The order of the Bench was delivered by
B. Ramakotaiah (Accountant Member)- This is an appeal filed by the assessee for the assessment year 2006-07 against the order of the Commissioner of Income-tax (Appeals)-IV, Hyderabad dated February 3, 2010. The assessee has raised various grounds, which are being decided after hearing both the parties.
2. Briefly stated, the assessee is a private limited company engaged in the business of manufacture of CI castings and the company for the assessment year 2006-07 filed its return of income on November 30, 2006 admitting an income of Rs. 47,21,234 from the business and capital gains of Rs. 12,96,230. The Assessing Officer while completing the assessment under section 143(3) on December 30, 2008 has made various disallowances, which the learned Commissioner of Income-tax (Appeals) confirmed, except the claim of excess depreciation which was given relief and on which the Revenue is not an appeal. Aggrieved on the order of the learned Commissioner of Income-tax (Appeals), the assessee is in appeal before us.
3. Ground No. 1 is as under :
"1. The Commissioner of Income-tax (Appeals) erred in law and facts of the case in confirming the addition of Rs. 58,714 by the Assessing Officer under section 40A(3) of the Income-tax Act, 1961, ignoring the fact that they are independent payments supported by vouchers and cannot be aggregated."
3.1 The issue pertaining to this ground is that the Assessing Officer noticed from the books of account that the assessee made payments on various dates in cash exceeding Rs. 20,000 each amounting to Rs. 2,93,569 and 20 per cent. thereof was disallowed invoking the provisions of section 40A(3).
3.2 Before learned Commissioner of Income-tax (Appeals), the asses see contested that there is no single payment in excess of Rs. 20,000 and the amounts were paid at different times in the day, which would not attract the provisions of section 40A(3) of the Income-tax Act. Copy of the cash book furnished in support of the claim.
3.3 The learned Commissioner of Income-tax (Appeals) while accepting that the payments have been made on several occasions on a day, the contentions of the assessee have not accepted that the assessee has not substantiated that the amounts were paid at different times and therefore would attract the provisions of section 40A(3) of the Income-tax Act, accordingly confirmed the disallowance made.
3.4 Referring to the findings of the learned Commissioner of Income- tax (Appeals), the learned counsel admitted that the payments were made at different points of time and it is less than Rs. 20,000 per payment. He referred to the provisions of section 40A(3) of the Income-tax Act to submit that the section was amended with effect from April 1, 2008 so as to consider the aggregate payments in a day and the same was not applicable for the impugned assessment year.
3.5 After considering the rival contentions, we are in agreement with the contentions of the assessee's counsel. The provisions of section 40A(3) of the Income-tax Act before its amendment by the Finance Act, 2008, is as under :
"40A.(3) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 20,000 otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure."
There is a finding both by the Assessing Officer and by the Commissioner of Income-tax (Appeals) that each of the payment is less than Rs. 20,000. The contentions of the Assessing Officer and the Commissioner of Income-tax (Appeals) the payments in a day have exceeded Rs. 20,000 does not apply to the impugned assessment year as the new provision has come into effect with effect from April 1, 2008. The amended provision is as under :
"Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds Rs. 20,000, no deduction shall be allowed in respect of such expenditure."
Thus, the aggregate of payments in a day would apply from the assessment year 2009-10 only, and not applicable for the impugned assessment year. Since each of the payment is less than Rs. 20,000, even if it is paid to the same person in a day, the same cannot be disallowed as the provisions of section 40A(3) of the Income-tax Act as applicable are not attracted. Accordingly, the disallowances made by Assessing Officer, as confirmed by the Commissioner of Income-tax (Appeals), stands deleted. The ground is allowed.
4. Ground No. 2 is as under :
"2. The Commissioner of Income-tax (Appeals) ought to have deleted the addition under section 40(a)(ia) of the Income-tax Act, 1961 amounting to Rs. 1,78,280 considering the fact that TDS has been deducted and paid."
4.1 The issue pertains to the disallowance of an amount of Rs. 1,78,280 invoking the provisions of section 40A(3) of the Income-tax Act. The Assessing Officer noticed that in the five cases of contractors, TDS has been charged to the respective accounts and later Rs. 50,620 was written off. The Assessing Officer noted that the assessee had paid/credited various accounts to the contractors without deducting TDS. However, the assessee submitted that tax on contract amounts have been paid to the Government and expenditure has been incurred by the company itself. The Assessing Officer invoking the provisions of section 195A of the Income-tax Act grossed up the amount and disallowed an amount Rs. 1,78,280.
4.2 The learned Commissioner of Income-tax (Appeals) after examining the contentions of the assessee, directed the Assessing Officer to verify that only an amount of Rs. 50,620 has been paid by the assessee and to recompute the amount disallowable under section 40(a)(ia) of the Income-tax Act.
4.3 After considering the rival contentions and directions of the Commissioner of Income-tax (Appeals), we are of the opinion that the amount mentioned in the ground is not correct as the Commissioner of Income-tax (Appeals) has partly allowed the amount and directed the Assessing Officer to verify the amount of Rs. 50,620, accordingly the ground to an extent of Rs. 1,78,280 does not arise. We were informed that the Assessing Officer has not given consequential effect to the order of the Commissioner of Income-tax (Appeals). It was submitted that there is no outstanding amount at the end of the year and hence the provisions of section 40(a)(ia) does not apply, in view of the Special Bench decision of the Income-tax Appellate Tribunal Vizag Bench in the case of Merilyn Shipping and Transports v. Addl. CIT [2012] 16 ITR (Trib) 1 (Vizag). While agreeing with the order of the Commissioner of Income-tax (Appeals) to verify the contention, we are of the opinion that the provisions of section 40(a)(ia) cannot be invoked on this fact. In case the assessee has paid the TDS on behalf of the contractors and written off the amount to an extent of Rs. 50,620, the same cannot be allowed as business expenditure under section 37(1) of the Income-tax Act. The provisions of section 195A of the Income-tax Act and the provisions of section 201 and 201(1A) of the Income-tax Act may apply but not the provisions of section 40(a)(ia) of the Income-tax Act. In these circumstances, the Assessing Officer is directed to examine the issue afresh and examine whether the provisions of section 37 would apply. The ground is considered allowed for statistical purposes.
5. Ground No. 3 is as under :
"3. The Commissioner of Income-tax (Appeals) ought to have deleted the addition of Rs. 15,800 under section 40(a)(ia) as reported in the tax audit on considering the fact that TDS has been paid."
5.1 The issue arising out of this ground was that an amount of Rs. 15,800 has been paid without deducting tax. The assessee submitted that the TDS has been deducted on the said payment and the amount has already remitted to the Government account. Even though the same was reiterated before the learned Commissioner of Income-tax (Appeals), the learned Commissioner of Income-tax (Appeals) rejected the ground that the assessee has not preferred the ground nor substantiated the contentions made in the statements of facts.
5.2 After consider the rival contentions, we are of the opinion that the disallowance is not warranted. The assessee has not violated the provisions of section 40(a)(ia) of the Income-tax Act as the TDS has been deducted and paid to the Government. Moreover the amount is also not outstanding at the end of the year. In view of that, we direct the Assessing Officer to delete the amount and the ground is accordingly allowed.
6. Ground Nos. 4 and 5 are as under :
"4. The Commissioner of Income-tax (Appeals) ought to have considered that fact that rent paid of Rs. 8,10,000 for the managing director's residence is in the course of business and exclusively for the purpose of business of the company and allowed the same on the ratio of the decision of the hon'ble Supreme Court in the case of Upper India Publishing House P. Ltd. v. CIT [1979] 117 ITR 569 (SC) and also that in the case of D. C. Gandhi Associates v. ITO [1990] 32 ITD 285 (Ahd).
5. The Commissioner of Income-tax (Appeals) erred in law and facts of the case in not allowing the expenditure incurred in the course of business and exclusively for the purpose of business on the ground that this payment of rent is not reflected in form 12BA. Your appellant prays that the addition of Rs. 8,10,000 may be deleted."
6.1 The grounds pertain to the issue of disallowance under section 40A of the Income-tax Act. Brief facts of the issues are that the assessee claimed an amount of Rs. 8,10,000 as an expenditure. The Assessing Officer disallowed the same invoking the provisions of section 40A of the Income- tax Act holding that the expenditure is not relatable to the business and was given as the benefit to the director.
6.2 The assessee contended the matter before the learned Commissioner of Income-tax (Appeals) that the above amount was paid as rent to two owners, the director Shri C. V. Anand Reddy having 40 per cent. of the share and Smt. C. Veena Reddy having 60 per cent. share and the house was given for the purpose of residence of the director as per the terms of employment. It was submitted that the provisions of section 40A of the Income-tax Act do not apply. Further it was contended that there is no finding by the Assessing Officer about unreasonableness of such payment. The assessee referred to various case law as discussed by the learned Commissioner of Income-tax in paragraph 10.2. However the learned Commissioner of Income-tax (Appeals) did not agree as the rent paid on behalf of the director was not reflected in form No. 12BA, therefore the expenditure is not proved and the disallowance made by the Assessing Officer was confirmed in order.
6.3 Referring to the paper book placed on record, it was the submission of the learned counsel that both Shri C. V. Anand Reddy and Smt. C. Veena Reddy have declared these amounts as income in their hands and it is the obligation of the company to provide the residence to the director. Coming to the issue of not reflecting the same in the hands of the director, it was placed on record the working of perquisites in the hands of the managing director, which comes to taxable rent-free accommodation value at Rs. 1,26,750. It was submitted that in the computation of income by that assessee even though this amount was not taken separately, there was excess income offered. The learned counsel referred to the return filed at Rs. 13,28,963 whereas the revised computation of the director would come to Rs. 11,62,590. It was submitted that the expenditure was for the purpose of business and allowable in the hands of the company.
6.4 After considering the rival contentions, we are of the opinion that the provision of rent-free accommodation to the director is generally provided by the company. However, the assessee has not placed on record the terms of employment or the resolution passed with reference to the provision of accommodation to the managing director. Not only that the Assessing Officer has invoked the provision of section 40A of the Income- tax Act, however, there is no finding of the Assessing Officer that the amount was unreasonable. In these circumstances the disallowance cannot be either deleted or sustained in the absence of complete details. It is a fact that the respective recipients have declared the income. It is also the fact that the director has not shown its value in the computation of income nor the company included in Form No. 16 given to the director. In these circumstances, we are of the opinion that the same is required to be re- examined (1) with reference to the agreement or resolution for providing the rent free accommodation to the director. (2) Whether the same accommodation was provided in the earlier years and later years (3) Whether the rent paid is reasonable or not and (4) Whether the value of perquisites in the hands of the director required to be brought to tax separately, keeping in mind that computations provided by the assessee in the paper book. In order to examine these issues, we hereby set aside the entire issue to the file of the Assessing Officer to be re-examined and determined according to the provisions of the Act. The assessee should be given due opportunity to place the necessary evidence on record justifying the claim. The ground is considered accordingly allowed for statistical purposes.
7. Ground Nos. 6, 7 and 8 are as under :
"6. Your appellant submits that the Assessing Officer erred in law and facts of the case in disallowing the proportionate interest amount to Rs. 13,32,330. Your appellant submits that it is an existing business and the capital work-in-progress related to the same business. Hence disallowance is not correct.
7. Your appellant submits that the apex court in the case of CIT v. Associated Fibre and Rubber Industries Pvt. Ltd. [1999] 236 ITR 471 (SC) squarely covers the facts of the present case and the addition should be deleted.
8. The Commissioner of Income-tax (Appeals) has ignored the fact that working capital facilities cannot be used for capital works and the alternative stand that at best the interest on the term 'loan' in proportion may be disallowed out have been considered."
7.1 The issue pertaining to these grounds are that the assessee had shown an amount of Rs. 91,63,211 as capital work-in-progress. Since the assessee availed of loans of Rs. 2.59 crores and debited the interest and financial charges of Rs. 37,70,628, the Assessing Officer disallowed proportionate rate of interest on the amount attributable to capital work- in-progress to an extent of Rs. 13,32,330.
7.2 The assessee contended before the learned Commissioner of Income-tax (Appeals) that the amount is allowable as a revenue expenditure, the following principles laid down by the hon'ble Supreme Court in the case of CIT v. Associated Fibre and Rubber Industries Pvt. Ltd. [1999] 236 ITR 471 (SC). The learned Commissioner of Income-tax (Appeals) however distinguished the said judgment as it pertains to the assessment year 1972-73. He also referred to the judgment of the hon'ble Supreme Court in the case of Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC) and stated that the proviso inserted in section 36(1)(iii) of the Income-tax Act with effect from April 1, 2004 will operate prospectively and accordingly the proportionate disallowance was required to be capitalised.
7.3 The learned counsel while reiterating the submissions made before the Commissioner of Income-tax (Appeals), referred to the judgment of the hon'ble Delhi High Court in the case of CIT v. Bharat Hotels Ltd. [2016] 381 ITR 222 (Delhi) for the proposition that in a business which is already in existence, the funds borrowed for expansion of the business is allowable as revenue expenditure. It was further submitted that the term "loan" obtained from new machinery was only Rs. 69.30 lakhs and not the entire amount which include working capital loans by hypothecation of stock. If at all a disallowance is required, it should be restricted to the term "loan" obtained for the purpose of investing in assets and not on the working capital loans.
7.4 We have examined the rival contentions and perused the documents placed on record. The learned Commissioner of Income-tax (Appeals) rightly concluded that the principles laid down by the hon'ble Supreme Court in the case of CIT v. Associated Fibre and Rubber Indus tries Pvt. Ltd. [1999] 236 ITR 471 (SC) would not apply to the impugned assessment year as there was a change in the provisions with effect from April 1, 2004. This issue was elaborately discussed by the hon'ble Supreme Court in the case of Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC). In that case, the provision as applicable to prior to April 1, 2004 was discussed and the amounts attributable to expansion of business was allowed as revenue expenditure. However, the hon'ble Supreme Court also very categorically observed that there was an amendment to the provisions by insertion of a proviso which restricts the interest allowance on the assets which are not put to use. Since the assets in question are not yet used and are shown as capital work-in-progress, the interest attributable to borrowing of funds for purchase of such assets is not allowable deduction under section 36(1)(iii) of the Income-tax Act. However, the Assessing Officer working on a proportionate basis cannot be considered correct as working capital loans obtained by assessee-company generally will have not any bearing on the investments made for capital assets. The assessee states that the term "loan" was to the tune of Rs. 69,30,328 only. The Assessing Officer was directed to restrict the interest claim on the amounts borrowed for the purpose of capital work-in-progress.
7.5 The learned counsel relied on the recent judgment of the hon'ble Delhi High Court in the case of CIT v. Bharat Hotels Ltd. [2016] 381 ITR 222 (Delhi). Herein also the hon'ble High Court has noticed that the proviso to section 36(1)(iii) of the Income-tax Act will apply with effect from April 1, 2004 as considered by the hon'ble Supreme Court in the above referred case and allowed the expenditure for expansion of hotels in other places for the impugned year assessment year 2000-01. The said judgment will apply to the provisions prior to April 1, 2004. However, the impugned assessment year in this case is the assessment year 2006-07. Consequently the proviso inserted in section 36(1)(iii) of the Income-tax Act read with section 43(1) Explanation 8, the Assessing Officer's action is to be upheld, subject to restricting the interest to the borrowed amount of Rs. 69,30,328. Needless to say that the above interest disallowed with form part of the actual cost, as and when the said assets are put to use. With these observations and directions, the grounds are considered party allowed. The Assessing Officer is directed to rework the interest disallow able on the loans availed of for capital work-in-progress.
8. In the result, the appeal filed by the assessee is allowed for statistical purposes.
The order pronounced in the open court on 5th May, 2017