DCIT, CC-2(4), KOLKATA, Kolkata V. M/S. UIC FINANCE PVT. LTD., Kolkata

ITA 2184/KOL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4555 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 05-12-2014
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Notional interest
• Section: 92C; 143(3); 92F; 14A

Judgement Text

I.T.A. NO. 2184/KOL./2014 ASSESSMENT YEAR: 2010-2011 & C.O. NO. 08/KOL/2015 (IN ITA NO. 2184/KOL/2014) ASSESSMENT YEAR 2010-2011 PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA B(SMC) BENCH, KOLKATA BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER I.T.A. NO. 2184 /KOL/ 2014 ASSESSMENT YEAR: 2010-2011 DEPUTY COMMISSIONER OF INCOME TAX,................. .....................APPELLANT CENTRAL CIRCLE-2(4), KOLKATA, ROOM NO. 611, 6 TH FLOOR, AAYAKAR BHAWAN POORVA, 110, SHANTI PALLY, E.M. BYE-PASS, KOLKATA-700 107 -VS.- M/S. UIC FINANCE PVT. LIMITED,..................... ..........................RESPONDENT 227, A.J.C. BOSE ROAD, KOLKATA-700 020 [PAN : AAACU 3288 R] & C.O. NO. 08/KOL/2015 (ARISING OUT OF I.T.A. NO. 2184 /KOL/ 2014) ASSESSMENT YEAR: 2010-2011 M/S. UIC FINANCE PVT. LIMITED,..................... ........................CROSS OBJECTOR 227, A.J.C. BOSE ROAD, KOLKATA-700 020 [PAN : AAACU 3288 R] -VS.- DEPUTY COMMISSIONER OF INCOME TAX,................. .....................RESPONDENT CENTRAL CIRCLE-2(4), KOLKATA, ROOM NO. 611, 6 TH FLOOR, AAYAKAR BHAWAN POORVA, 110, SHANTI PALLY, E.M. BYE-PASS, KOLKATA-700 107 APPEARANCES BY: SHRI RAJAT KUMAR KUREEL, JCIT, SR. D.R., FOR THE DEPARTMENT SHRI K.K. CHHAPARIA, FCA, FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : JUNE 10, 2016 DATE OF PRONOUNCING THE ORDER : JULY 8, 2016 I.T.A. NO. 2184/KOL./2014 ASSESSMENT YEAR: 2010-2011 & C.O. NO. 08/KOL/2015 (IN ITA NO. 2184/KOL/2014) ASSESSMENT YEAR 2010-2011 PAGE 2 OF 6 O R D E R THIS APPEAL FILED BY THE REVENUE IS PREFERRED AGAIN ST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), CENTR AL-III, KOLKATA DATED 24.09.2014 FOR THE ASSESSMENT YEAR 2010-11 AND THE SAME IS BEING DISPOSED OF ALONG WITH THE CROSS OBJECTION FILED BY THE ASSESSEE BEING C.O. NO. 08/KOL/2015. 2. THE SOLITARY ISSUE INVOLVED IN THE APPEAL OF THE REVENUE RELATES TO THE DELETION BY THE LD. CIT(APPEALS) OF THE ADDITIO N OF RS.2,19,62,954/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF NOTIONA L INTEREST INCOME. 3. THE ASSESSEE IN THE PRESENT CASE IS A NON-BANKIN G FINANCE COMPANY. THE RETURN OF INCOME FOR THE YEAR UNDER CO NSIDERATION WAS FILED BY IT ON 30.09.2010 DECLARING TOTAL INCOME OF RS.31 ,45,170/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE-COMPANY HAS ADVANCED SUBSTANTIAL AMOUNT OF RS.20.88 CRORES TO THE RELATED PARTIES AT THE VERY LOW RATE OF INTEREST RANGING FROM 4% TO 4.5%. ACCORDING TO HIM, THE ASSESSEE BEING A NBFC, PRIMARILY ENGAGED IN THE BUSINESS OF GENERATING REVENUE FROM FINANCING AND INVESTMENT ACTIVITIES, SHOULD HAVE CHARGED INTEREST ON THE LOANS ADVANCED TO THE RELATED PARTIES AT THE PREVAILING MARKET RAT E. HE, THEREFORE, APPLIED THE PREVAILING MARKET RATE OF INTEREST TAKEN AT 12% PER ANNUM AND CALCULATED THE INTEREST THAT OUGHT TO HAVE BEEN CHA RGED BY THE ASSESSEE- COMPANY TO THE RELATED PARTIES ON THE LOANS ADVANCE D AT RS.2,50,55,160/-. SINCE THE INTEREST ACTUALLY CHARGED BY THE ASSESSEE ON THE SAID LOANS WAS RS.30,92,206/-, THE BALANCE AMOUNT OF RS.2,19,62,95 4/- WAS TREATED BY HIM AS NOTIONAL INTEREST INCOME WHICH THE ASSESSEE SHOULD HAVE RECOVERED FROM THE LOANS ADVANCED TO THE RELATED PA RTIES AND THE SAME WAS ADDED BY HIM TO THE TOTAL INCOME OF THE ASSESSE E IN THE ASSESSMENT COMPLETED UNDER SECTION 143(3) VIDE AN ORDER DATED 31.03.2013. I.T.A. NO. 2184/KOL./2014 ASSESSMENT YEAR: 2010-2011 & C.O. NO. 08/KOL/2015 (IN ITA NO. 2184/KOL/2014) ASSESSMENT YEAR 2010-2011 PAGE 3 OF 6 4. AGAINST THE ORDER PASSED BY THE ASSESSING OFFICE R UNDER SECTION 143(3), AN APPEAL WAS PREFERRED BY THE ASSESSEE BEF ORE THE LD. CIT(APPEALS) CHALLENGING THE ADDITION MADE BY THE A SSESSING OFFICER ON ACCOUNT OF INTEREST INCOME ON NOTIONAL BASIS AND AF TER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE AND PERUSING THE R ELEVANT MATERIAL ON RECORD, THE LD. CIT(APPEALS) DELETED THE SAID ADDIT ION MADE BY THE ASSESSING OFFICER FOR THE FOLLOWING REASONS GIVEN I N PARAGRAPH NO. 4.1 (INCLUDING PARA NO. 4.1.1 TO 4.1.5):- 4.1. I HAVE GONE THROUGH THE ABOVE - THE EXTRACTS FROM THE IMPUGNED ASSESSMENT ORDER, SUBMISSIONS IN THE ASSES SMENT PROCEEDINGS, THE GROUNDS OF APPEAL, AND THE APPELLA TE SUBMISSIONS, AND THE JUDICIAL DECISIONS CITED. 4.1.1 FOREMOST, THE ASSESSING OFFICER HAS MADE A GR OSS ERROR OF APPROACH BY APPROACHING THIS ISSUE FROM THE EYES OF TRANSFER PRICING OFFICER [TPO] DEALING WITH ARM'S LENGTH PRI CE DETERMINATION OF INTERNATIONAL TRANSACTIONS QUA SEC TIONS 92C TO 92F. IT IS JUST NOT THE CASE HERE. THERE IS NO INTE RNATIONAL TRANSACTION OR ASSOCIATED ENTERPRISES. THESE SECTIO NS 92C TO 92F ARE NOT APPLICABLE HERE. THE ASSESSING OFFICER HAD STARTED OFF BY QUERY ABOU T RELATED PARTIES. THIS IS THE TYPICAL STARTING APPROACH OF A TPO. THENCE, THE ASSESSING OFFICER PROCEEDED AHEAD TO QU ESTION THE BUSINESS WISDOM OF THE APPELLANT AS TO WHY IT CHARG ED INTEREST WHICH WAS LOWER THAN MARKET RATE' @ 12%; AND SO ST RAIGHTAWAY PROCEEDED IN SUMMARY MANNER TO MAKE THE ADDITION BY APPLYING INTERESTS AT 12%. IN SHORT, THE ASSESSING OFFICER W AS ACTING AS A TPO DETERMINING THE ARMS LENGTH PRICE. TPO APPROACH IS JUST NOT APPLICABLE HERE. 4.1.2 ANOTHER HOLE IN THE ASSESSING OFFICER'S ACTIO N IS THAT THE ASSESSING OFFICER HAS NOT QUOTED ANY SECTION IN THE INCOME TAX ACT AUTHORIZING FOR SUCH NOTIONAL ADDITION TO BE MA DE - FOR THERE IS NO SUCH SECTION OR PROVISION IN THE ACT. THIS AS PECT HAS BEEN POINTED OUT BY THE APPELLANT IN THE APPEAL GROUND N O. 1; TO WHICH. I FULLY CONCUR. THERE IS NO SECTION IN THE ACT AUTHORIZING FOR NOTI ONAL ADDITION OR CHARGING MORE INTEREST ON LOANS ADVANCED. IT IS THE BUSINESS I.T.A. NO. 2184/KOL./2014 ASSESSMENT YEAR: 2010-2011 & C.O. NO. 08/KOL/2015 (IN ITA NO. 2184/KOL/2014) ASSESSMENT YEAR 2010-2011 PAGE 4 OF 6 WISDOM OF THE APPELLANT AS TO WHOM THE LOANS ARE AD VANCED AND AT WHAT RATE OF INTEREST. 4.1.3 TO EXAMINE THE ISSUE OF RELATED PARTY TRANSAC TION, THE RELEVANT SECTION IS SECTION 40A(2) - BUT IT IS ONLY WHEN EXPENDITURE IS INCURRED, AND IT IS ONLY FROM THAT A NGLE. IT IS NOT FROM THE ANGLE OF RECEIPT OF THE EXPENDITURE BY THE OTHER PARTY, THUS, IN THE INSTANT CASE, IT IS NOT THE APPELLANT WHO INCURS EXPENDITURE, BUT IT IS THE RELATED PARTIES. SO, EVE N IF AT ALL, SECTION 40A(2) WERE TO BE CONSIDERED, IT COULD BE O NLY FROM THE ANGLE OF THE RELATED PARTIES, AND NOT THE APPELLATE . 4.1.4 ANOTHER ANGLE TO EXAMINE THE MANIFESTATIONS O F RELATED PARTY TRANSACTIONS IS TO LOOK AT THE INTEREST EXPEN DITURE OF THE APPELLANT, AND FOR POSSIBILITY OF DISALLOWANCE THER EFROM. THE LEARNED AR IN THE SUBMISSIONS HAS POINTED OUT T HAT FUNDS ADVANCED WERE OUT OF OWN FUNDS. THE APPELLANT HAS N ET WORTH AT RS.27.19 CRORES. THE ADVANCES TO THE RELATED PARTIE S WHICH ARE AT ABOUT RS.20.87 CRORES IS COVERED BY OWN FUNDS. FURTHER, THE INTEREST EXPENDITURE OF THE APPELLANT DEBITED TO THE P&L ACCOUNT IS ONLY AT RS.5,000/- ONLY. SO TO LOOK FROM THE ANGLE OF POSSIBILITY OF DISALLO WANCE OUT OF INTEREST EXPENDITURE - THIS IS ALSO NOT RELEVANT. 4.1.5 THE JUDICIAL PRONOUNCEMENTS CITED BY THE LEAR NED AR ALSO EMPHASIZE THAT THERE CANNOT BE ANY ADDITION TOWARDS NOTIONAL INTEREST. AGGRIEVED BY THE ORDER OF THE LD. CIT(APPEALS), THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 5. I HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE IMPUGNED ADDITION ON ACCOUNT OF INTEREST INCOME, WHICH WAS N EITHER RECEIVED BY NOR RECEIVABLE TO THE ASSESSEE, WAS MADE BY THE ASS ESSING OFFICER ON NOTIONAL BASIS ON THE GROUND THAT SUCH INTEREST OUG HT TO HAVE BEEN CHARGED BY THE ASSESSEE ON THE LOANS ADVANCED TO TH E RELATED PARTIES. AS RIGHTLY HELD BY THE LD. CIT(APPEALS) IN HIS IMPUGNE D ORDER, SUCH ADDITION MADE BY THE ASSESSING OFFICER ON NOTIONAL BASIS WAS NOT SUSTAINABLE EITHER IN LAW OR IN THE FACTS OF THE SAME AND EVEN THE LD. D.R. AT THE TIME I.T.A. NO. 2184/KOL./2014 ASSESSMENT YEAR: 2010-2011 & C.O. NO. 08/KOL/2015 (IN ITA NO. 2184/KOL/2014) ASSESSMENT YEAR 2010-2011 PAGE 5 OF 6 OF HEARING HAS NOT BEEN ABLE TO DISPUTE THIS POSITI ON. AS FURTHER HELD BY THE LD. CIT(APPEALS), EVEN THE PROVISIONS OF SECTI ON 40A(2) SPECIFICALLY DEALING WITH THE ALLOWABILITY OF PAYMENT OF EXPENDI TURE MADE TO THE RELATED PARTIES ARE NOT APPLICABLE TO THE ISSUE UND ER CONSIDERATION INVOLVING ADDITION MADE ON ACCOUNT OF INTEREST INCO ME ON NOTIONAL BASIS. I, THEREFORE, FIND NO INFIRMITY IN THE IMPUGNED ORD ER OF LD. CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE ON THIS ISSUE AND UPH OLDING THE SAME, I DISMISS THIS APPEAL FILED BY THE REVENUE. 6. AS REGARDS THE SOLITARY ISSUE INVOLVED IN THE CR OSS OBJECTION FILED BY THE ASSESSEE RELATING TO THE DISALLOWANCE OF RS. 6,61,268/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPE ALS) UNDER SECTION 14A READ WITH RULE 8D, THE LIMITED CONTENTION RAISE D BY THE LD. COUNSEL FOR THE ASSESSEE IS THAT THE TOTAL EXPENDITURE ACTU ALLY CLAIMED BY THE ASSESSEE EXCLUDING DEPRECIATION BEING RS.4,04,514/- , THE DISALLOWANCE UNDER SECTION 14A AS COMPUTED BY APPLYING RULE 8D A T RS.6,61,268/- SHOULD HAVE BEEN RESTRICTED TO RS.4,04,515/-. SINCE THIS CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE IS DULY SUPPORTED BY T HE DECISION OF THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF HOSHAN G D. NANAVATI VS.- ACIT [16 ITA(T) 614] AS WELL AS THE DECISION OF THE AHMEDABAD (SPECIAL) BENCH OF THIS TRIBUNAL IN THE CASE OF VISHNU ANANT MAHAJAN -VS.- ACIT REPORTED IN 137 ITD 189, WE RESTRICT THE DISALLOWAN CE OF RS.6,61,268/- TO RS.4,04,515/-. THE CROSS OBJECTION FILED BY THE ASS ESSEE IS THUS PARTLY ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED, WHILE THE CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON JULY 8, 2016. SD/- (P.M. JAGTAP) ACCOUNTANT MEMBER KOLKATA, THE 8 TH DAY OF JULY, 2016 I.T.A. NO. 2184/KOL./2014 ASSESSMENT YEAR: 2010-2011 & C.O. NO. 08/KOL/2015 (IN ITA NO. 2184/KOL/2014) ASSESSMENT YEAR 2010-2011 PAGE 6 OF 6 COPIES TO : (1) DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(4), KOLKATA, ROOM NO. 611, 6 TH FLOOR, AAYAKAR BHAWAN POORVA, 110, SHANTI PALLY, E.M. BYE-PASS, KOLKATA-700 107 (2) M/S. UIC FINANCE PVT. LIMITED, 227, A.J.C. BOSE ROAD, KOLKATA-700 020 (3) COMMISSIONER OF INCOME-TAX (APPEALS), CENTRAL- III, KOLKATA (4) COMMISSIONER OF INCOME TAX, KOLKATA (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.