Supath Leasing and Finance Pvt. Ltd., Ahmedabad V. The Dy.CIT, Circle-8, Ahmedabad

ITA 2640/AHD/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9892 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 19-10-2016
• Assessment Year: 1996-1997
• Appeal Filed On: 12-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRADIPKUMAR MAJUMDAR
• Assessee Lawyers: J P SHAH; M J SHAH
• Keywords: Notional interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD SMC BENCH AHMEDABAD BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI S. S. GODARA, JUDICIAL MEMBER. ITA NO. 2640/AHD/2013 (ASSESSMENT YEAR:1996-97) SUPATH LEASING AND FINANCE PVT. LTD. C/O RASIKBHAI A. PATEL 8, VALLABH SOCIETY, OPP. KRISHNA CINEMA, NARODA, AHMEDABAD 380023 APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE-8, AHMEDABAD RESPONDENT PAN: AACCS6210M / BY ASSESSEE : SHRI J. P. SHAH & M. J. SHAH, A.R. / BY REVENUE : SHRI PRADIP KUMAR MAJUMDAR, SR. D.R. /DATE OF HEARING : 19.10.2016 /DATE OF PRONOUNCEMENT : 24.11.2016 ORDER PER S. S. GODARA, JUDICIAL MEMBER THIS ASSESSEES APPEAL FOR ASSESSMENT YEAR 1996-97 ARISES AGAINST THE CIT(A)-XIV, AHMEDABADS ORDER DATED 19.08.2013, IN APPEAL NO. CIT(A) XIV/DC CIR.8/201/12-13, IN PROCEEDINGS UNDER SECTIO N 143(3) R.W.S. 254 OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. 2. THE ASSESSEES SOLE SUBSTANTIVE GROUND CHALLENGE S ACTION OF BOTH THE LOWER AUTHORITIES MAKING NOTIONAL INTEREST INCOME A DDITION OF RS.11,76,266/-. ITA NO.2640/AHD/2013 (SUPATH LEASING AND FINANCE PV T. LTD. VS. DCIT) A.Y. 1996-97 - 2 - THE CASE FILE INDICATES THAT THIS IS SECOND ROUND O F LITIGATION ON THE VERY ISSUE BETWEEN THE PARTIES. THE ASSESSEE IS A COMPANY ENG AGED IN LEASING AND FINANCE BUSINESS. IT FILED RETURN ON 30.11.1996 ST ATING NIL INCOME. THE ASSESSING OFFICER FRAMED A REGULAR ASSESSMENT ON 31 .03.1999 ASSESSING TOTAL INCOME AT RS.32,73,869/- WHICH INCLUDED THE IMPUGNE D ADDITION OF NOTIONAL INTEREST INCOME MADE ON ACCRUAL BASIS AMOUNTING TO RS.11,76,266/-. THE CIT(A) CONFIRMED THE SAME IN HIS ORDER DATED 13.10. 2003. THE ASSESSEE FILED APPEAL IN THIS TRIBUNAL. A CO-ORDINATE BENCH REMIT TED THE ISSUE BACK TO THE LOWER APPELLATE AUTHORITY VIDE ORDER DATED 30.01.20 09. THE CIT(A) THEREAFTER DELETED THE ABOVE STATED NOTIONAL INTEREST INCOME A DDITION IN HIS ORDER DATED 21.04.2009 READING AS UNDER: 5.1 THE THIRD GROUND OF APPEAL IS AGAINST ADDITION OF RS. 11,76,266/- AS INTEREST INCOME ON ACCRUAL BASIS. IT WAS NOTICED BY THE A.O. THAT THE APPELLANT HAD ADVANCED LOANS TO NINE PARTIES, THE TOTAL OF WHICH WAS OF RS. 87,00,000/- AND THE DETAILS REVEALED THAT THE ACCRUED INTEREST WAS DEBI TED TO THEIR INDIVIDUAL ACCOUNTS BUT LATER ON REVERSAL ENTRY WAS PASSED IN THE CASE OF FIVE PARTIES REVERSING INTEREST OF RS. L1,76,266/- . THE A.O. FURTHER OBSERVED THAT THE APPELLANT COMPANY WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THE A UDITOR REPORTED THAT LOANS AND ADVANCES GRANTED TO COMPANIES , FIRMS AND PERSONS A RE PRIMA FACIE NOT PREJUDICIAL TO THE INTEREST OF THE COMPANY. THE APPELLANT COMPA NY WAS EARNING INTEREST INCOME ON THE LOANS GRANTED TO LALBHAI FINANCE LTD., WHICH WERE WITHDRAWN AND ADVANCED TO THE ABOVE NAMED PARTIES AND THE INTERES T ACCRUED OF RS. 11,76,266/- ON THE LOANS GRANTED TO THE ABOVE PARTIES WAS DEBIT ED TO THEIR ACCOUNTS, BUT ON ASCERTAINING THE INCOME FOR THE YEAR UNDER CONSIDER ATION AND AFTER VISUALIZING THE TAX LIABILITY THEREON AND AS THE PERSONS WERE FAMIL Y MEMBERS OF THE GROUP, THE INTEREST WAS REVERSED BY PASSING A PAPER ENTRY AND THEREBY THE APPELLANT CONVENIENTLY UNDERSTATED ITS INCOME AND REDUCED ITS TAXABILITY. THE A.O. THEREFORE, ADDED THIS AMOUNT TO THE TOTAL INCOME OF THE APPELLANT. 5.2 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE A.R. SUBMITTED THAT AS PER COPY OF AUDITED ACCOUNTS FOR THE YEAR ENDED 31/03/9 6 RELEVANT TO AY 1996-97, AS PER SCHEDULE 9 UNDER THE HEAD OF LOANS & ADVANCES, THERE IS A DEBIT BALANCE OF RS.2,58,93,537/- AGAINST LOANS & ADVANCES OF RS. 1, 10,44,620/- AS ON 31/03/95. SO ALSO UNDER THE HEAD OF CURRENT LIABILITIES THERE WAS BALANCE OF RS. 2,33,20,025/- AS ON 31/03/96 AGAINST BALANCE OF RS. 1,20,13,9487- AS ON 31/03/95. IT IS FURTHER SUBMITTED THAT CERTAIN BORROWINGS / ADVANCES WERE C ARRYING INTEREST AND CERTAIN ADVANCES WERE WITHOUT INTEREST. SO ALSO OUT OF UNSE CURED LOANS & CREDITORS FOR CURRENT LIABILITIES, ONLY TWO DEPOSITS FROM SHRI RA SIKBHAI A. PATEL AND M/S AMBICA TRADING CO. WERE INTEREST BEARING DEPOSITS. ITA NO.2640/AHD/2013 (SUPATH LEASING AND FINANCE PV T. LTD. VS. DCIT) A.Y. 1996-97 - 3 - OUT OF LOANS & ADVANCES GIVEN TO VARIOUS PARTIES, A DVANCES GIVEN TO M/S VOLVO TERRY INDUSTRIES LTD. AND LALBHAI FINANCE LTD. WERE INTEREST BEARING AND ON BOTH THESE ADVANCES / LOANS, THE APPELLANT HAS EARNED IN TEREST OF RS. 17,66,286/- AS PER PAGE 23 OF PAPER-BOOK AND PROFIT & LOSS A/C FOR THE YEAR ENDED 31/03/96 FILED IN THE PAPER-BOOK . ACCORDING TO THE PROFIT & LOSS A/C FOR THE YEAR ENDED 31/03/96 RELEVANT TO AY 1996-97, THE APPELLANT HAS CLAIMED INTEREST PAYMENT TO THE TUNE OF RS. 96,171/- AS AGAINST INTEREST PAYMENT OF RS. 2,6 6,979/- IN THE IMMEDIATE PRECEDING YEAR ENDED 31/03/95. IT WAS FURTHER POI NTED OUT THAT AS PER PROFIT & LOSS A/C FOR THE YEAR ENDED 31/03/96 RELEVANT TO AY 1996-97, THERE IS INTEREST RECEIPT OF RS. 17,66,286/- AS AGAINST RECEIPT OF RS . NIL IN FY 1994-95. THE FULL DETAILS OF INTEREST RECEIVED AND INTEREST PAID HAVE BEEN FILED AS PER PAGE NO. 22 & 23 OF THE PAPER-BOOK. THUS IF THE NET FIGURE IS TAK EN FOR INTEREST, THERE IS NET INCOME OF RS. 16,70,115/- (RS. 17,66,286 - RS.96,1 71), WHEREAS IN THE FY 1994-95 RELEVANT TO AY 1995-96 THE IMMEDIATE PRECEDING YEAR , THE NET CLAIM OF PAYMENT OF INTEREST IS OF RS. 2,66,979/-. THUS, IN THE YEAR UN DER APPEAL, THE APPELLANT HAS NET SURPLUS IN INTEREST ACCOUNT TO THE TUNE OF RS. 16,7 0,115/-. IT WAS SUBMITTED THAT DURING THE YEAR UNDER APPEAL, THE APPELLANT HAD ADV ANCED VARIOUS SUMS TO PARTIES AS STATED IN PARA 3 ON PAGE NO. 6 OF THE ASSESSMENT ORDER. IT WAS SUBMITTED BY THE A.R. THAT ADVANCES TO ALL THESE PARTIES WERE INTERE ST FREE AND HENCE THERE WAS NO QUESTION OF CHARGING OF ANY INTEREST ON SUCH ADVANC ES , HOWEVER, THE ACCOUNTANT OF THE APPELLANT COMPANY, BY MISTAKEN BELIEF, PROVIDED INTEREST IN RESPECT OF THESE 5 PARTIES AS STATED IN THE ASSESSMENT ORDER, TO THE T UNE OF RS.L1,76,266/-. THIS MISTAKE WAS IMMEDIATELY CORRECTED BY PASSING REVERS AL ENTRY IN THE BOOKS OF ACCOUNTS OF THE APPELLANT COMPANY ON THE SAME DAY I .E. ON 31/03/96. THUS, THE NET AFFECT OF THIS IS NIL AND NONE OF THE 5 PARTIES HAV E PAID ANY INTEREST IN THIS REGARD . IT WAS FURTHER STATED NONE OF THE ABOVE 5 PARTIES A RE RELATED TO THE DIRECTORS OF THIS COMPANY. THE DIRECTORS OF THE APPELLANT COMPANY ARE SHRI RASIKLAL A. PATEL & SHRI NIKETAN SANGHVI. IT WAS FURTHER POINTED OUT TH AT IT IS FOR THE APPELLANT TO DECIDE WHETHER IT SHOULD CHARGE INTEREST ON BUSINES S ADVANCES OR NOT AND THE IT DEPARTMENT CAN NOT COMPEL IT FOR THE SAME AND WHAT MAXIMUM, CAN BE SEEN BY THE REVENUE, IS WHETHER THERE IS ANY LOSS OF REVENUE. T HIS ASPECT IS VERY CLEAR THAT DURING THE YEAR UNDER CONSIDERATION THERE IS NET SU RPLUS OF RS. 16,70,115/- IN INTEREST ACCOUNT, WHICH HAS BEEN DULY INCLUDED IN P ROFIT & LOSS A/C OF THE APPELLANT AND THEREBY IT HAS OFFERED THE SAME FOR T AXATION AS INCOME FROM BUSINESS. THE A.R. FURTHER ARGUED THAT JUST BECAUSE A WRONG E NTRY IS RECORDED IN THE BOOKS OF ACCOUNTS BY THE ACCOUNTANT, WHICH IS IMMEDIATELY RE VERSED IN THE SAME ACCOUNTING YEAR, IT SHOULD NOT AND CAN NOT BE THE BASIS OF ADD ITION AND SUCH ADDITION MADE BY THE A.O. IS WITHOUT ANY AUTHORITY , WITH OUT ANY BA SIS , AND SO THE SAME IS REQUIRED TO BE DELETED. ALTERNATIVELY AND WITH OUT PREJUDICE TO WHAT IS STATED ABOVE, IT WAS FURTHER SUBMITTED THAT IN THE WORST SCENARIO, THE D ISALLOWANCE CAN BE TO THE EXTENT OF INTEREST PAYMENT DURING THE YEAR, WHICH IS RS. 9 6,171/-. 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS AS MADE BY THE A.R. OF THE APPELLANT. FROM THE DETAILS FURNISHED B Y THE A.R. IT IS SEEN THAT THE ADVANCES MADE TO THE PARTIES CONCERNED ARE INTEREST FREE AND THERE IS NO QUESTION OF CHARGING ANY INTEREST FROM THE SAID PARTIES AND IT WAS AN INADVERTENT MISTAKE ON THE PART OF THE ACCOUNTANT OF THE APPELLANT TO HAVE CHARGED INTEREST IN THE BOOKS. LATER ON, ON REALIZATION THAT IT WAS A MISTAKE, THE ENTRY WAS REVERSED IN THE BOOKS ON THE SAME DAY. I AM INCLINED TO AGREE WITH THE CO NTENTION OF THE A.R. THAT SIMPLY FOR THIS REASON, THE ADDITION CANNOT BE SUSTAINED, OTHERWISE, THERE WAS NO BASIS FOR MAKING SUCH ADDITION, EXCEPT FOR THE WRONG ENTRY IN THE BOOKS. IT IS ULTIMATELY THE ITA NO.2640/AHD/2013 (SUPATH LEASING AND FINANCE PV T. LTD. VS. DCIT) A.Y. 1996-97 - 4 - DECISION OF THE APPELLANT THAT WHETHER INTEREST IS TO BE CHARGED ON ADVANCES OR NOT AND THE DEPARTMENT IN NO CASE CAN COMPEL THE APPELL ANT IN THIS CONNECTION. CONSIDERING THE FACT THAT THE A.R. HAS FURNISHED CO MPLETE DETAILS WITH REGARD TO THE RECEIPT OF INTEREST AS WELL AS PAYMENT OF INTEREST DURING THE YEAR AND THE FACT THAT THE ADDITION HAS BEEN MADE JUST BECAUSE OF ONE WRON G ENTRY, WHICH WAS LATER ON REVERSED, THE DISALLOWANCE MADE IN RESPECT OF PAYME NT OF INTEREST IS HELD TO BE NOT JUSTIFIED, HENCE I DIRECT THE A.O. TO DELETE THE DI SALLOWANCE SO MADE. 3. THE REVENUE THEN FILED ITA NO.2057/AHD/2009 BEFO RE THIS TRIBUNAL. A CO-ORDINATE BENCH IN ITS ORDER DATED 19.08.2011 RES TORED THE ISSUE BACK TO THE ASSESSING OFFICER AS FOLLOWS: 13. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF ADVANCING LOANS ON I NTEREST. DURING THE COURSE OF ASSESSMENT, THE A.O. FOUND THAT ASSESSEE HAS ADVANC ED A SUM OF RS.87 LACS TO DIFFERENT PARTIES, AND THE RESPECTIVE ACCOUNTS OF T HE PARTIES WERE ALSO DEBITED WITH INTEREST ACCRUED THEREON AMOUNTING TO RS.11,76,266. THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, ACCORDING TO WHICH INTEREST IS ACCRUED IN ITS FAVOUR ON THE AMOUNT OF THE LOAN GIVEN DURING THE Y EAR COMPUTED @ RATE OF INTEREST ON WHICH ADVANCE WAS GIVEN TILL THE END OF THE YEAR. WE ALSO FOUND THAT EARLIER THIS ADVANCE WAS GIVEN TO LALBHAI FINANCE L TD., ON WHICH ASSESSEE WAS CHARGING INTEREST. THE SAID LOAN WAS WITHDRAWN AND ADVANCE WAS GIVEN TO THE PARTIES WHO ARE STATED TO BE FAMILY MEMBERS OF THE GROUP. HOWEVER, AFTER DEBITING THE RESPECTIVE ACCOUNTS OF THESE PARTIES WITH THE I NTEREST ACCRUED ON THEIR ADVANCES, AT THE END OF THE YEAR, THE ASSESSEE PASS ED A REVERSE ENTRY AND INTEREST INCOME WAS NOT OFFERED FOR TAX. MERELY BY OBSERVING THAT IT WAS AN INADVERTENT MISTAKE OF PASSING INTEREST ENTRY AND REVERSING IT, THE CIT (A) HAS DELETED THE ADDITION, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE CIT (A) IN SO FAR AS INTEREST INCOME WAS ALREADY ACCRUED TO THE ASSESSEE IN TERMS OF MERCANTILE SYSTEM OF ACCOUNTING BEING FOLLOWED BY IT CONSISTENTLY. WHEN THE ASSESSEE WAS IN THE BUSINESS OF ADVANCING MONEY ON INTEREST, THERE DOES NOT APPEAR TO BE ANY REASON FOR WITHDRAWING THE ADVANCE GIVEN ON INTEREST AND A GAIN GIVING ADVANCES WITHOUT CHARGING ANY INTEREST TO OTHERS. IT IS ALSO NOT THE CASE OF ASSESSEE THAT FINANCIAL POSITION OF CREDITORS WERE BAD, THEREFORE INTEREST DUE ON ADVANCES WAS DIFFICULT TO BE RECOVERED, WHEN THE ASSESSEE IS FOLLOWING MERCAN TILE SYSTEM OF ACCOUNTING INTEREST ON LOANS AND ADVANCES ACCRUES IN ITS FAVOU R IRRESPECTIVE OF THE FACT THAT ASSESSEE HAS NOT PASSED ANY ENTRY OF INTEREST SO AC CRUED IN ITS BOOKS OF ACCOUNTS OR MERELY BY REVERSING THE INTEREST CHARGED IN CREDITO RS ACCOUNT WILL NOT ABSOLVE THE ASSESSEE FROM SUCH INCOME, INCOME ON ACCOUNT OF INT EREST ON ADVANCES ACCRUES ON DAY TO DAY BASIS AND GOT THE RIGHT TO RECEIVE THE A CCRUED INTEREST AT THE END OF THE YEAR OR AT PROPER INTERVALS AS PER TERMS OF ADVANCI NG. 4. THE ASSESSING OFFICER PASSED CONSEQUENTIAL ORDER ON 23.11.2012 ONCE AGAIN REITERATING THE IMPUGNED NOTIONAL INTEREST AD DITION BY MERELY RELYING UPON ASSESSEES MERCANTILE SYSTEM OF ACCOUNTING. T HE CIT(A) UPHOLDS THE SAME IN HIS ORDER UNDER CHALLENGE. ITA NO.2640/AHD/2013 (SUPATH LEASING AND FINANCE PV T. LTD. VS. DCIT) A.Y. 1996-97 - 5 - 5. WE HAVE HEARD BOTH THE PARTIES. THERE IS HARDLY ANY QUARREL LEFT BY NOW INTER ALIA ABOUT THE FACT THAT THIS ASSESSEE FO LLOWS MERCANTILE SYSTEM OF ACCOUNTING, IT WOULD DEBIT VARIOUS ACCOUNTS OF THE PARTIES WITH ACCRUED INTEREST IN QUESTION, IT HAD EARLIER ADVANCED THE C ORRESPONDING PRINCIPAL SUM TO M/S. LALBHAI FINANCE AND CHARGED INTEREST THEREU PON, THE SAID PRINCIPAL AMOUNT WAS WITHDRAWN AND GIVEN TO GROUPS FAMILY ME MBERS. THE ASSESSEE THEREAFTER PASSED A REVERSE ENTRY NOT OFFERING THE IMPUGNED INTEREST INCOME ON ACCRUAL BASIS. ITS CASE THROUGHOUT HAS BEEN THA T THE IMPUGNED ASSESSMENT YEAR INVOLVES NET INTEREST SURPLUS INCOME AS IN THE CIT(A)S FINDINGS EXTRACTED HEREINABOVE. THIS FACT GOES UNREBUTTED F ROM REVENUES END IN THE COURSE OF HEARING. WE FIND IN IDENTICAL FACTS THAT HONBLE JURISDICTIONAL HIGH COURT IN (2013) 36 TAXMANN.COM 14 (GUJARAT) CIT VS. ARIHANT AVENUE & CREDIT LTD. HOLDS THAT NOTIONAL INTEREST INCOME WOU LD NOT BE ADDED IN AN EVENT OF SURPLUS MONEY AVAILABILITY EVEN IF AN ASSE SSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. WE THUS CONCLUDE THAT BOTH T HE LOWER AUTHORITIES HAVE ERRED IN MAKING THE IMPUGNED NOTIONAL INTEREST INCO ME ADDITION MERELY BECAUSE THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF A CCOUNTING. THE SOLE SUBSTANTIVE GROUND RAISED IN THE INSTANT APPEAL IS THUS ACCEPTED. 6. THE ASSESSEES APPEAL IS ALLOWED. [PRONOUNCED IN THE OPEN COURT ON THIS THE 24 TH DAY OF NOVEMBER, 2016.] SD/- SD/- (N. K. BILLAIYA) ( S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD: DATED 24/11/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT ITA NO.2640/AHD/2013 (SUPATH LEASING AND FINANCE PV T. LTD. VS. DCIT) A.Y. 1996-97 - 6 - 4 !- / CIT (A) ( )* + ,--. . /0 / DR, ITAT, AHMEDABAD 1 + 23 / GUARD FILE. BY ORDER / . // . /0