Sumeru Enterprises Vs ITO (ITAT Jaipur)
It is the case of the assessee that it had cancelled the allotment of certain flats in its commercial complex as the allottees/debtors refused to pay the outstanding amount towards the interest, complex maintenance charges and electric installation charges and the same were reversed and written off in respective ledger accounts of the parties and claimed in its profit/loss account for the previous year relevant to impugned assessment year. It has been further submitted that such interest, complex maintenance charges and electric installation charges were duly offered to tax in previous assessment years and the return for those years have been assessed u/s 143(3) wherein such charges have been brought to tax and accepted by the Assessing officer. We find force in the contentions so advanced on behalf of the assessee and agree with the same. It is a settled legal position as laid down by the Hon’ble Supreme Court in case of TRF Ltd (supra) and also accepted by the CBDT as communicated vide circular no. 12/2016 dated 30.05.2016 that claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of section 36 of the Act i.e, such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year.
It has been further submitted by the ld AR that such contentions of the assessee are duly supported by the journal entries in respective ledger account of the parties reflecting the reversal of these outstanding charges during the previous year relevant to impugned assessment year, and such charges have been duly offered in the earlier years and all these details in terms of journal vouchers, ledgers and entries in the books of accounts, copies of returns of income for past assessment years were duly submitted before the AO as well as the ld CIT(A). The AO has however disputed the same holding that the claim of the assessee couldn’t be examined in absence of complete details. To our mind, all the AO has to examine is whether the amount of aforesaid charges so recoverable have been actually reversed in respective ledger accounts of individual allottees/debtors and written off in the books of accounts of the assessee during the previous year relevant to impugned assessment year or not. Further, the AO has to examine whether such charges which have not been claimed as irrecoverable and written off were forming part of income and offered to tax in the previous assessment years or not. Given that these details have been claimed to be on record and in absence of findings of the AO, we are constrained to remand the matter to the file of the AO. Therefore, for the limited purposes of verifying these two aspects, the matter is set-aside to the file of the AO and where the same is found to be in order, the AO is directed to allow the necessary relief to the assessee. In the result, the ground of appeal is partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
These are three appeals filed by the assessee against the orders of the ld. CIT(A), Ajmer dated 25.02.2019 for the assessment years 2012-13 to 2014-15 respectively. Since common issues are involved, all these appeals were heard together and disposed off by this consolidated order.
2. In ITA No. 886/JP/2019 for A.Y 2012-13, the assessee has taken the following grounds of appeal:-
”1. On the facts and in the circumstances of the case the Ld. CIT(A) has grossly erred in confirming the disallowance of the expenditure of Rs. 4,77,36,535/- claimed on account of interest paid on borrowed funds, arbitrarily by solely relying upon observations of ld. AO, thus the disallowance so made deserves to be deleted.
1.1 That the Ld. CIT(A) has further erred in upholding the observation of Ld. AO that the interest paid is not a business expenditure by ignoring the fact that assessee has proved direct nexus between the borrowed funds and its utilization in business of assessee thus the observations deserves to be ignored and excluded.
1.2 That the Ld. CIT(A) has further erred in misinterpreting the provisions of section 37(1) and thereby considering the interest paid on fresh loan taken to repay the old loan as not for business purpose, thus the said observation being based on no logic deserves to be ignored.
1.3 On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in not following the order of the Hon ‘ble ITAT, Jaipur Bench, Jaipur wherein addition of similar nature and in identical circumstances were deleted, therefore, following the principle of consistency addition confirmed by Ld. CIT(A) deserves to be deleted.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of an expenditure of Rs. 25,282/-, claimed on account of depreciation charged during the relevant year, arbitrarily. Appellant prays depreciation is a statutory allowance and deserves to be allowed.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of the expenditure of Rs. 11,59,34,654/- claimed by assessee u/s 36(1)(vii) on account of exceptional items during the relevant year by ignoring the submissions made and evidences adduced, thus disallowance so made deserves to be deleted.
3.1 That the Ld. CIT(A) has further erred in ignoring the fact these exceptional charges stood declared in the return income of the assessee filed in the preceding assessment years and have already suffered tax in preceding assessment years and if the same is not allowed it would tantamount to double taxation, thus the disallowance so made deserves to be deleted.
3.2 That the Ld. CIT(A) has further erred in ignoring the fact that assessee has duly complied with all the conditions as enumerated in section 36(1)(vii) thus the resultant addition deserves to be deleted.
4. On the facts and in the circumstances of the case Ld. CIT(A) has grossly erred in not allowing set off of the brought forward unabsorbed business loss and unabsorbed depreciation arbitrarily without any cogent reasons, thus the same deserves to be allowed.”
3. Briefly the facts of the case are that the assessee has filed its return of income on 31.07.2012 declaring a loss of Rs.16,48,87,898/-. The matter was taken up for scrutiny assessment whereby the Assessing Officer assessed the loss at Rs.11,89,097/- vide order passed u/s 143(3) dated 28.03.2015 by making disallowances of interest paid on borrowed funds of Rs.4,77,36,535/-, depreciation of Rs.25,282/- and disallowance of Rs.11,59,34,654/- being “Exceptional Items” claimed in Profit & Loss Account. On appeal, the findings of the AO have been confirmed by the ld CIT(A) and aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
4. Regarding ground Nos. 1 to 1.3, the ld. AR submitted that in these grounds of appeal, the assessee has challenged the action of the ld. CIT(A) of upholding the disallowance of Rs.4,77,36,535/- made in respect of interest expenditure claimed by the assessee by misinterpreting the provisions of section 37(1) of the Act and by solely relying on the observations of the AO. At the outset, it was submitted that the issue under consideration has been adjudicated by the Tribunal in assessee’s own case for AY 2008-09, 2009-10 and 2011-12 vide common order dated 22.08.2016 in ITA Nos. 446/JP/2012, 764/JP/2013 & 158/JP/2015. Also in earlier years, i.e. AY 2004-05 to 2007-08 disallowance of similar nature was made, which has been deleted by the Tribunal. For AY 2004-05, i.e. first year of disallowance, the Tribunal has deleted the disallowance vide its order dated 10.12.2010 in ITA No. 282/JP/2010 by observing as under:
“7. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find no infirmity in the finding of Ld. CIT(A). The Ld. CIT(A) has ascertained the factual aspect that this is not a closure of business but temporary discontinuance of business. We further noted that in earlier years the interest expenditure claimed by assessee were allowed by the department itself. However, in the year under consideration the same was not allowed for the reason that during the year under consideration fresh loans have been taken by the assessee for repayment ofold loans taken for the purpose of business. Fresh loans taken during the year under consideration for the purpose of repaying the loans taken in past for the purpose of business, in our considered view does not change the character ofthe loan taken during the year under consideration. The loan taken for the year under consideration has to be treated as taken for business purposes for the simple reason that this loan was substituted with the loans taken in past after repaying the old loans. There is a direct nexus between the fresh loans and old loans because the fresh loans have been utilized for the purpose of repaying the old loan. Now fresh loans partakes the character of loans taken for business purposes. Interest paid on old loans was held as allowable, therefore, interest paid on fresh loans has to be allowed as the character of loan remains the same but only change ofthe name of the person / institution from whom the fresh loans are taken. Therefore, the decision of Hon Hble Allahabad High Court considered by Ld. CIT(A) in case of Raj Kumar Singh & Co. (supra) is directly on the issue. Therefore, we see no reason to interfere with the finding of Ld. CIT(A). Accordingly, we confirm the findings ofthe Ld. CIT(A) in respect to both the disallowances deleted by him.”
5. Further, the Tribunal has also dismissed the appeals of the department for the Assessment Year 2005-06 & 2007-08 vide order dated 13.01.2011 passed in ITA No.416 & 417/JP/2010 by observing that the issue is squarely covered by the decision of Tribunal for the assessment year 2004-2005 and confirmed the order of Ld. CIT(A) deleting the disallowances. It was accordingly submitted that the disallowance of Rs.4,77,36,535/- on account of interest expenditure claimed by the assesse may be deleted.
6. Per contra, the ld. CIT/DR relied on the finding of the lower authorities and our reference was drawn to the findings of the ld. CIT(A) which are contained at para 4.3 which read as under:-
”4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that the AO has discussed in detail at Para 4 (Page No. 5 to 8), as to why the interest of Rs. 4,77,36,535/- debited by the appellant in the books of accounts was not having any nexus with the business of the appellant. Even during the course of appellate proceedings, the appellant has failed to show that the interest of Rs. 4,77,36,535/- debited by the appellant was incurred in investment of the business carried on by the appellant. Therefore, in view of the facts discussed by the AO in the assessment order in detail, I am of the considered view that the AO has rightly disallowed the interest of Rs. 4,77,36,535/-. Accordingly, the disallowance of Rs. 4,77,36,535/- made by the AO is hereby confirmed.”
7. Further, our reference was drawn to the findings of the AO which read as under:
”Disaiowance on A/c of FinancialCharges & Depreciation:
1.1 The assessee is a partnership firm came into existence in terms of partnership deed dated 31.01.1987 and constructed a commercial complex namely Laxmi Complex at Subhash Marg, M.~.Road, Jaipur. During the course ofconstruction ofthe complex a dispute arose between the partners and therefore, one of the partner Smt. Sudha Yadav filed a suit in the year 1995 for rendition of accounts and dissolution of the firm and accordingly, the Hon ‘ble Rajasthan High Court had granted the stay in the month of March, 1996, on further sale of the offices/ shops constructed in the commercial. complex, therefore, after March, 1996 neither any sale was taken place nor any construction activity was carried out andthe portion left undeveloped as on the date ofstay remained in its original position.
1.2 During the year under consideration, two partners namely Smt. Sudha Yadav and Shri Prashant Kumar Yadav retired and remaining partners i.e. Smt. Kalpana Kothari and M/s.Padmini Enterprises Pvt. Ltd., has decided to continue the firm in partnership and give effect these changes Deed of Retirement and Reconstitution of Partnerhip is entered into between the parties on 17.02.2012.
1.3 During the year under consideration the long pending litigation between partners settled through a settlement agreement dated 17.02.2012 and Hon’ble Arbitrator Justice N.M. Kasliwal has accordingly passed an Arbitration award dated 20.03.2012, according to which two partners Smt. Sudha Yadav and Shri Prashant Kumar Yadav retired from the firm. As per settlement agreement both the partners Smt. Sudha Yadav and Shri Prashant Yadav received built up area 5686 Sq.Ft. and 11,837 Sq.Ft respectively out of total built up area. Further, the continuing partners also made payment of Rs.61,50,000/- to each ofthem.
2. The assessee firm constructed a commercial complex name “Laxmi Complex” in F.Y. 1995-96 relevant to A.Y. 1996-97 thereafter due to dispute amongst the partners/owners of land some shops offices were sold but title could not be transferred through registered deed. Simultaneously, advances were taken against some office/shops but sale transactions could not be finalized. There were some creditors also. Since, then the assesee working out interest on balance amount receivable from the person to whom possesion have been transferred in lieu of part sale consideration and interest is worked out on the on the outstanding liabilities (loan taken). During the year interest paid on loans including financial brokerage and bank commission is Rs. 4,77,36,535/-.
3. As per point No.28(b) of form No.3CD reflecting finished and work in progress the opening stock in respect of ‘commercial complex was shown at 21,503 sq. feet and closing stock was also shown at an even figure. This reflected that no construction work was carried out in commercial complex project during the year under consideration. There being no business activity in the A.~. 2011-12 in the assessee firm in so far as real estates was concern neither any shops nor offices were constructed nor sold. The assessee was asked to furnish an explanation as to why interest expenses and depreciation thereof should not be disallowed. The reply of the assessee justifying his claim submitted vide letter dated 24.10.2014 Justification of payment made to person specified u/s.40A(2)(b) :
During the year under consideration assessee firm has made interest payment Rs. 71,47,640/- to the relatives which are covered u/s.40A(2)(b) Details ofthe same are as under:
