Sri.Arun Thomas, Chengannur V. ACIT, Thiruvalla

CO 16/COCH/2012

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8300 (ITAT-COCHIN)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 22-03-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 06-11-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T M SREEDHARANSR
• Assessee Lawyers: SUSAN GEORGE
• Keywords: Business expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

1 ITA NO.248/COCH/2012 CO 16-COCH-2012 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI B.R. BASKA RAN(AM) I.T.A NO. 248/COCH/2012 (ASSESSMENT YEAR 2009-10) A.C.I.T., CIR.1 VS SHRI ARUN THOMAS THIRUVALLA KANNATTU ARUN FINANCE M.C. ROAD, CHENGANNUR PAN : ABQPT8553J (APPELLANT) (RESPONDENT) C.O. 16/COCH/2012 (ARISING OUT OF I.T.A NO. 248/COCH/2012) (ASSESSMENT YEAR 2009-10) SHRI ARUN THOMAS VS A.C.I.T., CIR.1(1) CHENGANNUR THIRUVALLA (APPELLANT) (RESPONDENT) REVENUE BY : SMT. SUSAN GEORGE RESPONDENT BY :SHRI T.M. SREEDHARAN, SR COUNSEL DATE OF HEARING : 31-01-2013 DATE OF PRONOUNCEMENT : 22-03-2013 2 ITA NO.248/COCH/2012 CO 16-COCH-2012 O R D E R PER N.R.S. GANESAN (JM) THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A), TRIVANDRUM DATED 13-08-2012 AND PERTAINS TO ASSESSM ENT YEAR 2009-10. THE TAXPAYER FILED THE CROSS OBJECTION. 2. SMT. SUSAN GEORGE VERGHESE, THE LD.DR SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISALLOWANCE OF INTERES T PAID ON DEPOSIT OUTSIDE THE BOOKS OF ACCOUNT. ACCORDING TO THE LD.DR, THE TAXPAYER RECEIVED DEPOSIT OUTSIDE THE BOOKS OF ACCOUNT AND PAID INTER EST. THE LD.DR SUBMITTED THAT AS PER KERALA MONEY LENDERS ACT THE DEPOSIT SHALL BE ACCEPTED ONLY AS PER THE PROVISIONS OF RBI ACT AT T HE RATE FIXED BY RBI FOR NON BANKING FINANCIAL INSTITUTION. PRIVATE MONEY L ENDERS ARE PROHIBITED FROM ACCEPTING DEPOSITS FROM PUBLIC. REFERRING TO EXPLANATION TO SECTION 37(1), THE LD.DR SUBMITTED THAT ANY EXPENDITURE INC URRED BY A TAXPAYER FOR ANY PURPOSE WHICH IS AN OFFENCE OR PROHIBITED BY LA W SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS O R PROFESSION. THE LD.DR FURTHER SUBMITTED THAT THE TAXPAYER HAS ACCEPTED TH E DEPOSIT IN VIOLATION OF 3 ITA NO.248/COCH/2012 CO 16-COCH-2012 THE PROVISIONS OF RBI ACT AND PAID INTEREST IN VIOL ATION OF EXPLANATION TO SECTION 37(1). THEREFORE, THE ASSESSING OFFICER DI SALLOWED THE CLAIM OF THE TAXPAYER. ACCORDING TO THE LD.DR, THE CIT(A) IS NO T CORRECT IN ALLOWING THE CLAIM OF THE TAXPAYER. THE LD.DR PLACED RELIANCE O N THE JUDGMENT OF KARNATAKA HIGH COURT IN CIT VS SMT. AMARJEET KAUR 2 83 ITR 71 (KAR) AND SUBMITTED THAT THE DEPOSIT LINKED INCENTIVE SCHEME WHICH HAS ALL THE INGREDIENTS OF MONEY CIRCULATION SCHEME; THEREFORE, IT WAS HELD THAT THE EXPENDITURE COULD NOT BE ALLOWED. THE LD.DR HAS AL SO PLACED HER RELIANCE ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN CIT VS TARAPOREWALA SONS CO (P) LTD 239 ITR 319 (BOM). 3. ON THE CONTRARY, SHRI T.M. SREEDHARAN, THE LD.SE NIOR COUNSEL FOR THE TAXPAYER SUBMITTED THAT THE TAXPAYER IS DOING MONEY LENDING BUSINESS IN THE NAME AND STYLE KANNATTU ARUN FINANCE. NO MON EY WAS BORROWED IN THE NAME OF `KANNATTU ARUN FINANCE. ACCORDING TO THE LD.SENIOR COUNSEL, THE TAXPAYER BORROWED MONEY IN HIS INDIVIDUAL CAPAC ITY. RBI DOES NOT PROHIBIT BORROWAL IN INDIVIDUAL CAPACITY. SINCE TH E MONEY WAS BORROWED IN INDIVIDUAL CAPACITY, ACCORDING TO THE LD.SENIOR COU NSEL IT WAS NOT SHOWN IN 4 ITA NO.248/COCH/2012 CO 16-COCH-2012 THE BOOKS OF ACCOUNT OF THE BUSINESS CONCERN. THE LD.SENIOR COUNSEL FURTHER SUBMITTED THAT THE DEPOSITORS WERE IDENTIFI ABLE AND TAX WAS ALSO DEDUCTED ON INTEREST PAYMENT AT APPLICABLE RATES. SINCE THE RECEIPT AND REPAYMENT OF DEPOSIT WAS PERSONALLY MAINTAINED, THE INTEREST PAID WAS ALSO NOT BOOKED IN THE MONEY LENDING BUSINESS. THAT IS WHY, ACCORDING TO THE LD.SENIOR COUNSEL, THE PAYMENT OF INTEREST IS CLAIM ED IN THE STATEMENT OF NET INCOME. REFERRING TO EXPLANATION TO SECTION 37 (1), THE LD.SENIOR COUNSEL SUBMITTED THAT EXPLANATION WAS INTRODUCED BY FINANC E (NO.2) ACT, 1998. IN THE EXPLANATORY NOTE ON THE PROVISIONS OF FINANCE ( NO.2) ACT OF 1998 IT WAS CLARIFIED THAT SECTION 37(1) WAS AMENDED TO DISALLO W THE EXPENDITURE INCURRED BY A TAXPAYER FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE EXPLANATORY NOTE FURTHER ST ATES THAT THE AMENDMENT MADE IN SECTION 37(1) WOULD RESULT IN REJ ECTING THE CLAIM MADE BY CERTAIN TAXPAYER IN RESPECT OF PAYMENT ON ACCOUN T OF PROTECTION MONEY, EXTORTION, HAFTA, BRIBE, ETC. ACCORDING TO THE LD. SENIOR COUNSEL, THE PAYMENT OF INTEREST IN PERSONAL CAPACITY IS NOT IN THE NATURE OF PROTECTION MONEY, EXTORTION, HAFTA, BRIBE, ETC. THEREFORE, TH E PAYMENT OF INTEREST ON DEPOSIT MAY NOT COME WITHIN EXPLANATION TO SECTION 37(1). ACCORDING TO THE 5 ITA NO.248/COCH/2012 CO 16-COCH-2012 LD.SENIOR COUNSEL, THE INTEREST PAID ON CAPITAL BOR ROWED FALLS IN SECTION 36(1)(III) OF THE ACT. THEREFORE, THE PROVISIONS O F SECTION 37(1) ARE NOT APPLICABLE. 4. THE LD.SENIOR COUNSEL FURTHER SUBMITTED THAT THE CIT(A), AFTER CONSIDERING THE EXPLANATION TO SECTION 37(1) FOUND THAT INTEREST ON SUCH DEPOSIT IN PERSONAL CAPACITY IS NOT FORBIDDEN BY LA W. ACCORDING TO THE LD.SENIOR COUNSEL, THE TAXPAYER HAS NOT COMMITTED A NY OFFENCE AS PROVIDED IN EXPLANATION TO SECTION 37(1) OF THE ACT. ACCORD ING TO THE LD.SENIOR COUNSEL, THE INTEREST PAID BY THE TAXPAYER IS ONLY FOR EMPLOYING CAPITAL FOR THE BUSINESS AND NOT FOR THE PURPOSE OF INCURRING E XPENDITURE. THEREFORE, ACCORDING TO THE LD.SENIOR COUNSEL, EXPLANATION 1 T O SECTION 37(1) MAY NOT BE APPLICABLE. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 37(1) OF THE INCO ME-TAX ACT WHICH READS AS FOLLOWS: 6 ITA NO.248/COCH/2012 CO 16-COCH-2012 37(1) ANY EXPENDITURE NOT BEING EXPENDITURE OF TH E NATURE DECRIBED IN SECTIONS 30 TO 36 AND (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALL OWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PRO FITS AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION.- FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR AN Y PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW S HALL NOT BE DEEMED TO HAVE BEN INCURRED FOR THE PURPOSE OF BUSI NESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE M ADE IN RESPECT OF SUCH EXPENDITURE. A BARE READING OF SECTION 37(1) CLEARLY SHOWS THAT ANY EXPENDITURE WHICH IS NOT IN THE NATURE DESCRIBED U/SS 30 TO 36 AND NOT B EING CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE LAID OUT WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS HAS TO BE ALLOWED IN COMPUTING THE TOTAL I NCOME. THEREFORE, IT IS OBVIOUS THAT THE EXPENDITURE WHICH FALLS UNDER SECT ION 30 TO 36 AND CAPITAL EXPENDITURE AND PERSONAL EXPENDITURE ARE EXCLUDED F ROM SECTION 37 OF THE 7 ITA NO.248/COCH/2012 CO 16-COCH-2012 ACT. FOR REMOVAL OF DOUBTS, EXPLANATION 1 TO SECTI ON 37(1) INTRODUCED BY FINANCE (NO.2) ACT OF 1998 WITH RETROSPECTIVE EFFEC T FROM 01-04-1962 CLARIFIES THAT ANY EXPENDITURE INCURRED FOR ANY PUR POSE, WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE TREATED AS INCURRED FOR BUSINESS AND NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUC H EXPENDITURE. WHILE CLARIFYING EXPLANATION TO SECTION 37(1) THE CBDT CL ARIFIED IN CIRCULAR NO.772 DATED 23-12-1998 AS UNDER: 20.1 SECTION 37 OF THE INCOME-TAX ACT IS AMENDED T O PROVIDE THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR AN Y PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW S HALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSES OF BU SINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE M ADE IN RESPECT OF SUCH EXPENDITURE. THIS AMENDMENT WILL R ESULT IN DISALLOWANCE OF THE CLAIMS MADE BY CERTAIN ASSESSEE S IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFTA, BRIBES, ETC. AS BUSINESS EXPENDIT URE. IT IS WELL DECIDED THAT UNLAWFUL EXPENDITURE IS NOT AN ALLOWAB LE DEDUCTION IN COM PUTATION OF INCOME. 8 ITA NO.248/COCH/2012 CO 16-COCH-2012 FROM THE ABOVE EXPLANATION, THE LEGISLATURE INTENDE D TO DISALLOW THE PAYMENT LIKE PROTECTION MONEY, EXTORTION, HAFTA, BR IBE, ETRC. WHEN IT WAS CLAIMED AS BUSINESS EXPENDITURE. THE CONTENTION OF THE LD.SENIOR COUNEL FOR THE TAXPAYER IS THAT THE PAYMENT OF INTEREST BY THE TAXPAYER COMES WITHIN THE AMBITS OF SECTIONS 30 TO 36. NO DOUBT, SECTION 37(1) IS NOT APPLICABLE IN RESPECT OF EXPENDITURE WHICH FALLS WITHIN SECTIONS 30 TO 36 OF THE ACT. IN THIS CASE, THE TAXPAYER ADMITTEDLY BORROWED FUNDS F OR ENHANCING THE WORKING CAPITAL FOR THE PURPOSE OF MONEY LENDING BU SINESS. INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS FALLS WITHIN THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. THEREFORE, ANY INTE REST PAID ON THE CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION HAS TO BE ALLOWED AS DEDUCTION U/S 36(1)(III) OF THE ACT. IN VIEW OF TH E ABOVE, PROVISIONS OF SECTION 37(1) MAY NOT BE APPLICABLE IN RESPECT OF I NTEREST ON THE CAPITAL BORROWED FOR BUSINESS PURPOSE. APART FROM THIS, TH E TAXPAYER CLAIMS THAT THE FUNDS WERE BORROWED IN THE PERSONAL CAPACITY AN D NOT IN THE NAME OF BUSINESS CONCERN. THE PAYMENT OF INTEREST ON THE B ORROWED CAPITAL FALLS WITHIN SECTION 36(1)(III) OF THE ACT AND HENCE THE PROVISIONS OF SECTION 37(1) MAY NOT BE APPLICABLE. THEREFORE, IT MAY BE IMMATE RIAL WHETHER THE 9 ITA NO.248/COCH/2012 CO 16-COCH-2012 MONEY WAS BORROWED IN PERSONAL CAPACITY OR NOT? WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENTS OF THE KARNATAKA HIGH CO URT AND BOMBAY HIGH COURT. IN AMARJEET KAUR (SUPRA) AND IN TARAPOREWAL A SONS CO (P) LTD (SUPRA) THE PAYMENT OF INTEREST WAS NOT ON THE MONE Y BORROWED FOR CAPITAL. IN TARAPOREWALA SONS CO (P) LTD (SUPRA), THE PAYMENT WAS MADE AS SECRET COMMISSION. IN AMARJEET KAUR (SUPRA), DEPOS IT LINKED INCENTIVE SCHEME WAS FOUND TO BE MONEY CIRCULATION SCHEME. T HE RELEVANT EXPENDITURE IN BOTH CASES WAS ALLOWABLE U/S 37(1) O F THE ACT. THEREFORE, THE HIGH COURT FOUND THAT EXPENDITURE WOULD FALL UN DER EXPLANATION TO SECTION 37(1) OF THE ACT. IN THIS CASE, THE EXPEND ITURE / INTEREST IS ALLOWABLE UNDER SECTION 36(1)(III), THEREFORE, THE EXPLANATIO N TO SECTION 37(1) IS NOT APPLICABLE. THIS BENCH OF THIS TRIBUNAL IN TAXPAYE RS OWN CASE FOR THE ASSESSMENT YEAR 2008-09 IN ITA NO.115/COCH/2012 & C O NO.10/COCH/2012 VIDE ORDER OF EVEN DATED HAS ALREADY UPHELD THE DEC ISION OF THE CIT(A) DELETING THE DISALLOWANCE FOR THE DETAILED REASONS AS STATED ABOVE. THEREFORE, CONSISTENT WITH OUR EARLIER DECISION FOR THE SAME REASONS FOR ASSESSMENT YEAR 2008-09, THE ORDER OF CIT(A) IS CON FIRMED. 10 ITA NO.248/COCH/2012 CO 16-COCH-2012 6. THE CROSS OBJECTION FILED BY THE TAXPAYER IS ONL Y TO SUPPORT THE ORDER OF THE CIT(A), THEREFORE, IS NOT MAINTAINABLE. ACC ORDINGLY, BOTH THE APPEAL OF THE REVENUE AND THE CROSS OBJECTION OF THE TAXPA YER ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 22 ND MARCH, 2013. SD/- SD/- (B.R. BASKARAN) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 22 ND MARCH, 2013 PK/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE COMMISSIONER OF INCOME-TAX 4. THE COMMISSIONER OF INCOME-TAX(A) 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH