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TMI Blog2021 (1) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid is not a business expenditure by ignoring the fact that assessee has proved direct nexus between the borrowed funds and its utilization in business of assessee thus the observations deserves to be ignored and excluded. 1.2 That the Ld. CIT(A) has further erred in misinterpreting the provisions of section 37(1) and thereby considering the interest paid on fresh loan taken to repay the old loan as not for business purpose, thus the said observation being based on no logic deserves to be ignored. 1.3 On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in not following the order of the Hon'ble ITAT, Jaipur Bench, Jaipur wherein addition of similar nature and in identical circumstances were deleted, therefore, following the principle of consistency addition confirmed by Ld. CIT(A) deserves to be deleted. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of an expenditure of Rs. 25,282/-, claimed on account of depreciation charged during the relevant year, arbitrarily. Appellant prays depreciation is a statutory allowance and deserves to be allowed. 3. On the facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 22.08.2016 in ITA Nos. 446/JP/2012, 764/JP/2013 & 158/JP/2015. Also in earlier years, i.e. AY 2004-05 to 2007-08 disallowance of similar nature was made, which has been deleted by the Tribunal. For AY 2004-05, i.e. first year of disallowance, the Tribunal has deleted the disallowance vide its order dated 10.12.2010 in ITA No. 282/JP/2010 by observing as under: "7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of Ld. CIT(A). The Ld. CIT(A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier years the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in our considered view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO in the assessment order in detail, I am of the considered view that the AO has rightly disallowed the interest of Rs. 4,77,36,535/-. Accordingly, the disallowance of Rs. 4,77,36,535/- made by the AO is hereby confirmed." 7. Further, our reference was drawn to the findings of the AO which read as under: "Disallowance on A/c of Financial Charges & Depreciation : 1.1 The assessee is a partnership firm came into existence in terms of partnership deed dated 31.01.1987 and constructed a commercial complex namely Laxmi Complex at Subhash Marg, M.I.Road, Jaipur. During the course of construction of the complex a dispute arose between the partners and therefore, one of the partner Smt. Sudha Yadav filed a suit in the year 1995 for rendition of accounts and dissolution of the firm and accordingly, the Hon'ble Rajasthan High Court had granted the stay in the month of March, 1996, on further sale of the offices/ shops constructed in the commercial. complex, therefore, after March, 1996 neither any sale was taken place nor any construction activity was carried out and the portion left undeveloped as on the date of stay remained in its original position. 1.2 During the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply of the assessee justifying his claim submitted vide letter dated 24.10.2014 Justification of payment made to person specified u/s.40A(2)(b) : During the year under consideration assessee firm has made interest payment Rs. 71,47,640/- to the relatives which are covered u/ s.40A(2)(b) Details of the same are as under : S. N Name of Person Amount Paid Rate of Interest 1. Smt. Amarao Devi Sethi 10,29,292.00 13.20% 2. Shri Nihar Kothari 6,05, 552.00 13.20% 3. Shri Sanchai Sethi 8,18,169.00 13.20% 4. Smt. Sangeeta Sethi 10,93,075.00 13.20% 5. Sh. Sohan Lal Sethi 19,18,610.00 13.20% 6. Sh. Sidharth Kothari 10, 91, 101.00 13.20% 7. Sh. Gulab Kothari 5,91,841.00 13.20% Total 71,47,640.00 During the year under consideration assessee firm has paid interest to various parties ranging between 13 to 15 percent which depends upon the interest rate prevailing in the market. On the perusal of the aforesaid chart, it is crystal clear that he assessee firm has made interest payment to the related parties @ 13.20% which is within the range of prevalent market rate at which interest was paid to unrelated parties. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest paid is with stock in trade and not with Sundry Debtors. Therefore, it is not to be allowed against interest income. (v) It has been held in various judicial pronouncements that the expenditure should be for the purpose of business and connection between expenditure and object must be real and not remote or illusory as held in the cases of CIT vs. Vazir sulaton Tobacco Co. Ltd ( 1978) 114 ITR 605 (Col.)- Co. (vi) The undersigned wishes to place reliance on the decision of (A) Hon'ble Kerala High Court in the case of T.M. Chacko and Partners vs. CIT (1978) 195 ITR 905 ( Ker.) Business Expenditure Condition Precedent Business must be in existence- Assessee carrying on business form 1971-72 to 1978-79 due to a legal bar-interest on kist arrears not deductible in assessment year 1976-77 Income Tax Act, 1961. The authorities as well as the Tribunal came to the conclusion that, on account of the prohibition in law, the assessee could not carry on the abkari business and during the previous year the assessee obtained remuneration as an employee from M/s CT. Thereafter, it was not open to the tribunal to come to the conclusion that the assessee " must be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permitted in respect of only those expenses and losses which are incurred in the relevant accounting year. Though the assessee has been stating that there is no discontinuance of the business but there is only a stay of the court, yet it is worth considering that the Period of stay has been substantial and there is no chance of its vacation considering the fact that there is dispute between the partners of the concern. Accordingly, deduction cannot be allowed for payment of interest on loans taken for paying off earlier loans & not for the purpose of the business of the assessee. Viii. It is important to mention that assessee has taken advance of Rs. 16,12,270/- in F.Y. 1995-96 since then cost of shop/offices has increased many times. Now in the perspective of increase in cost of project many times (as claimed by assessee due to outstanding liability of loans) corresponding interest on amount of advance is not taken to evaluate the sale price of shops/office at the market rate whenever the dispute is resolved. But assessee has not made any such entries. It does not reflect the correct corresponding value of stock against which advances have been taken. It also does not give the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in considered view does not change the character of the loan taken during the year under consideration. The loan taken for the year under consideration has to be treated as taken for business purposes for the simple reason that this loan was substituted with the loans taken in past after repaying the old loans. There is a direct nexus between the fresh loans and old loans because the fresh loans have been utilized for the purpose of repaying the old loan. Now fresh loans partakes the character of loans taken for business purposes. Interest paid on old loans was held as allowable, therefore, interest paid on fresh loans has to be allowed as the character of loan remains the same but only change of the name of the person / institution from whom the fresh loans are taken. Therefore, the decision of Hon'ble Allahabad High Court considered by Ld. CIT(A) in case of Raj Kumar Singh & Co. (supra) is directly on the issue. Therefore, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork in progress, however, from A.Y. 2001-02 and onwards it was decided to claim the same separately in the Profit & Loss Account as normal business expenditure and the returns filed by claiming such expenses were never doubted and processed u/s 143(1) by the department. For the first time in A.Y. 2004-05, the department has changed its stand by alleging that the assessee has taken fresh loans therefore, they loose their character of business expediency and accordingly disallowance of interest was made. While doing so, the fact that in the A.Y. 2004-05 fresh loans have been taken by the assessee firm for the purpose of repayment of old loans and the interest payment was made during the year on the said loans which were obtained and utilized wholly and exclusively for the purpose of business of the appellant and are admissible expenditure u/s 36(1)(iii) or 37(1) of the Income Tax Act, 1961 was ignored by the department. There is direct nexus and live link between the interest expenditure and the business of the appellant but the Ld. AO alleged that there is no such direct nexus by stating that fresh loans raised are not for the purpose of business but to pay off the old loans and sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as following the directions of the Hon'ble Jurisdictional High Court during the suspension of its real estate activity. In this regard, it is further submitted that there was no total discontinuance of business of the appellant as presumed by the AO and Ld. CIT(A). The appellant had earned income from "Complex maintenance charges" and interest income from sundry debtors. On the basis of same and unchanged figure of opening and closing stock, the Ld. AO concluded that during the year under consideration there was no business activity carried out and accordingly held that the interest claimed u/s 36(1)(iii) was not admissible. Further the Ld. AO alleged that the nexus of payment with stock in trade and not with sundry debtors. The allegation of the Ld. AO with regard to nexus are incorrect as the nexus of payment of interest is fully justified which is on account of borrowed loans which were utilized for purpose of real estate business. It is pertinent to note here that the business of construction had remained in abeyance due to orders of stay passed by Hon'ble Rajasthan High Court dated 24-03-1996 due to ongoing dispute between partners of the assessee firm. Thus construction act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ywhere in the assessment order. Since this is an established fact that the real estate business is always carried out on the basis of loans from various agencies and their utilization is exclusively to expand the business without in any way leading to the fact that any stoppage or a lull period would hamper the construction work. Even if, for argument sake, the findings of the Ld. AO are considered that there was no business due to stay order of the court, thus it cannot be said that the repair works, construction of passage and other allied and facility items did not continue during this period also as the stay order was purely for constructing new units and extension of the existing units. The Ld. CIT(A) at page 7 of its impugned order firstly tried to disbelieve the value of closing work in progress claimed by the appellant in A.Y. 1996-97 which as submitted above is due to typographical error and deserves to be ignored. Further Ld. CIT(A) has also doubted the total area available with the appellant as work in progress by alleging that the assessee received advances for 8549 sq. ft. area by wrongly appreciating the fact that the amount was received against the booking of such ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been revived now by vacation of stay with effect from settlement reached between parties. It is further submitted that the suspension or discontinuation of one of the activities of business out of several such activities does not disentitle the taxpayer from deduction of interest or other expenditure incidental to the business. All the business activities taken together constitutes the business undertaking as one and so long the same remains under the common management with common resource employment and common establishment and control it cannot be said that the business activity is separate and distinct. The appellant continued its business in the relevant assessment year and the business was neither closed nor discontinued nor it had ever ceased to be functional during the previous year relevant to the assessment year under appeal. It is further submitted that u/s 36(1)(iii) of the Income Tax Act, 1961 it is categorically spelled out that the interest paid is an allowable expenditure if it is paid in respect of capital borrowed for the purpose of business. From the perusal of section 36(1)(iii) it is submitted that the interest paid on borrowed capital and used for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year under consideration fresh loans have been taken by the assessee for repayment of old loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in our considered view does not change the character of the loan taken during the year under consideration. The loan taken for the year under consideration has to be treated as taken for business purposes for the simple reason that this loan was substituted with the loans taken in past after repaying the old loans. There is a direct nexus between the fresh loans and old loans because the fresh loans have been utilized for the purpose of repaying the old loan. Now fresh loans partakes the character of loans taken for business purposes. Interest paid on old loans was held as allowable, therefore, interest paid on fresh loans has to be allowed as the character of loan remains the same but only change of the name of the person/institution from whom the fresh loans are taken. Therefore, the decision of Hon'ble Allahabad High Court considered by ld. CIT (A) in case of Raj Kumar Singh & Co. (supra) is directly on the issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The revenue has not placed any contrary material on record suggesting that there is change in facts and circumstances of the case. Therefore, we are unable to sustain the finding of ld. CIT (A). Respectfully, following the decision of Coordinate Bench in assessee's own case in earlier assessment years, we direct the AO to delete the disallowance of interest expenditure. Thus the appeal of the assessee is allowed." 9. The AO in the assessment order has also stated that the issue has been decided by the Tribunal for A.Y. 2004-05, 2005-06 and 2007-08 and the reason why the same is not followed is that the department is in further appeal before the Hon'ble High Court and the matter has not attained finality. There is thus no dispute that the matter is squarely covered by earlier decisions of the Tribunal and therefore, following the principle of consistency, the matter is decided in favour of the assessee and against the Revenue. The grounds of appeal are thus allowed. 10. Regarding Ground No. 2, the ld. AR submitted that the assessee has challenged the action of the ld. CIT(A) of upholding the disallowance of Rs. 25,282/- made the AO claimed on account of depreciation charged fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of business. Therefore, in absence of any adverse finding by the AO, the disallowance of claim of depreciation is hereby set-aside and the ground of appeal so taken by the assessee is allowed. 15. Regarding ground Nos. 3. to 3.2, the ld. AR submitted that the assessee has challenged the action of the ld. CIT(A) of arbitrarily upholding the disallowance of Rs. 11,59,34,654/- made by the ld. AO on account of expenditure in nature of exceptional items claimed u/s 36(1)(vii) of the Act by ignoring the submissions made by the assessee and the materials placed on record. 16. It was submitted that during the year under consideration, assessee debited a total sum of Rs. 11,59,34,654/- to profit & loss a/c as 'Exceptional Items", which consisted of following items: S.No. Particulars Amount 1 Interest recoverable from debtors reversed 11,16,01,886.00 2 Complex Maintenance Charges Reversed 35,74,268.00 3 Electric Installation Charges 7,58,500.00 Total 11,59,34,654.00 17. During the course of assessment proceedings, AO issued show cause notice dated 12.02.2015 directing assessee to furnish details of expenses to the tune of Rs. 11,59,34,654/- claimed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven certain built up area 5686 Ft. and 11,837 Ft. respectively on the corresponding market value. Assessee requested the Sundry Debtors to repay the outstanding due including interest accrued and debited to their accounting year to year basis and get the documents registered. However, they refused to make the payment of outstanding dues and under these circumstances, only option left with appellant was to cancel their allotment and forfeit the flats already sold to them. Accordingly assessee cancelled the earlier allotments and written off the outstanding amounts and claimed the same in Profit & Loss account as "Exceptional Items". Since, assessee had cancelled the allotments against which interest was charged, income already booked in respect of such allottees got irrecoverable and assessee was left with no other option but to write it off. Accordingly, amount so charged in their respective ledger on account of interest, complex maintenance charges, and electric installation charges are reversed and credited to their respective account in the year under consideration. 19. It was further submitted that in respect of the observations of the AO, it is submitted that the details in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of above, it is evident that when ld. AO admits that assessee was charging interest in respect of outstanding debtors. In fact, income for earlier Assessment Years has been assessed by ld. AO u/s 143(3), after duly including such interest income offered by assessee. Details of such interest income offered are furnished as under: A.Y. Total Income declared in Return Interest income included in Total income APB Disallowance made by AO Assessed Income APB Depreciation Interest 2004-05 (76,57,476) 61,95,251/- 90 & 93 9,011/- 1,39,87,305/- 63,38,840/- 6 2005-06 (69,29,882) 72,84,362/- 97 & 102 26,887/- 1,43,33,911/- 74,30,916/- 14 2006-07 (72,95,095) 83,55,823/- 106 &109 11,247/- 1,53,94,387/- 68,90,955/- 18 2007-08 (1,10,85,390) 96,08,164/- 113 & 117 6,000/- 2,06,57,878/- 95,72,490/- 22 2008-09 (1,36,88,648) 1,09,52,068/- 121&126 9,738/- 2,51,64,779/- 1,14,76,130/- 27 2009-10 (1,66,00,101) 1,25,77,776/- 129&133 13,479/- 2,92,49,133/- 1,26,75,990/- 32 2011-12 (2,31,28,905) 1,66,22,102/- 148&155 20,740/- 3,95,30,668/- 1,64,22,500/- 35 From perusal of above, it is evident that inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;] (ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable5a in the accounts of an earlier previous year 6[(being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year)], but the 7[Assessing] Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year 8[(being a previous year releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff in the books - Assessee having written off certain debt, it is entitled to deduction thereof as a bad debt - There is no further requirement to prove that the debt was a trade debt or that it is in fact irrecoverable. 26. In view of above judgment of the Hon'ble Apex Court, CBDT passed circular no.12/2016 dated 30.05.2016 which categorically holds that- "3. The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon'ble Supreme Court in the case of TRF Ltd. In CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.2.2010 (available in NJRS 2010-LL-0209-8), has stated that the position of law is well settled. "After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1) (vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Para 4 of the assessment order has given the details reason why the deduction of Rs. 11,59,34,645/- claimed by the appellant u/s 36(1)(vii) is not admissible. In view of the facts discussed by the AO in the assessment order, I am fully in agreement with the finding of the AO that the amount of Rs. 11,59,34,654/- was not admissible as deduction u/s 36(1)(vii). Accordingly, the disallowance of Rs. 11,59,34,654/- made by the AO is hereby confirmed." 31. Further, our reference was drawn to the findings of the AO which read as under: "4.5 The written submission filed by the A/R of the assessee has been considered carefully, however, the same has not been found convincing. As per provisions of section 36(1)(vii) the amount of debt or part thereof which is written off as irrecoverable in the accounts of the assessee can be considered as expenditure of the relevant year. However, in the case of the assessee the amount of Rs. 11,59,34,654/- cannot be considered as written off as irrecoverable due to the following reasons: (1) The assessee has failed to furnish details of the parties in whose cases the amount of Rs. 11,59,34,654/- has been considered as bad debts. (2) The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance charges and electric installation charges were duly offered to tax in previous assessment years and the return for those years have been assessed u/s 143(3) wherein such charges have been brought to tax and accepted by the Assessing officer. We find force in the contentions so advanced on behalf of the assessee and agree with the same. It is a settled legal position as laid down by the Hon'ble Supreme Court in case of TRF Ltd (supra) and also accepted by the CBDT as communicated vide circular no. 12/2016 dated 30.05.2016 that claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of section 36 of the Act i.e, such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. 33. It has been further submitted by the ld AR that such contentions of the assessee are duly supported by the journal entries in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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