Commissioner of Income Tax vs Rose Services Apartment India P. Ltd.

This is an appeal u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as the "Act") against the judgment dated 27-7-2007, passed by the Income Tax Appellate Tribunal (hereinafter referred to as the "Tribunal") in I. T. A. No. 3249/Del/2005 in respect of the assessment year 2002-03. The revenue has proposed several substantial questions of law, none of which, according to us, arise in the instant case. The reasons for arriving at this conclusion are given hereinafter.

In order to deal with the issues raised in the appeal the following brief facts require to be noted. The Assessee which is a company was incorporated on 22-9-1994. The Assessee claimed that it was in the business of real estate and investment.

On 31-10-2002, the Assessee filed a return declaring a loss of Rs. 52,46,330. The Assessees case was picked up for scrutiny and accordingly, a notice u/s 143(2) of the Act was issued to the Assessee. In response thereto the representative of the Assessee furnished details and answered queries raised by the assessing officer.

The assessing officer after examining the details furnished by the Assessee arrived at the following conclusions on various issues resulting in several additions:

(i) the Assessee was not conducting real estate business as claimed by it. The income of the Assessee was not on account of activities in the nature of real estate business. Thus, income derived by the Assessee was liable to tax under "Income from other sources" ;

(ii) the Assessees claim in the sum of Rs. 4 lakhs on account of bad debts cannot be allowed. This claim of the Assessee arose on account of the Assessee having advanced Rs. 2.55 crores (approximately) under an agreement, to one Sh. Ved Chaudhary for purchase of land. Due to a dispute the agreement for purchase of land could not fructify. The Assessee sought refund of Rs. 2.55 crores paid to Sh. Ved Chaudhary ; whereupon the Assessee received a sum of Rs. 2.51 crores. The Assessee claimed the shortfall of Rs. 4 lakhs as a bad debt. The assessing officer disallowed it on the ground that this was a capital loss which occurred on account of the fact that Sh. Ved Chaudhary had retained the said sum as a compensation for breach of contract;

(iii) a sum of Rs. 1,01,47,264 appearing under the head "Other liabilities" for long period in the name of M/s. R. P. Malhan and Co. being in the nature of an unclaimed liability ought to be added back to the Assessees income u/s 41(1) read with Section 28 of the Act. Reliance in this regard was placed on the Supreme Court judgment in the case of Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., ; and

(iv) lastly, the Assessees claim for deduction of interest paid to the bank amounting to Rs. 69,02,336 was disallowed on the ground that the Assessee had failed to prove that the loan taken by it from the bank had been utilized for the purposes of the Assessees business.

Aggrieved by the order of the assessing officer, the Assessee preferred an appeal to the Commissioner (Appeals) (hereinafter referred to as "Commissioner (Appeals)"). The Commissioner (Appeals) reversed the findings of the assessing officer on all the four issues referred to above. The revenue being aggrieved preferred an appeal to the Tribunal. The Tribunal by the impugned judgment held as follows in respect of issues referred to in above:

As far as first issue is concerned the Tribunal came to the conclusion that in view of the fact that land and flat in issue had been purchased in the assessment year 1998-99 and the fact that since then it continued to be shown by the Assessee as stock-in-trade, then, merely by virtue of the fact that in the interregnum (i.e., the assessment year 1998-99 and the assessment year under consideration) there had been no profit or gain shown by the Assessee it could not be assumed that the Assessee had given up its business of real estate. The Tribunal observed that it was the intention of the Assessee which would matter and not the opinion of the assessing officer. The Tribunal also pointedly noted that a perusal of the assessment order would show that while computing the total income, the Assessees income is assessed under the head "Profits of business" and that though the head is not mentioned in the assessment order, various expenses have been debited to the profit and loss account apart from brought forward losses which had been claimed and allowed to be set off by the assessing officer. Taking into account all these factors the Tribunal came to the conclusion that the Assessee was carrying on a business of real estate.

As regards the second issue the Tribunal agreed with the revenue that even though a sum of Rs. 4 lakhs could not be allowed as a bad debt under the provisions of Section 36(1)(vii) of the Act since the said sum had not been taken into account in computing the income of the earlier years and hence the conditions prescribed u/s 36(2) of the Act were not fulfilled ; the said loss, however, could be treated as business loss since it was occasioned in the course of business carried on by the Assessee.

The third issue which pertained to the addition of a sum of Rs. 1,01,47,264 u/s 41(1) of the Act; the Tribunal observed that since neither the Assessee had claimed the said sum as an expenditure in the earlier years nor had the Assessee denied its liability to pay the said sum the provisions of Section 41(1) of the Act were not applicable. The Tribunal also noted that Explanation 2 to Section 41(1) was not applicable" since Assessee merely took over the liability of M/s. R. P. Malhan and Co. which was due to be paid by its subsidiary, i.e., Adharshila Towers Pvt. Ltd. (ATPL) while selling its shares in ATPL to Ansals. Explanation 2 to Section 41(1) of the Act, according to the Tribunal, would be applicable only if the Assessee was a "successor in business" of ATPL.

In respect of the last issue the Tribunal observed that since the interest disallowed pertained to an amount which was borrowed in the earlier year it could not have been disallowed for two reasons: first, the interest on the said amount had been allowed by the revenue in the earlier years. Secondly, there was no finding that interest bearing funds had been diverted for non-business purposes. The Tribunal was of the view that since the loan had continued from the earlier years in which it had been held that it was used for business purposes, in the absence of any change in the circumstances, the interest for the year under consideration had to be allowed.

Having noticed the findings returned by the Tribunal on each of the issues discussed above, we find neither any infirmity in the reasoning nor perversity in the conclusion arrived at in the impugned judgment. The Tribunal has rightly concluded that the Assessee was carrying on the business of real estate in view of the fact that purchased land and flat had been shown as stock-in-trade since the year of purchase, i.e., the assessment year 1998-99. Furthermore, as noticed by the Tribunal, income had been assessed as profits from business. The Tribunal noted that not only expenses but also brought forward business losses had been allowed by the assessing officer. No infirmity is found in respect of the said issue.

As regards the second issue once again the Tribunal correctly appreciated the issue with respect to loss incurred by the Assessee on account of refund of advance by Sh. Ved Chaudhary as being in the nature of business loss. It was vehemently argued before us by the learned Counsel for the revenue that this was a plea taken by the Assessee for the first time before the Tribunal. The Tribunal could not have entertained this plea. In our view, since the entire facts, in respect of transactions, were on record, the Tribunal was empowered to deal with the issue and determine whether the Assessee was entitled to claim a loss, if at all, under one section or the other. See the observations of the Supreme Court in the case of National Thermal Power Co. Ltd. Vs. Commissioner of Income Tax, .

The third issue relating to addition of an unclaimed sum of Rs. 1,01,47,264 shown as payable to one M/s. R. P. Malhan and Co. u/s 41(1) of the Act, in our view, was correctly decided by the Tribunal. The Assessee had not claimed the said sum as an expenditure in the earlier years, as rightly observed by the Tribunal, the provisions of Section 41(1) were not applicable. The Tribunals view that the provisions of Explanation 2 to Section 41(1) of the Act would not be applicable pursuant to its finding that the Assessee was not a successor in business of ATPL is correct.

With respect to the last issue pertaining to disallowance of bank interest in the sum of Rs. 69,02,336, the Tribunal returned a finding of fact that this interest related to loans taken by the Assessee in the earlier years and that the funds had not been diverted for non-business purposes. Once again, according to us, in view of the Tribunal having returned findings of fact, that the loan given to bodies corporate had not been diverted for "nonbusiness" purposes, as also that, the loan had continued from earlier years ; the interest on bank loan ought to be allowed to the Assessee as a deduction as there was no perceptible change in circumstances.

In the result, we find that there is no room for interference in the orders passed by the Tribunal. No substantial question of law arises for our consideration. The appeal is dismissed.