ITO, Kannur V. M/s.Muthoot Bankers, Kannur

ITA 400/COCH/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77487 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2014
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 01-07-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 06-06-2013
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Keywords: Business expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NOS.400&401 /COCH/2013 ASSESSMENT YEARS : 2005-06 & 2006-07 THE INCOME TAX OFFICER, WARD-1, KANNUR VS. M/S. MUTHOOT BANKERS, FORT LIGHT COMPLEX, FORT ROAD, KANNUR. [PAN:AAEFM 5264A] (REVENUE-APPELLANT) (ASSESSEE-RESPONDENT ) REVENUE BY SHRI K.K. JOHN, SR. DR ASSESSEE BY SHRI R. SREENIVASAN, CA DATE OF HEARING 01/07/2014 DATE OF PRONOUNCEMENT 18/07/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE TWO APPEALS FILED BY THE REVENUE ARE DIRECTE D AGAINST THE COMMON ORDER DATED 13-03-2013 PASSED BY THE LD. CIT(A), KO ZHIKODE FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07. 2. THE GROUNDS RAISED BY THE REVENUE IN BOTH THE AP PEALS ARE AS UNDER: I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE CIT(A) IS RIGHT IN LAW IN DELETING THE ADDITION MADE IN THE ASSESS MENT ORDER. II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS RIGHT IN LAW IN ALLOWING INTEREST PAID TO PARTNERS SINCE THE INTEREST PAID TO I.T.A. NOS.400&401/COCH/2013 2 PARTNERS AFTER THE CLOSURE OF THE BUSINESS WAS NOT INCURRED FOR THE PURPOSE EARNING THE INCOME RECEIVED AFTER THE CLOSURE OF T HE BUSINESS. III) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) IS RIGHT IN LAW IN RELYING ON THE DECISION OF HON BLE I.T.A.T., COCHIN BENCH IN I.T.A. NO.788/COCH/2008 DATED 27-04-2012 FOR A. Y. 2005-06 IN THE CASE OF M/S. MUTHOOT BANKERS AND FINANCIERS, TRIVA NDRUM WHICH HAS SINCE BEEN CONFIRMED BY THE HONBLE HIGH COURT OF KERALA VIDE ORDER DATED 06- 12-2013 SINCE THE FACTS OF THAT CASE ARE DIFFERENT FROM THE FACTS OF THIS CASE. 3. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PER USED THE RECORD. THE LD. DR SUBMITTED THAT THE ASSESSEES CASE CANNOT BE CON SIDERED AS COVERED BY THE DECISION OF THE COCHIN BENCH OF THE TRIBUNAL IN THE CASE OF MUTHOOT BANKERS AND FINANCIERS, TRIVANDRUM IN I.T.A. NO. 788/COCH/2008 DATED 27/04/2012 FOR THE ASSESSMENT YEAR 2005-06 WHEREIN THE TRIBUNAL HAD HE LD AS UNDER: 5. WE ARE UNABLE TO ACCEPT THE VIEW OF THE LD CIT(A). WHEN THE ASSESSEE HAS TRANSFERRED THE BUSINESS ASSETS (HERE LOAN BALANCES) TO SOME OTHER CONCERN, THERE IS NO QUESTION OF ASSE SSEE RECEIVING ANY INCOME FROM THOSE BUSINESS ASSETS, WHICH HAVE BEEN TRANSFERRED ALREADY. IT IS THE BUYER OF THOSE BUSINESS ASSETS, WHO WOULD RECEIVE THE INCOME THERE FROM. BY CONSIDERING THIS LEGAL P OSITION ONLY, THE ASSESSEE HAS CALCULATED THE INTEREST RECEIVABLE FRO M THOSE BUSINESS ASSETS UP TO THE DATE OF TRANSFER AND CLAIMED THE S AME FROM THE BUYER. IN OUR VIEW, THE MOMENT THE BUYER AGREED TO COMPENSATE THE ASSESSEE FOR THE INTEREST ACCRUED ON THOSE BUSINESS ASSETS UP TO THE DATE OF TRANSFER, THERE IS CONSTRUCTIVE RECEIPT OF INTEREST BY THE ASSESSEE, EVEN UNDER THE CASH SYSTEM OF ACCOUNTING. THE REASON IS SIMPLE I.E., WHEN THE BUYER AGREES TO PAY THE INTER EST RECEIVABLE AMOUNT, THE NET RESULT IS THAT THERE IS A CONSTRUCT IVE RECEIPT OF INTEREST AMOUNT FROM THE BUSINESS ASSETS AND THERE IS ALSO A CONSTRUCTIVE PAYMENT OF THE VERY SAME AMOUNT TO THE BUYER. IN T HE INSTANT CASE, THE ABOVE SAID CONSTRUCTIVE RECEIPT AND PAYMENT HAV E ALSO BEEN ACKNOWLEDGED BY BOTH THE PARTIES BY INCLUDING THE INTEREST RECEIVABLE AMOUNT IN THE CONSIDERATION FOR THE TRA NSFER. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THE AO WAS RIGHT IN LAW IN ASSESSING THE INTEREST RECEIVABLE AMOUNT OF RS.66,09,167/- I.T.A. NOS.400&401/COCH/2013 3 IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ADDITION AND RESTORE THAT OF THE AO. 5. THE NEXT ISSUE RELATES TO THE DISALLOWANCE O F INTEREST PAID TO ONE OF THE PARTNERS. THE ASSESSEE FIRM PAID INTEREST O NLY TO ONE OF THE PARTNERS, THOUGH THE PARTNERSHIP DEED AUTHORISED PA YMENT OF INTEREST TO ALL THE PARTNERS. SINCE THERE WAS FAILURE ON TH E PART OF THE ASSESSEE TO PAY INTEREST TO ALL THE PARTNERS AS MANDATED BY THE PARTNERSHIP DEED, THE AO CONSIDERED THE SAME AS VIOLATION OF PR OVISIONS OF SEC. 40(B) AND ACCORDINGLY DISALLOWED THE INTEREST OF RS .1.57 CRORES PAID TO ONE OF THE PARTNERS. 6. SECTION 40(B)(II) TO (IV) OF THE ACT, WHICH GO VERNS THE ISSUE UNDER CONSIDERATION, READS AS UNDER:- 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON,- .......................... (II) ANY PAYMENT OF REMUNERATION TO ANY PARTNER WH O IS A WORKING PARTNER, OR OF INTEREST TO ANY PARTNER , WHICH, IN EITHER CASE, IS NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, THE TERMS OF PARTNERSHIP DEED; OR (III) ANY PAYMENT OF REMUNERATION TO ANY PARTNER W HO IS A WORKING PARTNER, OR OF INTEREST TO ANY PARTNER , WHICH, IN EITHER CASE, IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNERSHIP DEED, BUT WHICH RELATES TO ANY PERIOD (FALLING PRIOR TO THE D ATE OF SUCH PARTNERSHIP DEED) FOR WHICH SUCH PAYMENT WAS NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, AN Y EARLIER PARTNERSHIP DEED, SO, HOWEVER, THAT THE PER IOD OF AUTHORISATION FOR SUCH PAYMENT BY ANY EARLIER PARTNERSHIP DEED DOES NOT COVER ANY PERIOD PRIOR TO THE DATE OF SUCH EARLIER PARTNERSHIP DEED; OR (IV) ANY PAYMENT OF INTEREST TO ANY PARTNER WHICH IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF I.T.A. NOS.400&401/COCH/2013 4 PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED IN SO FAR AS SUCH AMOUNT EXCEEDS THE AMOUNT CALCULATED AT THE RATE OF TWELVE PER CENT SIMPLE INTEREST PER ANNUM. ON A PLAIN READING OF THE ABOVE SAID PROVISIONS, WE UNDERSTAND THAT THE PAYMENT OF INTEREST TO ANY PART NER IS LIABLE TO THE DISALLOWED ONLY IF IT IS NOT AUTHORISED OR I S NOT IN ACCORDANCE WITH THE TERMS OF PARTNERSHIP DEED OR IF IT RELATES TO ANY PERIOD FALLING PRIOR OR AFTER THE DATE OF SUCH PARTNERSHIP DEED PROVIDED THAT THE SUCH PAYMENT WAS NOT AUTHORI SED OR IS NOT IN ACCORDANCE WITH ANY EARLIER PARTNERSHIP DEED . ANOTHER CONDITION IS THAT THE INTEREST IS ALLOWABLE AT THE RATE OF 12% SIMPLE INTEREST, IF THE PARTNERSHIP DEED PROVIDES F OR HIGHER RATE. IN THE INSTANT CASE, NONE OF THE CONDITIONS IS APPL ICABLE TO THE PAYMENT OF INTEREST OF RS.1.57 CRORES TO ONE OF THE PARTNERS, I.E., THE PAYMENT IS AUTHORISED BY AND IS IN ACCORDANCE W ITH THE PARTNERSHIP DEED AND IT IS AT THE RATE PRESCRIBED I N THE ABOVE SAID SECTION AND ALSO FOR THE PERIOD FOR WHICH THER E IS AUTHORISATION FROM THE PARTNERSHIP DEED. THE INTER EST IS ALSO STATED TO HAVE BEEN PAID @ 12% SIMPLE INTEREST. THO UGH THE ASSESSEE DID NOT PAY INTEREST TO OTHER PARTNERS, SU CH KIND OF SITUATION WAS NOT DISCUSSED IN THE ACT AND HENCE TH E SAME CANNOT BE CONSIDERED AS VIOLATION OF PROVISIONS OF SEC. 40(B) OF THE ACT. ACCORDINGLY WE UPHOLD THE ORDER OF LD CIT (A) ON THIS ISSUE. 4. ACCORDING TO THE LD. DR, THE ABOVE ORDER OF THE TRIBUNAL IS APPLICABLE ONLY IN THE CASE WHERE THE BUSINESS OF THE ASSESSEE IS N OT CLOSED. IN THE CASE OF THE ASSESSEE, THE BUSINESS WAS TOTALLY CLOSED. ALL THE ASSETS AND LIABILITIES OF THE ASSESSEE WERE ALREADY COMPLETELY SOLD. BEING SO, T HE ABOVE ORDER OF THE TRIBUNAL HAS NO APPLICATION TO THE FACTS OF THE PRE SENT CASE. 5. ON THE CONTRARY, THE LD. AR STRONGLY RELIED ON T HE ORDER OF THE TRIBUNAL, CITED SUPRA. I.T.A. NOS.400&401/COCH/2013 5 6. WE HAVE HEARD BOTH PARTIES AND CAREFULLY CONSIDE RED THE SUBMISSIONS MADE BY THE RIVAL PARTIES. WE HAVE GONE THROUGH TH E DETAILS OF PROFIT AND LOSS ACCOUNT. IN THE ASSESSMENT YEAR 2005-06, AS PER TH E P&L ACCOUNT, THE ASSESSEE RECEIVED RS. 17,50,361/- AS INTEREST FROM PAST BUSI NESS ACTIVITIES AS FOLLOWS: (I) INTEREST ON SECURITIES RS. 22 ,750/- (II) INTEREST FROM MUTHOOT BANKERS(MG ROAD, COCHI N) RS.11,60,377/- (III)INTEREST FROM IT REFUNDS RS. 1,290/- (IV)INTEREST ON GOLD LOAN RS. 5,65,9 44/- THE ASSESSEE CLAIMED INTEREST PAYMENT TO THE PARTNE RS AT RS. 18.00 LAKHS U/S. 40(B) OF THE I.T. ACT. IT WAS DISALLOWED BY THE AS SESSING OFFICER MAINLY ON THE GROUND THAT THE ASSESSEE HAD NOT CARRIED ON ANY BUS INESS ACTIVITY DURING THE PREVIOUS YEARS RELEVANT TO THE ASSESSMENT YEARS UND ER CONSIDERATION. SO THE MAIN ISSUE BEFORE US IS THAT WHETHER THE ASSESSEE W AS CARRYING ON ANY BUSINESS DURING THE PREVIOUS YEARS RELEVANT TO THE ASSESSMEN T YEARS 2005-06 AND 2006-07 OR THE ASSESSEE HAS COMPLETELY DISCONTINUED THE BUS INESS. 7. WE HAVE GONE THROUGH THE AGREEMENT ENTERED INTO BY THE ASSESSEE ON THE 1ST DAY OF APRIL, 2004 WITH M/S. MUTHOOT FINCOR P LTD. FOR THE SALE OF ASSESSEE BUSINESS. AS PER THIS AGREEMENT, ALL ASSETS AND LI ABILITIES OF THE ASSESSEE WERE TAKEN OVER BY M/S. MUTHOOT FINCORP LTD. FOR A CONSI DERATION OF RS.1,82,02,199.67. ALL THE ASSETS LISTED IN THE SC HEDULE OF THE AGREEMENT WERE DELIVERED TO THE PURCHASER AND ON DELIVERY OF ALL T HE ASSETS, THE VENDOR SHALL EXECUTE A PROPER CONVEYANCE IN FAVOUR OF THE PURCHA SER OR HIS NOMINEE. THE I.T.A. NOS.400&401/COCH/2013 6 VENDOR SHALL BEAR AND PAY OF ALL OUTGOINGS AND LIAB ILITIES OF THE PROPERTY UP TO AND INCLUSIVE OF THE DATE OF SALE AND IT SHALL BE T HE RESPONSIBILITY AND RIGHT OF THE PURCHASER TO COLLECT THE DEBTS AND ASSETS SPECIFIED IN THE SCHEDULE AND THE VENDOR SHALL EFFECTIVELY EXECUTE SUCH DOCUMENTS AS MAY BE REQUIRED IN THIS BEHALF. THE CRUX OF THE ABOVE COVENANT IS THAT THE BUSINESS OF THE ASSESSEE CEASED TO EXIST. THOUGH THE ASSESSEE IS AN INVESTME NT COMPANY, THERE IS NO IOTA OF EVIDENCE TO SUGGEST THAT THE ASSESSEE HAS CARRIE D ON ANY OF ITS PRIMARY BUSINESS ACTIVITIES IN THE ASSESSMENT YEARS UNDER C ONSIDERATION. IT IS NOTICED THAT OTHER THAN CERTAIN INCIDENTAL EXPENSES, THE AS SESSEE HAS NOT INCURRED ANY BUSINESS EXPENDITURE IN THE ASSESSMENT YEARS UNDER CONSIDERATION LIKE STAFF EXPENSES, BUSINESS ADMINISTRATIVE EXPENSES, LEGAL A ND PROFESSIONAL EXPENSES ETC. TO SHOW THAT THE ASSESSEE CONTINUED TO BE IN BUSINE SS. IT IS TO BE POINTED OUT THAT FOR CLAIMING DEDUCTION TOWARDS INTEREST, THE B ASIC REQUIREMENTS ARE: (I) MONEY MUST HAVE BEEN BORROWED BY THE ASSESSE E FOR ITS BUSINESS/PROFESSION. (II) THE ASSESSEE MUST HAVE PAID INTEREST ON THE AMOUNT. (III) THE ASSESSEE MUST HAVE CLA IMED IT AS AN ALLOWANCE. THUS, TO CLAIM DEDUCTION TOWARDS INTEREST AS BUSINE SS EXPENDITURE, THE EXPENSES OF BUSINESS IS MUST AND WHOSE PROFIT OR LOSS OF THE BUSINESS IS ASSESSABLE IN THE YEARS UNDER CONSIDERATION. IN THIS CASE, DURING TH E ASSESSMENT YEARS UNDER CONSIDERATION, IT WAS BROUGHT ON RECORD BY THE ASSE SSING OFFICER THAT THE ASSESSEE HAS NOT CARRIED ON ANY BUSINESS AND THEREF ORE, NO QUESTION OF I.T.A. NOS.400&401/COCH/2013 7 COMPUTATION OF INCOME UNDER THE HEAD BUSINESS ARISE S. EVEN IF THE ASSESSEE HAS EARNED CERTAIN INCOME AFTER THE CLOSURE OF THE BUSI NESS, IT CANNOT BE LED TO THE CONCLUSION THAT THE INTEREST PAID TO PARTNERS IS TO BE ALLOWED UNLESS MONEY BORROWED IS FOR THE PURPOSE OF BUSINESS WHICH IS IN EXISTENCE. THEREFORE, INTEREST PAYMENTS MADE BY THE ASSESSEE TO THE PARTN ERS CANNOT BE CONSIDERED AS INCOME FOR THE PURPOSE OF BUSINESS WHICH WAS NOT IN EXISTENCE DURING THE RELEVANT ASSESSMENT YEARS AND THE SAME, IS THEREFO RE, NOT ALLOWABLE U/S. 40(B) OF THE I.T. ACT. 8. IT IS NOTICED THAT THE SAME ISSUE CAME UP BEFORE THIS TRIBUNAL IN THE CASE OF MUTHOOT BANKERS, KOLLAM & ORS. IN I.T.A. NOS. 58 4, 585 & 586/COCH/2010 VIDE ITS ORDER DATED 29/03/2012 WHEREIN THE TRIBUNAL HAD REMITTED THE ISSUE BACK TO THE FILE OF THE CIT(A) TO VERIFY WHETHER THE PAYMEN T WAS IN ACCORDANCE WITH THE PARTNERSHIP DEED. SIMILARLY, IN THE CASE OF MUTHOO T BANKERS, KOLLAM IN I.T.A. NO. 582/COCH/2010, THE TRIBUNAL VIDE ITS ORDER DATED 16 -12-2011 FOR THE ASSESSMENT YEAR 2005-06 HAD REMITTED THE SAME ISSUE BACK TO TH E FILE OF THE CIT(A) FOR THE SAME REASON. FURTHER, IN THE CASE OF MUTHOOT BANK ERS, TELLICHERRY & ORS. IN I.T.A. NOS. 103,104&160/COCH/2009, THE TRIBUNAL VID E ITS ORDER DATED 29-07- 2011 FOR THE ASSESSMENT YEAR 2005-06 HAD REMITTED T HE ISSUE BACK TO THE FILE OF THE CIT(A) TO SEE WHETHER THE BUSINESS OF THE ASSES SEE IS CARRIED ON OR NOT AND TO DECIDE THE ISSUE AFRESH. I.T.A. NOS.400&401/COCH/2013 8 9. IN THE PRESENT CASE, AS WE HAVE DISCUSSED EARLIE R, THERE IS A CLEAR CUT FINDING OF THE ASSESSING OFFICER AND ALSO THE FACTS OF THE ASSESSEES CASE CLEARLY SHOWS THAT THE ASSESSEE HAS TRANSFERRED ITS BUSINES S AS A GOING CONCERN, LEFT WITH NO OPERATIVE ASSETS, AND HAS INCURRED NO BUSINESS E XPENDITURE IN THE ASSESSMENT YEARS UNDER CONSIDERATION OTHER THAN THE INTEREST P AYMENT. BEING SO, WE ARE NOT IN A POSITION TO APPRECIATE THE ARGUMENT OF THE LD . AR SO AS TO APPLY THE RATIO LAID DOWN BY THE TRIBUNAL IN THE EARLIER CASE IN I. T.A. NO.788/COCH/2008 AND OTHERS CITED SUPRA. ACCORDINGLY, IN OUR OPINION, T HE ASSESSEES CLAIM OF PAYMENT OF INTEREST TO PARTNERS U/S. 40(B) OF THE ACT CANNO T BE ALLOWED IN BOTH THE YEARS. 10. IN THE RESULT, THE APPEALS FILED BY THE REVENUE ARE ALLOWED. PRONOUNCED ACCORDINGLY ON 18-07-2 014. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 18TH JULY, 2014 GJ COPY TO: 1. M/S. MUTHOOT BANKERS, FORT LIGHT COMPLEX, FORT R OAD, KANNUR. 2. THE INCOME TAX OFFICER, WARD-1, KANNUR. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS), KOZHIKO DE. 4. THE COMMISSIONER OF INCOME-TAX, KOZHIKODE. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN I.T.A. NOS.400&401/COCH/2013 9