ITO, Ward - 4(1), Kolkata, Kolkata V. M/s. Tradelink Securities Ltd., Kolkata

ITA 1385/KOL/2011

• Counselvise Citation: 138523514 RSA 2011
• Duration Of Justice: 2 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 17-10-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: BISWANATH DAS
• Assessee Lawyers: P R KOTHARI

Judgement Text

I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 1 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA B BENCH, KOLKATA CORAM : SHRI ABRAHAM P. GEORGE (ACCOUNTANT MEMBER) AND SHRI GEORGE MATHAN (JUDICIAL MEMBER) I.T.A. NO.: 1385/KOL./ 2011 ASSESSMENT YEAR : 2006-2007 INCOME TAX OFFICER,................................ ...............APPELLANT WARD-4(1), KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, 8 TH FLOOR, KOLKATA-700 069 -VS.- M/S. TRADELINK SECURITIES LTD., 23A, NETAJI SUBHAS ROAD, KOLKATA-700 001 [PAN : AAACT 9210 G] APPEARANCES BY: SHRI BISWANATH DAS, JCIT, SR. D.R, FOR THE DEPARTME NT SHRI P.R. KOTHARI, FCA, FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : MAY 08, 2014 DATE OF PRONOUNCING THE ORDER : MAY 27, 2014 O R D E R PER ABRAHAM P. GEROGE : 1. THIS APPEAL FILED BY THE REVENUE, DIRECTED AGAIN ST AN ORDER DATED 29.06.2011 OF LD. COMMISSIONER OF INCOME TAX (APPEA LS)-IV, KOLKATA. IT HAS RAISED THE FOLLOWING THREE GROUNDS:- (1) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A) ERRED IN LAW IN DECIDING THE ISSUES RELATED TO THE ADDITION OF INTEREST TAKING THE GROUND THAT IT WAS RECEIVABLE AND WAS NOT ACTUALLY RECEIVED. (2) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.19,00,000/- RECEIVED BY THE ASSESSEE AS INTEREST FROM I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 2 M/S. ISG TRADERS LTD. AND RS.3,00,000/- RECEIVED FR OM M/S. DAVENPORT & CO. PVT. LTD. (3) THAT THE APPELLANT CRAVES FOR LEAVE TO ADD, DEL ETE OR MODIFY ANY OF THE GROUNDS OF APPEAL BEFORE OR AT TH E TIME OF HEARING. 2. ISSUES INVOLVED IN GROUNDS 1 & 2 ARE SAME. ASSES SEE, A COMPANY REGISTERED AS A NON-BANKING FINANCIAL COMPANY BY RE SERVE BANK OF INDIA, HAD FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YE AR DECLARING INCOME OF RS.65,352/-. DURING THE COURSE OF ASSESSMENT PROCEE DINGS, IT WAS NOTED THAT ASSESSEE HAD ADVANCED A SUM OF RS.95,00,000/- TO ONE M/S. ISG TRADERS LIMITED OF DUNCANS HOUSE, 31, NETAJI SUBHAS ROAD, KOLKATA-700 001 AND A SUM OF RS.25,00,000/- TO ONE M/S. DAVENPO RT & COMPANY PVT. LTD. OF 5 & 7, NETAJI SUBHAS ROAD, KOLKATA-700 001, ON WHICH IT HAD NOT SHOWN ANY INTEREST INCOME. ASSESSING OFFICER WAS HA VING INFORMATION THAT THE SAID TWO COMPANIES HAD IN THEIR RESPECTIVE ACCO UNTS CHARGED INTEREST ON THE LOANS TAKEN BY THEM FROM THE ASSESSEE. THE A MOUNTS SHOWN BY THEM AS INTEREST PAYABLE CAME TO RS.24,72,300/-,OF WHICH RS.19,00,000/- WAS OF M/S. ISG TRADERS LIMITED AND RS.3,00,000/- W AS OF M/S. DAVENPORT & COMPANY PVT. LTD. ASSESSEE WAS PUT ON NOTICE TO E XPLAIN WHY INTEREST FROM M/S. ISG TRADERS LIMITED AND M/S. DAVENPORT & COMPANY PVT. LTD. WAS NOT ACCOUNTED BY IT. REPLY OF THE ASSESSEE WAS THAT IT HAD NOT RECEIVED ANY INTEREST FROM THE SAID TWO COMPANIES. AS PER THE ASSESSEE, ADVANCE OF RS.95,00,000/- WAS GIVEN TO M/S. ISG TRA DERS LIMITED ON 16.05.2002 AND THE SUM OF RS.25,00,000/- WAS GIVEN TO M/S. DAVENPORT & CO. PVT. LTD. PRIOR TO FINANCIAL YEAR 2001-02. SUBM ISSION OF THE ASSESSEE WAS THAT IT HAD NOT RECEIVED ANY INTEREST FROM M/S. ISG TRADERS LIMITED AND HAD RECEIVED ONLY NEGLIGIBLE INTEREST FROM M/S. DAVENPORT & CO. PVT. LTD. ASSESSEE ALSO STATED THAT IT WAS A NON-BANKING FINANCIAL COMPANY, AND BOUND TO FOLLOW PRUDENTIAL NORMS FOR RECOGNITIO N OF INCOME AS DIRECTED BY RESERVE BANK OF INDIA. AS PER THE ASSES SEE, THE SAID PRUDENTIAL NORMS PROHIBITED RECOGNITION OF INTEREST ON LOANS WHICH REMAINED OVERDUE FOR MORE THAN SIX MONTHS. EVEN OTH ERWISE, AS PER THE I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 3 ASSESSEE, THERE WAS NO REAL INCOME OR NOTIONAL INTE REST INCOME, ACCRUING TO IT. 3. HOWEVER, ASSESSING OFFICER WAS NOT IMPRESSED BY THE ABOVE EXPLANATION. ACCORDING TO HIM, THE TWO COMPANIES HA D TAKEN LOAN FROM THE ASSESSEE AND CHARGED INTEREST IN THEIR RESPECTI VE ACCOUNTS AND ALSO DEDUCTED TAX AT SOURCE THEREON. SUCH TAX AT SOURCE WAS CREDITED BY THEM INTO THE GOVERNMENT ACCOUNT. THEREFORE, AS PER THE ASSESSING OFFICER, THE CONCERNED PARTIES HAD CONFIRMED, INTERESTS DUE TO T HE ASSESSEE. ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. HENC E, IT WAS BOUND TO SHOW THE INTEREST ACCRUED ON THE LOANS. IN THIS VIE W OF THE MATTER, HE HELD THAT THE INTEREST OF RS.22,00,000/- ACCRUED ON THE LOANS GIVEN TO THE TWO COMPANIES WAS CHARGEABLE TO TAX AND AN ADDITION WAS MADE ACCORDINGLY. 4. IN ITS APPEAL BEFORE THE LD. CIT(APPEALS), ARGUM ENT OF ASSESSEE WAS THAT IT WAS BOUND TO FOLLOW THE GUIDELINES ISSUED B Y RESERVE BANK OF INDIA WHICH WAS MANDATORY. AS PER THE ASSESSEE, NO INCOME WHATSOEVER WAS RECEIVED FROM THE CONCERNED TWO COMPANIES. THOUGH I T WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, ASSESSEE SUBMITTED THAT ONLY REAL INCOME COULD BE TAXED. 5. LD. CIT(APPEALS) WAS APPRECIATIVE OF THE ABOVE C ONTENTIONS. ACCORDING TO HIM, PRUDENTIAL NORMS PRESCRIBED BY RE SERVE BANK OF INDIA PROHIBITED RECOGNITION OF INTEREST INCOME ON LOANS AND DEBTS WHERE INTEREST OR INSTALMENTS OF PRINCIPAL WAS OUTSTANDIN G FOR MORE THAN SIX MONTHS. AS PER LD. CIT(APPEALS) ASSESSEE WAS REQUIR ED TO CLASSIFY THESE LOANS AS NON-PERFORMING ASSETS. ONCE IT WAS CONSIDE RED AS NON- PERFORMING ASSETS IT COULD NOT SHOW ANY ACCRUAL OF INCOME. AS PER THE LD. CIT(APPEALS) INTEREST INCOME DID NOT ACCRUE EVEN UN DER MERCANTILE SYSTEM OF ACCOUNTING, ONCE NON-BANKING FINANCIAL CO MPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS, 1998 APPLIED. IN T HIS VIEW OF THE MATTER, HE DELETED THE ADDITION MADE BY THE ASSESSI NG OFFICER. I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 4 6. NOW BEFORE US, LD. DR STRONGLY ASSAILING THE ORD ER OF LD. CIT(APPEALS) SUBMITTED THAT THE CONCERNED PARTIES T O WHOM ASSESSEE HAD ADVANCED LOANS WERE CHARGING INTEREST IN THEIR RESP ECTIVE BOOKS, DEDUCTING TAX AT SOURCE THEREON, AND CREDITING SUCH TAX TO THE GOVERNMENT ACCOUNT. ASSESSEE HAD NEVER MADE ANY EF FORT FOR REALIZING THE AMOUNTS DUE FROM THE CONCERNED COMPANIES. ASSES SEE HAD NOT RECALLED THE LOANS. RELYING ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS.- JCIT ( 2010) 320 ITR 577, LD. D.R. SUBMITTED THAT NON-BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA WOULD NOT OVERR IDE THE PROVISIONS OF THE INCOME TAX ACT, WHICH STIPULATED RECOGNITION OF INCOME ON ACCRUAL BASED, ONCE MERCANTILE SYSTEM WAS FOLLOWED. THEREFO RE, ACCORDING TO HIM, LD. CIT(APPEALS) FELL IN ERROR IN DELETING THE ADDI TION. 7. PER CONTRA, LD. AR SUBMITTED THAT THE DECISION O F THE HONBLE APEX COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SU PRA) WAS IN RESPECT OF DEDUCTIBILITY OF A CLAIM OF PROVISIONING MADE ON NO N-PERFORMING ASSETS. BUT ASSESSEES CASE, HERE WAS NOT A CLAIM FOR ANY S UCH PROVISIONING FOR NON-PERFORMING ASSETS. HONBLE APEX COURT ONLY HELD THAT RBI REGULATIONS ON NON-PERFORMING LOANS WOULD NOT HAVE ANY OVERRIDI NG EFFECT ON THE PROVISIONS OF INCOME TAX ACT. IT DID NOT DEAL WITH ACCRUAL OF INTEREST ON NON-PERFORMING LOANS. RELYING ON THE DECISION OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS.- VASISTH CHAY VYAPAR LTD. (2011) 330 ITR 440, LD. A.R. SUBMITTED THAT ASSESSEE HAVING NOT RE CEIVED ANY INTEREST, SECTION 45Q OF THE RESERVE BANK OF INDIA ACT HAD TO BE APPLIED. THIS SECTION HAD AN OVERRIDING EFFECT. INTEREST NOT RECO GNIZED BY THE ASSESSEE, NOR ACCOUNTED BY IT COULD NOT BE CONSIDERED AS ITS INCOME, JUST BECAUSE MERCANTILE SYSTEM OF ACCOUNTING WAS FOLLOWED. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. DURING THE COURSE OF HEARING, LD. COUNSEL FOR THE I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 5 ASSESSEE WAS ASKED WHETHER THE COMPANIES TO WHICH L OANS WERE GIVEN WERE STILL FUNCTIONING OR NOT. TO THIS HE REPLIED T HAT THE COMPANIES WERE STILL FUNCTIONING. LD. COUNSEL ALSO STATED THAT THE LOANS WERE GIVEN TO THE SAID COMPANIES BASED ON PROMISSORY NOTE, WITHOUT AN Y OTHER SECURITY. BENCH ALSO ASKED THE LD. COUNSEL WHETHER ANY EFFORT S WERE BEING MADE BY THE ASSESSEE FOR RECOVERING THE LOANS, TO WHICH LD. COUNSEL STATED THAT ONLY ORAL COMMUNICATION WAS THERE. WHAT WE FIND FRO M THE RECORD IS THAT THE LOAN TO M/S. DAVENPORT & CO. PVT. LTD. WAS GIVE N PRIOR TO FINANCIAL YEAR 2001-02 AND THE LOAN TO M/S. ISG TRADERS LTD. WAS GIVEN ON 16.05.2002. DESPITE NO INTEREST BEING RECEIVED BY T HE ASSESSEE, IT HAD NOT TAKEN ANY LEGAL STEP FOR RECALLING THE AMOUNTS FROM THE SAID CONCERNS. 9. NON-BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) AS PER THE NOTIFICATION NO. DFC.119/DG(SPT)-98 DATE D 31.01.1998 STATES AT RULE 3 THAT INCOME INCLUDING INTEREST/DISCOUNT S HALL BE RECOGNIZED ONLY WHEN IT IS ACTUALLY REALISED IF A LOAN IS CONS IDERED AS NON-PERFORMING ASSET. A NON-PERFORMING ASSET HAS BEEN DEFINED AS A N ASSET IN RESPECT OF WHICH INTEREST HAS REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE. A DEMAND OR CALL LOAN, WHICH REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE FROM THE DATE OF DEMAND IS ALSO CONSIDERED AS NON-PERFORMING ASSET. FOR BETTER APPRECIATION IT IS REQUIRED TO RE PRODUCE DEFINITION OF NON-PERFORMING ASSET AS PER RULE 1, CLAUSE-XII OF N ON-BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTION S, 1998:- (XII) WITH EFFECT FROM MARCH 31, 2003, NON-PERFOR MING ASSET (REFERRED TO IN THESE DIRECTIONS AS NPA) MEANS : (A) AN ASSET, IN RESPECT OF WHICH, INTEREST HAS REMAINE D OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE; (B) A TERM LOAN INCLUSIVE OF UNPAID INTEREST, WHEN THE INSTALMENT IS OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE OR ON WHICH INTEREST AMOUNT REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE; (C) A DEMAND OR CALL LOAN, WHICH REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE FROM THE DATE OF DEMAN D OR CALL OR ON WHICH INTEREST AMOUNT REMAINED OVERDUE F OR A PERIOD OF SIX MONTHS OR MORE; I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 6 (D) A BILL WHICH REMAINS OVERDUE FOR A PERIOD OF SIX MO NTHS OR MORE; (E) THE INTEREST IN RESPECT OF A DEBT OR THE INCOME ON RECEIVABLES UNDER THE HEAD OTHER CURRENT ASSETS I N THE NATURE OF SHORT TERM LOANS/ ADVANCES, WHICH FACILIT Y REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE ; (F) ANY DUES ON ACCOUNT OF SALE OF ASSETS OR SERVICES R ENDERED OR REIMBURSEMENT OF EXPENSES INCURRED, WHICH REMAIN ED OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE; (G) THE LEASE RENTAL AND HIRE PURCHASE INSTALMENTS, WHI CH HAS BECOME OVERDUE FOR A PERIOD OF TWELVE MONTHS OR MOR E; (H) IN RESPECT OF LOANS, ADVANCES AND OTHER CREDIT FACI LITIES (INCLUDING BILLS PURCHASED AND DISCOUNTED), THE BAL ANCE OUTSTANDING UNDER THE CREDIT FACILITIES (INCLUDING ACCRUED INTEREST) MADE AVAILABLE TO THE SAME BORROWER/BENEFICIARY WHEN ANY OF THE ABOVE CREDIT FACILITIES BECOMES NON-PERFORMING ASSET: PROVIDED THAT IN THE CASE OF LEASE AND HIRE PURCHAS E TRANSACTIONS, AN NBFC MAY CLASSIFY EACH SUCH ACCOUN T ON THE BASIS OF ITS RECORD OF RECOVERY. 10. IT IS AN ADMITTED POSITION THAT THE LOANS WERE ADVANCED BASED ON PROMISSORY NOTE. INTEREST CAN BE CONSIDERED AS OVER DUE ONLY WHEN THERE IS AN AGREEMENT BETWEEN THE PARTIES WHEREIN A STIPU LATION IS THERE WITH REGARD TO THE DATE OF PAYMENT OF INTEREST. IN THE A BSENCE OF ANY SUCH STIPULATION, WE CAN NEVER SAY THAT INTEREST HAS FAL LEN DUE ON A PARTICULAR DATE OR WAS OVERDUE. SIMILARLY A LOAN CAN BE CONSID ERED AS OVERDUE ONLY WHEN IT REMAINS UNPAID DESPITE LAPSE OF SIX MONTHS FROM THE DATE OF DEMAND OF THE LOAN. ASSESSEE HERE HAS BEEN UNABLE T O PRODUCE ANY DOCUMENT TO SHOW THAT IT HAD MADE ANY DEMAND FOR RE TURN OF THE LOAN BY THE CONCERNED CREDITORS. THERE IS NO CLAIM BY THE A SSESSEE THAT THE LOANS GIVEN WERE TERM LOAN. THIS BEING THE SITUATION, THE LOANS GIVEN BY THE ASSESSEE TO THE SAID TWO COMPANIES WILL NOT, IN OUR CONSIDERED OPINION, FALL WITHIN ANY OF THE LIMB OF THE DEFINITION OF NO N-PERFORMING ASSET. EVEN OTHERWISE, HONBLE APEX COURT HAD CLEARLY HELD IN T HE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) THAT PRUDENTIAL NORMS ISS UED BY THE RESERVE BANK OF INDIA CANNOT OVERRIDE THE PROVISIONS OF THE ACT. AS PER SECTION 5 OF THE ACT, TOTAL INCOME SHALL INCLUDE ALL INCOME F ROM WHATSOEVER DERIVED I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 7 FROM SUCH PERSON, WHICH ACCRUES OR ARISE TO HIM IN A GIVEN IN PREVIOUS YEAR. ASSESSEE UNDISPUTEDLY WAS FOLLOWING MERCANTIL E SYSTEM OF ACCOUNTING. BY VIRTUE OF THE APPLICATION OF THE ACC RUAL PRINCIPLE, INTEREST INCOME HAD DEFINITELY ACCRUED TO THE ASSESSEE. THE CONCERNED COMPANIES WERE CHARGING INTEREST IN THEIR RESPECTIVE ACCOUNTS , DEDUCTING TAX AT SOURCE AND ALSO REMITTING SUCH TAX TO THE GOVERNMEN T ACCOUNT. NO DOUBT HONBLE DELHI HIGH COURT IN THE CASE OF VASISTH CHA Y VYAPAR LIMITED (SUPRA) HAD HELD THAT, ONCE INTER-CORPORATE DEPOSIT S HAD BECOME NON- PERFORMING ASSET AND POSSIBILITY OF REALISING INTER EST WAS ALMOST NIL, NO INTEREST COULD BE TREATED AS ACCRUED TO THE ASSESSE E. HOWEVER, THE LOANS GIVEN HERE BY THE ASSESSEE, WERE NOT INTER-CORPORAT E DEPOSITS. THERE IS NOTHING ON RECORD TO SHOW THAT POSSIBILITY OF REALI SING THE INTEREST WAS NIL. LD. COUNSEL OF THE ASSESSEE HAD ADMITTED THAT THE SAID COMPANIES WERE HAVING SUBSTANTIAL ASSETS WITH THEM. HENCE WE CANNOT SAY THAT INTEREST INCOME WAS ILLUSORY OR NOT REAL. IN SUCH C IRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE CANNOT TAK E OF REFUGE UNDER THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDI A AND SAY THAT PRINCIPLES OF ACCRUAL OF INCOME, WHEN MERCANTILE BA SIS OF ACCOUNTANCY IS FOLLOWED WOULD NOT APPLY TO IT. NO DOUBT, SECTION 4 5Q OF THE R.B.I. ACT IS OVERRIDING IN NATURE AND HAS TO BE GIVEN PRIMACY. H OWEVER UNLESS AND UNTIL AN ASSESSEE SHOWS THAT A LOAN OR ADVANCE HAD BECOME A NON- PERFORMING ASSET, THERE CAN BE NO QUESTION OF APPLY ING THE NORMS SET OUT FOR SUCH NON-PERFORMING ASSET. WE ARE, THEREFORE, O F THE OPINION THAT LD. CIT(APPEALS) FELL IN ERROR IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. WE, THEREFORE, SET ASIDE THE ORDER OF LD. CIT(APPEAL) AND THE ADDITION MADE BY THE ASSESSING OFFICER IS RESTORED. 11. IN THE RESULT, APPEAL OF THE REVENUE STANDS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH DAY OF MAY, 2014. SD/- SD/- GEORGE MATHAN ABRAHAM P. GEORGE (JUDICIAL MEMBER) (ACC OUNTANT MEMBER) KOLKATA, THE 27 TH DAY OF MAY, 2014 I.T.A. NO.: 1385/KOL./20 11 ASSESSMENT YEAR : 2006-200 7 8 COPIES TO : (1) INCOME TAX OFFICER, WARD-4(1), KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, 8 TH FLOOR, KOLKATA-700 069 (2) M/S. TRADELINK SECURITIES LTD., 23A, NETAJI SUBHAS ROAD, KOLKATA-700 001 (3) CIT(APPEALS) (4) CIT (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.