Case Law Details
Allen Career Institute Vs JCIT (ITAT Jaipur)
Disallowance of Rs.2,01,515/- on account of New Electricity Connection charges. In Ground of Appeal disallowance of Rs. 2,01,515/- made relating to the claim on account of electric connection charges, is agitated. The AO noted that the assessee had claimed expenditure of Rs.2,37,076/- for new electricity connection charges. When asked, the assessee stated that the charges so paid were for connection charges, electricity lines, supervision charges, CTPT set cost and meter cost but did not create any property. The AO however, feeling dissatisfied, disallowed Rs.2,01,515 after allowing depreciation @ 15% vide para 2.5.3 pg 22 mainly on the ground that it is clearly a capital expenditure, which resulted into benefit of enduring nature. He placed reliance on Assam Bengal Cement Co. Ltd. v/s CIT (1955) 27 ITR 0034 (SC). However, the CIT(A) also confirmed the same.
Before us the ld. AR made the following submissions with prayers to delete the disallowance confirmed by the ld. CIT(A)
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg 32-33 & 37 of the order of CIT(A).
2. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an enduring nature and hence, such a disallowance was wrongly made. The impugned disallowance may kindly be deleted in full.
On the other hand, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to uphold the addition/disallowance.
We have heard both the parties and perused the materials available on record. A careful perusal of the facts and the material on record shows that the claimed expenditure of Rs. 2,37,076/- with, AO was on account of connection charges, electricity lines, supervision charges, CTPT set cost and meter cost as contended, (which is evident from the copies of invoices etc. APB 61 &104) such expenditure did not create any new asset and the facts as stated, remaining uncontroverted by the revenue, no disallowance was called for. The authorities below were not justified in making the disallowance hence, the same is hereby is deleted. Therefore, this ground is allowed.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal of the assessee is directed against the order of the ld. CIT(A), Kota dated 02-01-2015 for the assessment year 2010-11 raising therein following grounds of appeal.
1. The impugned additions and disallowances made in the order dated 20-03-2013 u/s 143(3) of the Act, bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence, the same kindly be deleted.
2. Rs. 10,83,901/-:The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs.10,83,901/- out of interest expenses alleging not for business purpose. The disallowance so made and confirmed by the ld. CIT(A) is contrary to the provisions of law and facts, hence kindly be deleted in full.
3. Rs. 7,236/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs.7,236/- out of interest payment on account of alleged notional interest on interest free advances. The disallowance so made and confirmed by the ld. CIT(A), is contrary to the provision of law and hence, kindly be deleted in full.
4. Rs. 76,60,166/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs.76,60,166/-made out of interest expenses u/s 36(1)(iii) alleging that the borrowed funds were used on capital expenditure. The disallowance so made and confirmed by the ld. CIT(A) is contrary to the provision of law and hence, kindly be deleted in full.
5. Rs. 15,60,000/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs.15,60,000/-being the amount of outstaying liability on account of scholarship expenses alleging that the same was a contingent/unascertainable liability not arising in the subjected year. The disallowance so made and confirmed by the ld. CIT(A) is contrary to the provision of law and hence, kindly be deleted in full.
6. Rs. 11,20,083/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of following expenses.
|
S.N |
Head of Expenses | Disallowed by the AO and sustained by the ld. CIT(A) |
| 6.1 | Electricity connection charges | Rs.2,01,515/- |
| 6.2 | Internal Networking expenses | Rs. 67,715/- |
| 6.3 | Name transfer fee | Rs. 21,000/- |
| 6.4 | Repairs & Maintenance | Rs.7,02,578/- |
| 6.5 | Regularization of construction of old building | Rs.1,21,275/- |
| Total | Rs.11,20,083/- |
The disallowance so made and confirmed by the ld. CIT(A) being totally contrary to the provision of law and hence, kindly be deleted in full.
7. The AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C & 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full.
2.1 The Ground No. 1 of the assessee is general in nature which does not require any adjudication by us. Hence, the same is dismissed.
3.1 In Ground No. 2, the assessee has challenged the disallowance of Rs. 10,83,901/- out of interest expenses incurred by the assessee on availing the bank overdraft facility which was debited in the profit and loss account and claimed in the return of income.
3.2 Brief facts of the case are that the AO noticed from the Profit & Loss Account that the assessee made claim of deduction of Rs.1.96 Crores being the interest paid on bank Overdraft a/c (OD a/c) and from the details, he noticed that out of the bank OD a/c some investments were made in the mutual funds totalling to Rs. 1.5 Crores on different dates (at page 2 of the asstt. order). The assessee paid such interest at 6.25% and when asked as to why the proportionate interest relating to such investment in the mutual funds, of Rs. 10,83,901/- which, in the opinion of the AO, was the interest paid on borrowed funds for purchases of mutual units be not allowed, the assessee submitted a reply dated 23.01.2013 & 06.02.2013 (reproduced at page 3 onwards of the asstt. order).The assessee mainly submitted that the object behind making investment is getting tax efficient income similar to bank interest. The income from mutual fund is not tax free as explained earlier also. The firm accumulated profit for its expansion plan and not taking any loan for the expansion plan. Further the annual account shows that the assessee had declared profit of Rs.50.76 Crores and the investment in the mutual funds a/c was merely of Rs. 1.5 Crores hence, such investment was out of assessee’s own fund and was not out of borrowings. In support, some decisions were cited. The AO however, felt dissatisfied. He relied upon the decision in CIT v/s Abhishek Industries Ltd. (2006) 286 ITR Industries Ltd. (2006) 286 ITR 1 (P&H) and distinguished the decisions cited by the assessee. Finally, the AO computed interest paid at the rate of 6.25% in relation to the investment made in the mutual funds which was disallowed.
3.3 In the first appeal, the ld. CIT (A) also confirmed the addition of Rs.10,83,901/- by observing as under:-
‘’I have gone through Assessee’s submissions and AO’s findings.
The assessee also claimed that the income from mutual fund was not tax free.Therefore, the disallowance of corresponding interest was not justified. I have gone through the scheme of mutual fund it was seen that income received from the units of mutual fund was exempt in the hands of unit holder, only capital gain on sale of these units was taxable.
From the above, it is clear that any additional sum received on redemption of these units was exempt in the hands of assessee and this plea of the assessee is therefore rejected.
On similar facts for the A.Y. 2009-10 (783/2011-12), I have confirmed the addition of Rs.20,45,751/-observing as under:
‘’The surplus funds of assessee were kept in the form of FDRS and the income from same was to be taxed as income from other sources.
On the security of these FDRS the assessee availed overdraft facility and part of the funds out of over draft were used for purchasing mutual fund Units.
As the income from mutual funds were exempt, any expenditure related to same has to be disallowed in view of specific provisions of section 14A of the I.T.Act.
The assessee’s plea that overdraft is its own money is not acceptable as FDRs were used as security for Over Draft and the source of investment was Over Draft and not its own money.
e.g. If an assessee has placed house property as security for taking overdraft would we allow interest expenses against income from house property? No.
The case laws cited by assessee are not relevant as in the case of assessee nexus between borrowed funds and investment as clearly established. The payments were directly made from overdraft account only and also admitted by assessee.
Considering the above, disallowance of interest of Rs.20,45,751/- is confirmed.
This Ground of appeal is, therefore, dismissed.”
The facts of the current year are identical. Therefore, addition of Rs.10,83,901/- is confirmed. This ground of appeal is dismissed.”
3.4 Before us the ld. AR made the following submissions praying therein that the ld. CIT(A) has erred in confirming the action of the AO.
“1. Firstly, we strongly rely upon the written submissions filed before the ld. CIT(A), which are reproduced at pg 2 to 6 & 15 to 17 of CIT(A) order. (PB 152-173).
2.1 The law is well settled that where assessee is having mixed i.e. interest free/interest bearing funds both, but the interest free funds are larger than the interest free advances than there will a presumption that the interest free advances were given out of the interest free funds (but not out of interest bearing fund/OD) and hence, no interest can be disallowed (as was not claimed).
2.2 It is submitted that the cited decisions strongly support the contentions raised by the assessee. These decisions relate to disallowance of the interest expenditure incurred on the loan amount used for payment of income tax/investment in the securities/capital expenditure etc. or for giving interest free advances to its sister concerns etc. sourced out of the loan/OD a/c. The Hon’ble Courts in similar factual matrix (as available in this case) has taken a view in favour of the assessee.
2.3 However, the lower authorities proceeded on misconception & misreading of the judicial guidelines provided through various decisions which were in the context that where there are borrowed funds and also interest free funds both, discretion lies with the assessee for the utilization of the funds in whatever manner it wants. What has been held is that where there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that interest free loans & advances would be out of interest free fund generated or available with the assessee, if the interest-free funds were sufficient to meet the investments and in such situation the specific nexus between utilization being of interest bearing bank overdraft towards interest free advances, loses significance/relevance.
2.4 Huge interest free funds available: During the assessment proceedings, it was specifically submitted vide letter dated 23.01.2013 (supra) (PB 51) that the assessee was having huge interest free capital. Moreover to support, copies of the Audited Balance Sheet as on 31.03.2010 (PB 4-27) were submitted before the authorities below. A perusal therefore, clearly reveals that there was a huge interest free Capital and Reserve & Surplus which stood at Rs.74,91,19,817/- as on 31.03.2010 (A.Y.2010-11) and Rs.70,64,91,272/- as on 31.03.2009 (A.Y.2009-10). The subjected investment in mutual fund stood at Rs.3,00,00,000/- in the preceding year which decreased to Rs.1,50,00,000/- this year as shown in the Audited Balance Sheet as against that the assessee was having a huge interest free Capital and Reserve & Surplus of Rs.74,91,19,817/- (PB 9). The authorities below however, completely failed to disprove the above factual position. Current year’s profit was of Rs. 50.76 crores.
3. Covered Matter:
3.1 At the outset, the controversy involved in the present case is directly covered by the recent ITAT order dated 27.09.2017 in ITA no. 10/JP/13 [190 TTJ 823 (JP)] is assessee’s own case for AY 99-00 on exactly identical facts (DPB 149-180). The relevant extracts are reproduced hereunder:
“24…………….It also proves the fact that the assessee was having mixed funds both in form of business receipts and borrowings in the form of overdraft from the bank from time to time. However, there is nothing which has been brought on record to prove that the investments have been made at the relevant point in time out of the borrowed funds. In absence of establishing the necessary nexus being between the borrowings and the investments in the mutual funds, it can safely be concluded that the investments in the mutual fund units have been made out of mixed funds.
25. …………The funds in the FDRs accounts clearly reflect the interest free funds which are available with the assessee which is far in excess of the amount of investments which has been made in the Mutual Funds units amounting to Rs. 3 Cr. Accordingly, on appreciation of the said facts and in absence of anything to the contrary, as per the settled legal proposition, a presumption can be drawn that the investments in the mutual fund units have been made out of interest- free funds and not out of interest bearing funds……”
26. Lastly, coming to the contention of the learned CIT(A) that provisions of s. 14A are applicable as income from the Mutual Funds are exempt, we find that the said finding is contrary to the facts of record. The appellant has invested in the fixed maturity plans of the various Mutual Funds which are basically fixed-term debt funds schemes. Where the amount is invested in such funds for less than a year, the maturity proceeds are taxable as short-term capital gain @ 30 per cent and where the amount is invested in such funds for the period exceeding one year, the maturity proceeds are taxable @ 10 per cent with the indexation benefit and @ 20 per cent without indexation benefits. In other words, the investments in Mutual Funds schemes are not tax-free investments. In support of its contentions, the learned Authorised Representative has also submitted a copy of the computation of income for the subsequent asst. yr. 2010-11 wherein the maturity proceeds amounting to Rs. 3,32,35,500 of all these Mutual Funds units wherein the assessee has invested Rs. 3,00,00,000 during the impugned assessment year have been offered to tax as long-term capital gains. In light of the same, we do not think that the learned CIT(A) was correct in invoking provisions of s. 14A of the Act.”
The Rule of Consistency mandatorily requires that in absence of any material change in the facts and circumstances, the earlier decision rendered by the ITAT in the case of the same assessee must be followed. Kindly refer para-38 of Godrej & Boyce Manufacturing Co. Ltd. v/s DCIT & Anr. (2017) 151 DTR 0089 (SC) (DPBIII 181-186) wherein, the earlier decision in the case of Radhswami Satsang vs CIT (1992) 193 ITR 321 (SC) at Pg-329 has been relied upon.
The authorities below themselves have admitted that the facts of this year are identical with those in A.Y. 2009-10 hence there is no reason why the Hon`ble ITAT order of A.Y. 2009-10 should not be applied in this case. A chart showing financials is enclosed as Annexure 3 to revised w/s to ITAT dated 1st February 2021
3.2 Also, in the case of ACIT v/s Ram Kishan Verma (2012) 143 TTJ 1 (Jp) (DPB – I 10-22), wherein the factual matrix is also the same. In fact, the cited case also of a coaching institute of Kota itself and there also the assessee used to receive the entire fees at the beginning of the year/session whereas it had to incur recurring expenditure on monthly basis. As a part of financial management/planning and to maximize its income, that assessee also used to deposit the entire fees in the FDRs and got OD A/c from which funds were utilized as per need. This way, it was claimed that it was assessee’s own money only who did not borrow any fresh money. The disallowance made by the AO u/s 36(i)(iii) was fully deleted by holding that
“10.4 We have heard both the parties. The assessee is having sufficient capital. If there are mixed funds then non-interest-bearing funds are to be considered as utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surpluses are used for making fixed deposits as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans used the AO could not have disallowed the interest. There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is placed on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon’ble Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. (2011) 51 DTR (Del) 98 : 2010-TIOL-51-HC-Del. There is no provision in the Act which may compel an assessee to earn income.
11.1 x————— x————- x————- x————- x—————
x———— x
11.2 After considering the facts as above, we feel that the AO was not justified in making any disallowance. Hence, disallowance is deleted.”
3.3 The Hon`ble Rajasthan High Court has also affirmed the above orders vide para 12 & 14 in the case of CIT v/s Ram Kishan Verma (2016) 132 DTR 107 (Raj.) (DPB 1-11) holding as under:
“12. As far as the disallowance of interest is concerned, admittedly the assessee had an opening capital of Rs. 5,70,74,967/- of his own and the advances, if at all, being interest free, is to the extent of Rs. 98,93,950/- which is far below the capital of the assessee and, therefore, the tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest. It is also noticed by the lower authorities that assessee earned bank interest to the extent of Rs. 24,48,843/- out of which he paid total amount of Rs. 10,99,099/- to the bank against loan and over draft, and it is out of the amount which has been paid by the assessee at 10,99,099/- that the AO has disallowed the interest.
13. Taking into consideration the fact as noticed hereinabove, in our view as well, when there was no agreement to charge interest from the persons to whom the assessee advance short term loan/advance, the AO could not disallow part of interest. It is also an admitted fact, as observed by the tribunal, that the AO was not able to pin pointedly come to a definite conclusion that how interest bearing loans has been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-à-vis interest free loans/advances, therefore, in our view as well, once the AO was not able to come to a definite conclusion as to nexus having been established about interest bearing loans having been diverted towards interest free loans/advances, and such being a finding of fact based on application of evidence, in our view no substantial question of law arise on this question as well. It can be observed that this court in similar circumstances and on identical facts, when the capital of the partner/proprietor being more than the interest free short term advances, has in the case of CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CRT (Raj.) 384 while relying on the judgments rendered in (a) S.A. Builders Ltd. V/s CIT (2007) 288 ITR 0001 (SC); (b) Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC) ; (c) CIT V/s Radico Khaitan Ltd. (2005) 274 ITR 354; (d) CIT v/s Dalmia Cement (Pvt.) Ltd. (2002) 254 ITR 377; (e) CIT v/s Britannia Industries Ltd. (2006) 280 ITR 525; and (f) CIT v/s Motors Sales Ltd. (2008) 304 ITR 123 (Allahabad), held as under:-
x————– x————— x————— x——————- x——– x
14. Therefore, the finding reached by the Tribunal is essentially a finding of fact based on the appreciation of the evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT.”
3.4 For various other case laws, kindly refer Annexure 1 to Revised w/s to ITAT dated 1st February 2021 (The assessee in Annexure 1 has relied upon the cases of CIT v/s Radico Khaitan Ltd. (2005) 194 CTR 451/274 ITR 354 (All) (HC), Godrej & Boyce Manufacturing Co. Ltd. v/s DCIT & Anr. (2017) 151 DTR 0089 (SC), East India Pharmaceutical Works Ltd. v/s CIT (1997) 139 CTR 0372 (SC), Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC), CIT vs. HDFC Bank LTD. (2016) 284 CTR 0409 (Bom) (DPB 64-70), Hero Cycle P. Ltd vs. CIT (2015) 128 DTR 1/379 ITR 347 (SC), SEL Manufacturing Co. Ltd. vs. DCIT 206 TTJ 937 (Chd.), Alkali & Chemical Corporation of India Ltd. vs. CIT (1986) 50 CTR 139 (Kol HC) and CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CTR 384 (Raj.))
3.5 Further the case of Abhishek Industries has already been impliedly overruled in Munjal sales (supra) and was also so considered in the case of Ram Kishan Verma by ITAT Jaipur.
4. Settlement Commission: The issue involved is otherwise also covered. A search was carried out in the case of assessee group and the matter reached to the Hon’ble Income Tax Settlement Commission, New Delhi. The issue of disallowance u/s 36(1)(iii) and the claim of liability towards the Scholarship payable have also been a subject matter of their consideration. These issues have been decided in the favour of the assessee in pr. 53.2 vide order dated 26.04.2018 (III PB176-183 of A.Y 2010-11). Though the assessment years involved are different, however, the said order fully support the contention of the assessee, in principal.
5. The AO un-wantedly stressed over the alleged absence of the commercial expediency behind giving of the subjected loans & advances in as much as, such a consideration was relevant only in a case where the interest free funds were given out of the interest bearing funds only and there was admittedly no availability of the interest free funds. In our case, such facts are not available and even otherwise the utilization of the funds was for commercial expediency in as much as the major utilization of the funds was towards capital investment in building for coaching, and partly in the mutual funds but income from both were duly taxed. It was not the case of AO that assessee diverted the funds to relatives etc. for personal purposes.
In the case of SA Builders also, the decision was rendered in the context of diversion of the interest bearing funds to the interest free advances. The Hon’ble Rajasthan High Court in Ram Kishan Verma (Supra) has also taken a note and interpreted the decision of SA Builder (Supra) in the same manner and therefore, held that to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest.
In DCIT v/s Gujarat Narmada Valley Fertilizers Co. Ltd. (2014) 31 ITR (Trib) 668 (Ahd) at page 671, it is held that
“ ………….., the decision of the Supreme Court in the case of S.A. Builders Ltd. v. CIT(Appeals) [2007] 288 ITR 1 (SC) would not be applicable to the facts of the present case…….”
6.1 No Interest paid on Partners’ Capital on current year profits: Its factually wrong that appellant paid interest on their capital. Factually there was no interest paid w.r.t. huge net-profits of Rs.53.02 Cr. before depreciation and Rs. 50.76 Cr. after depreciation, of this year in as much as such interest was credited at the end of the year. In other words, no interest at all was paid on the partners’ capital at least to the extent of the current year`s profit because profit was distributed at the end of the year and such interest, of course, was paid in the subsequent year.
The current year profit is otherwise much bigger than the investment made in mutual fund this year of Rs.1.50 Cr. or the total investment at the close of the year.
6.2.1 Interest on capital of partners: Even assuming some interest has been paid by the assessee to the partners to their respective capital yet however such interest is not a charge on the profit and not being an expenditure, it is nothing but an appropriation of profits and such payment of interest cannot be kept at par as any interest paid / claimed u/s 36(1)(iii) of the Act. It is submitted that the payment of interest (only on the capital), salary, bonus etc., are nothing but distribution (or appropriation out) of the profits earned by the partners collectively as partnership firm and such payment is nothing but a mode of distribution of such profits. This was and is a settled law. The payment of salary and interest to the partner were not allowable prior to the amendment made w.e.f. A.Y. 1993-94 but now a limit has been put u/s 40(b) of the Act. It is only for the limited purpose, to avoid double taxation, interest and salary are now being allowed (only u/s 40(b) (v), to be computed in a prescribed manner, w.r.t. the amount of “book profit”, as defined under Explanation 3 ( to mean the net profit as shown in the profit & loss account for the relevant previous year, computed in the manner laid down……).This is based on the principle that the firm is not a separate legal entity but is a compendium of persons hence, a partner is not a separate person from the firm.
6.2.2 Kindly refer CIT v/s R.N.Chidambaram 106 ITR 292 (SC), holding that “A firm is not a legal person, even though it has some attributes of personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm.
Held accordingly, the salary paid to a partner by a firm which grows and sells tea, is exempt from tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60 per cent thereof, representing agricultural income and is liable to tax only to the extent of 40 per cent.”
Further, in the case of CIT v. Ramniklal Kothari (1969) 74 ITR 57 (SC), it is held that the business of the firm is business of the partners of the firm and, hence, salary, interest and profits received by the partner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is partner. Section 4 of the Indian Partnership Act 1932 also support this contention. Thus, the ‘partnership firm’ and partners have been collectively seen and the distinction between the two was removed in the judicial precedents even for taxation purposes.
6.2.3 On the other hand, interest paid on borrowed capital u/s 36(1)(iii) presupposes a transaction between two independent entities, which is not the case here. Capital of a partner is not a borrowing and therefore, the Act does not cover interest on capital of partner u/s 36(1)(iii) but it’s limit of allowability has been prescribed u/s 40(b) only as appropriation out of profits.
6.2.4 Sec 13 of the Indian Partnership Act, 1932 contains the mutual rights and liabilities of the partners. Sec 13(c) of the Indian Partnership Act, 1932 reads as under:
“13. Subject to contract between the partners –
(c) where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits;”
From above it is clear that interest on capital can be paid only out of profits, which implies that interest on capital is an appropriation and not an expense. It means if in any particular year there are no profits, no interest on capital will be paid. This happens only in case of appropriations. However, in case a where partner has given loan to the firm over and above his capital, the interest thereon being an expense is payable even if there are no profits. This is the reason interest on such loan is debited in the Profit & Loss A/c and not in the Profit and Loss Appropriation A/c.
6.3 Supporting case laws:
6.3.1 Kindly refer Quality Industries vs. JCIT, (2016) 73 taxmann.com 363 (Pune Trib.) (DPB-IV 187-192). It was held as under:
“11.5……………. Consequently interest paid to its partners cannot be treated at par with the other interest payable to outside parties. Thus, in absence, the revenue is not adversely affected at all by the claim of interest on capital employed with the firm by the partnership firm and partners put together. Thus, capital diverted in the mutual funds to generate alleged tax free income does not lead to any loss in revenue by this action of the assesse. In view of the inherent mutuality, when the partnership firm and its partners are seen holistically and in a combined manner with costs towards interest eliminated in contra, the investment in mutual funds generating tax free income bears the same characteristics of and attributable to its own capital where no disallowance under S. 14A read with Rule 8D is warranted. Consequently, the plea of the assesse is merited in so far as interest attributable to partners. However, the interest payable to parties other than partners, in our view, would be subjected to provisions of Rule 8D(2)(ii) of the Rules. Similarly, in the absence of any specific plea from assesse towards disallowance under Rule 8D(3), we hold it sustainable in view of express mandate of law. The matter is accordingly remanded back to the file of the Assessing Officer for re-computation of disallowance under Rule 8D r.w.s. 14A of the Act in terms of our opinion expressed herein above”
6.3.2 The above decision was followed in M/s Syntholab Chemicals & Research vs. ACIT in ITA No. 4156/Mum/2015 dated 19.04.2017 (DPB-IV 193-198).
6.4 It is also pertinent to note that in A.Y.2009-10 also, the assessee made payment of interest on partner’s capital a/c yet however, the contention of the assessee of availability of the interest free funds in the shape of partner’s capital of Rs. 70.65 Cr., was accepted and disallowance made u/s 36(1)(iii) was completely deleted vide para 24 of the ITAT order dated 27.09.2017 in ITA No. 10/JP/2013 (DPB-III 149-180). In the later years also similar facts prevailed but contention of the assessee was accepted by the Settlement Commission also. There being no change in the facts and circumstances, the decision taken by this Hon’ble Bench & Commission in the earlier/other year/s, is binding upon it and as a rule of consistency a similar view has to be adapted these years also.
7. The ld.AO completely failed to deny and disprove the facts as argued although vide last para at pg 6, he alleged that the assessee had used a part of the borrowed funds available in the OD a/c and worked out the disallowable amount of the interest yet however, he completely failed to prove/ to bring contrary material to disprove that the assessee was having sufficient interest free funds, as aforesaid. He wrongly confused the OD a/c with an interest bearing loan/borrowings. Admittedly the assessee neither took any such loan in the past nor in this year, as evident from the Audited Balance Sheet as on 31.03.2010 (PB 10).
8. Against the concept of real income: It is unfortunate that the department on one hand, happily taxed a huge extra interest income from Bank earned by the assessee because of its financial management but unfortunately deduction of the interest paid is disallowed. It can`t be denied that had the assessee did not put the funds into the FDR it could not have earned and paid substantial extra tax to the department and also it would not have incurred the cost of interest payment which, the department is now denying. Such an approach of the department is completely against the concept of real income. The department must have seen the substance instead of going into the form. Therefore, if extra interest income is taxed under the head `Income from other sources` the interest payment should have also been allowed u/s 57(iii).
The disallowance may kindly be deleted in full in its entirety.”
Annexure 3 to revised w/s to ITAT dated 1ST February 2021 Extract of Balance sheet as on 31.03.2009 and 31.03.2010
(Rs. in crores)
| 31.03.2009 | Rs. | 31.03.2010 | Rs. |
| Capital | 70.65 | Capital | 74.91 |
| Fixed Assets | 22.43 | Fixed Assets | 45.04 |
| Investments | 3.00 | Investments | 1.50 |
| Bank FDRs | 98.04 | Bank FDRs | 99.64 |
| Bank O/D | 43.12 | Bank O/D | 54.01 |
| Interest to bank O/D | 1.96 | Interest on Bank FDR | 8.56 |
Net Interest Income-6.60 Cr.
Current Year Profit Before allocation to partners-50.76 Cr.
Bank OD Account Summary for A.Y. 2010-11
| Opening | Deposit | Withdrawal | Closing |
| 43.12 Credit | 225.93 | 236.83 | 54.01 Credit |
Bank FDR Summary for A.Y. 2010-11
| Opening | Fresh FDR | Matured in the Year | Closing |
| 98.03 | 83.90 | 82.29 | 99.64 |
3.5 During the course of hearing, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to uphold the addition/disallowance.
3.6 We have carefully considered the finding recorded in the impugned orders, the rival contentions raised by both the parties, material placed on record and have also gone through the judicial pronouncements cited by the parties. At the outset, it is observed that the law is well settled that where assessee is having mixed i.e. interest free/interest bearing funds both, but the interest free funds are larger than the interest free advances than there will be a presumption that the interest free advances were given out of the interest free funds (but not out of interest bearing fund/OD) and hence, no interest can be disallowed. It is noticed that this year also the assesse continued maintaining account with the Canara Bank having Overdraft Account facility on the strength of the FDRs. A careful perusal of bank Overdraft account summary, bank FDR summary submitted along with the written submission as also perusal of the other materials placed in the Assessee’s Paper Book (APB) shows that all types of business receipts and all types of payments are routed through the bank Overdraft Account. This proves the fact that the assessee was having mixed funds both in form of business receipts and borrowings in the form of overdraft from the bank from time to time. It is also an admitted fact that apart from the overdraft account based on the FDR of the assesse, the assesse did not make any other borrowing or taken loan from any source as no such account appear in the balance sheet and annual statement of accounts of the assesse, placed at APB 4-27. Undisputedly, all the outgoing being the investment in the mutual fund, purchases of plot, construction of building, interest free loan & advances given to faculties or to some other charitable organisation (as may be noted in the next grounds of appeal), in the year before us, were made from the OD Account only or in other words, from the mixed funds being the interest free funds as also the interest bearing. The AO failed to establish the necessary nexus between the borrowings and the investment so made. The facts and material available on records shows that the assessee was having interest free capital and reserves & surplus of Rs. 74,91,19,817/- as on 31.03.2010 as appears from the Balance Sheet as on 31.03.2010 at APB 4-27. The current’s year profit itself was of Rs 50.76 crore (which stood at Rs.53.02 crore before depreciation). There apart, the Mutual Funds of Rs. 3 crores in the preceding year were redeemed. These facts together with the fact based on the FDR summary submitted with written submission, shows that the interest free funds were much more in excess against the meager investment in Mutual Funds of Rs. 1.50 crores this year but also the investment made in the purchase of plot, construction, building etc. totalling to Rs. 17,06,26,980/- ( Ground of Appeal No.4) and the loan given to charitable organizations of Rs. 1.41 lakhs ( Ground of Appeal No.3). It is also noticed from the Balance Sheet that and the partners’ capital accounts that interest has been paid on the credit balance however, it is not disputed that such interest was computed and credited only with reference to the closing balance standing as on 31st March 2010 on the year end, which, therefore implies that even assuming the capital was not interest free, in any case the capital to the extent of the current year’s profit of Rs. 50.76 crore (and before depreciation Rs. 53.02 crore) was completely interest free in as much as such net profit was credited in the respected capital account only at the year end and no interest could be credited in the current year at least. These facts could not be rebutted by the Ld. DR, we are also in agreement with the contention of the Ld. AR that such interest payment on the capital of partner is not an expenditure but is a case of appropriation of profits. Such payment of interest cannot be kept at par like any other interest paid. The payment of interest (on the capital), salary, bonus etc., are nothing but distribution (or appropriation) of the profits. We derive support from the decisions in the cases of CIT v/s R.N. Chidambaram 106 ITR 292 (SC), CIT v. Ramniklal Kothari (1969) 74 ITR 57 (SC), Quality Industries vs. JCIT, (2016) 73 taxmann.com 363 (Pune Trib.), M/s Syntholab Chemicals & Research vs. ACIT in ITA No. 4156/Mum/2015 dated 19.04.2017 (copies of which are placed on record). We find that the controversy involved in the present case is directly covered by the case of ACIT v/s Ram Kishan Verma (2012) 143 TTJ 1 (Jp), wherein the factual matrix is also the same. In fact, the cited case also of a coaching institute of Kota itself and there also the assessee used to receive the entire fees at the beginning of the year/session whereas it had to incur recurring expenditure on monthly basis. As a part of financial management/planning and to maximize its income, that assessee also used to deposit the entire fees in the FDRs and got OD A/c from which funds were utilized as per need. This way, it was claimed that it was assessee’s own money only who did not borrow any fresh money. The disallowance made by the AO u/s 36(i)(iii) was fully deleted by holding that the Hon`ble Rajasthan High Court has also affirmed the above orders vide para 12 & 14 in the case of CIT v/s Ram Kishan Verma (2016) 132 DTR 107 (Raj.) holding as under:
“12. As far as the disallowance of interest is concerned, admittedly the assessee had an opening capital of Rs. 5,70,74,967/- of his own and the advances, if at all, being interest free, is to the extent of Rs. 98,93,950/-which is far below the capital of the assessee and, therefore, the tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest. It is also noticed by the lower authorities that assessee earned bank interest to the extent of Rs. 24,48,843/- out of which he paid total amount of Rs. 10,99,099/- to the bank against loan and over draft, and it is out of the amount which has been paid by the assessee at 10,99,099/- that the AO has disallowed the interest. 13. Taking into consideration the fact as noticed hereinabove, in our view as well, when there was no agreement to charge interest from the persons to whom the assessee advance short term loan/advance, the AO could not disallow part of interest. It is also an admitted fact, as observed by the tribunal, that the AO was not able to pin pointedly come to a definite conclusion that how interest bearing loans has been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-à-vis interest free loans/advances, therefore, in our view as well, once the AO was not able to come to a definite conclusion as to nexus having been established about interest bearing loans having been diverted towards interest free loans/advances, and such being a finding of fact based on application of evidence, in our view no substantial question of law arise on this question as well. It can be observed that this court in similar circumstances and on identical facts, when the capital of the partner/proprietor being more than the interest free short term advances, has in the case of CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CRT (Raj.) 384 while relying on the judgments rendered in (a) S.A. Builders Ltd. V/s CIT (2007) 288 ITR 0001 (SC); (b) Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC) ; (c) CIT V/s Radico Khaitan Ltd. (2005) 274 ITR 354; (d) CIT v/s Dalmia Cement (Pvt.) Ltd. (2002) 254 ITR 377; (e) CIT v/s Britannia Industries Ltd. (2006) 280 ITR 525; and (f) CIT v/s Motors Sales Ltd. (2008) 304 ITR 123 (Allahabad), held as under:-
14. Therefore, the finding reached by the Tribunal is essentially a finding of fact based on the appreciation of the evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT.”
On the aspect of the availability of current year profit before depreciation we also find support from the decision in the case of CIT vs Reliance Industries Ltd. (2018) 161 DTR 420 (Bom. HC) wherein it was held as under:
“Appeal (High Court)—Substantial question of law—Interest on borrowed capital—Net profit after tax and before depreciation exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest-free loans given to the subsidiaries as on 31st March, 2003—A presumption would arise that the investment would be out of the interest-free funds generated or available with the company—If the Tribunal had allowed deduction and followed the earlier view and on facts, then, there is no perversity when nothing contrary to the factual material was brought on record by the Revenue— No substantial question of law arises from such a view of the Tribunal”
Vide Para-31
“31. The facts were that, the assesse had given interest free loans to its subsidiaries aggregating to the sum specified in Para 7.2 as on 31st March, 2003 and the corresponding figures of such interest free loans as on 31st March, 2002 stood at Rs.2988.98 Crores. Thus, the differential loans given to subsidiaries during the year under consideration were worth Rs.3727.14 Crores. The net profit after tax and before depreciation was arrived at by the tribunal and which exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest-free loans of Rs.6716.12 Crores given to the subsidiaries as on 31st March, 2003. Considering these facts, the Tribunal found that the position is not different from the prior asst. year 2002-03.”
The facts are not disputed that a similar controversy based on the identical facts, was involved in the assesse’s own case for assessment year 2009-10, as also evident from the orders of the authorities below where they have followed their findings recorded in their respective orders for AY 2009-10. It is also not denied that based on similar contentions, identical facts and the controversy, the coordinate bench has decided the issue of allowability or otherwise u/s 14A and/or 36(1)(iii) in that year vide order dated 27.09.2017 in ITA no. 10/JP/2013 [reported in 190 TTJ 823 (JP)] holding as under:
“24 Regarding second issue as to whether the transactions in the bank overdraft account are limited to the borrowings and subsequent withdrawal for meeting expenditure and making the investments or it also includes other transactions in form of deposit of various business receipts including course fees as contended by the ld. AR, we find, on review of bank overdraft accounts summary details available at APB 45, that the assessee has an overdraft account with the Central Bank of India, Talwandi Branch, Kota wherein the opening credit balance is Rs. 28 Cr. and closing credit balance is Rs. 33 Cr and during the year, we find that there are deposits of Rs. 115.53 Cr and withdrawal of Rs. 120.85 Cr. The said numbers therefore supports the contention advanced by the ld. AR during the course of the assessment proceedings that all types of business receipts and all type of payments are routed through the bank overdraft account. It also proves the fact that the assessee was having mixed funds both in form of business receipts and borrowings in the form of overdraft from the bank from time to time. However, there is nothing which has been brought on record to prove that the investments have been made at the relevant point in time out of the borrowed funds. In absence of establishing the necessary nexus being between the borrowings and the investments in the mutual funds, it can safely be concluded that the investments in the mutual fund units have been made out of mixed funds.
25. Now coming to the third issue as to where assessee is having mixed funds and interest free funds are larger than the amount of investments made during the year, can a presumption be drawn that the investments in the mutual fund units have been made out of interest- free funds and not out of interest bearing funds. In this regard, we find that the assessee is having opening bank balance in their FDR account at the beginning of the year amounting to Rs. 62.99 Cr. and closing balance of Rs. 98.03 Cr with fresh FDRs made during the year amounting to Rs 58.03 Cr and FDRs matured during the year amounting to Rs 22.99 Cr. The funds in the FDRs accounts clearly reflect the interest free funds which are available with the assessee which is far in excess of the amount of investments which has been made in the Mutual Funds units amounting to Rs. 3 Cr. Accordingly, on appreciation of the said facts and in absence of anything to the contrary, as per the settled legal proposition, a presumption can be drawn that the investments in the mutual fund units have been made out of interest- free funds and not out of interest bearing funds.
26. Lastly, coming to the contention of the learned CIT(A) that provisions of s. 14A are applicable as income from the Mutual Funds are exempt, we find that the said finding is contrary to the facts on record. The appellant has invested in the fixed maturity plans of the various Mutual Funds which are basically fixed-term debt funds schemes. Where the amount is invested in such funds for less than a year, the maturity proceeds are taxable as short-term capital gain @ 30 per cent and where the amount is invested in such funds for the period exceeding one year, the maturity proceeds are taxable @ 10 per cent with the indexation benefit and @ 20 per cent without indexation benefits. In other words, the investments in Mutual Funds schemes are not tax-free investments. In support of its contentions, the learned Authorised Representative has also submitted a copy of the computation of income for the subsequent asst. yr. 2010-11 wherein the maturity proceeds amounting to Rs. 3,32,35,500 of all these Mutual Funds units wherein the assessee has invested Rs. 3,00,00,000 during the impugned assessment year have been offered to tax as long-term capital gains. In light of the same, we do not think that the learned CIT(A) was correct in invoking provisions of s. 14A of the Act.”
We have also carefully gone through the various decisions cited by the AR in the cases of CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CTR 384 (Raj.), CIT v/s Radico Khaitan Ltd. (2005) 194 CTR 451/274 ITR 354 (All) (HC), East India Pharmaceutical Works Ltd. v/s CIT (1997) 139 CTR 0372 (SC), CIT vs. HDFC Bank LTD. (2016) 284 CTR 0409 (Bom), Hero Cycle P. Ltd vs. CIT (2015) 128 DTR 1/379 ITR 347 (SC). However, we find the decision cited by the ld. DR in the case of CIT v/s Abhishek Industries Ltd. (2006) 286 ITR 1 (P&H) has already being distinguished in this context by the above decisions. In light of above discussions and in the entirety of facts and circumstances of the case, we are of the view that the lower authorities were not justified in disallowing interest expense of Rs. 10,83,901/- in the hands of the assessee. Hence Ground No. 2 of the assessee is allowed.
4.1 In Ground of Appeal No. 3, the relevant facts in brief are that the AO noticed from Annexure E of Balance Sheet that the assessee has given advance of Rs.1.00 lakh to Akhil Bhatiya Maheshwari Educational Charitable Trust on 01.07.2009 and shown debit balance of Rs. 41,000/- in the a/c of Swanand Sewanyas in the earlier years, but no interest was charged on these advances hence, he disallowed interest @ 6.25% on this advance as was paid out of the borrowed funds.
4.2 In the first appeal, the ld. CIT(A) also confirmed the same, following his finding in AY 2009-10 that the assessee failed to submit any evidence to show that amount were advanced for any business purpose. The funds were advanced from the Overdraft Account.
4.3 Before us the ld. AR made the following submissions praying therein to delete the addition of Rs.7,236/- as confirmed by the ld. CIT(A)
‘’Before the ld. CIT(A) it was submitted that Akhil Bhatiya Maheshwari Educational Charitable Trust and Swanand Sewanyas no interest was charged on such advances. However, it appears that the ld. CIT(A) has not at all paid any attention to the submission. It is submitted that there can’t be any notional interest as held in the case of Shoorji Ballabh Das & Co. 39 ITR 0775 (SC) hence, this disallowance is bad in law. Otherwise, there being sufficient interest free funds already available with the assessee as stated in the grounds no. 2 & 4, it can’t be said that there was borrowing made for this purpose also. Hence the impugned disallowance kindly be deleted in full. Submission at pg. 13 para 2.2.2 are relied upon..”
4.4 In Ground of Appeal No. 4, the relevant facts in brief are as noted by the AO are that the assessee has given advances totalling to Rs.17.67 crores on different dates, which were utilized towards the purchase of plots of land, construction of a building known as CP, Rajeev Gandhi Nagar, Kota. The construction of the building was put to use in July, 2009. There apart, such amount was also utilized towards the construction work in progress in a building at Rajiv Gandhi Nagar, upto Rs.2,11,10,151/-. The AO, with reference to the proviso to Sec.36(1)(iii) asked the assessee, in reply to which, the assessee vide letter dated 23.01.2013 (AO Pg 14) stated that the assessee was having no Current a/c and it has only OD a/c based on the FDRs purchased from assessee’s own money and such advances were made out of current year’s profits which were to the tune of Rs.50.76 Crores (before allocation amongst partners). It was also stated that Sec..36(1)(iii) is applicable only when some capital is borrowed, whereas, in this case the assessee has not practically borrowed any money and hence, there was no occasion to claim interest nor of disallowance thereof. It was only a part of the financial management/planning adopted by the assessee. The AO feeling dissatisfied, however, concluded that the subjected interest expenditure on the funds used from the Bank OD a/c, which was a loan and hence, deduction in respect of the interest on account of purchase of plots of Rs.3,34,868/- on Plot. No.1, Rajiv Gandhi Nagar, Kota, Rs.13,38,412/- on Plot No.6, Rajiv Gandhi Nagar, Kota, Rs.54,20,422/- on Plot No. CP-7, Indra Vihar, Kota and Rs.5,66,465/- on account of construction of building on C.P., Rajiv Gandhi Nagar, Kota, which totalling to Rs.76,60,166/-, was disallowed.
4.5 Before us the ld. AR made the following submissions for deletion of disallowance confirmed by the ld. CIT(A)
‘’1. Firstly, we strongly rely upon the written submissions filed before the ld. CIT(A), which are reproduced at pg 2-6 & 15-17 of the order (PB 156158, 162).
2. When asked by the AO (vide para VII of order sheet at the date 15.01.2013), the assessee filed a detail explanation vide letter dated 23.01.2013 (PB 47-52) reproduced at pages 10 & 14 of the AO wherein the above facts were clearly mentioned. Amongst other things it was stated that the current year’s profit was of Rs.50.76 crores whereas the amount of construction WIP and the plot was only Rs.19.37 crores which was nothing but out of the interest free funds available in the shape of capital and reserves (including the current year is profits). And therefore it was contended that once the assessee was having more than sufficient own interest free funds, the assessee did not at all make any borrowing of fresh money during the year and did not have any opening balance on that account to be utilized towards the investment in the towards the capital investment being purchase of plots and/or construction etc. The AO completely failed to deny and disprove these facts although vide para 2.3.7 at pg 13 he alleged that the assessee had used a part of the borrowed funds available in the OD a/c and worked out the disallowable amount of the interest based on the withdrawal made out of the OD A/c yet however, he completely failed to prove/ to bring contrary material to the contention that the assessee was having sufficient interest free funds as aforesaid.
3.1 As regards the disallowances made in respect to interest on the alleged borrowings utilized for capital investment, our contentions can better be understood by referring to the facts involved and the decision rendered in the case of CIT v/s Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Mum) (DPB 44-49), which is also a case where for making capital investment in the shares of two companies, disallowance was made. It was held that
“The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs.43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee’s submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs.313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs.398.19 crores. In view thereof, it was submitted that from the analysis of the balance-sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal.”
On the above factual matrix, the Hon’ble court held as under:
“10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal.”
3.2 Principally, in the instant case also the facts are the same as were obtaining in the case of Reliance Utilities (supra) in as much as in both the cases, the investments were made in capital asset (whether in the shares of the two companies as was the case with Reliance Utilities (supra) or investment in the capital asset i.e. plot purchase, construction etc which makes no difference but at both the places, the common contentions of the assessee are that there were no borrowing made as such in as much as the assessee was already having sufficient interest free funds at its disposal therefore, such investment/outgoing on capital account should be treated to have gone out of the availability of interest free funds but not from the interest bearing funds, if any. This way, there was no occasion for the assessee to make a claim of deduction nor for the AO to have made disallowance u/s 36(1)(iii) of the Act.
4.1 it is submitted that the issue is directly covered by the decision of CIT vs Reliance Industries Ltd. (2018) 161 DTR 420 (Bom. HC) (DPB V 1992019) wherein it was held as under:
“Appeal (High Court)—Substantial question of law—Interest on borrowed capital—Net profit after tax and before depreciation exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest-free loans given to the subsidiaries as on 31st March, 2003—A presumption would arise that the investment would be out of the interest-free funds generated or available with the company—If the Tribunal had allowed deduction and followed the earlier view and on facts, then, there is no perversity when nothing contrary to the factual material was brought on record by the Revenue—No substantial question of law arises from such a view of the Tribunal”
“31. The facts were that, the assesse had given interest free loans to its subsidiaries aggregating to the sum specified in Para 7.2 as on 31st March, 2003 and the corresponding figures of such interest free loans as on 31st March, 2002 stood at Rs.2988.98 Crores. Thus, the differential loans given to subsidiaries during the year under consideration were worth Rs.3727.14 Crores. The net profit after tax and before depreciation was arrived at by the tribunal and which exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest-free loans of Rs.6716.12 Crores given to the subsidiaries as on 31st March, 2003. Considering these facts, the Tribunal found that the position is not different from the prior asst. year 2002-03.”
The above decision stands affirmed by Hon`ble Apex Court in the case of CIT vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) / (2019) 175 DTR 1 (SC)
4.2 The case of CIT vs Reliance Industries Ltd. (Supra) squarely fits in the case of the assesse. The profit of Rs.53.02 Crores (before depreciation and Rs.50.76 Cr. after depreciation) is much bigger than the incremental amount incurred on construction/purchase during the year which is merely Rs.17.06 Crores. The profits of the year not only exceeds the incremental amount but also the total amount of Rs.22.56 Crores. Such profits are interest free as were credited at the year end.
5. The profits of the year exceeds the Incremental as well as the closing value of investment and construction not only in this year but in every subsequent year. This position can be depicted by way of a table given below.
(In Crores)
| AY | Incremental Investment (a) | Construction (b) | Total (a+b) | Profits |
| 2011-12 | 6.1 | 3.96 | 10.06 | 31.47 |
| 2012-13 | 9.84 | 1.23 | 11.07 | 62.14 |
| 2013-14 | 2.6 | 0.93 | 3.53 | 107.49 |
| 2014-15 | 50.07 | 45.55 | 95.62 | 143.08 |
| 2015-16 | -6.99 | 49.68 | 42.69 | 170.16 |
| 2016-17 | 0 | 29.13 | 29.13 | 148.7 |
| 2017-18 | -3 | 81.95 | 78.95 | 260.32 |
6. Covered Issue: The Hon’ble ITAT in assessee’s own case for AY 2009-10 vide order dated 27.09.2017 has deleted the disallowance (Pages 20-51). Following this decision the Ld. CIT(A) has also deleted the disallowance in AY 2013-14 vide order dated 01.02.2018
7. Our detailed submissions made towards GOA 2 and various case laws are also relied upon and may kindly be considered.
8.1 The above submissions have been made on the basis that once the assessee was having sufficient interest free funds and did not borrow hence there was no question of paying any interest nor making any claim thereof. Thus, when in the view of the facts and submissions made above, there was no claim made by the assessee u/s 36(i)(iii), there was no question of allowing or disallowing the same and consequently even the discussion made by the AO in the light of the proviso to Sec.36(i)(iii) is also irrelevant.
8.2 However, alternatively and without prejudice to the above basic contention, even considering the claim on merits, the AO has wrongly considered the facts and alleged that the asset was not put to use in this year.
With regard to the user of the plot no 1 at Rajeev Gandhi Nagar as a cycle stand, w.r.t. “observation” and allegation of the AO contained in para 2.3.2, 2.3.3 and 2.3.5, it is submitted that our submissions made vide para no. 1 of letter dated 04.03.2013 (PB 58) reproduced in para 2.3.4 of the AO pg 12, are strongly relied upon which has adequately answered the allegations made. Despite these submissions, the AO and ld. CIT(A) both continued repeating the same factual allegation with blind eyes. They did not appreciate that the matter pertained to F.Y.2009-10 whereas inspector made the enquiries in February, 2013 i.e. after a lapse of period of almost 3 years by which time, on the vacant plot also, building stood constructed and the evidences furnished by the assessee being the electricity bill further proved the use of the plot as a parking place Pg 40-41 before the AO (PB 104-105) were completely ignored. Therefore, it has to be admitted that the said plot was put to use as a cycle stand in the relevant year only and hence otherwise on merits also, the claim of interest made u/s 36(1)(iii) was not hit by its proviso. The allegation of the AO that it was a costly plot to be used as cycle stand, is nothing more than a suspicion which is not permissible for making a valid assessment as held in the case of Dhakeshwari Cotton Mills Ltd 26 ITR 26 ITR 0775 (SC).
8.3 In any case, the same is allowable u/s 57(iii) in both grounds. The impugned disallowance may kindly be deleted in full. ‘’
4.6 During the course of hearing, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to uphold the addition/disallowance.
4.7 We have heard the rival contentions and pursued the material available on record. The facts and circumstances of the case are similar to the one which we have examined in detail in Ground no. 2 above. Apart from what has already been stated and held in preceding paras, it is noticed that the incremental outgoings in the shape of investment in mutual fund, investment in construction, loans and advances etc. totalling to Rs. 18.56 Crores as also the closing balances of the interest free outgoings up to 31.03.2010, were far below the current year’s profit of Rs. 50.76 Crores and net profit before depreciation at Rs. 53.02 crores. A table submitted by the assesse in its written submission (not controverted by the Ld. DR) and reproduced somewhere in this order, support this conclusion. Our findings and directions contained in Ground No. 2 shall mutatis mutandis to these grounds of appeal as well. Thus the Grounds No. 3 and 4 of the assessee’s appeal are allowed.
5.1 In Ground No.5, the dispute is with regard to the allowability of the claim deduction of Rs. 19,20,000/- on account of the Scholarship Scheme being run by the assessee. The disallowance was made mainly on the ground that it was a contingent and unascertained liability, which was based on condition of completion of 4 year course and moreover, it was a mere provision which was not allowable under the provisions of the Act. Hence, as against the claimed deduction of Rs 19,20,000/-, only Rs 3,60,000/- was allowed and the balance of Rs 15,60,000/-shown as payable at the year-end was disallowed.
5.2 Before us the ld. AR made the following submissions with prayer to delete the addition confirmed by the ld. CIT(A).
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg. 28 to 29 of the order of CIT(A).
2. It is submitted that the assessee is one of the most popular coaching institute of the Country, imparting coaching to the students preparing for entrance examinations. With a view to encourage the successful & intelligent students and to provide them with a financial support (which is otherwise, a part of its Advertisement – Promotional Schemes), the assessee has been floating scholarship schemes in the past. As per the scholarship scheme, for selection of the eligible candidates (who got coaching from the assessee’s institute), selection is made of those students, who are amongst the first 100 Ranks in AIPMT/IIT or the students who got selected in AIIMS, total amount of Rs.48,000/- per student is given. The assessee used to organize a big level function in the honour of the successful students, during the course of which they are honoured by giving them the certificates along with the cheques. Accordingly, the entire amount of Rs.19,20,000/- [Rs. 48,000/-*43 (27 + 15 + 1-3)] was provided this year. Also accordingly, 48 pre-dated cheques (PDI) were given to all the 43 students. This year, Rs.3,60,000/- [40 * Rs. 9,000/- (Rs. 1,000/- for July to March – 9 months)] was paid, based on the cheques already given to the successful students. Therefore, the balance of Rs.15,60,000/- was shown as payable at the end of the year, which were paid in subsequent years (i.e. cheques 9 + 12 + 12 + 3 in A.Y.2011-12 to 2014-15) as & when the concerned student got the cheque en-cashed. The bonafidies and allowabilities u/s 37(1) is not disputed.
3. It is submitted that the authorities below entertained factual and legal misconception by saying that the liability was not existent/ascertained or contingent for the simple reason that the liability relating to the subjected amount, was not only fully ascertained & existed but was even quantified on the very day, when the result of the Scholarship Scheme, selecting the eligible candidates was announced and in the award function they were tendered 48 cheques each. In terms of the Scheme, the assessee, of course, by its own admission, was liable to make payment of the scholarship amount to the selected candidates for the period of four years as agreed.
4. Such liability was assumed and admitted by the assessee without any condition as to the selected candidate must complete the course selected that to for the entire period of four years. The AO wrongly alleged that such a liability was conditional in as much as in the prospectus (PB 174), no condition at all, was imposed. the student was free to continue/discontinue the course/to continue in the same institution or to change. Since the courses were for a period of four years hence, the assessee based this for the quantification of the amount of award/scholarship. The assessee therefore, committed itself from the moment the candidates were selected for the scholarship scheme. Whether all or part of the students continue or not (for whatsoever reason), the liability which has already accrued, could not have been stopped or could not be termed as contingent. The assessee could not have assumed that some of the students may not be willing or may not be able to complete the full term of four years, which otherwise was not a condition of granting scholarship.
5.1 The authorities below therefore, proceeded on a misconception by considering the subjected expenditure as a provision only whereas, it was a liability in praesenti, as stated above, out of which Rs.3.60 Lacs could be got en-cashed this year however, balance of Rs.15,60,000/- remained outstanding in its Balance Sheet. Thus, it was nothing but an outstanding liability which has been wrongly named as a provision or a contingent liability by the authorities below. Notably, in A.Y.2011-12 to 2014-15, the cheques of entire balance of Rs.15,60,000/- got en-cashed and thus, stood paid. Such liability was certain as did not depend on happening of any event. There was no uncertain future event.
5.2 For better appreciation the meaning of the relevant terms are:
Outstanding Liability: Expenses relating to current year but actual payment to be incurred in the next financial years is outstanding expenses.
Provision: Provision is a present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation.
Contingent Liability: It is a possible obligation which may or may not be arise depending on happening or not happening of an uncertain future event.
6A. No Loss to Revenue: After the valid creation of liability, if a part of the scholarship cheques is not en-cashed, the related amount shall be written back and in the scheme of income tax, Sec.41(1) fully takes care and such amount is deemed to be an income in the year in which it is credited back. Thus, the liability relating to subjected amount stood ascertained and crystallized in the subjected year itself and is fully allowable.
6B. Accounting entries are not decisive of true nature of transaction. Kindly refer Kedarnath Jute Mfg. Co. Ltd. v/s CIT (1971) 82 ITR 0363 (SC) and Sutlej Cotton Mills Ltd. v/s CIT (1979) 116 ITR 0001 (SC).
7.1 Supporting Case Law: See Annexure 2 to revised w/s to ITAT dated 1st February 2021
7.2 Cases cited by Revenue are completely distinguishable: See Annexure 2 to revised w/s to ITAT dated 1st February 2021.
(The assessee in Annexure 2 has relied upon the cases of Bharat Earth Movers v/s CIT (2000) 162 CTR 325/245 ITR 428 (SC), CIT vs. Indian Transformers Ltd. (2004) 192 CTR 0216/270 ITR 0259 (KerHC), CIT vs. Vinitec Corporation (P) Ltd. (20005) 196 CTR 0369/ 278 ITR 0337 (DelHC), Calcutta Co. Ltd. v/s CIT (1959) 37 ITR 1 (SC), Metal Box Co. of India Ltd. v/s Their Workmen (1969) 73 ITR 53 (SC)).
8. No disallowance made in past:
8.1 It is pertinent to note that although the appellant has been making similar claims in the past based on the similarly floated schemes for the encouragement of the students in similar manner & method. Details of some years is an under:
| Scholarship to students : Asst. Year | Amount(Rs.) |
| 2006-07 | 8,16,000/- |
| 2007-08 | 16,80,000/- |
| 2008-09 | 17,76,000/- |
| 2009-10 | 20,16,000/- |
| 2010-11 | 19,20,000/- |
No disallowance were made in the earlier years.
Even the assessments of some of the years were completed under scrutiny u/s 143(3) (i.e. A.Y.2002-03 & onwards) yet however, no similar disallowance had been made in the past. It is, for the first time, the AO has made this disallowance despite there being no change in the fact & circumstances of the case. There were no special reason as to why the AO should have taken a departure from the settled position of law & facts between the parties. Although the doctrine of res judicata do not apply in the income tax proceedings yet however, in absence of any change in the facts & circumstances of the case, the doctrine has been applied by the Courts.
8.2 In the case of CIT v/s Excel Industries Ltd. (2013) 358 ITR 295 (SC), it was held that
“Secondly, as noted by the Tribunal, a consistent view had been taken in favour of the assessee, starting with the AY 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there was no reason to take a different view unless there are very convincing reasons, none of which had been pointed out by the Revenue. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) Court did not think it appropriate to allow the reconsideration of an issue for a subsequent AY if the same “fundamental aspect” permeates in different AYs. It appears from the record that in several AYs, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some AYs the matter was taken up in appeal before the High Court but without any success. That being so, the Revenue could not be allowed to flip-flop on the issue further.”
8.3 Sardar Kehar Singh v/s CIT (1991) 92 CTR 88/195 ITR 769 (Raj)
8.4 Although specific submissions were made before the ld. CIT(A) and his attention was drawn to this fact yet however, he completely remained silent.
9.1 Settlement Commission: The issue involved is otherwise also covered. A search was carried out in the case of assessee group and the matter reached to the Hon’ble Income Tax Settlement Commission, New Delhi. The issue of disallowance u/s 36(1)(iii) and the claim of liability towards the Scholarship payable have also been a subject matter of their consideration. These issues have been decided in the favour of the assessee vide order dated 26.04.2018 (III PB176-183). Though the assessment years involved are different, however, the said order fully support the contention of the assessee, in principal.
9.2 There apart, w.r.t. disallowance of Scholarship Payable, we are submitting herewith an at a glance chart (PB184) showing that the liability created in the subjected years, i.e. A.Y. 2010-11 & 11-12 stood paid off in later years and in some cases where the cheques were not encashed by the awardee-payee, the same stood credited back to the scholarship expenses. Even in the order of the Settlement Commission, there is a categorical finding expressing satisfaction of this factual aspect based on their sample test checking.
9.3 In any case, if it is not held allowable this year, the same has to be allowed in the year of payment, else it will amount to double taxation.
Hence, the impugned disallowance kindly be deleted in full.”
5.3 During the course of hearing, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to upheld the addition/disallowance.
5.4 We have carefully considered the finding recorded in the impugned orders, the rival contentions raised by both the parties as also the material placed on record and have also gone through the judicial pronouncements cited by the parties. It is evidently clear that the authorities below have not properly appreciated the undisputed facts of the scholarship scheme and the legal position. We find that the scheme has been designed, with a view to encouraging and providing financial assistance to the meritorious students. The assessee as a part of its advertisement and promotional scheme had been floating scholarship schemes in the past and also in the later years, as was also done in the current year. As per the scholarship scheme for selection of the eligible candidates (who got coaching from the assessee’s institute), selection is made of those students, who are amongst the first 100 Ranks in AIPMT/IIT or the students who got selected in AIIMS, and total amount of Rs. 48,000/- per student p.a. is given. The assessee used to organize a big level function in the honour of the successful students, during the course of which they are awarded by giving them the certificates along with the cheques. Accordingly, the entire amount of Rs.19,20,000/- [Rs. 48,000/-*43 (27 + 15 + 1- 3)] was provided this year. Also accordingly, 48 pre-dated cheques (PDI) were given to all the 43 students. This year, Rs.3,60,000/- [40 * Rs. 9,000/- (Rs. 1,000/-for July to March – 9 months)] was paid, based on the cheques already given to the successful students. Therefore, the balance of Rs.15,60,000/- is shown as payable at the end of the year, which were paid in subsequent years (in cheques 9 + 12 + 12 + 3 in A.Y.2011-12 to 2014-15) as & when the concerned student got the cheque en-cashed. The bonafidies and allowabilities u/s 37(1) is not disputed. Such liability was assumed and admitted by the assessee without any condition as the selected candidate must complete the course selected for the entire period of four years. On this aspect attention was drawn towards a copy of the prospectus placed at PB 174 wherein we find that there was no condition or stipulation imposed upon the student to complete the entire course and he was at liberty to continue or discontinue the course. Since the quantification of the liability is based on the amount of Rs 48,000/- p.a. for the total period 4 years for 43 eligible candidates, it amounted to Rs 19.20 Lakhs and as soon as the candidate was declared eligible and was awarded the scholarship fee, the assessee certainly committed itself towards such liability which is not only quantified and ascertained but was very much legally in existence on its pronouncement during the course of the functions and otherwise also, irrespective of the fact whether the entire amount so committed is paid during the year or is paid in part in the coming years. Thus, it was neither mere provision nor a contingent liability nor nonexistent or unascertained liability as wrongly alleged by the authorities. Out of the total liability created this year of Rs 19.20 Lakhs, the assessee could made payment of Rs 3.60 Lakhs and balance of Rs 15.60 Lakhs which is under dispute was admittedly paid in the later years. During the course of the hearing when asked, the ld. AR submitted at glance chart (PB 184) showing that the liability so created in the subjected year A.Y. 2010-11 stood paid off in later years and in some cases where the cheques were not encashed by the awardee-payee, the same stood credited back to the scholarship expenses. Even in the order dt. 26.04.2018 (PB 176-183) of the Settlement Commission also, a categorical finding expressing satisfaction of this factual aspect based on their sample test checking, has been recorded. Even assuming for a moment such liability has been wrongly claimed this year but in the later years, remains outstanding for a long period, S. 41(1) takes care of the revenue’s interest. Further it not disputed that even in the past also similar scheme were floated and the remaining outstanding amount was claimed as a liability and some of the years were completed under scrutiny u/s 143(3) yet however, no similar disallowance had been made in the past. We find that in A.Y. 2019-20 also similar claim was made but no disallowance was made of similar nature although some other disallowances were made and reached to the stage of ITAT. Although the doctrine of res judicata do not apply in the income tax proceedings yet however, in absence of any change in the facts & circumstances of the case, the doctrine has been applied by the Courts. In the case of CIT v/s Excel Industries Ltd. (2013) 358 ITR 295 (SC), it was held that
“Secondly, as noted by the Tribunal, a consistent view had been taken in favour of the assessee, starting with the AY 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there was no reason to take a different view unless there are very convincing reasons, none of which had been pointed out by the Revenue. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) Court did not think it appropriate to allow the reconsideration of an issue for a subsequent AY if the same “fundamental aspect” permeates in different AYs. It appears from the record that in several AYs, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some AYs the matter was taken up in appeal before the High Court but without any success. That being so, the Revenue could not be allowed to flip-flop on the issue further.”
We have also carefully gone through the decision cited by ld. AR in the cases of Bharat Earth Movers v/s CIT (2000) 162 CTR 325/245 ITR 428 (SC), CIT vs. Indian Transformers Ltd. (2004) 192 CTR 0216/270 ITR 0259 (Ker HC), Calcutta Co. Ltd. v/s CIT (1959) 37 ITR 1 (SC) etc. copy of which have also been supplied and are placed on record. However, we find that decision cited by the ld. DR are completely distinguishable based on peculiar facts available in those cases only, which are not obtaining in the present case. They were rendered in different legal factual context and therefore are not at all applicable. Thus, considering the totality of facts & circumstances and the legal position, we are of the considered opinion that the liability towards the amount payable under the scholarship scheme was rightly claimed and authorities below were not correct in disallowing the same. Hence, the disallowance so made is fully deleted. Therefore, this ground is allowed.
6.1 The Ground of Appeal No.6 taken by the assesse consists of several grounds against disallowances of various expenses and are being dealt with hereunder issue wise:
6.2 Disallowance of Rs.2,01,515/- on account of New Electricity Connection charges. In Ground of Appeal No. 6.1 disallowance of Rs. 2,01,515/- made relating to the claim on account of electric connection charges, is agitated. The AO noted that the assessee had claimed expenditure of Rs.2,37,076/- for new electricity connection charges. When asked, the assessee stated that the charges so paid were for connection charges, electricity lines, supervision charges, CTPT set cost and meter cost but did not create any property. The AO however, feeling dissatisfied, disallowed Rs.2,01,515 after allowing depreciation @ 15% vide para 2.5.3 pg 22 mainly on the ground that it is clearly a capital expenditure, which resulted into benefit of enduring nature. He placed reliance on Assam Bengal Cement Co. Ltd. v/s CIT (1955) 27 ITR 0034 (SC). However, the CIT(A) also confirmed the same.
6.3 Before us the ld. AR made the following submissions with prayers to delete the disallowance confirmed by the ld. CIT(A)
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg 32-33 & 37 of the order of CIT(A).
2. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an enduring nature and hence, such a disallowance was wrongly made. The impugned disallowance may kindly be deleted in full.
6.4 On the other hand, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to uphold the addition/disallowance.
6.5 We have heard both the parties and perused the materials available on record. A careful perusal of the facts and the material on record shows that the claimed expenditure of Rs. 2,37,076/- with, AO was on account of connection charges, electricity lines, supervision charges, CTPT set cost and meter cost as contended, (which is evident from the copies of invoices etc. APB 61 &104) such expenditure did not create any new asset and the facts as stated, remaining uncontroverted by the revenue, no disallowance was called for. The authorities below were not justified in making the disallowance hence, the same is hereby is deleted. Therefore, this ground is allowed.
6.6 The Disallowance of Rs. 67,715/- claimed on account of Internet Networking expenses, is agitated by the AO. During the course of assessment proceedings the AO noted that the assessee had claimed expenditure of Rs. 79,664/- for Internet networking expenses. When asked, the assessee stated that the charges so paid for increase effectiveness of business but not for creation of any asset. The AO however feeling dissatisfied, disallowed Rs. 67,715 after allowing depreciation @ 15% vide para 2.6.3 pg. 23 mainly on the ground that it is clearly a capital expenditure, which resulted into benefit of enduring nature. He placed reliance on Assam Bengal Cement Co. Ltd. v/s CIT (1955) 27 ITR 0034 (SC). However, the CIT(A) also confirmed the same.
6.7 Before us the ld. AR made the following submissions with prayer to delete the addition confirmed by the ld. CIT(A).
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg. 33 & 37 of the order of CIT(A).
2. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an endeavouring nature and hence, such a disallowance was wrongly made. The impugned disallowance may kindly be deleted in full.
6.8 On the other hand, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to uphold the addition/disallowance.
6.9 After hearing both the parties and perusing the materials available on record, we feel that Revenue has completely failed to establish as to how such expenditure has resulted into the creation of a new asset therefore, the authorities below were not correct in making the disallowance and hence the same is also deleted. Hence, this ground is allowed.
6.10 Disallowance of Rs. 21,000/- on account of Name Transfer Fee:- In this ground the assessee challenged the Disallowance of Rs. 21,000/- claimed on account of Name Transfer Fee. The AO noted that the assessee had claimed expenditure of Rs. 21,000/- for Name transfer fee. When asked, the assessee stated that the charges were paid to Nagar Nigam, Kota for getting the name changed. The AO however feeling dissatisfied, disallowed the same vide para 2.7.3 pg. 24 mainly on the ground that it is clearly a one-time expenditure and linked to acquisition of fixed asset. However, the ld. CIT(A) also confirmed the same.
6.11 Before us the ld. AR made the following submissions with prayer to delete the addition confirmed by the ld. CIT(A)
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg. 33 & 37 of the order of CIT(A).
2. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an endeavouring nature and hence, such a disallowance was wrongly made. The impugned disallowance may kindly be deleted in full.
6.12 On the other hand, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to upheld the addition/disallowance.
6.13 We have heard both the parties and perused the materials available on record. A careful consideration of the orders of the authorities below, rival contentions and the material placed on record, clearly shows that it was the case where the property was already purchased in CP-7, Indra Vihar, Kota. However, it was only a procedural formality of transferring the name was done whereupon, this amount was paid to the concerned authority i.e. Nagar Nigam, Kota, as evident from a copy placed at APB 151. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an enduring nature and hence, such a disallowance was wrongly made. Hence impugned disallowance is hereby deleted in full. Therefore, this ground is allowed.
6.14 Disallowance of Rs.7,80,642/- claimed on account of Construction Expenses of boundary wall of a building known as CP-14:- During the course of assessment proceedings, The AO noted that the assessee had claimed Rs.7,80,642/- for expenses incurred for constructing boundary wall. When asked, the assessee stated that the various repair works got done including the extension of height of existing boundary wall. The AO however feeling dissatisfied, disallowed Rs.7,02,578/- after allowing depreciation @ 10% vide para 2.8.3 pg 25 mainly on the ground that the expenditure was capital in nature and the assessee contention was neither convincing nor plausible. However, the ld. CIT(A) also confirmed the same.
6.15 Before us the ld. AR made the following submissions with prayer to delete the addition confirmed by the ld. CIT(A).
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg 38-39 of the order of CIT(A).
2. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an endeavouring nature and hence, such a disallowance was wrongly made. The impugned disallowance may kindly be deleted in full. (Bill PB 146)
6.16 On the other hand, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to upheld the addition/disallowance.
6.17 We have carefully considered the rival contention and the material placed on record. A reference has been made by the Ld. AR to the copy of invoice however it is a fact on the record that the height of the building was raised from the existing level. In that view of the matter, therefore we find the authorities below were justified in considering the expenditure of Rs. 7,80,642/- as capital expenditure and in allowing depreciation therefrom to assessee hence no interference is called for. This ground of appeal is therefore dismissed.
6.18 Disallowance of Rs. 1,27,275/- claimed on account of Regularisation of the construction of Old Building:- During the course of assessment proceedings, the AO noted that the assessee had claimed expenditure of Rs. 79,664/- for Internet networking expenses. When asked, the assessee stated that the charges so paid for increase effectiveness of business but not for creation of any asset. The AO however feeling dissatisfied, disallowed Rs. 67,715 after allowing depreciation @ 15% vide para 2.6.3 pg. 23 mainly on the ground that it is clearly a capital expenditure, which resulted into benefit of enduring nature. He placed reliance on Assam Bengal Cement Co. Ltd. v/s CIT (1955) 27 ITR 0034 (SC) also confirmed the same. However, the ld. CIT(A) also confirmed the same.
6.19 Before us the ld. AR made the following submissions with prayer to delete the addition confirmed by the ld. CIT(A)
1. Firstly, we strongly rely upon the detailed written submissions filed before the ld. CIT(A), which are reproduced at pg 35 of the order of CIT(A).
2. Cases cited by Revenue are completely distinguishable: The AO relied upon certain decision in the cases of Haddi Venkataraman & Co. Pvt. Ltd. v/s CIT (1998) 229 ITR 0534 (SC), Haji Aziz & Abdul Shakool Bros. v/s CIT (1961) 41 ITR 0350 (SC) and Indian Aluminum Co. Ltd. v/s CIT (1971) 79 ITR 0514 (SC). However, all those cases were based on the peculiar facts available in those cases only which are not obtaining in the present case. They were rendered in different legal factual context and therefore hence are not at all applicable being completely distinguishable and hence kindly be ignored.
6.20 On the other hand, the ld. DR strongly relied upon the findings recorded by the authorities below and justified the additions made and confirmed by the ld. CIT(A) and prayed to uphold the addition/disallowance.
6.21 We have heard both the parties and perused the materials available on record. The disallowance has been made because there has been a violation of building by laws, hence, penalty was imposed by the Urban Improvement Trust, Kota, on account of unauthorised construction made. The Ld. CIT(A) also confirmed the disallowance. Looking at the undisputed facts of the case, that it was case of penalty, it was not allowable. The authorities below were justified in disallowing the claimed expenditure. Hence, this ground of the appeal is dismissed.
7.0 Regarding Ground No. 5 relating to charging of interest u/s 234A, 234B, 234C & 234D and withdrawal of interest u/s 244A of the Act, the levy and withdrawal of interest being consequential in nature, hence the AO is directed to act accordingly.
8.0 In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 4/08/2022.
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