The Deputy Commissioner of Income Tax, Alappuzha V. M/s N.S.S. Karayogam, Alappuzha

ITA 14/COCH/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52273 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 04-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 14-01-2009
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Keywords: Business income; Business expenditure; Non-deduction of tax; Competent authority
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLAT E TRIBUNAL COCHIN BEN CH, COCHIN BEFORE S/SHRI N.VIJAYAKUMARAN, JM AND SANJAY AR ORA, AM I.T.A. 14/COCH/2009 ASSESSMENT YEAR:2005-06 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, ALAPPUZHA. VS. M/S. NSS KARAYOGAM, BRANCH NO. 1365, NEERKUNNAM, ALAPPUZHA. [PAN:AACAS 0029A] (REVENUE-APPELLANT) (ASSESSEE - RESPONDENT) REVENUE BY SHRI S.R.SENAPATI, SR.DR ASSESSEE BY NONE DATE OF HEARING 04/08/2011 DATE OF PRONOUNCEMENT 21/10/2011 O R D E R PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE REVENUE ARISING OUT OF TH E ORDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, KOCHI (CIT(A) FOR SHORT) DATED 30.10.2008, AND THE ASSESSMENT YEAR (A.Y.) UNDER REFERENCE IS 2005-06. 2. NONE APPEARED ON BEHALF OF THE ASSESSEE NOR ANY APPLICATION SEEKING ADJOURNMENT STANDS RECEIVED. THE SAME SITUATION OBTAINED IN THE PAST AS WELL, AS IS EVIDENT FROM THE ENTRIES IN THE ORDER-SHEET. ACCORDINGLY, THE HEARI NG WAS PROCEEDED WITH EX PARTE . THE APPEAL RAISES A SINGLE ISSUE, I.E., THE MAINTAINABI LITY OF THE DISALLOWANCE OF THE ENTIRE INTEREST ON DEPOSITS, WORKED OUT BY THE ASSESSING O FFICER (AO) AT ` 242.21 LAKHS, IN THE COMPUTATION OF BUSINESS INCOME OF THE ASSESSEE UNDE R CHAPTER IV-D OF THE INCOME-TAX ACT, 1961 (THE 'ACT' HEREINAFTER), SINCE REVERSED B Y THE FIRST APPELLATE AUTHORITY. I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 2 3. BEFORE WE PROCEED TO DISCUSS THE ISSUE IN APPEAL AS WELL AS THE RESPECTIVE CASES OF BOTH THE SIDES, IT MAY BE RELEVANT TO RECOUNT THE B ACKGROUND FACTS OF THE CASE. THE ASSESSEE IS A BRANCH OF NSS, ESTABLISHED OSTENSIBLY FOR THE BENEFIT OF THE MEMBERS OF KAKAZHAM/NEERKUNNAM WARD. FURTHER, IT HAD BEEN CON DUCTING FINANCING BUSINESS INDEPENDENTLY FOR SOME YEARS, ACCEPTING DEPOSITS FR OM THE PUBLIC AND LENDING THERETO, BOTH AT EXORBITANT RATES OF INTERESTS. IN FACT, TH E SAME, WHICH WAS PEGGED AT 36% PER ANNUM AND 60% PER ANNUM FOR THE DEPOSITS AND ADVANC ES RESPECTIVELY, STOOD REDUCED TO 24% P.A. AND 48% P.A. RESPECTIVELY DURING THE RELEV ANT PREVIOUS YEAR, I.E., F.Y. 2004-05. STATE OF AFFAIRS 4. THE ASSESSEE WAS NOT FILING ITS RETURN NOR WAS I T DEDUCTING ANY TAX AT SOURCE, EVEN AS BOTH THE DEPOSITS AND ADVANCES RAN INTO CRORES O F RUPEES, BEING AT ` 12.50 CRORES AND ` 5.49 CRORES RESPECTIVELY AS AT 31/3/2005, I.E., THE END OF THE RELEVANT PREVIOUS YEAR. ACCORDINGLY, A SURVEY WAS CARRIED OUT BY THE DEPART MENT AT THE ASSESSEES BUSINESS PREMISES ON 10.3.2005. IT WAS FOUND THAT THOUGH THE ASSESSEE WAS MAINTAI NING REGISTERS FOR DEPOSITS AS WELL AS ADVANCES, THE SAME WERE IN A VERY HAPHAZARD MANNER. THE BOOKS OF ACCOUNTS OR EVEN THE FINANCIAL STATEMENTS FOR THE EARLIER YEARS WERE NOT AVAILABL E. THE ENTIRE TRANSACTIONS WERE IN CASH, WITH THE ASSESSEE EVEN NOT MAINTAINING A BANK ACCOUNT, AND THE DAY TO DAY PAYMENT OF INTEREST, WHICH WAS D ISCHARGED ON A MONTHLY BASIS (RECKONED, WITH REFERENCE TO THE DATE OF RECEIPT), WERE NOT REFLECTED IN THE BOOKS OF ACCOUNTS; THE ACCOUNT BOOK DISCLOSING HUGE CASH BAL ANCES. THE AFFAIRS OF THE ASSESSEE WERE BEING MANAGED BY ONE SHRI GOPALAKRISHNAN UNNIT HAN, ITS SECRETARY SINCE 1999, WHO WAS EXAMINED ON OATH, BOTH DURING THE COURSE OF SUR VEY AS WELL AS SUBSEQUENTLY U/S. 131 ON 07.12.2007. HE CONFIRMED THE RATES OF INTEREST A PPLICABLE FOR DEPOSITS AND ADVANCES, I.E., AT 24% P.A. AND 48% P.A. RESPECTIVELY, THOUGH WAS CHARGED AT 36% P.A. FROM THE MEMBERS. NO TAX WAS BEING DEDUCTED AT SOURCE, AND N O DECLARATIONS FROM THE PAYEES, I.E., IN FORM 15G/15H WERE BEING ACCEPTED. IT TRANSPIRED AND CAME TO LIGHT THAT THOUGH THE DECISION TO START MONEY LENDING BUSINESS WAS ADOPTE D IN THE GENERAL BODY MEETING DATED 18.7.1999, WITH A MANAGING COMMITTEE IN PLACE TO LO OK AFTER ITS AFFAIRS, THE SAME WERE HANDLED INDEPENDENTLY BY ITS SECRETARY, WITH THE O THER MEMBERS (OF THE COMMITTEE) EITHER I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 3 HAVING NO SAY OR BEING PLAINLY NOT INTERESTED, EVEN AS THE BYE-LAWS OF THE SOCIETY DEFINES THE RIGHTS AND DUTIES OF THE OFFICE BEARERS. NO PER MISSION WAS OBTAINED FROM ANY COMPETENT AUTHORITY FOR THE COMMENCEMENT OF BUSINES S NOR WAS IT REPORTING ITS AFFAIRS THERE-TO FROM TIME TO TIME EVEN AS THE AS WAS DEALI NG WITH PUBLIC FUNDS, WHICH IS SUBJECT TO HEAVY REGULATION BY LAW, BOTH THE PROVINCIAL AND CENTRAL, INCLUDING BY THE RBI. THERE WAS COMPLETE DISREGARD FOR ALL THE NORMS OF ACCEPTE D BUSINESS PRACTICE AND ACCOUNTANCY, AND NO TRANSPARENCY IN ITS AFFAIRS. THERE WAS AN IN CREASING GAP BETWEEN THE DEPOSITS AND ADVANCES WITH EACH SUCCESSIVE YEAR. LOANS WERE BEI NG EXTENDED TO PERSONS KNOWN TO THE OFFICE BEARERS, AND IN SPITE OF THEY HAVING DEFAULT ED ON REPAYMENT AS WELL AS PAYMENT OF INTEREST. IN FACT, THE INTEREST ON DEPOSITS WAS BE ING SERVICED FROM FRESH DEPOSITS. AS A RESULT, PEOPLE AT THE HELM OF THE AFFAIRS WERE GETT ING RICH AT THE COST OF THE MEMBERS OF THE PUBLIC, WITH MOST OF THE DEPOSITORS HAVING LOST EVE N THEIR PRINCIPAL AMOUNT. NEEDLESS TO ADD, NO PROPER RECORDS WERE BEING MAINTAINED, AND N EITHER WERE THE SAME SUBJECT TO AUDIT. RETURNS 5. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE YEAR ON 11.11.2005 AT A LOSS OF ` 267.54 LAKHS, WHICH STOOD PROCESSED U/S. 143(1) ON 15.2.2007. SUBSEQUENTLY, A NOTICE U/S. 148 WAS ISSUED ON 19.2.2007. THE ASSESSEE VIDE ITS LETTER DATED 08.3.2007 COMMUNICATED THAT THE RETURN AS ORIGINALLY FILED BE TREATED AS ONE FILED IN RESPONSE TO THE NOTICE U/S. 148. THE CASE 6.1 THE ASSESSEE, CLAIMING TO BE FOLLOWING THE CASH SYSTEM OF ACCOUNTING, HAD CLAIMED INTEREST IN ITS RETURN ON ACCRUAL BASIS. THE BALAN CE-SHEET, WHICH WAS UNAUDITED, REFLECTED A CASH BALANCE OF ` 8.05 LAKHS AS AGAINST BOOK BALANCE OF ` 142.26 LAKHS, I.E., AS PER THE BOOKS OF ACCOUNTS PRODUCED ON BEING CALLED FOR TO V ERIFY THE ASSESSEES CLAIMS. IT WAS CLEAR THAT THE ASSESSEE HAD PREPARED A SET OF FINAL ACCOUNTS ONLY FOR THE SAKE OF FILING THE RETURN OF INCOME, WHICH DOCUMENTS WERE SIGNED ONLY BY ITS SECRETARY. THE SAME DID NOT AGREE WITH THE BOOKS OF ACCOUNTS, WHICH WERE NEITHE R CORRECT NOR A COMPLETE RECORD OF THE TRANSACTIONS. ACCORDINGLY, BOTH THE RETURNS AS WELL AS THE BOOKS OF ACCOUNTS WERE REJECTED I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 4 BY THE AO. THE LAW, AS ENUMERATED BY THE APEX COUR T IN THE CASE OF SALIG RAM KANHAYA LAL VS. CIT (1982)133 ITR 915(SC) AND [143 ITR 65], REQUIRED TH E ASSESSING AUTHORITY TO LOOK AT THE SUBSTANCE OF THE TRANSANCTION(S), DECID ING THE MATTER IN A MANNER SUCH THAT NEITHER THE REVENUE IS PUT TO AN UNREASONABLE LOSS NOR THE ASSESSEE IS SUBJECT TO UNREASONABLE HARDSHIP. HE, THEREFORE, PROCEEDED TO DETERMINE THE INCOME IN THE MANNER DEEMED FIT, IN VIEW OF THE GUIDELINES ISSUED BY THE APEX COURT IN CIT VS. BRITISH PAINTS INDIA LTD . (1991) 188 ITR 44 (SC). BOTH THE AMOUNT OF DEPOS ITS AND ADVANCES WERE ASSUMED AT THE SIMPLE MEAN OF THE RESPECTIVE FIGURE S AS OBTAINING AT THE BEGINNING AND CLOSE OF THE YEAR, AND WHICH WORKED TO ` 10.62 CRORES AND ` 5.06 CORES RESPECTIVELY. APPLYING THE INTEREST RATE OF 24% PER ANNUM AND 48% PER ANNUM THERE-TO, THE INTEREST INCOME (GROSS) AND INTEREST EXPENDITURE WAS DETERMI NED AT ` 242.96 LAKHS AND ` 254.88 LAKHS RESPECTIVELY. HOWEVER, AS NO TAX HAD BEEN DE DUCTED AT SOURCE, THE PROVISION OF SEC. 40(A)(IA) WOULD OPERATE TO DISALLOW THE DEDUCTION QUA INTEREST EXPENDITURE IN THE COMPUTATION OF BUSINESS INCOME. ACCORDINGLY, THE SA ME STOOD DISALLOWED AND THE ASSESSABLE BUSINESS INCOME DETERMINED AT ` 242.21 LAKHS, BY ALLOWING DEDUCTION FOR NOMINAL BUSINESS EXPENSES AT ` 0.75 LAKHS. IN DOING SO, HE REJECTED THE ASSESSEES CLAIM THAT THE DECLARATIONS IN FORM 15G/H WERE DEPOSITED WITH THE OFFICE OF THE CIT, KOTTAYAM ON 18.7.2005, AND THE NON-DEDUCTION OF TAX AT SOURC E WAS ON THAT BASIS, WHICH (REJECTION) BY THE AO WAS BOTH ON FACTS AS WELL WITH REFERENCE TO RULES. THE ASSESSEE WAS ADMITTEDLY PAYING INTEREST MONTHLY AND NOT ANNUALLY. ACCORDING LY, FORM 15G, WHICH WERE (IN ALL CASES) DATED 31.3.2005, WOULD BE VALID ONLY FOR THE MONTH OF MARCH, 2005. FURTHER, EVEN THESE WERE DEPOSITED ONLY IN JULY, WHILE AS PER THE RELEVANT RULE (R. 29C) WERE TO BE DEPOSITED BY 07.4.2005. IT IS DISALLOWANCE OF INTER EST EXPENDITURE, WHICH EXTENDS TO THE ENTIRE INTEREST EXPENDITURE AS COMPUTED BY HIM, WHI CH FORMS THE SUBJECT MATTER OF THE LIS BETWEEN THE REVENUE AND THE ASSESSEE. 6.2 IN APPEAL, THE LD. CIT(A) REJECTED EACH OF THE SEVERAL GROUNDS ASSUMED BY THE ASSESSEE BEFORE HIM, AGAINST THE REJECTION OF ITS R ETURN OF INCOME BY THE AO. SHE, HOWEVER, CONCURRED WITH THE ASSESSEE IN THAT THE DE CLARATION BY THE DEPOSITOR COULD NOT BE REJECTED. THE DELAYED FILING OF FORM 15G WOULD NOT INVALIDATE THE SAME. THE I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 5 DEPARTMENT, IF IT SO PREFERRED, WAS FULLY COMPETENT TO INITIATE PENALTY U/S. 272A(2)(F) OF THE ACT. ACCORDINGLY, S. 40(A)(IA) WAS NOT ATTRACT ED AND THE DISALLOWANCE BY THE AO WITH REFERENCE THERE-TO, DELETED. FINDINGS & DECISION 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 7.1 THE FIRST ISSUE IN THE MATTER, AS DISCERNED, IS WHETHER THE PROVISION OF S. 40(A)(IA) WOULD APPLY WHERE THE INCOME IS BEING DETERMINED BY ESTIMATING THE SAME IN VIEW OF THE CONDITION OF S. 145(3). THE SAME STANDS REJECTED BY BOTH THE AUTHORITIES BELOW. THIS CONSTITUTES THE PRINCIPAL OBJECTION OF THE ASSESSEE , GOING TO THE ROOT OF THE MATTER: IF THE REGULAR PROVISIONS OF THE ACT, APPLIED IN THE COMPU TATION OF INCOME CHARGEABLE TO TAX U/S. 28, ARE NOT APPLICABLE, THERE IS NO QUESTION OF THE APPLICATION OR OTHERWISE OF S. 40(A)(IA) OF THE ACT WHEREUNDER THE DISALLOWANCE HAS BEEN MAD E. IN OUR VIEW, THE ASSESSEES OBJECTION IS WITHOUT ANY BASIS IN LAW. SECTION 145 (3) ONLY EMPOWERS THE AO TO FRAME THE ASSESSMENT TO THE BEST OF THE JUDGMENT, CONSIDERING ALL THE RELEVANT ASPECTS, INCLUDING THE MATERIAL AND INFORMATION GATHERED AND AVAILABLE IN THE ABSENCE OF BOOKS OF ACCOUNTS, WHICH, AS IN THE INSTANT CASE, ARE NOT CORRECT AND COMPLETE. HE IS, WHILE MAKING THE ASSESSMENT, ONLY MAKING AN ESTIMATE, BY RELYING ON MATERIALS, I.E., IN CONTRADISTINCTION TO SOLELY ON THE ASSESSEES BOOKS OF ACCOUNTS, ONLY OF THE TOTAL INCOME ASSESSABLE UNDER THE ACT. AS SUCH, THE SAME WOULD BE SUBJECT TO THE APP LICABLE PROVISIONS OF THE ACT. IN FACT, S. 40(A)(IA) BECOMES APPLICABLE ONLY WHERE THE EXPE NDITURE IS OTHERWISE ALLOWABLE, SO THAT IT PRESUMES THE SATISFACTION OF THE RELEVANT PROVIS IONS OF THE ACT, AS S. 36(1)(III) QUA INTEREST EXPENDITURE ON THE DEPOSITS IN THE PRESENT CASE. THE ASSESSEES OBJECTION IS, THUS, EVEN OTHERWISE CONTRADICTORY, IMPLYING APPLICATION OF S. 36(1)(III), AND NOT OF S. 40(A)(IA), OR S. 194A FOR THAT MATTER. 7.2 THE ASSESSEES SECOND OBJECTION, I.E., OF THE A O BEING NOT CORRECT IN APPLYING THE ACCRUAL METHOD OF ACCOUNTING, AS IT WAS FOLLOWING C ASH METHOD OF ACCOUNTING, IS MET BY THE LD. CIT(A), AGAIN, TO OUR MIND VALIDLY. THE ACC EPTANCE OF THE DEPOSITS AND THE EXTENSION OF ADVANCES WOULD ONLY BE ON TRANSFER OF FUNDS. AS SUCH, RECORDING THE SAME ON RECEIPT AND PAYMENT BASIS, WOULD NOT BY ITSELF A MOUNT TO FOLLOWING THE CASH SYSTEM OF I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 6 ACCOUNTING. IT WAS FOUND IN SURVEY THAT THE PAYMENT AND RECEIPT OF INTEREST IS NOT BEING REFLECTED PROPERLY IN THE REGULAR COURSE. IN FACT, NO PROPER RECORDS WERE BEING MAINTAINED. THE BOOKS REFLECTED A CASH BALANCE OF O VER ` 142 LAKHS, TO NO CORRESPONDING ACTUAL CASH-IN-HAND. EVEN THE BALANCE-SHEET, FILED SUBSEQUENTLY, DID NOT AGREE WITH THE RECORDS, NOR BORE PROPER VERIFICATION, I.E., AS REQ UIRED BY ITS CONSTITUTING DOCUMENT, AND DULY APPROVED BY ITS MANAGING COMMITTEE AND FURTHER IN A GENERAL BODY MEETING. NO BOOKS OF ACCOUNTS FOR THE EARLIER YEARS WERE FOUND TO BE MAINTAINED. UNDER THE CIRCUMSTANCES, IT IS A COMPLETELY INCORRECT STATEME NT THAT THE CASH METHOD OF ACCOUNTING WAS BEING FOLLOWED. EVEN OTHERWISE, THE SAME ASSUME S RELEVANCE ONLY WHEN THE INCOME IS ASSESSED RELYING ON THE BOOKS OF ACCOUNTS MAINTA INED IN THE REGULAR COURSE OF ITS BUSINESS BY THE ASSESSEE, BEING CORRECT AND COMPLET E, SO THAT THEY WOULD ALSO EXHIBIT THE SAME, AND NOT WHEN THE INCOME IS ESTIMATED BY THE R EJECTING THE SAME. SECTION 5 DEFINES THE SCOPE OF TOTAL INCOME TO INCLUDE ALL SUCH INCOM ES THAT ACCRUES OR ARISES DURING THE RELEVANT PREVIOUS YEAR. AS SUCH NO INFIRMITY ATTEN DS THE AOS ACTION. 7.3 WE MAY NOW ADDRESS THE ISSUE OF ESTIMATION OF I NCOME, IN THE COMPUTATION OF WHICH THE IMPUGNED DISALLOWANCE STANDS EFFECTED. T HE SAME IS U/S. 40(A)(IA), WHICH AS AFORE-NOTED, COMES INTO PLAY ONLY WHEN AN EXPENDITU RE IS OTHERWISE ALLOWABLE, AS U/S. 36(1)(III) IN THE INSTANT CASE. THE FIRST THING TH AT STRIKES US IN THE MATTER IS THAT THERE IS NO FINDING QUA THE PURPOSE FOR WHICH THE EXCESS BORROWING HAS BEE N MADE; THE DIFFERENCE BETWEEN CAPITAL BORROWED AND THAT DEPLOYED FOR BUSI NESS BEING AT A WHOPPING ` 5.56 CRORES, I.E., AT AN AVERAGE (FOR THE YEAR), EVEN AS THE DIFFERENCE AS ON 31.3.2005 IS AT ` 7.01 CRORES ( ` 12.50 ` 5.49 CORES). THE BALANCE-SHEET AS ON 31.3.2005 REF LECTS A CASH BALANCE OF ` 8.06 LACS. WHERE IS THE BALANCE ` 6.92 CRORES ? THE BALANCE-SHEET IS NOT BEFORE US. THOUGH THE SAME COULD BE APPLIED FOR OTHER ASSETS A S WELL, THE ASSESSEE WOULD ALSO HAVE CAPITAL FUNDS, AND COULD HAVE OTHER LIABILITIES AS WELL. THE DIFFERENCE AS AT THE BEGINNING OF THE YEAR IS AT ` 4.11 CRORES, WHICH IS AGAIN INEXPLICABLE. WHY WOULD A FIRM CONTINUE TO BORROW WHEN IT ALREADY HAS SURPLUS FUNDS, WHICH IT IS NOT BEING ABLE TO BE EMPLOY FOR THE BUSINESS PURPOSES ; THE DIFFERENCE, EVEN AS FAR BACK AS 31.3.2002, BE ING TO THE TUNE OF ` 1 CRORE. THIS, EVEN OTHERWISE INCOMPREHENSIBLE, BECO MES ALL THE MORE FLUMMOXING WHEN I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 7 COUPLED WITH THE FACT THAT THE BORROWINGS ENTAILS A HEAVY COST, BOTH IN TERMS OF INTEREST AS WELL AS BUSINESS RISK, AS SAY DEPLOYMENT OTHER THAN THAT FULLY SECURED, BEARS A RISK OF DEFAULT. THIS IS PRECISELY WHY THE FINANCING BUSINE SS IS HEAVILY REGULATED BY LAW; IT PRESCRIBING MANDATORY RESERVES, INVESTMENT AVENUES, LIQUIDITY RATIO, ETC. THE ASSESSEES BUSINESS WAS BEING MANAGED WITHOUT REGARD TO ANY NO RMS, AS WOULD BE APPARENT FROM THE FOREGOING (REFER PARA 4), AND THE INCREASING GAP BE TWEEN THE DEPOSITS AND ADVANCES OVER THE YEARS COMPLETE THE PICTURE. THE FUNDS HAVE BEE N SIPHONED OFF, AND EVEN THOSE ADVANCED NOT PROPERLY MANAGED, SO THAT THERE WAS PR OBLEM OF RECOVERY, BOTH OF PRINCIPAL AND INTEREST. NO WONDER, THE OBSERVATION BY THE AO HIMSELF, THAT MOST OF THE DEPOSITORS HAD LOST THEIR CAPITAL. AS IT APPEARS, THE ASSESSEE RESORTED TO BORROWING EVEN TO SERVICE THE INTEREST ON EARLIER DEPOSITS, FURTHER DEEPENING ITS FINANCIAL C RISIS. FROM THE STAND-POINT OF DEDUCTIBILITY OF INTEREST ON SUCH ADDITIONAL DEPOSI TS, OF COURSE THE FIGURE OF WHICH IS ANYBODYS GUESS, THE SAME WOULD QUALIFY WHERE THE A DDITIONAL DEPOSIT IS MADE TOWARD MEETING AN ACTUAL, GENUINE LOSS, AS ANY LOSS WOULD LEAD TO A CORRESPONDING DEFICIT IN CAPITAL. HOWEVER, WHERE THE SAME IS CAUSED ON ACCOU NT OF DEFALCATION OR MISAPPROPRIATION OF CAPITAL, AS IS AGAIN APPARENT, OR BY LOANS GIVEN FOR OTHER THAN BUSINESS CONSIDERATIONS, COULD SUCH GAP OR DEFICIENCY BE CONSIDERED AS A BUS INESS LOSS ARISING IN THE COURSE OF BUSINESS. SURELY, NOT. IN OUR VIEW, IN REALITY, A MIX OF BOTH THE FACTORS, I.E., IMPROPER MANAGEMENT (OF BUSINESS) AS WELL AS SIPHONING OFF O F FUNDS BY THE MANAGEMENT, DIRECTLY, AS WELL AS THROUGH LOANS TO KNOWN PERSONS FOR EXTRA CONSIDERATIONS AS WHERE LOANS WERE MADE TO DEFAULTERS, IS PRESENT IN THE INSTANT CASE, AND RESPONSIBLE FOR THE LOSS. EVEN THOUGH THE TWO HAVE DIFFERENT IMPLICATIONS FOR THE DEDUCTION OF INTEREST AS BUSINESS EXPENDITURE, BEING ALLOWABLE IN THE CASE OF ONE (FO RMER) AND NOT IN THE OTHER (LATTER), IT IS AGAIN APPARENT THAT IT WOULD BE EXTREMELY DIFFICULT , ALMOST IMPOSSIBLE, IN THE ABSENCE OF PROPER RECORDS, TO DETERMINE THE EXTENT OF LOSS ATT RIBUTABLE TO THE FORMER, THE ONUS FOR WHICH IS AGAIN ONLY ON THE ASSESSEE. IN OTHER WORDS , NO PART OF THE DEFICIENCY OR THE EXCESS BORROWINGS CAN BE SAID AS ARISING OUT OF A B USINESS LOSS, WHICH, IF SO, WOULD MEET THE DEFICIENCY TO THAT EXTENT. A MERE LOOK AT THE W IDE INTEREST DIFFERENTIAL THAT OBTAINS BETWEEN THE DEPOSIT AND LENDING RATES, SO THAT THE ASSESSEE OPERATED AT A VERY GOOD I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 8 MARGIN, WOULD EXHIBIT AND REINFORCE THIS. CONSEQUEN TLY, THE ENTIRE OF IT HAS TO BE CONSIDERED AS EXCESS BORROWINGS OR NOT FOR THE PURP OSE OF BUSINESS, OR EVEN IF MADE FOR BUSINESS PURPOSES, AS DIVERTED FOR NON BUSINESS PU RPOSES. WE DWELL ON THIS ASPECT AS A FINDING AS TO THE SATISFACTION OF THE CONDITION OF S. 36(1)(III), WHICH IS INTEGRAL BOTH TO THE ESTIMATION OF INCOME AS WELL AS TO THE INVOCATION O F S. 194A R/W S. 40(A)(IA) APPLIED BY THE REVENUE, IS CONSPICUOUS BY ITS ABSENCE, EVEN AS THE SAME CANNOT BE A MATTER OF PRESUMPTION, WITH THE OBSERVATIONS AND FINDINGS OF THE REVENUE AUTHORITIES UNMISTAKABLY POINTING TO THE CONTRARY, I.E., THE NON-SATISFACTIO N OF S. 36(1)(III) ITSELF TO THE EXTENT OF THE DEFICIENCY. SO, HOWEVER, IN THE ABSENCE OF ANY CLE AR FINDING IN THE MATTER, WE CONSIDER IT ONLY FIT AND PROPER THAT THE MATTER IS RESTORED BAC K TO THE FILE OF THE AO, WHO SHALL ADJUDICATE THE SAME AFTER HEARING THE ASSESSEE, ALL OWING A REASONABLE OPPORTUNITY TO IT TO STATE AND PRESENT ITS CASE IN THE MATTER. IN ARRIVI NG AT OUR DECISION IN THE MATTER, WE HAVE PLACED RELIANCE ON THE DECISIONS, AMONG OTHERS, IN THE CASE OF KAPURCHAND SHRIMAL V. CIT (1981) 131 ITR 451 (SC) AND VISHNU KUMAR GUPTA V. CIT , 143 ITR 69 (ALL.). 7.4 COMING, NEXT, TO THE BORROWINGS DEEMED NOT IN E XCESS, SO THAT THEY ARE ADMITTEDLY FOR BUSINESS PURPOSES AND, THUS, SATISFY THE MANDAT E OF SEC. 36(1)(III). THOUGH THE QUANTUM THEREOF WOULD BE ASCERTAINED ONLY ON THE DE TERMINATION OF THE EXTENT OF THE EXCESS OR OTHER THAN FOR BUSINESS BORROWINGS, F OR WHICH THE MATTER STANDS RESTORED, WE MAY OBSERVE THAT IN THE ABSENCE OF ANY PROFIT OR LO SS FOR THE EARLIER YEARS, ONLY THE GAP OR DEFICIENCY IN CAPITAL CAN BE CONSIDERED AS AN EXCES S. IN FACT, CONSIDERING THE WIDE INTEREST DIFFERENTIAL, WHICH HAS BEEN MAINTAINED OVER THE YE ARS, SO THAT THE PROFIT, WHICH WOULD ONLY GO TO INCREASE THE APPARENT GAP/DEFICIENCY, IS A DISTINCT POSSIBILITY, THIS ITSELF REPRESENTS A CONSERVATIVE ESTIMATE. IT IS QUA SUCH BORROWINGS, AT AN AVERAGE OF ` 5.06 CRORES FOR THE YEAR, FOR WHICH S. 40(A)(IA) BECOMES RELEVANT AND COULD POSSIBLY BE APPLICABLE. THE REVENUES CASE IS THAT FORM 15G/H F ILED BY THE ASSESSEE CANNOT BE ADMITTED, HAVING BEEN FILED AFTER 07.4.2005, THE DU E DATE IN TERMS OF R. 29C. IN FACT, THE SAID FORMS ARE ONLY AN AFTERTHOUGHT, AS THE ASSESSE E ADMITTEDLY PAYING INTEREST ON A MONTHLY BASIS, ITS LIABILITY TO DEDUCT TAX AT SOURC E COMMENCES FROM THE FIRST MONTH OF THE YEAR, I.E., APRIL, 2004, ONWARDS, AND CONTINUES FRO M MONTH TO MONTH, RIGHT UP TO MARCH, I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 9 2005. IN ADDITION, HOW COULD THE ASSESSEE KNOW IN ADVANCE THAT THE DEPOSITORS WOULD FURNISH THE DECLARATION, AND WHICH SUDDENLY APPEAR ON THE LAST DAY OF THE YEAR, I.E., 31.3.2005 ? THE FACT THAT NO SUCH FORMS WERE FURNISHED FOR T HE PRECEDING YEARS, AND WERE NOWHERE IN SIGHT, OR EVEN IN CONTEMPLATION, EVEN UP TO 10.3.2005, THE DATE OF SURVEY, LENDS FURTHER CREDENCE TO THIS CLAIM. HOWEVER, ALL SUCH INFERENCES AMOUNT TO A NULLITY IN THE FACE OF THE ADMITTED DEPOSITS OF THE FORM 15G/H DATED 31.3.2005 ON 18.7.2005. WE ARE IN AGREEMENT WITH THE LD. CIT(A) THAT THE DECLA RATION SHALL NOT BECOME INVALID FOR THE REASON THAT IT HAS NOT BEEN OBTAINED FROM THE DEPOS ITOR IN TIME OR FURNISHING (TO THE DEPARTMENT) BEYOND THE PRESCRIBED TIME STIPULATED T HEREFOR. WE CONSIDER IT AS SO, AS THE RELEVANT PROVISION (S. 40(A)(IA)) ITSELF ALLOWS TIM E UP TO THE DUE DATE OF THE FILING OF THE RETURN U/S. 139(1) FOR THE DEPOSIT OF TDS, FAILING WHICH ONLY THE SAME WOULD GET ATTRACTED. HOW COULD THEN, THE FILING OF THE DECLARATIONS PRIO R TO THAT DATE, BE NOT CONSIDERED AS VALID? THE AO, WHEN HE INSISTS ON THE MONTHLY DEPOS IT OF THE DECLARATION FORMS FOR THEIR APPLICABILITY, CONFUSES THE TDS PROVISIONS WITH THA T OF SEC. 40(A)(IA). EVEN AS EXPLAINED BY THE LD. CIT(A), THE DEPARTMENT COULD JUSTIFIABLY PURSUE THE PENAL PROVISIONS QUA THE DEFAULT OF THE TDS PROVISIONS, BUT THE LATE FILING OF THE DECLARATION FORMS WOULD OPERATE TO INVALIDATE THE SAME. SO, HOWEVER, WE OBSERVE A FUNDAMENTAL FLAW IN THE ACCEPTANCE OF THE ASSESSEES CLAIM QUA 15G FORMS. THERE IS NO REFERENCE TO THE AMOUNT OF INTEREST THAT WOULD STAND COVERED THEREBY, IN THE ORDERS OF BOTH THE AUTHORIT IES BELOW. IN FACT, THE ASSESSEE HAS DEDUCTED TAX ON SOURCE ON INTEREST PAYMENTS AT ` 19.47 LAKHS, SO THAT THE APPLICATION OF S. 40(A)(IA) TO THE ENTIRETY OF INTEREST PAYMENT IS IT SELF A CLEAR MISTAKE. THOUGH THERE MAY BE NO MENTION OF THE AMOUNT OF INTEREST ON THE DECLARA TION FORM AS SUCH, THE INTEREST PAID TO THE CONCERNED DEPOSITOR ISSUING THE SAME, OR MORE P RECISELY, THE INTEREST ATTRIBUTABLE TO THE CONCERNED DEPOSITOR, I.E., GOING BY THE AVERAGE FORMULA ADOPTED BY THE REVENUE, WOULD, ON AGGREGATION ACROSS ALL DEPOSITS, LEAD TO THE INTEREST COVERED THEREBY. INCIDENTALLY, THE INTEREST CLAIMED AS PAID BY THE A SSESSEE ( ` 287.51 LAKHS) APPROXIMATES THAT MADE BY THE REVENUE ( ` 254.88 LAKHS), VALIDATING THE ESTIMATION EXERCISE M ADE BY THE AO. I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 10 A PROPER VERIFICATION OF THE DECLARATION FORMS, TH US, HAS NECESSARILY TO PRECEDE THEIR ACCEPTANCE, RESULTING IN THE ISSUE OF DEFINIT E FINDING/S QUA THE INTEREST COVERED THEREBY. IN THIS REGARD, WE ALSO OBSERVE THAT THE S AID FORM/DECLARATION IS NOT APPLICABLE TO THE PAYEE, WHERE IT IS A FIRM OR A COMPANY, AS ALSO WHERE THE INTEREST AMOUNT EXCEEDS THE MAXIMUM AMOUNT NOT CHARGEABLE TO TAX (S. 197A(1A) A ND S. 197A (1B)). NEEDLESS TO ADD THAT THE SAME, AGAIN, CANNOT BE A MATTER OF PRE SUMPTION. ALSO, CONSEQUENTLY, THERE WOULD ARISE THE ISSUE OF THE APPORTIONMENT OF THE I NTEREST COVERED BY THE FORM/DECLARATION, AS WELL AS ON WHICH THE TDS IS PA ID, SO THAT S. 40(A)(IA) IS NOT APPLICABLE THERE-TO, INTO TWO BROAD CATEGORIES, I.E ., WHICH SATISFY THE CONDITION OF S. 36(1)(III) AND THAT WHICH DOES NOT. THE MATTER, IS THUS, RESTORED BACK TO THE FILE OF THE AO WITH LIKE DIRECTION, I.E., AS STATED AT PARA 7.3 AB OVE. 7.5 FINALLY, WE OBSERVE THAT THE ASSESSEE, THROUGH ITS SECRETARY, ON BEING EXAMINED ON OATH, CLARIFIED THAT THE INTEREST STAND CHARGED DIF FERENTLY FROM MEMBERS AND NON- MEMBERS, I.E., AT THE RATE OF 36% PER ANNUM AND 48% PER ANNUM RESPECTIVELY (REFER PARA 2, PG. 2 OF THE ASSESSMENT ORDER). THE AO, HOWEVER, APPLIED THE RATE OF 48% PER ANNUM UNIFORMLY ACROSS ALL ADVANCES, WITHOUT CONTROVERTIN G THE SAID STATEMENT. THE SAME, OF COURSE, IS NOT BINDING ON THE AO, BUT IT COULD BE R EJECTED ONLY UPON VERIFICATION, BEING A MATTER WHICH WOULD STAND TO BE BORNE OUT BY THE REC ORD. THE ISSUE BEING BASIC TO THE ESTIMATION OF INCOME, WITH SIGNIFICANT BEARING ON T HE ASSESSMENT, WE CONSIDER IT JUSTIFIABLE UNDER THE CIRCUMSTANCES, AS A FACT FIND ING FINAL AUTHORITY, PARTICULARLY AS THE MATTER IS BEING RESTORED BACK FOR DETERMINATION OF OTHER RELEVANT, FACTUAL ASPECTS, TO DO SO QUA THIS ASPECT OF THE MATTER AS WELL, TO THE FILE OF THE AO WITH LIKE DIRECTIONS, I.E., AS STATED IN PARA 7.3 ABOVE. 8. IN THE RESULT, THE REVENUES APPEAL IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER I.T.A. NO. 14/COCH/2009 (ASSTT. YEAR: 2005-06) 11 PLACE: ERNAKULAM DATED: 21ST OCTOBER, 2011 GJ COPY TO: 1. M/S. NSS KARAYOGAM, BRANCH NO. 1365, NEERKUNNAM, ALAPPUZHA. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, ALAPPUZHA. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, KOC HI. 4. THE COMMISSIONER OF INCOME-TAX, KOTTAYAM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE .