M/S. SHREE KISMAT STONE SUPPLYING CO., MUMBAI v. THE ITO 21(3)-2,

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J MUMBAI BEFORE SHRI R.V. EASWAR (PRESIDENT) AND SHRI B. RAMAKOTAIAH (A.M.) ITA NO.221/MUM/2008 ASSESSMENT YEAR : 2003-2004 SHREE KISMAT STONE SUPPLYING CO. 2 VASANT INDL. SAKI VIHAR SAKINAKA ANDHERI (E) MUMBAI 400 072. PAN : AACFS4121J VS. I.T.O. 21(3)(2) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P DANIEL RESPONDENT BY : SHRI K. SINGH D.R. O R D E R PER B. RAMAKOTAIAH A.M. THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF THE CIT(A) XXI MUMBAI DATED 20.09.2007. WHILE COMPLETING THE ASSESSMENT U /S.143(3) THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF ` 1 56 076/- CLAIMED AS INTEREST ON VARIOUS LOANS STATING THAT FUNDS ARE USED FOR N ON-BUSINESS PURPOSES. THE CIT(A) CONFIRMED THE SAME. THE ASSESSEE RAISED FIVE GROUNDS ON ABOVE ISSUE OF DISALLOWANCE OF INTEREST ON LOANS AMOUNTIN G TO ` 1 56 076/- 2. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS TAKEN LOANS OF ` 17 05 820/- AND PAID INTEREST OF RS. 1 56 076. ON N OTICING THAT TWO FLATS AMOUNTING TO ` 18 05 746/- HAVE BEEN PURCHASED BY THE ASSESSEE H E CAME TO AN OPINION THAT FUNDS BORROWED WERE USED FOR PUR CHASE OF FLATS AND ACCORDINGLY THE INTEREST CLAIM OF ` 1 56 076/ WAS DISALLOWED. IT WAS THE ASSESSEES CONTENTION THAT IN THE ASSESSEES BUSINE SS OF SUPPLYING STONES METAL AND OTHER MATERIALS TO VARIOUS BUILDERS THE A SSESSE ADVANCED MATERIALS. THE ASSESSEE COULD NOT RECOVER MONEY FR OM M/S. LOK GROUP AGAINST THE MATERIAL SUPPLIED IN EARLIER YEARS SINC E 1999 AND AFTER LONG DELIBERATIONS AND LEGAL NOTICES THE GROUP AGREED TO ALLOT AN UNSOLD PROPERTY ITA NO.221/MUM/2008 A.Y.: 2003-2004 2 AGAINST THE DUES AND SAME IS THE CASE WITH ANOTHER BUILDER M/S. DINESH C. AGARWAL AND ACCORDINGLY THE ASSESSEE TOOK POSSESSI ON OF TWO FLATS FOR OUTSTANDING AMOUNTS RECEIVABLE FROM THEM. IT WAS TH E CONTENTION OF THE ASSESSEE THAT THE EXPRESSION FOR THE PURPOSE OF BU SINESS SHOULD BE CONSIDERED IN WIDER SCOPE AND SINCE THE ASSESSEE HA D NO OPTION THAN TO TAKE POSSESSION OF FLATS AND ADJUSTING IT TOWARDS OUTSTA NDING AMOUNTS THE ACQUISITION OF THE BUSINESS ASSET IS TO BE FOR THE PURPOSE OF BUSINESS ONLY. THIS CONTENTIONS OF THE ASSESSEE WERE NOT ACCEPTED BY THE ASSESSING OFFICER AND CIT(A). 3. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRING T O THE FACTS PLACED BEFORE THE AUTHORITIES SUBMITTED THAT THERE WERE OU TSTANDING AMOUNTS RECEIVABLE FROM M/S. LOK GROUP AND DINESH C. AGARWA L AND ACCORDINGLY AFTER TAKING POSSESSION OF THE FLATS THE OUTSTANDIN G AMOUNTS WERE ADJUSTED AGAINST THE FLATS. IT WAS FURTHER SUBMITED THAT DIN ESH C. AGARWAL HAS REPAID THE AMOUNT IN CASH AND FURNISHED THE RELEVANT DETAI LS. IT WAS STATED THAT THE ENTIRE AMOUNT WAS RECOVERED FROM AUGUST 2004 TO MA RCH 2005 AND LETTER GIVEN TO THE AUTHORITIES ABOUT THE ABOVE WAS PLACED IN PAGE 63 OF THE PAPER BOOK. EVEN THOUGH FLAT WAS STATED TO BE ADJUSTED F OR OUTSTANDING AMOUNT OF ` 7 86 500/- THERE WAS NEITHER AN AGREEMENT NOR ANY ACQUISITION OF PROPERTY BUT THE ENTIRE AMOUNT WERE RECOVERED IN CA SH WAS ADJUSTED IN THE BOOKS. THUS PURCHASE OF 2 FLATS AS STATED BY THE A O WAS NOT CORRECT. WITH REFERENCE TO THE BALANCE ONE FLAT THE LEARNED COUN SEL REFERRED TO THE LEGAL STEPS TAKEN AGAINST LOK GROUP PLACED UNDER PAGE 40 -62 TO SUBMIT THAT THEY WERE CORRECT AS TO PROCEED THE LOK GROUP AND THE ASSESSEE HAS TO ACCEPT TAKING ALLOTMENT OF ONE FLAT FOR OUTSTANDIN G AMOUNTS RECOVERABLE FROM THEM AND INSTEAD OF CLAIMING BAD DEBT OF THE A MOUNTS THE ASSESSEE COULD ACQUIRE THE FLAT AND ADJUST THE AMOUNTS ACCO RDINGLY. HE RELIED ON THE PRINCIPLES ESTABLISHED BY THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF CIT VS. SRISHTI SECURITIES (P) LTD. (2009) 226 CTR (BOM ) 551 FOR THE PROPOSITION THAT FUNDS UTILIZED FOR ACQUIRING SHARES BY WAY OF INVESTMENT AS WELL AS STOCK IN TRADE ARE FOR THE PURPOSE OF BUSINESS AND INTEREST IS ALLOWABLE AS DEDUCTION U/S.36(1)(III). REFERRING TO THE ABOVE CASE IT WAS SUBMITTED THAT ITA NO.221/MUM/2008 A.Y.: 2003-2004 3 THE ASSESSEE HAS TO ADJUST THE OUTSTANDING TRADE DE BT AMOUNT AGAINST THE FLAT ACQUIRED FROM THE SAID GROUP HENCE IT SHOULD BE CONSIDERED AS FOR BUSINESS PURPOSE ONLY. NOT ONLY THAT IT WAS FURTHE R SUBMITTED THAT LOANS WERE TAKEN IN EARLIER YEARS AND THERE WAS NO DISALL OWANCE IN ANY OF THE EARLIER YEARS. IT WAS FURTHER SUBMITTED THAT NO FR ESH LOANS WERE OBTAINED DURING THE ASSESSMENT YEAR AND THIS DISALLOWANCE OF INTEREST IS NOT CORRECT. 4. THE LEARNED DR SUBMITTED THAT THE ARGUMENTS NOW RAISED ARE NOT ON RECORD AND REFERRED TO THE ORDERS OF THE ASSESSING OFFICER SUBMITTED THAT INTEREST AMOUNT CANNOT BE ALLOWED. 5. WE HAVE EXAMINED THE ISSUE. AS SEEN FROM THE FACTS ON RECORD THE ASSESSEE HAD TAKEN POSSESSION OF ONE FLAT PERTAINS TO M/S. LOK GROUP TOWARDS THE OUTSTANDING AMOUNT RECEIVABLE FROM THEM FOR SUPPLY OF MATERIAL AND THERE IS NO DISPUTE WITH REFERENCE TO ADVANCES TO THE SAID GROUP IN EARLIER YEARS. IT IS ALSO ON RECORD THAT OUT OF TH E TWO FLATS SO ADJUSTED THE AMOUNT ` 7 86 500/- WAS COVERED BY CHEQUES LATER AND THE A MOUNTS WERE ADJUSTED AS SUCH AND NO FLAT WAS ACQUIRED. ACCORD INGLY TO THE EXTENT OF ONE FLAT SHOWN AT COST ` 7 86 500/- THERE IS NO NEED OF ANY DISALLOWANCE A S ONLY ENTRIES HAVE BEEN PASSED AND NO FLAT WAS TAKEN POS SESSION OF. WITH REFERENCE TO OTHER FLAT PERTAINING TO LOK GROUP TH E LOK GROUP WAS TO PAY AN AMOUNT OF ` 11.25 LAKHS AND HAVE DISPUTES WITH THE ASSESSE AN D LEGAL PROCEEDINGS BETWEEN ASSESSEE AND LOK GROUP WERE UND ERTAKEN IN ORDER TO PROTECT THE MONEY RECOVERABLE FROM THE SAID GROUP. THE ASSESSEE TOOK POSSESSION OF THE FLAT IN ONE OF THE BUILDING BEING CONSTRUCTED AND SEMI FINISHED FLAT WAS USED BY ASSESSEE IN THE BUSINESS AS A GODOWN. ACCORDINGLY ON THE PRINCIPLE ESTABLISHED BY THE HONBLE SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD. [2008] 298 CTR 551 ( SC) IT IS TO BE CONSIDERED THAT ACQUISITION OF FLAT WAS FOR THE PUR POSE OF BUSINESS BUT FOR WHICH THE ASSESSEE WOULD HAVE SUFFERED A BAD DEBT. SINCE THE AMOUNTS ARE BORROWED IN EARLIER YEARS AND WERE USED FOR THE ASS ESSEES BUSINESS THE INTEREST CLAIM UNDER 36(1)(III) IS ALLOWABLE. THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE AMOUNT AS SUCH. THE GROUNDS RAISED IN THIS REGARD ARE TREATED AS ALLOWED. ITA NO.221/MUM/2008 A.Y.: 2003-2004 4 5. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 28 TH DAY OF FEBRUARY 2011. SD/- (R.V. EASWAR) PRESIDENT SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER MUMBAI DATED 28 TH FEBRUARY 2011 JANHAVI COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- MUM BAI 4. COMMISSIONER OF INCOME TAX CITY- MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH MUMBA I //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI