ARUN THOMAS,CHENGANNUR, ALAPPUZHA, KERALA V. ACIT, CIRCLE,THIRUVALLA

ITA 768/COCH/2023

AI Insights

The case involves Arun Thomas Baby Memorial Building Kannattu Arun Finance, the appellant, contesting the disallowance of interest payments by the Assessing Officer (AO) and upheld by the CIT(A). The primary legal issue was whether the interest payments made on deposits accepted from the public were allowable as business expenditures under section 37(1) of the Income Tax Act, 1961, given the restrictions imposed by the Kerala Money Lenders Act. The Tribunal referenced a prior judgment by the Kerala High Court, which supported the disallowance of such expenditures when they contravene statutory provisions. The Tribunal also noted that the Supreme Court had stayed the Kerala High Court's decision, but the final decision was still pending.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 31387 (ITAT-COCHIN)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2017-2018
• Appeal Filed On: 03-11-2023
• Other Referred Cases: Muthoot Finance Corporation [2013] 39 taxmann.com 17 (Kerala)/[2013] 219 Taxman 82 (Kerala)
• Laws Referred To: Income Tax Act, 1961, Kerala Money Lenders Act, RBI Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJIT KUMAR DAS
• Assessee Lawyers: SURESH KUMAR
• Keywords: Business expenditure
• Section: 37; 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Waseem Ahmed, Accountant Member and Shri Soundararajan K., Judicial Member ITA Nos. 768& 769/Coch/2023 (Assessment Years: 2017-18 & 2018-19) Arun Thomas Baby Memorial Building Kannattu Arun Finance Chengannur 689121 [PAN: ABQPT8553J] vs. Asst. Commissioner of Income Tax Thiruvalla (Appellant) (Respondent) Appellant by: Shri Suresh Kumar, CA Respondent by: Shri Sanjit Kumar Das, CIT-DR Date of Hearing: 30.09.2024 Date of Pronouncement: 21.10.2024 O R D E R Per Bench These appeals filed by the assessee are directed against the orders of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 05.09.2023 for Assessment Years (AY) 2017-18& 20-18-19. 2. The only issue raised by the assessee is that the learned CIT(A) erred in confirming the order passed by the Assessing Officer (AO) by sustaining the disallowance of interest payments of Rs.668,28,669/- for AY 2017-18 & 9,38,33,022/- for AY 2018-19, respectively under the provisions of Explanation (1) to section 37(1) of the Income Tax Act, 1961 (the Act). 3. In the present case, the AO found that the assessee has incurred interest expenditure after accepting deposits from the public in violation of Kerala Money Lenders Act. Therefore, the AO invoked the provisions of 2 ITA Nos. 768& 769/Coch/2023 Arun Thomas Explanation (1) of section 37(1) of the Act and disallowed the same for Rs.6,68,28,669/- after making reference to the judgement of the Hon'ble Kerala High Court dated 30.10.2017 in the own case of the assessee. On appeal the learned CIT(A) confirmed the same. 4. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 5. The learned A.R. fairly admitted that the issue on hand has been decided by the Hon'ble Kerala High Court against the assessee. 6. On the other hand, the CIT-DR, vehemently supported the orders of the authorities below. 7. We have heard the rival contentions of both the parties and perused the material available on record. At the outset, we note that the issue stands covered against the assessee by virtue of the order of the Hon'ble Kerala High Court,as discussed by the CIT(A) in his order which is reproduced as under: “11.0. In this regard the decision in the case of Muthoot Finance Corporation [2013] 39 taxmann.com 17 (Kerala)/[2013] 219 Taxman 82 (Kerala), the High Court has held as follows:- \"Section 37(1) of the Income-tax Act, 1961 Business expenditure Allowability of [Illegal payments] - Assessment year 1996-97 - Assessee was a financial enterprise engaged in accepting fixed deposits as loans for which it paid interest Assessing Officer disallowed interest paid by assessee in excess of maximum permissible limit as prescribed under Kerala Money Lenders Act - Whether where expenditure was laid out for purpose which constitutes an offence or prohibited by law, same could not be treated as expenditure for which deduction could be claimed Held, yes Whether in instant case, since amount of disallowance represented money paid in excess of limit which was prescribed under Kerala Money lenders Act, expenditure was in teeth of Explanation to section 37(1) and was not to be allowed - Held, yes [Para 9] [In favour of revenue]\" 12.0. Here, assessee is accepting deposits which is prohibited by law-section 45- S of the RBI Act. The appellant is paying interest on those deposits is clearly an expenditure which is prohibited by law. Therefore, this attracts the provision of 3 ITA Nos. 768& 769/Coch/2023 Arun Thomas explanation 1 to section 37 of the IT Act. Accordingly, the claim of interest paid as expenditure cannot be allowed within the meaning of explanation 1 to section 37 of the IT Act. Grounds of the appellant is therefore dismissed. 13.0. In the assessment order, Ld AO has observed that on similar issue in the case of the appellant Hon'ble Supreme Court has stayed the order passed by the Kerala High Court on 03.10.2017 and SLP is admitted. A direction in this respect was sought u/s 144A of the Act by the AO from Addl CIT, Thiruvalla range, wherein, the AO was directed as under- \"The operation of the order passed by the High Court dated 03/10/2017 is stayed by the Honorable Supreme Court and SLP admitted, but there was no final decision taken by the Honorable Supreme Court on the allowability of interest expenditure. Hence the assessing officer is directed to do the assessment for raising of the demand, but collection of the demand is not enforceable and hence collection of demand may be kept in abeyance.\" 14.0. As on the similar issue in the case of the appellant for earlier years, Hon'ble Supreme Court has stayed the order passed by the Hon'ble Kerala High Court on 03.10.2017 and SLP is admitted, but final decision of the Hon'ble Supreme Court is still awaited, Ld AO in line with direction issued by the Addl CIT, Thiruvalla is advised not to enforce the demand and collection of demand to be kept in abeyance till the decision of the Hon'ble Supreme Court for earlier years in the appellant's own case.” 8. In view of the above, we do not find any infirmity in the order of the learned CIT(A). Hence the grounds of appeals of the assessee are hereby dismissed. 9. In the result, the appeals filed by the assessee are dismissed. Order pronounced on 21st October, 2024 under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963. Sd/- Sd/- (Soundararajan K.) JudicialMember (Waseem Ahmed) AccountantMember Cochin, Dated: 21st October, 2024 n.p. 4 ITA Nos. 768& 769/Coch/2023 Arun Thomas Copy to: 1. The Appellant 2. The Respondent 3. The Pr. CIT concerned 4. The Sr. DR, ITAT, Cochin 5. Guard File By Order Assistant Registrar ITAT, Cochin "