ACIT, Thiruvalla V. Sri.Arun Thomas, Chengannur

ITA 403/COCH/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7539 (ITAT-COCHIN)
• Duration Of Justice: 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 02-02-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 10-07-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K P GOPAKUMAR
• Assessee Lawyers: DIVYA RAVINDAN
• Keywords: Business expenditure; Retrospective amendment; Capital expenditure
• Section: 37(1); 37

Judgement Text

ITA NO . 403/C/2015 1 IN THE INCOME TAX APPEL L A TE T R IBUNAL COCHIN BENCH , COCHIN BEFORE S/SH RI B P JAIN , A M & G EORGE GEORGE.K , J M ITA NO . 403/COCH/2015 (ASST YEAR 2012 - 13 ) THE ASST COMMR OF INCOME TAX CIRCLE 1 THIRUVALLA VS SHRI ARUN THOMAS KANNATTU ARUN FINANCE M C ROAD CHE NGANNUR 689 121 ( APPELLANT) (RESPONDENT) PAN NO. ABQPT8553J ASSESSEE BY SMT DIVYA RAVINDAN REVENUE BY SH K P GOPAKUMAR, SR DR DATE OF HEARING 2 ND FEB 2015 DATE OF PRONOUNCEMENT 3 RD F EB 2016 OR D ER PER GEORGE GEORGE. K. J M: TH IS APPEAL , AT THE INSTANCE OF THE REVENUE, IS DIRECTED AGAINST THE ORDER OF THE CIT (A), KOTTAYAM, DATED 28 TH MAY 2015 . THE RELEVANT ASSESSMENT YEAR IS 2012 - 13. 2 THE REVENUE HAS RAISED 8 GROUNDS IN ITS M EMORANDUM OF APPEAL. HOWEVER, ALL THE GROUNDS RELATE TO A SOL ITARY ISSUE ; NAMELY WHETHER THE INTEREST EXPENDITURE AMOUNTING TO RS.4,70,00,020/ - IS ADMISSIBLE U/S 36(1) OF THE ACT AND IT IS NOT HIT BY EXPLANATION TO SECTION 37(1) OF THE I T ACT. 3 BRIEFLY STATED, THE FACTS OF THE ISSUE ARE AS UNDER: ITA NO . 403/C/2015 2 THE ASSESSE E IS A N INDIVIDUAL , ENGAGED IN THE BUSINESS OF MONEY LENDING IN THE NAME AND STYLE OF M/S. KANNATTU ARUN FINANC E. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE ASSESSING OFFICER MADE DISALLOWANCE OF INTEREST AMOUNTING TO RS. 4,70,00,020/ - ON THE DEPOSITS ACCEPTED BY THE ASSESSEE IN HIS INDIVIDUAL CAPACITY , WHICH IN TURN WAS NOT BROUGHT IN THE BOOKS OF ACCOUNT MA INTAINED BY THE PROPRIETARY 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 ACCEPTED ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE RESERVE BANK OF IN DIA ACT, 1934 AND INTEREST SHOULD BE CHARGED AT SUCH RATE NOT EXCEEDING THE RATE FIXED BY THE RESERVE BANK OF INDIA APPLICABLE FOR NON BANKING FINANCIAL COMPANIES. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT PRIVATE MONEY LENDERS CANNOT ACCEPT DEPOSITS FROM THE GENERA L PUBLIC BUT THE ASSESSEE HAD ACCEPTED DEPOSITS FROM THE PUBLIC. THE INTEREST PAID THEREOF WHICH WAS CLAIMED AS EXPENSES WAS THEREFORE DISALLOWED BY RELYING ON EXPLANATION 1 TO SECTION 37 OF THE IT ACT AND ADDED TO THE INCOME RETURNED. 4 ON FURTHER APPEAL, T HE CIT(A) ALLOWED RELIE F FOLLOWING HIS PREDECESSORS ORDER DATED 11/01/2012 IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008 - 09 AND ORDER DATED 13 - 08 - 2012 FOR THE ASSESSMENT YEAR 2009 - 10 WHICH HAS BEEN DECIDED ON THE IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE. IT WAS AL SO OBSERVED BY THE CIT(A) THAT HIS PROCESSOR ORDER FOR AY 2009 - 10 WAS AFFIRMED B Y THE HONBLE ITAT IN ITA NO.2 4 8/COCH/2012 DATED 22.3.2013. ITA NO . 403/C/2015 3 5 THE REVENUE BEING A GGRIEVED IS IN APPEAL BEFORE US. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE ARGUMENTS RAISED BEFORE THE LD. CIT(A) AND INVITED OUR ATTENTION TO THE ORDERS OF ITAT, COCHIN BENCH IN THE ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2009 - 10 , ( CITED SUPRA ) AND FOR THE ASSESSMENT YEARS 2010 - 11 AND 2011 - 12 , WHEREIN AN IDENTICAL ISSUE RAISED BY THE REVENUE HAS BEEN DISMISSED BY THE ITAT, COCHIN BENCH IN ITA N OS. 03 & 04/COCH/2015 (ORDER DATED 10.7.201 5) . THE LD. AR, ACCORDINGLY, PRAYE D FOR DISMISSAL OF TH IS APPEAL ALSO. 5 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AT THE OUT - SET, WE WOULD LIKE TO POINT OUT THAT AN IDENTICAL ISSUE TO THAT OF THE PRESENT ONE CAME UP FOR CONSIDERATION BEF ORE THE EARLIER BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AYS 2009 - 1 0, 2010 - 11 AND 2011 - 12 (SUP RA) . AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS, THE EARLIER BENCH HAD DISMISSED THE REVENUES APPEAL. FOR READY REFERENCE, THE RELEVANT PORTIONS OF THE FINDINGS OF THE EARLIER BENCH IN ITA NO S . 3 & 4/COCH/2015 DATED 10.7.2015 ARE REPRODUCED AS UNDER: 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 HAS RAISED LOANS IN THE INDIVIDUAL CAPACITY AND INTEREST HAS BEEN PAID ON THE CAPITAL SO BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE ASSESSING OFFICER MADE THE DISALLOWANCE BY FOLLOWING EXPLANATION TO SECTION 37(1) OF THE ACT. AS REGARDS SECTION 37(1) OF THE ACT, CBDT HAS CLARIFIED VIDE CIRCULAR NO.772 DATED 23/12/1998 THAT WHERE THE DISALLOWANCE HAS TO BE MADE WITH REGARD TO THE CLAIMS MADE BY THE ASSESSES IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFTA, BRIBES ETC., AS BUSINESS EXPENSES. WHEREAS IN THE PRESENT CASE, THERE IS NO PAYMENT ON ACCOUNT OF PROT ECTION MONEY, EXTORTION, ITA NO . 403/C/2015 4 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 EXCLUDES EXPENDITURE WHICH FALLS UNDER SECTIONS 30 TO 36, CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE. OBVIOUSLY, THE CASE FALLS U/S 36(1)(III) OF THE ACT WHEREIN DEDUCTION IS ALLOWED FOR THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, EXPE NDITURE IS ALLOWED U/S 36(1)(III). THEREFORE, SECTION 37(1) IS NOT APPLICABLE TO THE PRESENT FACTS AND CIRCUMSTANCES OF THE CASE. AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT, COCHIN BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009 - 10 AND IT IS PERTINENT TO REPRODUCE THE ORDER OF THE BENCH DATED 22/03/2013 HEREIN: 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS SECTION 37(1) O F THE INCOME - TAX ACT WHICH READS AS FOLLOWS: 37(1) ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION: FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITUR E INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION 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 BEING CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS HAS TO BE ALLOWED IN C OMPUTING THE TOTAL INCOME. THEREFORE, IT IS OBVIOUS THAT THE EXPENDITURE WHICH FALLS UNDER SECTIONS 30 TO 36 AND CAPITAL EXPENDITURE AND PERSONA EXPENDITURE ARE EXCLUDED FROM SECTION 37 OF THE ACT. FOR REMOVAL OF DOUBTS EXPLANATION 1 TO SECTION 37(1) INT RODUCED BY FINANCE (NO.2) ACT OF 1998 WITH RETROSPECTIVE EFFECT FROM 01.04.1962 CLARIFIES THAT ANY EXPENDITURE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE TREATED AS INCURRED FOR BUSINESS AND NO DEDUCTION SHALL B E ALLOWED IN RESPECT OF SUCH EXPENDITURE. WHILE CLARIFYING EXPLANATION TO SECTION 37(1), THE CBDT CLARIFIED IN CIRCULAR NO.772 DATED 23.12.1998 AS UNDER: ITA NO . 403/C/2015 5 20.1. SECTION 37 OF THE INCOME - TAX ACT IS AMENDED TO PROVIDE THAT ANY EXPENDITURE INCURRED BY AN ASS ESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSES OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. THIS AMENDMENT WILL RE SULT IN DISALLOWANCE OF THE CLAIMS MADE BY CERTAIN ASSESSES IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFT, BRIBES, ETC., AS BUSINESS EXPENDITURE IS NOT AN ALLOWABLE DEDUCTION IN COMPUTATION OF INCOME. FROM THE ABOVE EXPLANATION, THE LEGISLATURE INTENDED TO DISALLOW THE PAYMENT LIKE PROTECTION MONEY, EXTORTION, HAFTA, BRIBE, ETC., WHEN IT WAS CLAIMED AS BUSINESS EXPENDITURE. THE CONTENTION OF THE LD. SENIOR COUNSEL FOR THE TAXPAYER IS THAT THE PAYMENT OF INTEREST BY THE TAXPAYER C OMES WITHIN THE AMBITS OF SECTIONS 30 TO 36. NO DOUBT, SECTION 37(1) IS NOT APPLICABLE IN RESPECT OF EXPENDITURE WHICH FALLS WITHIN SECTIONS 30 TO 36 OF THE ACT. IN THIS CASE, THE TAXPAYER ADMITTEDLY BORROWED FUNDS FOR ENHANCING THE WORKING CAPITAL FOR T HE PURPOSE OF MONEY LENDING BUSINESS. INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS FALLS WITHIN THE PROVISIONS SECTION 36(1)(III) OF THE ACT. THEREFORE, ANY INTEREST PAID ON THE CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION HAS T O BE ALLOWED AS 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 INTEREST ON THE CAPITAL BORROWED FOR BUSINESS PURPOSE. APART FROM THIS, THE TAXPAYER CLAIMS THAT THE FUNDS WERE BO RROWED IN THE PERSONAL CAPACITY AND NOT IN THE NAME OF BUSINESS CONCERN. THE PAYMENT OF INTEREST ON THE BORROWED 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 IM MATERIAL WHETHER THE MONEY WAS BORROWED IN PERSONAL CAPACITY OR NOT? WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENTS OF THE KARNATAKA HIGH COURT AND BOMBAY HIGH COURT. IN AMARJEET KAUR (SUPRA) AND IN TARAPOREWALA SONS CO (P) LTD (SUPRA), THE PAYMENT O F INTEREST WAS NOT ON THE MONEY BORROWED FOR CAPITAL. IN TARAPOREWALA SONS CO (P) LTD (SUPRA), THE PAYMENT WAS MADE AS SECRET COMMISSION. IN AMARJEET KAUR (SUPRA) , DEPOSIT LINKED INCENTIVE SCHEME WAS FOUND TO BE MONEY CIRCULATION SCHEME. THE RELEVANT E XPENDITURE IN BOTH CASES WAS ALLOWABLE U/S 37(1) OF THE ACT. THEREFORE, THE HIGH COURT FOUND THAT EXPENDITURE WOULD FALL UNDER EXPLANATION TO SECTION 37(1) OF THE ACT. IN THIS CASE, THE EXPENDITURE (III), THEREFORE, THE EXPLANATION TO SECTION 37(1) IS NO T APPLICABLE. THIS BENCH OF THIS TRIBUNAL IN TAXPAYERS OWN CASE FOR THE ASSESSMENT YEAR 2008 - 09 IN ITA NO. 115/COCH/2012 & CO NO.10/COCH/2012 VIDE ORDER OF EVEN DATED HAS ALREADY UPHELD THE DECISION OF THE CIT (A) DELETING THE DISALLOWANCE FOR THE DETAIL ED REASONS AS STATED ABOVE. THEREFORE, CONSISTENT WITH OUR EARLIER DECISION FOR THE SAME REASONS FOR ASSESSMENT YEAR 2008 - 09, THE ORDER OF CIT (A) IS CONFIRMED. ITA NO . 403/C/2015 6 6. THE.ARE DISMISSED. 7. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND OUR FINDINGS HEREINABOVE AND THE DECISION OF THE ITAT, COCHIN BENCH FOR THE ASSESSMENT YEAR 2009 - 10 REPRODUCED HEREIN ABOVE, 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. 6 . IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL IN ASSESSEE S OWN C ASE , CITED SUPRA , ON A SIMILAR ISSUE TO THAT OF THE MATTER UNDER APPEAL, WE ARE OF THE VIEW THAT THE CIT (A) WAS JUSTIFIED IN ALLOWIN G THE INTERESTS PAID ON THE CAPITALS BORROWED FOR THE PURPOSE OF BUSINESS AS DEDUCTIONS U/S 36(1)(III) OF THE ACT FOR THE ASSESSMENT YEARS 2012 - 13 . IT IS ORDERED ACCORDINGLY 7 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED ORDER PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF FEB 2016 . SD/ - SD/ - ( B P JAIN ) ( GEORGE GEORGE K ) ACCOUNTANT MEMBER JUDICIAL M EMBER COCHIN: DATED 3 RD , FEB 2016 RAJ* ITA NO . 403/C/2015 7 COPY TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT , 5 . DR 6 . GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN