ITO, Trivandrum V. M/S Muthoot Bankers and Financiers, Trivandrum

ITA 788/COCH/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61479 (ITAT-COCHIN)
• Duration Of Justice: 3 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2012
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 08-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 26-06-2008
• Court: TRIBUNAL
• Department Lawyers: R SIVAKUMAR
• Keywords: Notional interest
• Section: 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A NO. 788/COCH/2008 ASSESSMENT YEAR: 2005-06 THE INCOME TAX OFFICER, WARD- 1(2), TRIVANDRUM. VS. M/S. MUTHOOT BANKERS & FINANCIERS, MUTHOOT BUILDINGS, PUNNEN ROAD, TRIVANDRUM. [PAN:AAEFM 0925G] (REVENUE-APPELLANT) (ASSESSEE -RESPONDENT) REVENUE BY SHRI R.SIVAKUMAR, JR. DR ASSESSEE BY SHRI R. SREENIVASAN, FCA DATE OF HEARING 08/03/2012 DATE OF PRONOUNCEMENT 27/04/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 18-02-2008 PASSED BY LD CIT(A)-I AND IT RELATES TO THE ASSESSMENT YEAR 2 005-06. 2. THE GROUNDS RAISED BY THE REVENUE GIVE RISE TO THE FOLLOWING ISSUES:- A) ADDITION ON THE BASIS OF AGREEMENT FOR TRANSF ER OF ASSETS. B) DISALLOWANCE OF INTEREST PAID TO A PARTNER. C) CASH CREDIT ADDED U/S 68 D) VIOLATION OF RULE 46A BY LD CIT(A). E) ASSESSMENT OF INTEREST ACCRUED ON ADVANCE MA DE TO SISTER CONCERNS. I.T.A. NO. 788/COCH/2008 2 3. THE FACTS RELATING TO THE ABOVE ISSUES ARE STATED IN BRIEF. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MONEY L ENDING. THE BUSINESS ASSETS OF THE ASSESSEE FIRM WERE TAKEN OVER BY M/S MUTHOOT FINCOR P LTD, A NON-BANKING FINANCIAL COMPANY IN THE SAME GROUP VIDE A BUSINESS PURCHASE AGREEMENT DATED 01.4.2004. THE AO NOTICED THAT THERE WAS DIFFERENCE BETWEEN THE BO OK VALUE OF ASSETS SO TAKEN OVER AND THE AGREED VALUE AND ADDED THE SAID DIFFERENCE TO T HE INCOME OF THE ASSESSEE. THE ASSESSEE HAD PAID INTEREST OF RS.1.57 CRORES TO ONL Y ONE OF THE PARTNERS, THOUGH THE PARTNERSHIP DEED AUTHORISED PAYMENT OF INTEREST TO ALL THE PARTNERS. THE AO CONSIDERED THE SAID ACTION OF THE ASSESSEE AS VIOLATION OF PRO VISIONS OF SEC.40(B) AND ACCORDINGLY DISALLOWED THE SAID INTEREST PAYMENT. THE AO NOTIC ED THAT A SUM OF RS.1.57 CRORES WAS FOUND INTRODUCED IN THE ACCOUNT OF ONE OF THE PART NERS. THE AO ADDED THE SAME U/S 68 OF THE ACT, AS THERE WAS FAILURE ON THE PART OF THE AS SESSEE TO PROPERLY EXPLAIN THE SOURCES THERE OF. THE ASSESSEE HAD GIVEN ADVANCES TO THE T UNE OF RS.36.70 CRORES TO THREE OF ITS SISTER CONCERNS. THE ASSESSEE DID NOT COLLECT ANY INTEREST FROM THE SAID ADVANCES. THE AO CALCULATED INTEREST @ 12% P.A. AND ADDED THE SAM E ON THE GROUND THAT THE ASSESSEE IS SUPPRESSING REAL INCOME UNDER THE GUISE OF FOLLOWIN G CASH SYSTEM OF ACCOUNTING. ALL THESE ADDITIONS, EXCEPT A SMALL AMOUNT, WERE DELETE D BY LD CIT(A). HENCE THE REVENUE IS IN APPEAL BEFORE US. 4. THE FIRST ISSUE PERTAINS TO THE ADDITION MAD E ON ACCOUNT DIFFERENCE BETWEEN THE BOOK VALUE OF ASSETS AND THE AGREED VALUE FOR THE PURPOS E OF TRANSFER. THE AO MADE THE ADDITION ON THE FOLLOWING ITEMS:- A) CASH IN HAND RS.36,217/- B) DIFFERENCE IN VALUE OF FIXED ASSETS RS.2,83,2 00/- C) INTEREST RECEIVABLE RS.66,09,167/- D) GOLD LOAN BALANCE DIFFERENCE RS.7,09,075/-. THE LD CIT(A) DELETED THE ADDITIONS LISTED AS (A), (B) AND (D) ABOVE ON THE BASIS OF CERTAIN DOCUMENTS FILED BEFORE HIM, WITHOUT CONFRONTING THE SAME WITH THE AO. IT IS NOT SHOWN TO US THAT THESE DOCUMENTS WERE ALSO FILED BEFORE T HE AO. HENCE, IN OUR VIEW, THERE IS VIOLATION OF RULE 46A OF THE INCOME TAX RULES. ACC ORDINGLY, WE SET ASIDE THE ORDER OF LD I.T.A. NO. 788/COCH/2008 3 CIT(A) ON THE ABOVE SAID THREE ITEMS AND RESTORE TH E SAME TO THE FILE OF AO FOR FRESH EXAMINATION. THE REMAINING ITEM REPRESENTS INTERE ST RECEIVABLE AMOUNT. IT IS STATED THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNT. WHEN THE OUTSTANDING BUSINESS ASSETS WERE TRANSFERRED, THE ASSESSEE HAS CALCULATED THE I NTEREST ACCRUED ON THE ADVANCES AND SHOWN IT AS INTEREST RECEIVABLE. THE ASSESSEE, H OWEVER, DID NOT OFFER THE SAID INTEREST INCOME ON THE GROUND THAT IT IS FOLLOWING CASH SYST EM OF ACCOUNTING AND IT HAS NOT RECEIVED SAID INTEREST INCOME OF RS.66,09,167/- . THE LD CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ACCEPTING THAT CONTENTION OF THAT ASSE SSEE THAT IT IS NOT REQUIRED TO BE OFFERED AS INCOME UNDER THE CASH SYSTEM OF ACCOUNTING FOLLO WED BY THE ASSESSEE. 5. WE ARE UNABLE TO ACCEPT THE VIEW OF THE LD C IT(A). WHEN THE ASSESSEE HAS TRANSFERRED THE BUSINESS ASSETS (HERE LOAN BALANC ES) TO SOME OTHER CONCERN, THERE IS NO QUESTION OF ASSESSEE RECEIVING ANY INCOME FROM THOS E BUSINESS ASSETS, WHICH HAVE BEEN TRANSFERRED ALREADY. IT IS THE BUYER OF THOSE BUSI NESS ASSETS, WHO WOULD RECEIVE THE INCOME THERE FROM. BY CONSIDERING THIS LEGAL POSIT ION ONLY, THE ASSESSEE HAS CALCULATED THE INTEREST RECEIVABLE FROM THOSE BUSINESS ASSETS UP TO THE DATE OF TRANSFER AND CLAIMED THE SAME FROM THE BUYER. IN OUR VIEW, THE MOMENT T HE 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 BUY ER AGREES TO PAY THE INTEREST 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 PA YMENT OF THE VERY SAME AMOUNT TO THE BUYER. IN THE INSTANT CASE, THE ABOVE SAID CONSTRU CTIVE RECEIPT AND PAYMENT HAVE ALSO BEEN ACKNOWLEDGED BY BOTH THE PARTIES BY INCLUDING THE INTEREST RECEIVABLE AMOUNT IN THE CONSIDERATION FOR THE TRANSFER. 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/- IN THE HANDS OF THE ASSESSEE. ACCOR DINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ADDITION AND RESTORE THAT OF THE AO. I.T.A. NO. 788/COCH/2008 4 5. THE NEXT ISSUE RELATES TO THE DISALLOWANCE O F INTEREST PAID TO ONE OF THE PARTNERS. THE ASSESSEE FIRM PAID INTEREST ONLY TO ONE OF THE PART NERS, THOUGH THE PARTNERSHIP DEED AUTHORISED PAYMENT OF INTEREST TO ALL THE PARTNERS. SINCE THERE WAS FAILURE ON THE 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 PROVISIONS O F SEC. 40(B) AND ACCORDINGLY DISALLOWED THE INTEREST OF RS.1.57 CRORES PAID TO O NE 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 S ECTIONS 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCO ME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION,- .......................... (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 I S 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 DATE OF SUCH PARTNERSHIP DEED) FOR WHI CH SUCH PAYMENT WAS NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, ANY EA RLIER PARTNERSHIP DEED, SO, HOWEVER, THAT THE PERIOD 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 PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED IN SO FAR A S SUCH AMOUNT EXCEEDS THE AMOUNT CALCULATED AT THE RATE OF TWELVE PER CENT SI MPLE INTEREST PER ANNUM. ON A PLAIN READING OF THE ABOVE SAID PROVISIONS, WE UNDERSTAND THAT THE PAYMENT OF INTEREST TO ANY PARTNER IS LIABLE TO THE DISALLOWED ONLY IF IT IS NOT AUTHORISED OR IS 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 TH AT THE SUCH PAYMENT WAS NOT AUTHORISED OR IS NOT IN ACCORDANCE WITH ANY EARLIER PARTNERSHI P DEED. ANOTHER CONDITION IS THAT THE I.T.A. NO. 788/COCH/2008 5 INTEREST IS ALLOWABLE AT THE RATE OF 12% SIMPLE INT EREST, IF THE PARTNERSHIP DEED PROVIDES FOR HIGHER RATE. IN THE INSTANT CASE, NONE OF THE CONDITIONS IS APPLICABLE 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 WITH THE PARTNERSHIP DEED AND IT IS A T THE RATE PRESCRIBED IN THE ABOVE SAID SECTION AND ALSO FOR THE PERIOD FOR WHICH THERE IS AUTHORISATION FROM THE PARTNERSHIP DEED. THE INTEREST IS ALSO STATED TO HAVE BEEN PAID @ 12% SIMPLE INTEREST. THOUGH THE ASSESSEE DID NOT PAY INTEREST TO OTHER PARTNERS, SUCH KIND O F SITUATION WAS NOT DISCUSSED IN THE ACT AND HENCE THE SAME CANNOT BE CONSIDERED AS VIOLATIO N OF PROVISIONS OF SEC. 40(B) OF THE ACT. ACCORDINGLY WE UPHOLD THE ORDER OF LD CIT(A) ON THIS ISSUE. 7. THE NEXT ISSUE RELATES TO THE CASH CREDIT OF RS.1.57 CRORES ADDED U/S 68 OF THE ACT. THOUGH THE ASSESSEE FILED LETTERS DATED 22.12.2007 AND 18.12.2007 EXPLAINING THE SOURCES FOR THE ABOVE SAID CASH CREDIT, THE CASE OF THE AO IS THAT THE ASSESSEE DID NOT FURNISH THE RELEVANT ACCOUNT COPIES IN SUPPORT OF THE SAID SOUR CE. HENCE, THE AO ADDED THE CASH CREDIT OF RS.1.57 CRORES BY INVOKING THE PROVISIONS OF SEC.68 OF THE ACT. WE NOTICE THAT THE LD CIT(A) DELETED THE SAME BY CONSIDERING THE L EDGER ACCOUNT COPIES FILED BEFORE HIM. APPARENTLY, THE LD CIT(A) DID NOT AFFORD AN O PPORTUNITY TO THE AO TO CONSIDER THE EVIDENCES FILED BEFORE HIM. ACCORDINGLY, WE SET AS IDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WI TH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH IN ACCORDANCE WITH THE LAW. THE ASSESSEE IS ALSO DIRECTED TO FURNISH ALL THE DETAILS THAT MAY BE CALLED FOR BY THE AO IN THIS REGARD. 8. THE LAST ISSUE RELATES TO THE ASSESSMENT OF INTEREST ACCRUED ON ADVANCES MADE TO THE SISTER CONCERNS OF THE ASSESSEE. THE AO NOTICED T HAT A SUM OF RS.36.70 CRORES WAS DUE TO THE ASSESSEE FROM THREE SISTER CONCERNS, VIZ.,MUTHO OT CHITTY FUND KOZHENCHERRY, MUTHOOT BANKERS TRIVANDRUM AND MUTHOOT FINCORP LTD. IN THE IMMEDIATELY PRECEDING YEAR, THE ASSESSEE HAD SHOWS INTEREST RECEIPTS FROM THE ABOVE SAID CONCERNS. DURING THE YEAR UNDER CONSIDERATION, THOUGH THERE WERE TRANSACTIONS OF TR ANSFER OF BALANCES BETWEEN THE SISTER CONCERNS, YET NO INTEREST WAS SHOWN AS RECEIVED FRO M THEM. THE AO TOOK THE VIEW THAT THE ASSESSEE HAS FORGONE THE INTEREST AMOUNT, WHICH IT IS LEGITIMATELY ENTITLED TO, BY NOT I.T.A. NO. 788/COCH/2008 6 CHARGING INTEREST. SINCE THERE WERE TRANSFER OF BA LANCES BETWEEN THE SISTER CONCERNS, THE AO ALSO TOOK THE VIEW THAT THE ASSESSEE HAS NOT FOL LOWED CASH SYSTEM OF ACCOUNTING. ACCORDINGLY, THE AO PROCEEDED TO COMPUTE THE INTERE ST ON THE DEBIT BALANCES OUTSTANDING IN THE NAME OF SISTER CONCERN @ 12%. ACCORDINGLY H E COMPUTED INTEREST AT RS.4.40 CRORES AND ADDED THE SAME TO THE TOTAL INCOME OF TH E ASSESSEE. 9. FROM THE FOREGOING DISCUSSIONS, WE NOTICE TH AT THE AO HAS PROCEEDED TO COMPUTE THE INTEREST ON THE DEBIT BALANCES REFERRED ABOVE, WHIC H WAS OUTSTANDING IN THE NAME OF SISTER CONCERNS, ON THE BASIS OF SURMISES AND WITHOUT PLAC ING RELIANCE ON ANY MATERIAL. THE CHARGING OF INTEREST IS GOVERNED BY THE AGREEMENT E NTERED INTO BETWEEN THE TWO PARTIES. IN THE INSTANT CASE, THE AO HAS FAILED TO BRING ON RECORD ANY MATERIAL TO SHOW THAT THERE EXISTED ANY SUCH AGREEMENT. FURTHER IT IS ALSO NOT THE CASE OF THE AO THAT THERE WAS DIVERSION OF INTEREST BEARING FUNDS TO THESE SISTER CONCERNS. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO WAS NOT CORRECT IN LAW IN ASSESSIN G THE NOTIONAL INTEREST ON THESE ADVANCES. ACCORDINGLY, WE UPHOLD THE ORDER OF LD C IT(A) ON THIS ISSUE. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS TREATED AS PARTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 27-04-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 27TH APRIL, 2012 GJ COPY TO: 1. M/S. MUTHOOT BANKERS & FINANCIERS, MUTHOOT BUILD INGS, PUNNEN ROAD, TRIVANDRUM. 2. THE INCOME TAX OFFICER, WARD-1(2), TRIVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE . BY ORDER (ASSISTANT REGISTRAR) ITAT, COCHIN