Shriram Investments, CHENNAI V. DCIT, CHENNAI

ITA 995/CHNY/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7456 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 21-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N GOPINATH IRS
• Assessee Lawyers: R SIVARAMAN
• Keywords: Related party transaction; Commercial expediency
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI . . . , !' . #$#% , & '' ( [BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./I.T.A. NO.995/CHNY/2017 / ASSESSMENT YEAR : 2013-2014. SHRIRAM INVESTMENTS, MOOKAMBIKA COMPLEX, NO.4, LADY DESIKA ROAD, MYLAPORE, CHENNAI 600 004. [PAN AAAFS 2590M] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, NON CORPORATE CIRCLE 2, CHENNAI. ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : SHRI. R. SIVARAMAN, ADVOCATE /RESPONDENT BY : SHRI. N. GOPINATH, IRS, JCIT. /DATE OF HEARING : 18-07-2018 ! /DATE OF PRONOUNCEMENT : 19-07-2018 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IN THIS APPEAL FILED BY THE ASSESSEE, WHICH IS DI RECTED AGAINST AN ORDER DATED 30.01.2017 OF LD. COMMISSIONER OF INCOM E TAX (APPEALS)- 2, CHENNAI, IT IS AGGRIEVED ON A DISALLOWANCE OF RS.1,65,81,384/- MADE U/S.36(1)(III) OF THE INCOME TAX ACT, 1961 (I N SHORT THE ACT). ITA NO.995/CHNY/2017. :- 2 -: 2. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN THE BUSI NESS OF FINANCING AND INVESTMENTS HAD FILED ITS RETURN O F INCOME FOR THE IMPUGNED ASSESSMENT YEAR DECLARING LOSS OF RS.84,55 ,310/-. MAIN BUSINESS OF THE ASSESSEE WAS PROVIDING FINANCIAL SU PPORT TO CONCERNS IN AN INDUSTRIAL GROUP CALLED SHRIRAM GROUP. LD. ASS ESSING OFFICER NOTED THAT ASSESSEE HAD ADVANCED A SUM OF RS.926,59,85,04 4/- TO 102 PERSONS. AS PER THE LD. ASSESSING OFFICER, ASSESSE E WAS SELECTIVE IN RECEIVING INTEREST. LD. ASSESSING OFFICER NOTED TH AT ASSESSEE OWED A SUM OF RS.1058,41,56,014/- TO THE GROUP COMPANIES, FROM WHICH ADVANCES WERE GIVEN. LD. ASSESSING OFFICER FOUND F ROM THE PROFIT AND LOSS ACCOUNT THAT ASSESSEE HAD RECEIVED INTEREST OF C10,09,62,087/- WHEREAS IT HAD PAID INTEREST OF C11,75,43,471/-. AS PER THE LD. ASSESSING OFFICER, THERE WAS NO BUSINESS PRUDENCE O N THE PART OF THE ASSESSEE TO RECEIVE LESSER INTEREST WHILE PAYING HI GHER INTEREST, WHEN ALL THE TRANSACTIONS WERE WITH RELATED PARTIES. L D. ASSESSING OFFICER ALSO NOTED THAT PARTNERS CURRENT ACCOUNTS REFLECT ED A HUGE DEBIT BALANCE OF RS.27,56,67,897/-, ON WHICH NO INTERES T WAS CHARGED. RELYING ON SECTION 40A2(B) OF THE INCOME TAX ACT, 1 961 (IN SHORT THE ACT) LD. ASSESSING OFFICER HELD THAT EXPENDITURE WHICH INVOLVED RELATED PARTIES HAD TO BE RESTRICTED TO THE MARKET VALUE. ACCORDING TO HIM, CONCEPT OF MATCHING PRINCIPLE HAD TO BE ALLO WED ON THE INTEREST RECEIVED AND PAID. DIFFERENCE BETWEEN INTEREST REC EIVED AND INTEREST ITA NO.995/CHNY/2017. :- 3 -: PAID WORKING OUT TO RS.1,65,81,384/- WAS DISALLOWED U/S.36(1) (III) OF THE ACT. ASSESSMENT WAS COMPLETED ACCORDINGLY. 3. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS). RELYING ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD VS, CIT, 288 ITR 1, ASSESSEE SUBMITTED THAT ADVANCES GIVEN TO VARIOUS PERSONS WERE ALL IN THE BUSINESS INTEREST OF THE ASSESSEE. AS PER T HE ASSESSEE, IT WAS FOLLOWING CASH SYSTEM AND THEREFORE THERE WAS NO QUESTION OF APPLYING ANY MATCHING PRINCIPLE. ASSESSEE ALSO STA TED THAT ADVANCES GIVEN BY IT, TO THE EXECUTIVES OF SHRIRAM GROUP O F CONCERNS AND MEMBERS OF SHRIRAM OWNERSHIP TRUST WERE ALL INTERE ST BEARING. CONTENTION OF THE ASSESSEE WAS THAT IT HAD INTERES T RECEIPT OF RS.13,34,06,510/- DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2009-2010. ACCORDING TO IT, DUE TO THE CASH SYSTEM OF ACCOUNTING FOLLOWED, FOR SOME YEARS INTEREST RECEIP T COULD BE LOWER THAN THE INTEREST PAYMENT AND IN SOME OTHER YEARS IT COULD BE VICE- VERSA. RELYING ON THE DECISION OF CO-ORDINATE BENCH IN ITS OWN CASE FOR ASSESSMENT YEAR 2009-2010 (ITA NO.1690/MDS/2013, D ATED 27.11.2013) ASSESSEE STATED THAT COMMERCIAL EXPEDIE NCY OF ITS INVESTMENTS WAS UPHELD BY THIS TRIBUNAL. ASSESSEE A LSO POINTED OUT ITA NO.995/CHNY/2017. :- 4 -: THAT THE PERSONS TO WHOM IT HAD ADVANCED MONEY HA D REPAID SUBSTANTIAL SUMS. 4. HOWEVER, LD. COMMISSIONER OF INCOME TAX (APPEALS) W AS NOT APPRECIATIVE OF THE ABOVE CONTENTIONS OF THE ASSESS EE. ACCORDING TO HIM, ASSESSEE HAD RECEIVED INTEREST FROM M/S. SHRI RAM TRANSPORT COMPANY LIMITED. FURTHER, AS PER THE LD. COMMISSIO NER OF INCOME TAX (APPEALS), PARTNERS CURRENT ACCOUNT EXHIBITED HU GE DEBIT BALANCES. ACCORDING TO THE LD. COMMISSIONER OF INCOME TAX (AP PEALS) IF HUGE AMOUNTS WERE NOT GIVEN TO THE PARTNERS THEN ASSESSE E COULD HAVE REDUCED ITS INTEREST BURDEN SUBSTANTIALLY. LD. COM MISSIONER OF INCOME TAX (APPEALS) ALSO NOTED THAT THE JUDGMENT OF HONB LE APEX COURT IN THE CASE OF SA BUILDERS LTD (SUPRA) WAS OVERRULED BY A LARGER BENCH OF APEX COURT IN THE CASE OF ADDL. CIT VS. M/S. TUL IP STAR HOTELS LTD (SL TO APPEAL (CIVIL) /2012 (CC 7138-7140/2010) D ATED 30.04.2012). CRUX OF THE FINDING OF THE LD.CIT(A) AS IT APPEARS AT PARAS 5.5 AND 5.6 OF HIS ORDER IS REPRODUCED HEREUNDER:- THE CONTENTION OF THE APPELLANT IS CAREFULLY CONSIDERED. DURING THE FY 2008-09, THE ASSESSEE HAS COLLECTED INTEREST FROM THE GROUP EXECUTIVES AND ALSO THE PRINCIPAL AMOUNT DUE FROM THEM AS ON 31/03/2009. DURING THE FYS 2009-10 TO 2012-13, THE APPELLANT HAS BEEN LENDING SUMS TO 44 EXECUTIVES IN ALL AMOUNTING TO RS.11,91,72,798/- AS ITA NO.995/CHNY/2017. :- 5 -: ON 31/03/2013. APART FROM THE SAME, A SUM OF RS.10,11,96,799/- IS DUE FROM THE PROMOTERS BEING THE ADVANCES PROVIDED TO THEM. WHILE THE TOTAL SUM ADVANCED BY THE APPELLANT FREE OF INTEREST TO ITS EXECUTIVES AND PROMOTERS STANDS AT RS.22 CRORES APPROXIMATELY, INTEREST ONLY TO THE EXTENT OF RS.5,97,253/- HAS BEEN COLLECTED AND ADMITTED AS INCOME. THE APPELLANT HAD FAILED TO NOTE THAT THE TRANSACTIONS ARE BETWEEN RELATED ENTERPRISES AND IT IS CORRECT ON THE PART OF THE ASSESSING OFFICER TO INVOKE THE CONCEPT OF MATCHING PRINCIPLE BECAUSE THE DISALLOWANCE IS NOT GOVERNED ONLY BY THE PROVISIONS OF 5.36(1)(III) BUT IS ALSO COVERED BY T HE PROVISIONS OF SEC, 40A(2)(B) OF THE ACT. 5.6. FURTHER, AS PER THE INDENTURE OF PARTNERSHIP MADE AT CHENNAI ON 01/04/2006, OF THE APPELLANT FIRM, LOANS AND ADVANCES OR OVER-WITHDRAWAL FROM THE FIRM BY THE PARTNERS WOULD RESULT IN COLLECTION OF SIMPLE INTEREST @ 12%. FOR EASIER COMPREHENSION, THE RELEVANT CLAUSE NO.11 OF THE PARTNERSHIP DEED IS CAPTURED AND PROVIDED BELOW. 10.AS AND WHEN REQUIRED THE FIRM CAN OBTAIN LOANS A ND OR ADVANCES FROM THE PARTNERS AND SUCH LOANS AND OR ADVANCES WHICH SHALL BE IN ADDITION TO AND OVER AND ABOVE THC CAPITAL SHALL CARRY SIMPLE INTEREST NOT EXCEEDING 12% PER ANNUM OR SUCH OTHER RATE OF INTEREST AS MAY BE AGREED UPON FROM TIME TO TIME. 11. ANY PARTNER OF THE FIRM CAN WITHDRAW MONEY FROM THE FIRM SUBJECT HOWEVER TO AN AGREEMENT BETWEEN ALL TH E PARTNERS AND SUCH DRAWINGS ARE TO BE ADJUSTED AGAIN ST PROFITS AND OR CAPITAL OR LOANS AND SHALL CARRY SIM PLE INTEREST NOT EXCEEDING @ . 12% PER ANNUM OR SUCH ITA NO.995/CHNY/2017. :- 6 -: OTHER RATE OF INTEREST AS MAY BE AGREED UPON FROM T IME TO TIME. 1. SD/- 6. SD/- 2. SD/- 7. SD/- 3. SD/- 8. SD/- 4. SD/- 9. SD/-` 5. SD/- 10. SD/- SHRI. R. THIAGARAJAN , SHRI. T. JAYARAMAN AND SHRI AVS RAJA ARE THE FIRST, THIRD AND FIFTH PARTNERS OF THE FIRM WHO HAVE TAKEN A LOAN OF 10,11,96,799/-. FURTHER, THE BALANCE SHEET AS ON 31.03.2013 EXHIBITS A OVER-DRAW AL BY THE PARTNERS OF THE FIRM TO THE EXTENT OF 27,56,67,897/-. AS PER THE TERMS OF THE RELEVANT CL AUSE IN THE PARTNERSHIP DEED, IT IS CLEARLY STATED THAT THE PAYMENT OF INTEREST BY THE PARTNERS IS COMPULSORY S INCE THE PRECEDING CLAUSE NO.10 REQUIRES THE FIRM TO PAY INTEREST @ 12% TO THE CREDIT BALANCE IN THE CAPITAL ACCOUNT OF THE PARTNERS. UNDOUBTEDLY, THE METHOD OF ACCOUNTING DOES NOT IMPACT THE RECEIPT OR PAYMENT OF INTEREST BY AND TO THE PARTNERS RESPECTIVELY. THE APPELLANT OUGHT TO PROVIDE INTEREST @ 12% ON THE LOANS AND OVER-WITHDRAWALS BY ITS PARTNERS AND WHEN THESE TRANSACTIONS ARE ALSO RELATED PARTY TRANSACTIONS, THE DISALLOWANCE O F INTEREST ON SUCH INTEREST FREE DIVERSIONS UNDERTAKE N BY THE ASSESSING OFFICER IS FOUND TO BE IN ORDER AN D THEREFORE THE GROUNDS OF APPEAL OF THE APPELLANT ARE DISMISSED. HE THUS UPHELD THE ORDER OF THE LD. ASSESSING OFFIC ER. 5. NOW BEFORE US, THE LD. AUTHORISED REPRESENTATIVE S TRONGLY ASSAILING THE ORDER OF THE LD. COMMISSIONER OF INCO ME TAX (APPEALS) SUBMITTED THAT ASSESSEE WAS FOLLOWING CASH BASIS OF ACCOUNTING. ACCORDING TO HIM, THIS WAS CLEARLY MENTIONED IN TH E RETURN OF INCOME ITA NO.995/CHNY/2017. :- 7 -: FILED. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT ASSESSEE HAD RECEIVED SUBSTANTIAL INTEREST FROM LOANS AND ADVAN CES GIVEN BY IT. AS PER THE LD. AUTHORISED REPRESENTATIVE, INVESTMENT A ND LOANS GIVEN BY THE ASSESSEE WERE ONLY FOR BUSINESS PURPOSE. CONTE NTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT DISPARITY IN IN TEREST RECEIPTS AND INTEREST PAYMENTS AROSE ON ACCOUNT OF THE CASH BAS IS SYSTEM FOLLOWED AND NOT BECAUSE OF ANY UNDERCHARGING OF I NTEREST. RELIANCE WAS PLACED ON A LETTER DATED 27.01.2017 FILED BEFOR E LD. COMMISSIONER OF INCOME TAX (APPEALS), WHEREIN LOANS GIVEN TO VAR IOUS PARTIES AND INTEREST RECEIVED FROM THEM WERE LISTED. ACCORDING TO HIM, LOWER AUTHORITIES FELL IN ERROR IN DISALLOWING A PART OF THE INTEREST EXPENSES BASED ON MATCHING PRINCIPLE, WHICH WAS NOT APPLICA BLE WHEN CASH BASIS OF ACCOUNTING WAS FOLLOWED. 6. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMITT ED THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD CLEARL Y BROUGHT OUT THE LOWER AMOUNT OF INTEREST RECEIVED FROM PERSONS TO W HOM ASSESSEE HAD ADVANCED MONEY. ACCORDING TO HIM, LOWER AUTHORITIE S WERE JUSTIFIED IN MAKING A DISALLOWANCE OF INTEREST TO THE EXTENT OF EXCESS OVER RECEIPTS. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. ASSESSEE HAD DEB ITED IN ITS PROFIT AND ITA NO.995/CHNY/2017. :- 8 -: LOSS ACCOUNT, ONLY THE ACTUAL INTEREST PAID AND CR EDITED ONLY THE ACTUAL INTEREST RECEIVED, SINCE IT WAS FOLLOWING TH E CASH SYSTEM OF ACCOUNTING. IN OUR OPINION IN A CASH BASIS OF ACCO UNTING SYSTEM, THERE IS NO QUESTION OF APPLYING ANY MATCHING PRINCIPLE. INTEREST IS CREDITED AS INCOME AT POINT OF RECEIPT AND DEBITED AS EXPEN SES AT THE POINT OF PAYMENT. ACCORDING TO THE DISPARITY IN THE PERIO D FOR WHICH INTEREST IS RECEIVED AND PAID, THERE COULD BE DIFFERENCE. TH AT APART, COPY OF THE PARTNERS CURRENT ACCOUNT PLACED AT PAPER BOOK P AGE 10, SHOWS THAT DEBIT BALANCES IN PARTNERS CURRENT ACCOUNT ARO SE MORE ON ACCOUNT OF LOSSES SUFFERED IN THE EARLIER YEARS, THAN DUE T O ANY DRAWINGS BY THE PARTNERS. IT MIGHT BE TRUE THAT IT HAD RECEIVE D INTEREST ONLY FROM FOUR INDIVIDUALS TO WHICH IT HAD ADVANCED AMOUNTS D URING THE RELEVANT PREVIOUS YEAR. THIS DOES NOT MEAN THAT ASSESSEE HA D NOT RECEIVED INTEREST FROM OTHER PARTIES IN OTHER YEARS. DURING THE PREVIOUS ASSESSMENT YEAR 2009-2010, IT HAD RECEIVED INTEREST OF C13,34,06,510/- FROM PERSONS TO WHOM IT HAD ADVANCE D LOANS. HENCE IN OUR OPINION, IT IS OBVIOUS THAT DISPARITY BETWE EN INTEREST RECEIVED AND INTEREST PAYMENT AROSE NOT ON ACCOUNT OF ANY SE LECTIVE CHARGING OF INTEREST, BUT ON ACCOUNT OF CASH BASIS SYSTEM F OLLOWED BY THE ASSESSEE. THERE IS NOTHING IN THE STATUTE WHICH ST OPPED THE ASSESSEE FROM FOLLOWING THE CASH SYSTEM OF ACCOUNTING. IN A SSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-2010 ON REVENUE APPEAL (IT A ITA NO.995/CHNY/2017. :- 9 -: NO.1690/MDS/2013, DATED 27.11.2013), THIS TRIBUNAL HAD HELD AS UNDER:- 6. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THE ASSESSEE IS AN INVESTMENT COMPANY MADE INVESTMENTS IN GROUP CONCERNS AS PART OF ITS BUSINESS OF THE ASSES SEE I.E. ADVANCING LOANS TO GROUP CONCERNS. THE COMMISSIONE R OF INCOME TAX (APPEALS) ALSO GAVE A FINDING THAT MONIE S ARE BORROWED FROM GROUP CONCERNS ONLY AND THESE MONIES ARE UTILIZED BY THE INVESTEE CONCERNS FOR THEIR TRADE PURPOSES. SINCE THE INVESTMENTS IN SHARES OF GROUP CONCERNS AMOUNTING TO C4,38,00.000/- ARE WITHIN THE COURSE O F TRADING ACTIVITIES AND OUT OF COMMERCIAL EXPEDIENCY AND THE DECISION OF THE HONBLE HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS (288 ITR 1) IS APPLICABLE TO THE ASSES SEE. THE COMMISSIONER OF INCOME TAX (APPEALS) ALSO HELD THAT C76,58,00,000/- INVESTED IN SISTER CONCERNS AS SHAR E APPLICATION MONEY IS NOT CAPABLE OF YIELDING ANY IN COME NOR ANY RIGHT TO A BENEFIT IS VESTED IN, THEREFORE PRO VISIONS OF SECTION 14A ARE NOT ATTRACTED IN VIEW OF THE DECISI ON OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASES OF MSA SECURITY SERVICES AND NMS CONSULTANCY P. LTD (SUPRA ). THE DEPARTMENT COULD NOT REBUT ANY OF THE FINDINGS OF T HE COMMISSIONER OF INCOME TAX (APPEALS). THEREFORE, WE SUSTAIN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING THE DISALLOWANCE MADE UNDER S ECTION 14A OF THE ACT. THE GROUNDS RAISED BY THE REVENUE A RE REJECTED. THUS ASSESSEE HAS BEEN CONSIDERED AS AN INVESTMENT COMPANY AND MAKING INVESTMENTS WAS PART OF ITS BUSINESS. HONB LE JURISDICTIONAL HIGH COURT ALSO IN THE CASE OF CIT VS. SHRIRAM INVESTMENTS (FIRM), (2015) 54 TAXMANN.COM 15 ALSO HELD THAT DEDUCTION U/S.36(1) (III) OF THE ACT HAD TO BE ALLOWED IN RESPECT OF INTEREST PA ID, IF CAPITAL WAS BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION . AS ALREADY MENTIONED BY US, THERE IS NO FINDING BY ANY OF TH E LOWER AUTHORITIES ITA NO.995/CHNY/2017. :- 10 -: THAT DISPARITY BETWEEN INTEREST RECEIPTS AND PAYM ENTS AROSE ON ACCOUNT OF CHARGING OF LOWER RATE OF INTEREST ON L OANS ADVANCED WHEN COMPARED TO INTEREST PAID ON LOANS RECEIVED. IN TH E CIRCUMSTANCES, WE ARE OF THE OPINION THAT LD. ASSESSING OFFICER WAS N OT JUSTIFIED IN MAKING A DISALLOWANCE FOR THE DIFFERENCE BETWEEN INTEREST RECEIVED AND INTEREST PAID BY THE ASSESSEE. DISALLOWANCE OF C1,6 5,81,384/- STANDS DELETED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED ON THURSDAY, THE 19 TH DAY OF JULY, 2018, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED: 19TH JULY, 2018 KV %& '()( / COPY TO: 1 . / APPELLANT 3. *+, / CIT(A) 5. (-. / / DR 2. / RESPONDENT 4. * / CIT 6. .01 / GF