B.D. FIBER ASSOCIATES, MUMBAI V. ASST CIT CIR 16(2), MUMBAI

ITA 7853/MUM/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71629 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 21-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Keywords: Business income; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI , BEFORE SHRI SANJAY ARORA, AM AND DR. S. T. M. PAVAL AN, JM ! ' I.T.A. NO. 7853/MUM/2011 ( / ASSESSMENT YEAR: 2008-09) B. D. FIBER ASSOCIATES 32, ASHIANA, NEPEAN SEA ROAD, MUMBAI-400 036 ' VS. ASST. CIT, CIRCLE 16(2), MUMBAI # '!$! ./PAN/GIR NO. AAATB 1773 B ( #% /APPELLANT ) : ( &'#% / RESPONDENT ) #%( / APPELLANT BY : SHRI SUNIL TALATI &'#% )( / RESPONDENT BY : SHRI S. S. RANA * + ), / DATE OF HEARING : 24.10.20.13 - ./ ), / DATE OF PRONOUNCEMENT : 31.10.2013 !0' O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-27, MUMBAI (CIT(A) FOR SH ORT) DATED 06.09.2011, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT U/S .143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A. Y.) 2008-09 VIDE ORDER DATED 10.12.2010. 2 ITA NO. 7853/MUM/2011 (A.Y. 2008-09) B. D. FIBER ASSOCIATES VS. ASST. CIT 2. THE APPEAL RAISES A SINGLE ISSUE, PER ITS THREE EFFECTIVE GROUNDS, I.E., THE MAINTAINABILITY OF THE DISALLOWANCE OF INTEREST PAI D BY THE ASSESSEE, A SPECIFIC TRUST, ASSESSED AS AN AOP, ON THE CAPITAL CONTRIBUTION BY THE BENEFICIARIES, CLAIMED IN THE SUM OF RS.50,01,484/-. THE SAID CAPITAL, AS ALSO THE UN SECURED LOANS RAISED BY THE ASSESSEE- TRUST (AT RS.104.33 LACS), STAND ADVANCED BY WAY OF INTEREST BEARING LOANS, WHICH REPRESENT THE ONLY ACTIVITY BY THE ASSESSEE-TRUST. WHILE THE UNSECURED LOANS WERE AVAILED ON INTEREST-FREE BASIS, INTEREST STOOD ALLOWED TO T HE 100 BENEFICIARIES @ 1% EACH; THEIR CAPITAL CONTRIBUTIONS BEING THE SAME. AS SUCH, WHET HER THE INTEREST INCOME IS ASSESSED AS BUSINESS INCOME, I.E., AS ASSESSED, OR U/S.56 AS IN COME FROM OTHER SOURCES, I.E., AS RETURNED, THE DEDUCTION FOR THE INTEREST PAID, WHIC H IS APART FROM THE SHARE IN THE INCOME OF THE BENEFICIARIES (I.E., AGAIN, AT 1% EACH), IS DEDUCTIBLE, EITHER U/S. 36(1)(III) OR U/S.57(III). NO CASE FOR DISALLOWANCE IS THUS IN AN Y CASE MADE OUT. RELIANCE FOR THE PURPOSE IS PLACED ON THE DECISION IN THE CASE OF CIT VS. TANVI SAJNI FAMILY TRUST [1994] 209 ITR 497 (GUJ) AS WELL AS BY THE DECISIONS BY TH E TRIBUNAL FOLLOWING IT. THIS SUMS UP THE ASSESSEES CASE BEFORE THE REVENUE AS WELL AS B EFORE US. 3. IN THE REVENUES VIEW, ON THE OTHER HAND, THE SA ID INTEREST IS ONLY A FORM OF DISTRIBUTION OF THE SHARE OF THE BENEFICIARIES IN T HE INCOME OF THE TRUST, AND IS, THEREFORE, LIABLE TO BE TAXED IN ITS HANDS AT THE MAXIMUM MARG INAL RATE. THE BIFURCATION OF THE SAID INCOME OF THE BENEFICIARIES, I.E., BETWEEN THE INTE REST AND SHARE PER SE , WHICH IS ONLY IN EQUAL RATIO OF 1% EACH, WOULD NOT MAKE IT ANY LESS A SHARE IN THE INCOME OF THE TRUST. IN FACT, THIS METHOD HAS BEEN ADOPTED BY THE ASSESSEE ONLY NOW, I.E., BEGINNING A.Y. 2007- 08 (THE RETURN FOR WHICH YEAR THOUGH STOOD PROCEED U/S. 143(1)), EVEN AS THE ASSESSEE IS IN EXISTENCE SINCE 1979. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. IN OUR VIEW, THE ISSUE IS, AT HEART, VERY SIMPLE. T AX UNDER THE ACT, BE IT IN THE CASE OF A TRUST (AOP), OR ANY OTHER PERSON FOR THAT MATT ER, COULD BE LEVIED ONLY ON INCOME, I.E., THE RECEIPT/ACCRUALS (FOR A PERIOD) LESS EXPE NSES INCURRED IN RELATION TO THE ACTIVITY TOWARD RECEIPT/ACCRUAL. WHERE THE ASSESSEE CLAIMS I NTEREST AS EXPENDITURE, IT IS NECESSARY 3 ITA NO. 7853/MUM/2011 (A.Y. 2008-09) B. D. FIBER ASSOCIATES VS. ASST. CIT FOR IT TO, INTER ALIA , ESTABLISH ITS OBLIGATION TO PAY INTEREST ON THE R ELEVANT CAPITAL. THE SAID LIABILITY COULD ONLY BE RECKONED WITH REFERENCE TO THE TRUST DEED, I.E., THE CONSTITUTING (OR THE GOVERNING) DOCUMENT, IN THE INSTANT CASE. IF TH E TRUST DEED PROVIDES FOR AN OBLIGATION TO PAY/ALLOW INTEREST, WITHOUT DOUBT THE SAME WOULD HAVE TO BE ALLOWED, ELSE NOT, INASMUCH AS THERE IS NO LIABILITY TOWARD THE SAME I N THAT CASE, AND WHAT STANDS ALLOWED BY THE ASSESSEE, THOUGH OSTENSIBLY INTEREST, IS ONLY T HE SHARE OF ITS CONSTITUENT MEMBERS. IN OTHER WORDS, THE ASSESSEES CLAIM DE HORS THE SAME IS WITHOUT SUBSTANCE. THERE BEING NO FINDING IN THE ORDERS OF THE AUTHORITIES BELOW ON T HIS VITAL ASPECT, THE LD. AUTHORIZED REPRESENTATIVE (AR) WAS CALLED UPON TO PRODUCE THE TRUST DEED, SO AS TO EXAMINE THE VALIDITY OF THE ASSESSEES CLAIM WITH REFERENCE THE RETO. THIS BECOMES ALL THE MORE RELEVANT AS NO RATE OF INTEREST ON THE CAPITAL BORROWED, I.E ., W.R.T. A UNIT OF TIME, IS SPECIFIED - WHICH AGAIN COULD ONLY BE IN ACCORDANCE WITH THE SA ID DOCUMENT, BUT ONLY IN TERMS OF THE RATIO OF EACH CONTRIBUTORY IN THE TOTAL INTEREST AL LOWED, I.E., 1%. HE HOWEVER, EXPRESSED HIS INABILITY TO FURNISH THE SAME, EVEN AS HE AFFIR MED THE EXISTENCE OF THE RELEVANT CLAUSE IN THE TRUST DEED, AND TOWARD WHICH THE MATTER, HE FURTHER SUGGESTED, MAY BE EXAMINED BY THE ASSESSING OFFICER (A.O.). WE MAY FURTHER CLARIFY THAT THE RETURN OF THE INTER EST INCOME BY THE BENEFICIARIES IN THEIR OWN HANDS, AS SOUGHT TO BE EXHIBITED BY THE L D. AR WITH REFERENCE TO THEIR RETURNS (ON A SAMPLE BASIS), IS OF LITTLE CONSEQUENCE. THIS IS AS IT IS WELL-SETTLED THAT INCOME IS TO BE ASSESSED IN THE HANDS OF THE RIGHT PERSON, AND I T BEING RETURNED OR ASSESSED IN THE HANDS OF ANOTHER IS OF NO CONSEQUENCE [REFER: ITO V. CH. ATCHAIAH (1996) 218 ITR 239 (SC)]. WHERE (AND TO THE EXTENT) THE IMPUGNED INTEREST IS FOUND ASSESSABLE IN THE HANDS OF THE ASSESSEE; THE BENEFICIARIES MAY PROCEED TOWARDS REV ISION OF THEIR ASSESSMENTS, ADOPTING THE COURSE PERMISSIBLE UNDER LAW. THOUGH THE ASSESSEE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SUBSTANTIATE ITS CASE, WE CONSIDER THAT UNDER THE CIRCUMSTANCES; THE REVENUE AUTHORITIES HAVING ALSO NOT EXAMINED THE MATTER IN THE RIGHT PERSPECTIVE, AS WE LL AS IN THE INTEREST OF JUSTICE, THE MATTER NEEDS TO BE RESTORED TO THE FILE OF THE A.O. FOR NECESSARY EXAMINATION AND ISSUE OF RELEVANT FINDINGS. TOWARD THIS, WE MAY CLARIFY THAT WHERE A PROVISION IS MADE FOR THE 4 ITA NO. 7853/MUM/2011 (A.Y. 2008-09) B. D. FIBER ASSOCIATES VS. ASST. CIT SAME IN THE TRUST DEED, EVEN THOUGH SUBJECT TO THE DISCRETION OF THE TRUSTEES, THE SAME HAS TO BE GIVEN EFFECT TO, EVEN THOUGH THE AO COULD SEE K TO SATISFY HIMSELF WITH REGARD TO THE VERACITY OF THE ASSESSEES CLAIM/S IN THIS REGARD. FURTHER, WE OBSERVE THAT THE IMPUGNED INTEREST STANDS PROVIDED FOR IN THE AUDITED ACCOUNT S, AND WHICH CAN ONLY BE CONSIDERED AS IN CONSISTENCE WITH THE UNDERLYING FACTS OF THE CAS E INASMUCH AS THE AUDITED ACCOUNTS CAN ONLY BE REGARDED AS AUTHENTIC. WE MAY ALSO REFER TO THE DECISION IN THE CASE OF DEVIDAS VITHALDAS & CO. VS. CIT [1972] 84 ITR 277 (SC) IN THIS REGARD, CLARIFYING THAT WHERE A TRANSACTION IS EMBODIED IN A DOCUMENT, THE LIABILIT Y TO TAX WILL DEPEND UPON THE MEANING AND CONTENT OF THE LANGUAGE USED, INTERPRETING THE SAME IN ACCORDANCE WITH THE ORDINARY RULES OF CONSTRUCTION. THE APEX COURT EMPHASIZED TH E PRECEDENCE OF SUBSTANCE OVER FORM. THERE IS ANOTHER ASPECT OF THE MATTER. THE ASSESSEE HAS, PER ITS GROUND NO. 3, ALSO CHALLENGED THE ASSESSMENT OF THE INTEREST INCOME AS BUSINESS INCOME, I.E., AS AGAINST INCOME FROM OTHER SOURCES RETURNED BY IT. DURING HE ARING, HOWEVER, ON BEING QUESTIONED IN THE MATTER, THE LD. AR WOULD CONCEDE TO THE SAID ASPECT HAVING BEEN DECIDED AGAINST IT BY THE TRIBUNAL, HOLDING IT AS BUSINESS INCOME, WHI CH IN FACT ALSO FINDS MENTION IN THE ASSESSMENT ORDER (PARA 4). AND FURTHER, THAT THOUGH THE ASSESSEE IS IN APPEAL BEFORE THE HONBLE HIGH COURT, THE MATTER MAY BE PROCEEDED WIT H ON THE BASIS OF THE INTEREST BEING ASSESSABLE AS BUSINESS INCOME. THOUGH, WITHOUT DOUB T, AS STATED THEREIN (GROUND # 3), RES JUDICATA IS NOT APPLICABLE TO THE PROCEEDINGS UNDER THE ACT , IN VIEW OF THE SAID CONCESSION, AS WELL AS NOT BRINGING FORTH ANY CHANG E IN THE FACTS AND CIRCUMSTANCES OF THE CASE WITH REFERENCE TO THE BASE YEAR, WE CONFIRM TH E ASSESSMENT AS BUSINESS INCOME ON THE TWIN CONSIDERATIONS OF CONSISTENCY AND PRECEDEN CE. SO HOWEVER, IT IS INCUMBENT AND RELEVANT TO STATE THAT NO INTEREST HAVING BEEN ADMI TTEDLY PAID ON UNSECURED LOANS, REPRESENTING OVER 20% OF THE BORROWED CAPITAL (OF T HE TOTAL CAPITAL OF RS.451.55 LACS), THE (NEAR) EQUALITY OF THE INTEREST EARNED (RS.50.51 LA CS) WITH THAT PAID/ALLOWED (RS.50.01 LACS), IMPLIES, AT LEAST PRIMA FACIE , OF INTEREST HAVING BEEN ALLOWED AT A RATE HIGHER (ON AN AVERAGE) THAN THAT REALIZED. THE SHORTFALL, WHERE S O, WOULD STAND TO BE ALLOWED SUBJECT TO PROVING COMMERCIAL EXPEDIENCY. THE A.O. SHALL IN TH E SET ASIDE PROCEEDINGS ALSO CONSIDER THIS ASPECT OF THE MATTER. WE MAY CLARIFY THAT WE ARE NOT EXPANDING THE SCOPE OF 5 ITA NO. 7853/MUM/2011 (A.Y. 2008-09) B. D. FIBER ASSOCIATES VS. ASST. CIT THE CONTROVERSY, BUT BRINGING THE RELEVANT ISSUES T O THE FORE; THE REVENUE HAVING REJECTED THE ASSESSEES CLAIM ON THE PRELIMINARY GROUND OF T HE SAME BEING NOT MAINTAINABLE, AND WHICH WE HAVE FOUND AS SO ONLY WITH REFERENCE TO TH E CONSTITUTING DOCUMENT. THE SAME WOULD BE RELEVANT EVEN IF THE IMPUGNED CLAIM WERE T O BE PRESSED U/S.57(III). FINALLY, BEFORE PARTING, WE MAY ALSO ADD THAT OUR D ECISION IS IN CONFORMITY WITH THE DECISION BY THE HONBLE HIGH COURT IN THE CASE OF TANVI SAJNI FAMILY TRUST (SUPRA), WITH WE FINDING THE ISSUE AS FACTUALLY INDETERMINATE AND , CONSEQUENTLY, RESTORING THE MATTER TO THE FILE OF THE ASSESSING AUTHORITY TO DETERMINE, I N TERMS OF THE CONSTITUTING DOCUMENT, THE ASSESSEES LIABILITY, IF ANY, TO PAY INTEREST TO IT S BENEFICIARIES AS WELL AS ITS DEDUCTIBILITY. NEEDLESS TO ADD, HE SHALL ALLOW DUE OPPORTUNITY TO THE ASSESSEE TO STATE ITS CASE. WE DECIDE ACCORDINGLY. 5. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 1/ ,23 41, ) 5 )678 9 : , ) ,;<= ORDER PRONOUNCED IN THE OPEN COURT ON OCTOBER 31, 2 013 SD/- SD/- (DR. S. T. M. PAVALAN) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER * + MUMBAI; > DATED : 31.10.2013 ' ROSHANI , SR. PS ! ' #$%& ' &$ ' COPY OF THE ORDER FORWARDED TO : 1. #% / THE APPELLANT 2. &'#% / THE RESPONDENT 3. ! ! * ?, @ A / THE CIT(A) 4. ! ! * ?, / CIT - CONCERNED 5. BC D&,E3 ! E3 / * + / DR, ITAT, MUMBAI 6. D 4F + ' GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , * + / ITAT, MUMBAI