ACIT, Coimbatore V. M/s. Sakthi Finance Ltd., Coimbatore

ITA 1816/CHNY/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73797 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 19-02-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 05-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARI RAO
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . , !' # , $ % BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 1816/MDS/2012 ( / ASSESSMENT YEAR : 2009-10) ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(1), 7 TH FLOOR,63A,RACE COURSE ROAD COIMBATORE. VS . M/S. SAKTHI FINANCE LTD. 62, DR.NANJAPPA ROAD, COIMBATORE-18. PAN:AADCS0656G ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. HARI RAO, JCIT /RESPONDENT BY : MR. R.VIJAYARAGHAVAN, ADVOCATE / DATE OF HEARING : 19 TH FEBRUARY, 2014 ! /DATE OF PRONOUNCEMENT : 21 ST MARCH, 2014 & / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, COIMBA TORE DATED 02.07.2012 FOR THE ASSESSMENT YEAR 2009-10. 2. THE FIRST ISSUE IN THE GROUNDS OF APPEAL OF THE REVENUE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING THE CLAIM OF PROVISION FOR NON-PERFORMING ASSETS AS ITA NO.1816/MDS/2012 2 DEDUCTION. THE COUNSEL FOR THE ASSESSEE REFERRING T O PAGES 1 TO 8 OF THE PAPER BOOK SUBMITS THAT THIS ISSUE IS S QUARELY COVERED BY THE DECISIONS OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2000-01 TO 2007-08. ON READING OF THE DECISION OF T HE CO- ORDINATE BENCH OF THIS TRIBUNAL, WE FIND THAT THE I SSUE IN APPEAL REGARDING CLAIM FOR DEDUCTION OF PROVISION F OR NON- PERFORMING ASSETS HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN ITA NOS. 1646 TO 1648/MDS/2010 FOR THE ASSESSMENT YEARS 2003-04 , 2004-05 & 2007-08 BY ORD ER DATED 16.12.2010 OBSERVING AS UNDER:- 2. SHORT FACTS APROPOS ARE THAT THE ASSESSING OFF ICER HAD CONSIDERED THE FINANCE CHARGES ON NON-PERFORMIN G ASSETS (NPAS) ON ACCRUAL BASIS FOR ALL THE IMPUGNED ASSESSMENT YEARS. ASSESSEE DURING THE PREVIOUS YEAR S RELEVANT TO THE IMPUGNED ASSESSMENT YEARS DID NOT S HOW ANY INCOME ON FINANCE CHARGES RELATING TO NPAS. PROVISION FOR NPAS WAS NOT CHARGED BY THE ASSESSEE TO ITS PROFIT & LOSS ACCOUNT NOR WAS FINANCE CHARGES ON SU CH NPAS CREDITED AS ACCRUED INCOME. A.O. WAS OF THE OP INION THAT SINCE ASSESSEE ITSELF HAD NOT CONSIDERED PROVI SION FOR NPAS AS A LIABILITY, IT WAS BOUND TO SHOW THE ACCRU ED FINANCIAL CHARGES AS PART OF ITS INCOME. IN ITS APP EAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS), ASSESSEE RELYING ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS.ELGI FINANCE LTD. (2007) 293 ITR 357 ARGUED THAT ASSESSEE BEING AN NBFC GOVERNED BY THE NORMS PRESCRIBED BY RBI HAD TO FOLLOW ITS REGULATIO NS EVEN THOUGH IT WAS MANAGING ITS BOOKS ON MERCANTILE SYST EM. ITA NO.1816/MDS/2012 3 COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDER ING THE NBFCS PRUDENTIAL NORMS (RESERVE BANK) DIRECTION S, 1988 AND RELYING ON THE DECISION OF THE HONBLE MAD RAS HIGH COURT IN THE CASE OF ELGI FINANCE LTD. (SUPRA) AND THE DECISION OF HONBLE APEX COURT IN THE CASE OF SOUTH ERN TECHNOLOGIES VS. JCIT (320 ITR 577) HELD THAT INTER EST ON NON-PERFORMING ASSETS WAS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE ON ACCRUAL BASIS EVEN THOUGH THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT S. 3. NOW BEFORE US, THE LEARNED AR SUBMITTED THAT THE ISSUE BEFORE THE APEX COURT IN THE CASE OF SOUTHERN TECHNOLOGIES (SUPRA) WAS WITH REGARD TO PROVISIONIN G MADE FOR NON-PERFORMING ASSETS AND IT COULD NOT BE EXTENDED TO INTEREST ACCRUED ON NON-PERFORMING ASSE TS. LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER SUBMITT ED THAT THE ISSUE WAS SQUARELY COVERED BY THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. EL GI FINANCE LTD. (SUPRA) AS ALSO THE DECISIONS OF THIS TRIBUNAL IN THE CASE OF ELGI FINANCE LTD. AND SAKTHI FINANCE LTD. FOR ASSESSMENT YEARS 1995-96 TO 1998-99 IN ITA NOS.1879 TO 1881/MDS/2004 AND ITA NOS.3409 TO 3411/MDS/2004 DATED 11 TH JUNE, 2010. 4. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE ISSUE IS SQUARELY COV ERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF JURISDICT IONAL HIGH COURT IN ASSESSEES OWN CASE REPORTED IN 293 I TR 357. IT WAS HELD BY HONBLE JURISDICTIONAL HIGH COU RT THAT INTEREST ON NON-PERFORMING ASSETS WAS TO BE CONSIDE RED ONLY AFTER RECOGNIZING THE INCOME FROM SUCH ASSETS. IN ADDITION TO THAT WE ALSO FIND THAT HONBLE DELHI HI GH COURT IN THE CASE OF CIT VS. M/S.VASISTH CHAY VYAPAR LTD. BY ORDER DATED 29.11.2010 AFTER REFERRING TO THE DECIS ION OF HONBLE APEX COURT IN THE CASE OF SOUTHERN TECHNOLO GIES (SUPRA) AS WELL AS THAT OF HONBLE JURISDICTIONAL H IGH COURT IN THE CASE OF ELGI FINANCE LTD. (SUPRA) HELD THAT INTEREST ON NON-PERFORMING ASSETS COULD NOT BE CONSIDERED AS INCOME ON ACCRUAL BASIS. WE, THEREFORE FIND NO MERI TS IN THE APPEAL FILED BY THE REVENUE. 3. RESPECTFULLY FOLLOWING THE SAID DECISION, WE DIS MISS THE GROUNDS OF APPEAL RAISED BY THE REVENUE ON THIS IS SUE. ITA NO.1816/MDS/2012 4 4. THE NEXT ISSUE IN THE GROUNDS OF APPEAL OF THE R EVENUE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING THE CLAIM OF THE ASSESSEE THAT RENTAL RECE IPTS ARE ASSESSABLE UNDER THE HEAD BUSINESS AND NOT UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 5. DEPARTMENTAL REPRESENTATIVE SUBMITS THAT ASSESSI NG OFFICER WHILE COMPLETING THE ASSESSMENT CONSIDERED RENTAL RECEIPTS RECEIVED BY THE ASSESSEE ON LETTING OUT OF PORTION OF BUILDING OF ASSESSEE AS INCOME FROM HOUSE PROPERTY AS AGAINST THE CLAIM MADE BY THE ASSESSEE THAT RENT SH OULD BE ASSESSED AS INCOME FROM BUSINESS. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF ASSESSING OFF ICER IN ASSESSING RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 6. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSEE H AS RECEIVED RENTAL INCOME FOR THE YEAR ENDED 31.3.2009 FROM THE PROPERTIES AND THE PROPERTIES WERE ORIGINALLY INTEN DED FOR ITA NO.1816/MDS/2012 5 HOUSING OFFICERS OF THE ASSESSEE COMPANY TO TAKE CA RE OF ITS REQUIREMENTS OF OFFICE SPACE FOR THE ENVISAGED EXPA NDED BUSINESS PLAN. THE ASSESSEE HAD PLANS TO ENGAGE IN MULTIFARIOUS FINANCIAL ACTIVITIES SUCH AS GOLD LOAN , LEASE FINANCING ETC., THUS PROPERTIES WERE HELD FOR ITS O WN USE. THE COUNSEL SUBMITS THAT INITIALLY ASSESSEE HAD BEEN CONCENTRATING ON HIRE PURCHASE FINANCIAL ACTIVITIES ONLY AND THE OTHER FINANCIAL ACTIVITIES WERE TO BE TAKEN UP SUBSEQUENTLY AND IN ORDER TO EXPLOIT THE BUSINESS ASSET, THE ASS ESSEE HAD LET THESE PROPERTIES ON RENT TO OTHER COMPANIES. TH E COUNSEL FINALLY SUBMITS THAT COMMISSIONER OF INCOME TAX (AP PEALS) IS CORRECT IN ALLOWING THE CLAIM OF THE ASSESSEE THAT RENTAL RECEIPTS SHOULD BE ASSESSED AS BUSINESS INCOME INST EAD OF INCOME FROM HOUSE PROPERTY. THE COUNSEL ALSO RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS ABOVE CONTENT IONS: 1. UNIVERSAL PLAST LTD. VS. CIT 237 ITR 454 (SC) 2. CIT VS. VST MOTORS LTD. 226 ITR 155(MAD) 3. SCIENTIFIC INSTRUMENT COMPANY LTD. VS. CIT (202 TAXMAN 536 (ALL) ITA NO.1816/MDS/2012 6 7. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE CASE LAWS RELIED ON. IT IS NOT IN DISPUTE T HAT THE ASSESSEE ALL ALONG OFFERING RENTAL INCOME FROM THE PROPERTY LET OUT UNDER THE HEAD INCOME FROM BUSINESS AND SUCH POSITION SUBSISTED WELL OVER A DECADE. IN ALL THE SCRUTINY A SSESSMENTS COMPLETED IN THE CASE OF THE ASSESSEE, REVENUE ACCE PTED THE ASSESSEES STAND THAT INCOME EARNED FROM THESE PROPERTIES WOULD BE ASSESSABLE UNDER THE HEAD INCO ME FROM BUSINESS. PROPERTIES WERE ORIGINALLY INTENDED FOR HOUSING OFFICE USE OF THE ASSESSEE TO TAKE CARE OF ITS REQU IREMENTS OF OFFICE SPACE FOR THE ENVISAGED EXPANDED BUSINESS. THE ASSESSEE COMPANY HAD PLANNED TO ENGAGE IN MULTIFARI OUS FINANCIAL ACTIVITIES SUCH AS GOLD LOAN, LEASE FINAN CING ETC. THEREFORE, PROPERTIES WERE HELD BY THE COMPANY FOR ITS OWN USE. SO, IN ORDER TO EXPLOIT THE BUSINESS ASSET, CO MPANY HAD LET THESE PROPERTIES ON RENT TO OTHER COMPANIES. TH E ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT T REATED THE RENT RECEIVED BY THE ASSESSEE FROM THE ASSETS A S INCOME FROM HOUSE PROPERTY STATING THAT AS PER THE PROVISI ONS OF THE ACT, RENTAL INCOME IN ITS NORMAL CONNOTATION HAS TO BE ITA NO.1816/MDS/2012 7 ASSESSED AS INCOME FROM HOUSE PROPERTY. THEREFORE, HE ASSESSED THE INCOME AS INCOME FROM HOUSE PROPERTY I NSTEAD OF INCOME FROM BUSINESS. THE COMMISSIONER OF INCOM E TAX (APPEALS) ON EXAMINING THE FACTS, SUBMISSIONS OF TH E ASSESSEE AND THE CASE LAWS HELD THAT THE INCOME REC EIVED BY THE ASSESSEE FROM EXPLOITING BUSINESS ASSETS OF THE ASSESSEE IS TO BE ASSESSED AS INCOME FROM BUSINESS AND NOT U NDER THE HEAD INCOME FROM HOUSE PROPERTY. THE COMMISSIONER OF INCOME TAX (APPEALS) ALSO OBSERVED THAT IN EARLIER YEARS, THE ASSESSEE WAS OFFERING RENTAL INCOME UNDER THE HEAD INCOME FROM BUSINESS AND THIS HAS BEEN ACCEPTED BY THE A SSESSING OFFICER IN THE SCRUTINY ASSESSMENT COMPLETED UNDER SECTION 143(3) ON SIMILAR SET OF FACTS. 8. MORE OR LESS AN IDENTICAL ISSUE CAME UP BEFORE T HE JURISDICTIONAL HIGH COURT IN THE CASE OF VST MOTORS LTD. (SUPRA). IN THIS CASE, THE ASSESSEE WAS A COMPANY CARRYING ON BUSINESS AS AUTHORIZED DEALERS IN TATA DIESEL VE HICLES IN A BUILDING ON MOUNT ROAD BUILDING CONSISTED OF THREE FLOORS INCLUDING GROUND FLOOR. THE GROUND FLOOR & FIRST FL OOR WERE USED ITA NO.1816/MDS/2012 8 FOR ASSESSEES BUSINESS AND SECOND FLOOR WAS LET OU T TO A GOVERNMENT DEPARTMENT. THE ASSESSEE CLAIMED RENTAL RECEIPTS AS BUSINESS INCOME AS PROPERTY HAS BEEN CONSTRUCTED WITH A VIEW TO USE THE SAME FOR THE PUR POSE OF ITS BUSINESS AND THAT SURPLUS ACCOMMODATION DUE TO SHIF TING OF ITS BRANCHES OUTSIDE CHENNAI WAS LET OUT. THE ASSES SING OFFICER REJECTED THE CONTENTION AND TREATED THE INC OME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE HONBLE HIGH COURT HELD THAT RENTAL INCOME DERIVED THEREFROM BY THE ASSESSEE WAS RIGHTLY ASSESSABLE UNDER THE HEAD BUS INESS INCOME OBSERVING AS UNDER:- H E LD THA T INASMUC H AS T H E BU I LDING IN QUESTION ON MOUNT R OAD WAS A C OMM E RCIAL ASSET, T H E ASSESSEE C O U L D EX PLOI T IT EIT H ER B Y I TSEL F OR B Y L E TTING I T TO OTH E RS . THEREFORE, IN A MATTER LIKE T HIS TH E FUNDAME N TAL POSI T ION THAT H AD T O B E AS CE RTAIN E D WAS WHETHER A PARTICULAR BUILDING OR PREMISES W A S A C OMMERCIA L ASSET OR A HOUSE PROPE R TY . I F T H E PR E M ISES WERE A C OMMERC IAL ASSE T , T HEN T H E INCOME DERIVED THERE FROM WOULD AMOUNT TO BUSINESS INC OM E, O T H ER WISE IT WOULD B E INCOME DERIVED FROM PROPERTY ASS E SS ABL E U NDER TH E HEAD 'PROP E RTY INCOME ' . ON T H E FACTS, THE TRIBUNAL HAD FOUN D IN TH E PR ESE NT CAS E THAT T HE PROPERTY IN QUESTION WAS A C OM MERCIA L A S SE T , W HICH WAS USED BY THE ASSESSEE AS SUCH IN THE BEGINNING AN D LAT ER O N A FT E R SHIFT I NG I TS BRANC H ES TO O UTSIDE STAT I ONS, THE SECOND F L OOR HAD BECOME SUR PL US AND W AS EXPLOITED BY THE ITA NO.1816/MDS/2012 9 ASSESSEE BY LETT I NG IT OUT TO OTH E RS. THEREFORE, TH E RE NTAL INCOME DERIVED THEREFROM WAS RIGHTLY ASSESS AB L E UND E R THE HEAD 'BUSINESS INCOME'. 9. THE HONBLE ALLAHABAD HIGH COURT ON A SIMILAR IS SUE IN THE CASE OF SCIENTIFIC INSTRUMENT COMPANY LTD. VS. CIT (SUPRA) HELD AS UNDER:- ALL THE ASSETS OF THE BUSINESS WERE NOT RENTED OUT BY THE APPELLANT COMPANY. IT WAS DOING THE MAIN BUSINESS OF MANUFACTURES, IMPORTS , PURCHASES AND DEAL I NG I N SCIENTIFIC APPARATUS, CHEMICALS, CHEM I CAL PRODUCTS, ART I CLES OF GLASS, METAL, WOOD, PAPER ETC . , MORE OR LESS CONNECTED WITH SCIENCE, AS GIVEN IN THE MEMORANDUM OF ASSOCIATION . OUT OF THE THREE PROPER T IES AT MUMBA I, THE PROPERTY IN D I SPUTE WAS BEI NG USED FOR ITS REGIONAL OFF I CE. IN THE INTERE S T OF THE COMPANY, I T DECIDED TO LET OUT ONE OF ITS PROPERTIES, TO THE CITY BA N K, BY WAY OF E X PLO I TATION OF BUSINESS ASSETS, F OR MAK I NG P ROFIT . THE ASSETS WERE LET OUT, WHILE CARRYING OUT OTHE R BUS I NESS ACTIVITIES . THERE WAS NOTHING ON RECORD, TO SHOW THA T THE APPELLANT HAD SOLD AWAY THE PROPERTIES OR ABANDONED ITS BUS I NESS ACTIVITIES . IN THE C I RCUMSTANCES, IN ORDER TO E X PLOIT BUS I NESS ASSETS, AS A PRUDENT BUSINESS DECISION , THE APPELLANT T OO K IN TE R EST FREE LOAN FROM THE CITY BANK, RENTED OU T, ONE OF I TS PROPERTI E S TO I T, AND SHIFTED ITS REGI O NAL O FF I CE . IN T HIS COMMERC I A L V E NTUR E, T H E APPELLANT R EC E I VED A HI G HER I N C O ME R E GULARLY F RO M ITS COMMERCIAL ASS E T S . TR I BU NAL WAS L E G A LL Y N OT COR RE C T I N HO L D ING THAT THE I N COME E AR NE D B Y THE ASSESSEE FROM L EASIN G OUT O N LEAVE A ND L ICENCE FEE T H E P REM I SES I N QUESTION SHOU L D BE ASSESSED AS INCOME FROM PROPE R TY AND NOT INCOM E FROM B U S I NESS. - UNIVERSAL PLAST LTD. VS . CI T (1999) 1 5 3 CTR ( S C) 95 : ( 1 999) 237 ITR 454 (SC). ITA NO.1816/MDS/2012 10 10 . IN VIEW OF THE ABOVE DISCUSSIONS IN THE DECISIONS, WE HOLD THAT THE PROPERTY LET OUT BY THE ASSESSEE IN O RDER TO EXPLOIT COMMERCIAL ASSET OF THE ASSESSEE WHICH MEAN T FOR ITS BUSINESS IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS AND NOT UNDER THE HEAD INCOME FROM HOU SE PROPERTY. THIS POSITION WAS ALSO ACCEPTED BY THE D EPARTMENT ITSELF OVER A PERIOD OF DECADE AND THEREFORE THERE IS NO VALID REASON NOT TO CONSIDER THE INCOME FROM EXPLOITATION OF ASSETS BY THE ASSESSEE AS INCOME FROM BUSINESS. THUS, WE S USTAIN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) IN ACCEPTING THE CLAIM OF THE ASSESSEE ON THIS ISSUE. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ON THIS ISS UE ARE REJECTED. 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 21 ST DAY OF MARCH, 2014 AT CHENNAI. SD/- SD/- (A.MOHAN ALANKAMONY) (CHALLA NAGEN DRA PRASAD) ACCOUNTANT MEMBER JUDI CIAL MEMBER CHENNAI, DATED THE 21 ST MARCH, 2014. SOMU ITA NO.1816/MDS/2012 11 COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R (3) CIT (6) G.F.