DCIT Vs Sylvannus Builders and Developers Ltd (ITAT Ahmedabad)
ITAT Ahmedabad held that when interest free funds are available with the assessee, it can be said that investments are made out of interest free funds and hence disallowance under section 36(1)(iii) of the Income Tax Act not justifiable.
Facts- The respondent assessee is a Private Limited Company engaged in the business of Real Estate Developers and Construction. For A.Y. 2016-17, the assessee filed its Return of Income on 28.09.2015 declaring a total income of Rs. 3,11,94,560/-. The case was selected for scrutiny and assessment was completed u/s. 143(3) wherein the Assessing Officer held that the assessee in principal accepted Percentage Completion Method (PCM) and returned profit of Rs. 3,11,94,560/- whereas AO estimated the profit at 31% under Profit Margin Method (PMM) as per earlier A.Y. 2015-16 and accordingly made an addition of Rs. 2,76,69,223/-. AO also made disallowance of interest u/s. 36(1)(iii) of the Act amounting to Rs. 1,06,64,058/- and thereby demanded tax thereon.
Aggrieved against the same, the assessee filed an appeal before Commissioner of Income Tax (Appeals) who deleted the additions. Being aggrieved, revenue has preferred the present appeal.
Conclusion- We have given our thoughtful consideration and perused the materials available on record. The Ld. CIT(A) deleted the addition on the ground that the A.O. without rejection of books of accounts u/s. 145 of the Act, but estimated the income based on Profit Margin Method.
It is settled principle of law that when the interest free funds available with the assessee were far in excess of investments, it can be said that the investments are made out interest free funds, then the disallowance made u/s. 36(1)(iii) by the A.O. is not justifiable.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Revenue as against the Appellate order dated 16. 10.2019 passed by the Commissioner of Income Tax (Appeals)-8, Ahmedabad, arising out of the Assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2015-16.
2. The brief facts of the case is that the respondent assessee is a Private Limited Company engaged in the business of Real Estate Developers and Construction. For the Assessment Year 2016-17, the assessee filed its Return of Income on 28.09.20 15 declaring a total income of Rs. 3,11,94,560/-. The case was selected for scrutiny and assessment was completed u/s. 143(3) wherein the Assessing Officer held that the assessee in principal accepted Percentage Completion Method (PCM) and returned profit of Rs. 3,11,94,560/- whereas the Assessing Officer estimated the profit at 31% under Profit Margin Method (PMM) as per earlier assessment Year 20 15-16 and accordingly made an addition of Rs. 2,76,69,223/-. The assessing officer also made disallowance of interest u/s. 36(1)(iii) of the Act amounting to Rs. 1,06,64,058/- and thereby demanded tax thereon.
3. Aggrieved against the same, the assessee filed an appeal before Commissioner of Income Tax (Appeals) who deleted the additions as follows:
7.1 Assessment has been completed u/s. 143(3) of the Act and the appellant had furnished all information called for during the course of assessment proceedings. The assessee is a private limited company and it maintaining regular books of accounts which have been subject to statutory tax and company audit. The perusal ci the audit report also does not reveal any qualificatory remark passed by the auditor with regard the maintenance or reliability of accounts. The AO has not pointed out any defect or shortcoming in the books of accounts maintained. It is also an undisputed fact that the books of accounts have not been rejected as provided in section 145 of the Act. Therefore, AO has accepted the correctness of the books of accounts maintained. Where no shortcomings or other defects are pointed out in the books of accounts, the AO is precluded from estimating the profit particularly when no fault with the books of accounts has been demonstrated. The AO has not pointed out any single item of suppression of receipts, inflation of expenditure, valuation of inventories, principle followed for recognizing income etc. under these facts the AO cannot superimpose a profit percentage ignoring the books of accounts produced and maintained without bringing any material or evidence on record and rejecting the books of accounts. The AO has adopted the net profit percentage being the profit %age adopted by the assessee company while preparing budgeted forecasts of the income arising from the project prior to its commencement. The budgets and forecasts by itself cannot be the reason for estimating profits unless it is demonstrated by credible evidences that the book profit declared by the appellant company is incorrect and which is evidenced by any defect or deficiencies in the books of accounts maintained. Appellant has summarized the total consideration in their submissions reproduced in the earlier part of this order, cost of project till March 2015, the percentage of completion and the revenue booked which matches the percentage of completion i.e. 46.64% The percentage of completion recognize has not been found to be lesser than the actual percentage of completion, no part of the expense is found to be excessively charged. Hence, there is no justification in applying the estimated percentage of profits once the revenue has been recognized on the basis of actual undisputed figures.
7.2 The Ld. AR has also referred to the various decisions including that of the jurisdictional High Court in support of his contention. The Ld. AR has relied upon the decision in the case of CIT v. Shakti Industries (2013) 217 taxman 77 (Gujarat) in support of the proposition that additions made without rejecting the books of accounts would not be justifiable. In the case of the appellant company, the AO has not rejected the books of accounts. Where the books of accounts have not been rejected would only imply that the books results are acceptable. Even for the purpose of estimating income therein has to be a reasonable nexus between the material available and circumstances of the case. The AO has not pointed out any material or other evidence on the basis of which an inference can be drawn that the books of accounts maintained by the appellant company are unreliable and the profits disclose therein are not acceptable and therefore, are required to be estimated. The Ld. AR has also relied upon the case of CIT v Symphony Comforts Systems Ltd. (2013) 216 taxman 225 (Gujarat) wherein the AO has merely observed a fall in GP rate as compared to the earlier years and accordingly made additions to the gross profit. However, no defect in the maintenance of the books of accounts was pointed out. Accordingly, it was held that there was no justification in rejecting the books of accounts and enhancement the GP rate.
In view of the above discussion, I do not find any merit in the action of the AO in determining the profits at Rs.5,88,63,783/- the same is restricted to Rs. 3,11,94,560/- which is the returned profit offered by the appellant company, the addition made is deleted. AO is directed accordingly Ground NO 2 & 4 of the appeal are allowed.
3.1. Similarly, the Ld. CIT(A) deleted the interest expenditure made u/s. 36(1) (iii) as follows:
8.1 At the outset it has been contended by the appellant that the AO has taken into the alleged net interest of Rs.5,75,81,311/- (6,20,89,147-45,07,836) for the purpose of disallowance of interest. Appellant pointed out that the AO has ignored the interest that the appellant company has earned interest on bank deposits amounting to Rs. 1,35,14,960/-. Therefore, the total interest expenses (net) would be Rs. 4.40.66,351/- (5,75,81,311 – 1.35,14,960). This fact can be ascertained on perusal of note 17 of the audited accounts wherein interest or bank deposits of Rs. 1,35,14,960/- and has been reduced from the total expenses while determining the cost of sales and services. Therefore, the addition which has been made is on incorrect amount completely ignoring the interest income derived by the appellant which has not been taken into consideration by the AO while making such disallowances.
8.2 Without prejudice to the above, it is contended that during the year under consideration the long term borrowings of the appellant have decreased from Rs 44.71 crores to Rs 21.66 crores. This fact can be seen from the perusal of the Balance Sheet and Note 5 of the accounts. Therefore, in fact during the year under consideration, the liability on which interest is payable has decreased. Further attention is drawn to member’s contributions as appearing in note 8 of the accounts. The same has increased from 122.66 crores to Rs. 160.33 crores. Therefore, the appellant company has in fact received members advances which are interest free and there is a simultaneous reduction in the liabilities which are interest bearing. The work in progress as seen from note 13 of the accounts indicate that the same has reduced from Rs. 120.31 crores to 109.95 crores. This is on account of the fact that an amount of Rs. 59.94 crores being the cost of goods sold has been transferred to the sales account. From the above discussion it would become clear that the appellant company had the following interest free funds available with it:
