INDRAVADHAN C. SHAH, MUMBAI V. ITO 6(3)(2), MUMBAI

ITA 1568/MUM/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2695 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 09-12-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 06-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K R DAS
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, SENIOR VICE PRESIDENT I.T.A. NO. 1568/MUM/2009 (ASSESSMENT YEAR : 2003-04) INDRAVADHAN C.SHAH, 146A, JAIN SOCIETY, SION(E), MUMBAI-400 022. PAN:AAHPS2976A VS. THE INCOME TAX OFFICER, WARD-8(3)(2), AAYAKAR BHAVAN, MARINE LINES, MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. K.GOPAL RESPONDENT BY : MR. K.R.DAS, (CIT)DR O R D E R THIS APPEAL BY THE ASSESSEE RELATES TO THE ASSE SSMENT YEAR 2003-04. THE ASSESSEE IS AN INDIVIDUAL. HE WAS THE DIRECTOR IN L.N. ENGINEERING WORKS PVT. LTD. DURING THE RELEVANT ASSESSMENT YEAR. IN THE RETURN OF INCOME, THE ASS ESSEE DECLARED INTEREST INCOME OF RS.19,666/- AGAINST WHI CH DEDUCTION WAS CLAIMED FOR THE INTEREST OF RS.2,62,0 39/- PAID BY THE ASSESSEE AND THE BALANCE OF RS.2,42,373/- WAS C LAIMED AS A LOSS. THE INTEREST WAS RECEIVED FROM FIXED DEPOSIT S AND BANK ACCOUNT AND THE INTEREST PAYMENT WAS MADE ON THE LO AN OF RS.55,32,451/- BORROWED BY THE ASSESSEE FROM THE BA NK FOR THE PURPOSE OF ADVANCING THE SAME TO THE COMPANY IN WHI CH HE WAS A DIRECTOR. NO INTEREST WAS RECEIVED IN THE YEAR UN DER APPEAL FROM THE COMPANY ON THE AMOUNT ADVANCED. 2. ON THE ABOVE FACTS THE ASSESSING OFFICER, IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, CALLED UPON THE ASSESS EE TO ADDUCE REASONS FOR NOT CHARGING INTEREST FROM THE C OMPANY ON THE AMOUNT ADVANCED. THE ASSESSEE FILED TWO LETTERS EXPLAINING ITS POSITION AS UNDER:- ITA NO.1568/MUM/09 2 (A) HE HELD 34% SHARES IN THE COMPANY. HE WAS RECEIVING SALARY OF RS.1,50,000/- FROM THE COMPANY. THE LOAN WAS ADVANCED TO THE COMPANY BY BORROWING FROM VARIOUS PARTIES. (B) DURING THE YEAR UNDER CONSIDERATION, THE COMPANYS BUSINESS DETERIORATED AND RESULTED IN LOSSES DUE TO WHICH IT COULD NOT PAY ANY INTEREST TO THE ASSESSEE. (C) THE ASSESSEE WAS REGULARLY RECEIVING INTEREST ON TH E LOAN ADVANCED TO THE COMPANY IN THE EARLIER YEARS. DURIN G THE NEXT FINANCIAL YEAR (YEAR UNDER 31.3.2004) THE ASSE SSEE SOLD HIS SHARES IN THE COMPANY AND RECEIVED THE ENT IRE LOAN BACK ALONG WITH INTEREST FOR THE YEAR ENDED 31.3.2004. THE INTEREST FOR THE YEAR ENDED 31.3.200 3, WHICH IS THE YEAR UNDER APPEAL, WAS HOWEVER NOT REC EIVED. ON THE BASIS OF THESE FACTS AND CITING SEVERAL AUTH ORITIES, THE ASSESSEE CONTENDED THAT THE INTEREST MUST BE ALLOWE D AS A DEDUCTION NOTWITHSTANDING THAT NO INTEREST WAS RECE IVED FROM THE COMPANY TO WHICH THE ASSESSEE HAD ADVANCED AMOU NTS OUT OF THE BORROWINGS ON WHICH HE WAS PAYING INTEREST. 3. THE ASSESSING OFFICER APPEARS TO HAVE TAKEN THE VIEW THAT THE PRESENT CASE INVOLVES ISSUE OF INTEREST FREE L OAN MADE OUT OF INTEREST BEARING FUNDS AND PROCEEDED TO CONCLUDE T HAT THERE WAS NO QUESTION OF ALLOWING THE INTEREST AS AN EXPE NDITURE. HE SOUGHT TO DISTINGUISH THE AUTHORITIES CITED BY THE ASSESSEE AND ULTIMATELY HELD AS UNDER:- 3.5 AS CAN BE SEEN FROM THE ABOVE DISCUSSION THAT THE RULINGS OF THE COURTS IN THE ABOVE TWO CASES CI TED HAS DIRECT BEARING TO THE ASSESSEES CASE AS THE ASSESSEE HAS DEPLOYED INTEREST BEARING FUNDS ON INTEREST FREE LOANS. MOREOVER, INTEREST EARNED (RS.19,666/-) FROM WHICH INTERST PAID (RS.2,62,039/ - HAS BEEN REDUCED, HAS NO BEARING ON THE BORROWED/ADVANCED FUNDS AS THESE AMOUNT OF RS.19,666/- HAS BEEN EARNED ON FIXED DEPOSITS AND ITA NO.1568/MUM/09 3 OTHER BANK INTEREST. THE ASSESSEE CANNOT EVEN TAKE THE PLEA THAT INTEREST PAID HAS BEEN DEBITED AGAINS T THE INTEREST RECEIVED. THUS, ON THE BASIS OF THE AB OVE DISCUSSION, THE AMOUNT OF RS.2,62,039/- CLAIMED AS INTEREST PAID TO VARIOUS LOAN CREDITORS IS DISALLOW ED AND ADDED BACK AS ASSESSEES INCOME. PENALTY PROCEEDINGS U/S.271(1)(C) READ WITH EXPLANATION THERETO ARE SEPARATELY INITIATED FOR FURNISHING OF INACCURATE PARTICULARS. 4. ON APPEAL, THE CIT(A) ENDORSED THE DECISION OF T HE ASSESSING OFFICER AND UPHELD THE DISALLOWANCE. HE F URTHER HELD THAT THE ASSESSEE HAS FAILED TO EXPLAIN THE BUSINES S EXPEDIENCY IN ADVANCING THE LOAN AND THEREFORE, HELD THAT THE INTEREST DEBITED WAS NOT FOR THE PURPOSE OF THE BUSINESS. HE THUS DISMISSED THE ASSESSEES APPEAL. 5. THE ASSESSEE IS IN FURTHER APPEAL TO CONTEND THA T THE INCOME-TAX AUTHORITIES HAVE NOT APPRECIATED THE FAC T THAT THE LOAN WAS NOT GIVEN INTEREST FREE AND IT IS ONLY A C ASE OF THE INTEREST NOT BEING RECEIVED FROM THE COMPANY FOR TH E YEAR UNDER APPEAL DUE TO ADVERSE BUSINESS CIRCUMSTANCES AND LO SSES INCURRED. IT IS FURTHER CONTENDED THAT THIS FACTUAL ERROR HAS PERMEATED THROUGH THEIR FINDINGS AND CONCLUSIONS. M Y ATTENTION WAS DRAWN TO THE FACT THAT THE ASSESSEE HAS DECLARE D INTEREST INCOME FROM THE COMPANY ON THE LOAN IN THE EARLIER YEARS AND ALSO IN THE SUBSEQUENT YEAR AND IN THIS CONNECTION THE RETURNS FILED FOR THOSE YEARS HAVE BEEN COMPILED IN THE PAP ER BOOK . IT IS FURTHER SUBMITTED THAT THE CIT(A) ERRONEOUSLY CONSI DERED THE ASSESSEES CLAIM AS ONE FALLING UNDER THE HEAD BUS INESS WHEREAS THE ASSESSEE HAD CLAIMED BOTH THE INTEREST RECEIVED AND PAID UNDER THE HEAD INCOME FROM OTHER SOURCES AND THEREFORE THE ONLY SECTION UNDER WHICH THE CLAIM FO R INTEREST DEDUCTION CAN BE PROCESSED IS SECTION 57(III) OF TH E ACT. MY ATTENTION HAS BEEN DRAWN TO THE JUDGEMENT OF THE S UPREME COURT IN CIT VS. RAJENDRA PRASAD MOODY (1978) 115 I TR 519) ITA NO.1568/MUM/09 4 AND THE JUDGEMENT OF CALCUTTA HIGH COURT IN CIT VS. NEW SAVAN SUGAR & GOOD REFINING COMPANY LTD., (1990) 185 ITR 564 TO CONTEND THAT EXPENDITURE CAN BE ALLOWED AS A DEDUCT ION UNDER SECTION 57(III) EVEN THOUGH IT WAS NOT PRODUCTIVE I N THE SENSE THAT NO INCOME WAS RECEIVED BY THE ASSESSEE BY INCU RRING THE EXPENDITURE. 6. ON THE OTHER HAND, THE LEARNED SENIOR DR BESIDES STRONGLY RELYING ON THE ORDERS OF THE DEPARTMENTAL AUTHORITIES, POINTED OUT THAT THERE IS NO LINK ESTABLISHED BETWE EN THE INTEREST EXPENDITURE AND THE INTEREST INCOME. HE T HEREFORE, SUBMITTED THAT THE DISALLOWANCE MUST BE UPHELD. 7. ON A CAREFUL CONSIDERATION OF THE FACTS AND RIVA L SUBMISSIONS, I AM INCLINED TO AGREE WITH THE ASSESS EE. FROM THE STATEMENTS FILED IN THE PAPER BOOK, I FIND THAT THE ASSESSEE HAS NOT ADVANCED THE LOAN TO THE COMPANY FREE OF INTERE ST BUT HAS ACTUALLY RECEIVED INTEREST IN THE EARLIER YEARS A ND THE FOLLOWING ARE THE DETAILS CULLED OUT FROM THE STATEMENTS OF I NCOME FILED BEFORE ME:- ASSESSMENT YEAR YEAR ENDED INTEREST RECEIVED FROM THE COMPANY RS. 2000-01 31.3.2000 12,68,036 2001-02 31.3.2001 19,11,557 2002-03 31.3.2002 14,55,475 8. I ALSO FIND THAT THE ASSESSEE HAS PAID INTEREST ON THE BORROWINGS MADE BY HIM IN THE ABOVE YEARS AND APPAR ENTLY NO QUESTION WAS RAISED IN THE ASSESSMENTS FOR THOSE YE ARS. I FURTHER FIND THAT IN THE STATEMENTS OF INCOME FOR T HE ABOVE YEARS THE INTEREST RECEIVED AND PAID HAS BEEN ADJUSTED AG AINST EACH OTHER AND THE NET SURPLUS OR DEFICIT HAS BEEN SHOWN UNDER THE HEAD INCOME FROM OTHER SOURCES. EVEN FOR THE YEA R UNDER ITA NO.1568/MUM/09 5 APPEAL, THE POSITION IS THE SAME, THE ONLY DIFFEREN CE BEING THAT THERE WAS NO INTEREST RECEIVED FROM THE COMPANY DUE TO ADVERSE BUSINESS CIRCUMSTANCES AND LOSSES. THE CLAIM OF TH E ASSESSEE BEFORE THE ASSESSING OFFICER THAT IN THE ASSESSMENT YEAR 2004- 05 THE ENTIRE LOAN ALONG WITH INTEREST FOR THAT YEA R WAS RECEIVED BY THE ASSESSEE HAS ALSO NOT BEEN DISPUTED. THE CIT (A) WAS THEREFORE IN ERROR IN PROCESSING THE ASSESSEES CLA IM AS IF IT WAS MADE UNDER THE HEAD BUSINESS AND IN APPLYING THE CRITERIA THAT THE ASSESSEE SHOULD HAVE PROVED THAT THE LOAN WAS A DVANCED ON ACCOUNT OF BUSINESS EXPEDIENCY OR THAT IT WAS GIVEN FOR THE PURPOSE OF THE BUSINESS. BE THAT AS IF MAY, UNDER S ECTION 57(III) IT IS NOT NECESSARY FOR THE ASSESSEE TO PROVE THAT THE EXPENDITURE, IN ORDER TO MERIT DEDUCTION, WAS PRODU CTIVE AND ACTUALLY RESULTED IN INCOME. THIS HAS BEEN ESTABLIS HED BY A LONG SERIES OF DECISIONS STARTING FROM THE JUDGEMENT OF THE SUPREME COURT IN EASTERN INVESTMENTS LTD. VS. CIT., (1951) 20 ITR 1 AND A DIRECT DECISION UNDER SECTION 57(III) IS THAT OF THE SUPREME COURT IN CIT VS. RAJENDRA PRASAD MOODY. IN THIS JUD GEMENT THE SUPREME COURT RELIED ON ITS EARLIER JUDGEMENT IN TH E CASE OF EASTERN INVESTMENTS (SUPRA) IN WHICH THE QUESTION A ROSE UNDER SECTION 12(2) OF THE INDIAN INCOME TAX ACT, 1922 WH ICH WAS ON THE SAME TERMS AS SECTION 57(III) OF THE INCOME TAX ACT, 1961. THE JUDGEMENT OF THE CALCUTTA HIGH COURT CITED SUPR A IS ALSO TO THE SAME EFFECT. IN THE LIGHT OF THIS LEGAL POSITIO N, IT IS NOT PERMISSIBLE FOR THE INCOME-TAX AUTHORITIES TO DISAL LOW THE INTEREST CLAIMED BY THE ASSESSEE AS A DEDUCTION ON THE GROUND THAT THE ASSESSEE DID NOT RECEIVE ANY INTEREST ON T HE LOANS ADVANCED TO THE COMPANY DURING THE RELEVANT ACCOUNT ING YEAR. THE ASSESSEE HAS ALSO EXPLAINED THE REASON AS TO WH Y HE DID NOT RECEIVE ANY INTEREST FROM THE COMPANY IN THE RELEVA NT YEAR. THE ASSESSEE HAS BEEN ADOPTING THE MERCANTILE SYSTEM OF ACCOUNTING ABOUT WHICH THERE IS NO DISPUTE. UNDER SECTION 145 OF THE ACT, INCOME CHARGEABLE TO TAX UNDER THE HEAD INCOME FRO M OTHER ITA NO.1568/MUM/09 6 SOURCES SHALL BE COMPUTED IN ACCORDANCE WITH EITHE R THE CASH SYSTEM OR THE MERCANTILE SYSTEM REGULARLY ADOPTED B Y THE ASSESSEE. EVEN UNDER THE MERCANTILE SYSTEM OF ACCOU NTING, THE PRINCIPLE OF REAL INCOME NEEDS TO BE APPLIED AS HEL D BY THE CALCUTTA HIGH COURT IN SRI KEWAL CHAND BAGRI (1990) 183 ITR 207. IN THIS CASE IT WAS HELD, FOLLOWING THE JUDGEM ENT OF THE SUPREME COURT IN CIT VS. SHOORJI VALLABHADAS & CO., (1962) 46 ITR 144 AND THAT OF THE MADRAS HIGH COURT IN CIT VS . MOTOR CREDIT CO. P. LTD. (1981) 127 ITR 572 THAT IF INCOM E DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX BECAUSE THE SU BJECT MATTER OF THE INCOME TAX ACT IS INCOME. IN THE CASE BEFORE TH E CALCUTTA HIGH COURT THE ASSESSEE DID NOT RECEIVE ANY INTERES T SINCE THE DEBTOR WAS FINANCIALLY IN A BAD POSITION AND COULD NOT PAY INTEREST. APPLYING THE REAL INCOME PRINCIPLE, THE HIGH COURT HELD THAT MERELY BECAUSE THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT CANNOT BE SAID THAT INCOME SHOULD BE ASSESSED ON ACCRUAL BASIS WHEN THERE IS E VIDENCE TO SHOW THAT DUE TO THE ADVERSE FINANCIAL POSITION OF THE DEBTOR, IT IS NOT POSSIBLE TO CONCEIVE OF ANY INCOME. I AM IN CLINED TO ACCEPT THE ASSESSEES CONTENTION THAT THE RATIO OF THE AFORESAID AUTHORITIES APPLIES TO THE PRESENT CASE. THE ASSES SEE HAS SHOWN THE INTEREST RECEIVED ON THE LOAN FROM THE COMPANY IN ALL THE EARLIER YEARS AS INCOME FROM OTHER SOURCES AND WAS ALSO ALLOWED DEDUCTION IN RESPECT OF INTEREST PAID ON THE BORROW INGS TO EFFECT THE LOAN. THE CLAIM WAS APPARENTLY ALLOWED ONLY UND ER SECTION 57(III). FOR THE YEAR UNDER APPEAL DUE TO ADVERSE F INANCIAL CIRCUMSTANCES NO INTEREST COULD BE RECEIVED FROM TH E COMPANY. IT IS A CASE OF NO INCOME HAVING RESULTED AT ALL. E XPENDITURE ALLOWABLE UNDER SECTION 57(III) CANNOT BE DISALLOWE D MERELY BECAUSE IT HAS NOT RESULTED IN AN INCOME, AS HELD B Y THE SUPREME COURT IN THE JUDGEMENTS CITED ABOVE. IT IS NOT THE CASE OF THE DEPARTMENTAL AUTHORITIES THAT THE INTEREST E XPENDITURE HAS NO NEXUS WITH THE INTEREST INCOME. IN FACT, CON SIDERING THE ITA NO.1568/MUM/09 7 PAST ASSESSMENTS, IT CANNOT BE ARGUED BY THEM THAT THE INTEREST PAID HAS NO NEXUS WITH THE INTEREST RECEIVED FROM T HE COMPANY BECAUSE THE BORROWINGS HAVE BEEN USED FOR THE PURP OSE OF ADVANCING THE LOAN TO THE COMPANY. I AM UNABLE TO A GREE WITH THE OBSERVATION OF THE ASSESSING OFFICER THAT THIS IS A CASE OF BORROWINGS BEING USED FOR ADVANCING INTEREST FREE LOANS. THIS IS AN INCORRECT FINDING BECAUSE THE DEPARTMENT ITSELF HAS ASSESSED THE INTEREST RECEIVED FROM THE COMPANY IN THE EARLI ER YEARS AND IS THUS AWARE THAT THE LOAN WAS NOT ADVANCED INTERE ST FREE. TAKING ALL THESE INTO CONSIDERATION AND RESPECTFULL Y FOLLOWING THE AUTHORITIES CITED ABOVE, I DIRECT THE ASSESSING OFF ICER TO ALLOW THE INTEREST OF RS.2,62,039/- AS A DEDUCTION. 9. THE OTHER GROUND AGAINST DISALLOWANCE OF THE EXP ENDITURE OF RS.12,505/- IS DISMISSED AS NOT PRESSED. 10. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 14 TH DAY OF DECEMBER, 2009. SD/- ( R.V.EASWAR ) SENIOR VICE PRESIDENT MUMBAI, DATED 14 TH DECEMBER, 2009. SOMU COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-6, MUMBAI. 4. THE CIT(A)-XXVI, MUMBAI 5. THE DR SMC BENCH /TRUE COPY/ BY ORDE R ASSTT. REGISTRAR, I.T.A.T, MUMBAI