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IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "D" NEW DELHI
BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
AND
SHRI A.T. VARKEY : JUDICIAL MEMBER
ITA No. 1824 & 3473/Del/2010
Asstt. Yrs: 2005-06 & 2007-08
Jyoti Metal & Allied Industries Vs. Income-tax Officer,
(P) Ltd., C-22, NDSE Part-II, Ward 4(2), New Delhi.
New Delhi.
PAN: AABCJ 3790 J
( Appellant ) ( Respondent )
Appellant by : Shri Gautam Jain CA
Assessee by : Shri Vivek Nangia Sr. DR
Date of hearing : 22-09-2014
Date of order : 31-10-2014.
ORDER
PER S.V. MEHROTRA, A.M:-
These appeals, preferred by the assessee, are directed against separate
orders of the ld. CIT(A)-VII, New Delhi, relating to A.Yrs. 2005-06 & 2007-08.
Common grounds have been raised for adjudication in both the appeals,
therefore, the same were heard together and disposed of by this consolidated
order for the sake of convenience.
ITA no. 1824/Del/2014:
Assessee has raised following grounds of appeal:
"1. That on facts and in law the orders passed by the A.O. and
partly confirmed by the Commissioner of Income Tax (Appeals)
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(hereinafter referred to as "CIT(A)") are bad in law and void ab
initio.
2. That the Commissioner of Income Tax (Appeals) has erred
both in law and on facts in confirming disallowance of claim of
deductions of Rs. 4,63,367/- representing the interest paid on
borrowed capital utilized for construction of house property and
eligible for deduction under section 24(1)(vi) of the Act.
2.1. That the finding Commissioner of Income Tax (Appeals)
that the liability incurred by the appellant on purchase of material
for construction of house property does not represent borrowed
capital by mechanically applying the decision of the Andhra
Pradesh High Court in the case of Doondoo Mohan Rao vs. CIT
(1978) Tax Law Reports 394 and Hon'ble Punjab and Haryana
High Court in the case of CIT vs. Forefield Private Limited
reported in 231 ITR 262 without giving opportunity is
misconceived, misplaced and contrary to the facts and statutory
provisions of law.
2.2. That the Commissioner of Income Tax (Appeals) has failed
to appreciate that one the appellant had provided for interest on the
sums borrowed by way of purchase of raw material, it is
denominated that there was a relationship of the borrower and
lender between the parties who had supplied raw material and the
appellant and as such, interest payable on such borrowed capital
was eligible for claim of deduction under section 24(1)(vi) of the
Act.
3. That the Commissioner of Income Tax (Appeals) has
further erred both in law and on facts in confirming the
disallowances of following expenses incurred by the appellant
company in the course of business of the appellant company and
were eligible deductions under section 37(1) of the Act:
S.No. Nature of Expenditure Amount of disallownce
1. Salary 31,800/-
2. Telephone expenses 6,500/-
3. Security Expenses 24,000/-
4. Conveyance Expenses 14,610/-
5. Staff Welfare Expenses 14,780/-
6. Office Expenses 6,670/-
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3.1. That the disallowance so confirmed by the learned
Commissioner of Income Tax (Appeals) are based on mere
assumptions and presumptions and on erroneous assumption that a
part disallowance of expenditure is permissible in the hands of
accounts is not justified.
3.2. That the learned Commissioner of Income Tax (Appeals)
has failed to appreciate that once there is undisputedly business of
the appellant company, no disallowance of expenditure was
otherwise warranted and as such, conclusion is illegal, invalid and
unsustainable.
4. That the learned Commissioner of Income Tax (Appeals)
has erred both in law and on facts in levying interest under section
234B of the Act which is not leviable on the facts of the instant
case".
2. Brief facts for A.Y. 2005-06 are that assessee company had filed its
return of income declaring total income of Rs. 1,73,530/-. The AO noticed that
company had earned rental income of Rs. 19,80,000/- and business receipts of
Rs. 25,850/- and claimed expenses of Rs. 13,74,694/-. He noted from the
computation of income that property tax of Rs. 91,950/-, 30% deduction for
repai rs of Rs. 5,66,415/- and consultancy charges of Rs. 2,40,000/- had been
claimed as deduction from the rental receipts of Rs. 19,80,000/- and income
from house property had been declared at Rs. 10,81,635/-. A net business loss
of Rs. 9,08,104/- had been shown and after setting off such loss against the
income from house property, the assessee had declared a net taxable income of
Rs. 1,73,530/-.
2.1. From P&L A/c the AO noticed that assessee, inter alia, had debited
interest to parties and consultancy charges. He examined the details of interest
debited to parties aggregating to Rs. 4,63,367/-, which was as under:
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S.No. Name of parties Amount in Rs.
a. Bhatia Constructions 1,22,910/-
b. Komal Interiors 1,16,794/-
c. Natasha Furnishers, Prop. Renu Dang. 93,732/-
d. Sonali Enterprises 42,290/-
e. Super Sales (India) 87,641/-
2.2. The AO had issued notice u/s 133(6) to verify the payment of interest as
claimed by the assessee. However, notices remained uncomplied. Accordingly,
he show caused the assessee as to why this amount should not be disallowed.
The assessee in its reply, inter alia, submitted that interest paid on money
borrowed for construction of building is an allowable deduction u/s 24 of the
I.T. Act. The assessee pointed out that these parties had supplied materials and
done some work relating to the construction of building in FY 2002-03 from
which the assessee was deriving rental income. The AO again issued notice u/s
133(6), calling for details of transaction made by them with the assessee.
However, since there was no compliance from M/s Sonali Enterprises and M/s
Super Sales (India), other parties only sought time but no details were filed. The
AO denied the assessee's claim, inter alia, for the following two reasons:
"(b) When specifically asked, the assessee has submitted as an
afterthought that this amount of interest is allowable from the house
property income as the interest was paid on the credit balance of
the parties who have done construction work or supplied material
for construction. No proof was filed to show that the creditors have
done any work or supplied material to the assessee company. Even
the notices u/s 133(6) issued and served on creditors parties on the
addresses given by assessee remained uncomplied with.
(c) As per the provisions of section 24 of the IT Act 1961, a
deduction of interest paid can be claimed on borrowed capital and
not paid to the creditors.
The above discussion on the claim of the assessee put forth as an
afterthought has been made only for the sake of arguments. The fact
remains is that the interest has not been paid and it is merely
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credited in the accounts of the parties year to year. It is also
inexplicable as to how a party who has already supplied materials
or provided services has not pressed the assessee for payment and
the assessee on the other hand is debiting interest on the amount
shown as outstanding. Even the interest portion is not being paid
but merely credited in the parties' account as book entries.
2.3. Before ld. CIT(A), the assessee reiterated its submissions and further
submitted that money outstanding at the close of the year represents money
borrowed for construction of the building. The bills, confirmations of the
parties were also filed. Ld. CIT(A) observed that from the bills it was evident
that material had been supplied to the assessee which had also resulted into
construction of building and the interest was payable by the assessee to such
parties in respect of the material supplied to the assessee for the purpose of
construction of the building. He also noted that the materials were not supplied
in the assessment year under appeal but in the preceding assessment year. He
referred to the provisions of section 24(1)(iv), which reads as under:
"24. Deductions from income from house property (1) Income
chargeable under the head `Income from house property' shall,
subject to the provisions of sub-section (2), be computed after
making the following deductions, namely:-
(vi) where the property has been acquired, constructed repaired,
renewed or reconstructed with borrowed capital, the amount of any
interest payable on such capital."
2.4. He denied the assessee's claim of allowing deduction in respect of
interest payable to sundry creditors, inter alia, observing that the relationship
of a borrower and a lender did not exist. He relied on the decision in the case of
Dundoo Madan Mohan Rao Vs. CIT (1978) Tax LR 394 (A) and has pointed
out as under in regard to this decision:
"In the said case, the assessee was a common partner in two firms,
namely (i) Pentagon Firm and (ii) Pentaiah Firm. The assessee had
purchased a house property belonging to Pentagon Firm for a sum
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of Rs. 2,00,000/-. Over and above this, the assessee had also
undertaken to pay a sum of Rs. 1,45,000/- to one of the creditors of
the said firm. The assessee claimed deduction under section
24(1)(vi) in respect of interest paid by him to the said creditor. It
was held that there was no nexus or connection between the
purchase consideration of Rs. 2,00,000/- and the undertaking given
by the assessee to pay Rs. 1,45,000/-. Thus, it could not be said that
this amount of Rs. 1,45,000/- was borrowed towards purchase of
property. Therefore, it was held that section 24(1)(vi) has no
application to the facts and circumstances of the case."
2.5. Aggrieved, assessee is in appeal before us
3. We have considered the submissions of both the parties and have perused
the record of the case. The short point for consideration is whether the interest
credited to sundry creditor's account par takes the character of interest payable
as contemplated u/s 24(b) or not. It cannot be denied that for the relationship of
lender (creditor) and borrower (assessee), it is not necessary that there should be
actual flow of money between lender and borrower, but the borrowing can take
place in different forms also. The true nature of relationship has to be
considered and no restrictive meaning can be assigned to the term "borrowed
capital" in section 24(b). If there is direct nexus between the interest payment
and construction of property, which in the present case is through creditors,
because they had supplied material for construction, then the said interest would
come within the ambit of section 24(b). As far as reliance on the judgment in
Dundoo Madan Mohan Rao (supra) is concerned, we are of the opinion that the
said decision is not at all applicable to the facts of the present case because there
was no nexus or connection between the purchase consideration of Rs. 2 lacs
and the undertaking given by the assessee to pay Rs. 1,45,000/-. In the present
case the assessee's claim is that interest is payable to sundry creditors.
Therefore, in principle we agree with the assessee that interest payable to
sundry creditors, who supplied material for construction of the property, is an
allowable deduction u/s 24(b).
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4. From our earlier discussion of the assessment order, it is evident that
assessee has not been able to substantiate its claim regarding supply of material
by alleged creditors, inasmuch as the AO, inter alia, observed that the interest
had not been paid and it was merely credited in the accounts of the parties year
after year. Therefore, we restore the matter to the file of AO for verification of
bills, confirmation of parties etc. which were filed before ld. CIT(A) and also to
verify whether the payment of interest had been made to parties in subsequent
years or not, as claimed by assessee.
5. Apropos ground nos. 3, 3.1 & 3.2, facts in brief, are that AO had
disallowed various expenses claimed by the assessee u/s 37(1) of the
Act. In appeal, ld. CIT(A), inter alia, observing that assessee had not
been able to fully establish the facts necessary to support its claim for
deduction u/s 37(1) to the complete extent of 100%, restricted the
disallowance to the extent of 10% out of salary claimed to have been
paid to the employees. Ld. CIT(A) further restricted disallowance, and
on estimate basis, to Rs. 6,500/- as against 11,500/- on account of
telephone expenses; Rs. 24,000/- as against 54,000/- on account of
security expenses; Rs. 14,610/- as against 24,610/- on account of
conveyance expenses; Rs. 14,780/- as against 19,780/- on account of
staff welfare expenses; and Rs. 6,670/- as against Rs. 12,670/- on
account of office expenses. Having heard both the parties, we see no
reason to interfere in the conclusion arrived at by the ld. CIT(A) on these
counts. Accordingly, grounds of appeal nos. 3, 3.1 and 3.2 stand
dismissed.
6. Apropos charging of interest u/s 234B raised in ground no. 4, the
same is consequential. Ld. AO shall recalculate the charging of interest
u/s 234B, if any, while giving effect to appellate order.
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7. In the result, assessee's appeal is partly allowed statistical
purpose.
ITA no. 3473/Del/2010 (A.Y. 2007-08):
"1. That on facts and in law the orders passed by the A.O. and
partly confirmed by the Commissioner of Income Tax (Appeals)
(hereinafter referred to as "CIT(A)") are bad in law and void ab
initio.
2. That the Commissioner of Income Tax (Appeals) has erred
both in law and on facts in confirming the disallowances of
following expenses incurred by the appellant company in the course
of business of the appellant company and were eligible deductions
under section 37(1) of the Act:
S.No. Nature of Expenditure Amount of disallowance
1. Salary Exp. 37,200/-
2. Security Expenses 22,000/-
3. Professional Charges 10,000/-
4. Travelling Expenses 50,000/-
Total 1,19,200
2.1. That the disallowance so confirmed by the learned
Commissioner of Income Tax (Appeals) are based on mere
assumptions and presumptions and on erroneous assumption that a
part disallowance of expenditure is permissible in the hands of
accounts is not justified.
2.2. That the learned Commissioner of Income Tax (Appeals)
has failed to appreciate that once there is undisputedly business of
the appellant company, no disallowance of expenditure was
otherwise warranted and as such, conclusion is illegal, invalid and
unsustainable.
3. That the learned Commissioner of Income Tax (Appeals)
has erred both in law and on facts in levying interest under section
234B of the Act which is not leviable on the facts of the instant
case".
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8. Ground no. 1 is general in nature and requires no adjudication.
9. Apropos ground no. 2, 2.1 & 2.2, facts in brief, are that AO had
disallowed various expenses claimed by the assessee u/s 37(1) of the
Act. In appeal, ld. CIT(A), inter alia, observing that assessee had not
been able to fully establish the facts necessary to support its claim for
deduction u/s 37(1) to the complete extent of 100%, restricted the
disallowance to the extent of 10% out of salary claimed to have been
paid to the employees.
9.1. Ld. CIT(A) ,further restricted disallowance, on estimate basis, to
Rs. 22,000/- as against 66,000/- on account of security expenses.
9.2. Ld. CIT(A) confirmed the action of AO in disallowing Rs.
10,000/- on account of professional charges by observing that assessee
could not be able to prove its claim for deduction u/s 37(1) by adducing
supporting evidence.
9.3. Ld. CIT (A) restricted the disallowance to the extent of 50%
amounting to Rs. 50,000/- as against Rs. 1,00,000/- disallowed by AO.
9.4. Having heard both the parties, we find that in arriving at its
conclusion the ld. CIT(A) has properly taken into consideration the facts
and circumstances of the case. We see no reason to interfere in the order
of ld. CIT(A) on these counts. Accordingly, grounds of appeal nos. 2,
2.1 and 2.2 stand dismissed.
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10. Charging of interest u/s 234B is consequential. The ld. AO shall
recalculate the charging of interest u/s 234B, if any, while giving effect
to appellate order.
11. In the result, assessee's appeal for A.Y. 2007-08 is dismissed.
12. In the result, ITA no. 1824/Del/2010 is allowed for statistical purposes
and ITA no. 3473/Del/2010 stands dismissed.
Order pronounced in open court on 31-10-2014.
Sd/- Sd/-
( A.T. VARKEY ) ( S.V. MEHROTRA )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 31-10-2014.
MP
Copy to :
1. Assessee
2. AO
3. CIT
4. CIT(A)
5. DR
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