DCIT 12(2), MUMBAI v. KAMDAR CONSTRUCTIONS, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT ASHA VIJAYARAGHA VAN (JM) ITA NO. 963/MUM/2009 (ASSESSMENT YEAR-2003-04) THE DY. CIT-12(2) AAYAKAR BHAVAN MUMBAI-400 020 VS. M/S. KAMDAR CONSTRUCTIONS 102 KRISHNA CHAMBERS 59 NEW MARINE LINES MUMBAI-400 020 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SRAVAN KUMAR RESPONDENT BY: SHRI B.N. RAO O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)-XII MUMBAI DATED 5.11.2008 FOR THE A.Y. 2003-04. 2. THE FIRST GROUND RAISED BY THE REVENUE READS AS UNDER: A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF INTEREST OF RS 51 34 130/- U/S. 36(1)(III) OF THE ACT PAID ON BORROWED FUNDS. B) WHILE DOING SO THE LD. CIT(A) ERRED IN ALLOWING DEDUCTION ON ACCOUNT OF INTEREST PAID ON BORROWED FUNDS EVEN THOUGH NO INTEREST WAS CHARGED FROM THE DEBTORS ON THE DELAYE D PAYMENTS. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD PAID INTEREST AMOUNTING TO RS 1 19 87 719/- TO ICICI BANK ON LOAN S AND RS 14 20 200/- TO PARTNERS ON THEIR CAPITAL. THE ASSESSING OFFICE R OBSERVED THAT THERE HAD BEEN TREMENDOUS INCREASE IN THE INTEREST PAYMENTS O N ACCOUNT OF SECURED AND UNSECURED LOANS IN COMPARISON TO EARLIER YEARS. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE DEDUCTION OF INTEREST ON L OANS WOULD BE ALLOWABLE BASED ON THE UTILIZATION OF FUNDS FOR BUSINESS PURP OSE ONLY WHICH WOULD BE JUDGED BY SEVERAL PARAMETERS LIKE THE NATURE OF BUS INESS FUNDS REQUIRED ETC. SCHEDULE V TO THE BALANCE SHEET WHICH SHOWED SUNDRY DEBTORS OF RS ITA NO. 963/M/09 2 69138830/-. THE LIST OF DEBTORS FROM WHOM AMOUNT EX CEEDING RS 50 LACS DUE TO THE ASSESSEE WERE FOUND TO BE THE FOLLOWING: MANOJ BHANDARI RS 9450071 NAKODA CONSTRUCTION RS 14592857 KUMAR SANGHVI GUNDECHA RS. 10219724 HOTEL PARVEZ RS 636 1753 PRANAY REAL ESTATE DER (P)LTD RS 6437619 KRUTI CONSTRUCTION RS 7148979 THE EXAMINATION OF THE ACCOUNTS REVEAL THE FOLLOWIN G IN CASE OF FOUR PARTIES. A. MANOJ BHANDARI THE DEBIT BALANCE OF RS 2846027/- IN THE CASE OF MA NOJ BHADARI WAS BROUGHT FORWARD FROM THE EARLIER YEAR AND IN THE CU RRENT YEAR THE ASSE3SSEE HAD EXECUTED WORK FOR RS 66 04 044/- THE ACCOUNTS OF THE PARTY DO NOT REFLECT ANY PAYMENTS RECEIVED FROM THE PARTY DURING THE YEAR AND THE TOTAL AMOUNT DUE TO THE ASSESSEE AT THE END OF THE YEAR WAS RS 9450071/- B. NAKODA CONSTRUCTION: IN THE CASE OF NAKODA CONSTRUCTION A DEBIT BALANCE OF RS 14664402/- WAS BROUGHT FORWARD AND WORKS AMOUNTING TO RS 21108097/ - WAS EXECUTED DURING THE YEAR. PAYMENTS OF RS 21179642/- WAS REC EIVED BY THE APPELLANT DURING THE YEAR LEAVING A DEBIT BALANCE OF RS 14592857/- THE ASSESSING OFFICER OBSERVED THAT THE ENTIRE OPENING BALANCE OF RS 14664402/- WAS STILL OUTSTANDING FOR PAYMENTS. C. KUMAR SANGHVI GUNDESHA : IN THIS CASE THE ASSESSEE HAD EXECUTED WORK AMOUN TING TO RS 14667684/- AND HAD ALSO MADE CERTAIN PAYMENTS TO TH E PARTY AMOUNTING TO RS 5967040/- ON SEVERAL OCCASIONS. THE ASSESSEE HAD RECEIVED RS 10415000/- FROM THE PARTY DURING THE YE AR AND THE OUTSTANDING BALANCE AS ON 31.3.2003 WAS RS 10319724 /-. D. HOTEL PARVEZ : IN THIS CASE THE ASSESSEE HAD EXECUTED WORK AMOUNT ING TO RS 8969448/- NO PAYMENTS WERE RECEIVED FROM THE SAID P ARTY BUT CREDIT WAS GIVEN FOR RS 2607695/- THROUGH A JOURNAL ENTRY THEREBY LEAVING AN OUTSTANDING BALANCE OF RS 6361753/- AS ON 31.3.2003 . 4. THE AO OBSERVED AS UNDER: ITA NO. 963/M/09 3 THE ASSESSING OFFICER MENTIONED THAT NO EXPLANATION WAS GIVEN FOR THE DELAY IN COLLECTING THE OUTSTANDING AMOUNTS DUE TO IT FROM THE ABOVE SAID FOUR PARTIES. REGARDLESS OF THE NON-PAY MENT OF DUES OR PROLONGED DELAYS IN RECEIVING PAYMENTS ASSESSEE WEN T ON EXECUTING THE WORK AND RAISING THE BILLS FOR THE SAID PARTIES. AS SESSEE HAS NOT OFFERED ANY INFORMATION FOR RECOVERING THE AMOUNTS DUE FROM THE FOUR PARTIES AND HAD NOT ENFORCED THE CONTRACTUAL OBLIGATIONS FO R REASONS BEST KNOWN TO IT. THE DELAY IN RECOVERING THE DUES HAS I NCREASED THE FINANCIAL COST AND ERODED THE PROFIT MARGINS. THE B ORROWED FUNDS AND CAPITAL HAVE BEEN UTILIZED FOR EXECUTION OF WORK OF THE SAID FOUR PARTIES. ASSESSEE HAS NOT CHARGED INTEREST FROM THE SAID FOU R PARTIES FOR DELAYED PAYMENTS AND NO PRUDENT BUSINESS MAN WOULD DO SO. B ECAUSE OF THIS THE ASSESSING OFFICER WAS OF THE VIEW THAT THE INT EREST ON BORROWED FUNDS TO THE EXTENT UTILIZED IN THE CONTRACT WORK W ITH THE ABOVE FOUR PARTIES COULD NOT BE CONSIDERED AS EXPENDED IN CONN ECTION WITH THE BUSINESS AND AS SUCH DISALLOWABLE U/S 36(1)(III). THE ARGUMENTS THAT THE ASSESSEE HAD EARNED INTEREST ON LOANS ADVANCES WHICH ARE CREDITED TO THE P & L A/C IS NOT TENABLE AS THE ASSESSEE IS NOT IN THE BUSINESS OF MONEY LENDING AND THE CAPITAL AND LOAN FUNDS TAKEN HAVE BEEN MEANT TO BE UTILIZED FOR THE PURPOSE OF BUSINESS. THE INT EREST CREDITED TO THE P & L A/C CAN AT BEST BE TERMED AS INCREMENTAL INCOME OF THE ASSESSEE NOT CONNECTED WITH HIS BUSINESS. THE ASSESSING OFFI CER HELD THAT THE INTEREST ATTRIBUTABLE TO THE BORROWED FUNDS UTILIZE D FOR NON RECOVERY OF DEBTORS IN UNDULY DELAYED ACCOUNTS IS TO BE CONSIDE RED AS NON BUSINESS EXPEDIENCY AND NEEDS TO BE DISALLOWED. T HE ASSESSING OFFICER CALCULATED INTEREST @ 14.25% PER ANNUM ON T HE MONTHLY OUTSTANDING BALANCES OF THE FOUR SUNDRY DEBTORS AND ARRIVED AT A FIGURE OF RS 5134130/- ACCORDINGLY THE ASSESSING OFFICER D ISALLOWED THE AMOUNT OF RS 5134130/- OUT OF THE INTEREST CLAIMED AMOUNTING TO RS 11987719/- AS NOT BEING ALLOWABLE DEDUCTION U/S 36( 1)(III). 5. THE AO FURTHER OBSERVED AS UNDER: THE INTEREST AMOUNTING TO RS 580800/- WAS RECEIVED FROM ONE PARTY M/S PRANAY REAL ESTATE DEVELOPMENT P. LTD @ 9 % PER YEAR. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE INTEREST CHARGED WAS QUITE ;LOW AND IT SHOULD HAVE BEEN 14.25% WHICH COMES TO RS 919600/- ACCORDINGLY THE AMOUNT OF RS 338800/- I.E. (RS 9196 00 RS 580800 = RS 338800) WAS ADDED TO THE INCOME AS DIFFERENTIAL INTEREST. 6. ON APPEAL BEFORE THE LD. CIT(A) THE ASSESSEE SU BMITTED AS UNDER: THE ASSESSEE FIRM HAS PAID INTEREST OF RS 1 19 87 7 19/- ON MONEYS BORROWED FROM BNK AND RS 14 20 200/- ON CAPI TAL ACCOUNT OF PARTNERS. AGAINST THIS THE ASSESSEE HAS CREDITED RS 90 82 303/- TO P & L A/C ON ACCOUNT OF INTEREST INCLUDED IN OTHER I NCOME. THE ASSESSEE HAD BORROWED THE MONEY FROM THE BANK FOR B USINESS PURPOSES AND HAS UTILIZED THE SAME IN ITS BUSINESS ONLY. THE AO HAS ITA NO. 963/M/09 4 NOT DISPUTED THIS FACT. THE AO HAS SOUGHT TO MAKE T HIS ADDITION OF INTEREST ON THE AMOUNTS RECEIVABLE FROM DEBTORS VIZ . (I) MANOJ BHANDARI (II) NAKODA CONSTRUCTIONS (III) KUMAR SANGHVI GUNDE SHA AND (IV) HOTEL PARVEZ WHILE MAKING ADDITION THE AO ARGUED THAT:- IT IS A FACT THAT REGARDLESS OF NON PAYMENT OF DUES OR PROLONGED DELAYS IN RECEIVING SOME PAYMENTS ONLY AS SESSEE WENT ON EXECUTING THE WORK AND RAISING THE BILLS. THE B ORROWED FUNDS AND THE CAPITAL OF THE FIRM BEARING THE INTER EST HAS BEEN UTILIZED FOR EXECUTION OF WORK OF THESE PARTIES IT IS CLEAR FROM THE ABOVE OBSERVATION OF THE AO TH AT THE ASSESSEE HAS USED THE FUNDS BORROWED ON WHICH INTEREST HAS B EEN PAID FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE. IN EXECUTING THE WORK AND RAISING BILLS THE ASSESSEE HAS EARNED INCOME WHICH IT OFFE RED TO TAX. WHEN INCOME HAS BEEN EARNED AND OFFERED TO TAX ANY EXPE NDITURE INCURRED FOR EARNING THE SAID INCOME HAS TO BE ALLOWED AS DE DUCTION. THE ASSESSEE FURTHER CONTENDED THAT THESE PARTIES ARE I TS BUSINESS CUSTOMERS AND CONSIDERING THE BUSINESS EXIGENCIES A ND FUTURE BUSINESS PROSPECTS THE ASSESSEE HAS NOT CHARGED INTEREST TO THESE PARTIES. THE ASSESSEE HAS EARNED INCOME IN THE SUBSEQUENT YEARS ALSO BY EXECUTING THE WORK OF THESE PARTIES. IT IS EVIDENT FROM THE B ILLING DONE BY THE ASSESSEE IN THE SUBSEQUENT YEARS ON THESE PARTIES A S ALSO THE PAYMENTS RECEIVED DURING THESE YEARS FROM THE SAID PARTIES. THE ASSESSEE HAS THUS EARNED INCOME EXECUTING THE WORK OF THESE PARTIES BY UTILIZING THE BORROWED FUNDS. HOWEVER IT IS IMPO RTANT TO NOTE THAT THE ASSESSEE HAS CHARGED INTEREST ON MONEYS ADVANCED TO OTHERS. THE INTEREST THUS CHARGED ON LOANS AND ADVANCES AND INC LUDED IN OTHER INCOME AMOUNTED TO RS 90 82 303/-. AS REGARDS THE OBSERVATION OF THE AO THAT ANY AR GUMENTS THAT THE ASSESSEE HAS ALSO EARNED INTEREST ON LOANS/ ADV ANCES TO OTHERS. THE INTEREST ON WHICH IS CREDITED TO THE P & L ACCO UNT IS NOT TENABLE AS THE ASSESSEE IS NOT IN THE BUSINESS OF MONEY LENDIN G. THE ASSESSEE SUBMITTED THAT IT IS SURPRISING THAT ON ONE HAND T HE AO IS MAKING ADDITION ON ACCOUNT OF INTEREST ON AMOUNTS RECEIVAB LE FROM DEBTORS AS MENTIONED ABOVE EVEN THOUGH THE A HAS NOT CHARGED OR RECOVERED ANY INTEREST FROM THEM AND ON THE OTHER HAND HE IS NOT CONSIDERING THE INTEREST CHARGED ON LOANS AND ADVANCES ON THE GROUN D THAT THE ASSESSEE IS NOT IN THE BUSINESS OF MONEY LENDING. T HE AO HAS ALSO FAILED TO APPRECIATE THAT THE ASSESSEE HAS NOT PAI D ANY INTEREST ON AMOUNT OUTSTANDING TO ITS TRADE CREDITORS TO THE TU NE OF RS 5 71 93 016/- AND ADVANCE RECEIVED FROM CUSTOMERS RS 42 33 832/- THE ASSESSEE CONTENDS THAT APPLYING THE SIMILAR LOG IC OF RECOVERING INTEREST FROM DEBTORS THE ASSESSEE BE ALLOWED A DED UCTION ON ACCOUNT OF INTEREST AT THE SAME RATE ON THESE OUTSTANDING A MOUNTS IN CASE THE ADDITION MADE BY THE AO ON THIS GROUND IS UPHELD. ITA NO. 963/M/09 5 THE ASSESSEE SUBMITTED THAT THE AO HAS THUS ASSUMED A CHARGE OF A DECISION MAKE AS TO HOW TO UTILIZE THE FUNDS I N THE BUSINESS WHICH WE THINK IS EXCLUSIVE PREROGATIVE OF ANY BUSINESSMA N THE AO SHOULD NOT STEP IN TO THE SHOES OF THE BUSINESSMAN. WHAT AO HAS TO ASCERTAIN IS WHETHER OR NOT THE FUNDS HAVE BEEN USED IN AND F OR THE PURPOSES OF BUSINESS ONLY. LASTLY THE AO HAS DISALLOWED INTERES T U/S 36(1)(III). THE ASSESSEE CONTENDED THAT THE FUNDS HAVE BEEN BORROWE D TO MEET ITS WORKING CAPITAL REQUIREMENTS AND THAT THEY HAVE BEE N SPENT ON ONGOING PROJECTS OF THE ASSESSEE INCOME FROM WHICH IS TAXAB LE AS BUSINESS INCOME AND HENCE INTEREST PAID ON SUCH BORROWING IS ALLOWABLE U/S 36(1)(III) OF THE INCOME TAX ACT 1961. 7. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS MADE FOR THE APP ELLANT AS WELL AS THE ASST. ORDER. IT IS NOT DISPUTED THAT THE INTERE ST OF RS 11987719/- PAID BY THE APPELLANT WAS NOT ON ACCOUNT OF BUSINES S CARRIED OUT BY THE APPELLANT. IT IS ALSO NOT DISPUTED THAT THE INT EREST PAID IS EXCESSIVE. IT IS ALSO NOT DISPUTED THAT THE SUNDRY DEBTORS WER E ON ACCOUNT OF CONTRACT WORK BUSINESS CARRIED ON BY THE APPELLA NT AND THAT THE INCOME ARISING THEREOF HAD BEEN OFFERED TO TAX. IT IS ALSO NOT THE CASE THAT THE APPELLANT HAD BORROWED FUNDS AND ADVANCED INTEREST FREE LOANS. WHATEVER IS OUTSTANDING AND REFLECTED AS DEB TORS IN THE BALANCE SHEET PERTAINS TO THE AMOUNTS RECEIVABLE BY THE APP ELLANT FROM THE ABOVE SAID FOUR PARTIES FOR WORKS CARRIED OUT FOR T HEM. THE LEDGER ACCOUNTS OF THE FOUR PARTIES BEARS TESTIMONY TO THE FACT THAT THERE WERE OUTSTANDING BALANCE AT THE BEGINNING OF THE YEAR TH ERE WERE TRANSACTIONS PERTAINING TO RECEIPTS AND PAYMENTS DU RING THE YEAR AND THAT THE BALANCE OUTSTANDING IS THE RESIDUAL OF WHA T HAS BEEN CONTINUOUSLY TRANSACTED. IT IS NOT A CASE THAT THE TRANSACTIONS WITH THE FOUR PARTIES HAD COMPLETELY STOPPED AND THAT AND T HE AMOUNT OUTSTANDING WERE FOR A LONG PERIOD OF TIME. THE TR ANSACTIONS WITH THE FOUR PARTIES ARE ONGOING BUSINESS PROCESS. AS TO TH E BUSINESS EXIGENCIES AND COMMERCIAL EXPEDIENCY BEHIND NOT REC EIVING THE OUTSTANDING AMOUNTS ON TIME OR NOT CHARGING INTERES T THEREOF IT IS THE PREROGATIVE OF THE APPELLANT AND NO ADVERSE PRESUMP TIONS CAN BE DRAWN ON IT. WHERE EVER MONEY HAS BEEN ADVANCED THE APPELLANT HAD CHARGED INTEREST THEREON AND HAD SHOWN INTEREST IN COME OF RS 9082303/- THERE WERE TRADE CREDITORS AMOUNTING TO R S 57193016/- AND ADVANCES OF RS 4233832/- THE FACT THAT NO INTER EST HAD BEEN PAID ON THE SAID CREDIT BALANCE ALSO DOES NOT JUSTIFY TH E COMPUTATION OF NOTIONAL INTEREST ON THE DEBTORS. THE ASSESSING OF FICER IS NOT JUSTIFIED IN CALCULATING THE NOTIONAL INTEREST BY ASSUMING TH AT INTEREST OUGHT TO HAVE BEEN CHARGED FROM THE ABOVE SAID FOUR TRADE DE BTORS. THE ASSESSING OFFICER HAD HIMSELF ADMITTED THAT THE APP ELLANT HAD BORROWED FUNDS WHICH HAVE BEEN UTILIZED IN THE CONS TRUCTION BUSINESS AND THAT THEY ARE NOT MEANT FOR MONEY LENDING BUSIN ESS. IN SUCH A ITA NO. 963/M/09 6 SITUATION THE AMOUNT OUTSTANDING FROM THE TRADE DEB TORS CANNOT BE HELD AS AMOUNTS GIVEN ON LOAN. NO MATERIALS HAVE BEEN B ROUGHT BY THE ASSESSING OFFICER TO IMPUTE THAT THE DELAY IN RECEI VING THE OUTSTANDING BALANCE AMOUNTS FROM THE FOUR DEBTORS PARTIES WAS O N ACCOUNT OF DELIBERATE ACT OF THE APPELLANT. THE APPELLANTS CA SE IS WELL SUPPORTED BY THE FOLLOWING DECISIONS. I) D & H SECHERON ELECTRODES P. LTD V COMMISSIONER OF INCOME TAX (1983) 35 CTR (MP) 41 HIGH COURT OF MADHYA PRAD ESH II) COMMISSIONER OF INCOME TAX V PREMIER AUTO FINANCE P . LTD (1980) 18 CTR (DEL) 295 HIGH COURT OF DELHI III) COMMISSIONER OF INCOME TAX V INDO KOPP LTD (2008) 1 67 TAXMAN 172 (DEL) HIGH COURT OF DELHI IV) COMMISSIONER OF INCOME TAX V RAM LAL RAJARAM (1999) 157 CTR (ALL) 119 HIGH COURT OF ALLAHABAD V) MADHAV PRASAD JATIA V COMMISSIONER OF INCOME TAX (1 979) 10 CTR (SC) 375 SUPREME COURT OF INDIA IN VIEW OF THE ABOVE THE DISALLOWANCE OF INTEREST AMOUNTING TO RS 5134130/- IS HELD TO BE UNJUSTIFIED AND IS DELETED . THE ASSESSING OFFICER HAD ALSO ADDED AN AMOUNT OF R S 338800/- ON ACCOUNT OF DIFFERENTIAL INTEREST ON LOANS ADVANCED. THERE BEING NO SUBMISSIONS ON THE PART OF THE APPELLANT ON THIS IS SUE AND THE FACT THAT THE INTEREST COST OF BORROWING WAS 14.25% AND THAT ISSUE AND THE FACT THAT THE INTEREST WAS RECEIVED @ 9% ON LOAN ADVANC ED THE ACTION OF THE ASSESSING OFFICER STANDS CONFIRMED. 8. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. AS POINTED OUT BY THE LD. CIT(A) THE AO HAS NOT DOUBTED THAT THE BORROWE D FUNDS HAVE BEEN UTILIZED FOR BUSINESS PURPOSES. HE HAS NOT BROUGHT ON RECORD ANY EVIDENCE OF BORROWED FUNDS BEING DIVERTED FOR NON BUSINESS PURP OSES. HIS ONLY OBJECTION IS THAT AMOUNTS DUE FROM DEBTORS HAVE NOT BEEN RECO VERED FOR SOME TIME AND NO INTEREST HAS BEEN CHARGED ON THESE AMOUNTS D UE. IT IS NOT IN DISPUTE THAT THESE AMOUNTS HAVE BECOME DUE IN THE COURSE OF BUSINESS. THUS THE ENTIRE BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PU RPOSE OF BUSINESS. SEC 36(1)(III) PERMITS INTEREST PAYABLE ON THE BORROWED FUNDS WHICH HAVE BEEN UTILIZED FOR THE PURPOSE OF BUSINESS. ONCE THE FUND S HAVE BEEN ACCEPTED TO HAVE BEEN UTILIZED FOR THE PURPOSE OF BUSINESS THER E CAN BE DISALLOWANCE OF THE INTEREST PAYABLE ON THOSE FUNDS. THE JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT V BOMBAY SAMACHAR LTD (74 ITR 723) HA S HELD THAT AS LONG AS ITA NO. 963/M/09 7 THE BORROWED FUNDS HAVE BEEN UTILIZED IN THE BUSINE SS THE INTEREST PAYABLE CANNOT BE DISALLOWED ON THE GROUNDS THAT INTEREST H AS NOT BEEN CHARGED ON THE AMOUNTS OUTSTANDING IN CONNECTION WITH THE BUSI NESS TRANSACTION. RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDIC TIONAL HIGH COURT WE CONFIRM THE ORDER OF THE LD.CIT(A) DELETING THE DIS ALLOWANCE OF RS. 51 34 130/- AND DISMISS THE DEPARTMENTAL APPEAL ON THIS ISSUE. 9. THE NEXT GROUND OF APPEAL BY THE REVENUE IS AGAI NST CIT(A) TREATING RS 2 25 000/- PAID TOWARDS LOAN PROCESSING CHARGES AS REVENUE EXPENDITURE. 10. THE ASSESSING OFFICER WAS OF THE VIEW THAT THOU GH THERE WAS A RUNNING BUSINESS FROM THE EARLIER YEAR THE ASSET IN THE FO RM OF LOAN IS A CAPITAL NATURE AND SUCH EXPENDITURE INCURRED IN OBTAINING T HE LOAN IS CAPITAL EXPENDITURE. ACCORDINGLY THE CLAIM OF DEDUCTION OF RS 225000/- BEING LOAN PROCESSING CHARGES WAS DISALLOWED. 11. ON APPEAL BEFORE THE LD.CIT(A) THE ASSESSEE HA S MADE THE WRITTEN SUBMISSIONS AS UNDER: DISALLOWANCE OF LOAN PROCESSING CHARGES RS 2 25 00 0/- THE ASSESSEE HAS PAID LOAN PROCESSING CHARGES OF R S 2 25 000/- TO ICICI BANK FOR LOAN OBTAINED FOR WORKING CAPITAL PU RPOSES. THE ASSESSEE HAD NOT ACQUIRED ANY CAPITAL ASSET BY USING THE LOA N AMOUNT AS IT WAS FOR WORKING CAPITAL ONLY AND AS SUCH HAD CLAIMED THE SA ME AS REVENUE EXPENDITURE. THE AO DISALLOWED THE CLAIM ON THE GR OUND REPRODUCED HEREUNDER- .THE BANK LOAN IS A CAPITAL RECEIPT AND ANY CHARG ES PAID IN CONNECTION WITH OBTAINING OF THE CAPITAL RECEIPT AR E RELATED TO CAPITAL IS A CAPITAL EXPENDITURE ONLY. IN THE CASE OF THE ASSESSEE THOUGH THERE WAS A RUNNING BUSINESS FROM EARLIER YE ARS THE ASSET IN FORM OF THE LOAN IS A CAPITAL NATURE ONLY. AS SUCH THE EXPENDITURE RELATED TO THE OBTAINING OF THIS LOAN I S CAPITAL EXPENDITURE ONLY. 12. ON APPEAL THE LD. AR SUBMITTED BEFORE THE LD. CIT(A) AS FOLLOWS: THE CONTENTIONS OF THE AO HAVE NO BASIS AND DEFY A LL FUNDAMENTAL ACCOUNTING PRINCIPLES. ITA NO. 963/M/09 8 IN DCIT V PARAMOUNT HOTELS LTD (ITAT MUMBAI SMC BEN CH) (2001) 71 TTJ MUMBAI 704 IT WAS HELD THAT PROCESSING ND ADMINISTRATIVE FEES PAID TO FINANCIAL INSTITUTIONS IS PURELY REVEN UE EXPENDITURE. IN INDIA CEMENTS LTD V CIT (1966) 60 ITR 52 SC IT W AS HELD THAT AMOUNT SPENT ON OBTAINING LOAN. THERE IS NO DISTI NCTION BETWEEN INTEREST IN RESPECT OF A LOAN AND EXPENDITURE INCUR RED ON OBTAINING LOAN. LOAN IS NOT AN ASSET OR ADVANTAGE OF ENDURING NATUR E. OBJECT OF LOAN IS IRRELEVANT CONSIDERATION. EXPENDITURE WAS NOT CAPIT AL EXPENDITURE AND WAS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS.. IN S.F. ENGINEERS & ORS (A FIRM) V COMMISSIONER OF INCOME TAX (1965) 57 ITR 455(BOM) HIGH COURT OF MADRAS IT WAS HELD THAT .AS THE CONSTRUCTION AND SALE OF THE BUILDING WAS THE SOLE BUSINESS OF ASSESSEE AND THE BUILDING WAS ITS STOCK IN TRADE EXPENDITUR E ON RAISING LOAN USED FOR THE PURPOSE OF ACQUIRING THIS STOCK IN TRA DE AND NOT FOR OBTAINING ANY FIXED ASSET WAS REVENUE EXPENDITURE. IN VIEW OF THE ABOVE WE REQUEST YOUR HONOR TO KINDL Y DELETE THE DISALLOWANCE ON ACCOUNT OF LOAN PROCESSING CHARGES OF RS 2 25 000/-. 13. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSE E BY OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS AND THE ASSTT. O RDER ON THE ISSUE. IT IS NOT DISPUTED THAT THE EXPENDITURE HAD BEEN INCURRED IN OBTAINING LOAN FOR ITS WORKING CAPITAL AND NOT FOR ACQUISITION OF ANY CAPITAL ASSET. IN THIS SITUATION ANY EXPENDITURE I NCURRED ON ACCOUNT OF LOAN OBTAINED HAS TO BE TREATED AS REVENUE EXPENDIT URE. THE APPELLANT IS ALSO WELL SUPPORTED BY THE DECISIONS RELIED BY I T AS ABOVE. AS SUCH THE ASSESSING OFFICER IS DIRECTED TO DELETE THE AMO UNT OF RS 225000/- BEING LOAN PROCESSING EXPENDITURE. 14. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. 15. WE HEARD BOTH THE PARTIES. VARIOUS DECISIONS A RE IN SUPPORT OF ASSESSEES CLAIM. INTEREST PAYMENTS (INDIA CEMENTS LTD 60 ITR 52 SC) AND GUARANTEE COMMISSION (SIVAKAMI TEXTILES LTD 227 ITR 465 SC) PAID ON BORROWED FUNDS HAVE BEEN HELD TO BE AN ALLOWABLE DE DUCTION. THE MADRAS HIGH COURT IN THE CASE OF CIT VS SUPER SPINNING MIL LS LTD (296 ITR 168) HAS HELD THAT UPFRONT FEES PAID FOR OBTAINING LOAN IS IN THE NATURE OF LOAN PROCESSING FEES AND IS AN ALLOWABLE DEDUCTION. RESP ECTFULLY FOLLOWING THE ITA NO. 963/M/09 9 RATIO OF THE ABOVESAID DECISIONS WE CONFIRM THE OR DER OF THE LD. CIT(A) AND DISMISS THE DEPARTMENTAL APPEAL ON THIS ISSUE. 16. THE NEXT GROUND IN THE REVENUES APPEAL IS AGAI NST LD. CIT(A) ALLOWING THE DEDUCTION OF RS 6 30 063/- SPENT ON ADVERTISEME NT AS BUSINESS EXPENDITURE. 17. THE ASSESSING OFFICER WAS OF THE VIEW THAT AS T HE ASSESSEE WAS CARRYING OUT CONSTRUCTION WORK ONLY AND IT IS NOT I NVOLVED IN THE SALE OF FLATS AND AS SUCH THERE WAS NO REASON TO INCUR EXPENDITUR E ON ADVERTISING. THE ADVERTISEMENT EXPENDITURE IS NOTHING BUT THE VARIOU S ADVERTISEMENTS PUBLISHED IN THE NEWS PAPERS WHERE M/S KUMAR PROPER TIES WAS CONSTRUCTING THE FLATS. THE ADVERTISEMENT NOWHERE R EFLECTS THE NAME OF THE ASSESSEE BUT THAT OF KUMAR PROPERTIES. AS SUCH THE ASSESSING OFFICER HELD THAT THE ADVERTISEMENT EXPENDITURE WAS NOT RELATED TO THE BUSINESS OF THE ASSESSEE AND DISALLOWED THE SAME. 18. IN THE APPEAL BEFORE THE LD. CIT(A) THE ASSESSE E CONTENDED AS UNDER: THE ASSESSEE HAS TAKEN A COMPOSITE CONTRACT IN THE CASE OF THE PROJECT KUMAR PRIVILEGE. ACCORDINGLY THE ASSESSEE WAS PAID ADDITIONAL CONSIDERATION OF 10% OF THE CONTRACT VALUE FOR ADMI NISTRATIVE EXPENSES TO BE INCURRED BY THE ASSESSEE. THUS THE CONTRACT VALUE WAS ENHANCED BY 10% TO COMPENSATE THE ASSESSEE FOR THE ADMINISTR ATIVE EXPENSES INCLUDING ADVERTISEMENT TOBE INCURRED BY THE ASSESS EE. A COPY OF THE SAID CONTRACT WAS SUBMITTED TO THE AO DURING THE CO URSE OF ASSESSMENT. IT IS THUS CLEAR THAT THE ASSESSEE UNDER THE CONTRA CT HAD UNDERTAKEN TO CARRY OUT ADMINISTRATIVE WORK INCLUDING ADVERTISEME NT FOR THE CONTRACTEE AT AN ADDITIONAL CONSIDERATION OF 10% OF THE CONTRACT VALUE. THE ENTIRE CONSIDERATION RECEIVED BY THE ASSESSEE H AD BEEN TREATED AS BUSINESS INCOME AND THEREFORE THE EXPENDITURE INCUR RED FOR THE PURPOSE AUTOMATICALLY BECAME DEDUCTIBLE AS BUSINESS EXPENDI TURE OF THE ASSESSEE. THE ASSESSEE FURTHER CONTENDED THAT IT IS BUT OBVIO US THAT THE ADVERTISEMENT WILL REFLECT THE NAME OF THE PRINCIPA L WHO IS OWNER OF THE PROPERTY. THE CONTRACTEE IS AN AGENT OF THE PRINCIP AL AND HENCE HIS NAME NEED NOT APPEAR ON THE ADVERTISEMENT THE OBJE CTIVE SHOULD NOT BE TO SEE WHOSE NAME APPEARS ON THE ADVERTISEMENT B UT TO SEE FOR WHICH PROJECT THE ADVERTISEMENT WAS GIVEN WHOSE EXP ENDITURE THE ASSESSEE IS CLAIMING. ITA NO. 963/M/09 10 THE ARGUMENT OF THE AO THAT SINCE THE ASSESSEE IS N OWHERE CONNECTED IN SALE OF FLATS THE ADVERTISEMENT EXPEN DITURE IS NOT JUSTIFIABLE DOES NOT HOLD GOOD SPECIALLY WHEN THIS EXPENDITURE WAS A PART OF THE CONTRACTUAL OBLIGATION UNDERTAKEN BY TH E ASSESSEE AND FOR WHICH THE ASSESSEE HAD RECEIVED ADDITIONAL CONSIDER ATION. AGAIN THERE IS NO DISPUTE BETWEEN THE ASSESSEE AND THE AO THAT THE ADVERTISEMENTS WERE FOR ONE PROJECT KUMAR PRIVILEGE ONLY IN THAT C ASE WHEN THE ASSESSEE IS PAID FOR A JOB ALL EXPENSES RELATING TO THE SAME ARE DEDUCTIBLE. IF INCOME IS INCLUDED AND ACCEPTED BY T HE AO THEN THE EXPENDITURE INCURRED TO EARN THAT INCOME IS NATURAL LY ALLOWABLE U/S 37 OF THE INCOME TAX ACT 1961.IN VIEW OF THE FACTS MEN TIONED ABOVE THE ASSESSEE SUBMITTED THAT THE ADVERTISEMENT EXPENDITU RE OF RS 630 063/- BE ALLOWED. 19. THE LD. CIT(A) ALLOWED THE ASSESSEES CLAIM BY OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS AND THE ASSTT. O RDER ON THE ISSUE. AS PER TERMS AND CONDITIONS AND THE PROJEC T COST FOR THE CONSTRUCTION OF THE RESIDENTIAL COMPLEX KUMAR PRIVI LEGE THE CONTRACT VALUE WAS SHOWN AT RS 22937598/- TO THE SAID CONTRA CT VALUE AN AMOUNT OF RS 2293760/- BEING 10% OF THE CONTRACT VA LUE WAS ADDED TOWARDS OFFICE EXPENSES SUPERVISION MARKETING ADVE RTISING ADMINISTRATIVE EXPENSES TO BE INCURRED. THIS CLEARL Y SHOWS THAT THE APPELLANT HAD RECEIVED EXTRA PAYMENTS FROM THE PROM OTERS ON ACCOUNT OF EXPENSES INCLUDING ADVERTISEMENT EXPENSES. THE ENTIRE AMOUNT RECEIVED ON ACCOUNT OF ADVERTISEMENT ADMINISTRATIV E EXPENSES ETC. HAVE BEAN TAKEN AS BUSINESS INCOME. THE APPELLANTS CONTENTION THAT IT IS OBVIOUS THAT THE ADVERTISEMENT WILL REFLECT THE NAME OF THE PRINCIPAL AND NOT ITS NAME IS JUSTIFIED. CONSIDERING THE ABOV E THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE ADVERTISEMENT EXPE NSES OF RS 630063/- AS CLAIMED BY THE APPELLANT. 20. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. T HE LD. CIT(A) HAS FOUND IT AS A FACT THAT THE ASSESSEE HAS PAID AN AD DITIONAL 10% OF THE CONTRACT VALUE FOR ADMINISTRATIVE EXPENSES. THEREF ORE THE EXPENDITURE INCURRED BY THE ASSESSEE ON ADVERTISEMENT IS IN ACC ORDANCE WITH AND AS PER THE CONTRACT FOR CONSTRUCTION. 21. BEFORE US IT WAS SUBMITTED BY THE LD. COUNSEL F OR THE ASSESSEE THAT EVEN OTHERWISE ADVERTISEMENT ABOUT THE PROJECT IN W HICH THE ASSESSEE HAS BEEN AWARDED THE CONSTRUCTION CONTRACT WILL BENEFIT ASSESSEE IN THE SENSE OF SALE FLATS IN THE PROJECT WOULD HELP THE PROJECT OW NERS TO REALIZE THE MONIES AND PAY THE ASSESSEE FOR THEIR WORK. THE FACT IS T HAT THE ASSESSEE WAS OBLIGED TO ADVERTISE AND HAS BEEN REMUNERATED FOR T HE SAME. IN THE ITA NO. 963/M/09 11 CIRCUMSTANCES THE LD. CIT(A) HAS RIGHTLY HELD THAT THE ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSESSEE IS AN ALLOWABL E EXPENDITURE. THE REVENUES APPEAL ON THIS ISSUE IS DISMISSED. 22. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED ON THIS 25 TH DAY OF FEBRUARY 2011 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI DATED 25 TH FEBRUARY 2011. RJ COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR A BENCH TRUE COPY BY ORDER ASST. REGISTRAR I.T.A.T MUMBAI ITA NO. 963/M/09 12 DATE INITIALS 1 DRAFT DICTATED ON: 17.02.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 18.02.2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: ______ 9 DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER: ______