ACIT, Circle-1(1), Tirupati, Tirupathi V. B.V. Reddy & Sons, Chittoor, Chittoor

ITA 164/HYD/2016

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2997 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 15-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KOMALI KRISHNA
• Assessee Lawyers: S RAMA RAO
• Keywords: Source of fund; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES CIRCUIT BENCH A, AT TIRUPATI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 164/HYD/2016 ASSESSMENT YEAR: 2010-11 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(1), TIRUPATI VS M/S. B.V. REDDY & SONS CHITTOOR [PAN: AACFB2166N] (APPELLANT) (RESPONDENT) FOR REVENUE : SMT. KOMALI KRISHNA, DR FOR ASSESSEE : SHRI S. RAMA RAO, AR DATE OF HEARING : 15-05-2018 DATE OF PRONOUNCEMENT : 23-05-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-TIRUPATI, DATED 19-11-2015. THE GROUNDS RAISED BY REVENUE ARE AS UNDER: 2. THE LD.CIT(A) ERRED IN NOT PASSING A SPEAKING O RDER BY NOT GIVING ANY REASONS FOR THE DECISION. 3. THE LD.CIT(A) ERRED IN PLACING RELIANCE ON THE I TATS ORDER FOR ASST. YEARS 2003-04 AND 2004-05 AND LD.CIT(A)S ORDER FOR ASST. YEAR 2008-09 IN APPELLANTS CASE, IGNORING THE FACT THAT THE SAI D ORDERS PERTAINED TO NON- CHARGING OF INTEREST FROM ALTOGETHER DIFFERENT DEBT ORS. I.T.A. NO. 164/HYD/2016 :- 2 - : 4. THE LD.CIT(A) ERRED IN NOT ADDRESSING THE ISSUE FOR CONSIDERATION I.E., DIVERSION OF HIGHER INTEREST BEARING FUNDS TO LESSE R INTEREST BEARING LOANS TO THE THREE PARTNERS OF THE ASSESSEE-FIRM. GROUND NO. 1 IS GENERAL IN NATURE. 2. BRIEFLY STATED FACTS ARE THAT ASSESSEE, M/S. B.V. R EDDY & SONS, A FIRM DOING BUSINESS AS HPC DEALERS, FINANCI ERS AND VEHICLE OPERATORS, E-FILED ITS RETURN OF INCOME FOR THE AY. 201 0-11 ON 29- 09-2010 ADMITTING NIL INCOME. AO NOTICED THAT : (A) SRI V. DWARKANATH REDDY, PARTNER, HAS TAKEN A LOAN FROM THE FIRM AT RS. 17,38,18,316/_ AND PAID INTEREST AT RS. 1,5 9,16,750/- SAY @ 9.15% ; (B) SRI V. MADHUSUDHAN REDDY, PARTNER, HAS TAKEN A LO AN AT RS. 12,38,03,768/- FROM THE FIRM AND PAID INTEREST AT RS 97 ,01,618/- SAY @ 9.83% & (C) SRI V. DINESH REDDY, PARTNER, HAS TAKEN A LOAN FR OM THE FIRM AT RS 18,71,89,191/- AND PAID INTEREST AT RS. 1,49,99,248 /-, SAY @8.01% WHEREAS THE ASSESSEE-FIRM IS CHARGING INTEREST FROM THE DEBTORS AT A HIGH RATE I.E. 12% AND ABOVE. (D) THE SOURCES FOR THE ABOVE ADVANCES ARE FROM IN TEREST BEARING BORROWALS AND HENCE THE LOSS INCURRED BY THE FIRM ON ACCOUNT OF INTEREST PAID BY THE PARTNERS AT A LOWER RATE IS NOT IN A CCORDANCE WITH BUSINESS PRINCIPLES. I.T.A. NO. 164/HYD/2016 :- 3 - : HENCE, AO PROPOSED TO CHARGE THE INTEREST @ 12% ON THE A BOVE LOANS TO THE PARTNERS AND BRING TO TAX THE DIFFERENCE O F INTEREST, AS WORKED OUT BY HIM, AT RS. 49,41,447/-, RS. 51,54,834 /-& OF RS. 74,63,554/- RESPECTIVELY ON THE LOANS TO THE RESPECTIVE PARTNERS AND ACCORDINGLY ISSUED A SHOW CAUSE NOTICE TO ASSESSE E. AR OBJECTED FOR THE PROPOSED ADDITION STATING THAT IT IS SO A GREED BY PARTNERS TO SO CHARGE. FURTHER, THE FIRM HAS MANY CREDI T BALANCES ON WHICH NO INTEREST WAS PAID WHICH WAS ALSO AVAILAB LE FOR LENDING TO PARTNERS. AO FOUND THAT THIS EXPLANATION IS NOT ACCE PTABLE IN THE ABSENCE OF PROOF. AO HELD THAT ASSESSEE HAS CONVEN IENTLY REDUCED ITS NET PROFIT, THUS REDUCED THE TAX PAYABLE. IN VIEW OF THAT AO MADE AN ADDITION OF RS. 1,71,59,735/- TO THE INCOM E RETURNED. 2.1. FURTHER, AO HAS NOTICED THAT ASSESSEE HAS NOT CHARG ED INTEREST ON THE OUTSTANDING AMOUNTS FROM THE FOLLOWING PE RSONS: I. E RAMACHANDRAM NAIDU - RS. 3,36,000/- II. A ARUMUGAM - RS. 50,05,000/- III. R PURUSHOTHAM REDDY - RS. 27,40,522/- TOTAL - RS. 80,81,522/- AO FOUND THAT THESE AMOUNTS HAVE BEEN SHOWN AS AN OUTS TANDING FOR THE LAST SEVERAL YEARS & ALL OF THEM WERE BROUGHT INTO SYSTEM EITHER BY WAY OF DEPOSITS OR LOANS. SO, HE WAS OF THE VIEW THAT THE AMOUNTS SO OUTSTANDING WITHOUT YIELDING ANY INCOME ARE NOTHING BUT AMOUNTS DIVERTED FROM THE SYSTEM. IN OTHER WORDS, A O IS OF THE VIEW THAT THE INTEREST BEARING LOANS WERE DIVERTED AS I NTEREST FREE ADVANCES. THE ABOVE AMOUNTS WERE VERY OLD AND NO RE COVERY PROCEEDINGS HAVE BEEN INITIATED BY THE ASSESSEE-FIRM T O I.T.A. NO. 164/HYD/2016 :- 4 - : SRI E. RAMACHANDRA NAIDU, ASSESSEE ADVANCED RS. 3,0 0,000/- BUT DID NOT OFFER ANY INTEREST IN ANY YEAR ON THIS ADVANCE. IN THE CASE OF SRI R. ARUMUGAM, THE ASSESSEE-FIRM HAS OFFERED IN TEREST TILL AY. 2003-04 BUT SUDDENLY DID NOT OFFER ANY INTEREST FROM A Y. 2004-05 ONWARDS. IN RESPECT OF SRI R. PURUSHOTHAM REDDY, ASSE SSEE DID NOT FURNISH THE DETAILS FOR ANY OF THE YEAR INCLUDING FROM WHICH YEAR THE AMOUNT IS OUTSTANDING IN ASSESSEE'S BOOKS ETC. AO WAS OF THE VIEW THAT THE PARTNERS OF THE FIRM WERE HAVING SUBSTANTIA L INTEREST WITH THE ABOVE PERSONS AND HENCE NOT CHARGED ANY INTER EST FROM THEM AND MENTIONED AS INTEREST FREE LOANS. HENCE, HE PR OPOSED TO CHARGE THE INTEREST @12% ON THE ABOVE OUTSTANDING AT RS. 80,81,522/- AND ADD THE SUM QUANTIFIED AT RS. 9,69,782 /- TO THE RETURNED INCOME AND ACCORDINGLY ISSUED A SHOW CAUSE NOTICE. LD.AR OBJECTED STATING THAT ALL OF THEM HAVE BEEN REDUCE D TO POOR STATUS, RECOVERY OF PRINCIPAL ITSELF IS DOUBTFUL AND HE NCE THE PROPOSED ADDITION IS NOT NECESSARY. AO HELD THAT THIS EX PLANATION IS NOT ACCEPTABLE AS THERE IS A PROCEDURE LAID DOWN U /S. 36(2) OF THE ACT TO TREAT A DEBT AS A BAD DEBT. THEREFORE, HE ADD ED THE INTEREST AT RS 9,69,782/- TO THE RETURNED INCOME. 3. AGGRIEVED BY THE ORDER, ASSESSEE PREFERRED AN APP EAL BEFORE THE LD.CIT(A) AND SUBMITTED THAT ASSESSEE GOT FUNDS AT 8.5 % FROM M/S. B.V. REDDY ENTERPRISES PVT. LTD., TO AN EXTENT OF RS. 101.84 CRORES AND ONLY RS. 18.71 CRORES WERE ADVANCED TO PA RTNERS AT 9 % AND THERE IS NO REVENUE LOSS. FURTHER, IT WAS SUBMITT ED THAT THE ISSUE WAS SETTLED BY THE ORDER OF ITAT IN EARLIER YEA R. WITH REFERENCE TO CHARGING OF INTEREST ON BAD AND DOUBTFUL A CCOUNTS, IT RELIED ON THE ORDER OF CIT(A) IN EARLIER YEAR. I.T.A. NO. 164/HYD/2016 :- 5 - : 4. LD.CIT(A) ACCEPTED THE CONTENTIONS BUT DISCUSSED ONL Y ABOUT THE SECOND ISSUE AND DELETED THE ADDITIONS. 5. LD.DR SUBMITTED THAT THE ORDER OF LD.CIT(A) IS NOT CL EAR AS HE HAS NOT DISCUSSED THE ISSUE OF CHARGING INTEREST AT 9% AT ALL AND GAVE RELIEF ONLY AFTER EXTRACTING THE ORDER OF PREDECE SSOR CIT(A) ON CHARGING OF INTEREST ON BAD AND DOUBTFUL DEBTS. 6. LD.AR SUBMITTED THAT THE ISSUES HAVE BEEN CRYSTALLIS ED BY THE ORDER OF ITAT IN EARLIER YEARS AND JUSTIFIED THE ORDE RS. IT WAS FURTHER SUBMITTED THAT ASSESSEE WAS CHARGING 12% ON FIXE D TERM LOANS AND 9% ON CURRENT LOANS WHEN TERM IS NOT FIXED A ND HAS SOURCE OF THE FUNDS TO AN EXTENT OF RS. 101.84 CRORES F ROM A SISTER CONCERN; SO THE ALLEGATION OF AO IS NOT CORRECT. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE PAPER BOOK. THERE IS SOME TRUTH IN GROUND NO. 2 OF T HE REVENUE AS THE LD.CIT(A) DID NOT DISCUSS THE ISSUE OF CHARGING INTEREST AT 9% ON PARTNERS BALANCES AT ALL IN THE ORDER. THE CON TENTION THAT IT HAD FUNDS AVAILABLE AT 8.5% WERE NOT EXAMINED AND THER E IS NO DISCUSSION ON THE ISSUE. THEREFORE, GROUND NOS. 2 & 4 ARE ALLOWED, SETTING ASIDE THE ISSUE TO THE FILE OF AO TO EXAMINE THE C ONTENTIONS AFRESH. IT IS ALSO NOTICED THAT THE AO CALCULATED THE IN TEREST ON PARTNERS ACCOUNT ON THE BALANCE AT THE END OF THE YEAR WH ICH GIVES A DISTORTED PICTURE, WHEN ASSESSEE IS CHARGING AT 9% ON PRODUCT BASIS, I.E., ON OUTSTANDING BALANCES EVERY MONTH/DAY. THE CALCULATION MADE BY AO ITSELF IS NOT PROPER. THEREFOR E, AO IS DIRECTED TO EXAMINE THE SOURCE OF FUNDS AND CHARGING OF INTEREST. IF THE BORROWED FUNDS ARE AT HIGHER RATE OF INTEREST THAN W HAT WAS I.T.A. NO. 164/HYD/2016 :- 6 - : CHARGED ON THE FUNDS DIVERTED TO PARTNERS CHARGED AT 9 %, THEN THE EXCESS INTEREST CAN BE DISALLOWED U/S. 36(I)(III). AO CANNOT BRING ANY INTEREST (NOTIONAL OR OTHERWISE) TO TAX WHEN ASSES SEE HAS NOT CHARGED. WITH THESE DIRECTIONS, THE ISSUE OF CHARGING INTEREST ON PARTNERS BALANCE WAS SET ASIDE TO AO FOR EXAMINATION OF FACTS AND APPLICABLE LAW. 7.1. COMING TO THE ISSUE OF CHARGING INTEREST ON BAD AN D DOUBTFUL RECOVERY, THIS ISSUE WAS HELD AGAINST REVENUE IN EAR LIER YEARS. IN FACT THE GROUND NO. 3 IS NOT CLEAR WHETHER THE GROUND PE RTAINS TO THIS ISSUE OR NOT. AS THE ISSUE WAS DECIDED AGAINST THE REVENUE IN EARLIER YEAR, WE DO NOT SEE ANY REASON TO HOLD OTHERWI SE. THE ORDER OF LD.CIT(A) ON THIS ISSUE (WHICH WAS DISCUSSED IN T HE ORDER) IS CONFIRMED. GROUND IS REJECTED. 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD MAY, 2018 SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT ME MBER HYDERABAD, DATED 23 RD MAY, 2018 TNMM I.T.A. NO. 164/HYD/2016 :- 7 - : COPY TO : 1. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(1 ), TIRUPATI. 2. M/S. B.V. REDDY & SONS., D.NO. 2-1285, B.V. REDD Y COLONY, CHITTOOR. 3. CIT(APPEALS)-TIRUPATI. 4. PR.CIT-TIRUPATI. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.