessee. Had the Assessing Officer examined the claim under the head income from property separately then he would not have committed such an error of disallowing the entire claim debited in the profit and loss account which aggregated to ₹ 71,12,593 which was the amount of interest paid as also bank charges, detailed in the profit and loss account. 8. The Learned AR submitted further that Learned CIT(Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration 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. The ground No. 2.4 is thus allowed. 11. Ground No.3: It is regarding the finding of the Learned CIT(Appeals) that assessee company has not commenced the business of a real estates. 12. The Learned AR submitted that the assessee had been carrying on various business activities including business of real estates. In fact, the Assessing Officer has himself observed in the assessment order as assessee engaged in the business of consultancy and real estates and has computed business income at ₹ 18,77,041. The Assessing Officer had denied the claimed deduction on the basis that there was no income from real estates in the year under consideration. The Assessing Officer accordingly disallowed interest and bank charges claimed as deduction. The Assessing Officer could not have arrived at such a conclusion since assessee company had even during the year under consideration given advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07 1,35,44,011 14. The Learned Senior DR on the other hand placed reliance on the orders of the authorities below with this contention that under the facts of the present case, the Learned CIT(Appeals) has rightly come to the conclusion that the assessee company had not commenced the business of real estates. The assessee was in several business activities and it was not clear that as to which business was commenced during the year. 15. Considering the above submission, we find that in the assessment year 2005-06 in the assessment framed under sec. 143(3) of the Act, the Assessing Officer himself has admitted that the assessee is engaged in the work of real estates development. The relevant extracts thereof is being reproduced hereunder for a ready reference: As in the past, the company is engaged in the work of real estates development. In addition to the same company also derived income in the business of sale, purchase of wood and related items and also from the management consultancy. Besides, it is an established position of law that any expenditure incurred after the date of setting up of the business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of business or to be used for business purpose and thus assessee has not set up or commenced the business of real estates. In our opinion, the ground No.4 is unsustainable, since the assessee had not either shown the agricultural land as an investment nor is there any material brought on record to establish that it was an investment. On the contrary, it was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , interest paid for money borrowed for real estates business is eligible for deduction under sec. 36(1)(iii) of the Act. He pointed out that the amount of interest paid to ICICI Bank of ₹ 3,88,138 was for purchase of two flats in Vatika Limited, which flats were delivered in the financial year 2007-08 and was duly reflected in the balance sheet and out of the two flats one is sold in financial year 2009-10 and income accruing on the sale thereof has been shown as business income. He referred copy of loan agreement with ICICI Bank made available at page No. 179 to 197 of the paper book and agreements for purchase of flats with Vatika Ltd. have been made available at page Nos. 198 to 363 of the paper book. Learned AR submitted that the Learned CIT(Appeals) has failed to appreciated that the amount of interest paid to HDFC Bank of ₹ 26,86,143 and interest paid to ICICI Bank of ₹ 3,88,138 in respect of investment made in stock in trade ought to have been held as allowable deduction in computing the income earned by the assessee for the year under consideration. In any case, it is undisputed that assessee was also engaged in the business of consultancy, trading of prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. The ground No. 5 is accordingly allowed. 25. Ground No.6: It is in respect of disallowance sustained by the Learned CIT(Appeals) at ₹ 9,80,103 out of the expenditure of ₹ 12,31,084 as debited in the profit and loss account under the head employees cost . 26. At the outset of hearing, the Learned AR submitted that similar expenditure had been incurred in the preceding years 2001-02 (Rs.22,24,713), 2002-03 (Rs.23,13,054), 2003-04 (Rs.13,77,196), 2004-05 (Rs.9,83,823) and 2005-06 (Rs.12,38,588) have been held allowable. The Learned AR submitted that in each of the preceding years including in the assessment years 2001-02 and 2005-06 when assessments were made under sec. 143(3) of the Act, the said expenditure incurred has been held allowable. Hence, the finding of the Learned CIT(Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of ₹ 9,18,103 made out of the claimed expenditure of ₹ 12,31,084. Ground Nos. 6 is accordingly allowed. 30. Ground No.7: It is in respect of disallowance of expenditure of ₹ 5,89,433 out of aggregate expenditure of ₹ 11,78,186 incurred on conveyance and travelling. 31. The relevant facts are that the assessee claimed expenditure on travelling and conveyance of its employees at ₹ 11,78,186. The Assessing Officer made disallowance of 50% of the claimed expenditure on the assumption that the aforesaid expenditure could not have been incurred to earn a receipt of ₹ 22.36 lacs. The Learned CIT(Appeals) has upheld the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nessman 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 of ₹ 5,89,433 made out of the claimed expenditure of ₹ 11,78,186 incurred on conveyance and travelling. The ground No. 7 is accordingly allowed. 36. In result, the appeal is allowed. ITA No. 3052/Del/2010: 37. The Revenue has questioned First Appellate Order on the following grounds that Learned CIT(Appeals) has erred in: i) allowing deduction under sec. 24 of the Income-tax Act, 1961 of ₹ 27,70,088 to the assessee on account of interest paid on borrowed capital used for the business purposes; ii) holding that legal and professional expenses of ₹ 15,24,479 are of Revenue in nature. Ground No. (i): 38. We have discussed the related facts on the issue raised in this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid expenditure was to pay consultancy charges incurred to various professionals for the purpose of business. He pointed out that similar expenditure incurred in past in the course of business had been held allowable as such. In this regard, he referred the assessment years 2001-02 to 2006-07 wherein expenditure incurred in this regard has been allowed. He submitted further that the assessee is the best judge of its own business affairs and it is who incurs expenditure for the purpose of business may be at times, it may not result into immediate benefit or at time no benefit or differed benefit but the same cannot be treated as not incurred for the purpose of the business so as to disallow the same under sec. 37 of the Act. 44. Considering the above submission, we find substance in the contention of the learned AR that there would be no justification to disallow any expenditure incurred by the assessee when the expenditure was incurred by it in the course of business and the claim is supported with complete details with evidence mainly on the basis that the assessee did not act prudently while incurring such expenditure. We thus do not find infirmity in the First Appellate O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ventory and it remained stock-in-trade. The Learned CIT(Appeals) while holding so has further erred in not appreciating that in the instant assessment year inventories under the real estate business have increased by a sum of ₹ 1,20,56,497. 6. That the Learned CIT(Appeals) has also failed to appreciate that, so long the business carried did not cease to be carried on, any expenditure incurred in the course of such business, is an allowable deduction u/s. 37(1) of the Income-tax Act, 1961 which expenditure had to be set off from income under any other head of income, as has been held by the Apex Court in the case of CIT vs. R.P. Mody reported in 115 ITR 519 and as such the aggregate disallowance of expenditure incurred of ₹ 2,09,62,446 was erroneous both on facts and in law. In doing so the Learned CIT(Appeals) has overlooked that the assessee had claimed a deduction only ₹ 1,79,09,346 and in any case and without prejudice addition of ₹ 30,53,100 was wholly erroneous being without any basis. 7. That in any case and without prejudice the Learned CIT(Appeals) was not justified in upholding the partial allowance of the claim of expenditure incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer framed the assessment under sec. 143(3) at the income of ₹ 1,51,50,290 as against the returned income at nil. The Assessing Officer held that interest income is taxable under the head income from other sources as against the business income offered by the assessee. The Assessing Officer further held that since no business activity was undertaken by the assessee as such no expenses can be allowed to the assessee and in view thereof the Assessing Officer disallowed the expenditure to the extent of ₹ 2,09,62,446 as against ₹ 1,79,09,346 claimed in the computation of income. The Learned CIT(Appeals) has upheld the same, which has been questioned in ground Nos.1 to 7. 49. The Learned CIT(Appeals) with regard to disallowance made under sec. 14A of the Act by the Assessing Officer has, however, set aside the matter to the file of the Assessing Officer for verification, which has been questioned by the assessee in ground Nos. 8 and 9. 50. In ground No.10, the assessee has questioned validity of charging of interest under sec. 234B of the Income-tax Act, 1961 at ₹ 15,61,030. 51. We thus find that following three issues have been raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sources , if it is not chargeable to income-tax under any of the heads specified in sec. 14, item A to E. He cited following decisions in support: i) SG Mercantile Corporation (P) Ltd. vs. CIT 83 ITR 700 (S.C); ii) CIT vs. Bokaro Steel Ltd. 236 ITR 315 (S.C); 54. The Learned AR submitted that the assessee is in the business of development of real estates, sale and purchase of woods and related items, business of providing consultancy, earning service income by providing infra-structure facility for maintenance of property and earning of interest income. He submitted that it is not denied that during the year under consideration apart from interest income earned to ₹ 83,65,124 and ₹ 19,917 earned from the sale of timber, no other business income was earned, however, merely because business income was not earned from its activity of real estates and consultancy business, it cannot be held that no business was undertaken during the year. He submitted that the business of assessee had never ceased to exist. The Learned AR placed reliance on the following decisions: i) CIT vs. Vikram Cotton Mills Ltd. 169 ITR 597 (S.C); ii) Additional CIT vs. Rajend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra) has been pleased to hold that Revenue cannot be allowed to flip flop on the issue and having accepted the order in preceding years, Revenue cannot be allowed to take a contrary view in subsequent assessment years. Further, in the case of CIT vs. J.K. Charitable Trust (supra) the Hon'ble Supreme Court has been pleased to hold that if the facts for the years under assessment are identical to the facts of the immediately preceding years then in such a situation, the Revenue would not be permitted to deviate from the position it had accepted in the preceding assessment years. Hon'ble Delhi High Court in the case of CIT vs. Neo Poly Pack Pvt. Ltd. (supra) has been pleased to hold that there would be no specification to alter the head of income once in past such head of income was accepted to be the head under which the income had been earned. In the case of CIT vs. Rajender Flour Allied Industries Pvt. Ltd. (supra), the Hon'ble Delhi High Court upheld the view taken by the ITAT that the lease was essentially a temporary measures to tide over a period of difficulties and letting must be taken as one possible way available to the assessee for exploiting its com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT- ITA No. 117 of 2015 dated 25.2.2015. 61. The learned Senior DR on the contrary tried to justify the orders of the authorities below with this further submission that there is no grievance to the assessee on the issue since the Learned CIT(Appeals) has set aside the matter to the file of the Assessing Officer. 62. Considering the above submissions and having gone through the above cited decisions, we are of the view that for 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. We thus respectfully following the ratios laid down in the above cited decision in the case of CIT vs. Taikisha Engg. India Ltd. (supra) of the Hon ble jurisdictional High Court of Delhi, hold that the disallowance in question made by the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X
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