DCIT, Thiruvalla V. Sri.Arun Thomas, Chengannur

ITA 3/COCH/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90791 (ITAT-COCHIN)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2015
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 07-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 05-01-2015
• Court: TRIBUNAL
• Department Lawyers: M ANIL KUMAR
• Assessee Lawyers: T M SREEDHARAN
• Keywords: Business expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI B.P. JAIN, AM AND GEORGE GEOR GE K., JM I.T.A. NOS.03&04/COCH/2015 ASSESSMENT YEARS : 2010-11 & 2011-12 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, THIRUVALLA. VS. SHRI ARUN THOMAS, KANNATTU ARUN FINANCE, M.C. ROAD, CHENGANNUR-689121. [PAN:ABQPT 8553J] (REVENUE-APPELLANT) (ASSESSEE-RESPONDENT) C.O. NOS. 1&2/COCH/2015 (ARSG. OUT OF I.T.A. NOS.03&04/COCH/2015) ASSESSMENT YEARS : 2010-11 & 2011-12 SHRI ARUN THOMAS, KANNATTU ARUN FINANCE, M.C. ROAD, CHENGANNUR-689121. [PAN:ABQPT 8553J] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, THIRUVALLA. (ASSESSEE -APPELLANT) (REVENUE-RESPONDENT) EVENUE BY SHRI M. ANIL KUMAR, CIT(DR) ASSESSEE BY SHRI T.M. SREEDHARAN, SR. ADV. DATE OF HEARING 07/07/2015 DATE OF PRONOUNCEMENT 10TH/07/2015 O R D E R PER BENCH: THESE TWO APPEALS OF THE REVENUE ARISE FROM THE OR DER OF THE LD. CIT(A) KOWDIAR, THIRUVANANTHAPURAM FOR TWO DIFFERENT ASSES SMENT YEARS, I.E. A.Y. 2010- 11 AND A.Y. 2011-12 EACH DATED 12 TH NOVEMBER, 2014. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS FOR BOTH THE YEARS. I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 2 2. THE LD. DR ARGUED THAT THE ONLY ISSUE WHICH ARIS ES FOR CONSIDERATION IS DISALLOWANCE OF INTEREST PAID ON DEPOSITS OUTSIDE B OOKS OF ACCOUNT IN BOTH THE YEARS. THEREFORE, THE ISSUE IN BOTH THE APPEALS IS IDENTICAL. ACCORDINGLY, WE ARE TAKING UP THE APPEALS FOR BOTH THE YEARS TOGETHER B Y THIS CONSOLIDATED ORDER. 3. FIRST, WE SHALL TAKE UP THE REVENUES APPEAL IN I.T.A. NO. 03/COCH/2015 FOR THE ASSESSMENT YEAR 2010-11 AND OUR ORDER THERE OF WILL BE IDENTICALLY APPLICABLE TO THE REVENUES APPEAL IN I.T.A. NO. 04 /COCH/2015 FOR THE ASSESSMENT YEAR 2011-12. THE REVENUE HAS TAKEN AS MANY AS SIX GROUNDS IN ITS GROUNDS OF APPEAL BUT THE ONLY ISSUE RAISED BY THE REVENUE IS DISALLOWANCE OF INTEREST AMOUNTING TO RS.4,20,02,029/-. THE FACTS ARE THAT THE ASSESSING OFFICER MADE DISALLOWANCE OF INTEREST AMOUNTING TO RS. 4,20 ,02,029/- ON THE DEPOSITS ACCEPTED BY THE ASSESSEE IN HIS INDIVIDUAL CAPACITY WHICH IN TURN WAS NOT BROUGHT OUT IN THE BOOKS OF ACCOUNT MAINTAINED BY THE PROPR IETARY CONCERN M/S. KANNATTU ARUN FINANCE. ACCORDING TO THE ASSESSING OFFICER, BY VIRTUE OF SECTION 4(2)(III) OF THE KERALA MONEY LENDERS ACT, DEPOSITS SHALL BE ACC EPTED ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE RESERVE BANK OF INDIA AC T, 1934 AND INTEREST SHOULD BE CHARGED AT SUCH RATE NOT EXCEEDING THE RATE FIXED B Y THE RESERVE BANK OF INDIA APPLICABLE FOR NON BANKING FINANCIAL COMPANIES. IT IS THE CONTENTION OF THE ASSESSING OFFICER THAT PRIVATE MONEY LENDERS CANNOT ACCEPT DEPOSITS FROM THE GENERAL PUBLIC BUT THE ASSESSEE HAD ACCEPTED DEPOSI TS FROM THE PUBLIC. THE I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 3 INTEREST PAID THEREOF WHICH WAS CLAIMED AS EXPENSES WAS THEREFORE DISALLOWED RELYING ON EXPLANATION 1 TO SECTION 37 OF THE IT ACT AND ADDED TO THE INCOME RETURNED. THE LD. CIT(A) ALLOWED RELIEF FOLLOWING HIS PREDECESSORS ORDER DATED 11/01/2012 IN THE ASSESSEES OWN CASE FOR THE ASSE SSMENT YEAR 2008-09 AND ORDER DATED 13-08-2012 FOR THE ASSESSMENT YEAR 200 9-10 WHICH HAS BEEN DECIDED ON THE IDENTICAL ISSUE IN FAVOUR OF THE ASS ESSEE. IT WAS ALSO OBSERVED BY THE LD. CIT(A) THAT THERE IS NO BAR IN PAYMENT OF S UCH INTEREST AND AS PER THE SPIRIT OF THE SECTION, PAYMENT OF INTEREST IS NOT A N OFFENCE IN ITSELF SO THAT IT WOULD BE CONSIDERED FOR THE PROVISION OF EXPLANATION TO SECTION 37(1) FOR DISALLOWANCE BUT CLEARLY MENTIONS THAT THE AMENDMEN T SHALL RESULT IN DISALLOWANCE OF THE CLAIMS MADE BY CERTAIN ASSESSEE S IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFTA, BRIB ES ETC. AS BUSINESS EXPENSES. BUT IN THE PRESENT CASE, INTEREST HAS BEEN PAID ON DEPOSITS AND ANY PAYMENT RELATING TO INTEREST PAID FOR BUSINESS ACTIVITIES I S ADMISSIBLE AS EXPENSES. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT NO PAYMENT H AS BEEN MADE. THEREFORE, SUCH PAYMENT OF INTEREST IS NOT AN OFFENCE AND NO T COVERED UNDER THE PROVISIONS AND EXPLANATION TO SECTION 37(1) OF THE ACT. THE FUNDS MOBILIZED FROM THE DEPOSITS CONSTITUTED THE WORKING CAPITAL O F THE ASSESSEE AND BY USING THE SAME INTEREST, THE ASSESSEE HAS EARNED INTEREST BY LENDING MONEY THE SAME TO THE CUSTOMERS. THE ASSESSEE HAS NOT BEEN PUNISH ED BY ANY AUTHORITY UNDER THE KERALA MONEY LENDERS ACT AS OBSERVED BY THE LD. CIT(A). THE LD. CIT(A) RELIED UPON THE DECISION OF THE ITAT, COCHIN BENCH VIDE ORDER DATED 22/03/2013 I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 4 IN I.T.A. NO. 248/COCH/2012 AND C.O. NO.16/COCH/201 2 DATED 22/03/2013 FOR THE ASSESSMENT YEAR 2009-10 AND ACCORDINGLY, DECIDE D THE IDENTICAL ISSUE FOR THE IMPUGNED YEAR BY DELETING THE DISALLOWANCE OF RS. 4 ,20,02,029/-MADE BY THE ASSESSING OFFICER. 4. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE ARGUMENTS RA ISED BEFORE THE LD. CIT(A) AND INVITED OUR ATTENTION TO THE DECISION OF ITAT, COCHIN BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 WHEREIN AN IDENTICAL ISSUE RAISED BY THE REVENUE HAS BEEN DISMISSED BY THE ITAT, COCHIN BENCH. THE LD. AR, ACCORDINGLY, PRAYED TO DISMISS THE APPEAL OF THE RE VENUE. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE CIRCUMSTANCES AND THE FACTS OF THE CASE IN THE PRESENT CASE ARE THAT THE ASSESSEE ASSESSEE HAS RAISED LOANS IN THE INDIVIDUA L CAPACITY AND INTEREST HAS BEEN PAID ON THE CAPITAL SO BORROWED FOR THE PURPOS E OF BUSINESS OR PROFESSION. THE ASSESSING OFFICER MADE THE DISALLOWANCE BY FOLL OWING EXPLANATION TO SECTION 37(1) OF THE ACT. AS REGARDS SECTION 37(1) OF THE ACT, THE CBDT HAS CLARIFIED VIDE CIRCULAR NO.772 DATED 23/12/1998 THAT WHERE THE DIS ALLOWANCE HAS TO BE MADE WITH REGARD TO THE CLAIMS MADE BY THE ASSESSEES IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFTA, BRIB ES ETC. AS BUSINESS EXPENSES. WHEREAS IN THE PRESENT CASE, THERE IS NO PAYMENT ON ACCOUNT OF PROTECTION I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 5 MONEY, EXTORTION, HAFTA, BRIBES ETC. AND THEREFORE, EXPLANATION TO SECTION 37(1) CANNOT BE MADE APPLICABLE TO THE PRESENT FACTS AND CIRCUMSTANCES OF THE CASE. 6. AS REGARDS APPLICABILITY OF SECTION 37(1), IT EX CLUDES EXPENDITURE WHICH FALLS UNDER SECTIONS 30 TO 36, CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE. OBVIOUSLY, THE PRESENT CASE FALLS U/S. 36(1)(III) O F THE ACT WHEREIN DEDUCTION IS ALLOWED FOR THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, EXPENDITURE IS AL LOWED U/S. 36(1)(III). THEREFORE, SECTION 37(1) IS NOT APPLICABLE TO THE P RESENT FACTS AND CIRCUMSTANCES OF THE CASE. AN IDENTICAL ISSUE HAS BEEN DECIDED B Y THE ITAT, COCHIN BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 200 9-10 AND IT IS PERTINENT TO REPRODUCE THE ORDER OF THE BENCH DATED 22/03/2013 H EREIN 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE A LSO CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 37(1) OF THE INCO ME-TAX ACT WHICH READS AS FOLLOWS: 37(1) ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DECRIBED IN SECTIONS 30 TO 36 AND (NOT BEING IN THE NATURE OF C APITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXP ENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PRO FESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER TH E HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION.- FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PRTOHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEN INCURRED I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 6 FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DE DUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. A BARE READING OF SECTION 37(1) CLEARLY SHOWS THAT ANY EXPENDITURE WHICH IS NOT IN THE NATURE DESCRIBED U/SS 30 TO 36 AND NOT B EING CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE LAID OUT WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS HAS TO BE ALLOWED IN COMPUTING THE TOTAL I NCOME. THEREFORE, IT IS OBVIOUS THAT THE EXPENDITURE WHICH FALLS UNDER SECT ION 30 TO 36 AND CAPITAL EXPENDITURE AND PERSONAL EXPENDITURE ARE EXCLUDED F ROM SECTION 37 OF THE ACT. FOR REMOVAL OF DOUBTS, EXPLANATION 1 TO SECTIO N 37(1) INTRODUCED BY FINANCE (NO.2) ACT OF 1998 WITH RETROSPECTIVE EFFEC T FROM 01-04-1962 CLARIFIES THAT ANY EXPENDITURE INCURRED FOR ANY PUR POSE, WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE TREATED AS INCURRED FOR BUSINESS AND NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUC H EXPENDITURE. WHILE CLARIFYING EXPLANATION TO SECTION 37(1) THE CBDT CL ARIFIED IN CIRCULAR NO.772 DATED 23-12-1998 AS UNDER: 20.1 SECTION 37 OF THE INCOME-TAX ACT IS AMENDED T O PROVIDE THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO H AVE BEEN INCURRED FOR THE PURPOSES OF BUSINESS OR PROFESSION AND NO DEDUC TION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. THIS AMENDM ENT WILL RESULT IN DISALLOWANCE OF THE CLAIMS MADE BY CERTAIN ASSESSEE S IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFTA, BRIBES, ETC. AS BUSINESS EXPENDITURE. IT IS WELL DECIDED THAT UNLAW FUL EXPENDITURE IS NOT AN ALLOWABLE DEDUCTION IN COM PUTATION OF INCOME. FROM THE ABOVE EXPLANATION, THE LEGISLATURE INTENDE D TO DISALLOW THE PAYMENT LIKE PROTECTION MONEY, EXTORTION, HAFTA, BR IBE, ETRC. WHEN IT WAS CLAIMED AS BUSINESS EXPENDITURE. THE CONTENTION OF THE LD.SENIOR COUNEL FOR THE TAXPAYER IS THAT THE PAYMENT OF INTEREST BY THE TAXPAYER COMES WITHIN THE AMBITS OF SECTIONS 30 TO 36. NO DOUBT, SECTION 37(1) IS NOT APPLICABLE IN RESPECT OF EXPENDITURE WHICH FALLS WITHIN SECTIO NS 30 TO 36 OF THE ACT. IN THIS CASE, THE TAXPAYER ADMITTEDLY BORROWED FUNDS F OR ENHANCING THE WORKING CAPITAL FOR THE PURPOSE OF MONEY LENDING BU SINESS. INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS FALLS WITHIN THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. THEREFORE, ANY INTER EST PAID ON THE CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION HAS TO BE ALLOWED AS I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 7 DEDUCTION U/S 36(1)(III) OF THE ACT. IN VIEW OF THE ABOVE, PROVISIONS OF SECTION 37(1) MAY NOT BE APPLICABLE IN RESPECT OF I NTEREST ON THE CAPITAL BORROWED FOR BUSINESS PURPOSE. APART FROM THIS, THE TAXPAYER CLAIMS THAT THE FUNDS WERE BORROWED IN THE PERSONAL CAPACITY AN D NOT IN THE NAME OF BUSINESS CONCERN. THE PAYMENT OF INTEREST ON THE BO RROWED CAPITAL FALLS WITHIN SECTION 36(1)(III) OF THE ACT AND HENCE THE PROVISIONS OF SECTION 37(1) MAY NOT BE APPLICABLE. THEREFORE, IT MAY BE I MMATERIAL WHETHER THE MONEY WAS BORROWED IN PERSONAL CAPACITY OR NOT? WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENTS OF THE KARNATAKA HIGH COU RT AND BOMBAY HIGH COURT. IN AMARJEET KAUR (SUPRA) AND IN TARAPOR EWALA SONS CO (P) LTD (SUPRA) THE PAYMENT OF INTEREST WAS NOT ON THE MONE Y BORROWED FOR CAPITAL. IN TARAPOREWALA SONS CO (P) LTD (SUPRA), T HE PAYMENT WAS MADE AS SECRET COMMISSION. IN AMARJEET KAUR (SUPRA), DEPO SIT LINKED INCENTIVE SCHEME WAS FOUND TO BE MONEY CIRCULATION SCHEME. TH E RELEVANT EXPENDITURE IN BOTH CASES WERE ALLOWABLE U/S 37(1) OF THE ACT. THEREFORE, THE HIGH COURT FOUND THAT EXPENDITURE WOULD FALL UN DER EXPLANATION TO SECTION 37(1) OF THE ACT. IN THIS CASE, THE EXPENDI TURE / INTEREST IS ALLOWABLE UNDER SECTION 36(1)(III), THEREFORE, THE EXPLANATION TO SECTION 37(1) IS NOT APPLICABLE. ACCORDINGLY, THE ORDER OF CIT(A) IS CONFIRMED. 6. THE CROSS OBJECTION FILED BY THE TAXPAYER IS ONLY TO SUPPORT THE ORDER OF THE CIT(A), THEREFORE, IT IS NOT MAINTAINABLE. ACCO RDINGLY, BOTH THE APPEAL OF THE REVENUE AND THE CROSS OBJECTION OF THE TAXPAY ER ARE DISMISSED. 7. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND O UR FINDINGS HEREINABOVE AND THE DECISION OF THE ITAT, COCHIN BENCH FOR THE ASSESSMENT YEAR 2009-10 REPRODUCED HEREINABOVE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) WHO HAS RIGHTLY ALLOWED THE APPEAL OF THE ASSESSEE AND THEREFORE, ALL THE GROUNDS OF THE REVENUE ARE DISMISSED. 8. WE SHALL NOW TAKE UP THE REVENUES APPEAL FOR TH E ASSESSMENT YEAR 2011- 12. THE ISSUE IN THE PRESENT APPEAL IS IDENTICAL T O THE ISSUE IN REVENUES APPEAL I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 8 FOR THE ASSESSMENT YEAR 2010-11 IN I.T.A. NO. 03/CO CH/2015 AND THEREFORE, THE ORDER HEREINABOVE IN I.T.A. NO. 03/COCH/2015 IS IDE NTICALLY APPLICABLE TO THE PRESENT CASE AND THEREFORE, ALL THE GROUNDS OF THE REVENUE STAND DISMISSED. 9. THE CROSS OBJECTIONS IN C.O NOS. 01&02/COCH/2015 FOR BOTH THE YEARS ARE SUPPORTIVE TO THE ORDER OF THE LD. CIT(A) AND THERE FORE, ARE NOT MAINTAINABLE AND ACCORDINGLY, CROSS OBJECTIONS BEARING NOS. 01&02/CO CH/2015 FILED BY THE ASSESSEE FOR THE ASSESSMENT YEARS 2010-11 AND 2011- 12 ARE DISMISSED. IN THE RESULT, THE APPEALS FILED BY THE REVENUE AN D THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT O N 10-07-2015 SD/- SD/- (GEORGE GEORGE K.) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 10TH JULY, 2015 GJ COPY TO: 1. SHRI ARUN TNOMAS, KANATTU ARUN FINANCE, M.C. RO AD, CHENGANNUR-689121. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, THIRUVALLA. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS),TRIVANDR UM 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. I.T.A. NOS.03&04/COCH/2015 & C.O. NOS.01&02/COCH/2015 9 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COC HIN