Victory Financial Services Pvt. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 854/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90360 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 19-03-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 04-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: T BANUSEKAR
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! # , $ & BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ I.T.A.NO . 854/MDS/2014 ( / ASSESSMENT YEAR: 2005-06) M/S. VICTORY FINANCIAL SERVICES PVT.LTD., RAJA ANNAMALAI BUILDING, 4 TH FLOOR, 72, MARSHALLS ROAD, CHENNAI-600 008. VS ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-III(4), CHENNAI. PAN:AAACV7673B ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. T.BANUSEKAR, C.A. /RESPONDENT BY : MR. A.V.SREEKANTH, JCIT /DATE OF HEARING : 19 TH MARCH, 2015 /DATE OF PRONOUNCEMENT : 15 TH MAY, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-III CHENNA I DATED 14.11.2013 FOR THE ASSESSMENT YEAR 2005-06. 2. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE I S THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN UPHOL DING THE ADDITION OF INTEREST ACCRUED OF ` 9,00,000/- FROM M/S. ACMA INDUSTRIAL PROJECTS PVT. LTD. THE ASSESSING OF FICER WHILE COMPLETING THE ASSESSMENT NOTICED THAT ASSESS EE LENT MONIES OF ` 50,00,000/- TO M/S. ACMA INDUSTRIAL PROJECTS 2 ITA NO.854 /MDS/2014 PVT. LTD. AND NO INTEREST WAS OFFERED BY THE ASSESS EE . THE ASSESSING OFFICER NOTICED THAT ASSESSEE IN ITS NOTE S ON ACCOUNTS STATED THAT AS PER PRUDENTIAL NORMS PRESC RIBED BY THE RESERVE BANK OF INDIA FOR NON-BANKING FINANCE COMPANIES, ACCOUNTS HAVE BEEN CLASSIFIED AS SUB-STA NDARD AND NO INTEREST HAS BEEN PROVIDED FOR THE YEAR ON M /S. ACMA INDUSTRIAL PROJECTS PVT. LTD. INTEREST OF ` 9,00,000/- RECEIVABLE ON THE OUTSTANDING OF ` 50,00,000/- WILL BE ACCOUNTED FOR AS AND WHEN REALIZED. THE ASSESSING O FFICER, HOWEVER ADDED BACK ` 9,00,000/- AS INCOME OF THE ASSESSEE OBSERVING THAT JURISDICTIONAL HIGH COURT IN THE CAS E OF TAMIL NADU POWER FINANCE & INFRASTRUCTURE CORPORATION LTD . (280 ITR 491) HELD THAT PROVISIONS FOR NON-PERFORMING A SSETS AS PER RBI GUIDELINES CANNOT OVERRIDE THE STATUTORY PR OVISIONS CONTAINED IN SECTION 37(1) OF THE ACT. SINCE THE AS SESSEE IS MAINTAINING MERCANTILE SYSTEM OF ACCOUNTING ITS PRO PER COURSE IS TO ACCOUNT FOR INTEREST AS INCOME. ON AP PEAL, COMMISSIONER OF INCOME TAX (APPEALS) UPHELD THE ADD ITION HOLDING THAT EXCEPT STATING THAT ACCOUNT HAS BEEN C LASSIFIED AS SUB-STANDARD AND NO INTEREST WAS RECEIVED, IT HA S NOT BEEN ESTABLISHED WHETHER THE ACCOUNT IS SUB-STANDARD THE REFORE, 3 ITA NO.854 /MDS/2014 COMMISSIONER OF INCOME TAX (APPEALS) SUSTAINED THE ADDITION. 3. BEFORE US, COUNSEL FOR THE ASSESSEE REFERRING TO NOTIFICATION NO.DFC/119/DG(SPT)-98 DATED 31.01.199 8 SUBMITS THAT NON-PERFORMING ASSET MEANS, AN ASSE T IN RESPECT OF WHICH INTEREST HAS BEEN REMAINED PAST DU E FOR SIX MONTHS. HE ALSO INVITED OUR ATTENTION TO THE DEFINI TION OF SUB- STANDARD ASSET WHICH MEANS AN ASSET WHICH HAS BEE N CLASSIFIED AS NON-PERFORMING ASSET FOR A PERIOD NOT EXCEEDING 18 MONTHS. THEREFORE, HE SUBMITS THAT ASSESSEE HAS RECOGNIZED THIS AS NON-PERFORMING ASSET BASED ON TH E GUIDELINES OF THE RBI AND IT WAS CLASSIFIED AS SUB -STANDARD ASSET. PLACING RELIANCE ON THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. COIMBATORE LAKSHMI INVESTMENTS & FI NANCE CO.LTD., (331 ITR 229) SUBMITS THAT INTERESTS ON NON- PERFORMING ASSETS ARE NOT LEVIABLE FOR TAX ON ACCR UAL BASIS . HE SUBMITS THAT THE SAID DECISION IS SQUARELY APPLI CABLE TO THE FACTS OF THIS CASE. 4 ITA NO.854 /MDS/2014 4. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF LOWER AUTHORITIES. DEPARTMENTAL REPRESENT ATIVE FURTHER SUBMITS THAT IT IS NOT CLEAR FROM THE ACCOU NTS AS TO WHETHER THE ASSESSEE HAS RECOGNIZED THE SAID OUTST ANDING LOAN AS NON-PERFORMING ASSET OR NOT. THEREFORE, HE PLEADS THAT MATTER MAY BE REMITTED BACK TO THE ASSESSING O FFICER TO EXAMINE WHETHER SUCH ASSET IS RECOGNIZED AS NON-PER FORMING ASSET OR NOT. 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISIONS RELIED ON. THE ASSESSING OFFICER BROUGHT INTEREST ON THE LOAN TO M/S. ACMA INDUSTRIAL PROJEC T LTD. TO TAX HOLDING THAT RBI GUIDELINES CANNOT OVERRIDE STA TUTORY PROVISIONS. ASSESSING OFFICER WAS OF THE OPINION TH AT SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING THE ASSESSEE SHOULD HAVE RECOGNIZED INTEREST ON SUC H ASSET. THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE VIEW OF THE ASSESSING OFFICER. WE HAVE PERUSED THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CAS E OF CIT VS. COIMBATORE LAKSHMI INVESTMENTS & FINANCE CO.LTD., ( SUPRA) AND ALSO THE DECISION IN THE CASE OF TAMIL NADU POW ER 5 ITA NO.854 /MDS/2014 FINANCE & INFRASTRUCTURE CORPORATION LTD.(288 ITR 4 91) . THE MOST APPROPRIATE DECISION APPLICABLE TO THE FACTS O F THIS CASE IS THE DECISION IN THE CASE OF CIT VS.COIMBATORE L AKSHMI INVESTMENTS & FINANCE CO.LTD., (SUPRA).THE JURISDIC TIONAL HIGH COURT HAD CONSIDERED AN IDENTICAL ISSUE AND HE LD THAT INTEREST FOR NON-PERFORMING ASSET CANNOT BE TAXED O N ACCRUAL BASIS. WHILE HOLDING SO, THE HONBLE MADRAS HIGH CO URT HELD AS UNDER:- THE TRIBUNAL IN ITS ORDER HAD RELIED ON THE TWO D ECISIONS OF THE DIVISION BENCH OF THIS COURT IN CIT VS. ELG I FINANCE LTD. (2007) (293 ITR 357) (MAD) AND IN CIT VS. INDIA EQUIPMENT LEASING LTD. (2007) 293 ITR 350 (MAD). IN THE LATTER DECISION, IN WHICH ONE OF US I S A PARTY, HAS CONSIDERED THE CASE OF THE ASSESSEE IN RESPECT OF HIRE-PURCHASE TRANSACTIONS AND LEASING O F PLANT AND MACHINERY, HAS HELD THAT INTEREST ON 'STI CKY' LOANS NOT BEING BROUGHT INTO THE P&L ELC, BUT BEING TAKEN TO THE SUSPENSE ACCOUNT WAS AN ACCEPTED MODE OF TREATMENT OF NOTIONAL INCOME IN ACCOUNTING PRACTICE. THE FACT THAT THE ASSESSEE, ALTHOUGH GENERALLY USING THE MERCANTILE SYSTEM OF ACCOUNTING, KEPT SUCH INTEREST AMOUNT IN A SUSPENSE ACCOUNT AND DID NOT BRING THOSE AMOUNTS TO THE P&L AJC, SHOWED THAT THE ASSESSEE WAS FOLLOWING A MIXED SYSTEM OF ACCOUNTING BY WHICH SUCH INTEREST WAS INCLUDED IN ITS INCOME ONLY WHEN IT WAS ACTUALLY RECEIVED. THE CBDT CIRCULAR PERMITTED SUCH INTEREST TO BE EXCLUDED FROM INCOME, IF FOR THREE YEARS SUCH INTEREST WAS NOT ACTUALLY RECEIVED. ON THAT BASIS I T GRANTED THE RELIEF IN FAVOUR OF THE ASSESSEE. THE S AID JUDGEMENT HAS BEEN SUBSEQUENTLY REFERRED TO BY ANOTHER DIVISION BENCH. IF NO INCOME WAS RECOGNISED AT ALL FROM SUCH ASSET, THERE WAS NO QUESTION OF APPLYING THE PRINCIPLE OF ACCRUAL. THE PRINCIPLE OF 'ACCRUAL OF INCOME' COMES INTO PLAY ONLY WHEN THE INCOME WAS RECOGNISED. IN THE PRESENT CASE, THE ASSESSEE HAS CLASSIFIED ITS ASSETS ON THE BASIS OF THE NOTIFICATION ISSUED BY THE RESERVE BANK OF INDIA AN D FOUND THAT THE APPELLANT UNDER THE CATEGORY OF NON- PERFORMING ASSETS. FROM SUCH PERFORMING ASSETS, THE ASSESSEE HAD NOT RECOGNISED ANY INCOME IN 6 ITA NO.854 /MDS/2014 CONCEALING THE NOTIFICATION ISSUED BY THE RBI. THEREFORE, THE ASSESSEE WAS JUSTIFIED IN NOT RECOGNISING THE INCOME AS SUCH. ONCE THAT WAS THE CASE, THERE WAS NO OCCASION TO CONSIDER WHETHER THE PRINCIPLE OF 'ACCRUAL' WOULD ARISE OR NOT. IN THAT VIEW OF THE MATTER, THE TRIBUNAL REVERSED THE FINDING OF THE LOWER AUTHORITY AND THE ISSUE HAS BEEN HELD AGAINST THE REVENUE. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE JURISDI CTIONAL HIGH COURT IN THE CASE OF CIT VS. LG FINANCE LTD. (293 ITR 357) AND THE HONBLE DELHI HIGH COURT IN THE CASE O F CIT VS. VASISTH CHAY VYAPAR LTD. (330 ITR 440). 6. IN THE CASE OF TAMIL NADU POWER FINANCE & INFRASTRUCTURE CORPORATION LTD. (SUPRA) THE ISSUE B EFORE THE HONBLE HIGH COURT WAS WHETHER THE PROVISION FOR NO N- PERFORMING ASSET DEBITED TO PROFIT AND LOSS ACCOUN T CAN BE ALLOWED AS BAD DEBT UNDER SECTION 36(1)(VII) OF THE ACT OR NOT. THIS DECISION HAS NO APPLICATION TO THE FACTS ON HA ND. AS IN THAT CASE ASSESSEE WAS CLAIMING EXPENDITURE BY WAY OF BAD DEBT. SUCH BAD DEBT WAS RECOGNIZED AS PER RBI NORM S. IN THE CASE ON HAND, THE ISSUE WAS WHETHER INTEREST ON NON- PERFORMING ASSET CAN BE TAXED ON ACCRUAL BASIS WHE N THE ASSESSEE WAS NOT EARNING ANY INCOME. THE APPROPRIA TE DECISION TO THE FACTS OF THE CASE IS CIT VS. COIMB ATORE 7 ITA NO.854 /MDS/2014 LAKSHMI INV. & FINANCE CO.LTD.,(SUPRA). THEREFORE, RESPECTFULLY FOLLOWING THE SAID DECISION, WE HOLD T HAT INTEREST ON NON-PERFORMING ASSET IS NOT LEVIABLE TO TAX ON A CCRUAL BASIS. HOWEVER, FOR THE LIMITED PURPOSE, WE DIRECT THE ASSESSING OFFICER TO EXAMINE WHETHER THE ASSET HAS BECOME NON-PERFORMING ASSET OR NOT AND WHETHER THE ASSESS EE HAS CLASSIFIED THAT ASSET AS NON-PERFORMING ASSET OR NO T. SUBJECT TO VERIFICATION, THE CLAIM OF THE ASSESSEE ON THIS ISSUE IS DIRECTED TO BE ALLOWED. 7. THE NEXT ISSUE IN THE GROUNDS OF APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEAL S) ERRED IN UPHOLDING THE ADDITION MADE OF ` 4,78,054/- TREATING THE EXPENSES INCURRED FOR IMPROVEMENT OF LEASEHOLD BUILDING AS CAPITAL EXPENDITURE. THE ASSESSING OFFICER WHIL E COMPLETING THE ASSESSMENT NOTICED THAT ASSESSEE SPE NT ` 5,03,220/- FOR IMPROVEMENT OF LEASE HOLD BUILDING AND HAS BEEN CLAIMED AS REVENUE EXPENDITURE. HE OBSERVED TH AT ASSESSEE COMPANY MOVED TO NEW PREMISES WHICH WAS TA KEN ON LEASE AND INCURRED EXPENDITURE FOR WOODEN AND OT HER INTERIOR WORKS. THE ASSESSING OFFICER DISALLOWED TH E SAID 8 ITA NO.854 /MDS/2014 EXPENSES TREATING THE EXPENDITURE AS CAPITAL EXPEND ITURE AND ALLOWED DEPRECIATION @ 10% ON SUCH WOODEN AND INTE RIOR WORKS. ON APPEAL, COMMISSIONER OF INCOME TAX (APPEA LS) UPHELD THE DISALLOWANCE OBSERVING THAT ASSESSEE IS STILL OCCUPYING THE LEASED PREMISES AND THE EXPENDITURE R ESULTED IN ENDURING BENEFIT. 8. COUNSEL FOR THE ASSESSEE SUBMITS THAT EXPENDITUR E WAS INCURRED FOR WOODEN AND INTERIOR WORKS AND TO MAKE THE LEASED PREMISES SUITABLE FOR OFFICE/BUSINESS PURPOS ES. HE SUBMITS THAT ASSESSEE IS NOT DERIVING ANY ENDURING BENEFIT BY INCURRING SUCH EXPENSES. COUNSEL PLACES RELIANCE ON THE DECISIONS OF THE HONBLE MADRAS HIGH COURT IN THE F OLLOWING CASES:- I) THIRU AROORAN SUGARS LTD. VS. DCIT (2013) (31 TAXMANN.COM 3) II) CIT VS. HARIDAS BHAGATH & CO.P.LTD., (240 ITR 1 69) III) CIT VS. AYESHA HOSPITALS P.LTD. (292 ITR 266) 9. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF LOWER AUTHORITIES AND HE PLACES RELIANCE ON THE 9 ITA NO.854 /MDS/2014 DECISION OF HIGH COURT OF PUNJAB IN THE CASE OF UTT AR BHARAT EXCHANGE LTD. VS. CIT (55 ITR 550). 10. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES AND THE DECISIONS RELIED ON. ON GOING THROUGH THE ASSESSMENT ORDER, WE FIND THAT THE ASSESSEE HAS INC URRED EXPENSES ON LEASED PREMISES TOWARDS WOODEN AND INTE RIOR WORKS FOR OFFICE PURPOSES. IN THE CASE OF THIRU ARO ORAN SUGARS LTD. VS. DCIT (SUPRA) THE HONBLE HIGH COU RT HELD THAT EXPENDITURE INCURRED ON TEMPORARY STRUCTURES B Y MEANS OF FALSE CEILING AND OFFICE RENOVATION ON LEASED PR EMISES ARE DEDUCTIBLE AS REVENUE EXPENDITURE. IN THE CASE OF CIT VS. HARIDAS BHAGATH & CO.P.LTD., (SUPRA) THE HONBLE HIGH COURT HELD THAT EXPENDITURE PROVIDED ON EXTRA AME NITIES IN LEASEHOLD PREMISES I.E. SOME CONSTRUCTION WORK TO MAKE THE PROPERTY SUITABLE FOR BUSINESS PURPOSES IS REVENUE EXPENDITURE AND NO CAPITAL ASSET BROUGHT INTO EXIST ENCE. IN THE CASE OF CIT VS. AYESHA HOSPITALS P.LTD. (SUPRA) , THE HONBLE HIGH COURT HELD THAT EXPENDITURE ON PAINTIN G, RELAYING OF DAMAGED FLOORS, PARTITIONS ETC. IN LEASEHOLD PR EMISES ARE ALLOWABLE AS REVENUE EXPENDITURE. THE HIGH COURT F URTHER 10 ITA NO.854 /MDS/2014 HELD THAT SUCH EXPENDITURE CANNOT BE CONSIDERED TO BE A CAPITAL EXPENDITURE OF THE NATURE MENTIONED IN EXPL ANATION 1 TO SECTION 32(1) OF THE ACT. ALL THESE DECISIONS S UPPORT THE CONTENTION OF THE ASSESSEE THAT EXPENDITURE ON WOOD EN AND INTERIOR WORKS ON THE LEASED PREMISES INCURRED FOR OFFICE PURPOSES IS ALLOWABLE AS REVENUE EXPENDITURE. THUS, RESPECTFULLY FOLLOWING THE ABOVE CITED DECISIONS, W E DIRECT THE ASSESSING OFFICER TO ALLOW THIS EXPENDITURE AS REVE NUE EXPENDITURE. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MAY, 2015. SD/- SD/- ( # ) ( & (# ) ( CHANDRA POOJARI ) ( CHALLA NAGENDRA PRASAD ) * / ACCOUNTANT MEMBER ( * / JUDICIAL MEMBER ( /CHENNAI, , /DATED 15 TH MAY, 2015 SOMU ./ 0/ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. 1 () /CIT(A) 4. 1 /CIT 5. / 5 /DR 6. /GF .