M/S.ANAND vs. THE DEPUTY

T.C.A.No.855 of 2019 In the High Court of Judicature at Madras Dated : 09.07.2020 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.855 of 2019 M/s.Anand Transport Pvt. Ltd., No.1, 9th Street, Dr.Radhakrishnan Salai, Mylapore, Chennai – 600 004. PAN: AAJCA111N ...Appellant Vs The Deputy Commissioner of Income Tax, Corporate Circle – I(1), Chennai – 600 006. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 28.07.2017 in ITA No.513/MDS/2017 on the file of the Income Tax Appellate Tribunal Chennai 'B' Bench for the assessment year 2011-12. For Appellant : G.Baskar For Respondent : M/s.R.Hemalatha, SSC 1/9 http://www.judis.nic.in T.C.A.No.855 of 2019 Judgment was delivered by T.S.SIVAGNANAM,J We have heard Mr.G.Baskar, learned counsel appearing for the appellant and M/s.R.Hemalatha, the learned Senior Standing Counsel for the respondent. 2.This appeal, filed by the assessee under Section 260A of the Income Tax Act, 1961 (“the Act” for brevity), is directed against the order dated 28.07.2017 passed by the Income Tax Appellate Tribunal, Chennai 'B' Bench (for brevity, the Tribunal) in ITA No.513/Mds/2017 for the assessment year 2011-12. 3.The assessee has filed this appeal by raising the following substantial questions of law : “1.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that interest on borrowed capital, in so far as it is relatable to the interest free advance given to the sister concern, is disallowable u/s.37 of the Income Tax Act, 1961? 2.Whether on the facts and in the circumstances of the case, the Income Tax Appellate 2/9 http://www.judis.nic.in T.C.A.No.855 of 2019 Tribunal was right in law in dismissing the ground regarding disallowance of interest, without considering the order of the co-ordinate Bench in the case of Appellant's own predecessor's Firm's case for the earlier years dated 31.05.2017? 3.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in not holding that disallowance of interest, in any event cannot exceed the expenditure on account of interest? 4.Whether borrowed funds and the advances lost its independent identity after all the assets and liabilities of the erstwhile Partnership Firm have been taken over by the appellant Company and if so, no disallowance on the ground that borrowed funds had been diverted for non-business purposes is warranted?” 4.The factual issue involved in the matter is with regard to the disallowance of the interest on borrowed capital. For the purpose of deciding this appeal, it may not be necessary for this Court to go into the factual exercise for the reasons which we shall assign. Before the Tribunal for the assessment year under question two issues arose for consideration. The first pertaining to the taxability of the transport charges paid by the assessee to M/s.Jaladhi Oversees Pte. Ltd. The 3/9 http://www.judis.nic.in T.C.A.No.855 of 2019 assessee contended that the transaction is not taxable and referred to the Article 7 and Article 8 of the Indo Singapore Treaty. The assessee also referred to the assessee's own case decided by this Court in W.A.No.952 of 2013 dated 05.02.2014. The Tribunal has remanded the matter to the Assessing Officer to make enquiry with appropriate authority as to whether the Payee M/s.Jaladhi Oversees Pte. Ltd. has a permanent establishment [PE] in India and decide the issue afresh in accordance with law after affording an opportunity to the assessee. The second issue is with regard to disallowance of interest on the amount paid by the assessee to their sister concern. The Tribunal has decided the issue against the assessee. 5.Mr.G.Baskar,

learned

counsel

appearing

for

the appellant/assessee contended that the assessee was originally a partnership firm and during the assessment year under consideration, i.e. 2011-2012, the partnership firm became a private limited company, the assessee herein. An identical issue came up for consideration under the the assessee Company was a partnership firm for the very same assessment year, namely, 2011-2012 as well as in two earlier assessment years, namely, 2009-2010 and 2010-2011. An identical argument was made by the assessee as raised in the instant 4/9 http://www.judis.nic.in T.C.A.No.855 of 2019 case before the Tribunal in those three cases and the Tribunal by order dated 31.01.2017 remanded the matter to the Assessing Officer to re-examine the matter afresh in the light of the agreement relied on by the assessee. It is submitted by the learned counsel that in those three appeals, the Tribunal had fully heard the arguments and reserved orders on 15.03.2017. So far as in the present case, the Tribunal heard the arguments in full and reserved orders on 29.05.2017. In the earlier batch of three cases, the Tribunal pronounced the order on 31.05.2017. Since by then the Tribunal had reserved orders in the present proceedings, the assessee filed a memorandum dated 09.06.2017 enclosing the copy of the order passed by the Tribunal dated 31.05.2017. The purpose for filing such order is to request the Tribunal to consider the same and remand the matter to the Assessing Officer for re-examination. However, the Tribunal without even referring to the said request has proceeded to decide the matter on merits. Therefore, it is submitted that the assessee was put to prejudice on account of the decision of the Tribunal deciding the issue on merits when the issue is now pending before the Assessing Officer for re-examining the matter as per the directions of the different Bench of the Tribunal dated 31.05.2017. 5/9 http://www.judis.nic.in T.C.A.No.855 of 2019 6.M/s.R.Hemalatha, learned Senior Standing Counsel appearing for the respondent sought to sustain the impugned order and submitted that the reason given by the Tribunal was perfectly right as the loan granted was neither secured against any specific project or land to be developed nor the fund was deposited in an escrow account for utilization in the direction of the specified purpose. Therefore, there was no business expediency behind the borrowal and the trial was in affirming the order passed by the CIT(A), who in turn affirmed the order of assessment disallowing the said expenses and adding the same to the total income under the head “business income”. 7.After we have elaborately heard the learned counsels for the parties, we are of the view that the trial ought to have remanded the matter to the Assessing Officer for being re-examined afresh. We say so because the assessee before becoming a private limited was a partnership firm and part of the assessment year 2011-2012 the assessee is being assessed as a firm. The very same agreement which was referred to by the assessee in the instant case has also been referred to by the firm for part of the assessment year 2011-2012. That apart, the same type of transaction also arose for two earlier years, namely, 2009-2010 and 2010-2011 and the Tribunal thought fit 6/9 http://www.judis.nic.in T.C.A.No.855 of 2019 to remand the matter to the Assessing Officer for verification of the agreement. Therefore, in our considered view if the Tribunal by taking a decision on merits has virtually set at not the earlier order of the Tribunal though by a different Bench but obviously a co-ordinate Bench of the Chennai Bench of the Tribunal. The Assessing Officer will be in a quandary and he would be bound over by the present impugned order passed by the Tribunal as the remand order in the earlier batch of cases dated 31.05.2017 has been virtually set at not by the impugned order. Such a position should not arise because the agreement in question has already been directed to be considered and re-examined by the Assessing Officer. Therefore, the Tribunal could have remanded the matter to the Assessing Officer on the same lines as was done in the order dated 31.05.2017. That apart, the assessee looses the right of appeal before the CIT(A) and the right of appeal before the Tribunal if they are unsuccessful. Therefore, the matter requires to be remanded to the Assessing Officer for re-examination of the agreement and take a decision on merits. 8.For the above reasons, the appeal filed by the assessee is allowed and the substantial question of law No.2 is answered in favour of the assessee. Substantial Question of law Nos.1, 3 and 4 are left 7/9 http://www.judis.nic.in T.C.A.No.855 of 2019 open and not decided the case as we are remanding the matter to the Assessing Officer for re-consideration. Accordingly, the Assessing Officer is directed to re-examine the matter afresh along with other cases pertaining to the assessment year 2009-2010, 2010-2011 and 2011-2012 as expeditiously as possible. No costs. (T.S.S.J.) (V.B.S.J.) 09.07.2020 Speaking (or) Non Speaking Order Index : Yes (or) No Internet : Yes (or) No To The Income Tax Appellate Tribunal, Madras 'B' Bench. cse 8/9 http://www.judis.nic.in T.C.A.No.855 of 2019 T.S.SIVAGNANAM,J AND V.BHAVANI SUBBAROYAN,J cse TCA.No.855 of 2019 09.07.2020 9/9 http://www.judis.nic.in