Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI ‘B’ BENCH, MUMBAI.
Before: Shri B.R. Baskaran (AM) & Shri Pavan Kumar Gadale (JM)
The assessee has filed this appeal challenging the order dated 20.10.2022 passed by the learned CIT(A)-National Faceless Appeal Centre, Delhi and it relates to A.Y. 2002-03. Original grounds of appeal and additional ground of appeal raised by the assessee are related to the following issues : a) Addition of lease rental accrued - Rs. 24.60 lakhs b) Disallowance of expenses - Rs. 1.44 crore c) Disallowance of depreciation – Rs. 4.26 lakhs d) Addition of increase in liability – Rs. 1.16 crore e) Non-granting to set off of brought forward losses.
2. The assessee is engaged in the finance and leasing business. The present assessment was completed by the Assessing Officer under section 144 read with section 254 of the I.T. Act, since the entire assessment was 2 NCFS Limited restored to the file for AO for framing assessment afresh. The Assessing Officer was constrained to complete the assessment to the best of his judgment since the assessee did not cooperate with the Assessing Officer. Accordingly he completed the assessment by determining total income at Rs. 1,39,14,000/-, as determined in the earlier assessment order dated 30.3.2005. The appeal filed by the assessee before the learned CIT(A) was partly allowed. Still aggrieved the assessee has filed this appeal.
3. First issue relates to addition of lease rental accrued did not book amounting to Rs. 24.60 lakhs.
4. Learned AR submitted that the assessee has stopped business during the year under consideration. He submitted that the Assessing Officer has made the impugned addition on the basis of a Note given by the Statutory auditor of the assessee company in the Audit report. He submitted that the auditor has stated in Note-8 of the audit report that the assessee has not accounted for income from hire rental to the tune of Rs. 18.06 lakhs and lease rental income to the tune of Rs. 6.54 lakhs. The Learned AR submitted that the above said Note was not relevant to the year under consideration and it has been included in the audit report due to a typographical error (copy and paste error) committed by the auditor. In support of this submission, the A.R invited our attention to the audit report given for the year ending 31.3.2000 and 31.3.2001, which are placed at page No. 23 & 39 of the paper book. A perusal of the audit report given for the preceding two years (referred above), we notice that the auditor has give identical note in those two years also. Accordingly, it was the contention of the learned AR submitted that the Assessing Officer should not have made the impugned addition as it is not related to the income of the year under consideration.
The Learned AR also submitted that the hire purchase rental of Rs.18.06 lakhs is to be received from M/s. Datar Switchgear Ltd., whose
3 NCFS Limited agreement has expired in August, 2000 itself. Hence there was no right to receive any hire rentals during the year under consideration. The Lease rental of Rs.6.54 lakhs was receivable from M/s. Electrex (India) Ltd., whose agreement has expired in April, 2001. He further submitted that both these accounts have become classified as non-performing assets (NPA) and hence no income could be recognised by the assessee as per accounting standard-7, as there is no certainty of receipt of money from the above said two parties. Accordingly, he prayed that the above said addition be deleted.
The Learned DR, on the contrary, submitted that the addition has been made on the basis of note given statutory auditor of the assessee-company and hence the Assessing Officer has rightly made the addition.
We heard the rival contention on this issue and perused the record. We noticed the auditor has given very same note in his report given for the year ending 2000 & 2001. Accordingly, there may be merit in the submission of learned AR that the note given by auditor during the year under consideration may be a case of inadvertent error committed in inclusion of the note relating to earlier years. This view is further reinforced for the fact that the agreement with M/s. Datar Switchgear Ltd. has expired in August, 2000 itself and the other agreement has expired in April, 2001. When the agreement expires, the assessee may not getting right to receive the income. In any case, it is the submission of the assessee that both the assets have been classified as non-performing assets. It is the submission of the assessee that these assets have been classified as non-performing assets due to default in receiving installments and as per accounting standard-7, income can be recognised only when its realisation is certain. In our view, there is merit in this legal contention also. Accordingly both on merits as well as on legal point, we are of the view that this addition could not have been made by the Assessing Officer. Accordingly, we set aside the order passed by the 4 NCFS Limited learned CIT(A) on this issue and direct the Assessing Officer to delete this addition.
The Next issue relates to disallowance of expenses of Rs. 1,44,87,000/- The Learned AR submitted that the major component of this expenditure to the tune of Rs. 141.39 lakhs relates to interest expenditure only. Out of the above said amount, a sum of Rs. 131.34 lakh is interest payable to the banks and the remaining amount of Rs.10.04 lakhs is the interest payable on public deposits. All these interest is payable on opening balances of outstanding loans. Accordingly, he submitted that there is no reason to suspect the interest expenditure to the tune of Rs. 141.39 lakhs and hence no disallowance of this amount is called for.
With regard to the remaining amount of expenses of Rs.3.48 lakhs, learned AR submitted that the assessee does not have evidence to prove these expenses.
We have heard learned DR on this issue and perused the record. We noticed that the assessee does not have explanation for the expenses other than interest expenditure. Hence, disallowance of other expenses made by the Assessing Officer is required to be confirmed.
With regard to interest expenditure of Rs. 141.39 lakhs, we noticed that a sum of Rs.131.34 lakhs is the interest payable to Scheduled banks. Admittedly the assessee has not made payment and hence the same is required to be disallowed under section 43B of the I.T. Act. On this count, the interest expenditure of Rs. 131.34 lakhs payable to the bank is the liable to be disallowed. With regard to the remaining amount of interest of Rs.10.05 lakhs, the assessee does not have any detail. Accordingly, we are of the view that the Ld CIT(A) was justified in confirming disallowance of entire expenses
5 NCFS Limited of Rs. 144.87 lakhs and his decision does not call for any interference. Accordingly we confirm the order passed by the learned CIT(A) on this issue.
The Next issue relates to disallowance of depreciation of Rs.4.26 lakhs. The Assessing Officer had disallowed this depreciation amount on the reasoning that it related to sale and leased back transaction.
The Learned AR submitted that the disallowance of depreciation assets covered under sale and leased back transaction would apply only in the cases where seller of assets and lessee are one and the same person. If the seller of asset and lessee are two different persons, then depreciation is not required to be disallowed. He submitted that this view has been expressed by the Coordinate Bench in assessee’s own case in and CO No. 247/Mum/2018 dated 28.9.2018. The Learned AR submitted that the above said depreciation relates to an asset which was purchased from one party and leased out to another party. Accordingly, he prayed that the disallowance of depreciation be deleted.
We heard Ld DR on this issue and perused the record. The proposition expounded by the Coordinate Bench in assessee’s own case in relating to A.Y. 1997-98 is that the disallowance of depreciation on assets, where seller of the assets and lessee are different is not required to be made. However, it is not discernible from the record that the assets on which depreciation was disallowed fall under the above said category. Accordingly, we set aside this issue to the file of the Assessing Officer with the direction to examine the nature of asset. If he finds that the seller of the asset and lessee are two different persons, then no disallowance of the depreciation is called for
The Next issue relates to the addition of liability of Rs. 116.43 lakhs made under section 68 of the Act. The Learned AR submitted that the amount of Rs. 116.43 lakhs consisted of following items :
6 NCFS Limited
Increase in bank loan - Rs. 20.32 lakhs Increase in unsecured loan - Rs. 59.92 lakhs Increase in outstanding expenses - Rs. 36.19 lakhs Rs. 116.23 lakhs He submitted that the increase in bank loan is on account of interest expenditure and increase in outstanding expenses is on account of expenses not paid. Hence there was no fresh flow of funds in these two items. The Learned AR submitted that the AO has already disallowed the expenses claimed by the assessee. Hence the addition of increase in liability on account of very same expenses has resulted in making double disallowance.
With regard to the unsecured loan of Rs.59.92 lakhs, the Ld A.R submitted that the loan of Rs. 21.45 lakhs was taken from Akash Farms P. Ltd. And the loan of Rs.73.39 lakhs was taken from Akash Enterprises. The learned AR submitted that the assessee has filed confirmation letters obtained from these parties.
We heard learned DR on this issue and perused the record. In the earlier paragraph we have confirmed the disallowance of expenses of Rs. 144.87 lakhs. We noticed that the increase in secured loan and the increase in outstanding expenses are on account of the above said expenses only. Since we have confirmed the disallowance of expenses, in our view, making addition of increase in liability of Rs. 20.32 lakhs and Rs. 36.19 lakhs would result in double disallowance, since there was no fresh flow of funds. Accordingly, we direct deletion of Rs. 20.32 lakhs and Rs. 36.19 lakhs relating to interest and expenses respectively.
With regard to fresh loan of Rs. 21.45 lakhs and Rs. 73.39 lakhs taken from M/s. Akash Farms Pvt. Ltd. and Akash Enterprises, we noticed that the assessee has only furnished confirmation letters. In our view, mere filing of confirmation letters would not discharge the assessee from the burden placed on its shoulder under section 68 of the Act. Accordingly, we confirm the 7 NCFS Limited addition made under section 68 of the Act in respect of the above said two loans.
The Last issue relates to non-granting of set off of brought forward losses. The learned AR submitted that the assessee had brought forward losses and the same was not set off by the AO against the income of the current year. Hence the assessee filed a rectification petition under section 154 of the Act requesting the Assessing Officer to grant set off of brought forward losses. However, the Assessing Officer, vide its order dated 27.1.2006, rejected the rectification petition filed by the assessee. Hence the assessee filed appeal before the learned CIT(A) challenging the order passed by the AO u/s 154 of the Act. He submitted that the learned CIT(A) has since disposed of the appeal, vide its order dated 27.7.2006 passed in F.No.CIT(A)-I/IT/240/05-06/32 directing the Assessing Officer to allow set off of brought forward losses after verifying the past records. The Learned AR submitted that the Assessing Officer has not given effect to this order of the learned CIT(A) till date and hence the assessee has raised an additional ground seeking direction from the bench to the AO to allow set off of brought forward losses. He submitted that it is only a legal ground and the AO is required to grant set off of brought forward losses as per law. Accordingly he prayed that the Assessing Officer may be directed to give effect to this order of the learned CIT(A).
The Learned DR submitted that the assessee is raising this ground for the first time before the Tribunal and hence this should not be admitted.
We heard the rival submissions. We do not find any merit in the objection raised by learned AR. By way of this additional ground the assessee only seeks granting of set off of brought forward losses to which assessee is statutorily entitled to. In our view, it is the duty of the AO to grant set off of brought forward losses while computing total income of the assessee. Without allowing set off of brought forward losses, the total income
8 NCFS Limited could not have been computed correctly. Hence the direction sought by the assessee is for implementation of provisions of the Act only. In any case the learned CIT(A), vide its order dated 27.7.2006 (supra), has already directed the Assessing Officer to allow set off of brought forward losses after verifying the record. We do not find any reason for not implementing the said order of the learned CIT(A). Accordingly, we direct the Assessing Officer to implement the order of the learned CIT(A) granting set off of brought forward losses after verifying record.
In the result, appeal filed by the assessee is treated as partly allowed.
Pronounced in the open court on 11.1.2023.