Interest expense on loans borrowed during the course of real estate and finance business is allowable: ITAT Delhi

Gurcharan Singh Bhatia Vs ACIT (ITAT Delhi)

ITAT Delhi held that interest paid on loans borrowed during the course of business of real estate and finance business is allowable as deduction. Accordingly, disallowance of the same deleted.

Facts- Vide the present appeal, the contention of the assessee is that the interest paid on bank loans is business expenditure and is deriving income from business on account of real estate and finance business was not accepted by AO as the assessee has not sold any property or built/purchased any property during the current assessment year.

AO was of the view that the investment appears to be interest free advances/loans to friends/related persons and no interest income has been earned on these advances. AO was also of the view that a significant part of interest free advances has been given to assessee’s own company M/s. Khushi Trading Pvt. Ltd. as well as other relatives or other Bhatia’ s Siblings. AO concluded that the investments were diverted for non business purposes and there is no nexus between the interest paid on funds borrowed and the income earned and, therefore, not allowable as deduction u/s. 36(1)(3) of the Act. The claim of the assessee that the expenditure is allowable u/s. 37(1) of the Act was also denied by observing that the interest bearing funds were not utilized wholly and exclusively for the purpose of business or professions.

CIT(A) sustained the disallowance. Being aggrieved, the present appeal is filed.

Conclusion- Held that the assessee is not carrying on the real estate business. Thus, following the order of the Tribunal for the assessment year 2009-10, we hold that the assessee is into the business of real estate and finance the interest expenditure incurred by the assessee is an allowable deduction. Accordingly, we delete the disallowance of Rs.1,65,62,973/- made by the Assessing Officer.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the assessee against the order of the learned Commissioner of Income-Tax (Appeals)-16, New Delhi dated 26.03.2019 for the assessment year 2014-15. The assessee has raised the following grounds of appeal:

“On the facts and in the circumstances of the case and in law the Ld. CIT(Appeals) erred in confirming the following additions made to the returned income by the Assessing Officer:

i. 1,65,62,973/- on account of interest paid;

ii. 66,70,000/- on account of cash deposited in bank invoking section 68 of the Income-Tax Act, 1961.

Both the above actions being erroneous unlawful and untenable it is prayed that the same must be quashed with directions for appropriate relief.”

2. The first ground of appeal relating to disallowance of interest paid by the assessee.

3. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed from P & L accounts of the assessee that the asses see had debited Rs. 1,65,65,973/- towards interest paid on loan. The assessee in the course of assessment proceedings explained that the nature of business of the assessee is of real-estate and Finance business. It was also explained that assessee is getting rental income from property, interest from savings bank account and on FDRs. The assessee submitted that he has taken loans for the business purposes from banks and paid interest and, therefore, the interest paid on loans borrowed is an allowable deduction as it was paid in the course of business of real estate. The assessee also explained that he is into the real estate business and finance business since assessment year 2007-08 and the fact of carrying on this business has already been accepted while framing regular assessment for the assessment years 2007-08 and 2008-09 and subsequent assessment years. The assessee explained that he is booking space, shops in malls, flats and plots and advancing money for earning business income. The assessee also explained that he is also advancing money for earning interest income. For investment in the above business, the assessee had raised funds from banks, financial institutions and from relatives and private parties. The assessee also explained that he had advanced amounts to various parties for earning interest income. In that process, an amount of Rs.17,52,681/- was earned as interest from finance business.

4. The assessee further explained that he could not sell any booking on account of fall in real estate business and the advance is remained as advance. It is also explained that no new loans have been taken from the banks during the year. The assessee explained that he has secured bank loans which were used in business and for construction of business properties, it was also explained that the property could not be sold on account of fall in real estate business by more than 40%. It was further explained that the assessee instead of keeping the property idle, it has given on rent for earning rental income and for payment of loan, interest and EMIs to banks. It was further explained that during the year, the assessee earned rental income of Rs.1,96,20,000/- which was declared under the head “income from house property”. The assessee also earned interest of Rs.17,52,681/- from finance business and he has incurred expenses of Rs.2,07,13,188/- including bank charges, electricity, interest on secured loan, loan processing charges, travelling expenses, repair and maintenance expenses etc. It was submitted that all these expenses are business expenses and are allowable under Section 37(1) of the Act.

5. The contention of the assessee is that the interest paid on bank loans is business expenditure and is deriving income from business on account of real estate and finance business was not accepted by the Assessing Officer as the assessee has not sold any property or built/purchased any property during the current assessment year. The Assessing Officer was of the view that the investment appears to be interest free advances/loans to friends/related persons and no interest income has been earned on these advances. The contention of the assessee that he has derived income from finance business and there is direct nexus between interest paid and interest earned was also not accepted by the Assessing Officer on the ground that assessee has shown interest earned only from 4 parties out of 17 parties whereas interest was being paid to banks and others on the entire amount of borrowed funds. The Assessing Officer was also of the view that a significant part of interest free advances has been given to assessee’s own company M/s. Khushi Trading Pvt. Ltd. as well as other relatives or other Bhatia’ s Siblings. The Assessing Officer placing reliance on various decisions referred to in page 8 of assessment order concluded that the investments were diverted for non business purposes and there is no nexus between the interest paid on funds borrowed and the income earned and, therefore, not allowable as deduction under Section 36(1)(3) of the Act. The claim of the assessee that the expenditure is allowable under Section 37(1) of the Act was also denied by observing that the interest bearing funds were not utilized wholly and exclusively for the purpose of business or professions.

6. On appeal, learned Commissioner of Income-Tax (Appeals) sustained the disallowance made by the Assessing Officer.

7. The learned counsel for the assessee referring to page 5 of the paper book which is the copy of the order of the learned Commissioner of Income-Tax (Appeals) for the assessment year 2009-10 submits that the issue of whether the assessee is into the business of real estate and finance and whether the interest paid was allowable as business expenses came up for consideration during assessment years 2007-08 to 2009-10 and in the assessment year 2009-10, the learned Commissioner of Income-Tax (Appeals) has accepted the position that the assessee is into the real estate and finance business and, therefore, there is no justification in denying deduction of interest payments which are incurred for the purposes of business of the assessee. The learned counsel for the assessee submits that year after year, the assessee has adduced evidences to show that he is into the real estate business and the expenses claimed by the assessee have been allowed year after year, therefore, the learned counsel submits that the observations of the lower authorities that the assessee is not into the real estate business is contrary to record and perverse. The learned counsel further submits that the learned Commissioner of Income-Tax (Appeals) also decided the issue in favour of the assessee for the assessment years 2011-12 to 2013-14 and the Revenue filed appeals before the Tribunal for these assessment years and the Tribunal dismissed the appeals of the Revenue on account of low tax effect.

8. In so far as findings of the learned Commissioner of Income-Tax (Appeals) for the assessment year 2009-10, they became final as the Tribunal decided the issue in assessee’ s favour and Revenue has accepted that the assessee is into the business of real estates and finance. The learned counsel further submits that the returns filed by the assessee were also accepted by the Revenue even for the assessment years 2017-18 to 2022-23 accepting the income/loss return by the assessee under the head “business”. Learned counsel for the assessee further submits that 17 parties to whom loans and advances have been given were never for earning interest in all those cases. It is only 4 parties from whom interest was expected to be earned on loans extended to them. Interest earned from these four parties was offered for taxation. The other thirteen parties from whom interest has not been earned are those with whom properties have been booked for purchase and later on for sale at an appropriate time and, therefore, the allegation of the Assessing Officer that the assessee did not charge interest from all these seventeen parties and charged only from four parties is not correct. The learned counsel, therefore, submits that this is a covered matter as learned Commissioner of Income-Tax (Appeals) for the assessment year 2009-10 and subsequent assessment years held that the assessee into the real estate business and the interest expenses are allowable as deduction. The Tribunal sustained the order of the Ld. CIT(A) for assessment year 2009-10.

9. On the other hand, learned Departmental Representative referring to para 3.8 of the assessment order submits that it is the finding of the Assessing Officer that the loans were not used for any business purposes, no agreements were produced and, therefore, the interest expenses are not allowable as deduction. The learned Departmental Representative also submits as under:

“ It is respectfully submitted that the following facts and arguments may kindly be taken into consideration –

1. The assessee has not transacted in any property during the year. The claim of the assessee that he is engaged in the business of buying and selling of property and that he takes loans to buy properties stands disproved from the fact that no property has been purchased by him since 2006. This is clearly proven by the submission of the assessee himself as reproduced in the order of Ld. CIT(A) at Page 16 of his order.

2. The Ld. CIT(A) has further observed at page 16 that the AO has clearly recorded that the assessee did not file any documentary

3. proof to authenticate his claim that some loans were used to book properties. He has further observed very clearly that the Balance Sheet is NIL against “Investments” column which clearly proves that the claims of the assessee are factually incorrect. The assessee ’s own documents are clearly showing that he has been misleading the Revenue regarding the state of his affairs.

4. Even the interest received by the assessee is largely from the FDs.

5. In respect of the loans and advances of Rs. 8.17 crore advanced by the assessee, the interest earned is only Rs. 12.10 lacs approx.

6. While the assessee has argues that the borrowed funds were used for investment in properties by him, no details of such investments were filed during the assessment proceedings. All the so called investments have been found to be nothing but “interest free advances/loans to friends and related persons” as no interest has been charged on most of such funds advanced to other parties out of the interest bearing

7. The details provided by the assessee show that interest has been shown from only 4 out of 17 parties to whom the assessee has collectively given Rs. 8.17 crore loan out of interest bearing loans that he has availed.

8. Further, even the interest claimed from 4 out of 17 parties has actually NOT BEEN RECEIVED at all and only entries in the ledger accounts have been made.

9. A significant part of interest free advances have been given by hin to his own company M/s Khushi traders private Ltd or other Bhatia siblings.

10. The assessee dissolved the earlier loan of Rs. 8.41 crore and took a loan from syndicate bank for Rs. 10.14 crore by paying huge overdue charges, bank processing charges, advance EMI charges and claimed that amount in P&L. At the same time, the extra amount of loan taken has not been invested to earn income from finance or any other business activity, but it was invested to purchase 3,30,000 shares of assessee’s own company M/s Khushi Traders Pvt Ltd amounting to Rs. 2,53,85,000/- and also given to sister concern SGP Developers and to the assessee ’s wife Pawanjeet Kaur. The rest of the amount has been given to other relatives for their use. As mentioned earlier, meager interest has been shown from these interest bearing funds, that too from only 4 out of 17 parties to whom the same have been advanced. It is thus clear that there is no nexus between the high interest paid and meager interest In fact, the assessee is deliberately engaged in booking losses on account of interest outgo for purposes not related to business at all as discussed above.

11. Further, the fraud being perpetrated by the assessee is also evident from the fact that on one hand, the assessee is claiming the property rented out as Income from House property and availing standard deduction @30% on the same, while at the same time, he is claiming the entire activity as business and also claiming interest paid on purchase of the relevant property as business expenditure, thereby taking double deduction.

12. As mentioned clearly by the Ld.CIT(A) at page 17 of his order, it was specifically enquired if the property C­9, Westend Colony purchased/constructed during 2006- 11 was sold off as the assessee has claimed interest on loan taken for purchase/construction as BUAINESS EXPENDITURE. The assessee claimed that as the property could not be sold, so l/4th of the said property was being used as the personal residence of the assessee while 3/4th has been given out on rent. The CIT(A) has thus rightly concluded that in these facts , only deduction u/s24(b) could have been allowed and not claim of interest payment as business expenditure which the assessee has wrongfully done over several years.

13. Further, the CIT(A) has rightly observed at page 17 of his order that the assessee has himself submitted that for loan of Rs. 10 crore from syndicate bank, the bank had taken collateral charge on the property in CP, Delhi and he had paid loan of Reliance Capital used in construction of property at C-9, Westend Colony. Hence the loan is, therefore, inextricably linked with purchase of property C-9 and, therefore, double deduction cannot be allowed.

14. The Ld CIT(A) has further rightly observed that the top up loan of RS. 22.79 lacs from ICICI was also used for purchase of shops on which the assessee is earning rental income and hence the interest paid on such loan cannot be allowed as business expenditure.

15. The assessee has thus been consistently defrauding the Revenue by claiming interest paid on loan as business deduction and also standard deduction from the income that has been earned by letting out such properties”.

10. The learned counsel for the assessee filed his rejoinder as under:

“The Submissions are as under:-

Para 1) It is true that there was no property transaction during the year. Assessee has been explaining to the Assessing Officers (AO hereafter), year after year and inclusive of the subject year, that the Real Estate business had become in-conducive and loss-making. The decline of prices in the reality sector was nearly about 40%. Consequently the properties or ‘interest in property’ as acquired in the preceding years were continued to be held for sales at an appropriate time in future when the market would revive. It needs appreciation that any business is a continuous process. Business does not begin with the commencement of the financial year to end with the conclusion of that financial year. The beginning and the end of financial years are two points which are relevant only for the purpose of profit determination for a year. Business, however, is a continuing, integral and uninterrupted process which is spread after over several years after its commencement. Business terminates only the business activity is wholly given up. Thus the submission made by the Revenue that since the Assessee had not transacted in any property during the year and so the assessee was not engaged in any business is misconceived, misleading and fallacious.

2 & 3) In the first place it needs to be clarified that the Assessee is not an investor in properties. Assessee is a trader of properties. The properties held for trade are reflected under the head current assets, fixed assets in the Balance Sheet placed at page 10 of the main Paper Book. The averment of the Revenue in this regard is per se erroneous.

4) Investing in FDRs is one amongst the several business activities of the Assessee. No objection can, therefore, be taken to the receipt of interest from FDRs by the Assessee.

5) The loans and advances comprise both of loans provided to customers for earning interest and also paid for the booking of moce^es. ^e advances paid for booking properties do not fetch any interest. The figures under the two heads, therefore, cannot be aggregated to argue insufficiency of income from interest receipts.

6) The allegation of interest free advances / loans to friends and related persons is misconceived and untrue. No specific case has been brought on record by the Revenue with proper evidence.

7) The 17 parties to whom loans and advances have been given were never for earning interest in all those cases. It is only 4 parties from whom interest was expected to be earned on loans extended to them. Interest so earned has been submitted for taxation. The other 13 parties from whom interest has not been earned are those with whom properties have been booked for purchase for sale at an appropriate

8) Assessee’s accounts are subject to assessment on accrual basis, Therefore, irrespective of the receipt of the interest amount, they get To be taxable on the due dates. The AO in the assessment order in the Cause Title has clearly mentioned the method of accounting of the Assessee as mercantile in column No. 9. The taxation of interest as submitted by the Assessee is consistent with that system. The remarks of the Authorities in this context that Assessee has inflated interest income by passing journal entries etc. are misconceived and incorrect.

9) The investment made by the Assessee for M/s Khushi Traders PrivateLtd. is for earning dividend income from that Company in due course. Advances were never extended to any Bhatia ‘siblings’. The allegation of the AO in this regard is wrong. Further no specific instance has been cited by the Authorities to support his allegation.

10) The shuffling on loans and advances has been done out of business compulsions. The swan-cry of the Authorities that meagre interest has been shown is incorrect and is not in accordance and is contrary to the facts of the case. The interest earned is proportionate to the loans extended during the year. As pointed out above, most of the advances are for acquisition of properties on which, as per market practice, no interest was due and so not earned. The allegation of fhe Revenue that “the Assessee is deliberately engaged in booking losses on account of interest outgo for purposes not related to business at all is misconceived and erroneous and not borne out by the facts of the case and the material on record.

11&15) The allegation of the Revenue that fraud has been perpetrated by the Assessee is stoutly denied. The allegation is malicious and obnoxious. In fact the Assessee has suffered continuously because of incorrect and improper actions of the Authorities culminating in disallowances year after year in the past. All that has happened due to the ignorance of the Authorities as to business practise and conventions and due to the complete absence of a requirement in the system for accountability and answerability. The compilation of 59 pages detailing the case history from AY 2009-10 to AY 2013-14 at pages 1-19 of the compilation clearly evidences the unfair treatment meted out to the Appellant by the several Assessing Authorities in the past.

12) The Ld. CIT(A) has contradicted herself by saying that the property investments at CX9, Westend Colony, New Delhi-110027 was personal even though she herself has taken note of fhe fact that 3/4h of that property was earning rent and only the rest of the ‘A th was occupied by the Assessee. Double deduction of any sort has not been claimed at any time by the Assessee. The allegation is false. The deduction as permitted by S.24(a) of the Income-tax Act, 1961 (the Act) to the Assessee is not for any interest paid on loans for purchasing a Deduction for interest paid on loans availed for acquiring properties is covered separately under S.24(b) of the Act. No such claim has been made by the Assessee u/s. 24(b). All interest outgoings have been claimed solely against business income. There is thus no question of any double deduction.

13) As a business entity, Assessee has the unfettered right to arrange his affairs according to his prudence and discretion. Any objection by the Revenue in this regard is inconsequential and redundant. The apex Court decisions in Walchand & Co. P. Ltd. (1967) 65 ITR 381 and J.K. Woollen Manufacturers (1969) 72 ITR 612 stand solidly to support this proposition.

14) The CIT(A) s observation regarding the interest charge on the top up loan of Rs. 22.79 lacs from ICICI is ex facie erroneous, in as much as, the property has been acquired out of an interest bearing loans and so interest has rightly to be allowed against the business income resulting from the same. Irrespective of assessment as rental income the income will not lose its identity as a receipt from business activity.

15) This allegation emanates out of a basic ignorance on the part of the Revenue Authorities as to the manner of treatment on the part of the Revenue Authorities to the manner of treatment of interest paid on loans obtained for acquisition of properties held as current assets. The basic principle that the nature of the activity giving rise to the income cannot be ignored as perhaps not been understood by the Revenue Authorities. The decision of the apex Court in Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 explains the principle applicable in such cases”.

11. We have heard the rival submissions and perused the material placed before us. The Assessing Officer while completing the assessment, denied deduction for interest expenses on the ground that the assessee is not into the business of real estates and finance. The learned Commissioner of Income-Tax (Appeals) agreed with the contentions of the Assessing Officer. The learned counsel placing reliance on the orders of learned Commissioner of Income-Tax (Appeals) for the assessment year 2009-10 submits that the issue of as to whether the assessee is into real estate and finance business was already decided in the assessment year 2007-08 onwards and in the assessment year 2009-10, it is the finding of the learned Commissioner of Income-Tax (Appeals) that the assessee is into real estate business and, therefore, the interest expenses have to be allowed as deduction and this decision of the Ld. CIT(A) has been sustained by the Tribunal.

12. We have perused the order of the learned Commissioner of Income-Tax (Appeals) for the assessment year 2009-10 which is placed at page nos. 1 to 7 of the paper books. We observe that the learned Commissioner of Income-Tax (Appeals) for the assessment year 2009-10 in his order dated 24.08.2012 decided the issue of whether the interest payments made by the assessee was for the purpose of real estate business or not and the learned Commissioner (Appeals) held as under:

“4.6 I have considered the order of the AO and the submissions of the assessee and I find considerable merit in the submission of the assessee that the assessee is in the real estate business. It is also apparent that the assessee purchased the property on 08/03/2006 for Rs.3,56,40,000/- and thereafter the assessee has demolished the old structure and had constructed a new building by making the new investments of Rs.1,02,50,064/- in the AY 2007-08, Rs.1,20,94,513 and the AY 2008-09 and Rs.1,05,16,509/- in the A.Y 2009-10 and as such it is very much apparent that the assessee was in a real estate business venture. So it is apparent that the motive of the assessee is to be in the real estate business. There is also considerable merit in the submissions of the assessee that the property could not be sold because of the poor market conditions. It is also apparent that the assessee is in the real estate business and for this purpose only the old property was purchased on 08/03/2006 and the assessee has constructed a new building on the same property after demolishing the old building. It is apparent from the above facts and circumstances of the case that the business activities of the assessee started with the purchase of the property on 08/03/2006 and as such the assessee is eligible for the deduction of the interest payments which are for the purpose of business.

4.7 After considering all the case facts and circumstances of the case, I am of the view that there is no proper justification for the AO for disallowance of the interest payments and accordingly, the appeal of the assessee is allowed and the addition made by the AO is deleted.”

13. This decision of the learned Commissioner of Income-Tax (Appeals) has also been affirmed by the Tribunal in the appeal filed by the Revenue in ITA No.5481/Del/2012 dated 25.10.2016 observing as under:

Ground No. 1.

3. Apropos Ground No. 1, the ld. DR supported the orders of the assessing officer and submitted that the CIT(A) was not justified in deleting the addition of 1,26,62,318/- by ignoring the facts the expenses of interest are for the prior period before the commencement of business and are not allowable as a normal business.

4. Replying to the above, the ld. AR reiterating the submissions made before the authorities below submitted that the submission of the ld. AR is that, after the property was constructed the land prices had come down substantially and the assessee was not able to sell the property at the proper market rate and, as such, the assessee had to bear the burden of the interest payments for the loans which were taken for the purpose of business and the assessee is in the real estate business and has undertaken various other property transactions. It is further submitted that the assessee had even considering to sell the property at C-2 & C­3, Premji House, Connaught Place, New Delhi for which there was a sale agreement dated 12/04/2008 with Nav Jyoti Overseas TP Ltd and the assessee had received an advance of Rs 40,00,000/- but even this transaction did not materialize because of the bad market condition. The main submission of the assessee was that the assessee was in the real estate business and had taken various loans for the purchase and sale of properties and as such the assessee was eligible for the deduction of the interest payments for the various loans taken which were for the purpose of business only. It is also submitted by the ld. AR that the AO had made inquiry with the Indian Bank and the Indian Bank had given a reply stating that the loan was granted to the assessee for the purpose of purchasing the commercial building at C-9, Westend Colony, New Delhi vide Para-3 of the AO. The assessee has also relied on various case laws in support of the claim that the business of the assessee started the moment the assessee started the purchasing of the property and the process of the activity of the development of the property started and the assessee also relied on the case of Swire Holding P Ltd. vs ITO, [2006] 6 SOT 621 (BANG.) (SMC) and Dhoomketu Builders & Development P Ltd. vs Addl. CIT [2012] 49 SOT 312 (Delhi). It is submitted that in the present case the business of the assessee started on 08/03/2006 when the property was purchased and the development activity was started by the assessee immediately thereafter”. It is also submitted by the ld. AR that the assessee has been dealing with many other properties regarding the purchase and sale of property and for this purpose, advances were made to various parties.

5. We have heard the rival submissions and have carefully perused the relevant material on record. From the facts emanating from the order of the AO and the submissions of the assessee it is an undisputed fact that the assessee was having a property at C-2 & 3, Premji House, Connaught Place, New Delhi which had been given on rent and the assessee was receiving rental income. The assessee has also purchased a property on 08/03/2006 for a consideration of Rs 3,56,40,000/- at C-9, Westend Colony, New Delhi and the property had been purchased by taking loans from Canara Bank and Indian Bank etc. The ld. AR submitted that the assessee hands demolished the old building/property and has constructed a new building at the same premises i.e C-9, Westend Colony, New Delhi. The investment in the new property had been made after taking loans and investment of Rs 1,02,50,064/- has been made in the AY 2007-08, Rs 1,20,94,531/- has been invested in the AY 2008-09 and Rs 1,05,16,509/- has been invested in the AY 2009-10 respectively. The assessee had taken loan from Kotak Mahindra Bank and has repaid the earlier old loans of Indian Bank etc. The assessee had also subsequently taken loan from Reliance Capital Ltd to repay the old loans of Kotak Mahindra Bank etc. The assessee has paid the interest amount of Rs. 1,26,62,318/- for the loans taken from Reliance Capital Ltd. During the course of assessment proceedings the assessee claimed the interest payments under the head ‘business expenses’ on the ground that the assessee was in the real estate business and the loans were taken for the purpose of purchasing and constructing a commercial property. Earlier the assessee had claimed the interest payments and had adjusted the expenses against the house property income. The AO disallowed the payments of interest on the ground that the assessee is not doing any real estate business and even if the real estate business is being done, the expenses of interest are for the prior period before the commencement of the business and as such the interest expenses are not allowable as a normal business expense vide the order of the AO. When the assessee went in appeal against the order of the AO and submitted that the AO was not justified in disallowing the interest payments as the same were paid for the purpose of business, the ld. CIT(A) deleted the same. Now the aggrieved Revenue is in appeal against the action of the ld. CIT(A) in granting relief to the assessee.

6. After considering the rival submissions, we find that the ld. CIT(A), at para 4.6 and 4.7 has discussed the issue and has come to the following conclusion as reproduced hereunder:

“4.6 I have considered the order of the AO and the submissions of the assessee and I find considerable merit in the submission of the assessee that the assessee is in the real estate business. It is also apparent that the assessee purchased the property on 08/03’2006 for Rs 3,56,40,000/- and thereafter the assessee has demolished the old structure and had constructed a new building by making the new investments of Rs 1.02,50,064/- in the AY 2007-08, Rs 1,20,94,531 / – in the AY 2008-09 and Rs 1.05.16,509/ – in the AY 2009-10 and as such it is very much apparent that the assessee was in a real estate business venture. So it is apparent that the motive of the assessee is to be in the real estate business. There is also considerable merit in the submissions of the assessee that the property could not be sold because of the poor market conditions. It is also apparent that the assessee is in the real estate business and for this purpose only the old property was purchased on 08/03/2006 and the assessee has constructed a new building on the same property after demolishing the old building. It is apparent from the above facts and circumstances of the case that the business activities of the assessee started with the purchase of the property on 08/03/2006 and as such the assessee is eligible for the deduction of the interest payments which are for the purpose of business.

4.7. After considering all the case facts and circumstances of the case, I am of the view that there is no proper justification for the AO for disallowance of the interest payments and accordingly, the appeal of the assessee is allowed and the addition made by the AO is deleted.”

7. From the above conclusion of the ld. CIT(A), it is apparent that the assessee is in the real estate business and for this purpose only the old property was purchased on 08/03/2006 and the assessee has constructed a new building on the same property after demolishing the old building. It is also apparent that the business activities of the assessee started with the purchase of the property on 08/03/2006 and as such the assessee is eligible for the deduction of the interest payments which are for the purpose of business. The ld. CIT(A) was quite justified and correct in deleting the addition so made by the A.O in view of his findings. We find no lacunae in his order and thus we uphold the same. Accordingly, there being no merits in the ground No. 1 raised by the department, the same is dismissed.

14. It is also observed that for the assessment years 2011-12 to 2013-14, the learned Commissioner of Income-Tax (Appeals) held that the assessee is into the business of real estate and the interest expenses are allowable as deduction. The Revenue’s appeals for these years were dismissed by the Tribunal on account of low tax effect. We further observe that the incomes/loss returned by the assessee under the head “income from business” have been accepted for the assessment years 2017-18 to 2022-23 by the Revenue and in none of these years, the incomes/losses shown by the assessee were disturbed. It is the submission of the learned counsel that the decision of the Tribunal for the assessment year 2009-10 affirming the order of the learned Commissioner of Income-Tax (Appeals) in holding that the assessee is into real estate business has became final and this was accepted by the Revenue for assessment year 2009-10. We are of the view that simply because the assessee has not shown any business income during the current assessment year, it cannot be held that the assessee is not carrying on the real estate business. Thus, following the order of the Tribunal for the assessment year 2009-10, we hold that the assessee is into the business of real estate and finance the interest expenditure incurred by the assessee is an allowable deduction. Accordingly, we delete the disallowance of Rs.1,65,62,973/- made by the Assessing Officer. Ground no.1 of grounds of appeal raised by the assessee is allowed.

15. Coming to ground no.2 of grounds of appeal, we notice that in the course of assessment proceedings, the Assessing Officer noticed that the assessee made several cash deposits into saving bank account with Karnataka Bank. Assessee was required to explain the cash deposits. Assessee vide letter dated 15.11.2016 explained the sources for the cash deposits of Rs.66,70,000/-. The assessee explained that the cash deposits in the Canara Bank Account was out of cash withdrawal made, out of opening cash in hand and, therefore, all the cash deposits were explained. However, not convinced with the submissions of the assessee, the Assessing Officer treated the cash deposits of Rs.66,70,000/- on the ground that the assessee did not show any expenditure against cash withdrawals from banks ignoring the submission of the assessee that the cash was withdrawn whenever required from other banks to meet the requirement or to honour the cheques issued by the assessee in any of the banks.

16. On appeal, learned Commissioner of Income-Tax (Appeals) sustained the addition accepting the contention of the Assessing Officer that there is no proximate connection between withdrawals made in other bank accounts and deposits made in Karnataka Bank account.

17. Learned counsel for the assessee submits that assessee is maintaining cash book, receipts and payments were reflected in the cash books, all the transactions are reflected in the bank book/statement. The Assessing Officer did not reject the books of account or did not point out any defects. The learned counsel for the assessee referring to page 106 of the paper book, submits that all the cash deposits into bank account are from cash withdrawals and no part of cash deposits is on account of loan/deposits. Learned counsel further submits that this was clearly explained before the authorities below and they have failed to appreciate that these cash deposits are from cash withdrawals.

18. On the other hand, learned Departmental Representative supported the orders of the authorities below. Learned Departmental Representative further submits that cash book is not part of audited books. He further submits that opening balance as on 01.04.2013 was not supported with evidence. Learned Departmental Representative further made his submissions as under:

“In respect of cash deposits, the several observations of the CIT(A) as enlisted by the Sr. DR are inconsistent with facts of the case and are incorrect. The correct position on facts and in law would be as under:-

1. The deposits in the Karnataka Bank account are required to be seen and assessed and evaluated on the basis of the entries in the cash boo9k and the books of account in this regard. There is no principle which prescribes proximate connectivity between the withdrawals and deposits as the icon.

2. The assessee has the clear option of conducting his business transactions in the manner he wishes, no matter what the current electronic age may propose or provide.

3. The A.O carried out the examination of the cash deposits and formed his preposterous opinion by deviating from the standard verification procedure adopted by the Department. The entirety of the cash deposits in Karnataka Bank are relatable to business receipts deposited with banks which have been rechanneled after withdrawals made therefrom form time to time.

The further observations of the CIT(A) are all misconceived and erroneous as under:

i) The balance sheet has been read partially by the CIT(A) and so the error in the findings.

ii) |The best evidence of cash-in-hand as on 04.2013 is the audit report as on 31.03.2013 which forms part of the records of the case.

iii) The CIT(A) perhaps was ignorant of the fact that without a cash book, there cannot be an audit of th books of account.

iv) The ‘bunch of papers’ as per the monenclature supplied by the Authorities is a partial printout of the cash book which was desired for checking the antecedents of the cash which was desired for checking the antecedents of the cash deposits. The so called ‘bunch of papers’ is on integral part of the cash book which has been misunderstood by the lower authorities.

v) The Sr. DR errs in describing the CIT(A) is “He”. It is actually a lady CIT(A) who has passed the order which basic fact the Sr. DR has omitted to This point regarding interest being submitted on for taxation accrual basis has already been dealt in point 8 above.

The several cases cited by the A.O, as pointed out during the course of the hearing on behalf of the assessee, are totally distinguishable on facts and so inapplicable to the subject case.

Rest of the observations of the Sr. DR being repetitious and inane, which require the separate comments subject to the caveat. That the order of the CIT(A) dated 26.03 .2019 complaining non-compliance by the Assessee on 26.03.2019 requires to be quashed as precipitous and arbitrary in terms of the decision of the Madras High Court in S. Velu Palander (1972) 83 Income Tax Return 683.”

19. The counsel for the assessee filed his rejoinder as under:

“In respect of cash deposits, the several observations of the CIT(A) as enlisted by the j Sr. DR are inconsistent with facts of the case and are incorrect. The correct position on facts and in law would be as under:-

1. The deposits in the Karnataka Bank account are required to be seen and assessed and evaluated on the basis of the entries in the cash book and the books of account in this regard. There is no principle which prescribes proximate connectivity between the withdrawals and deposits as the icon.

2. The Assessee has the clear option of conducting his business transactions in the manner he wishes, no matter what the current electronic age may propose or

3. The AO carried out the examination of the cash deposits and formed his preposterous opinion by deviating from the standard verification procedure adopted by the Department. The entirety of the cash deposits in Karnataka Bank are relatable to business receipts deposited with banks which have been rechanneled after withdrawals made therefrom from time to time.

The further observations of the CIT(A) are all misconceived and erroneous as under:-

(i) The balance sheet has been read partially by the CIT(A) and so the error in the findings.

(ii) The best evidence of cash-in-hand as on 01.04.2013 is the audit report as on 31.03.2013 which forms part of the records of the case.

(iii) The CIT(A) perhaps was ignorant of the fact that without a cash book, there cannot be an audit of the books of accounts.

(iv) The bunch of papers’ as per the nomenclature supplied by the Authorities is a partial printout of the cash book which was desired for checking the antecedents of the cash deposits. The so called ‘bunch of papers’ is an integral part of the cash book which has been misunderstood by the lower Authorities.

(v) The Sr. DR errs in describing the CIT(A) is “He ”. It is actually a lady CIT(A) who has passed the order which basic fact the Sr. DR has omitted to note. This point regarding interest being submitted for taxation on accrual basis has already been dealt in point 8 above.

The several cases cited by the AO, as pointed out during the course of the hearing on behalf of the Assessee, are totally distinguishable on facts and so inapplicable to the subject case.

Rest of the observations of the Sr. DR being repetitious and inane which require no separate comments subject to the caveat. That the order of the CIT(A) dated 26.03.2019 complaining non-compliance by the Assessee on 26.03.2019 requires to be quashed as precipitous and’ arbitrary in terms of the decision of the Madras High Court in S. Velu Palander (1972) 83 ITR 6«^

Placed for the most favourable consideration.”

20. Heard rival submissions and perused the orders of the authorities below.

21. It is observed that the assessee made detailed submissions before the learned Commissioner of Income-Tax (Appeals) as under:

“Ground no.2:

That the Ld. ACIT has erred in making addition of cash of Rs.66,70,000 deposited in small amount on different dates in Karnataka Bank out of cash in cash book without any cogent reasons. Whereas cash in cash book is out of realization of outstanding from parties and cash withdrawals from bank account. All the cash deposits in bank account are out of accepted sources of income and as such making addition of cash deposited in Karnataka Bank is not justified.

That the Ld. ACIT has made an addition of Rs.66,70,000 of cash deposit in Karnataka Bank Saving Fund account no. 5372500103694201. The said addition is wrong. The appellant is maintaining regular books of accounts consisting of cash book, ledger, bank account and vouchers. All the books of accounts were produced before him. The summary of source of cash withdrawal from bank account for deposit in the bank account is as under:

The cash deposit of Rs.6670000/- are out of accepted sources of income. There is no unexplained cash deposit in bank account.

The appellant was having following monthly cash in hand out of which cash was deposited in bank account:

The details of date wise cash deposit in bank account is as under: Statement of source of Cash of Rs.66,70,000 deposited in Karnataka Bank SB a/c. no. 5372500103694201

NOTE:

i) The source of cash in hand was out of opening cash in Interest income declared as income in previous year received in cash on 01.04.2013 from the parties and other amount received from outstanding debtors. Cash withdrawals from Canara Bank for business purposes out of rental income of Rs.1,96,20,000.

ii) Copies of cash book is filed.

iii) Hardcopy of Karnataka Bank saving fund account is filed with sources of deposit and w3ithdrawals.

The Karnataka Bank saving fund account no.5372500103694201 is in the books of accounts. He had examined the same. No defection was pointed out. No books of account was rejected. Copy of cash book was filed before the ACIT and filed here (copy at page no. 59 to 67 of paper book). All the cash deposit in Karnataka Bank saving funds account no. 5372500103694201 were out of cash book. The source of cash in cash in cash book was out of withdrawals from other bank account and realization of sundry debtors and outstanding interest income Rs.21,50,58 1 of previous year. The appellant had paid tax on the same in last year.

9) All the cash deposited in the Karnataka Bank saving fund account was out of books of accounts. The Ld. ACIT did not point out any cash deposit in cash book of unexplained sources. The summary of monthly cash in hand in cash book is as under:

SUMMARY OF MONTHLY CASHJ IN HAND IN CASH BOOK

From the above monthly cash summary of cash book it is clear that the appellant was having enough cash in hand. No addition could be made on suspicion basis.

The Ld. ACIT is wrong in holding that no cash expenditure has been claimed by the appellant when the appellant has withdrawn cash from cash book. The Ld. ACIT is wrong in saying that there are other modes of transfer. Such as online transfer, through NEFT/RTGS by which the appellant can transfer the funds amongst his bank account. The contention of the Ld. ACIT is wrong. He could not guide the appellant time to time how to do his business. In the case CIT vs. Dalmia Cements (P) Ltd. (2002) 254 Income Tax Return 337 (Delhi), it has been held that modus of doing business is the privilege of appellant.

The Ld. ACIT in para no.4.3 from a to h at pge no. 11 & 12 of the assessment order has stated certain details which are only for making addition. He did not take into account the copy of cash book. He did not give any cognizance to the detailed explanation filed. He has not taken into account the opening cash in hand in the books on the Ist of every month. If he would have taken into account the opening cash in hand on the Ist day of every month is much more. There is no shortage of cash book for depositing in Karnataka Bank saving bank account.

In view of the above stated facts and excess monthly cash in hand, the addition of Rs.66,70,000 deserves to be deleted. The relief of the same may be allowed.”

22. It is the observations of the learned Commissioner of Income-Tax (Appeals) that there is no authentication with respect to month-wise figure of cash in hand as cash book is not the part of the books listed as having been audited. He also observed that only a bunch of pages were submitted and it cannot be accepted as cash book. It is also the finding of the learned Commissioner of Income-Tax (Appeals) that entries in the cash book pertained to interest receivable and no interest received and such interest accrued and credited cannot be available for the use by the assessee. It is the observation of the learned Commissioner of Income-Tax (Appeals) that this makes clear that the cash book has been created to explain the cash deposits and is not a genuine reflection of the cash in hand available to the assessee. Thus, the learned Commissioner of Income-Tax (Appeals) rejected the documents holding that it is only a serving document.

23. On perusal of the assessment order, we find that the Assessing Officer has not given any finding that the assessee produced only a bunch of papers and it is not cash book. On the other hand, the reply furnished by the assessee before the Assessing Officer shows that the assessee has filed cash book and it is the finding of the Assessing Officer that as per cash book these are not sufficient withdrawals and the de4posits on various dates do not have enough proximate withdrawals. There is no finding by the Assessing Officer that assessee did not produce cash book and on the other hand it is observed that the Assessing Officer has examined the cash book. It is also observed that the auditor have not given any finding that assessee is not maintaining any cash book. Cash and bank books are the basic documents for beginning the audit, we are not able to see from where the learned Commissioner of Income-Tax (Appeals) came to know that the cash book is not a part of books listed in the audit report.

24. We further observe that none of the authorities below have taken cognizance of the submissions of the assessee that in the first week of April 2013, the assessee had received realization from debtors amounting to Rs.16,21,003/- and the cash balance stood in hand as on 16.04.2013 stood at Rs.16,55,844/- just a day before the deposits of Rs.5,00,000/- made into bank account on 17.04.2013 and Rs.2,00,000/- on 18.04.2013 rather the Assessing Officer simply stated that the assessee has withdrawn only Rs. 1,50,000/- on 16.04.2013 and this is the only proximate cash withdrawals for making cash deposits of Rs.5,00,000/- and Rs.2,00,000/- on 17.04.2013. On reading of the assessment order, it is observed that the Assessing Officer has only took note of the fact that the withdrawals made by the assessee from the bank accounts to co-relate with the deposits made with the bank accounts completely ignoring the cash balances stood as on the first day of last month. Therefore, the entire exercise made by the Assessing Officer appears to be futile. It is not in dispute that the cash book filed before the Assessing Officer and the Assessing Officer failed to examine the entries thoroughly and co-relate the deposits made into bank accounts vis-à-vis the cash balances as on first day of every month in the cash book. It appears that Assessing Officer not even examined detailed submissions made by the assessee. Therefore, as the Assessing Officer did not consider the cash balances and the realization of debtors and has simply gone by the just withdrawals, the addition cannot be sustained merely on that basis when the assessee had clearly demonstrated that the cash deposits were all made out of withdrawals, opening cash balance and realization of debtors. Thus, we direct the Assessing Officer to delete the addition made under Section 68 of the Income-Tax Act, 1961. Ground no.2 of the appeal of the assessee is allowed.

22. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 11/01/2024.