DCIT, Faridabad V. Shri Purshottam Lal Gupta, Faridabad

ITA 816/DEL/2012

• Counselvise Citation: 81620114 RSA 2012
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 22-08-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 17-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J S MINHAS
• Assessee Lawyers: K K AGGARWAL
• Keywords: Capital asset; Gift; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SHRI G.D.AGARWAL, VICE PRESIDENT AND SHRI RAJPAL YADAV, JUDICIAL MEMBER I.T.A .NO-816/DEL./2012 ASSESSMENT YEAR -2008-09 DCIT, VS. PURSHOTTAM LAL GUPTA, CENT. CIRCLE II, PROP M/S METAL TRADING CO. FARIDABAD B-270, NEHRU GROUND, FARIDABAD. PAN : AALPG3224H (APPELLANT) (RESPONDENT) APPELLANT BY: SH. J.S.MINHAS, DR RESPONDENT BY: SH. K.K.AGGARWAL, CA ORDER PER RAJPAL YADAV, JM THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORDE R OF LD. CIT(A), DATED 08.11.2011 PASSED FOR AY 2008-09. IN THE FIRST GROUND OF APPEAL, REVENUE HAS PLEADED THAT LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MADE BY THE AO O UT OF THE INTEREST EXPENSES. 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE A T THE RELEVANT TIME WAS ENGAGED IN BUSINESS OF TRADING IN IRON AND STEEL. HE HAS FILED HIS RETURN OF INCOME ON 29.09.2008 DECLARING AN INCOME OF RS. 64, 04,190/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT A ND A NOTICE U/S 143(2) OF THE INCOME TAX ACT, 1961 WAS ISSUED ON 13.08.2009 W HICH WAS DULY SERVED I.T.A .NO-816/DEL/2012 2 UPON THE ASSESSEE ON 24.08.2009. ON SCRUTINY OF TH E ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE HAD PAID AN INTEREST OF RS . 55,64,108/- TO THREE PARTIES ON THE CREDIT BALANCE. HE NOTICED THE DETA ILS OF INTEREST ALONG WITH THE NAMES OF FOLLOWING CREDITORS:- S.NO. NAME OF THE CREDITOR AMOUNT OF INTEREST RATE OF INT EREST 1. M/S SURYA ROSHNI LTD. 43,52,513/- 30% 2. M/S SWASTIK PIPES LTD. 5,62,312/- 20% 3. ALLIED POLES INDIA LTD. 6,49,193/- 15% 3. ACCORDING TO THE AO, THE RATE OF INTEREST CHANGE D BY THE BANKS ON THE LOAN ADVANCED DURING THIS YEAR WAS IN BETWEEN 9-12% . HE OBSERVED THAT THE ASSESSEE HAS ALSO RAISED LOANS FROM THE BANKS, WHER E HE PAID INTEREST IN BETWEEN 9-12%. THEREFORE, THE AO CONFRONTED THE AS SESSEE AS TO WHY THE INTEREST EXPENSES TO BE ALLOWED TO THE EXTENT OF 12 % AS PAYABLE ON THE CREDIT BALANCE OF THE THREE PARTIES. IN RESPONSE TO THE Q UERY OF AO, IT WAS CONTENDED BY THE ASSESSEE THAT INTEREST WAS PAID AG AINST THE DEBIT NOTES RAISED BY THESE PARTIES FOR LATE PAYMENTS MADE AGAI NST COST OF MATERIAL SUPPLIED TO THE ASSESSEE. NONE OF THE PARTIES WAS COVERED U/S 40A(2)(B) OF THE INCOME TAX ACT. LD. AO DOES NOT FIND MERIT IN THE EXPLANATION OF THE ASSESSEE. HE WAS OF THE VIEW THAT ASSESSEE HAS EXT ENDED UNDUE BENEFIT BY PAYING INTEREST MORE THAN 12% TO THESE PARTIES. TH OUGH, THE AO HAS NOT I.T.A .NO-816/DEL/2012 3 DISCUSSED THESE ASPECTS PACIFICALLY, BUT FROM THE P ERUSAL OF THE ASSESSMENT ORDER, IT REVEALS THAT IN THE OPINION OF THE AO, 12 % INTEREST OUGHT TO HAVE BEEN PAID ON THE CREDIT BALANCE. THE HIGHER RATE O F INTEREST PAID BY THE ASSESSEE IS NOT FOR BUSINESS EXIGENCIES. HE ALLOWED THE INTEREST EXPENSES TO THE ASSESSEE AT 12% AND MADE THE DISALLOWANCE OF TH E REST OF THE AMOUNT. AN ADDITION OF RS. 29,66,272/- HAS BEEN MADE. 4. DISSATISFIED WITH THE DISALLOWANCE, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). HE CONTENDED THAT IN AY 2007-08, SIMILAR DISALLOWANCE WAS MADE BUT THAT DISALLOWANCE WAS DEL ETED BY THE LD. CIT(A). THE TRIBUNAL HAS ALSO UPHELD THE ORDER OF THE LD. CIT(A). IT WAS ALSO CONTENDED BEFORE THE LD. CIT(A) THAT PARTIES A RE NOT COVERED U/S 40A(2)(B) OF THE INCOME TAX ACT. THE HIGHER RATE O F INTEREST, EVEN IF, PAID BY THE ASSESSEE, THAT WAS PAID ON ACCOUNT OF BUSINE SS EXIGENCIES AND THERE WAS DIRECT NEXUS OF THE INTEREST PAYMENT VIZ-A-VIZ THE REQUIREMENT OF BUSINESS. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT, RENDERED IN THE CASE OF CIT VS DALMIA C EMENT REPORTED IN 254 ITR 377. LD. CIT(A) HAS DELETED THE DISALLOWANCE. 5. BEFORE US, LD. COUNSEL FOR THE ASSESSEE, AT THE VERY OUTSET, SUBMITTED THAT ISSUE IN DISPUTE IS SQUARELY COVERED BY ORDER OF THE ITAT PASSED IN ITA NO. 2656/DEL/2010 IN ASSESSEES OWN CASE FOR AY 200 7-08. HE POINTED OUT THAT IN AY 2007-08, THE INTEREST PAID TO M/S ALLIED POLES INDIA LTD. AND M/S I.T.A .NO-816/DEL/2012 4 SURYA ROSHINI LTD. WAS ALLOWED TO THE ASSESSEE TO T HE EXTENT OF 21%. ON THE OTHER HAND, LD. DR CONTENDED THAT A LITTLE HIGHER R ATE OF INTEREST PAID ON UNSECURED LOANS THEN THE BANKS RATES CAN BE JUSTIFI ED, BUT NOT AT THE RATE OF 30%. THIS RATE WAS NOT FOR THE PURPOSE OF BUSINESS . 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AND GONE THROUGH THE RECORD CAREFULLY. SECTION 36(1)(III) OF THE INCOM E TAX ACT, 1961, PROVIDES THAT AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION, BE ALLOWED AS DEDUCTION TO THE ASSESSEE. THE CASE OF THE ASSESSEE IS THAT HE HAS PAID INTEREST TO THE CR EDITORS ON THEIR CREDIT BALANCE WHICH ARISES ON ACCOUNT OF MATERIAL SUPPLIED BY THE M TO THE ASSESSEE. THEY HAVE RAISED DEBIT NOTES INCLUDING INTEREST AMOUNT. THERE IS NO DISPUTE THAT CREDIT BALANCE IS THE RESULT OF A BUSINESS TRANSACT ION. THEY ARE NOT TO BE ENTITIES WHO COMES WITHIN THE AMBITS OF SECTION 40A (2)(B) OF THE INCOME TAX ACT, WHICH CAN SUGGEST THAT THE ASSESSEE HAS EX TENDED UNDUE BENEFIT TO THE INTERESTED PERSONS. THEREFORE, HE CLAIMED THAT NO DISALLOWANCE OUT OF THE EXPENSES CAN BE MADE. THE ENTITIES WHO HAVE SUPPLI ED GOODS TO THE ASSESSEE MAY NOT FALL WITHIN THE AMBIT OF SECTION 40A(2)(B) OF THE INCOME TAX ACT BUT THAT DOES NOT MEAN THAT AO CANNOT EXAMINE THE V ERACITY AND GENUINENESS OF THE EXPENSES INCURRED BY THE ASSESSEE. THE MARK ET RATE OF INTEREST AT THE RELEVANT POINT OF TIME WAS IN BETWEEN 9-12%. THIS CREDIT BALANCE HAS ARISEN ON ACCOUNT OF BUSINESS TRANSACTIONS. IN A WAY, THE Y ARE UNSECURED LOANS, THE I.T.A .NO-816/DEL/2012 5 ASSESSEE NEED NOT FURNISH ANY SECURITY FOR AVAILING THIS CREDIT FACILITY FROM THE SUPPLIERS. THUS, HE CAN BE JUSTIFIED TO PAY A LITTLE HIGHER RATE OF INTEREST THEN THE MARKET RATE. NO PRUDENT BUSINESSMAN WOULD PAY INTEREST MORE THAN DOUBLE OF THE MARKET RATE TO SUPPLIER. THUS, THE P AYMENT OF INTEREST @ 30% IS UNJUSTIFIABLE. IN THE YEAR 2007-08, TRIBUNAL HA S ALLOWED INTEREST PAYMENT ON THE CREDIT BALANCE TO THE EXTENT OF 21%. FOLLOW ING THE TRIBUNALS ORDERS IN AY 2007-08, WE DIRECT THE AO TO RESTRICT DISALLO WANCE IN THIS ASSESSMENT YEAR BEYOND 21% OF THE INTEREST. LD. AO SHALL CARR IED OUT THIS EXERCISE AFTER HEARING THE ASSESSEE. IN THIS EXERCISE, THE INTERE ST @ 9% WOULD BE DISALLOWABLE ONLY IN THE CASE OF M/S SURYA ROSHINI LIMITED BECAUSE THE INTEREST RATE TO THE OTHER CREDITORS IS LESS THAN 2 1%. IN THIS WAY, GROUND NO-1 IS ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE NEXT GROUND OF APPEAL, THE GRIEVANCE OF T HE REVENUE IS THAT LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY T HE AO ON ACCOUNT OF LONG TERM CAPITAL GAIN. THE BRIEF FACTS OF THE CAS E ARE THAT ASSESSEE HAS SHOWN LONG TERM CAPITAL GAIN OF RS. 1,78,468/-. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT TWO PROPERTIES NAMELY PLOT NO-10, SECTOR-23, FARIDABAD AND SSI PLOT NO-3, NEHRU GROUN D, FARIDABAD WERE SOLD DURING THE YEAR. THESE PROPERTIES WERE ACQUIRED BY INHERITANCE. 8. IN BRIEF, THE DISPUTE BETWEEN THE ASSESSEE AND T HE AO IS THAT THESE PROPERTIES WERE PURCHASED BY THE PREVIOUS OWNER ON 05.12.1995 AND I.T.A .NO-816/DEL/2012 6 02.09.1997. SH. AJAY GUPTA, SON OF ASSESSEE AND TH E ASSESSEE HIMSELF INHERITED THE PROPERTY IN AY 2002-03. THE PURCHAS E COST OF THE PLOT BEARING NO.-10, SECTOR-23 IS RS. 75,080/- AND THE PLOT SSI, PLOT NO-3, NEHRU GROUND WAS RS. 1,74,000/-. THE ASSESSEE, SH. P.L.GUPTA AN D HIS SON HAS 1/3 RD SHARE EACH OF THESE PROPERTIES. THEY TOOK THE INDEX COST OF THE PROPERTY FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAIN AS WAS AVAIL ABLE IN THE HANDS OF THE PURCHASER FROM WHOM THEY HAVE INHERITED THE PROPERT Y. THE AO WAS OF THE VIEW THAT INDEX COST OF THE PROPERTY IS TO BE TAKEN FROM THE DATE WHEN THE ASSESSEE, I.E SELLER BECOME THE OWNER OF THE PROPER TY. MEANING, THEREBY THE INDEX COST OUGHT NOT TO BE TAKEN AS ON 05.12.1995 O R 02.12.1997, IT SHOULD BE TAKEN FROM AY 2002-03 WHEN ASSESSEE AND HIS SON SH. AJAY GUPTA BECOME THE OWNER OF THE PROPERTY. THE AO RE-COMPUT ED THE CAPITAL GAIN AND MADE THE ADDITION. ON APPEAL, LD. CIT(A) HAS H ELD THAT INDEXATION BENEFIT WOULD BE GIVEN TO THE ASSESSEE FROM THE DAY , PREVIOUS OWNER WHO PURCHASED THE PROPERTY AND NOT FROM THE AY 2002-03. ACCORDINGLY, LD. CIT(A) DELETED THE ADDITION. 9. AT THE VERY OUTSET, LD. COUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT ISSUE IN DISPUTE IS SQUARELY COVERED IN FAVOUR OF T HE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS MANJULA J. SHAH REPORTED IN 318 ITR (AT) PAGE 417. I.T.A .NO-816/DEL/2012 7 ON THE OTHER HAND, LD. DR WAS UNABLE TO CONTROVERT THE CONTENTIONS OF LD. COUNSEL FOR THE ASSESSEE. 10. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AN D GONE THROUGH THE RECORD CAREFULLY. THE CONTROVERSY BETWEEN THE ASSE SSEE AND THE AO RELATES TO THE DATE OF INDEXATION. ACCORDING TO THE ASSESS EE FOR COMPUTING THE CAPITAL GAIN, THE DATE OF INDEXATION WOULD BE TAKEN THE DATE WHEN THE PROPERTY WAS PURCHASED BY THE ORIGINAL OWNER FROM W HO HE HAS INHERITED PROPERTY. ON THE OTHER HAND, AO IS TAKING THE DAT E ON WHICH THE ASSESSEE HAS INHERITED THE PROPERTY AND BECOME THE OWNER. 11. AN IDENTICAL ISSUE WAS CONSIDERED BY THE SPECIA L BENCH. THE QUESTION FRAMED BY THE SPECIAL BENCH READ AS UNDER :- WHILE COMPUTING THE CAPITAL GAINS IN THE HANDS OF AN ASSESSEE WHO HAD ACQUIRED THE ASSET TRANSFERRED UND ER GIFT WHETHER INDEXED COST OF ACQUISITION WAS TO BE COMPU TED WITH REFERENCE TO THE YEAR IN WHICH THE PREVIOUS OWNER F IRST HELD THE ASSET OR THE YEAR IN WHICH THE ASSESSEE BECAME THE OWNER OF THE ASSET. 12. THE TRIBUNAL, AFTER A DETAILED ANALYSIS, ARRIVE D AT A CONCLUSION THAT WHILE DETERMINING CAPITAL GAIN, COST OF INDEXATION WOULD BE TAKEN FROM THE DATE FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS O WNER. THE CONCLUSIONS OF THE SPECIAL BENCH READ AS UNDER :- FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW TH AT FOR THE PURPOSE OF COMPUTING LONG-TERM CAPITAL GAINS AR ISING FROM THE TRANSFER OF A CAPITAL ASSET WHICH HAD BECOME PR OPERTY OF THE ASSESSEE UNDER GIFT, THE FIRST YEAR IN WHICH THE CA PITAL ASSET WAS I.T.A .NO-816/DEL/2012 8 HELD BY THE ASSESSEE HAS TO BE DETERMINED TO WORK O UT THE INDEXED COST OF ACQUISITION AS ENVISAGED IN EXPLANA TION (III) TO SECTION 48 AFTER TAKING INTO ACCOUNT THE PERIOD FOR WHICH THE SAID CAPITAL ASSET WAS HELD BY THE PREVIOUS OWNER. IN THAT VIEW OF THE MATTER, WE HOLD THAT THE INDEXED COST OF ACQ UISITION OF SUCH CAPITAL ASSET HAS TO BE COMPUTED WITH REFERENC E, TO THE YEAR IN WHICH THE PREVIOUS OWNER FIRST HELD THE ASS ET. ACCORDINGLY, WE ANSWER THE QUESTION REFERRED TO US IN FAVOUR OF THE ASSESSEE AND UPHOLD THE IMPUGNED ORDER OF THE L EARNED COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ISSUE. 13. THE ISSUE IN DISPUTE IS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH. IN VIEW OF THE ABOVE, WE DO NOT SEE ANY REASON TO INTERFERE IN THE ORDER OF LD. CIT(A) ON THIS ISSUE. ACCORDINGLY, SECOND GROUND OF APPEAL IS REJECTED. 14. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 21.09.2012. SD/- SD/- (G.D.AGARWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER DATED: 21/09/2012 *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI I.T.A .NO-816/DEL/2012 9