ACIT, Circle-2(1), Tirupathi, Tirupathi V. Chadalawada Krishna Murthy, Tirupathi, Tirupathi

ITA 961/HYD/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5935 (ITAT-HYDERABAD)
• Duration Of Justice: 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 07-05-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 05-06-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KOMALI KRISHNA
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Notional interest
• Section: 201(1)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL , HYDERABAD BENCHES CIRCUIT BENCH A AT TIRUPATI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA. NOS. 961/HYD/2017 ASSESSMENT YEAR: 2012 - 2013 ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 2(1), 3 RD FLOOR, AAYAKAR BHAVAN, KT ROAD, TIRUPATI. VS SHRI CHADALAWADA KRISHNA MURTHY, D.NO.14/182, PADMAVATHIPURAM, TIRUCHANUR ROAD, TIRUPATI. PAN:ABXPC 6036 E (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI K.A. SAI PRASAD REVENUE BY SMT. KOMALI KRISHNA, DR ORDER PER D. MANMOHAN, VP: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY CIT (A), TIRUPATI AND IT PERTAINS TO ASSESSMENT YEAR 2012 - 13. 2. ASSESSEE IS ENGAGED IN CONTRACT WORKS APART FROM EARNING AGRICULTURAL INCOME. THOUGH THE RETURN OF INCOME FILED BY THE ASSESSEE WAS ORIGINALLY PROCESSED U/S 143(1) OF THE ACT, IN VIEW OF THE LARGE AGRICULTURAL INCOME AND LOW INCOME SHOWN FROM CONTRACT WOR KS, THE CASE WAS SELECTED FOR SCRUTINY AND ACCORDING LY A NOTICE WAS ISSUED U/S 143(2 ) OF THE ACT. DURING THE COURSE OF PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE PAID INTEREST TO SEVERAL CONCERNS ON WHICH TAX OUGHT TO HAVE BEEN DEDUCTED AT THE TIME OF CREDITING OF SUCH INCOME WHEREAS THE DATE OF HEARING : 17.05.2018 DATE OF PRONOUNCEMENT : 17.05.2018 2 ASSESSEE FAILED TO COMPLY WITH THE PROVISIONS OF SECTION 194A OF THE ACT. THOUGH THE ASSESSEE PLEADED THAT THIS IS NOT A FIT CASE FOR INVOKING THE PROVISIONS OF SECTION 194A, AO DISALLOWED THE INTEREST PAYMENT BY INVOK ING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. ACCORDINGLY, A SUM OF RS. 2,03,61,381/ - WAS ADDED TO THE INCOME RETURNED. 3. THE NEXT ISSUE IS WITH REGARD TO THE INTEREST RECEIVABLE BY THE ASSESSEE ON THE AMOUNTS ADVANCED. IN THIS REGARD, AO OBSERVED THAT THOUGH THE ASSESSEE ADVANCED A SUM OF RS. 2,00,02,678/ - TO EIGHT PERSONS, HE HAS NOT OFFERED ANY INTEREST INCOME ON SUCH SUNDRY DEBTORS WHEREAS THE ASSESSEE PAID INTEREST ON THE SECURED LOANS TO THE TUNE OF RS. 14.09 CRS AND SUNDRY CREDITORS TO THE T UNE OF RS. 5.70 CRS. THEREFORE, THE AO CONCLUDED THAT THE ASSESSEE LENT THE BORROWED MONEY TO OTHERS WITHOUT CHARGING INTEREST WHICH WOULD AMOUNT TO DIVERSION OF FUNDS TO OTHERS BY WAY OF GIVING INTEREST FREE LOANS. HE CALCULATED THE TOTAL LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF DIVERSION OF THE BORROWED FUNDS TO OTHERS AT RS. 24,00,321/ - . ASSESSEES CONTENTION WAS THAT HUF FUNDS TO THE TUNE OF RS. 49,35,000/ - ON WHICH THE ASSESSEE HAS NOT PAID ANY INTEREST. SINCE SMT. KAVITHA AND SMT. SUMALATHA ARE THE CO - PARCENARS IN THE HUF THE ASSESSEE CLAIMED TO HAVE PAID AN AMOUNT OF RS. 49,35,000/ - OUT OF THE FUNDS AVAILABLE FOR HUF. HAVING TAKEN THE SAME INTO CONSIDERATION, THE AO OBSERVED THAT THE BALANCE LOAN OF RS. 1.42 CRS WAS DIVERTED FOR NON - BUSINESS PU RPOSES AND HE ESTIMATED THE SAME @ 12% AND ADDED A SUM OF RS. 18,08,121/ - . 4. LEARNED CIT (A) PARTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. IN THIS REGARD HE OBSERVED THAT OUT OF THE TOTAL INTEREST PAYMENTS OF RS. 2.03 CRS, INTEREST PAID TO S HRIRAM CITY UNION FINANCE LTD WAS OFFERED TO TAX BY PAYEE AND HE HAS FILED THE RETURN AND IT WAS CERTIFIED BY 3 THE PAYEE TO THAT EXTENT. BASED O N THE FACTS, THE LD CIT (A) RESTRICTED THE ADDITION TO RS. 35,77,034/ - . IN OTHERWORDS, INTEREST OF RS. 1.67 CRS WAS PAID TO SHRIRAM CITY UNION FINANCE LTD., WITHOUT DEDUCTING TAX AT SOURCE BUT THE PAYEE FILED THE RETURN OF INCOME AND OFFERED THE INTEREST INCOME TO TAX AND PAID DUE TAXES. 5. AS REGARD THE NEXT ISSUE, THE CASE OF THE ASSESSEE WAS THAT THERE WERE SUBSTANTIAL BORROWINGS ON WHICH THE APPELLANT HAS NOT PAID INTEREST AND ALSO CONTENDED THA T THE INTEREST FREE BORROWINGS WE RE UTILIZED TO FUND INTEREST FREE LOANS IN WHICH EVENT NO ADDITION CAN BE MADE ON THE GROUND OF DIVERSION OF INTEREST BEARING FUNDS FOR INTEREST FREE LOANS. 6. LEARNED CIT (A) OBSERVED THAT ASSESSEE HAS DEBTORS TO THE TUNE OF RS. 1.97 CRS ON WHICH INTEREST WA S NOT CHARGED WHEREAS DIVERSION OF FUNDS IS ONLY TO THE EXTENT OF RS. 32,77,926/ - ON WHICH INTEREST @ 12% COMES TO RS. 3,93,351/ - . ACCORDINGLY ADDITION IS RESTRICTED TO RS. 3,93,351/ - . 7. AGGRIEVED BY THE RELIEF GRANTED BY THE LD CIT (A), REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 8. IT DESERVES TO BE NOTICED THAT THE ASSESSEE NEITHER FILED AN APPEAL NOR CROSS OBJECTION WITH REGARD TO THE ADDITIONS PARTLY CONFIRMED BY THE LD CIT (A). 9. IN THE GROUNDS OF APPEAL, WE NOTICED THAT GROUNDS NO.1 AND 5 ARE GENERAL IN NATURE AND GROUNDS NO.2 AND 3 ARE WITH REGARD TO DISALLOWANCE U/S 40(A)(IA) OF THE ACT. IT IS NOT IN DISPUTE THAT THE PAYEE OFFERED THE INTEREST RECEIPT TO TAX. BUT THE GROUNDS REFER TO A DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M/S. PALAM GAS SERVICE. IT IS NO WAY CONNECTED TO THE ISSUE ON HAND SINCE THE MAIN PLEA OF THE 4 ASSESSEE IS THAT IN VIEW OF THE EXPLANATI ON 2 TO SECTION 40(A)(IA) OF THE ACT IF THE PAYEE OFFERS INTEREST INCOME TO TAX, ASSESSEE CANNOT BE TREATED AS A DEFAULTER U/S 201(1) OF THE ACT AND CONSEQUENTLY THERE CANNOT BE ANY DISALLOWANCE U/S 40(A)(IA) FO THE ACT. 10. LEARNED DEPARTMENTAL REPRESEN TATIVE STRONGLY RELIED UPON THE ORDER PASSED BY THE ASSESSING OFFICER WHEREAS THE LEARNED COUNSEL FOR THE ASSESSEE NOT ONLY RELIED UPON THE ORDER PASSED BY THE LD CIT (A) BUT ALSO PLACED RELIANCE ON THE LATEST DECISION OF THE ITAT HYDERABAD A BENCH IN TH E CASE OF DCIT VS. ACP INDUSTRIES LIMITED (ITA NO.26.03.2018) WHEREIN THE BENCH CONSIDERED THE ISSUE IN DETAIL AND OBSERVED THAT SECOND PROVISO TO SECTION 40(A)(IA) SHOULD BE TREATED AS CURATIVE IN NATURE AND THEREFORE RETROSPECTIVE IN OPERATION AND IF THE SAME INCOME IS OFFERED BY THE PAYEE IN ITS HANDS, IT CANNOT BE TAXED TWICE ONCE IN THE HANDS OF THE ASSESSEE AND SECOND TIME IN THE HANDS OF THE RECIPIENTS THEREFORE TO THE EXTENT OF INTEREST PAYMENT, WHEN THE ASSESSEE PROVES THAT THE RECIPIENT HAS FI LED RETURN OF INCOME AND OFFERED THE INTEREST TO TAX, DISALLOWANCE CANNOT BE MADE U/S 40(A)(IA) OF THE ACT. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IN THE CASE OF ACP INDUSTRIES LIMITED (SUPRA), THE TRIBUNAL OBSERVED AS UNDER: - 8. LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANSAL LAND MARK TOWNSHIP P LTD (377 ITR 635) TO CONTEND THAT THE SECOND PROVISO IS RETROSPECTIVE IN OPERATION. IT WAS ALSO SUBMITTED THAT THE SAME INCOME WAS OFFERED BY THE PAYEE IN ITS HANDS IN WHICH EVENT THE SAME CANNOT BE TAXED TWICE ONCE IN THE HANDS OF THE ASSESSEE AND THE SECOND TIME IN THE HANDS OF THE RECIPIENT. THE SECOND PROVISO WAS INSERTED ONLY TO AVOID UNDUE HARDSHIP TO THE ASSESSEE AND HENCE IT HAS TO BE TREATED AS DECLARATORY IN CHARACTER AND APPLIES RETROSPECTIVELY. HE ALSO REFERRED TO A DECISION OF THE ITAT HYDERABAD B BENCH IN THE CASE OF PVRPL APRCL (JV) VS. ITO (ITA NO. 4 736/HYD/2015) DATED 09.10.2015 WHEREIN THE BENCH REFERRED TO THE ISSUE IN GREAT DETAIL AND HELD THAT WHERE TWO VIEWS ARE POSSIBLE ON AN ISSUE, THE VIEW IN FAVOUR OF THE ASSESSEE HAS TO BE 5 PREFERRED AND ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE DECISION OF THE HONBLE DELHI HIGH COURT (SUPRA). LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DECISION OF THE HONBLE DELHI HIGH COURT IS LATER IN POINT OF TIME AND HENCE THE VIEW TAKEN BY THE HONBLE DELHI HIGH COURT HAS TO BE PREFERRED OVER THE VIEW TAKE N BY THE HONBLE KERALA HIGH COURT AND AT ANY RATE, IDENTICAL ISSUE HAVING BEEN CONSIDERED BY THE ITAT HYDERABAD BENCH, CONSISTENT WITH THE VIEW TAKEN THEREIN THE ORDER PASSED BY THE LD. CIT(A) DESERVES TO BE AFFIRMED. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE VIEW TAKEN BY THE LD. CIT(A) IS CONSISTENT WITH THE VIEW TAKEN BY THE HONBLE DELHI HIGH COURT, WHICH IS A DECISION RENDERED IN 2015 WHEREAS, THE DECISION OF THE HONBLE KERALA HIGH COURT WAS RENDERED IN 2014. APART FROM THIS, ITAT HYDERABAD BENCH HAD CONSIDERED IDENTICAL ISSUE WHEREIN IT WAS HELD THAT REALISATION OF LEGITIMATE TAX DUE IS THE MAIN OBJECT OF SECTION 40(A)(IA) OF THE ACT AND IT IS ME T IF THE SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT IS HELD AS RETROSPECTIVE IN CHARACTER. WE ARE IN COMPLETE AGREEMENT WITH THE ORDER OF THE ITAT. SINCE THE VIEW TAKEN BY THE LD. CIT(A) IS IN CONSONANCE WITH THE ORDER OF THE ITAT, WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL. 12. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE HOLD THAT THE SECOND PROVISO IS RETROSPECTIVE IN OPERATION AND APPLICABLE FOR THE AY UNDER CONSIDERATION IN WHICH EVENT LD CIT (A) WAS JUSTIFIED IN SETTING ASIDE THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT. THEREFORE, GROUND NOS. 2 AND 3 URGED BY THE REVENUE ARE DISMISSED. 13. VIDE GROUND NO.4, THE REVENUE CONTENDS THAT THE CIT (A) ERRED IN RESTRICTING THE DISALLOWANCE TO 3,93,351/ - REPRESENTING DIVERSION OF FUND S. LEARNED DR SUBMITTED THAT THE ASSESSEE HAS BORROWED FUNDS AND DIVERTED BY LENDING THE SAME FOR NON - BUSINESS PURPOSES. HOWEVER, WHEN CALLED TO EXPLAIN AS TO THE DATES OF TAKING THE LOAN AND AVAILABILITY OF INTEREST BEARING FUNDS AS WELL AS NON - INTE REST BEARING FUNDS AT THE TIME OF ADVANCING THE SAME TO OTHERS BY THE ASSESSEE, NEITHER THE LEARNED COUNSEL FOR THE ASSESSEE NOT THE DR WAS ABLE TO PLACE THE MATERIAL ON RECORD. THEREFORE, FOR THE LIMITED PURPOSE OF VERIFICATION OF THE SAME, THE ISSUE IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER WHO IS DIRECTED TO VERIFY AS TO WHETHER THE ASSESSEE HAS SUFFICIENT INTEREST FREE LOANS AVAILABLE WITH IT AND IF THE SAME IS PROVED THEN NO ADDITION CAN BE 6 MADE ON ESTIMATE BASIS . W ITH REGARD TO THE AMOUNT GI VEN TO SUNDRY DEBTORS T HERE IS NO PROVISION UNDER THE IT ACT, 1961 TO CHARGE NOTIONAL INTEREST ON THE AMOUNTS LENT BY THE ASSESSEE . I F THE INTEREST BEARING FUNDS ARE NOT USED FOR BUSINESS PURPOSES, THE INTEREST PAID CAN BE DISALLOWED. BUT THE ASSESSING O FFICER AS WELL AS THE CIT (A) CHOSE TO ADD BACK THE INTEREST PAYABLE BY THE DEBTORS WHICH IS NOT THE CORRECT LEGAL POSITION. WITH THESE OBSERVATION, WE SET ASIDE THE ORDER OF THE CIT (A) ON THIS ASPECT AND DIRECT THE AO TO RE - DO IN ACCORDANCE WITH LAW. 14. IN THE RESULT, APPEAL FILED BY THE REVENUE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH MAY, 2018. SD/ - SD/ - (B. RAMAKOTAIAH) (D. MANMOHAN) ACCOUNTAT MEMBER VICE PRESIDENT TIRUPATI , DATED: 17 TH MAY, 2018. OKK, SR.PS COPY TO 1. SHRI CHADALAWADA KRISHNA MURTHY, D.NO.14/182, PADMAVATHIPURAM, TIRUCHANUR ROAD, TIRUPATI. 2. ACIT, CIRCLE 2(1), 3 RD FLOOR, AAYAKAR BHAVAN, KT ROAD, TIRUPATI. 3. CIT (A) , TIRUPATI. 4. PRINC IPAL COMMISSIONER OF INCOME TAX, TIRUPATI. 5. DR, ITAT, HYDERABAD. 6. GUARD FILE