Anurag Birla, New Delhi vs Assessee

Anurag Birla Addl. CIT,Range-24, C/O, M/S RRA Taxindia,D-28, New Delhi South Extenson, Part-1 Vs. New Delhi Pan No-AADPB3556B ITA No.2380/Del/2012 (Assessment Year: 2008-09)

Addl. CIT,Range-24, Anurag Birla New Delhi C/O, M/S RRA Vs. Taxindia,D-28, South Extenson, Part-1 New Delhi Pan No-AADPB3556B Appellant by : Sh Rakesh Gupta, Adv, A.K. Aggarwal CA Respondent by : Sh B.R.R. Kumar, Sr. DR

Date of Hearing 22.04.2015 Date of pronouncement 30 .06.2015 ORDER

PER A. T. VARKEY, JUDICIAL MEMBER

These are cross appeals preferred by assessee and revenue arising from the order of CIT(Appeals) XXIII, New Delhi dated 31.1.2012 and relate to Assessment year 2008-09.

2 The grounds raised by assessee are as under:

"1 That having regard to the facts and circumstances of the case ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs. 27,85,968/- fully as made by ld. AO u/s 36(i)(iii) on account of interest payment and has further erred in directing the assessing officer to re- compute the disallowance of interest expenses on Rs. 68,00,000/- and has further erred in treated the interest amount as „capital expenditure‟ instead of „revenue expenditure‟ and the impugned addition has been made without appreciating the facts and circumstances of the case and by recording incorrect facts and findings.

Page 2 of 10 2 That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in confirming the action of ld. AO in making adhoc disallowance of Rs. 1,30,152/- (i.e. 10% of 13,01,525/-) on account of vehicle running and maintenance, interest on car loan and car depreciation by treating it as personal in nature.

3 That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in confirming the action of ld. AO in making adhoc disallowance of Rs. 65,909/- on account of telephone and telex charges.

4 That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs. 3,64,409/- fully as made by ld. AO on account of electricity and water charges and has further erred in sustaining the disallowance of Rs. 3,54,303/- under the said head and that too without appreciating the facts and circumstances of the case.

5 That in any case and in any view of the matter action of ld. CIT(A) in not reversing the action of ld. AO in making the impugned disallowances and framing the impugned assessment order, as the same is not sustainable on various legal and factual grounds and more so as the same has been passed by recording incorrect facts and finding and without giving adequate opportunity of hearing to the assessee."

3 The grounds raised by revenue are as under:

"1 On the facts and on the circumstances of the case the ld. CIT(A) has erred in allowing the interest ignoring these facts that both the assets were not put to use as required as per provisions of section 36(1)(iii) of the Act. 2 On the facts and on the circumstances of the case the ld. CIT(A) has erred in holding that the loans were not entirely availed for acquisition of assets.

3 On the facts and on the circumstances of the case the ld. CIT(A) has erred in admitting the addition evidences under Rule 46A of the. T. I. Rule, 1962 without providing opportunity to the AO as required under sub Rule 3 of Rule 46A.

4 On the facts and on the circumstances of the case the ld. CIT(A) has erred in holding that payment of interest/penalty is not penal in nature and allowing the interest penalty amounting to Rs. 12,97,627/- paid on service tax."

4 Ground No. 2 to 5 raised by the assessee were not pressed during the course of hearing and are therefore dismissed.

5 Ground No. 1 of assessee's appeal and Ground No(s) 1 to 2 of departmental appeal relate to disallowance of Rs. 27,85,968/- u/s 36(1)(iii) of the Act. The facts in brief are that assessee had debited to the profit Page 3 of 10

and loss account interest expenses of Rs. 40,64,973/- which included the interest payment of Rs. 12,95,595/- and Rs. 14,90,373/- paid to HDFC Bank. 6 The AO has noted that assessee contended that interest of Rs. 12,95,595/- and 14,90,373/- were paid in respect of commercial space at Saket and Grand Mall Gurgaon, which were purchased in view of sealing drive by M.C.D in Delhi as assessee was operating from Basement at C-37, Hauz Khas Enclave, New Delhi. The AO directed the assessee to state as to whether the property at Saket is now being used by the assessee for his business and in response thereto it was submitted that the same has not yet been occupied and till date the business is operating from C-37, Hauz Khas Enclave, New Delhi only. Having regard to the above the AO disallowed claim of interest of Rs. 27,85,968/- by holding as under:

"It is important to note that the asessee is associated with/interest in several companies/firms that are carrying out diverse business. The property at Gurgaon is used by another concern as discussed above. Similarly, the property at Saket cannot be stated to be used for assessee‟s business because till date it has not been used so and the assessee‟s claim cannot rest on uncertain future use. Further without prejudice to the above factual position, the legal position even if we assume the above properties to be the capital assets of the assessee is that such interest would not be allowable. In CIT vs. Sharpedge Ltd. 249 ITR 319, Delhi High Court ruled that interest on borrowing for acquiring capital asset was not a deductible revenue expense but was a capital expense. The Finance Act, 2003 also inserted a provision to section 36(i)(iii) which clarifies that interest paid on capital borrowed for acquisition of capital asset will not be allowable as deduction till the date the assessee is first put to use for business. Thus, it is clear that the assessee has failed to establish any connection between the business of the assessee and the above interest payments. Accordingly, the amount of Rs. 27,85,968/- on property loan payments is hereby disallowed and added to the total income of the assessee."

7 During the appeal proceedings it was submitted that assessee obtained a business loan of Rs. 1,25,00,000/- from HDFC Bank by offering collateral security of commercial property at DLF South Court Saket. It was further submitted that loan was received in Centurion Bank of Punjab A/c No. 113804000000940 on 5th May 2007 and the said loan was utilized by the assessee for its business purposes and assessee paid a sum of Rs. 22,61,250/- from its own sources from ABN AMRO Bank A/c No. 817903 to DLF Services Limited during the year for acquiring the aforesaid property.

Page 4 of 10 It was thus contended that borrowed funds have not been utilized for acquiring the property and entire interest payment is revenue expenditure. It was further submitted that as regards disallowance of a sum of Rs. 14,90,373/- that assessee purchased commercial shop No. GS 0122 First Floor DLF Grand Mall Gurgaon vide agreement dated 4.12.2006 at a total consideration of Rs. 1,41,25,000/-. It was submitted that the assessee raised a loan of Rs. 1,25,00,000/- from HDFC Bank for purchasing the said property. The total interest payment during the year against the said loan was Rs. 14,90,373/- which has been disallowed by the AO. It was further submitted that provision to section 36(i)(iii) of the income tax is attracted only in cases of acquisition of asset. It was submitted that in the instant case the interest payment were made post acquisition of the asset and, since the property was purchased in December 2006 therefore the interest payment amounting to Rs. 14,90,373/- deserves to be allowed as revenue expenditure .It was further submitted that the assessee was carrying out its business activities from C-37 basement Hauz Khas New Delhi and the commercial space at DLF Grand Mall was purchased as a ready to move alternate office space in view of the sealing drive of offices located in basement of residential colonies in Delhi by MCD. It was stated that part of the office space at DLF Grand Mall was also being used by M/s Origin Overseas (a sister concern of the assessee), which does not deprive the assessee from claiming the interest payments made on borrowed capital. It was submitted that expenses incurred are not personal in nature and have been incurred wholly and exclusively for the purpose of business.

8 The CIT(A) on examination of the above submission has held as under:

"4 I have carefully considered the appellant‟s various submissions. The first grievance of the appellant pertains the disallowance of interest expenses on the grounds that the loans were availed for purchase of property. The appellant contends that the commercial loans have been availed by offering collateral security of commercial properties purchased, but the loans have not been obtained for purchase of the property. A loan of Rs. 1,25,00,000/- is seen to be sanctioned on 5.5.2007 by the Centurion Bank against the property at 141, First Page 5 of 10

Floor, DLF South Court Yard, Saket, which amount was credited to the appellant‟s overdraft account on the same date. Copy of the said bank account submitted by the appellant shows that there are no payments from the said account towards the purchase of the property. Total payments in a current year of Rs. 22,61,250/- made towards the purchases are from the appellant‟s current account with ABN AMRO Bank, and there is no utilization of the loan of Rs. 1,25,00,000/- towards these payments. Hence, the payment of interest of Rs. 12,95,595/- on the loan account no. HCPL60110000416628 cannot be held to pertain to the purchase of office space at South Courtyard Saket. Thus while the said office space has not been proved to have been put to use for the business of the appellant either in the year under consideration, or in any later year, the disallowance of interest of Rs. 12,95,595/- on the loan availed on mortgage of this property cannot be upheld as the appellant has not utilized the interest bearing funds for its purchase.

4.1 However, the second loan account at No. HCPL 60110000175849, also of Rs. 1,25,00,000/- was sanctioned on 4.12.2006 by offering the security of shop No. GS 0122, First Floor, DLF Grand Mall, Gurgaon. The appellant has argued that the property was purchased vide agreement dated 4.12.2006 and the proviso to section 36(1)(iii) is attracted only where interest payment on borrowed capital pertains to the period prior to acquisition of asset. However on verification of the details of payment for this property, it was seen that purchase of the shop and sanction of loan has taken place at the same time. In the written submission dated 24.1.2012, it is conceded that Rs. 68,00,000/- out of the loan amount of Rs. 1,25,00,000/- has been utilized for purchase of the said asset for Rs. 1,41,25,000-. Hence, the issue at hand is not whether the interest pertained to the period prior to putting the asset to use, but whether the loan amount was utilized for purchase of the asset. It is evident that the interest payment does pertain partly to the purchase of the commercial property. As clearly brought out by the assessing officer, the shop at DLF Grand Mall Gurgaon, is not used by the appellant for the purposes of his business, even till date. The appellant has furnished no evidence whatsoever to prove that the premises are used for the business from which income is disclosed by him. It is also relevant that the balance sheet of the appellant shows as WDV as on 31.3.2008 of only Rs. 28,70,825/- for „shop at Gurgaon‟ but no claim of depreciation. Moreover, the shop is admitted to be used by M/s Origin Overseas, a sister concern. An internet search showed that the property is presently listed as the branch office of „Queens Furniture‟ and „Affaire‟ with the contact number of M/s Shikha Birla, spouse of the appellant. Hence, the action of the AO in disallowing the interest expenses pertaining to acquisition of the shop, which is not used for the purposes of business is justified. However, the Assessing Officer is directed to re-compute the disallowance of interest expenses to the extent relatable to the utilization of interest bearing funds for the purchase i.e. Rs. 68,00,000/- out of the total loan of Rs. 1,25,00,000/-. Hence the appellant gets partial relief on this Ground of Appeal."

9 Before us the learned counsel for the assessee contended that the CIT(A) has deleted the interest of Rs. 12,95,595/- yet he was incorrect in upholding disallowance of Rs. 14,90,373/- on the ground that interest has been paid for purchase of commercial property which have not been Page 6 of 10

used for the purpose of business. It was submitted that the property was purchased as ready to move alternative space and therefore in view of the judgment of the Hon'ble Delhi High Court in the case of Capital Bus Service P. Ltd. vs CIT 123 ITR 404 disallowance made is untenable. On the other hand the learned DR supported the finding of the CIT(A) viz-a-viz the disallowance of interest of Rs. 14,90,373/- and further contended that CIT(A) has erred in allowing the interest ignoring the fact that both the assets were not put to use as required as per provisions of section 36(1)(iii) of the Act.

10 We have considered the rival submissions and perused the material on record. The issue of disallowance of interest comprises of Rs. 12,95,595/- and Rs. 14,90,373/- paid to HDFC Bank. As regards interest paid of Rs. 12,95,595/- to HDFC Bank, the conclusion of the CIT(A) is that borrowings raised on which interest has been paid of Rs. 12,95,595/- from Centurion Bank of Punjab has not been utilized for purchase of property. On the contrary the conclusion is that such borrowings have been utilized for the purpose of business. This factual finding has not been shown to be contrary to evidence on record by the ld. DR in the course of hearing. In such circumstances once admittedly borrowings have been used for the purpose of business and interest has been paid on such borrowing then such interest is eligible for deduction u/s 36(1)(iii) of the Act. The contention of the ld. DR that asset were not put to use i.e. namely the property at 141, First Floor, DLF South Court Yard, Saket was not put to use is an irrelevant consideration. The issue is confined to use of the borrowed funds which have been held to have been used for business then such interest undeniably has to be allowed as deduction. We therefore decline to interfere in the conclusion of the CIT(A) that the disallowance of interest of Rs. 12,95,595/- on the loan availed on mortgage of this property cannot be upheld as the appellant has not utilized the interest bearing funds for purchase of property. As regards interest of Rs. 14,90,373/- it is undisputed that out of the borrowed of Rs. 1,25,00,000/- sum of Rs. 68,00,000/- was utilized for purchase of shop No. GS 0122, First Page 7 of 10

Floor, DLF Grand Mall, Gurgaon. It is also not denied that the property has not been actually used for the purpose of the assessee. All what has been contended is that it is kept as an alternative premise in view of the ceiling drive of residential premises by MCD at Delhi. No evidence has been led to support the aforesaid claim of the appellant. Mere assertion unsupported by any evidence cannot be accepted. On the contrary it has been found as a matter of fact that the said premises is used by M/s Origin Overseas, a sister concern and an internet search showed that the property is presently listed as the branch office of 'Queens Furniture' and 'Affaire' with the contact number of M/s Shikha Birla, spouse of the appellant. In such circumstances we are unable to accept the claim of assessee that property was an alternative premise. However, since the amount utilized for the purchase of property was Rs. 68,00,000/- therefore the CIT(A) was justified to direct the AO to re-compute the disallowance of interest expenses to the extent relatable to the utilization of interest bearing funds for the purchases of property i.e. Rs. 68,00,000/- out of total loan of Rs. 1,25,00,000/- . In light of the above, we uphold the conclusion of the CIT(A) as to deletion of disallowance of Rs. 12,95,595/- and direction to re-compute the disallowance of Rs. 14,90,373/- to the extent relatable to amount invested in the property. Thus Grounds raised by assessee and revenue are rejected.

11 Ground No. 3 and 4 of departmental appeal relate to deletion of disallowance of Rs. 12,97,636/- being interest on service tax and contended to be penal in nature and therefore not allowable. 12 The CIT(A) noted that AO had disallowed sum of Rs. 55,14,034/- as being service tax penalty. However the assessee pointed out that it had made service tax payments on 30.4.2008 amounting to Rs. 55,14,034/- alongwith which interest payment amounting to Rs. 12,97,627/-. It was further submitted that payment of Rs. 12,97,627/- made by the assessee were towards interest charges and not towards penalty charges. It was stated that payments made against challan code of 0104440190 and Page 8 of 10

00440064 were towards other receipts being interest charges and copy of challans alongwith notification were furnished. Further vide order sheet entry dated 13.6.2011 the CIT(A) directed the assessee to furnish evidence that the service tax interest of Rs 12,97,627/- was not penal in nature and in response thereof on 17.6.2011 it was submitted that there are separate sections under the service tax for levying of interest and for imposing penalties. It was submitted that section 75 of the Service Tax Act governs the provisions regarding interest on delayed payments and whereas section 76 to section 80 of the Act deals with imposition of penalties. It was further submitted that section 75 states that any person who is liable to pay service tax, fails to pay the tax within the specified period has to pay simple interest at such rate not below 10% and not exceeding thirty six percent per annum for the delayed period. Since the assessee did not make the service tax payments on time, therefore interest had to be paid at the prescribed rates. It was submitted that no show-cause notice has ever been/issued served on the assessee for levying penalty. In light of the above contention the CIT(A) deleted the disallowance by holding as under:

"At ground no. 7 the appellant has contested that the disallowance of service tax penalty of Rs. 55,14,034/-. The appellant has furnished the copies of challans to show that the payment of Rs. 55,14,034/- pertained to service tax, and only an amount of Rs. 12,97,627/- was paid towards interest, which was not penal in nature. The challans show that no amount of penalty has been affirming that no penalty under the Service Tax Act has been initiated or imposed upon him. After verifying all these facts, the addition made of Rs. 55,14,034/- is found to be without any basis, and is deleted."

13 Having regard to considered the rival submission, we are of the considered opinion that it is well settled law that the interest is compensatory and not penalty. The Hon'ble Apex Court in the case of Mahalakshmi Sugar Mills Co. v CIT 123 ITR 429 has held as under:

"We have been referred by the revenue to Mahabir Sugar Mills (P.) Ltd. vs Commissioner of Income-tax (1969) 71 Itr 87 (All) and Commissioner of Income- tax vs A.K. Das (1970) 77 Itr 31 (Cal), but in those two cases the Allahabad High Court and the Calcutta High Court respectively were concerned with a claim to deduction on account of penalty paid under s. 3(5) of the Cess Act. Reliance was also placed on Commissioner of Income-tax vs Oriental Carpet Manufacturers Page 9 of 10

(India) P. Ltd. (1973) 90 ITR 373. In that case, the High Court of Punjab and Haryana laid down that interest paid by an assessee on account of delay in payment of the provisional demand of tax is not a permissible deduction under s.

36(1)(iii) and s. 37 of the I. T. Act. The learned judges observed that the liability to tax, although arising out of a business activity, could not be said to be a liability related to the assessees' business. It is not necessary for us to express any opinion on the decision. The case is distinguishable because we are concerned with a particular statutory scheme enacted in ss. 3 and 4 of the Cess Act before us. Our attention has also been invited to Saraya Sugar Mills (P.) Ltd. vs Commissioner of Income-tax (1979) 116 Itr 387, where a Full Bench of the Allahabad High Court has held that the payment of interest under s. 3(3) of the U. P. Sugarcane Purchase Tax Act, 1961, is a penal liability which accrues on an infraction of the law. Section 3(3) of the U. P. Sugarcane Purchase Tax Act, 1961, does seem to be in pari materia with s. 3(3) of the Cess Act. But we think we should resist the blandishment to sit in judgment over that decision when it is not in appeal before us. We are concerned solely with the nature of the liability to pay interest under s. 3(3) of the Cess Act. A court should be slow to succumb to the temptation of deciding questions on the construction of a statute not directly before it.

In our opinion, the interest paid under s. 3(3) of the Cess Act cannot be described as a penalty paid for an infringement of the law. As that is the only ground on which the revenue resist the claim of the assessee to a deduction of the interest under s. 10(2)(xv) of the Indian I. T. Act, 1922, the assessee is entitled to succeed. There is no dispute that the payment of interest represents expenditure laid out wholly or exclusively for the purpose of the business. There is also no dispute that it is in the nature of revenue expenditure."

14 Respectfully following the said judgment we uphold the order of CIT(A) and rejected the grounds raised by the revenue. 15 We also hold that no additional evidence has been pointed out to us which has been admitted and considered without opportunity to the AO and as such even the specific ground of admission of additional evidence is untenable. The grounds raised by the revenue are thus dismissed

16. In the result, assessee and departmental appeals are dismissed.

Order pronounced in the open court on 30.06.2015.

-Sd/- -Sd/- (N.K.SAINI) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 30/06/2015 *A K Keot (D.O.C) Copy forwarded to Page 10 of 10

1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi