ITO Ward 1(2)(1), Bangalore V. Century Sheltors, Bangalore

MA 204/BANG/2023

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 6095 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s) 15 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 26-10-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-10-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 11-09-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reasonable cause
• Section: 40(b); 37(1); 254(2)

Judgement Text

MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER MP Nos.202 to 204/Bang/2023 (Arising out of ITA Nos.1073 to 1075/Bang/2022 Assessment Years: 2013-14 to 2015-16 ITO Ward-1(2)(1) Bangalore Vs. Century Sheltors No.10/1, Lakshminarayana Complex Palace Road Vasanthnagar Bangalore 560 052 PAN No.AAFFC5111R APPELLANT RESPONDENT MP Nos.205 to 207/Bang/2023 (Arising out of ITA Nos.1100 to 1102/Bang/2022 Assessment Years: 2013-14 to 2015-16 ITO Ward-1(2)(1) Bangalore Vs. Century Silicon City No.10/1, Lakshminarayana Complex Palace Road Vasanthnagar Bangalore 560 052 PAN No.AAFFC5112N APPELLANT RESPONDENT Appellant by : Shri Nischal B., D.R. Respondent by : Smt. Sheetal Borkar, A.R. Date of Hearing : 27.10.2023 Date of Pronouncement : 27.10.2023 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: These miscellaneous petitions filed by the revenue against common order of the Tribunal in ITA Nos.1073 to 1075/Bang/2022 & ITA Nos.1100 to 1102/Bang/2022 vide order dated 10.3.2023, MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 2 of 10 wherein the assessee came in appeal before the Tribunal with regard to disallowance of interest payment to partners. 2. The Tribunal decided the issue in favour of the assessee by placing reliance on various decisions. Now the contention of the ld. D.R. is that Section 40(b) of the Act which deals with amounts not deductible says that notwithstanding anything to the contrary in Sections 30 to 38 the amounts mentioned thereafter shall not be deducted in computing the income chargeable under the head profits and gains of business or profession. Clause (b)(iv) mentions, in the case of any assessable firm, any payment of interest to any partner which is authorized by. and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of twelve percent simple interest per annum. In other words what the aforesaid provision contemplates is that in the case of a firm, any payment of interest to any partner exceeding the amount mentioned therein shall not be deducted in computing the income chargeable under the head profits and gains of business or profession. 2.1 The ld. D.R. further drew our attention to CBDT Circular No 12/2019 which at para (ii) has laid down following conditions for allowability of interest to partners of firm:- . a) The payment should be in accordance with the terms of the partnership deed, and b) It should relate to any period falling after the date of such partnership deed, and c) It should not exceed the amount calculated at the rate of twelve percent simple interest per annum. MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 3 of 10 2.2 The ld. D.R. submitted that admittedly, the disallowance had not been made by citing any of the above grounds and the proportionate disallowance was made in assessment orders by holding that assessee has adopted colorable device and the amounts transferred to retiring partners has not been utilized wholly and exclusively for the purpose of business. Accordingly, impugned interest expenditure was held to be not allowable either u/s. 37(1) or u/s. 36(1)(iii) of the Act. 2.3 However, he submitted that the Tribunal has failed to appreciate that Hon'ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT(2008)(298 ITR 298){SC} has categorically held that in case of a firm to claim deduction in respect of interest paid on capital borrowed from third parties (apparently partners), firm is required to establish, in first instance, that it is entitled to claim deduction under section 36(1)(iii), and secondly that it is not disentitled to claim such deduction or account of applicability of section40(b)(iv). He submitted that in the present case Tribunal has erred in holding that Section 40(b) is an overriding section to Section 30 to 38 of the Act without appreciating that Hon’ble Supreme Court has held that Section 40 is not a stand-alone section. Section 40, before and after the Finance Act, 1992 has remained the same in the sense that it begins with a non obstante clause. It starts with the words 'Notwithstanding anything to the contrary in sections 30 to 38' which shows that even if an expenditure or allowance comes within the purview of sections 30 to 38, the assessee could lose the benefit of deduction if the case fails under section 40. In other words, every assessee, including a firm, has to establish in the first instances its right to claim deduction under one of the sections between sections 30 to 38 and in the case of the firm, if it claims special deduction, it has also to prove that it is not disentitled to claim deduction by reason of applicability of section 40(b)(iv). Therefore, he submitted that in the instant case, the assessee MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 4 of 10 was required to establish in the first instance that it was entitled to claim deduction under section 36(1)(iii) and that it was not disentitled to claim such deduction on account of applicability of section 40(b)(iv). It is important to note that section 36(1) refers to other deductions whereas section 40 comes under the heading 'Amounts not deductible'. Therefore, sections 30 to 38 of the Act are other deductions, whereas section 40 of the Act is a limitation on those deductions. 2.4 He further submitted that the ITAT grossly erred in interpreting in para 4.5 (page 17) that deduction of interest to partners is out of purview of sec 30 or 37. This is in stark contrast to the ratio of Hon'ble Supreme Court in case of Munjal sales corporation wherein it was held that after enactment of Finance Act 1991, every assessee including a firm has to establish, in the instance, its right to claim deduction under one of the section between sec.30 to 38 and in case of a firm, if it claims special deductions, it also has to prove that is not dis-entitled to claim deduction by reason of applicability of sec 40(b) of the Act. 2.5 He submitted that this decision was discussed and relied upon by Ld. CIT(A) in his order and has been refused by ITAT in its order at page 11 para 3.7, but the Tribunal did not discuss how it is not applicable to the facts of the present case. 2.6 H e s u b m i t t e d t h a t t he T r i bu na l ' s o b s e r v a t i o n a t pa r a 4 . 5 p a g e 1 6 deserve all the attention wherein it is stated here to refer decision of Hon`ble Supreme court in the case of CIT vs. R.M. Chidambaram (1977) 106 ITR 292(SC), wherein it is held as under: MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 5 of 10 "11.4 Sec 4.,. ..... is new of sec 40(b) of the Act, the assessing officer purportedly has no jurisdiction to apply to test laid down under sec 38 of the Act...........". 2.7 This is a perverse order for the following reasons: The above para 11.4 reported to be a finding of Hon'ble SC in case of R.M. Chidambaram, is NOT appearing in the judgement anywhere. 2.8 He submitted that further search shows that this finding is of ITAT Pune in case of Quality Industries, which in turn referred to the decision of Hon’ble Supreme Courtin R.M. Chidambaram case. This case of Quality Industries is in a completely different context which is of sec 14A. Further, this decision of ITAT Pune, though decided in 2016, after the decision of Hon'ble Supreme Court in case of Munjal sales (which is dated 19/02/2008), does not refer order with the letter. Thus the perverse decision in the present case arises out of misplaced reliance and reference and misquoting. 2.9 He further submitted that on merits, Hon’ble Supreme Court has already held that, after the enactment of Finance Act 1992, sec 40(b)(iv) has brought to avoid double taxation and to bring on par different assessee in different year of assessment. "Therefore, assessee firm, was required to prove that it was entitled to claim deduction for payment of interest on capital borrowed u/s 36(i)(iii) and it was not disentitled u/s 40b(iv).....Sec 40 is a corollary to sec 30-38 and therefore sec 40 is not a stand-alone section°. 2.10 He submitted that in 2016, ITAT Mumbai also dealt with this issue in extenso referring to decision of the Hon’ble Supreme Court in Munjal Auto sales as well as in case of R.M. Chidambaram highlighting that the letter judgment was pronounced prior to the major amendments in the case of partnership firms by Finance Act 1992, while the former was MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 6 of 10 pronounced in 2008, after the amendment. Applying the decision in case of Munjal sales, Mumbai ITAT held that taxpayer has to first establish its claim of deduction with respect to payment of interest u/s 36(i)(iii) and then the same shall be placed u/s 40(b) of the Act. 2.11 Thus, he submitted that this Miscellaneous Petition is being filed for the following reasons: a) For Non consideration of decision of Hon'ble Supreme Court in case of Munjal Auto Sales (2008) {298 ITR 298 (SC)} b) Order made under misconception quoted at para 4.6 of the ITAT judgment, are those of Hon’ble Supreme court in case of R. M. Chidambaram (1977) 106 ITR 292 (SC) c) Referring of decision in case of R.M. Chidambaram and quoting from decision of ITAT Pune in case of Quality Industries. 3. The ld. A.R. relied on the order of the Tribunal and submitted that the department wants to re-argue the appeal before this Tribunal, which cannot be allowed in view of the decision of the Hon’ble Supreme Court in case of CIT Vs. Reliance Telecom Limited in Civil Appeal No.7111 of 2021 dated 3.12.2021. 4. We have heard the rival submissions and perused the materials available on record. In this case, the assessee came in appeal before this Tribunal challenging the disallowance of interest payment to partners though it is authorized by the partnership deed in terms of section 40(b) of the Act. Now the contention of ld. D.R. is that while passing such order, the Tribunal has not considered the judgement of Hon’ble Supreme Court in case of Munjal Auto Sales cited (supra) and wrongly placed reliance of the judgement of Hon’ble Supreme Court in the case of R.M. Chidambaram cited (supra) and also on the order of Tribunal in case of R.M. Chidambaram. 4.1 In our opinion, the whole argument of the department in this miscellaneous petition is devoid of merits. The scope and ambit of MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 7 of 10 an application of s. 254(2) of the Act is very limited. The same is restricted to rectification of mistakes apparent from the record. Recalling the entire order, would mean passing a fresh order. That does not appear to be the legislative intent. The order passed by the Tribunal under s. 254 (1) is the effective order so far as the appeal is concerned. Any order passed under s. 254(2) either allowing the amendment or refusing to amend gets merged with the original order passed. The order as amended or remaining unamended is the effective order for all practical purposes. The same continues to be an order under s. 254(1). That is the final order in the appeal. An order under s. 254(2) does not have existence de hors the order under s. 254(1). Recalling the order is not permissible under s. 254(1). Recalling the order automatically necessitates rehearing and re-adjudication of the entire subject-matter of appeal. The dispute no longer remains restricted to any mistake sought to be rectified. Power to recall an order is prescribed in terms of r. 24 of the ITAT Rules, 1963, and that too only in cases where the assessee shows that it had a reasonable cause for being absent at a time when the appeal was taken up and was decided ex-parte. 4.2 Further, in the case of CIT vs. Karamchand Thapar & Brothers (P) Ltd. (1989) 76 CTR (SC) 36 : (1989 176 ITR 535 (SC) wherein it has been held as under : "It is equally well settled that the decision of the Tribunal has not to be scrutinize sentence by sentence merely to find out whether all facts have been set out in detail by the Tribunal or whether some incidental fact which appears on the record has not been noticed by the Tribunal in its judgment. If the Court, on a fair reading of the judgment of the Tribunal, finds that it has taken into account all relevant material and has not taken into account any irrelevant material in basing its conclusions, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse. MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 8 of 10 It is not necessary for the Tribunal to state in its judgment specifically or in express words that it has taken into account the cumulative effect of the circumstances or has considered the totality of the facts, as if that were a magic formula; if the judgment of the Tribunal shows that it has, in fact done so, there is no reason to interfere with the decision of the Tribunal." 4.3 Further, in the case of CIT vs. Ramesh Electric & Trading Co. (1993) 203 ITR 497 (Bom), wherein it has been held as under : "The power of rectification under s. 254(2) can be exercised only when the mistake which is sought to be rectified as an obvious and patent mistake which is apparent from the record, and not a mistake which requires to be established by arguments and a long drawn process of reasoning on points on which there may conceivably be two opinions. Failure of the Tribunal to consider an argument advanced by either party for arriving at a conclusion is not an error apparent on the record, although it may be an error of judgment. The Tribunal cannot, in the exercise of its power of rectification, look into some other circumstances, which •would support or not support its conclusion." 4.4 Further, in the case of Shakti Savanta vs. ITO (1983) 5 ITD 713 (Bom)(TM) wherein it has been held as under : "It is not always necessary that even in a speaking order the Tribunal should put down every argument of the assessee in a detailed manner as he has made it and that too in an equally detailed manner as he would like to have it. What is important is whether the argument has been heard and grasped by Tribunal and the decision bears the stamp of such grasp. As regards interpretation of r. 9A, the Tribunal adopted what it considered to be a rational method of computation, and this could be said either to be an interpretation of the rules given by the Tribunal or certainly a view which it holds on the particular question. Merely because its opinion differs from that of the assessee, the Tribunal's view cannot be said to be a mistake either of law or of fact. In effect what the assessee wants is a review of the Tribunal's order on this point adopting the interpretation which he would give to these provisions. This cannot be done by a rectification." MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 9 of 10 4.5 Further, Hon’ble Supreme Court in the case of Reliance Telecom Ltd. cited (supra) held as under: “4. In the present case, a detailed order was passed by the ITAT when it passed an order on 06.09.2013, by which the ITAT held in favour of the Revenue. Therefore, the said order could not have been recalled by the Appellate Tribunal in exercise of powers under Section 254(2) of the Act. If the Assessee was of the opinion that the order passed by the ITAT was erroneous, either on facts or in law, in that case, the only remedy available to the Assessee was to prefer the appeal before the High Court, which as such was already filed by the Assessee before the High Court, which the Assessee withdrew after the order passed by the ITAT dated 18.11.2016 recalling its earlier order dated 06.09.2013. Therefore, as such, the order passed by the ITAT recalling its earlier order dated 06.09.2013 which has been passed in exercise of powers under Section 254(2) of the Act is beyond the scope and ambit of the powers of the Appellate Tribunal conferred under Section 254 (2) of the Act. Therefore, the order passed by the ITAT dated 18.11.2016 recalling its earlier order dated 06.09.2013 is unsustainable, which ought to have been set aside by the High Court. 5. From the impugned judgment and order passed by the High Court, it appears that the High Court has dismissed the writ petitions by observing that (i) the Revenue itself had in detail gone into merits of the case before the ITAT and the parties filed detailed submissions based on which the ITAT passed its order recalling its earlier order; (ii) the Revenue had not contended that the ITAT had become functus officio after delivering its original order and that if it had to. relook/revisit the order, it must be for limited purpose as permitted by Section 254(2) of the Act; and (iii) that the merits might have been decided erroneously but ITAT had the jurisdiction and within its powers it may pass an erroneous order and that such objections had not been raised before ITAT. 6. None of the aforesaid grounds are tenable in law. Merely because the Revenue might have in detail gone into the merits of the case before the ITAT and merely because the parties might have filed detailed submissions, it does not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2) of the Act. As observed hereinabove, the powers under Section 254(2) of the Act are only to correct and/or rectify the mistake apparent from the record and not beyond that MP Nos.202 to 204/Bang/2023 M/s. Century Sheltors, Bangalore MP Nos.205 to 207/Bang/2023 M/s. Century Silicon City, Bangalore Page 10 of 10 Even the observations that the merits might have been decided erroneously and the ITAT had jurisdiction and within its powers it may pass an order recalling its earlier order which is an erroneous order, cannot be accepted. As observed hereinabove, if the order passed by the ITAT was erroneous on merits, in that case, the remedy available to the Assessee was to prefer an appeal before the High Court, which in fact was filed by the Assessee before the High Court, but later on the Assessee withdrew the same in the instant case.” 4.6 In view of this, we do not find any merit in the argument of department made in its miscellaneous petitions herein and all the miscellaneous petitions filed by the revenue are dismissed. 5. In the result, all the miscellaneous petitions by the revenue are dismissed. Order pronounced in the open court on 27 th Oct, 2023 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 27 th Oct, 2023. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(Judicial) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore