Smt. D. Sailaja, CHENNAI V. DCIT, CHENNAI

ITA 2350/CHNY/2016

• Counselvise Citation: [2019] 111 COUNSELVISE.COM (IT) 8797 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 12-08-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: J PURSHOTHAMAN
• Keywords: Salary income; Opportunity of being heard; Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 250

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , . , BEFORE SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A. NO. 2350/CHNY/2016 / ASSESSMENT YEAR: 2012-13 MRS. D. SAILAJA, NO. 4, 10TH STREET, NANDANAM EXTENSION, NANDANAM, CHENNAI 600 035. [PAN:AAOPS2743J] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, NON CORPORATE CIRCLE II, CHENNAI 600 034. ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI J. PURSHOTHAMAN, C.A. / RESPONDENT BY : SHRI GURU BASHYAM, ADDL. CIT / DATE OF HEARING : 26.11.2019 /DATE OF PRONOUNCEMENT : 23.12.2019 / O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 2, CHENNAI, DATED 15.06.2016 RELEVANT TO THE ASSESSMENT YEAR 2012-13. THE GROUNDS RAISED IN THE APPEAL OF THE ASSESSEE ARE THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE UNDER SECTION 36(1)(III) OF THE INCOME TAX ACT, 1961 [ACT IN SHORT) AND CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A R.W. RULE 8D. I.T.A. NO. 2350/CHNY/16 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS FILED THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2012-13 ADMITTING TOTAL INCOME OF .57,61,340/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND AGAINST THE STATUTORY NOTICES, THE ASSESSEE FURNISHED THE DETAILS AS CALLED FOR. AFTER VERIFICATION OF THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED BY ASSESSING TOTAL INCOME OF THE ASSESSEE AT .70,89,668/- AFTER MAKING DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT AND DISALLOWANCE UNDER SECTION 14A OF THE ACT. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLOWANCES MADE BY THE ASSESSING OFFICER. 3. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. WITH REGARD TO THE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT, BY RELYING UPON THE DECISION IN THE CASE OF S.A. BUILDERS LTD. V. CIT 288 ITR 1(SC) AND THE DECISION IN THE CASE OF CIT V. RELIANCE COMMUNICATIONS INFRASTRUCTURE LTD. [2012] 21 TAXMANN.COM 118 (BOM.), THE LD. COUNSEL FOR THE ASSESSEE HAS PRAYED FOR DELETING THE DISALLOWANCE. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 4. WE HAVE HEARD BOTH THE SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THIS CASE, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAD OBTAINED LOAN OF I.T.A. NO. 2350/CHNY/16 3 .3.45 CRORES FROM RANJINI C. REDDY AND PAID INTEREST OF .30,00,000/- TO HER. FURTHER, THE ASSESSEE HAS UTILIZED THE FUNDS I.E. THE LOAN AMOUNT, BY WAY OF INVESTING IN THE SISTER CONCERN (CENTWIN ESTATES), WHICH WAS LATER CONVERTED INTO A PRIVATE LIMITED COMPANY. THE QUANTUM OF LOAN FROM RANJINI C REDDY REMAINING AS OUTSTANDING DURING THE RELEVANT PREVIOUS YEAR IS .2,00,00,000/-. FURTHER, THE ASSESSEE HAS CHARGED INTEREST @ 12% ON LOAN GRANTED TO THEIR SISTER CONCERN, BUT HAS OBTAINED THE LOAN FROM RANJINI C. REDDY AT THE RATE OF 15% AND PAID INTEREST OF .30,00,000/- ON VARIOUS DATES TO RANJINI C REDDY. THE QUANTUM OF INTEREST RECEIVED @ 12% 2,00,00,000 IS .24,00,000/-. THUS, THE ASSESSING OFFICER DISALLOWED THE AMOUNT OF DIFFERENCE BETWEEN THE INTEREST PAID AND INTEREST RECEIVED OF .6,00,000/- [.30,00,000-.24,00,000] UNDER SECTION 36(1)(III) OF THE ACT AND BROUGHT THE SAME TO TAX. 5. APART FROM THIS, THE ASSESSING OFFICER HAS ALSO FOUND THAT THE SUM OF .5,00,000/- BORROWED BY THE ASSESSEE FROM DAGGOLU RAJESWARAMMA ON 02.08.2010, WHICH CARRIED INTEREST @ 18% WAS LENT BY THE ASSESSEE TO MS. NITHYA REDDY, ON WHICH NO INTEREST WAS CHARGED BY THE ASSESSEE. THE LOAN ADVANCED TO MS. NITHYA REDDY WAS RECEIVED BACK BY THE ASSESSEE ON 08.06.2011. THUS, ASSESSING OFFICER WORKED OUT THE DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT FOR THE PERIOD FROM 01.04,2011 TO I.T.A. NO. 2350/CHNY/16 4 08.06.2011, OR APPROXIMATELY 2 MONTHS, AND ADDED BACK THE QUANTUM OF SUCH INTEREST I.E. .15,000/- (.90,000 X 2/12). 6. FURTHER, THE ASSESSING OFFICER FOUND THAT A SUM OF .1,00,000/ - BORROWED BY THE ASSESSEE FROM MR. N. SAILESH REDDY ON 02.04.2005, @ 12% WAS UTILIZED FOR GIVING INTEREST - FREE ADVANCE TO ONE MR. SRINIVASAN. SINCE INTEREST BEARING BORROWED FUNDS HAVE BEEN DIVERTED FOR MAKING INTEREST FREE ADVANCES, THE QUANTUM OF INTEREST PAID TO MR. N. SAILESH REDDY DURING THE YEAR AMOUNTING TO .24,000/- WAS DISALLOWED UNDER SECTION 36(1)( III) OF THE ACT AND BROUGHT TO TAX. 7. ON APPEAL, IN VIEW OF THE DECISION IN THE CASE OF SA BUILDERS LTD. V. CIT (SUPRA), THE LD. CIT(A) HAS OBSERVED THAT M/S. CENTWIN ESTATES, THE FIRM OF WHICH THE ASSESSEE WAS ORIGINALLY A PARTNER [M/S. CENTWIN ESTATES WAS LATER CONVERTED INTO A COMPANY] UTILIZED THE MONEY FOR ITS OWN BUSINESS PURPOSES, THEN THE ASSESSEE, WHO HAD A DEEP INTEREST IN THE FIRM AS ITS PARTNER, WOULD HAVE BEEN JUSTIFIED IN LENDING THE BORROWED MONEY AT A LOWER RATE OF INTEREST TO THE FIRM. HOWEVER, SINCE M/S. CENTWIN ESTATES CHOSE TO TRANSFER THE ENTIRE BORROWED MONEY TO OLIVE BEACH PROMOTERS, IN THE ABSENCE OF DEEP INTEREST OF THE ASSESSEE IN OLIVE BEACH PROMOTERS, BEING ESTABLISHED, IT WAS REALLY IMMATERIAL THAT OLIVE BEACH PROMOTERS HAD GENERATED INCOME OF .1.05 CRORES (FOR ITSELF) DURING THE RELEVANT PREVIOUS I.T.A. NO. 2350/CHNY/16 5 YEAR AND THUS, THE LD. CIT(A) OBSERVED THAT THE ASSESSEE HAS FAILED TO ESTABLISH THE NEXUS BETWEEN THE HUGE AMOUNT OF BORROWED FUNDS AND ITS OWN BUSINESS EXPEDIENCY. ACCORDINGLY, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 8. BEFORE US, IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS HEAVILY RELIED ON THE DECISION IN THE CASE OF SA BUILDERS LTD. V. CIT (SUPRA) IN SUPPORT OF ITS CONTENTION. EVEN THOUGH THE ASSESSEE FAILED TO ESTABLISH THE NEXUS BETWEEN THE HUGE AMOUNT OF BORROWED FUNDS AND ITS OWN BUSINESS EXPEDIENCY, IN VIEW OF THE DECISION IN THE CASE OF SA BUILDERS LTD. V. CIT(SUPRA), SUBSEQUENTLY, WE FIND THAT IN THE CASE OF ADDL. CIT V. TULIP STAR HOTELS LTD. [2012] 21 TAXMANN.COM 97, THE HONBLE SUPREME COURT HAS OBSERVED THAT THE DECISION IN THE CASE OF SA BUILDERS LTD. V. CIT & ANOTHER, REPORTED IN 288 ITR 1, NEEDS RECONSIDERATION. OTHERWISE ALSO, VIDE ORDER DATED 23.11.2016 IN I.T.A. NO. 1146/MDS/2015 IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2010-11 CONFIRMED THE DISALLOWANCE BY OBSERVING AS UNDER: 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THE ASSESSEE BORROWED THE FUNDS AT A HIGHER RATE OF INTEREST I.E.15% PER ANNUM AND LEND THE SAME AT A VERY LOW RATE AT 6% PER ANNUM. NO SHREWD BUSINESSMAN WOULD DO SO. MORE SO, THE ASSESSEE BORROWED THE FUND FROM RANJINI C. REDDY ON A PARTICULAR DAY AND THE SAME WAS ADVANCED TO SISTER CONCERN AT A LOWER RATE OF INTEREST. IN OUR OPINION, THERE IS NO REASON FOR ADVANCING BORROWED FUNDS AT SUCH A LOWER RATE OF INTEREST AND THAT EXPENDITURE CANNOT BE SAID TO BE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS AND THE ASSESSEE TRIED TO DIVERT THE ENTIRE BORROWED FUNDS TO A SISTER CONCERN WITH A SOLE INTENTION OF REDUCING ITS PROFITS AND THIS KIND OF I.T.A. NO. 2350/CHNY/16 6 ACT CANNOT BE APPRECIATED AND IT IS A DUBIOUS METHOD FOLLOWED BY THE ASSESSEE SO AS TO EVADE THE TAX. ACCORDINGLY, IN OUR OPINION THE LOWER AUTHORITIES IS JUSTIFIED IN TREATING THE BORROWED FUNDS NOT USED FOR THE PURPOSE OF BUSINESS AND IT IS DIVERTED TO SISTER CONCERN. ACCORDINGLY, WE UPHOLD THE ORDER OF LOWER AUTHORITIES. IN LINE WITH THE FACTS OF THE CASE FOR THE ASSESSMENT YEAR 2010-11, IN THE PRESENT CASE ALSO, THE ASSESSEE OBTAINED LOAN BY PAYING INTEREST @ 15% AND INVESTED IN THE SISTER CONCERN M/S. CENTWIN ESTATES BY CHARGING INTEREST @ 12%, WHO IN TURN, CHOSE TO TRANSFER THE ENTIRE BORROWED MONEY TO OLIVE BEACH PROMOTERS, IN THE ABSENCE OF DEEP INTEREST OF THE ASSESSEE IN OLIVE BEACH PROMOTERS, THE ASSESSEE HAS NOT ESTABLISHED THAT THE LOAN OBTAINED WAS UTILIZED FOR HER OWN BUSINESS EXPEDIENCY. ONCE IT IS CLEAR FROM THE FACTS THAT THE ENTIRE EXPENDITURE WAS NOT AT ALL RELATED TO HER BUSINESS EXPEDIENCY, THERE IS NO QUESTION OF CLAIM OF THE ASSESSEE THAT THE ASSESSING OFFICER HAS NOT CONSIDERED THE FACT THAT THE ASSESSEE HERSELF HAS DISALLOWED A SUM OF .2,15,779/- AS INTEREST NOT RELATING TO BUSINESS. THUS, THE GROUND RAISED BY THE ASSESSEE STANDS DISMISSED. 9. THE NEXT GROUND RAISED IN THE APPEAL RELATES TO CONFIRMATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE WAS IN RECEIPT OF SHARE OF PROFIT FROM VARIOUS PARTNERSHIP FIRMS AMOUNTING TO .1,01,02,703/-, WHICH ARE EXEMPTED UNDER SECTION 10(2A) OF THE ACT. HOWEVER, IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS NOT UNDERTAKEN ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT AS PRESCRIBED I.T.A. NO. 2350/CHNY/16 7 UNDER RULE 8D IN RESPECT OF THESE INVESTMENTS. ACCORDINGLY, AS PRESCRIBED UNDER RULE 8D, THE METHOD TO BE ADOPTED FOR MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT, THE ASSESSING OFFICER DETERMINED THE DISALLOWANCE AT .6,66,212/- AND BROUGHT TO TAX. ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE. 10. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE RECEIPT OF SHARE OF PROFIT FROM VARIOUS PARTNERSHIP FIRMS AMOUNTING TO .1,01,02,703/- IS NOTHING BUT SALARY AND TAXABLE UNDER INCOME FROM SALARY, WHICH CANNOT BE TREATED AS EXEMPT INCOME. IT WAS FURTHER SUBMISSION THAT THE ASSESSEE HAS VOLUNTARILY DISALLOWED .1,29,921/- UNDER SECTION 14A OF THE ACT AND THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS UNWARRANTED AND PRAYED FOR DELETING THE SAME. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THE ASSESSEE HAS NOT ESTABLISHED AS TO HOW SHE HAS COMPUTED THE DISALLOWANCE AND MORE PARTICULARLY, THE ASSESSEE HAS NOT ADOPTED THE CORRECT METHOD PRESCRIBED UNDER RULE 8D IN DETERMINING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. 11. WE HAVE HEARD RIVAL CONTENTIONS, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THE GROUNDS OF APPEAL, THE ASSESSEE CONTENDED THAT THE ASSESSING OFFICER HAS NOT RECORDED SATISFACTION WITH THE AMOUNT OF THE DISALLOWANCE MADE BY THE ASSESSEE I.T.A. NO. 2350/CHNY/16 8 UNDER SECTION 14A OF THE ACT. HOWEVER, ON PERUSAL OF THE ASSESSMENT ORDER, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN FURNISHING A TABULATION SHOWING THE NEXUS BETWEEN THE BORROWED FUNDS AND ITS DEPLOYMENT, AS PER WHICH NO PART OF THE INTEREST PAYMENTS IS RELATABLE TO INVESTMENT IN SHARES, WARRANTING DISALLOWANCE OF INTEREST UNDER THE SECOND LIMB OF RULE 8D(2), WE FIND THAT THE ASSESSING OFFICER HAS ACCEPTED THE SUBMISSIONS OF THE ASSESSEE. HOWEVER, THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE UNDER THE THIRD LIMB OF RULE 8D(2). THEREFORE, THE ABOVE CONTENTION OF THE ASSESSEE THAT THE ASSESSING OFFICER HAS NOT RECORDED SATISFACTION STANDS RULED OUT. 12. FURTHER, THE SUBMISSIONS OF THE ASSESSEE THAT SHE HAS VOLUNTARILY DISALLOWED .1,26,921/- UNDER SECTION 14A OF THE ACT, APPEARS TO BE NOT DETERMINED THE DISALLOWANCE AS PER THE METHOD PRESCRIBED UNDER RULE 8D. NO EVIDENCE WAS BROUGHT ON RECORD AS TO HOW THE ASSESSEE HAS ARRIVED AT A SUM OF .1,26,921/- WHILE DISALLOWING UNDER SECTION 14A OF THE ACT. 13. ON PERUSAL OF THE COMPUTATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT, WE FIND THAT THAT BY APPLYING THIRD LIMB OF RULE 8D(2) AND CALCULATED 0.5% OF THE AVERAGE TOTAL INVESTMENT AND DISALLOWED .6,66,212/-. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE WAS IN RECEIPT OF SHARE OF PROFIT FROM VARIOUS PARTNERSHIP FIRMS AMOUNTING TO .1,01,02,703/-, WHICH IS I.T.A. NO. 2350/CHNY/16 9 EXEMPTED UNDER SECTION 10(2A) OF THE ACT. THE ASSESSING OFFICER HAS ALSO OBSERVED THAT THE ASSESSEES AVERAGE TOTAL INVESTMENTS, THE INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME WORKS OUT TO .13,32,42,335/-. HOWEVER, THE ASSESSING OFFICER HAS NOT EXAMINED AND IDENTIFIED THOSE INVESTMENTS MADE FOR BUSINESS PURPOSES THAT COULD YIELD EXEMPTED INCOME AND WOULD ENTER THE COMPUTATION OF AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSES OF RULE 8D(2)(III) FOR MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. 14. AS CONTENDED BY THE ASSESSEE THAT THE RECEIPT OF SHARE OF PROFIT FROM VARIOUS PARTNERSHIP FIRMS AMOUNTING TO .1,01,02,703/- IS NOTHING BUT SALARY AND TAXABLE UNDER INCOME FROM SALARY, WHICH CANNOT BE TREATED AS EXEMPT INCOME, IN CASE, IF IT IS SO AND IN THE ABSENCE OF ANY EXEMPT INCOME, THE DECISION IN THE CASE OF REDINGTON (INDIA) LTD. V. ADDL. CIT 392 ITR 633 (MAD) AND CIT V. CHETTINAD LOGISTICS (P) LTD. REPORTED IN [2017] 80 TAXMANN.COM 221 (MADRAS) AND SUBSEQUENT DECISION OF THE HONBLE SUPREME COURT IN DISMISSING THE SLP FILED BY THE DEPARTMENT IN THE CASE OF CIT V. CHETTINAD LOGISTICS (P) REPORTED IN [2018] 95 TAXMANN.COM 250 (SC) WOULD COME TO THE RESCUE OF THE ASSESSEE. THUS, THE ABOVE SUBMISSION REQUIRES VERIFICATION. UNDER THESE FACTS AND CIRCUMSTANCES, WE REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE AND DECIDE THE ISSUE AFRESH IN VIEW OF THE I.T.A. NO. 2350/CHNY/16 10 OBSERVATIONS STATED ABOVE IN ACCORDANCE WITH LAW AFTER ALLOWING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER INDICATED ABOVE. ORDER PRONOUNCED ON THE 23 RD DECEMBER, 2019 IN CHENNAI. SD/- SD/- (RAMIT KOCHAR) ACCOUNTANT MEMBER (DUVVURU RL REDDY) JUDICIAL MEMBER CHENNAI, DATED, 23.12.2019 VM/- /COPY TO: 1. / APPELLANT, 2. / RESPONDENT, 3. ( ) /CIT(A), 4. /CIT, 5. /DR & 6. /GF.