M/s. ALP Consulting Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle- 11(1), Bangalore

ITA 1738/BANG/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4197 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-10-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 21-10-2020
• Assessment Year: 2010-2011
• Appeal Filed On: 06-08-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R PREMI JT BENGALU RU
• Assessee Lawyers: R PRATIBHA
• Keywords: Source of fund; Question of law; Notional interest; Commercial expediency; Rule 8D; Set aside
• Section: 14A; 192; 73; 69

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI A K GARODIA , ACCOUNTANT MEMBER ITA NO. 1738/BANG/2019 ASSESSMENT YEAR: 2010 - 11 M/S. ALP CONSULTING LTD., ALP HEIGHTS, NO.3, PALACE ROAD, 12 TH MAIN, VASANTHNAGAR, BANGALORE 560 052. PAN: AACCA 9226B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SMT. R. PRATIBHA, ADVOCATE RESPONDENT BY : SMT. R. PREMI, J T.CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 21 . 1 0.2020 DATE OF PRONOUNCEMENT : 26 . 1 0.2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 9.11.2018 OF CIT(APPEALS)-XIV, BENGALURU RELATING TO ASSESSME NT YEAR 2010-11. 2. THERE IS A DELAY OF ABOUT 210 DAYS IN FILING THI S APPEAL. ALONG WITH THE APPLICATION FOR CONDONATION OF DELAY, THE DIREC TOR OF THE ASSESSEE COMPANY HAS FILED AN AFFIDAVIT EXPLAINING THE REASO NS FOR THE DELAY STATING THAT DUE TO OFFICIAL TRIP, HE COULD NOT SIGN THE AP PEAL AND ON HIS RETURN FROM OFFICIAL TRIP, IT WAS SIGNED AND FILED. THOUGH THE PARTICULARS OF OFFICIAL TRIP AND OTHER DETAILS HAVE NOT BEEN FURNISHED, KEEPING IN M IND THE PRINCIPLE THAT SUBSTANTIVE RIGHTS SHOULD NOT BE DENIED ON TECHNICA LITIES, WE CONDONE THE DELAY IN FILING THE APPEAL. ITA NO. 1738/BANG/2019 PAGE 2 OF 7 3. COMING TO THE APPEAL, THE FIRST ISSUE THAT NEEDS ADJUDICATION IS AS TO, WHETHER THE REVENUE AUTHORITIES WERE JUSTIFIED IN D ISALLOWING THE CLAIM OF ASSESSEE FOR DEDUCTION ON ACCOUNT OF INTEREST PAID ON BORROWED FUNDS U/S. 36(1)(III) OF THE INCOME-TAX ACT, 1961 [THE ACT]. 4. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF RENDERING HR CONSULTANCY AND SUPPORTING SERVICES. IN THE COU RSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD C LAIMED DEDUCTION OF A SUM OF RS.1,74,86,837 ON ACCOUNT OF FINANCIAL CHARG ES [INTEREST], WHILE COMPUTING INCOME FROM BUSINESS. THE AO NOTICED TH AT THE ASSESSEE HAD GIVEN ADVANCES WITHOUT INTEREST TO ITS RELATED CONC ERN, M/S. DATACORE TECHNOLOGIES PVT LTD. [DTPL]. THE AO HAS FURTHER O BSERVED IN THE ORDER OF ASSESSMENT THAT THE ASSESSEE COULD NOT JUSTIFY THE BUSINESS AND COMMERCIAL EXPEDIENCY IN MAKING LOANS TO SISTER CON CERN WITHOUT CHARGING INTEREST. THE AO ACCORDINGLY HELD THAT BORROWED FU NDS ON WHICH INTEREST WAS PAID AND WHICH WAS CLAIMED AS A DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS HAD NOT BEEN USED FOR THE PURPOSE OF BUSINESS. THE AO FOUND THAT THE OPENING BALANCE OF ADVANCES TO THE S ISTER CONCERN AS ON 13.3.2009 WAS RS.78,60,037 AND THE CLOSING BALANCE AS ON 31.3.2010 WAS RS.90,40,183, THE AVERAGE OF WHICH WAS A SUM OF RS. 84,50,110. HE APPLIED THE NOTIONAL INTEREST RATE OF 13.50% WHICH WAS THE AVERAGE COST ON BORROWING TO THE ASSESSEE AND ARRIVED AT A SUM OF R S.11,40,764, WHICH WAS DISALLOWED AND ADDED TO TOTAL INCOME OF ASSESSE E. 5. BEFORE THE CIT(APPEALS), THE ASSESSEE RELIED ON THE DECISION OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. SRIDEV ENTERPRISES, 192 ITR 165 (KARN) WHEREIN IT WAS HELD THAT IF THE OPENING BALANCE OF LOANS ADVANCED AND ITS NATURE IS ACCEPTED IN THE EARLIER ASSESSMENT YEAR AND IF IN THE EARLIER ASSESSMENT YEAR THOSE ADVANCES WERE CON SIDERED AS FOR THE PURPOSE OF BUSINESS, THEN A DIFFERENT VIEW CANNOT B E TAKEN FOR THE CURRENT ASSESSMENT YEAR. THE ASSESSEE THEREFORE SUBMITTED THAT DISALLOWANCE OF ITA NO. 1738/BANG/2019 PAGE 3 OF 7 INTEREST SHOULD BE DELETED. THE CIT(APPEALS), HOWE VER, REJECTED THE PLEA OF ASSESSEE, HOLDING THAT INTEREST CAN BE ALLOWED A S A DEDUCTION ONLY WHEN INTEREST-FREE ADVANCES WERE OWING TO COMMERCIAL EXP EDIENCY AND SINCE SUCH COMMERCIAL EXPEDIENCY WAS ABSENT IN THE CASE O F ASSESSEE, THE SAME WAS RIGHTLY DISALLOWED BY THE AO. WITH REGARD TO THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF SRIDEV ENTERPRISES (SUPRA) , THE CIT(APPEALS) TOOK THE VIEW THAT THERE IS NOTHIN G BROUGHT ON RECORD TO SHOW THAT OPENING BALANCE AND OUTSTANDING LOAN GIVE N TO SISTER CONCERN WAS EXAMINED AND ACCEPTED BY THE AO AS A LOAN OWING TO COMMERCIAL EXPEDIENCY. AGGRIEVED BY THE ORDER OF CIT(APPEALS) , THE ASSESSEE PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. CO UNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OWN FUNDS AVAIL ABLE WITH THE ASSESSEE WERE MUCH MORE THAN THE AMOUNTS BORROWED. IN THIS REGARD, IT IS SEEN THAT THE BORROWINGS AS ON 31.3.2010 WAS A SUM OF RS.10, 46,81,000. THE ASSESSEES OWN FUNDS IN THE FORM OF SHARE CAPITAL, RESERVE AND SURPLUS IS A SUM OF RS.16,63,00,000. THOUGH THIS FACT HAS NOT B EEN HIGHLIGHTED BY THE ASSESSEE BEFORE THE REVENUE AUTHORITIES, YET THE FA CT REMAINS THAT THESE FIGURES ARE AVAILABLE IN THE BALANCE SHEET AS ON 31 .3.2010 , A COPY OF WHICH IS AT PAGE 28 OF ASSESSEES PB. IT IS THUS C LEAR THAT INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS MUCH MORE THA N THE BORROWINGS ON WHICH INTEREST WAS PAID BY THE ASSESSEE AND IT WAS CLAIMED AS A DEDUCTION. 7. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. HDFC BANK LTD., ITA NO.330 OF 2012, JUDGMENT DATED 23.7.14 HAS TAKEN THE VIEW THAT WHERE OWN FUNDS ARE MUCH MORE THAN THE BORROWED FUN DS ON WHICH INTEREST WAS PAID, THEN THERE IS A PRESUMPTION THAT OWN FUND S HAVE BEEN USED FOR THE PURPOSE OF GIVING INTEREST-FREE LOANS TO THE SI STER CONCERN AND THEREFORE THERE COULD BE NO DISALLOWANCE OF INTEREST EXPENSES U/S. 36(1)(III) ON THE ITA NO. 1738/BANG/2019 PAGE 4 OF 7 GROUND THAT BORROWED FUNDS HAD BEEN DIVERTED INTERE ST-FREE TO THE SISTER CONCERN. 8. IN ITA.NOS.569/2015 & 229/2016 IN THE CASE OF THE COMMISSIONER OF INCOME-TAX, CIT (A) AND ANOTHER -VS.- M/S. CHAIT ANYA PROPERTIES PVT. LTD. , ORDER DATED 15.6.2018 THE HONBLE KARNATAKA HIGH COURT HELD AS FOLLOWS:- 4. THE SAID CONTROVERSY WITH REGARD TO SECTION 14- A READ WITH RULE 8D OF THE RULES HAS BEEN DECIDED BY THIS COURT IN THE FOLLOWING TWO JUDGMENTS WHICH ARE QUOTED BELOW FOR READY REFERENCE. (I) COMMISSIONER OF INCOME TAX & ANR. VS. MICROLABS LTD., [2016] 383 ITR 490 (KARN). '39. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS RAISED GROUND NO.2. 40. WE HAVE HEARD THE RIVAL SUBMISSIONS. A COPY OF THE AVAILABILITY OF FUNDS AND INVESTMENTS MADE WAS FILE D BEFORE US WHICH IS AT PAGES 38 TO 42 OF THE ASSESSE E'S PAPERBOOK AND THE SAME IS ENCLOSED AS ANNEXURE-III TO THIS ORDER. IT IS CLEAR FROM THE SAID STATEMENT THA T THE AVAILABILITY OF PROFIT, SHARE CAPITAL AND RESERVES & SURPLUS WAS MUCH MORE THAN INVESTMENTS MADE BY THE ASSESSEE WHICH COULD YIELD TAX FREE INCOME. 41. THE HON'BLE BOMBAY HIGH COURT IN RELIANCE UTILI TIES & POWER LTD. 313 ITR 340 (BOM) HAS HELD THAT WHERE THE INTEREST FREE FUNDS FAR EXCEED THE VALUE OF INVESTM ENTS, IT SHOULD BE CONSIDERED THAT INVESTMENTS HAVE BEEN MAD E OUT OF INTEREST FREE FUNDS AND NO DISALLOWANCE U/S. 14A TOWARDS ANY INTEREST EXPENDITURE CAN BE MADE. THIS VIEW WAS AGAIN CONFIRMED BY THE HON'BLE BOMBAY HIGH COUR T IN CIT V. HDFC BANK LTD., ITA NO.330 OF 2012, JUDGM ENT DATED 23.7.14, WHEREIN IT WAS HELD THAT WHEN INVEST MENTS ARE MADE OUT OF COMMON POOL OF FUNDS AND NON-INTERE ST BEARING FUNDS WERE MORE THAN THE INVESTMENTS IN TAX FREE SECURITIES, NO DISALLOWANCE OF INTEREST EXPENDITURE U/S. 14A CAN BE MADE. ITA NO. 1738/BANG/2019 PAGE 5 OF 7 42. IN THE LIGHT OF ABOVE SAID DECISIONS, WE ARE OF THE VIEW THAT DISAL LOWANCE OF INTEREST EXPENSES IN THE PRESENT CASE OF RS.49,42,4 73 MADE UNDER RULE 8D(2)(II) OF THE I.T. RULES SHOULD BE DELETED. WE ORDER ACCORDINGLY.' 5. THE AFORESAID SHOWS THAT THE TRIBUNAL HAS FOLLO WED A DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. HDFC BANK LTD., (ITA NO.330/2012 DISPOSED OF ON 23/7/2014). W HEN THE ISSUE IS ALREADY COVERED BY A DECISION OF THE HIGH COURT OF BOMBAY WITH WHICH WE CONCUR, WE DO NOT FIND ANY SUBSTANTIAL QUESTION OF LAW WOULD ARISE FOR CONSIDERATION AS CA NVASSED. 6. IN VIEW OF THE ABOVE OBSERVATIONS, THE APPEAL IS DISMISSED.' 9. IN LIGHT OF THE LAW AS EXPLAINED BY THE HONBLE JURISDICTIONAL HIGH COURT IN CHAITANYA PROPERTIES PVT.LTD. (SUPRA) AND IN THE LIGHT OF ADMITTED FACTUAL POSITION THAT OWN FUNDS WERE MUCH MORE THAN THE BORROWED FUNDS, WE ARE OF THE VIEW THAT DISALLOWANCE OF INTEREST EX PENDITURE CANNOT BE SUSTAINED AND THE SAME IS DIRECTED TO BE DELETED. THE FIRST ISSUE IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 10. THE SECOND ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS AS TO, WHETHER REVENUE AUTHORITIES WERE JUSTIFIED IN MAKIN G AN ADDITION OF RS.8,15,000 ON THE GROUND THAT ASSESSEE HAD A FIXED DEPOSIT WITH ICICI BANK AND ASSESSEE FAILED TO EXPLAIN THE SOURCE OF F UNDS OUT OF WHICH THE SAID DEPOSIT WAS MADE. THE AO WAS IN POSSESSION OF THE ANNUAL INFORMATION REPORT [AIR] WHICH MENTIONED THAT ASSES SEE HAD TWO TERM DEPOSITS OF RS.1,65,000 AND RS.6,50,000 IN ICICI BA NK, ALWARTHIRUNAGAR BRANCH, CHENNAI. THE ASSESSEE SUBMITTED BEFORE THE AO IN A LETTER DATED 26.12.2012 THAT IT DID NOT HAVE ANY SUCH TERM DEPOS ITS AS CLAIMED BY THE AO BASED ON THE AIR . THE AO, HOWEVER, PROCEEDED TO MAKE AN ADDITION OF RS.8,15,000 U/S. 69 OF THE ACT OBSERVING THAT TH E ASSESSEE FAILED TO EXPLAIN THE SOURCE OF FUNDS FOR THE AFORESAID DEPOS IT AS REQUIRED U/S. 69 OF THE ACT. ITA NO. 1738/BANG/2019 PAGE 6 OF 7 11. BEFORE THE CIT(APPEALS), THE ASSESSEE PRODUCED A LETTER FROM ICICI BANK, ALWARTHIRUNAGAR BRANCH, CHENNAI DATED 22.12.2 012 IN WHICH THE BANK CLARIFIED THAT THE TERM DEPOSITS IN QUESTION W ERE HELD IN M G ROAD BR., BANGALORE AND NOT ITS BRANCH. IT WAS FURTHER CLARIFIED THAT THE ASSESSEE DID NOT HAVE ANY TERM DEPOSITS IN ITS BRANCH FOR FY 2009-10. THE CIT(APPEALS), HOWEVER, CAME TO THE CONCLUSION THAT DEPOSITS REFERRED TO IN THE REPLY IN THE LETTER OF ICICI BANK, ALWARTHIRUNA GAR BRANCH, CHENNAI WERE IN M G ROAD BR., BANGALORE AND SINCE IT HAS NOT BEE N CLARIFIED THAT THE DEPOSIT IN M G ROAD BR. ALSO IS NOT IN THE NAME OF ASSESSEE, THE CIT(A) HELD THAT ADDITION MADE BY THE AO WAS JUSTIFIED. 12. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASS ESSEE HAS PREFERRED THE PRESENT APPEAL. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE AIR INFORMATION IS NOT CONCLUSIVE. THE SPECIFIC IN FORMATION RECEIVED BY THE AO IN THE FORM OF AIR IS THAT ASSESSEE HAD TERM DEP OSITS WITH ICICI BANK, ALWARTHIRUNAGAR BRANCH, CHENNAI AND IF THAT INFORMA TION IS SHOWN TO BE NOT TRUE IN THE FORM OF A LETTER DATED 22.12.2012 GIVEN BY THE SAID BRANCH, THERE CAN BE NO OTHER BASIS ON WHICH THE AO SHOULD MAKE T HE IMPUGNED ADDITION. THE FACT THAT TERM DEPOSITS REFLECTED IN THE AIR WERE IN THE M G ROAD BR., BANGALORE DOES NOT MEAN THAT THE DEPOSITS IN M G ROAD BR. BANGALORE IS IN THE NAME OF ASSESSEE. PERUSAL OF T HE LETTER DATED 22.12.2012 BY ICICI BANK, ALWARTHIRUNAGAR BRANCH, C HENNAI WHICH IS AT PAGE 38 OF ASSESSEES PB DOES NOT SHOW THAT THE TER M DEPOSITS IS IN THE NAME OF ASSESSEE. IN THE GIVEN CIRCUMSTANCES, WE A RE OF THE VIEW THAT THE ISSUE SHOULD BE SET ASIDE TO THE AO FOR A FRESH CON SIDERATION TO ASCERTAIN THE CORRECT FACTS WITH REGARD TO TERM DEPOSITS IN M G ROAD BR. BANGALORE, AS TO WHETHER THE SAME IS IN THE NAME OF ASSESSEE. IF SO, THEN THE ASSESSEE SHOULD EXPLAIN THE DEPOSIT IN THE PARAMETE RS LAID DOWN U/S. 69 OF THE ACT. ACCORDINGLY, WE SET ASIDE THE ORDER OF TH E CIT(APPEALS) ON THIS ITA NO. 1738/BANG/2019 PAGE 7 OF 7 ISSUE AND REMAND IT TO THE AO FOR FRESH CONSIDERATI ON IN LIGHT OF THE OBSERVATIONS MADE IN THIS ORDER. 14. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF OCTOBER, 2020. SD/- SD/- ( A K G A RODIA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 26 TH OCTOBER, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.