The ACIT, Thiruvalla V. Sri.Arun Thomas, Chengannur

ITA 497/COCH/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96827 (ITAT-COCHIN)
• Duration Of Justice: 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 14-12-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 12-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TRIPTHI BISWAS
• Keywords: Unexplained expenditure; Business income; Revision of order; Business expenditure
• Section: 143(3); 37(1); 37; 263

Judgement Text

ITA NO 497/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 . 497/COCH/2015 (ASST YEAR 2007 - 08) 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 RAVINDRAN, ADVOCATE REVENUE BY SMT TRIPTHI BISWAS. CIT - DR DATE OF HEARING 14 TH DEC 2015 DATE OF PRONOUNCEMENT 16 TH , DEC 2015 OR D ER PER GEORGE GEORGE. K. J M: THIS APPEAL, AT THE INSTANCE OF THE REVENUE, IS DIRECTED AGAINST THE CIT(A)S ORDER DATED 25.8.2015. THE RELEVANT ASSESSMENT YEAR IS 2007 - 08. 2 THE SOLITARY ISSUE THAT ARISES FOR OUR CONSIDERATION IS WHETHER THE CIT(A) IS JUSTIFIED IN HOLDING THAT PAY MENT OF INTEREST AMOUNTING TO RS.3,50,43,680/ - CLAIMED AS BUSINESS EXPENSES BY THE ASSESSEE IS ADMISSIBLE U/S 36(1) OF THE ACT AND THAT IT IS NOT HIT BY EXPLANATION TO SEC. 37(1) OF THE I T ACT. 3 BRIEFLY STATED, THE FACTS OF THE CASE ARE AS FOLLOWS: ITA NO 497/C/2015 2 TH E ASSESSEE IS AN INDIVIDUAL. HE IS A FINANCIER, WHO RUNS THE PROPRIETARY BUSINESS OF MONEY LENDING UNDER THE NAME AND STYLE OF KANNATTU ARUN FINANCIERS. THE ASSESSMENT U/S 143(3) WAS COMPLETED ON 31.12.2009 U/S 143(3) OF THE I T ACT, DETERMINING TOTAL LO SS OF RS. 40,29,390/ - . SUBSEQUENTLY, THE CIT, U/S 263 OF THE ACT, SET ASIDE THE ASSESSMENT AND DIRECTED THE AO TO RE - DO THE ASSESSMENT FOR THE FOLLOWING REASONS: ON VERIFICATION OF RECORDS, IT IS SEEN THAT WHILE COMPUTING ITS INCOME, THE ASSESSEE CLAIMED INTEREST PAID OUTSIDE THE BOOKS AMOUNTING TO RS. 3,50,43,680/ - AS EXPENSES. THE ASSESSEE ALSO OFFERED INCOME OF RS. 1,00,00,000/ - AS INCOME OUTSIDE THE BOOKS OF ACCOUNTS. INTEREST PAID OUTSIDE THE BOOKS IS NO T AN ALLOWABLE EXPENDITURE IT HAS TO BE TREATED AN UNEXPLAINED EXPENDITURE. HENCE, THE ORDER DATED 31.12.2009 IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE . 4 THE AO PURSUANT TO ORDER PASSED U/S 263 COMPLETED ASSESSMENT DISALLOWING THE INTEREST EXPENSES AMOUNTING TO RS. 3,50,43,680/ - . THE RELEVANT PORTION OF THE ASSESSMENT ORDER READ AS FOLLOWS: I) THE CENTRAL ISSUE IN THE PRESENT CASE REVOLVES ROUND THE ALLOWABILITY OF RS . 3 , 50 , 43 , 680/ - CLAIMED AS 'INTEREST ON BORROWAL FROM OUTSIDERS' . THE I SS UE TO BE DECIDED IS - WHE T HER THE SAID AMOUNT QUALIFIES FOR A DEDUCTIBLE EXPENDITURE? II) THE BORROWALS ON WHICH THE INTEREST IS CLAIMED IS NOT BROUGHT INTO THE BOOKS OF BUSINESS. INSTEAD THEY ARE BROUGHT I NTO A PERSONAL BOOK M AINTAINED BY THE ASSESSEE ..ASSESSEE CLAIMS THAT THE DEPOSITORS ARE IDENTIFIABLE AND TAX HAS BEEN DEDUCTED ON INTEREST PAYMENT TO THEM. YET THE FACT REMAINS AT THE EXPENDITURE CLAIMED IS INCURRED ON DEPOS I TS WHICH ARE RECEIVED OUTSIDE THE BOOKS OF BUSINES S. III) NOW, THE QUESTION IS - WHAT NECESSITATED THE DEPOSIT RECEIPTS OUTSIDE THE BOOKS OF BUSINESS? ASSESSEE, A MONEY LENDER, OPERATES UNDER THE KERALA MONEY LENDERS' ACT , 1958 ENACTED BY THE GOVERNMENT OF KERALA . AS PER SECTION 4(2) (III) OF THE ACT, 'DEPOSITS SHALL BE ACCEPTED ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE RESERVE BANK OF INDIA ACT, 1934 (CENTRAL ACT 2 OF 1934), AND AT SUCH RATES OF INTEREST NOT EXCEEDING THE RATES FIXED BY THE RESERVE ITA NO 497/C/2015 3 BANK OF INDIA UNDER THE NON - BANKING FINANCIAL COMPANIES (RESERVE BONK) DIRECT IONS, 1977'. PRIVATE MONEYLENDERS ARE PROHIBITED FROM ACCEPTING OR INVITING DEPOSITS FROM THE PUBLIC EXCEPT FROM THE LIST OF RELATIVES SHOWN IN SECTION 45 S OF THE RESERVE BANK OF INDIA ACT. THE ASSESSEE, BY ACCEPTING DEPOSITS FROM THE PUBLIC, HAS CLEARLY VIOLATED THE PROVISIONS OF KERALA MONEY LENDERS ACT. TO CAMOUFLAGE THE VIOLATION[ THE ACCEPTED DEPOSITS ARE NOT BROUGHT INTO THE BOOKS OF BUSINE. YET . THE EXPENSES INCURRED ON THESE DEPOSITS (INTEREST PAID ON THESE DEPOSITS) IS CLAIMED AS A DEDUCTION FROM THE BUSINESS PROFITS. THE EXPENSE CLAIMED ASSUMES THE COLOUR OF 'EXPENDITURE INCURRED FOR A PURPOSE WHICH IS PROHIBITED BY LAW'. VI) AS PER EXPLANATION 1 TO SECTION 37 'ANY EXPENDITURE 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'. ACCORDINGLY INTERES T CLAIMED ON DEPOSITS ACCEPTED FROM PUBLIC IN VI OLATION OF THE MONEY LENDER'S ACT 1958, BEING RS. 3,50 , 43,680/ - IS DISALLOWED. 5 ON APPEAL, THE CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE BY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2009 - 10 IN ITA NO.248/COCH/2012 & CO NO. 16 /COCH/2012 DATED 22.3.2013. 6 THE REVENUE BEING AGGRIEVED IS IN APPEAL BEFORE US, BY RAISING THE FOLLOWING GROUNDS: I) THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) , KOTTAYAM , IN SO FAR AS THE POINTS STATED BELOW ARE CONCERNED , IS OPPOSED TO LAW ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE . II . THE LD. COMMISSIONER OF INCOME TAX ( APPEALS ) HAS ERRED IN HOLDING THAT THE PAYMENT OF INTEREST AMOUNTING TO RS . 3 , 50 , 43 , 6801 - CLAIMED AS BUSINESS EXPENSE BY THE ASSESSEE I S ADMISSIBLE ULS 36(1 ) OF THE ACT AND THAT IT I S NOT H I T BY EXPLANATION TO SECTION 37 (1) OF THE INCOME TAX ACT . III. THE LEARNED CIT (APPEALS) OUGHT TO HAVE CONSIDERED THAT THE DEPOSITS ARE NEVER BROUGHT INTO THE REGULAR BOOKS OF THE BUSINESS BUT ARE PERSONALLY MA I NTAINED BY THE PROPRIETOR IN SEPARATE BOOKS . HENCE , THE INTEREST PAID ON ITA NO 497/C/2015 4 THESE BORROWALS CANNOT BE DEBITED AGAINST THE BUSINESS RECEIPTS . IV. THE LEARNED CIT (A) OUGHT TO HAVE APPRECIATED THE FIND I NG OF THE ASSESSING OFF I CER THAT BY ACCEPTING THE DEPOSITS FROM THE PUBLIC , THE ASSESSEE HAS CLEARLY VIOLATED THE PROVISIONS OF KERALA MONEY LENDERS ACT READ WITH SECTION 45 - S OF RBI ACT AND TO CAMOUFLAGE THE VIOLATION , THE ACCEPTED DEPOSITS ARE NEVER BROUGHT INTO THE BOOKS OF THE BUSINESS. V. THE LD . CIT (A) ' S DECISION G OES AGA I NST EXPLANATION TO SECTION 37(1) 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 HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE ' . THE INTEREST PAYMENT IS MADE FOR A PURPOSE EXPLICITLY PROHIBITED BY LAW, I . E., KERALA MONEY LENDERS ACT, AND HENCE , THIS CONSTITUTES AN ILLEGAL PAYMENT PROHIBITED BY LAW AND CANNOT BE CONSIDERED AN ALLOWABLE BUSINESS EXPENDITURE IN VIEW OF EXPLANATION TO SECTION 37 (1) OF THE ACT . VI . THE ILLEGAL PAYMENTS MENTIONED I N THE CIRCULAR NO . 772 OF THE CBDT REFERRED TO BY THE ASSESSEE ARE ONLY INDICATIVE IN NATURE AND DOES NOT ATTEMPT TO LIST OUT ALL PAYMEN TS WHICH ARE ILLEGAL . VII . THE DEPARTMENT ' S APPEALS ON IDENTICAL ISSUE IN THE CASE OF THE ASSESSEE FOR THE EARL I ER YEARS ARE PENDING BEFORE THE HON ' BLE HIGH COURT OF KERALA IN ITA NOS . 235 & 271 OF 2013 . FOR THESE AND OTHER GROUNDS THAT MAY BE ADVANCED AT THE TIME OF HEARING , THE ORDER OF THE LEARNED COMMISS I ONER OF INCOME TAX (APPEALS) ON THE ABOVE POINTS MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED . 7 AT THE VERY OUTSET, THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IN QUE STION IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2009 - 10 (SUPRA). THE LD DR FAIRLY SUBMITTED THAT THE ISSUE IS COVERED BY THE TRIBUNAL ORDER IN FAVOUR OF THE ASSESSEE. 8 WE HAVE HEARD THE RIVAL SUBM ISSIONS AND PERUSED THE MATERIAL ON RECORD. THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2009 - 10, IN IDENTICAL FACTS HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE RELEVANT FINDINGS OF THE TRIBUNAL FOR THE AY 2009 - 10 HAS BEEN REPRODUCED IN THE IMP UGNED ORDER OF THE CIT(A). ITA NO 497/C/2015 5 SINCE THE FACTS OF THIS CASE IS IDENTICAL TO THE FACTS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2009 - 10 (SUPRA), WE FOLLOW THE COORDINATE BENCH ORDER IN ITA NO.248/COCH/2012 DATED 22.3.2013 AND HOLD THAT THE CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST OF RS. 3,50,43,680/ - MADE BY THE AO. IT IS ORDERED ACCORDINGLY. 9 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH , DAY OF DEC 2015 . SD/ - SD/ - ( B P JAIN ) ( GEORGE GEORGE K ) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN: DATED 16 TH , DEC 2015 RAJ* COPY TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT , 5 . DR 6 . GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN