IN INCOME TAX APPELLATE TRIBUNAL PUNE BENCH , PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM ITA No. 123/PN/2014 Assessment Year: 2008-09 Dy. Commissioner of Income Tax, Circle 4, Pune Appellant Vs. Pune Mumbai Realty Pvt. Ltd., 2nd Floor, Kumar Capital 2413, East Street, Camp, Pune 411001 Respondent PAN: AADCP8622M Appellant by : Shri Anil Kumar Chaware Respondent by : Shri Nikhil Pathak Date of Hearing : 21.09.2016 Date of Pronouncement: 30.09.2016 ORDER PER SUSHMA CHOWLA, JM: This appeal filed by Revenue is against order of CIT(A)-II, Pune, dated 30.09.2013 relating to assessment year 2008-09 against order passed under section 143(3) of Income Tax Act, 1961 (in short Act ). 2 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. 2. Revenue is in appeal against order of CIT(A) and has raised following grounds of appeal :- 01) learned Commissioner of Income-tax (Appeals) erred in holding that assessee had sufficient funds to justify advances made to group concerns thereby allowing proportionate interest of Rs.64,27,901/- u/s.36(i)(iii) of Act without appreciating that every loan granted to subsidiary was preceded by receipt of money as loan from other entities. 02) learned Commissioner of Income-tax (Appeals) erred in accepting assessee's claim that loans to subsidiaries were from its internal sources & not from borrowed capital without appreciating that had interest bearing loan not been availed assessee could not have met its fund requirement from internal sources. 03) learned Commissioner of Income-tax (Appeals) erred in not appreciating that borrowed funds on interest for business purposes was being used for supplementing cash diverted by assessee and as such A.O was justified in disallowing proportionate interest on differential rates. 04) learned Commissioner of Income-tax (Appeals) erred in deleting disallowance made u/s.41(1)(a) of Act of Rs.1,96,64,687/- when liability on account of creditors for properties was not established by assessee either in assessment proceedings or appellate proceedings. 05) learned Commissioner of Income-tax (Appeals) erred in not appreciating that out of total sundry creditors for properties of Rs.14,43,59,639/-, liability in respect of Rs.1,96,64,687/- could not be established by assessee and as such Assessing Officer was justified in holding that liability pertaining thereto had ceased u/s.41 (1)(a) of Act. 06) learned Commissioner of Income Tax (Appeals) erred in not appreciating that assessee cannot be allowed to enjoy amount as liability for unlimited period without any intention to pay on excuse that amount has not been written off in books of accounts. 3. Briefly, in facts of case, assessee had furnished return of income declaring total income of Rs.8,76,06,180/-. assessee was engaged in business of real estate development and sale. assessee during year under consideration had sold part of its land at Hinjewadi. case of assessee was picked up for scrutiny. Assessing Officer noted that assessee had accepted loan from third parties and paid interest to them @ 18%. total interest derived during year was Rs.1,46,25,053/- as against same, assessee advanced loan to group concern and had received interest from them @ 12%. assessee was asked to explain as to why proportionate interest be not disallowed and added back to total income. assessee failed to furnish 3 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. any specific objections and Assessing Officer notes that assessee consented for addition on issue and accordingly, sum of Rs.64,27,701/- was disallowed under section 36(1)(iii) of Act. Assessing Officer further noted that assessee had shown sundry creditors for properties amounting to Rs.14,43,59,639/-. assessee was asked to furnish details along with details of payments made in subsequent years. From details filed by assessee, Assessing Officer noted that payments were not made to certain parties due to litigation, proof of which was filed on record. However, proof regarding non-payment for sundry creditors in respect of certain cases could not be provided by assessee. liability in respect of balance payments to said parties amounted to Rs.1,96,64,687/- which could not be established and thus, liability pertaining thereto was held to have ceased under section 41(1)(a) of Act and said amount was added to total income of assessee. 4. Before CIT(A), assessee explained that unsecured loans outstanding as on 31.03.2008 were borrowed at interest @ 12% only, which in turn, was advanced to group concern @ 12% itself. other funds which bore higher rate of interest at 18% were repaid during year by assessee. Hence, there was no merit in proportionate disallowance made by Assessing Officer. assessee further explained that it h ad interest free funds in form of share capital and reserves amounting to Rs.77,39,54,344/- as on 31.03.2008, which fact was also overlooked by Assessing Officer. assessee stressed that there was no merit in said disallowance made by Assessing Officer under section 36(1)(iii) of Act. With regard to addition made under section 41(1)(a) of Act, assessee explained liability outstanding was in respect of business transaction entered into by assessee in past years and said liability was being recognized by assessee. Further, none of parties had waived their right to receive outstanding dues 4 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. and hence, there was no justification for making disallowance under section 41(1)(a) of Act. Regarding observations of Assessing Officer that learned Authorized Representative for assessee had consented to addition, pointed out that same was not correct and affidavit to that effect was filed during course of appellate proceedings. objections of assessee along with affidavit were forwarded to Assessing Officer, who dismissed same as false and afterthought and reiterated that addition was made after consent of learned Authorized Representative for assessee by Assessing Officer. Assessing Officer also forwarded copy of order sheet along with aforesaid report. Counsel of assessee in its rejoinder stated that report of Assessing Officer and also order sheet entries does not state that learned Authorized Representative for assessee had consented to addition as per order sheet noting dated 29.12.2010. learned Authorized Representative for assessee was seen to have agreed to addition of exceptional items of expenses to work-in-progress and nowhere in order sheet, learned Authorized Representative for assessee had agreed to disallowance of interest of Rs.64,27,701/-. CIT(A) decided first issue raised with regard to disallowance of interest under section 36(1)(iii) of Act at Rs.64,27,701/-. first aspect of issue was whether learned Authorized Representative for assessee had consented to said addition of proportionate interest. CIT(A) in this regard after referring to order sheet entries of date to date observed that same was prima facie not correct. He accepted explanation of assessee that learned Authorized Representative for assessee had agreed to addition of exceptional item expenses to work-in-progress only. Regarding merits of issue involved, CIT(A) noted from details of funds that assessee had received sum of Rs.13.29 crores as unsecured loans from Kumar Urban Development Ltd. and further withdrawals from partnership firm appearing in Current Account of Rs.8.80 crores were 5 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. sufficient to justify advances made to group concern of Rs.7.74 crores. CIT(A) also noted that rates of interest of all above amounts were @ 12%. CIT(A) also took note of fact that assessee had sufficient interest free funds in form of share capital and reserves amounting to Rs.77.39 crores as on 31.03.2008. As per CIT(A), Assessing Officer had not examined all these vital facts before disallowing proportionate interest on different rates. Reliance was placed on ratio laid down by Hon ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) and in absence of any instance of money having been diverted for giving interest free loans or for non-business purposes, disallowance made by Assessing Officer was deleted. 5. second issue before CIT(A) was against addition made under section 41(1) of Act at Rs.1,96,64,687/-. Assessing Officer had made aforesaid addition as assessee had not been able to provide proof with respect to said liability. However, assessee was recognizing liability and also none of parties had waived their right to receive dues and claim of assessee before CIT(A) was that Assessing Officer had made addition without making any enquiry or verification that liabilities have ceased to exist. CIT(A) following ratio laid down by Apex Court in CIT Vs. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC) and in CCIT Vs. Kesaria Tea Co. Ltd. (2002) 254 ITR 434 (SC) deleted addition made by Assessing Officer where amounts have not been written off by assessee or its recovery become barred by limitation and where Assessing Officer had not questioned genuineness of credits as no material in this regard was available on record. 6. Revenue has also raised additional ground of appeal which reads as under:- 6 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. Ld. CIT(A) erred in not issuing enhancement notice for disallowance of Rs.149.6 lacs being interest etc. of prior period which was agreed by AR of assessee in course of assessment proceedings vide order sheet noting dated 29.12.2010 but was inadvertently not made by AO in assessment order though this omission of AO had come in notice of CIT(A) while examining records of assessee during appellate proceedings as is evident from para 3.6 of his order . 7. First, we shall take up additional ground of appeal raised by Revenue, under which Revenue is aggrieved by order of CIT(A) in not issuing enhancement notice to assessee against disallowance of Rs.149.60 crores being interest, etc. of prior period, which was agreed by learned Authorized Representative for assessee during course of assessment proceedings. case of Revenue before us was that vide order sheet noting dated 29.12.2010, learned Authorized Representative for assessee had agreed to said addition but inadvertently Assessing Officer had not made addition in assessment order and CIT(A) ought to have issued enhancement notice in this regard. 8. We find no merit in additional ground of appeal raised by Revenue against non-issuance of enhancement notice by CIT(A). addition, if any, on account of admission made by assessee at first instance, was to be made by Assessing Officer himself. Thereafter, CIT(A) has not referred to any such addition. Tribunal has no power of enhancement as held by Hon ble Supreme Court in Mcorp Global (P) Ltd. Vs. CIT (2009) 309 ITR 434 (SC) and hence there is no merit in additional ground of appeal raised. Another aspect of issue is that Assessing Officer had issued order under section 154 of Act in this regard, wherein addition was made on account of exceptional items of expenses totaling Rs.1.49 crores. However, said addition has been deleted by CIT(A) vide order dated 30.09.2013. learned Authorized Representative for assessee has pointed out that Revenue is not in appeal against order of CIT(A) passed against order under section 154 7 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. of Act. In view thereof, there is no merit in additional ground of appeal raised by Revenue. 9. Now, coming to issue on merits raised by way of grounds of appeal No.1 to 3 against disallowance made under section 36(1)(iii) of Act. We have heard contentions raised by both learned Authorized Representatives and have perused record. 10. factual aspects of case have been noted by CIT(A) in para 3.5 which clarifies that assessee in year under consideration had shown unsecured loans outstanding as on 31.03.2008 at Rs.13.29 crores, which was received from M/s. Kumar Urban Development Ltd., on which assessee was paying interest @ 12%. assessee during year under consideration had cleared all interest bearing unsecured loans, and on some of which assessee was paying interest @ 18%. assessee had also made withdrawals from partnership firm in which it was partner and outstanding credit balance of Current Account as on 31.03.2008 was Rs.8.80 crores, which was shown under current liabilities in Schedule to Balance Sheet. As against same total amount advanced to group concern as on 31.03.2008 was Rs.7.74 crores on which interest was charged @ 12%. explanation of assessee before authorities below was that it had total funds available with it amounting to Rs.22.09 crores, out of which advances to group concern was made to tune of Rs.7.74 crores @ 12%. Assessing Officer in addition to all this, assessee further had interest free funds in form of share capital and reserves to tune of Rs.77.39 crores. Assessing Officer had disallowed proportionate amount of interest expenditure totaling Rs.64,27,701/- on premise that assessee was paying interest @ 18% on unsecured loans as against which, it had advanced amount and charged interest @ 12%. assessee had claimed that it had paid interest of Rs.1,46,25,053/- and had received interest of 8 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. Rs.1,28,55,402/-. finding of CIT(A) is that assessee had not diverted any amount by way of interest free loans or for non-business purposes. learned Departmental Representative for Revenue has not controverted said finding. In totality of above said facts and circumstances, where assessee had interest bearing funds on which interest was paid @ 12% and had further made withdrawals from partnership firm to tune of Rs.8.80 crores and also had interest free funds available in form of share capital and reserves totaling Rs.77.39 crores, then advances made to group concern of Rs.7.74 crores, on which assessee was receiving interest @ 12%, does not justify disallowance of any proportionate amount of interest expenditure. ratio laid down by Hon ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. (supra) is squarely applicable. Upholding order of CIT(A), we dismiss grounds of appeal No.1 to 3 raised by Revenue. 11. Now, coming to second issue raised by Revenue by way of grounds of appeal No.4 to 6 i.e. against deletion of disallowance made under section 41(1)(a) of Act at Rs.1.96 crores. 12. assessee was engaged in business of real estate development and sales and had made investments in business assets, against which it had shown certain liabilities. liabilities were on account of creditors for properties which totaled Rs.14.43 crores, out of which addition was made of Rs.1.96 crores. assessee furnished complete information in this regard before Assessing Officer and pointed out that liability had not got time barred and further said liability was recognized by assessee and also by creditors and there was no write off of said account. However, Assessing Officer was of view that where liability was old and there was no litigation pending, then same had ceased under section 41(1)(a) of Act. Once liability has been recognized by assessee as payable in its books of account and no book entry 9 ITA No.123/PN/2014 Pune Mumbai Realty Pvt. Ltd. has been passed for its adjustment either by assessee or sundry creditors, cessation of such liability as envisaged under section 41(1) of Act does not arise. We find support from ratio laid down by Apex Court in CIT Vs. Sugauli Sugar Works (P) Ltd. (supra) and in CCIT Vs. Kesaria Tea Co. Ltd. (supra). Further, assessee has shown amounts outstanding as on 31.03.2008 and in such cases where assessee continues to recognize its liability, there is no justification for invoking provisions of section 41(1) of Act against assessee. Upholding order of CIT(A) in this regard, we dismiss grounds of appeal No.4 to 6 raised by Revenue. grounds of appeal raised by Revenue are thus, dismissed. 13. In result, appeal of Revenue is dismissed. Order pronounced on this 30th day of September, 2016. Sd/- Sd/- (ANIL CHATURVEDI ) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated : 30th September, 2016. GCVSR Copy of Order is forwarded to : 1. Appellant; 2. Respondent; 3. CIT(A)-II, Pune; 4. CIT-II, Pune; 5. DR , ITAT, Pune; 6. Guard file. BY ORDER, //True Copy // Sr. Private Secretary ITAT, Pune Dy. Commissioner of Income Tax, Circle – 4, Pune v. Pune Mumbai Realty Pvt. Ltd