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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI G.S. PANNU, AM & SHRI PAWAN SINGH, JM
O R D E R
Per Pawan Singh , Judicial Member:
This appeal by assessee is directed against the order of ld. Commissioner of Income-tax(Appeals)-40, Mumbai [ld. CIT(A)] dated 20/10/2014 for Assessment Year 2011-12, which arises from assessment order passed u/s. 143(3) dated 02/12/2013 . The assessee has filed revised Grounds of appeal
which read under :-. “1. The learned Commissioner of Income-Tax (Appeals) ought to have appreciated that as per the decision of Hon'ble Special Court dated 30.04.2010 in MP No. 41 of 1999, the assets under consideration and the consequential income belongs to Shri Harshad S. Mehta and hence the income assessed by the Assessing Officer ought to have been taxed in the hands of Shri Harshad S. Mehta and not in the hands of the appellant.
2. The learned Commissioner of Income-Tax (Appeals) has erred in law and in facts in not granting relief of liability amounting to Rs. l_,15,20,783/-,_ towards interest expenditure claimed by the appellant. The Ld. Commissioner of Income-tax (Appeals) ought to have appreciated that out of interest of Rs. 1,15,20,783/- payable on the borrowed funds, interest on the amount utilized in investment in Term deposit ought to have been allowed to the extent of interest income i.e. Rs. 69,98,791/-
3. The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in confirming calculation of book profit u/s. 115JB amounting to Rs. 69,77,541/-.
M/s. Velvet Holdings Pvt. Ltd.
4. The learned Commissioner of Income-Tax (Appeals) has erred in law and in facts in confirming interest charged u/s. 234A, 234B and 234C of the Act.
5. The learned Commissioner of Income-Tax (Appeals) has erred in law and in facts in the hands of the appellant was subjected to the provisions of TDS and hence on the said amount of tax no interest can be computed u/s. 234B and 234C of the Act.
6. The Appellant craves leave of Your Honour to add to, alter, amend and/or delete all or any of the foregoing grounds of appeal
.”
2. Brief facts of the case are that the assessee is a notified entity under Special Court (Trial of Offences Relating to Transactions in Securities) (TORT) Act, 1992. The assessee filed its return of income for the year under consideration on 29/09/2011declaring income of Rs.59,65,691/-. Assessment was completed u/s. 143 (3) of the Act on 02/12/2013 assessing total income at Rs.69,77,540/-. The Assessing Officer (A.O) while passing the assessment order besides other additions and disallowances disallowed interest expenditure of Rs.1,15,20,783/- and calculated book profit u/s. 115JB of the Act at Rs.69,77,541/-. On appeal before the CIT(A) the action of the A.O was confirmed. Thus, the assessee has filed the present appeal before the Tribunal.
3. We have heard the submissions of the ld. Authorised Representative (AR) and the ld. Departmental Representative (DR) and have perused the material available on record. The ld. AR submits that there is delay of 760 days in filing of the appeal and that the assessee has filed an application for condonation of delay supported with an affidavit of Shri Hitesh S.Mehta, one of the directors of the assessee company. The ld. AR submits that the delay was primarily due to obtaining the appeal filing fee from the custodian appointed by the Special Court (TORT). Hence, the delay in filing the appeal was beyond the control of the assessee. The ld. AR submits that similar issue of contention of delay occurred in a number of appeals by the assessee against different orders of lower authorities. Similar plea relating to condonation of delay was adjudicated by the M/s. Velvet Holdings Pvt. Ltd.
Tribunal in assessee„s group case wherein identical delay of 760 days on identical fact in Eminent Holdings Pvt.Ltd. & Ors. vs. ACIT in dated 11/09/2017), was condoned. The ld. AR prayed for condonation of delay.
4. On the other hand the ld. Departmental Representative (DR) contended that he left the issue at the discretion of the Bench.
5. We have considered the submission of both the parties. We have seen that the assessee has placed on record application dated 02/12/2014 moved before Officer on Special Duty (OSD) Office of Custodian under Special Court (TORT) for releasing the appeal fee. We further note that similar Ground for condonation of delay was raised by the assessee‟s Group Company (supra) in ITA No. 1215/Mum/2017 dated 11/09/2017). The Tribunal passed the following order (para 2-5) :-
“ 2. The appeals filed by these assessees are barred by limitation as detailed below :- (a) Orion Travels Pvt. Ltd. : 383 days (b) Aatur Holding Pvt. Ltd. : 391 days (c) Harsh Estates Pvt. Ltd. : 391 days (d) Eminent Holdings Pvt. Ltd. : 760 days All these assessees have filed an application requesting the bench to condone the days on the ground that there was delay in releasing funds for remitting appeal fees by the custodian. It is submitted that the assessee took the initiative to address letters and reminders to the custodian for release of funds for remitting appeal fees in connection with filing the present appeals. The assessee has furnished a chart explaining chronology of events that has taken place in this regard in all the cases. For the sake of convenience, I extract below the chronology of events narrated in the case of Orion Travels Pvt. Ltd. :- ……… ………..
Learned AR submitted that for AY 2004-05 and 2005-06 also, the delay had occurred on identical reasons in the case of Orion Travels Pvt. Ltd and the Tribunal, vide its order dated 16.4.2014 in & 4024/Mum/2011, has .condoned the delay accepting identical explanations of the assessee. He further submitted that the delay had also occurred on identical reasons in the case of other group companies namely Growmore Research & Asset Management Ltd., Growmore Exports Ltd. etc and the Tribunal vide its order dated 17.12.2007 has condoned the delay by following the decision rendered by Hon'ble Supreme Court in the case of N. Balakrishnan Vs. M. Krishnamoorthy (AIR 1998 S.C. 3222). Accordingly, learned AR submitted that the delay has occurred in these cases also for reasons beyond the control of the assessee and accordingly prayed that the delay may be condoned.
On the contrary, standing counsel strongly opposed the plea of the assessee. He submitted that these assessees are well aware of the disruptions and difficulties since the day their business got suspended in 1992. These Assessees should have taken enough M/s. Velvet Holdings Pvt. Ltd. precautions to get fund for filing the appeals well in advance. Accordingly he opposed the petition filed by these assessees.
Having heard the rival submissions and upon considering the decision rendered by the coordinate Benches in assessee's group cases, I am of the view that the delay has occurred for the reasons beyond the control of -the assessees. Accordingly, I condone the delay in filing these appeals and proceed to dispose of them on merits.
Considering, the decision of the Tribunal on identical facts the delay in filing the appeal are condoned.
On merits, the ld. AR submits that he is not pressing Ground of appeal
No.1 of the appeal. Considering the contention of the assessee Ground of appeal is dismissed as not pressed.
8. Ground of appeal No.2 relates to disallowance of interest expenditure of Rs.1,15,20,783/-. The ld. AR submits that this Ground of appeal is covered in favour of the assessee by the decision of the Tribunal in assessee‟s own group case in Sudhir Mehta vs. DCIT and Ors dated 27/12/2017 in ITA No. 5799/Mum/2015. The ld. AR submits that in Sudhir Mehta case (supra), the Tribunal allowed claim of interest expenditure and set aside the issue to the file of Assessing Officer for verification, calculation of disallowance u/s. 14A, however, the assessee has not earned any exempt income, and hence, no verification is required in the present case.
9. On the other hand the ld. DR supported the orders of lower authorities.
10. We have considered the rival submissions and perused the material and orders passed by the Tribunal in assessee‟s group case. The ld. AR submits that in Sudhir Mehta case (supra), the Tribunal allowed claim of interest expenditure and set aside the issue to the file of Assessing Officer for verification, calculation of disallowance u/s. 14A, however, the M/s. Velvet Holdings Pvt. Ltd. assessee has not earned any exempt income, hence, no disallowance is required u/s. 14A in the present case. The Tribunal passed the following order (para 6-16) :-
“ 6. Ground No. 1 relates to the interest expenditure claimed by the assessee. The AO disallowed the same because the interest income on term deposits as claimed by the assessee, in the opinion of the AO, was not allowable due to the following reasons: - (a) The interest payable is tentative and provisional. (b) There is no basis as per which the assessee has a right to pay and the creditors has a right to receive. (c) There is no basis of computation of interest payable which has been provided by the assessee. (d) The provisions made on account of interest payable is a contingent liability and therefore cannot be allowed. (e) The broking firms have not charged any interest on the amount receivable from companies of this group where the books of accounts have been produced before the AO.
7. Against the said disallowance the assessee went in appeal before the CIT(A). The CIT(A) dismissed the ground relating to deduction of interest on the ground that the assessee has only made provisions for interest but no interest has actually been paid to the creditors. Even the recipients have not offered the said interest in their returns filed before the AO. The interest was not payable as there is no agreement to pay the interest on the borrowed funds. The CIT(A) further held that the assessee has not explained and established the nexus between the interest expenses and the interest income. Otherwise also the issue relating to the interest has to be decided by the Special Court and there is no order of the Special Court directing to pay the interest by the assessee to creditors.
Before us the learned A.R. contended that the disallowance of interest made by the AO is without appreciating the facts. He, at the outset, stated that in the original grounds the figures of interest were incorrect and therefore these should be replaced with the figures given in the revised grounds of appeal. Identical issue was raised in the case of the assessee and his family members in other years wherein the Tribunal has set aside the issue to the file of the CIT(A) for readjudication. The very first order setting aside the issue to the file of the CIT(A) was passed in the case of Dr. Hitesh S. Mehta vide order dated 26.04.2013 in & 7727/Mum/2010 for A.Y. 2005-06 and 2006-07 which was followed by the Tribunal in the case of same assessee in ITA No. 5587 to 5589/Mum/2011 for A.Y. 1994-05, 1995-96, 2001-02 and 2008-09. The CIT(A) while passing the order in the case of the assessee has duly considered the order of the Tribunal in the case of Dr. Hitesh S. Mehta dated 12.06.2013. For this our attention was drawn towards para 8 of the order of the CIT(A). Since the order of the CIT(A) is after considering the order of the Tribunal therefore it was vehemently contended that the present appeal be decides on merit. The learned A.R. submitted that the finding of the AO in respect of interest not payable is factually incorrect. The assessee has entered into oral agreement with creditors being three brokerage firms, i.e. M/s. Harshad S. Mehta, M/s. J.H. Mehta and M/s. Ashwin S. Mehta to pay the interest @12% per annum on the credit balance. The family members are dealing with the above three brokerage firms within the family itself. There was no written agreement. Based on such understanding interest on credit balance 5 M/s. Velvet Holdings Pvt. Ltd.
was provided by the assessee as he followed mercantile system of accounting and therefore it is necessary for the assessee to reckon both income and expenditure. Our attention was drawn towards the assessment order in this regard that the assessee was following mercantile system of accounting. It was further submitted that the assessee has made such claims in the past which were duly allowed by the AO. In this regard attention was drawn towards computation of income for A.Y. 1990-91 as well as assessment order dated 26.03.1993 passed under Section 143(3). In that year assessee claimed interest on mercantile basis, which was allowed. The order for A.Y. 1990-91 was passed well after notification of the assessee on 08.06.1992 and even without any order being passed by the Hon'ble Special Court. The learned A.R. also referred to the order of the CIT(A) dated 26.06.2012 passed in the case of M/s. Grow More Leasing & Investment Ltd. for A.Y. 2007-08 and other cases wherein the CIT(A) has accepted the existence of agreement to pay interest on such credit balances. The learned A.R. by referring to the order also contended that the CIT(A) following his own order in the case of M/s. Eminent Holdings Pvt. Ltd. for A.Y. 2007-08 had accepted the contention of the assessee and held that a reasonable nexus can be said to exist between the interest incurred by the assessee and the interest income earned from these assets. The learned A.R. also referring to the order of the CIT(A) dated 29.09.2013 for A.Y. 2006-07 in assessee’s own case submitted similar findings were given by the CIT(A) which was not challenged by the Revenue before the Tribunal. The existence of agreement for payment of interest also stands confirmed by the fact that the interest income earned by the creditors have been offered to tax except by Mr. Harshed Mehta since he followed cash system of accounting. It was further submitted that interest income in the hands of recipients were brought to tax in all fairness the interest expenses incurred by the assessee must be allowed. The fact that the Hon'ble Special Court has not granted interest payment, will not have any bearing on allowability of interest expenses under law since the assessee followed mercantile system of accounts and therefore in view of the mercantile system of accounting interest accrued has to be allowed. The notification of the assessee on 08.06.1992 had no effect on the existing contracts and obligations. Our attention was drawn in this regard towards the decision of the Hon'ble Supreme Court holding that existing contractual rights and obligations created there under do not get affected by notification of any person under the Special Court Act. Reference was invited to Section 4(1) of the Special Court Act empowering the custodian to make enquiry if he thinks fit to cancel any agreement entered into between 01.04.1991 to 06.06.1992 with relation to any property of the person notified provided they have entered into the contract fraudulently or to defeat the provisions of the act. Thus it was contended that section 4(1) conclusively prove that the existing contract or agreement do not get disturbed by invocation unless the custodian appointed under the Special Court Act invoke power under Section 4(1). The custodian in the impugned case during the past 25 years has not cancelled the agreement to pay interest between the assessee and his creditors. Our attention was also drawn to the evidence filed by the custodian in M.P. No. 41 of 1999 in which the custodian himself strongly advocated levy of interest and infact calculated interest on such credit balances @15% to 18% per annum to demonstrate that the liability of the family members including the assessee are more than the assets of the respective members. This proves that the funds borrowed by the assessee from the brokerage firms were subject to levy of interest as claimed, even as per the custodian. Thus it was contended that since the contract entered into by the assessee to avail interest bearing loans and advances has not affected by the notification and the assessee is liable to pay the interest. The said interest should be allowed as deduction. Reliance was placed in 6 M/s. Velvet Holdings Pvt. Ltd. this regard on the decision of the Hon'ble Supreme Court in the case of Asea Brown Boveri Ltd. vs. IFCI 154 taxman 512 (SC) and BOI Finance Ltd. vs. Custodian and Others 10 SEC 488.
With regard to the contention of the AO that the recipient has not offered interest income to tax in their return, the learned A.R. submitted that though this issue has not relevant for the purpose of deciding the deductibility of expenses but the fact is that the interest payable by the assessee to the creditors Ashwani Mehta and Jyoti Mehta has actually been offered them in their respective returns of income. The learned A.R. also relied on the order of the CIT(A) dated 30.11.2005 in the case of Shri Ashwin S. Mehta for A.Y. 2010-11 wherein the issue relating to taxability of interest income has specifically be discussed and adjudicated. Reliance was also placed on the decision of this Tribunal in the case of M/s. Growmore Leasing & Investment Ltd. vs. ACIT in & 5136/Mum/2012 dated 03.05.2015 for A.Y. 2007-08 and 2009-10 wherein this Tribunal has already issued directions that the recipients can be taxed with respect to the income in case if the same is not brought to tax in their assessments.
With regard to income in the hands of Late Shri Harshad Mehta, the learned A.R. submitted that Late Shri Harshad Mehta has consistently following cash system of accounting and therefore the Tribunal in his case for A.Y. 1989-90 upheld this issue. Interest income in the case of Late Shri Harshad Mehta shall be offered only when the same is actually received by him. With regard to the objection of the AO that the interest has not been paid by the assessee, the learned A.R. submitted that the interest in the past has been paid to the account of the creditors referring to the interest claim in 1991. He submitted that several payment have been made to these creditors subsequent to A.Y. 1990-91, thereby the liability towards the creditors regarding principal and interest was discharged. The payment in the impugned year to the creditors could not be paid due to the notification dated 08.06.1992 and consequent attachment of all the assets on which notification has casted legal responsibility on the assessee and an assessee has less freedom to discharge his obligation towards creditors. In terms of provisions of Special Act the liability to pay interest falls under Section 11(2)(c). The liability towards interest can be made only at the stage of distribution to the creditors under Section 11(2) of the Special Court Act. It was further submitted that in pursuance to the direction of the Hon'ble Special Court some payment has been made to the account of Late Shri Harshad Mehta during A.Y. 2011-12 and for this attention was drawn toward the ledger account of Late Shri Harshad Mehta in his books for A.Y. 2011-12. For the objection of the AO that no basis for calculation of interest has been submitted by the assessee, the learned A.R. contended that this allegation is totally incorrect. The details were duly filed along with revised ground of appeal and therefore the observations of the AO are not justified. With regard to allegation of the CIT(A) that the nexus of interest income with interest expenses is not established the learned D.R. contended that the monies were borrowed to meet the investment in shares and securities. Subsequently under the direction of the Hon'ble Special Court for other years part of these very investments were sold and the fund realised were invested in the fixed deposits with several banks. Thus the income generated has been brought to tax by the AO in the impugned assessment year. There was in fact a direct nexus between the money borrowed and the investment made in terms deposits. Reference was invited to the order of the CIT(A) dated 31.08.2010 passed in the case of Dr. Hitesh S. Mehta for A.Y. 2005-06 wherein this issue has been specifically considered and held that there was nexus between the credit balance and the investment in terms deposits. He submitted that following the said order the CIT(A) has also held in assessee’s own case in his order dated 7 M/s. Velvet Holdings Pvt. Ltd.
29.09.2013 for A.Y. 2006-07 accepting the nexus between such credit balance and investment in term deposits. Thus it was vehemently contended that there was nexus between the amount borrowed and the investment.
The learned D.R., on the other hand, contended that the assessee has not filed the return of A.Y. 2009-10. Income has been determined by the AO on the basis of the details filed by the assessee and the computation of income filed before the AO. He relied on the orders of the AO and CIT(A) by mentioning that three firms of Chartered Accountants appointed by the Special Court stated that the loan taken by the Directors are interest free and there are no terms and conditions to pay interest to the creditors on investment. He further stressed that no payment has been made by the assessee to the creditors towards interest and the recipients has also not offered the said interest income to tax. The payment of interest has not been decided by the Hon'ble Special Court and no order in this regard has been passed. Therefore, he vehemently contended that interest has rightly been disallowed by the AO and sustained by the CIT(A).
12. We heard the rival submissions and carefully considered the same along with the orders of the Tax Authorities below. We have also gone through the case law as has been cited before us the relevant provisions of the Special Court Act which has been referred to before us during the course of hearing. This is an undisputed fact which we noted that the assessee is a notified person from 08.06.1992 under Section 3(2) of the Special Court Act. As per the provisions of the Special Court Act contract entered into by a notified person prior to notification made under Section 3(2) are not affected by the notification. Section 4(1) of the Special Court Act empowers the custodian to cancel any contract or agreement entered into between 01.04.1991 to 06.06.1992 if the custodian finds that these contracts have been entered into fraudulently or to defeat the provisions of the Special Court Act. In A.Y. 1990-91, the AO in the assessment order passed under Section 143(3) dated 26.03.1993 allowed the interest expenses to the assessee to the extent of Rs.5,86,404/-. From page 75 of the paper book which contains the computation of income for A.Y. 1990-91, we noted that the assessee has disclosed the loan taken for the purchase of investment. The assessee is consistently following mercantile system of accounting which is apparent even from the assessment order of A.Y. 1990-91 as well as from the impugned assessment year. The order for A.Y. 1990- 91 in fact has been passed by the AO after the date of notification and the enactment of the Special Court Act. We have gone through the order passed by the CIT(A) in the case of Shri Ashwin S. Mehta assessment years 2010-11 and 2011-12, where we noted that this issue of taxability of interest income of the assessee and other parties has specifically been dealt with by the CIT(A) and accordingly interest income of Rs.10,68,83,732/- was brought to tax. In view of this fact it is apparent that the assessee is liable to pay interest on the amount outstanding. Therefore the liability towards interest got accrued. Under the mercantile system of accounting interest is deductible when it has accrued. This also proves that there was an agreement, may be oral, to pay the interest on the borrowed funds by the assessee to the other family members. We, therefore, reject the plea of the learned D.R. that no liability towards interest has accrued but it was merely a contingent liability. We noted that section 4 of the Special Court Act empowers the custodian and the court to cancel any contract or agreement in relation to the property of a person notified under that Act provided they have entered into fraudulently. In this case no cogent material or evidence has been brought to our knowledge or placed before us which may prove that the custodian under Section 4(1) of the Special Court Act has taken any action to cancel the terms relating to payment of interest. Rather we have noted from the affidavit of the custodian dated 01.03.2006 in M.P. No. 41 of 1999 that the custodian seeking 8 M/s. Velvet Holdings Pvt. Ltd.
to levy interest @ 15% to 18% per annum. Therefore the interest on outstanding credit balance of the brokerage firm has accrued as actual liability. The issue with regard to contract for payment of interest has been raised by the AO and the CIT(A) in the case of other notified entities duly approve the existence of liability. We noted that in the case of Growmore Leasing & Finance Ltd. for A.Y. 2007-08 by order dated 26.06.2014 the CIT(A) followed the finding in the case of other group concerns, i.e. Eminent Holding Pvt. Ltd. by observing as under: - “6.3 I have gone through the submissions of the Ld. AR. I find that though there is no express document evidencing payment of interest to the brokerage firms, the intentions of the parties were always so, this is evident from the fact that identical claim was also made during A.Y. 1990-91 and the same was allowed to the appellant and other concerns. The claim made in the affidavit of Custodian in MP No. 41 of 1999 also supports this claim. I also agree with the appellant that there need not be any written agreement and that the oral agreement coupled with the actions and intentions of the parties is sufficient to prove the existence of the liability.”
13. Similar issue was involved in the case of other family member, i.e. Shri Hitesh S. Mehta for A.Y. 2005-06 where also the AO has disputed the very existence of liability towards interest to creditors. The CIT(A) vide his order dated 31.08.2010 confirmed and approved the claim of the assessee that there was no need for any written agreement and that the oral agreement coupled with action and intentions of the parties is sufficient to prove the existence of liability. This order of the CIT(A) was followed by him in the case of the assessee while adjudicating the ground relating to the interest expenses for A.Y. 2006-07 vide order dated 27.09.2013 under para 6 which has been reproduced under para 18 of the order of the assessee. These finding and observation in the above orders of the CIT(A) has not been disputed by the Revenue by filing an appeal. In view of this finding becoming final, in our view, the existence of liability for payment of interest cannot be disputed.
Coming to the objection of the Revenue that interest cannot be allowed as deduction has not been shown by recipients in their income. As has been discussed by us in the preceding paragraphs the interest has been shown as income by Mr. Ashwin S. Mehta in assessment years 2010- 11 and 2011-12. We also noted that Late Shri Harshad Mehta has been offering his income on cash basis and the method of accounting has been duly upheld by the Tribunal in his case for A.Y. 1989-90. Even otherwise disallowance of interest claimed by the assessee cannot be made merely because in the opinion of the AO the corresponding interest income has not been offered by the recipients. The interest can be allowed on the basis of method of accounting followed by the assessee. We noted that similar issue when arose in the case of M/s. Growmore Leasing & Investment Ltd. vs. CIT in & 5136/Mum/2012 wherein the Coordinate Bench of this Tribunal while setting aside the issue to the file of the CIT(A) directed him to tax the income in the hands of recipient family members in accordance with the method of accounting followed by them. We find force in the submission of the learned A.R. that since the assessee as well as the recipients are notified entities under the Special Court Act unless the Court directs for distribution of the assets towards existing liabilities under Section 11(2) of the Special Court Act, the assessee cannot make the payment to these creditors. Even otherwise since the existence of liability towards interest has accrued especially when the assessee is following the mercantile system of accounting the interest is to be allowed. During the course of hearing we raised a query about the nexus of interest expenses with the interest income. The learned A.R. pointed out that the 9 M/s. Velvet Holdings Pvt. Ltd.
liability in the present case was accrued on account of purchases of shares and securities by the assessee which were sold in terms of the directions of the Hon'ble Special Court in subsequent years and the sale proceeds so received were invested in term deposits with the banks and accordingly the assessee has claimed interest expenditure against the interest earned on term deposits. No contrary evidences or material were brought to our knowledge to contradict this fact. In view of this fact we find that there is a nexus between borrowed funds and investments in term deposits. Therefore, the interest paid on the borrowed funds has to be allowed out of the interest earned by the assessee on term deposits. We noted that identical issue was raised in the case of M/s. Growmore Leasing & Investment Ltd. in A.Y. 2007-08. The CIT(A) in his order dated 26.02.2012 considered the issue of nexus of interest expenditure with interest income, following his own finding in the case of another notified entity, i.e. Eminent Holding Pvt. Ltd. for A.Y. 2007-08 which are reproduced as under: - "As regards the nexus of the interest expenditure with the interest income, I find that the Balance Sheet of the appellant and the affidavit filed by the custodian before the Hon'ble Special Court supports the fact that the funds borrowed from Shri Harshad S. Mehta were deployed by the appellant in various assets like shares and securities, properties, etc. These funds generated income in the form of dividend and interest income. After being notified, such shares and securities got converted into Fixed Deposits with various banks. These fixed deposits generated interest income which is offered to tax. Hence, a reasonable nexus can be said to exist between the interest liability incurred by the appellant, and the interest income earned from these assets. However, this matter being sub-judice before the Hon'ble Special Court, no finding can be given on these matters."
Similar issue has arisen in the case of Shri Hitesh S. Mehta for A.Y. 2005-06 wherein the CIT(A) vide his order dated 31.08.2010 approved the nexus between borrowed funds and the investment in term deposit which has been followed by the CIT(A) even in the case of the assessee for A.Y. 2006-07 dated 27.09.2013. We do not agree with the submission of the learned D.R. that interest expenses cannot be allowed till the Hon'ble Special Court decide the issue. The allowance or disallowance of the expenditure depends on the accrual of expenditure. Even no dispute has been raised in respect of interest on such credit balances before the (+ 20) Growmore Leasing & Investment Ltd. & Others 15 Special Court. Even on this basis, following the principle of consistency, as the interest has been allowed as deduction in the A.Y. 2006-07 and there is no change in the facts, the deduction in respect of the interest expenditure has to be allowed. Our aforesaid view is supported by the following decisions: The Supreme Court in the case of Radhasoami Satsang Saomi Bagh vs. CIT 193 ITR 321 referred to the following passage from Hoystead v Commissioner of Taxation 1926 AC 155 (PC), wherein it was observed (page 328): “Parties are not permitted to begin fresh litigation because of new view they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, 10 M/s. Velvet Holdings Pvt. Ltd. the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the Plaintiff and traversable by the Defendant, has not been traversed. In that case also a Defendant is bound by the judgement, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”
At pg 329 of the judgement, Their Lordships observed as under: “We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating though the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter and if there was not change it was in support of the assesses – we do not think the question should have been reopened and contrary to what had been decided by the Commission of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961.” The aforesaid dictum of law was reiterated recently by the Supreme Court in CIT vs. Excel Industries Ltd. : 358 ITR 295.
It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather spend the tax payers money in pursuing litigation for the sake of it.
In view of our aforesaid discussion we set aside the order of the CIT(A) and direct the AO to allow deduction in respect of said interest accrued and calculated at 12% per annum amounting to Rs.2,64,72,208/- after disallowing proportionate interest in respect of the investment in shares amounting to Rs.3,51,176/- after verifying the calculation of the interest quantification.” 11. Considering the contention of the assessee and the decision of the Tribunal in assessee‟s group case this ground of appeal is restored to the file of assessing officer to verify the facts and allow appropriate relief to the assessee in accordance with the direction of the Tribunal in Sudhir Mehta‟s case in order dated 27.12.2017.
M/s. Velvet Holdings Pvt. Ltd.
Ground No.3 with regard to book profit u/s. 115JB of the Act is consequential in nature of ground No.2, which we have already allowed the issue in favour of the assessee.
Ground No. 4 and 5 relates to levy of interest u/s. 234A, 234B and 234C of the Act. The Ld. AR relied on the decision of the Tribunal in the case of Sudhir Mehta vs. DCIT (supra). Ld. DR relied on the orders of authorities below. 14.We have considered the submissions of the parties and have perused the material available on record. The Tribunal has set aside the similar issue to the file of the A.O in Sudhir Mehta vs. DCIT (supra) for calculating the quantum of interest u/s. 234B and 234C of the Act after reducing the amount of tax deductable at source. The Tribunal passed the following order (para 20) which reads as under :- “ 20. Ground Nos. 3 & 4 relate to levy or interest under Section 234A, 234B and 234C as well as calculation of the said interest. We find that the said issue has been decided by the Coordinate Bench in the case of Eminent Holding P. Ltd. in for A.Y. 2002-03 in which this Tribunal while dealing with the said issue held as under: - “3.Next ground of appeal is about levy of interest u/s. 234 of the Act. Before us, AR stated that the assessee was a notified entity that the provisions of s. 234A, 234B and 234C of the Act were deemed to have complied with, that the assets were already in attachment of the Custodian appointed under the provisions of the Special Courts Act, that the Tribunal in the case of the appellant and several other entities had held the view in favour of the appellant, that the Hon'ble Bombay High Court in the case of Divine Holdings Pvt. Ltd. and Cascade Holdings Pvt. Ltd. had held that the provisions of sections 234A,234B and 234C of the Act were mandatory and were applicable to the notified entities also, that the assessee was in the-process of filing an appeal against the said order before the Hon'ble Supreme Court, that the income earned in the year under consideration was subjected to provisions of TDS, that the changeability of the section 234A, 234B and 234C of the Act should be after considering the amount of tax deductible at source on the income assessed. The appellant relies in this regard on the following decisions. He relied upon the cases of Motorola inc. v. DCIT [95 ITD 269 (Del.) (SB)], Sedco Fores Drilling Co. Ltd. [264 ITR 320], NGC Network Asia LLC [313 ITR 187], Summit Bhatacharya [ 300 ITR (AT) 347 (Bom)(SB)], Vijal Gopal Jindal [ITA No. 4333/Del/2009] & Emillo Ruiz Berdejo [320 ITR 190 (Bom)]. DR relied upon the cases of Devine Holdings Pvt. Ltd. 3.1.We have heard the rival submissions and perused the material before us. We find that in the case of Devine Holdings Pvt. Ltd. Hon'ble Bombay High Court has held that provisions of section 234A, 234B and 234C were applicable to the notified person also. Therefore, upholding the order of the FAA to that extent, we hold that provisions of section 234 of the Act are applicable. As far as calculation part is concerned, we find merits in the submission made by the assessee. Therefore, we are restoring back the issue to the file of the AO for fresh 12 M/s. Velvet Holdings Pvt. Ltd. adjudication who would decide the issue after considering the amount taxed deductible at source on the income assessed and after affording a reasonable opportunity of hearing to the assessee. Ground no.5 is allowed in part in favour of the assessee.” Respectfully following the said order of the Tribunal in the case of Eminent Holding P. Ltd. (supra) we direct the AO to recompute the interest liability after reducing the amount of tax deductible at source on the income earned. Thus, ground No. 3 stand dismissed while ground No. 4 stand partly allowed.