DCIT, Bangalore V. M/s Grameen Financial Services Pvt. Ltd., Bangalore

ITA 949/BANG/2015

• Counselvise Citation: 94921114 RSA 2015
• Duration Of Justice: 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 15-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHESADRI
• Keywords: Proportionate interest; Bad and doubtful debts
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO. 949/BANG/2015 ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(2), BANGALORE. VS. M/S. GRAMEEN KOOTA FINANCIAL SERVICES PVT. LTD. [FORMERLY GRAMEEN FINANCIAL SERVICES PVT. LTD.], J.P. NAGAR, 9 TH PHASE, AVALAHALLI, ANJANAPURA POST, BANGALORE 560 108. PAN: AAECS 7201G APPELLANT RESPONDENT APPELLANT BY : MS. NEERA MALHOTRA, CIT(DR) RESPONDENT BY : SHRI SHESADRI, CA DATE OF HEARING : 05.11.2015 DATE OF PRONOUNCEMENT : 06.11.2015 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 16.03.2015 OF THE CIT(APPEALS)-III, BANGALORE RELAT ING TO ASSESSMENT YEAR 2011-12. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF FINANCIAL SERVICES. IT FILED RETURN OF INCOME FOR THE AY 201 0-11 DECLARING A TOTAL ITA NO.949/BANG/2015 PAGE 2 OF 10 INCOME OF RS.4,12,01,740. THE ASSESSING OFFICER PA SSED AN ASSESSMENT ORDER U/S. 143(3) OF THE INCOME-TAX ACT, 1961 [THE ACT] DETERMINING THE TAXABLE INCOME AT RS.19,87,60,915 BY MAKING THE FOL LOWING ADDITIONS:- A) INTEREST ON LOAN RS.4,53,40,320 B) DISALLOWANCE U/S. 14A R.W. RULE 8D RS.1,54,63,0 81 C) BAD DEBTS DISALLOWED RS.4,52,73,321 3. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS). 4. IN THE SUBMISSIONS BEFORE THE CIT(APPEALS), THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. TIN BOX CO. (260 ITR 637) AND CIT V. HOTEL SAVERA (239 ITR 795, 796) . 5. THE BRIEF FACTS ARE THAT THE AO NOTED THAT A LOA N OF RS.2,26,07,88,659 HAS BEEN TAKEN FROM VARIOUS CONCE RNS, OUT OF WHICH RS.68,35,95,390 HAS BEEN DIVERTED FOR OTHER THAN BU SINESS PURPOSE. THE AO STATED THAT RS.31,55,47,240 HAS BEEN INVESTED IN MUTUAL FUNDS AND RS.36,80,48,150 HAS BEEN DEPOSITED IN VARIOUS FDS I N BANKS. ACCORDING TO THE AO, THE ASSESSEE HAS DEBITED RS.32,02,98,420 AS INTEREST ON VARIOUS LOANS. CONSIDERING THE DIVERSION OF LOANS FOR NON-B USINESS PURPOSES, INTEREST OF RS.9,68,22,773 HAS BEEN DISALLOWED BY T HE AO AND ADDED BACK TO THE RETURNED INCOME. 6. THE CIT(APPEALS) OBSERVED THAT THOUGH THE AO STA TED THAT THE AMOUNT HAS BEEN DIVERTED FOR NON-BUSINESS PURPOSES, BUT THE REASONS FOR ITA NO.949/BANG/2015 PAGE 3 OF 10 ARRIVING AT SUCH A CONCLUSION HAVE NOT BEEN ELABORA TED. THE CIT(A) FURTHER OBSERVED THAT THE ASSESSEE IS CARRYING ON THE BUSIN ESS OF MICRO FINANCE AND IS AN NBFC WHICH IS LICENCED BY THE RBI AND THE AMOUNTS BORROWED FROM VARIOUS BANKS AND THE NCDS ARE SPECIFICALLY RE QUIRED TO BE UTILIZED ONLY .FOR THE PURPOSE OF MICRO LENDING. BEFORE THE CIT(A), THE ASSESSEE FURNISHED A COPY OF CERTAIN SPECIFIC TERMS AND COND ITIONS TO DEMONSTRATE THAT THE TERM LOAN SANCTIONED ARE NOT TO BE USED FO R ANY PURPOSE OTHER THAN THE SANCTIONED PURPOSE. THE CIT(A) HELD THAT THE A OS FINDING OF DIVERSION OF THESE LOANS FOR NON-BUSINESS PURPOSES IS NOT BAS ED ON ANY VERIFIABLE FACTUAL BASIS AS NO SPECIFIC VIOLATION OF THE TERMS OF LOAN SANCTION HAS BEEN POINTED OUT. THE CIT(A) OBSERVED THAT THE FINDING OF THE AO THAT FIXED DEPOSITS WERE MADE FOR NON-BUSINESS PURPOSES IS WIT HOUT ANY FACTUAL BASIS AS THE AMOUNT OF RS.21.80 LAKHS WAS PLACED AS SECUR ITY/COLLATERAL WITH THE LENDERS FOR THE PURPOSE OF BORROWING AND LETTER FRO M OBC HAS BEEN FILED IN THIS REGARD. THE CIT(A) OBSERVED THAT IT WAS POINTE D OUT BY THE ASSESSEE THAT THE FIXED DEPOSITS TO THIS EXTENT ARE NOT IN T HE NATURE OF ANY DISCRETIONARY INVESTMENT BUT HAVE BEEN MADE TO ADHE RE TO THE CONDITIONS OF THE SANCTION OF THE LOANS BY THE BANKS AND THE VARI OUS INSTITUTIONS. FURTHER AN AMOUNT OF RS.7 CRORES WAS PLACED IN SHORT TERM D EPOSITS TOWARDS THE END OF THE FINANCIAL YEAR. 7. THE CIT(APPEALS) STATED THAT THE INVESTMENTS, FI XED DEPOSITS AND MUTUAL FUNDS HAVE ONLY RESULTED IN EARNING OF INTER EST OF RS.2,66,17,276 AND THE AO HAS NOT POINTED OUT THAT INTEREST EXPEND ITURE OF RS.9.68 CRORES ITA NO.949/BANG/2015 PAGE 4 OF 10 HAS BEEN INCURRED ON EARNING THIS AMOUNT WHICH IS A GAINST THE PRINCIPLES OF COMMERCIAL PRUDENCE. HE FURTHER POINTED OUT THAT T HE ASSESSEE HAS SATED THAT IT HAD SUFFICIENT RESERVE AND CAPITAL WHICH WE RE FAR IN EXCESS OF MUTUAL FUND INVESTMENTS OF RS.31,55,47,240 AND THE AO HAS NOT SPECIFICALLY POINTED OUT THAT ANY INTEREST BEARING FUNDS HAVE BE EN UTILISED FOR THE PURPOSE OF EARNING THE DIVIDEND FROM MUTUAL FUNDS. 8. THE CIT(APPEALS) HELD AS FOLLOWS:- 5.6 AFTER EXAMINING THE FACTS, IT WOULD EMERGE TH AT INTEREST INCOME EARNED FROM THE FDS HAS BEEN OFFERED AS INC OME FROM OTHER SOURCES. IT IS AN ESTABLISHED PROPOSITION THA T EXPENDITURE INCURRED IN EARNING SUCH INCOME FROM OTHER SOURCES IS AN ADMISSIBLE EXPENDITURE. AO HAS NOT GIVEN ANY FINDIN GS THAT THE FUNDS HAVE BEEN DIVERTED FOR NON BUSINESS PURPOSES OR INTEREST FREE LOANS OR PERSONAL ADVANCES. THE DEPOSITS HAVE EARNED INTEREST INCOME WHICH HAS BEEN OFFERED TO TAX. THE AOS PROPOSITION THAT PROPORTIONATE INTEREST ATTRIBUTABL E TO THE DEPOSITS IS TO BE DISALLOWED IS NOT TENABLE OR SUPPORTED BY THE FACTS OF THE CASE. 5.7 AS POINTED OUT BY THE AR OF THE APPELLANT THE INVESTMENT, FDS AND MUTUAL FUND HAVE ONLY RESULTED IN INTEREST OF RS.2,66,17,276/-. THEREFORE NO CASE HAS BEEN MADE O UT THAT INTEREST EXPENDITURE OF RS.9,68,22,773/- WHICH IS P RIMAFACIE DISPROPORTIONATE HAS BEEN INCURRED ON EARNING THIS AMOUNT. IT IS ALSO TO BE MENTIONED THAT WHILE AT PARA 4.2 OF THE ASSESSMENT ORDER IT HAS BEEN STATED THAT PROPORTIONATE INTERES T EXPENDITURE OF RS.9,68,22,773/- IN THE COMPUTATION OF TOTAL INCOME ONLY AN AMOUNT OF RS.4,53,40,320/- HAS BEEN DISALLOWED AND ADDED BACK. THIS AMOUNT THEREFORE STANDS DELETED. AS REGARDS TH E INVESTMENT IN MUTUAL FUND DISALLOWANCE IF ANY IS REQUIRED TO B E MADE U/S. 14A, AS THE SPECIFIC PROVISIONS IN RELATION TO EXEM PT INCOME IS REQUIRED TO BE INVOKED. ITA NO.949/BANG/2015 PAGE 5 OF 10 9. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US AND RAISED GROUND NO.2 WHICH IS AS UNDER:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO NOT MAKE ANY DISALLOWANCE OF INTEREST ON LOANS WITHOUT APPRECIAT ING THE FACT THAT THE ASSESSEE COMPANY DIVERTED THE LOANS TAKEN FROM VARIOUS CONCERNS/BANK/FINANCIAL INSTITUTIONS ON INTEREST PA YABLE BASIS FOR INVESTMENT IN MUTUAL FUNDS AND FDS WHICH IS NOT THE BUSINESS PURPOSE OF ASSESSEE, AS HELD BY THE AO. 10. THE LD. COUNSEL FOR THE ASSESSEE TOOK US THROUG H CASH FLOW STATEMENT FOR THE YEAR ENDED 31.3.2011 AT PAGE 54 O F THE ASSESSEES PB AND POINTED OUT THAT THE ASSESSEE WAS HAVE A CLOSIN G BALANCE OF CASH OF RS.390,813,736 WHICH WAS SUFFICIENT TO MAKE INVEST MENTS IN MUTUAL FUND. HE ALSO POINTED OUT TO PAGE 70 OF THE PB WHERE UNDE R SPECIFIC TERMS & CONDITIONS WITH RESPECT TO LOAN SANCTIONED BY ORIEN TAL BANK OF COMMERCE, IT HAS BEEN STATED AS FOLLOWS:- 15. OUR BANK FINANCE SHOULD BE NECESSARILY UTILIZE D ONLY FOR FINANCING SELF-HELP GROUPS/MICRO FINANCE CLIENTS FO R INCOME GENERATION ACTIVITIES AND AN UNDERTAKING TO THAT EF FECT TO BE SUBMITTED TO THE BANK. 11. FURTHER, ATTENTION WAS DRAWN TO PAGE 67 OF THE PB WHEREIN AMENDMENT TO THE SANCTION TERMS & CONDITIONS IS MEN TIONED AS FOLLOWS:- 2. TERMS DEPOSIT OF 5% OF LOAN DISBURSED AS CASH COLLATERAL INSTEAD OF 10%. ITA NO.949/BANG/2015 PAGE 6 OF 10 12. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON TH E DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF HOTEL SAVERA (SUPRA) WHEREIN HAS BEEN HELD AS FOLLOWS;- THE GUJARAT HIGH COURT HELD THAT WHERE THE MATERIA L ON RECORD SHOWED THAT THE ASSESSEE HAD A COMMON FUND IT CANNO T BE PREDICATED THAT THE MONEY LENT CAME ONLY OUT OF BOR ROWED FUNDS. THE LEARNED AUTHOR, SAMPATH IYENGAR IN HIS BOOK SAMPATH IYENGARS LAW OF INCOME-AX,9 TH EDITION , AT PAGE 2349, OBSERVED AS UNDER: FOR THE SAME REASON A PRESUMPTION APPEARS TO BE PERMISSIBLE THAT WHERE THE ASSESSEE HAS HIS OWN CAP ITAL AS ALSO THE BORROWED FUNDS, THE FORMER RATHER THAN LAT TER TO HAVE BEEN UTILISED FOR THE NON-BUSINESS OR PERSONAL EXPENSES. 13. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. 14. WE HAVE HEARD BOTH THE PARTIES. IN THE CASE O F CIT V. RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM), IT HAS BEEN HELD AS FOLLOWS:- 16. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAILABLE. IN OUR OPINION, THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LT D. V. CIT [1997] 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD . [1982] 134 ITR 219 WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE TH E SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUM ED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT A CCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME C OURT NOTED ITA NO.949/BANG/2015 PAGE 7 OF 10 THAT THE ARGUMENT HAD CONSIDERABLE FORCE, BUT CONSI DERING THE FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER I T DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLC OMBERS OF INDIA LTD.' S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SU FFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PRO FITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNIN G OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, T HERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE, THEREFORE, WO ULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OV ER DRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT IN VESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFIC IENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTAB LISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISS IONER OF INCOME-TAX (APPEALS) AND THE INCOME-TAX APPELLATE T RIBUNAL. 15. RESPECTFULLY FOLLOWING THE RATION OF THE ABOVE DECISION, GROUND NO.2 OF THE DEPARTMENT IS DISMISSED. 16. THE SECOND ISSUE IS WITH RESPECT TO DISALLOWANC E OF BAD DEBTS OF RS.4,52,73,321. 17. THE FACTS ARE THAT THE AO IN THE ASSESSMENT ORD ER HAS STATED THAT THE ASSESSEE HAS ONLY SUBMITTED A LIST OF BAD DEBTS AND NOT PROVIDED ANY EVIDENCE THAT IT IS ALLOWABLE. ACCORDING TO THE AO , THE CONDITIONS OF SUB- SECTION (2) OF SECTION 36 HAVE NOT BEEN FULFILLED. HE THEREFORE DISALLOWED THE SAME. ITA NO.949/BANG/2015 PAGE 8 OF 10 18. ON APPEAL BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT THE AO FAILED TO CONSIDER THE FACT OF SMALL AMOUNTS OF INDIVIDUAL LOANS RANGING FROM RS.10 TO RS.48,203, NUMBER OF BRANCHES INVOLV ED (OVER 200), THE MAXIMUM CEILING OF RS.50,00 AND THE NUMBER (8249) O F LOANS INVOLVED IN THE WRITE OFF RENDERING NEGOTIATION, ARBITRATION, S TATUTORY LIMITATION, BANKRUPTCY, LIQUIDATION AND SUCH OTHER CRITERIA LAI D DOWN BY THE AO WERE COMMERCIALLY IMPRACTICAL TO FOLLOW. THE ASSESSEE R EITERATED THAT IT HAS NOT CREATED A PROVISION FOR DOUBTFUL DEBTS, BUT HAS ACT UALLY WRITTEN OFF THE ENTIRE AMOUNT OF RS.4,52,73,321 BY CREDIT TO THE RELEVANT ADVANCES ACCOUNT THUS REDUCING THE ASSETS CORRESPONDINGLY. THE ASSESSEE RELIED ON THE DECISIONS OF VIJAYA BANK V. CIT, 323 ITR 166 (SC) AND CIT V. GIRISH BHAGAWATPRASAD, 256 ITR 772,773 (GUJ) . 19. THE CIT(APPEALS) RELYING ON THE HONBLE JURISDI CTIONAL HIGH COURT DECISION IN THE CASE OF CIT V. KRONE COMMUNICATION LTD., 333 ITR 497 (KARN) ALLOWED THE ASSESSEES APPEAL ON THIS ISSUE. 20. AGGRIEVED THE DEPARTMENT IS IN APPEAL AND HAS R AISED GROUND NO.3 AS FOLLOWS:- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO NOT MAKE ANY DISALLOWANCE OF BAD DEBTS WITHOUT APPRECIATING THE FACT THAT THE REQUIREMENTS OF SECTION 36(2) ARE TO BE FULFILLED B Y THE ASSESSEE EVEN IN THE CASE WHERE A SUM IS WRITTEN OFF THE BOO KS OF ACCOUNTS AS IRRECOVERABLE DEBT AND THE AO HAS TO VERIFY WHET HER THE DEBTS HAS ACTUALLY BEEN WRITTEN OFF FROM THE BOOKS OF ACC OUNT OF THE ASSESSEE. ITA NO.949/BANG/2015 PAGE 9 OF 10 21. THE LD. DR RELIED UPON THE ORDER OF THE ASSESSI NG OFFICER, WHILE THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISS IONS MADE BEFORE THE CIT(APPEALS). 22. WE HAVE HEARD BOTH THE PARTIES. THE HONBLE HI GH COURT OF KARNATAKA IN THE CASE OF KRONE COMMUNICATION LTD., 333 ITR 497 (KARN) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, FOLLO WING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD., 323 ITR 397 (SC) WHEREIN IT WAS HELD THAT AFTER 1.4.1989, IT WAS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS B ECOME IRRECOVERABLE; IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF KRONE COMMUNICATION LTD. (SUPRA) , WE DISMISS GROUND NO.3 RAISED BY THE DEPARTMENT. 23. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF NOVEMBER, 2015. SD/- SD/- ( JASON P. BOAZ ) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 6 TH NOVEMBER, 2015. /D S/ ITA NO.949/BANG/2015 PAGE 10 OF 10 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.