Jaya Hospitalas, Warangal, Hyderabad V. Addl. CIT, Warangal Range, Warangal, Warangal

ITA 202/HYD/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6504 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-07-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 22-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N SWAPNA
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Proportionate interest; Commercial expediency
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B , HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 202 /HYD/201 6 (A.Y. 2011 - 2012) M/S. JAYA HOSPITALS, H.NO.6 - 2 - 234, CHOWRASTHA HANAMKONDA, WARANGAL. [PAN: AABFJ 2166 R ] VS ADDL. COMMISSIONER OF INCOME TAX, WARANGAL RANGE, WARANGAL. (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.A. SAI PRASAD FOR REVENUE : S MT. N. SWAPNA, DR DATE OF HEARING : 1 9 .07 .2018 DATE OF PRONOUNCEMENT : 20 .0 7 .2018 O R D E R PER B. RAMAKOTAIAH, AM 1. THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER OF CIT (A) - 3, HYDERABAD DATED 20.11.2015. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO DISALLOWANCE OF INTEREST TO AN EXTENT OF RS. 41,34,493/ - INVOKING THE PROVISIONS OF SECTION 37(1)/ 36(1)(III) . 2. F ACTS IN BRIEF ARE THAT THE ASSESSEE IS A FIRM AND RUNS A HOSPITAL. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTED (PARA 10 OF THE ASSESSMENT ORDER) THAT ASSESSEE HAS CLAIMED INTEREST TO PARTNERS CAPITAL ACCOUNT AT RS. 70,85,488/ - . ASSESSEE ALSO PAID INTEREST OF RS. 5,90,785/ - ON THE LOANS TAKEN. ON PERUSAL OF THE BALANCE SHEET, A.O. NOTICED AN AMOUNT OF RS. 4.63 CRS WAS GIVEN ON LO AN TO DR. T. NARASIMHA REDDY, HU F. A.O. ASKED WHY PROPORTIONATE INTEREST ON LOAN 2 GIVEN TO DR. T. NARASIMHA REDDY CO ULD NOT BE DISALLOWED OUT OF THE INTEREST EXPENDITURE AMOUNTING TO RS. 76,76,277/ - . IT WAS ALSO SHOW - CAUSED BY STATING TH AT THE SAID AMOUNT WAS ADVANCED FOR NON - BUSINESS PURPOSES. THE ASSESSEE SUBMITTED THAT HUF HAS CONTRIBUTED FUNDS TO THE FIRM IN THE E ARLIER YEARS AND FIRM DID NOT PAY ANY INTERES T TO THE HUF AND IT HAS CREDIT AMOUNT TO THE EXTENT OF RS 1. 8 5 CRORES AS ON 31.03.2007 AND FURTHER SUBMITTED THAT FUNDS DRAWN FROM THE FIRM ARE UTILISED BY THE SAID MEMBERS OF THE FAMILY FOR PURCHASE OF ASSETS W HICH WERE USED FOR THE BUSINESS. A.O HOWEVER DID NOT AGREE AND CONSIDERED THAT ASSESSEE HAD DIVERTED THE FUNDS OF THE FIRM FOR NON - BUSINESS PURPOSES AND ACCORDINGLY ARRIVED AT A PROPORTIONATE DISALLOWANCE TO AN EXTENT OF RS. 41,34,493/ - EXCLUDING THE OPEN ING BALANCE OF RS. 2,93,00,000/ - . 3. BEFORE THE CIT (A ), ASSESSEE RAISED CONTENTIONS THAT THERE ARE NO BORROWED FUNDS AND FURTHER THE AMOUNT CLAIMED BY THE PARTNERS IS UNDER THE PROVISIONS OF SECTION 40(B) OF THE ACT WHICH HAS TO BE SEPARATELY ALLOWED AND THEREFORE, THE ACTION OF THE A.O. IS NOT CORRECT IN LAW. LEARNED CIT(A) WHILE APPRECIATING THAT THE PAYMENT OF INTEREST BY PARTNERS IS COVERED BY THE PROVISIONS OF SECTION 40(B) , HOWEVER DID NOT ALLOW THE CONTENTIONS OF THE ASSESSEE STATING AS UNDER: - 6.5. THE APPELLANTS SUBMISSION THAT THE PAYMENT OF INTEREST TO PARTNERS IS GOVERNED BY PROVISIONS OF SECTION 40(B) OF I.T. ACT IS WELL APPRECIATED. AS PER THE PROVISIONS OF SECTION 40(B) SUCH INTEREST IS ALLOWABLE TO THE MAXIMUM EXTENT OF 12%. THE 12% OF INTEREST ON AMOUNT OF RS. 4,99,60,093/ - WORKS OUT T O RS. 59,95,211/ - WHEREAS THE APPELLANT CLAIMED RS. 70,85,488/ - . THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO LOOK INTO THIS ISSUE ONCE AGAIN, GIVE AN OPPORTUNITY TO THE APPELLANT AND TAKE ACTION AS PER THE PROVISIONS OF SECTION 40(B). SINCE THE APPELL ANT FAILED TO EXPLAIN THE PURPOSE FOR WHICH HUGE AMOUNT OF RS. 4.63 CRS OF LOAN WAS GIVEN TO HUF, I DO NOT CONSIDER NECESSARY TO INTERFERE WITH CORRESPONDING DISALLOWANCE OF INTEREST MADE BY ASSESSING OFFICER. FURTHER FOR THE PURPOSE OF INCOME TAX THE FIR M / PARTNERS / HUF / INDIVIDUALS AND ALL ARE INDEPENDENTLY ASSESSABLE. THEREFORE THE 3 EXPLANATION GIVE BY THE APPELLANT THAT THE HUF AND PARTNERS ALL BELONG TO THE SAME FAMILY NO INTEREST WAS CHARGED ON LOAN GIVEN TO HUF IS NOT ACCEPTABLE. THEREFORE, THIS GROUND OF APPEAL IS DISMISSED. 4. IN THE COURSE OF ARGUMENTS, LEARNED COUNSEL HAS REITERATED THAT THE PROVISIONS OF SECTION 40(B) STAND SEPARATE LY AND THE ALLOWANCE OF INTEREST ON THE PARTNER S CAPITAL IS SEPARATELY GOVERNED AND ASSESSEE HAS ACCORDINGL Y CLAIMED , WHICH CANNOT BE DISALLOWED U/S 36(1)(III) /37 OF THE ACT. IT WAS FURTHER SUBMITTED THAT THERE WAS A MERGER OF ANOTHER FIRM VIZ., JAYA DIAGNOSTIC AND RESEARCH CENTRE AND THE CAPITAL BALANCES HAVE INCREASED DURING THE YEAR AND THE ASSESSEE CLAIMED INTEREST AS PER THE PROVISIONS OF SECTION 40(B)(IV) WITHIN 12% AS ALLOWED BY THE PROVISIONS. APART FROM THAT, IT WAS ALSO CONTENDED THAT THE INTEREST PAID AND NOTED DOWN BY THE A.O. OF RS. 5,90,785/ - WAS INTEREST PAID TO THE BANKS AND THAT THERE ARE NO B ORROWED FUNDS ON WHICH ASSESSEE HAS PAID INTEREST. REFERRING TO THE PROFIT DURING THE YEAR AND THE BALANCES AVAILABLE WITH THE FIRM, IT WAS SUBMITTED THAT THE ADVANCES GIVEN TO THE HUF ARE OUT OF OWN FUNDS AND THERE IS NO NEXUS WITH THE BORROWED FUNDS. I T WAS FURTHER SUBMITTED THAT ASSESSEE HAD ADEQUATE FUNDS TO ADVANCE AND RELIED ON THE FOLLOWING CASE LAW: - (I) SRI GANESH BOTTLES PVT LTD VS. DCIT (ITA NOS. 616 TO 619 / HYD/2015, DATED 30.08.2017) AND (II) THIRD MEMBER DECISION IN THE CASE OF S.P. JAISWAL ESTATES ( P.) LTD VS. ACIT (29 TAXMANN.COM 221). 5. LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER SUBMITTED THAT THE ASSESSEE HAD ADVANCED VARIOUS FUNDS TO THE HUF AND THE ARGUMENT THAT ASSESSEE HAS OWN FUNDS AND HAS NOT DIVERTED ANY BORROWED FUNDS WAS NOT CONTENDED E ITHER BEFORE THE A.O. OR BEFORE THE CIT(A) , HENCE THAT CONTENTION CANNOT BE ACCEPTED. LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE DECISION OF THE HONBLE HIGH COURT OF ALLAHABAD IN THE CASE OF MAROLIA & SONS VS. CIT (129 ITR 475) AND DECISION OF THE HONBLE HIGH 4 COURT OF DELHI IN THE CASE OF PUNJAB STAINLESS STEEL INDS. VS. CIT (324 ITR 396). LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RELIED ON THE RECENT DECISION OF THE ITAT IN THE CASE OF GVK AIRPORT DEVELOPERS LIMITED (ITA NO. 488/HYD/2017, DATED 05 .07.2018) FOR THE PROPOSITION THAT THERE IS NO COMMERCIAL EXPEDIENCY. 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE DOCUMENTS PLACED ON RECORD AND THE CASE LAW. AS SEEN FROM THE ORDER OF THE ASSESSING OFFICER, THERE IS NO FINDING THAT BORRO WED FUNDS ARE DIVERTED FOR NON - BUSINESS PURPOSES. IT IS THE CONTENTION THAT THE ASSESSEE GOT FUNDS IN EARLIER YEARS WITHOUT INTEREST AND THERE WAS ALSO BALANCES OF THE HUF TO THEIR CREDIT TO AN EXTENT OF RS. 1.85 CRS. WITHOUT ESTABLISHING THAT BORROWED F UNDS ARE DIVERTED FOR THE PURPOSE OF BUSINESS, ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS. 41, 34,493/ - INVOKING THE PROVISIONS OF SECTION 37 OF THE ACT. FIRST OF ALL, WE ARE UNABLE TO UNDERSTAND HOW PROVISIONS OF SECTION 37 WILL APPLY , WHEN INTEREST ON BORROWED FUNDS ARE TO BE CONSIDERED U/S 36(1)(III ) OF THE ACT. BE THAT AS IT MAY, THE CLAIM OF INTEREST WAS ONLY RS 5,90,785/ - ON THE LOANS TAKEN, AS STATED BY THE A.O. IN PA RA 10.0 IN THE ASSESSMENT ORDER WHERE AS THE CLAIM OF RS. 70,85,488/ - IS INTERES T ON PARTNER S CAPITAL ACCOUNT GOVERNED BY PROVISIONS OF SECTION 40(B). 7. AS SEEN FROM THE PROVISIONS OF SECTION 40 WITH THE HEADING AMOUNTS NOT DEDUCTIBLE IT STARTS WITH THE WORDS NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION 30 TO 38. THUS, THE PROVISIONS OF SECTION 36(1)(III) AS WELL AS SECTION 37 ARE NOT TO BE CONSIDERED, WHEN THE AMOUNTS ARE GOVERNED BY SECTION 40. SECTION 40(B) IS WITH REFERENCE TO PAYMENTS OF SALARY , REMUNERATION, INTEREST AND OTHER AMOUNTS TO THE PARTNERS IN THE CASE OF ANY FIRM . T HERE IS NO DISPUTE W ITH REFERENCE TO APP LICABILITY OF SECTION 40(B)(IV) AS PAYMENT OF INTEREST TO THE PARTNERS IS 5 AUTHORISED BY THE PARTNERS HIP DEED AND AMOUNT CAN BE A LLOWED SUBJECT TO A MAXIMUM @ 12% OF INTEREST PER ANNUM. WHILE ACCEPTING THAT PROVISIONS OF SECTION 40(B) ARE APPLICABLE, CIT (A) SURPRISINGLY DID NOT GIVE ANY FINDING ON THE ISSUE , BUT ONLY STATED THAT THE RATE OF INTEREST @ 12% ON AN AMOUNT OF RS. 4.99 CRS WOULD WORKS OUT TO RS. 59,95,211/ - WHEREAS ASSESSEE CLAIMED RS. 70,85,488/ - . IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT THE INTEREST IS CLAIMED AS PER THE PROVISIONS OF THE ACT ON THE BALANCES TO THE CREDIT OF THE PARTNERS. SINCE THE BASIS FOR WORK ING OUT THE AMOUNT BY THE CIT(A) IS NO T VERIF IABLE, IN THE INTEREST OF JUSTICE , WE DIRECT THE A.O. TO VERIFY THE CLAIM OF INTEREST AT RS. 70,85,488/ - U/S 40(B). IF THE SAME IS AS PER THE PROVISIONS OF SECTION 40(B)(IV), THEN THE A.O. IS DIRECTED TO ALLOW THE ENTIRE AMOUNT AS PER THE PROVISIONS OF LAW. 8. THAT LEAVES US WITH THE CLAIM OF INTEREST AT RS. 5,90,785/ - WHICH IS THE ONLY INTEREST CLAIMED ON LOANS TAKEN. IT IS NOT CLEAR WHETHER THE ABOVE AMOUNT IS PAID ON ANY BORROWED AMOUNTS FROM ANY PARTIES OR THE AMOUNT PAID TO BANKS FOR THE DAY - TO - DAY OVER DRAFT FACILITY. THE CONTENTION THAT ASSESSEE HAD SUFFICIENT FUNDS , INCLUDING THE PROFITS OF THE YEAR HAS NOT BEEN EXAMINED BY THE A.O. AND FURTHER THERE IS NO FINDING THAT BORROWED FUNDS ARE DIVERTED FOR N ON - BUSINESS PURPOSES. SINCE THERE IS NO CLARITY OR FINDING ON THIS ISSUE, IN THE INTEREST OF JUSTICE WE DIRECT THE A.O. TO EXAMINE WHETHER THE INTEREST PAID AT RS. 5,90,785/ - REQUIRES TO BE DISALLOWED UNDER THE PROVISIONS OF SECTION 36(1)(III) OR NOT? IN CASE, ASSESSEE HAS SUFFICIE NTLY ENOUGH FUNDS TO ADVANCE THE HUF, ASSESSING OFFICER CANNOT DISALLOW ANY AMOUNT OUT OF THE INTEREST PAID AND USED FOR THE BUSINESS. THE PRINCIPLES LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., (313 ITR 340) (BOM.) WILL APPLY. ASSESSING O FFICER IS DIRECTED TO EXAMINE WHE THER ANY OF THE BORROWED FUNDS ARE DIVERTED FOR NON - 6 BUSINESS PURPOSES AND IN CASE THE ASSESSEE HAS USED THE BORROWED FUNDS FOR THE BUSINESS PURPOSES , NO AMOUNT CA N BE DISALLOWED OUT OF THE CLAIM M ADE BY THE ASSESSEE. WE MAKE IT CLEAR THAT THE ALLOWANCE OF IN TEREST ON THE PARTNER S CAPITAL IS GOVERNED BY THE PROVISIONS O F SECTION 40(B) WHICH SHOULD BE VERIFIED WHETHER THE CLAIM OF RS. 70,85,488 IS ACCORDING TO THE PR OVISIONS OF THE ACT (40(B)(IV) AND WITH REFERENCE TO THE CLAIM OF INTEREST RS. 5,90,785/ - A.O. IS DIRECTED TO EXAMINE WHETHER THE INTEREST CAN BE CONSIDERED FOR DISALLOWANCE U/S 36(1)(III) , SUBJECT TO GIVING A FIND ING THAT THERE IS NEXUS WITH DIVERSION O F BORROWED FUNDS. WITH THESE DIRECTIONS, THE ORDERS OF THE AUTHORITIES ARE SET - ASIDE AND ISSUES ARE RESTORED TO THE FILE OF THE A.O. TO PASS ORDER ACCORDINGLY. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT O N 20 TH JULY, 2018. SD/ - SD/ - ( CHALLA NAGENDRA PRASAD ) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 20 TH JULY , 2018 OKK, SR.PS COPY TO 1. C/O. CH. PARTHASARATHY & CO., 1 - 1 - 298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST. NO.1, ASHOKNAGAR, HYDERABAD 500 020. 2. ADDL. CIT, WARANGAL RANGE, AAYAKAR BHAVAN, STATION ROAD, WARANGAL. 3 . CIT (A) - 3, HYDERABAD. 4. PR. CIT - 3, HYDERABAD. 5 . D.R. ITAT, HYDERABAD. 6 . GUARD FILE