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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SHRI RAMA KANTA PANDA & SHRI K. NARASIMHA CHARY
आदेश / ORDER PER K. NARASIMHA CHARY, J.M : Aggrieved by the order(s) dated 23/09/2022 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), in the case of Jaya Hospitals, (“the assessee”) for the assessment years 2013-14 and 2015-16, assessee preferred these appeals.
ITA Nos.616 & 617/Hyd/2022
These two appeals relate to the same assessee but to two different assessment years and since the source of income of the assessee is same, we deem it just and convenient to dispose of these appeals by way of this common order.
Insofar as the appeal for A.Y. 2013-14 is concerned, there is only one addition under challenge. While scrutinizing the return of income for that year, learned Assessing Officer found that the assessee had shown the loan to Shri T. Narasimha Reddy (HUF) at Rs.6,77,00,000/- and it was further found that the assessee had taken loan from HDFC and SBH Banks and paying interest to the tune of Rs.1,02,29,523/- which includes the interest on partners’ capital. According to the learned Assessing Officer, since the assessee on one hand is paying huge interest of Rs.1,02,29,523/- and seems to have diverted such interest-bearing funds to Shri T. Narasimha Reddy (HUF) without charging any interest, the proportionate interest was to be disallowed. On this premise, learned Assessing Officer disallowed the interest expenditure to the tune of Rs.71.70 lakhs.
In appeal, ld.CIT(A) while considering these admitted facts, reached a conclusion that no infirmity was found in the action of the learned Assessing Officer in disallowing interest at Rs.71.70 lakhs out of the aggregate expenditure claim and therefore, there were no merits in the appeal. He accordingly dismissed the appeal.
Ld.AR submitted that as could be seen from the income and expenditure account at Page No.28 of the paper book, the interest paid on loans was only Rs.1,18,151/- and the interest paid to the partners’ capital
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account was to the tune of Rs.1,01,11,372/-, and inasmuch as no interest paid to the partners’ capital account could be disallowed under Section 37 of the Income Tax Act, 1961 (“the Act”), the entire interest expenditure in respect of the bank loan, at best has to be disallowed and nothing more than that.
Ld.AR submitted that a similar question had arisen in assessee’s own case for A.Y. 2011-12 in ITA No.202/Hyd/2016 and by order dt.20.07.2018, a Co-ordinate Bench of the Tribunal had taken a view that it would be in the interests of justice to direct the learned Assessing Officer to verify the claim of the interest under section 40(b) of the Act and if the same was to be found in accordance with the provisions of section 40(b)(iv) of the Act, then to allow the entire amount under such provision. Learned Assessing Officer was further directed to examine whether any borrowed funds were diverted for non-business purposes, and in case the assessee used the borrowed funds for business purpose, no interest expense can be disallowed out of the claim made by the assessee.
Per contra, ld.DR opposed the submission made on behalf of the assessee that at best the interest paid on the borrowed funds which was to the tune of Rs.1,18,151/- alone could be disallowed and submitted that the order for the earlier assessment year had become final and therefore, the same may be followed.
We have gone through the record in the light of the submissions made on either side. When a similar question had arisen for the earlier assessment year, a Co-ordinate Bench of the Tribunal has observed that, ---
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“6. We have considered the rival contentions and perused the documents placed on record and the case law. As seen from the order of the Assessing Officer, there is no finding that borrowed funds are diverted for non-business purposes. It is the contention that the assessee got funds in earlier years without interest and there was also balances of the HUF to their credit to an extent of Rs. 1.85 Crs. Without establishing that borrowed funds are diverted for the purpose of business, Assessing Officer disallowed an amount of Rs. 41, 34,493/- invoking the provisions of section 37 of the Act. First of all, we are unable to understand how provisions of section 37 will apply, when interest on borrowed funds are to be considered u/s 36(1)(iii) of the Act. Be that as it may, the claim of Interest was only Rs 5,90,785/- on the loans taken, as stated by the A.O. in para 10.0 in the Assessment Order whereas the claim of Rs. 70,85,488/- is interest on partner’s capital account governed by provisions of section 40(b). 7. As seen from the provisions of section 40 with the heading “amounts not deductible” it starts with the words “notwithstanding anything to the contrary in section 30 to 38”. Thus, the provisions of section 36(1)(iii) as well as section 37 are not to be considered, when the amounts are governed by section 40. Section 40(b) is with reference to payments of salary, remuneration, interest and other amounts to the partners in the case of any firm. There is no dispute with reference to applicability of section 40(b)(iv) as payment of interest to the partners is authorised by the partnership deed and amount can be allowed subject to a maximum @ 12% of interest per annum. While accepting that provisions of section 40(b) are applicable, CIT (A) surprisingly did not give any finding on the issue, but only stated that the rate of interest @ 12% on an amount of Rs. 4.99 Crs would works out to Rs. 59,95,211/- whereas assessee claimed Rs. 70,85,488/-. It was submitted by the Learned Counsel that the interest is claimed as per the provisions of the Act on the balances to the credit of the partners. Since the basis for working out the amount by the CIT(A) is not verifiable, in the interest of justice, we direct the A.O. to verify the claim of interest at Rs. 70,85,488/- u/s 40(b). If the same is as per the provisions of section 40(b)(iv), then the A.O. is directed to allow the entire amount as per the provisions of law. 8. That leaves us with the claim of interest at Rs. 5,90,785/- which is the only interest claimed on loans taken. It is not clear whether the above amount is paid on any borrowed amounts from any parties or the amount paid to banks for the day-to-day over draft facility. The contention that assessee had sufficient funds, including the profits of the year has not been examined by the A.O. and further there is no finding that borrowed funds are diverted for non-business purposes. Since there is no clarity or finding on this issue, in the interest of justice we direct the A.O. to examine whether the interest paid at
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Rs. 5,90,785/- requires to be disallowed under the provisions of section 36(1)(iii) or not? In case, assessee has sufficiently enough funds to advance the HUF, Assessing Officer cannot disallow any amount out of the interest paid and used for the business. The principles laid down by the Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd., (313 ITR 340) (Bom.) will apply. Assessing Officer is directed to examine whether any of the borrowed funds are diverted for non-business purposes and in case the assessee has used the borrowed funds for the business purposes, no amount can be disallowed out of the claim made by the assessee. We make it clear that the allowance of interest on the partner’s capital is governed by the provisions of section 40(b) which should be verified whether the claim of Rs.70,85,488 is according to the provisions of the Act (40(b)(iv) and with reference to the claim of interest Rs. 5,90,785/- A.O. is directed to examine whether the interest can be considered for disallowance u/s 36(1)(iii), subject to giving a finding that there is nexus with diversion of borrowed funds. With these directions, the orders of the Authorities are set-aside and issues are restored to the file of the A.O. to pass order accordingly.”
Since there is no change of facts and circumstances, the same is applicable for this year also. We therefore, are inclined to follow the same. We, accordingly, while setting aside the impugned order, restore the issue to the file of learned Assessing Officer to comply with the directions issued in the order for the earlier assessment year referred to above.
Appeal for A.Y. 2013-14 is accordingly treated as allowed for statistical purposes.
ITA No.617/Hyd/2022 for A.Y. 2015-16
Insofar as this appeal is concerned, three additions are under challenge. First addition is in respect of the disallowance of EPF and ESI contributions received by the assessee as an employer towards employee contribution, not deposited within the due dates as stipulated in the respective enactments but before the due date for filing of the return. This
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issue is squarely covered by the decision of the Hon'ble Apex Court in the case of Checkmate Services Pvt. Ltd., Vs. CIT, [2022] 143 taxmann.com 178 (SC). In Checkmate Services Pvt. Ltd., (supra), the Hon'ble Apex Court dealt with the impact of the provisions under section 36(1)(va) of the Act in depth and while holding the issue against the assessee, held as under :
“53. The distinction between an employer’s contribution which is its primary liability under law – in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) - unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B. 54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such
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concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.”
Respectfully following the decision of Hon'ble Apex Court in the case of Checkmate Services Pvt. Ltd (supra), we do not find any merits in this ground and the same is dismissed.
Coming to the second ground, it is in respect of depreciation on machinery. It could be seen from the impugned order that the assessee agreed for this disallowance and basing on the acceptance of the assessee, this addition was made. Ld.CIT(A) also found that apart from this admission by the assessee, no material to the contrary was produced before him and therefore, the addition has to be confirmed. The same is the situation before us also. We do not find any reason to take a different view from the authorities below because of the absence of any material whatsoever, contrary to the findings of the authorities below. We, therefore, uphold the findings of the authorities below and dismiss this ground.
Now coming to the last addition made in respect the interest on fixed deposits, assessment order speaks that such amount is reflected in Form 26AS statement and the same was not included in the taxable income. No explanation was offered before the learned Assessing Officer on this aspect. Same is the case before the ld.CIT(A). At no point of time, the assessee had taken a plea that no such interest was accrued or
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received by them. Entries reflected in Form 26AS remains unchallenged and uncontroverted. This being the factual position, we do not find any reason to interfere with the findings of the authorities below. This ground of appeal is also dismissed and consequently, the appeal is dismissed.
In the result, ITA No.616/Hyd/2022 is treated as allowed for statistical purposes and ITA No.617/Hyd/2022 stands dismissed.
Order pronounced in the open court on this the 30th day of December, 2022.
Sd/- Sd/- Sd/- ( RAMA KANTA PANDA) (K. NARASIMHA CHARY) ACCOUNT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 30/12/2022 TYNM/SR.PS
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