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TMI Blog2020 (11) TMI 735X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire amount of the directors remuneration. Aforesaid disallowance carried out by the A.O by pressing into service the provisions of Sec. 40A(2)(a), therein principally suffer from two serious infirmities, viz. (i). that the A.O had lost sight of the fact that the disallowance of the related party expenditure u/s 40A(2)(a) could have been made only to the extent the same was found to be excessive or unreasonable; and (ii). that as per the mandate of Sec. 40A(2)(a) the A.O remained under a statutory obligation to benchmark the excessiveness or unreasonableness of the expenditure keeping in view the fair market value of the goods, services or facilities for which the payment was made or was to be made to the specified related party. In the backdrop of our aforesaid observations, we are of the considered view that the A.O had traversed beyond the jurisdiction that was vested with him u/s 40A(2)(a) - remuneration paid by the assessee to its directors can by no means be stamped as exorbitant, and therein disallowed by invoking the provisions of Sec. 40A(2)(a) . As such, finding no infirmity in the view taken by the CIT(A) in context of the aforesaid issue under consideration, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost in its profit and loss account for the year under consideration. As per the details furnished by the assessee the finance cost was comprised of the following interest expenditure: Sr. No. Finance Cost Amount in Rs. 1. Interest on Car Loan 6,87,379 2. Interest on Bank Overdraft 4,70,253/- 3. Interest on Unsecured Loans 62,01,926/- Total 73,59,558/- As noticed by the A.O, the assessee had availed the overdraft facility and raised unsecured loans for developing its projects. Further, it was observed by the A.O that the assessee was recognizing its revenue as per project completion method. Observing, that the assessee did not have sufficient self-owned funds or any other source of funding, the A.O called upon it to explain as to why the interest expenditure pertaining to bank overdraft and unsecured loans of ₹ 4,70,253/- and ₹ 62,01,926/-, respectively, may not be capitalised to its work-in-pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outstanding liability under the head directors remuneration payable in its balance sheet for the year under consideration. Also, it was observed by the A.O that the assessee had raised unsecured loans of ₹ 6,96,00,000/- from the abovementioned directors on which it had claimed to have paid an interest amounting to ₹ 39,02,832/-. In the backdrop of his aforesaid observations, the A.O held a conviction that assessee by providing unreasonable remuneration to the directors had thereafter received back the funds by way of interest bearing loans from them, and thus, in the garb of the said transactions had tried to suppress its profits and convert the same into loss. On being confronted with the aforesaid facts the assessee tried to dispel the doubts raised by the A.O as regards the genuineness of the aforesaid transactions. However, the A.O not being persuaded to accept the claim of the assessee disallowed the entire amount of the directors remuneration of ₹ 3,63,00,000/- under Sec. 40A(2)(b) of the Act. After inter alia making the aforesaid additions/disallowances the A.O assessed the total income of the assessee under the normal provisions at ₹ 2,20,66,080/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed by the CIT(A) that the ICDS issued on valuation of inventories (though relevant in subsequent years), also supported the aforesaid claim of the assessee. Accordingly, the CIT(A) finding favour with the contentions advanced by the assessee vacated the disallowance of interest expenditure of ₹ 66,72,179/- so made by the A.O. As regards the disallowance of the directors remuneration of ₹ 3.60 crores, it was observed by the CIT(A) that in earlier years also which had been subjected to scrutiny assessments viz. A.Y 2007-08 to A.Y 2012-13, the remuneration paid to the directors was allowed and no dispute had therein arisen. In fact, it was observed by the CIT(A) that in the immediate preceding two assessment years i.e A.Y 2011-12 and A.Y 2012-13 the assessee company had raised claim for deduction of remuneration to directors aggregating to ₹ 5.94 crore, which was accepted by the department in scrutiny assessment. Also, it was observed by the CIT(A) that all the directors had shown the amount of remuneration in their respective returns of income and had paid tax on the same at the maximum marginal rate of tax. As such, the CIT(A) was of the view that there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose, thus, the interest expenses relatable to the same being in the nature of a carrying cost was to be capitalised to the WIP of the assessee. At this stage, we may herein observe that it was the claim of the assessee before the A.O that it had fulfilled the matching concept of cost and revenue while allocating all costs to the respective projects for which they were incurred. Also, it was submitted by the assessee that as the general administrative cost and finance cost were not attributable to any specific project, therefore, they were debited as a periodic cost in the profit and loss account for the year under consideration. But then, we find that the aforesaid claim of the assessee was rejected by the A.O without assigning any cogent reason. Be that as it may, we find that the assessee had consistently been following the same method of treating the finance cost as part of its periodic cost, and this method of accounting was accepted by the A.O in the earlier years. As is discernible from the order of the CIT(A), the assessee in the immediately preceding year i.e A.Y 2012-13 had claimed deduction of finance cost aggregating to ₹ 41,27,116/- (out of which an amount of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of our aforesaid observations, we find that the aforesaid claim of deduction of interest expenditure by the assessee is in conformity with the Accounting Standard-2 (AS-2) issued by the ICAI on Valuation of Inventories . AS-2 provides that overheads other than production overheads should be included as a part of the inventory cost only to the extent that they clearly relate to putting the inventories in their present location and condition . In our considered view, as the interest costs are in the nature of periodic costs, it would thus not only be prudent but in fact fair and correct to treat them as a revenue expenditure and debit the same in the profit loss account. Our aforesaid view is fortified by the judgment of the Hon ble High Court of Bombay in the case of Asst. CIT Vs. Lokhandwala Construction Industries Ltd. (2003) 260 ITR 579 (Bom). In the said case, the Hon ble High Court had observed that periodic costs cannot be treated as carrying costs and have to be allowed as deduction even though corresponding income is to be recognised only on completion of the project. The Hon ble High Court while concluding as hereinabove had observed as under: 4. From the facts fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case. Further, we find that ICDS II issued on valuation of inventories (though relevant to the subsequent years) also supports the aforesaid claim of deduction of the assessee. In the backdrop of our aforesaid deliberations, we are of the considered view that as the interest bearing borrowed funds had been raised by the assessee for the purpose of its business, and used for the said purpose, therefore, the interest expenditure pertaining to such borrowed funds was rightly claimed by the assessee and allowed as a deduction by the CIT(A). We thus finding no infirmity in the view taken by the CIT(A) in context of the aforesaid issue under consideration uphold his order to the said extent. The Ground of appeal No. 2 is dismissed. 8. We shall now ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved by the A.O that a major portion of the directors remuneration of ₹ 2.56 crores (out of ₹ 3.60 cores) was reflected by the assessee as an outstanding liability under the head directors remuneration payable in its balance sheet for the year under consideration. Also, it was observed by him that the assessee had raised unsecured loans of ₹ 6,96,00,000/- from its aforesaid directors on which it had claimed to have paid an interest amounting to ₹ 39,02,832/-. In the backdrop of his aforesaid observations, the A.O disallowed u/s 40A(2)(a) the entire amount of remuneration to directors amounting to ₹ 3,60,00,000/-. On appeal, the CIT(A) finding favour with the contentions advanced by the assessee had vacated the aforesaid disallowance made by the A.O. 9. We have heard the authorised representatives for both the parties on the issue under consideration, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements pressed into service by them. On a perusal of the records, we find that the assessee company had consistently been paying remuneration to its directors in the preceding years, as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvel, District : Raigad, for which during the year under consideration advances were paid to various parties. On the basis of the aforesaid facts, we find, that the assessee company with the directions of the aforesaid directors had successfully developed projects in the preceding years, and was in the process of constructing a project during the year in question. As such, it is not a case that a non-performing company whose operations had came to a standstill was found to be paying exorbitant remuneration to its directors. Infact the vast experience of the directors who had been rendering their services to the assessee company for decades dispel any type of doubt as regards the genuineness and veracity of the remuneration paid by the assessee to them during the year under consideration. Apart from that, we find that all the directors had duly reflected their respective remunerations in their individual income-tax returns, and the said amounts had been subjected to tax at the maximum marginal rate in their hands. As such, it is neither a case of any leakage of revenue nor that of a tax evasion. At this stage, we are reminded of the CBDT Circular No. 6P(LXXVI-66) of 1968, dated 06.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o subscribe to the disallowance of the entire amount of directors remuneration of ₹ 3.60 crores as had been carried out by the A.O u/s 40A(2)(a) of the Act. As submitted by the ld. A.R, and rightly so, the provisions of Sec. 40A(2)(a) can be pressed into service by the A.O for carrying out a disallowance, in a case, where the assessee incurs any expenditure in respect of which payments have been or is to be made to any related party as specified in clause (b) of sub-Section (2) to Sec. 40A, to the extent the expenditure is considered by him to be excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which such payment is made for the legitimate needs of the business or profession of the assessee, or the benefit derived by or accruing to him therefrom. In sum and substance, the scope of the provisions of Sec. 40A(2)(a) is to disallow the excessive or unreasonable component of the expenditure incurred by the assessee in respect of which payments have been or is to be made to a related party therein specified. Apart from that, the basis for gauging the excessiveness or unreasonableness of such expenditure incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronouncement of orders, provides as follows: (5) The pronouncement may be in any of the following manners:-(a) The Bench may pronounce the order immediately upon the conclusion of the hearing. (b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement. In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board. As such, ordinarily the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression ordinarily has been used in the said rule itself. This rule was inserted as a result of directions of Hon ble High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In case the limitation expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown . Hon ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly , and also observed that arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020 . It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure . The term force majeure has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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