COMMISSIONER OF INCOME TAX vs. M/S.GREGORIOUS MEMORIAL MUTHOOT MEDICAL

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON MONDAY, THE 24TH DAY OF SEPTEMBER 2018 / 2ND ASWINA, 1940 I.T.A.No.136 of 2011 AGAINST THE ORDER IN ITA 133/COCH/2010 OF I.T.A.TRIBUNAL, COCHIN BENCH DATED 20-10-2010 [ASSESSMENT YEAR 2006-07] APPELLANT/S: COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADVS. SRI.P.K.R.MENON, SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/S: M/S.MAR GREGORIOUS MEMORIAL MUTHOOT MEDICAL CENTRE, COLLEGE ROAD, KOZHENCHERRY-689641. BY ADVS. SRI.P.BENNY THOMAS SRI.JOSON MANAVALAN SRI.K.JOHN MATHAI SRI.KURYAN THOMAS SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.GOPINATH SRI.RAJA KANNAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24.09.2018, ALONG WITH I.T.A.NO.140/2011 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:-

I.T.A.No.136 of 2011 & - 2 - connected cases I.T.A.Nos.136, 140, 142 & 147 of 2011 JUDGMENT The following questions of law arise in the above appeals filed from the orders of the Income Tax Appellate Tribunal: "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in interfering both with substantive and protective additions? 2. Whether, on the facts and in the circumstances of the case-, (a) The ITAT is right in allowing the interest paid on deposits which were not taken for the purpose of business of the assessee, as a deduction u/s.37(1)? (b) the Tribunal is right in law and fact in interfering with the addition made on protective basis without considering the issue on merits? (c) should not the ITAT have directed the CIT(A) to consider the protective addition on merits in view of the reversal of the order of CIT(A), on the substantive addition? 3. Whether, on the facts and in the circumstances of the case-, (a) The withdrawals from the firm by the partners partakes the character of a loan given for business purposes? (b) the ITAT is right in law and fact in interfering with the protective addition?"

I.T.A.No.136 of 2011 & - 3 - connected cases 2. On facts, it has to be noticed that the respondent-assessee in I.T.A.Nos.136 and 147 of 2011 carries on a Multi Speciality Hospital and the respondent-assessee in I.T.A.Nos.140 and 142 of 2011 carries on Real Estate business. The Multi Speciality Hospital had a Resources Division and the Real Estate firm also had such a division which accepted deposits from the public. The amounts so deposited by the public were withdrawn by the partners and invested in other sister concerns which were doing business in finance. The partners, on their advances from the assessee-firms, paid 12% interest to the assessee-firms. The assessee-firms, on deposits from the public, paid 5 to 12 percent interest to such depositors. The assessee claimed set off, of the expenditure, being the interest paid to the depositors, under Section 37(1) of the Income Tax Act, 1961 [for brevity "IT Act"] and there was only a negligible profit which was returned as income from the business of finance so carried on by the assessee. 3. We have to immediately notice that the assessees were not carrying on any business in finance. The Assessing Officer [for brevity "AO"] issued notice to the assessee to explain the business carried on and found that the advance received by the partners and investment made in other sister concerns is a mere camouflage. On that basis, the assessees

I.T.A.No.136 of 2011 & - 4 - connected cases were found to have earned interest income far in excess of that received by it from the partners. To compute such interest income received, the AO resorted to Sections 144 and 145 of the IT Act. The AO, on enquiry, found the interest received by comparable financial institutions and computed the income accrued in the hands of the assessee-firms at the average of 20%. This addition was made to the income and there was a dis-allowance of the expenditure claimed by way of interest payment to the public who had deposited amounts with the assessee-firms. The dis-allowance was on the count that there was no business of finance carried on by the assessee. 4. The first appellate authority sustained the addition to the income; but, however, deleted the expenditure claimed. The first appellate authority found that the findings of the AO were mutually destructive. If the assessee was engaged in the business of finance and earned interest income far in excess of that received by the assessee-firms from its partners; then necessarily the expenditure by way of interest paid to the public who had deposits with the assessee-firms was to be allowed under Section 37 of the IT Act was the finding; with which we agree on principle. 5. Before the Tribunal, separate appeals were filed by the assessee and the Revenue. The Tribunal in the appeal

I.T.A.No.136 of 2011 & - 5 - connected cases of the assessees, deleted the addition made finding that there could not have been a speculative computation of interest earned based on the investment made by the partners who had merely taken an advance from the assessee-firms. The resort to best judgment assessment relying on Sections 144 and 145 of the IT Act was found to be bad. The appeals of the assessee with respect to interest income was allowed, deleting the same. In the appeals filed by the Revenue, the Tribunal found that the assessee-firms had been doing the business of advancing loans to the partners and receiving interest from them. On that basis, there was found to be existing a business between the assessee and its partners and hence, the expenditure was found to be permissible. 6. We agree with the Tribunal insofar as deletion of speculative computation of interest earned based on the investment made, but on different grounds. A camouflage or not, the assessee had arranged the affairs in such a manner as no interest being earned directly by the assessee firms through the investments made by its partners. The assessee had accepted deposits from the public and also made advances to its partners. In any event, the partners were entitled to take advances from the firm on payment of interest, which cannot be taken to be a business carried on by the assessee-firms. We do not agree with the Tribunal to that

I.T.A.No.136 of 2011 & - 6 - connected cases extent. 7. The investment made by the partners in the sister concerns and the income derived by way of more interest, than that they were paying to the assessee-firms could be assessed at the hands of the sister concerns or in the hands of the partners on which we need not give any specific opinion since that is not the subject matter of the present appeals. With respect to the present appeals and the assessments made on the assessee-firms, we are of the definite opinion that there could be no addition made under Section 145. We uphold the order of the Tribunal insofar as deleting the additions made. We answer the first question of law to the extent that it speaks of interference of substantive additions made to the interest income received by the assessee-firms, in favour of the assessee and against the Revenue. We uphold the findings of the Tribunal on that aspect. 8. The questions of law raised in addition to the interference with the substantive additions made on best judgment are with respect to the dis-allowance of expenditure under Section 37(1). There cannot be any dispute, insofar as allowance of expenditure can be allowed only in the case of a business carried on by the assessee. The respondent-assessees herein are respectively a Multi Speciality Hospital and Real Estate firm, which do not have any business of financing. The

I.T.A.No.136 of 2011 & - 7 - connected cases advance taken by the partners also cannot be said to be a business, since as we have noticed, the assessee does not carry on any business on finance and the partners by their very status were entitled to avail such advances from the firm. 9. We garner support from the decision of the Hon'ble Supreme Court in Madhav Prasad Jatia v. C.I.T. [(1979) 118 ITR 200]

. Therein the assessee carried on business in money lending and had various sources of income from shares, properties etc. It promised to donate Rs. 10 lakhs to set up an engineering college. The assessee also debited its capital account and corresponding credit was given to the account of the college. It then availed of an overdraft facility of Rs.5.5 lakhs from an account maintained for business purposes and disbursed it to the college. The balance was treated as a loan availed by the assessee from the College. The assessee paid interest to the bank on the overdraft and to the college for the loan, which were claimed as business expenditure. The overdraft facility was held to be not availed for business purposes and the so called loan from the college was held to be the assessees' own funds. Here too there was no business in finance carried on by the Firms and the partners had merely taken advances from the firm, the application of which was not the concern of the

I.T.A.No.136 of 2011 & - 8 - connected cases firm. 9. We, hence, find that the advances obtained by the partners were not in the nature of business carried on by the assessee and, hence, there could be no claim of business expenditure insofar as the interest paid to the depositors, the public. We, hence, answer the other questions of law framed against the assessee and in favour of the Revenue. We delete the order of the Tribunal insofar as the allowance of interest expenditure under Section 37. The order of the AO disallowing the expenditure on interest paid to the depositors is sustained on the grounds herein above mentioned as distinguished from the view taken by the AO. The appeals would stand partly allowed. Ordered accordingly. Parties are left to suffer their respective costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE

I.T.A.No.136 of 2011 & - 9 - connected cases APPENDIX [IN I.T.A.NO.136 OF 2011] APPELLANT'S ANNEXURES: ANNEXURE A ASSESSMENT ORDER U/S 143(3) DATED 30.12.2008 ANNEXURE B CIT (A)'S ORDER IN APPEAL NO. ITA NO.10/TVLA/09-10.DATED 30.12.2009 ANNEXURE C ITAT's ORDER IN APPEAL NO ITA NO.133/COCH/2010 DATED 20.10.2010 ANNEXURE D ARGUMENT NOTE FILED BEFORE CIT(A) ANNEXURE E COPY OF LETTER DATED 24.11.2008 ANNEXURE F COPY OF LETTER DATED 15.12.2008. RESPONDENT'S ANNEXURES:- NIL. Vku/- [true copy ]