Manipur Tea Co. Private Limited, Kolkata V. D.C.I.T., Circle-4, Kolkata, Kolkata

ITA 2692/KOL/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1488 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 02-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: M K JAIN
• Keywords: Rejection of books of accounts; Earning of tax free income; Notional interest; Commercial expediency
• Section: 143(3); 14A; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA A BENCH, KOLKATA [BEFORE SRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER & SRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER] I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD.. ..APPELLANT CONTINENTAL CHAMBERS, 4 TH FLOOR 15A HEMANTA BASU SARANI KOLKATA - 700001 [PAN : AAACT 9636 L] DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4 .RESPONDENT AAYAKAR BHAVAN P-7, CHOWRINGHEE SQUARE KOLKATA 700 069 APPEARANCES BY: SHRI M.K. JAIN, FCA, APPEARING ON BEHALF OF THE ASS ESSEE. SHRI SALLONG YADEN, ADDL. CIT, APPEARING ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : JULY 13, 20 17 DATE OF PRONOUNCING THE ORDER : JULY 26, 20 17 O R D E R PER J. SUDHAKAR REDDY, AM :- THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AG AINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-IV, KOLKATA, ( HEREINAFTER THE LD. CIT(A)), PASSED U/S 250 OF THE INCOME TAX ACT, 1961 (THE AC T), DATED 28/01/2011, FOR THE ASSESSMENT YEAR 2008-09, ON THE FOLLOWING GROUNDS:- 1. THAT THE DCIT HAS DISALLOWED A SUM OF RS. 36,00 ,000 AS REMISSION OF INTEREST OUT OF INTEREST PAYMENT OF RS.1,03,77,5 74 DEBITED TO THE PROFIT 2 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD AND LOSS ACCOUNT ON THE GROUND THAT BORROWED FUNDS HAVE BEEN ADVANCED TO ITS SUBSIDIARY COMPANY INTEREST FREE WI THOUT APPRECIATING THE FACT THAT THE FUNDS HAVE BEEN ADVANCED TO ITS S UBSIDIARY ONLY OUT OF COMMERCIAL EXPEDIENCY. MOREOVER THE DCIT HAS ERRED IN TAKING DISALLOWANCE OF REMISSION OF INTEREST OF RS. 36,00, 000 UNDER THE HEAD OF INCOME FROM OTHER SOURCES INSTEAD OF PROFIT AND GAI NS OF BUSINESS AND PROFESSION AS INTEREST DEBIT IS UNDER THIS HEAD ONL Y. 2. THAT THE DCIT HAS MADE AN ADDITION OF RS.56,36,3 81/- U/S 14A OF THE INCOME TAX ACT, 191 BY APPLYING 2 ND PROVISO OF RULE 8D WITHOUT RECORDING ANY REASONS IN THE ASSESSMENT ORDER SO MA DE OF REJECTING THE CLAIM OF THE APPELLANT COMPANY THAT A SUM OF RS.6,1 3,824 HAS BEEN INCURRED TOWARDS EARNING EXEMPT INCOME BY APPLYING 1 ST PROVISO OF RULE 8D. 2. AFTER HEARING THE RIVAL CONTENTIONS, PERUSING TH E PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE HOLD AS FOLLOWS :- GROUND NO. 1, IS AGAINST THE ADDITION OF RS.36,00, 000/- AS NOTIONAL INTEREST UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASS ESSING OFFICER, OBSERVED THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOAN OF RS.6 C RORES TO ITS SUBSIDIARY COMPANY M/S. DERBY PLANTATIONS. HE WAS OF THE VIEW THAT THE INTEREST FREE LOAN WAS ADVANCED FROM OUT OF BORROWED FUNDS, WHICH CARRIED INTEREST LIABILITY OF 12 PER CENT PER ANNUM. THE ASSESSING OFFICER, FURTHER HELD THAT M/S. DERBY PLANTATIONS HAD ENOUGH LIQUIDITY AS IT HAD PAID BACK THE INTERE ST FREE LOAN DURING THE YEAR EXCEPT AN AMOUNT OF RS.74,000/-. THE ASSESSING OFFI CER CHARGED INTEREST @ 12 PER 3 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD CENT ON THE LOAN GIVEN TO THE SUBSIDIARY CONCERNS O F RS. 6 CRORES AND MADE AN ADDITION OF RS.36,00,000/- UNDER THE INCOME FROM O THER SOURCES. 2.1. ON APPEAL THE LD. CIT(A), CONFIRMED THIS ADDIT ION ON THE GROUND THAT THE ASSESSE HAS NOT PRODUCED ANY DOCUMENTATION TO ESTAB LISH ITS CASE THAT THERE WAS REQUIREMENT OF WORKING CAPITAL ETC. FOR M/S. DERBY PLANTATION. AT PARA 5.2. OF HIS ORDER, HE UPHELD THE ORDER OF THE FIRST APPELLATE A UTHORITY. 2.2. IN OUR VIEW THIS ADDITION OF NOTIONAL INTEREST IS NOT PERMITTED UNDER THE INCOME TAX ACT, 1961. ADMITTEDLY, THERE IS NO CONTR ACT BETWEEN THE PARTIES FOR LEVY OF INTEREST. UNDER THESE CIRCUMSTANCES, MAKING AN ADDITION UNDER THE HEAD INCOME FROM OTHER SOURCES IS NOT IN ACCORDANCE WI TH LAW. THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S. SHIVNANDAN BUILDCON PVT. LTD. VS. CIT HELD AS FOLLOWS:- THE LOGIC THAT SEEMS TO HAVE BEEN APPLIED BY THE R EVENUE AUTHORITIES IS THAT THE PETITIONER WAS A BUSINESSMAN AND IT WOU LD BE IMPRUDENT FOR A BUSINESSMAN TO ADVANCE A SUM OF RS.1.6 CRORES AS IN THE CASE OF W.P.(C) 6265/2013 TO SMART TOURIST PRIVATE LIMITED AND TO NOT CHARGE ANYTHING IN RETURN. THE EXPLANATION SOUGHT T O BE GIVEN BY THE PETITIONER IN BOTH THESE CASES WAS THAT THE ADVANCE S WERE MADE IN THE COURSE OF THEIR BUSINESS AND IT IS NOT AT ALL N ECESSARY THAT AN ADVANCE GIVEN BY A BUSINESSMAN AT ALL TIMES MUST HA VE AN ELEMENT OF INTEREST ALSO. THERE ARE VARIOUS OTHER CONSIDERATIO NS WHICH COME INTO THE CALCULATIONS WHEN A BUSINESSMAN ADVANCES MONEY TO ANOTHER. IT IS NOT AT ALL NECESSARY THAT INTEREST MUST BE CHARG ED. IT WAS FURTHER SUBMITTED BY THE LEARNED SENIOR COUNSEL APPEARING O N BEHALF OF THE 4 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD PETITIONERS THAT THERE IS NO FINDING IN THE ASSESSM ENT ORDERS OR IN THE ORDER OF THE COMMISSIONER OF INCOME TAX THAT THE PE TITIONERS HAD, IN FACT, RECEIVED SOME AMOUNT BY WAY OF INTEREST AND T HAT SUCH AMOUNT WAS NOT SHOWN IN THE ACCOUNTS. IT IS ALSO CONTENDED THAT THE REVENUE AUTHORITIES HAVE NOT REJECTED THE BOOKS OF ACCOUNTS OF THE PETITIONER. IT WAS, THEREFORE, SUBMITTED THAT UNLESS AND UNTIL THERE WAS A CONCRETE FINDING THAT SOMETHING WAS RECEIVED BY THE PETITIONER FROM THE SAID SMART TOURIST PRIVATE LIMITED AND OTHER PE RSONS SIMILARLY SITUATED, NOTHING CAN BE ADDED BY WAY OF NOTIONAL I NCOME. A REFERENCE WAS MADE TO THE DECISION OF THE GUWAHATI HIGH COURT IN B AND A PLANTATIONS AND INDUSTRIES LTD. V COMMISSIONE R OF INCOME -TAX: 242 ITR 22. THE RELEVANT PORTION OF THAT DECISION R EADS AS UNDER:- 'AS REGARDS THE ADDITION OF NOTIONAL INTEREST THE A SSESSEE MADE AN INTEREST FREE ADVANCE OF RS. 19,58,256 TO JORHAT IN VESTMENTS LTD., WHICH IS A SISTER CONCERN. THE CASE OF THE ASSESSEE IS THAT THEY DID NOT CHARGE INTEREST ON THAT ADVANCE AND IN CONSIDERATIO N OF THE SAME THE ASSESSEE GOT THE PREMISES AT A VERY LOW RENT OF RUP EES TWO PER SQ. FEET IN A PRIME LOCALITY OF CALCUTTA. 15. THE ASSESSING OFFICER ADDED A NOTIONAL INTEREST OF 18 PER CENT. ON THE ADVANCE AMOUNT AND ADDED THE INCOME AS THE AMOU NT OF INTEREST. THE SAID ADDITION WAS APPROVED BY THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE TRIBUNAL. 16. IN THIS CASE THERE IS NO FINDING WHEN THE ASSES SEE HAD IN FACT RECEIVED THE INTEREST OR THAT THE JORHAT INVESTMENT S LTD., HAD IN FACT PAID THE INTEREST TO THE ASSESSEE AND THE INTEREST WAS NOT REFLECTED IN THE ACCOUNTS. THE FINDING IS THAT THE ASSESSEE OUGH T TO HAVE CHARGED INTEREST. 5 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD 17. THE FACTS IN THE INSTANT CASE ARE MORE OR LESS IDENTICAL WITH THE CASE OF HIGHWAYS CONSTRUCTION CO. PVT. LTD. V CIT [ 1993] 199 ITR 702, WHEREIN THIS COURT HELD (PAGE 708) : 'THERE IS NO FINDING OF FACT TO THE EFFECT THAT ACT UALLY THE LOAN HAD BEEN GRANTED TO THE MANAGING DIRECTOR OR ANY OTHER PERSON ON INTEREST, OR THAT INTEREST HAD ACTUALLY BEEN COLLEC TED AND THE COLLECTION OF THE INTEREST WAS NOT REFLECTED IN THE ACCOUNTS. THE FINDING OF THE INCOME TAX OFFICER IS THAT THE ASSES SEE OUGHT TO HAVE COLLECTED INTEREST. IN OTHER WORDS, THE VIEW OF THE INCOME TAX OFFICER, WHICH HAS BEEN ACCEPTED BY THE TRIBUNAL, WAS THAT T HE ASSESSEE, AS A GOOD BUSINESS CONCERN, SHOULD NOT HAVE GRANTED INTE REST-FREE LOAN, OR SHOULD HAVE INSISTED ON PAYMENT OF INTEREST. IF THE ASSESSEE HAD NOT BARGAINED FOR INTEREST, OR HAD NOT COLLECTED INTERE ST, WE FAIL TO SEE HOW THE INCOME TAX AUTHORITIES CAN FIX A NOTIONAL I NTEREST AS DUE, OR COLLECTED BY THE ASSESSEE. OUR ATTENTION HAS NOT BE EN INVITED TO ANY PROVISION OF THE INCOME TAX ACT EMPOWERING THE INCOME TAX AUTHORITIES TO INCLUDE IN THE INCOME, INTEREST WHIC H WAS NOT DUE OR NOT COLLECTED. IN THIS VIEW, WE ANSWER QUESTION NO. (II) IN THE NEGATIVE, THAT IS, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE.'' 5. ON GOING THROUGH THE SAID DECISION, IT CAN BE DI SCERNED THAT THE GUWAHATI HIGH COURT HELD THAT THERE WAS NOTHING TO SHOW THAT THE ASSESSEE HAD, IN FACT, RECEIVED INTEREST OR THAT TH E COMPANY TO WHOM THE LOAN WAS GIVEN HAD, IN FACT, PAID INTEREST TO T HE ASSESSEE. THERE WAS ALSO NOTHING ON RECORD TO SHOW THAT THE ALLEGED INTEREST WAS NOT REFLECTED IN THE ACCOUNTS. THE ONLY FINDING RECORDE D WAS THAT THE ASSESSEE 'OUGHT TO' HAVE CHARGED INTEREST. REFERRING TO AN EARLIER DECISION OF THE GUWAHATI HI GH COURT, IN HIGHWAYS CONSTRUCTION CO. PRIVATE LIMITED V. CIT : [1993] 199 ITR 6 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD 702, THE COURT OBSERVED THAT THEIR ATTENTION HAD NO T BEEN INVITED TO ANY PROVISION OF THE INCOME-TAX ACT EMPOWERING THE INCOME-TAX AUTHORITIES TO INCLUDE IN THE INCOME, INTEREST WHIC H WAS NOT DUE OR NOT COLLECTED. 6. IN SIMILAR VEIN, WHEN WE ASKED MR SAHNI, WHO IS APPEARING FOR THE RESPONDENT TO POINT OUT SOME PROVISION OF THE INCOME TAX ACT , WHEREUNDER SUCH NOTIONAL INTEREST COULD BE MADE T HE SUBJECT MATTER OF TAX, THE ONLY REFERENCE HE MADE WAS TO SECTION 144 OF THE SAID ACT. HOWEVER, WE ARE CLEAR THAT SECTION 144 DOES NOT AT ALL APPLY TO THE PRESENT PROCEEDINGS BECAUSE THE PRESENT PROC EEDINGS ORIGINATE FROM AN ASSESSMENT UNDER SECTION 143(3) OF THE SAID ACT. 7. IN THE ABSENCE OF ANY SPECIFIC PROVISION UNDER W HICH THE SO CALLED NOTIONAL INCOME ON ADVANCES, COULD BE BROUGHT TO TA X, WE DO NOT SEE AS TO HOW THE IMPUGNED ORDERS PASSED BY THE COMMISS IONER OF INCOME TAX CAN BE SUSTAINED. 8. CONSEQUENTLY, WE ALLOW THESE WRIT PETITIONS. THE IMPUGNED ORDERS ARE SET ASIDE. THE ADDITION ON ACCOUNT OF A NOTIONA L INCOME ON ADVANCES IS DELETED. THESE WRIT PETITIONS HAVE BEEN DECIDED ONLY IN RESPECT OF THE RESPECTIVE ASSESSMENT ORDERS FOR THE ASSESSMENT YEAR 2009-10 AND WILL NOT HAVE ANY BEARING ON THE OTHER ASSESSMENT YEARS, THE FACTS OF WHICH WE HAVE NOT EXAMINED. 3. GROUND NO. 2 IS ON THE ISSUE OF DISALLOWANCE U/S 14A. THE DISALLOWANCE MADE BY THE ASSESSEE SUO MOTO WAS RS.6,17,824/-. THE DIVIDEND EARNED BY THE ASSESSEE IS RS.4,26,974/-. THE ASSESSING OFFICER MA DE A DISALLOWANCE U/S 14A OF THE ACT, TO THE TUNE OF RS.56,36,381/-. 7 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD 3.1. ON APPEAL THE LD. CIT(A), CONFIRMED THE SAME. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE DISALLOWANCE U/S 14A OF THE ACT, CANNOT EXCE ED THE INCOME EXEMPT FROM TAX, WHICH IS RS.4,26,974/-, IN THIS CASE. REL IANCE IS PLACED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS PVT. LTD. VS. COMMISSIONER OF INCOME TAX IN ITA 117/2015, DT. 25. 02.2015, WHEREIN IT WAS HELD AS FOLLOWS:- 9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DIS CLOSED WHY THE APPELLANT/ASSESSEE'S CLAIM FOR ATTRIBUTING `2,97,44 0/- AS A DISALLOWANCE UNDER SECTION 14A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDICTION TO PROCEED FURTHER AND DETERMINE A MOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNTS AND REJECTION IF ANY OF THE ASSESSEE'S CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE AP PEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO - AN ASPECT W HICH IS COMPLETELY UNNOTICED BY THE CIT (A) AND THE ITAT. THE THIRD, A ND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UN MINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS `48,90,000/ -, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARL Y 110% OF THAT SUM, I.E., `52,56,197/-. BY NO STRETCH OF IMAGINATI ON CAN SECTION 14A OR RULE 8D BE INTERPRETED SO AS TO MEAN THAT THE ENTIR E TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOW ANCE IS INDICATED IN SECTION 14A, AND IS ONLY TO THE EXTENT OF DISALL OWING EXPENDITURE 'INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EX EMPT INCOME'. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURE LY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE. 8 I.T.A. NO. 2692/KOL/2013 ASSESSMENT YEAR: 2008-09 MANIPUR TEA CO. PRIVATE LTD APPLYING THE PROPOSITIONS LAID DOWN IN THE ABOVE D ECISION OF THE HONBLE DELHI HIGH COURT TO THE FACTS OF THIS CASE AND KEEP ING IN VIEW THE FACT THAT THE ASSESSEE HAS SUO MOTO DISALLOWED RS.6,17,824/-, WE DIRECT THE ASSESSING O FFICER TO RESTRICT THE DISALLOWANCE TO RS.6,17,824/-. ACCORDI NGLY, THIS GROUND OF THE ASSESSEE IS ALLOWED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. KOLKATA, THE 26 TH DAY OF JULY, 2017. SD/- SD/- [S.S. VISWANETHRA RAVI] [ J. SUDHAKAR REDDY ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 26 .07.2017 {SC SPS} COPY OF THE ORDER FORWARDED TO: 1. MANIPUR TEA CO. PRIVATE LTD CONTINENTAL CHAMBERS, 4 TH FLOOR 15A HEMANTA BASU SARANI KOLKATA - 700001 2. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4 AAYAKAR BHAVAN P-7, CHOWRINGHEE SQUARE KOLKATA 700 069 3. CIT(A)- 4. CIT- , 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY HEAD OF OFFICE/ D.D.O. ITAT, KOLKATA BENCHES