Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, DELHI ‘SMC’ BENCH,
Before: SHRI B.P. JAIN
The present appeal of the revenue arises from the order of Ld CIT(A) dated 08.02.2017 and relates to AY 2012-13.
The grounds of appeal as raised by the revenue in the memo of appeal are as under:-
“a) On the facts and under the circumstances of the case, the Ld CIT(A) has erred in law and the facts in deleting the addition made by the Assessing officer of Rs 33,64,918/- on account of interest paid on share application money by ignoring the facts, that the above expense is capital in nature” b) The appellant craves to be allowed to add any fresh ground(s) of appeal and/ or delete or amend any of the ground(s) of appeal.”
Facts of the case, as emanating out from the orders of authorities below, are that the assessee is a company and engaged in the business of investment, to advance, lend or loan money on interest or without interest. It has filed its return of Income declaring an income of Rs 13,01,580/-. Return filed by the assessee was picked up for scrutiny and assessment under section 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' has been framed.
During the course of assessment proceedings the AO disallowed the amount of Rs 33,64,918/- which is the figure of interest paid by assessee to M/s Conquer Investment and Finance Pvt Ltd. The relevant observation of the AO as borne out from Page No 1 para-2 and 2.1 of the assessment order are as under:-
“2 It is seen from the profit and loss account that an amount of Rs. 33,64,918/- has been debited on account of interest paid on share application money to M/S Conqure Investments and Finance Pvt Ltd. The AR vide Note sheet entry dated 09/03/2015 was specifically asked to furnish the complete details of the interest paid on share application to the above company and also show cause why same should not be disallowed as the same is not allowable on share application money. In response to the show cause, the assessee company vide reply dated 12/03/2015 stated that the share application of Rs. 6.10 crores was received for allotment of share during F.Y 2008-09 and after discussion with the company it was decided to pay one year interest i.e. for AY 2012-13 .The assessee company also stated that it has received interest on share application paid by it to various companies. 2.1 The submission of the assessee company has been considered and found not tenable. Since the interest paid on share application is an capital expense and cannot be claimed as revenue expense. The delay in allotment of share since the F.Y. 2008-09 has happened due to poor management decisions of the company resulting in payment of undue interest on the share application money. Since the expense is not incurred in day to day running of the business activity, the same cannot be allowed. Hence, I hereby disallow an amount of Rs. 33, 64,918/- treating the same as capital expenses and added the same to the income of the assessee company.”
Aggrieved with the order of the AO, assessee filed appeal before the CIT(A) and contended that appellant company has received share application money from M/s Conquer Investment and Finance Pvt Ltd, since F.Y 2008-09, appellant company has to allot equity shares against share application money received from M/s Conquer Investment Pvt Ltd, upto 31.03.2011 otherwise appellant company will have to pay interest @12% and refund the share application money with interest to M/s Conquer Investment (Pvt) ltd. Therefore, the assessee company was forced to pay interest to M/s Conquer Investment (P) Ltd during F.Y 2011-12 pertaining to AY.2012-13 and also refunded the share application money of Rs 5.55 Crore. The assessee submitted the copy of account of M/s Conquer investment.
Before the CIT(A), the assessee pointed out that the assessee is engaged in buying and selling of shares and securities, the receiving and giving of the monies as share application must be considered as part of normal business activity of the assessee company and, therefore, interest paid on share application money received deserves to be allowed. The assessee also pointed out that assessee has earned interest of Rs 73,95,209/- on investment of these funds and this income has been taxed under the head business income and not income from other sources.
After hearing the assessee, the CIT(A) has observed as under:-
“I have gone through the facts of the case and the submissions made by the AR. It is noticed that the appellant company had received share application money from M/S Conquer Investment & Finance Pvt. Ltd. Since 2008-09 and as per the investment agreement dated 25.05.2010, the appellant company was liable to allot securities by the end of FY 2010-11 and as per Clause-4 of the agreement, it was agreed that in case the appellant company could not allot the shares by the end of FY 2010-11, it will refund the principal amount along with interest @ 12%. During the FY 2011-12, the appellant company has returned the share application money of Rs. 5.55 crores along with net interest of Rs. 30, 28,426/- after deduction of TDS. It is contended by the appellant that it is engaged in the business of buying & selling of securities and the share application money has been received as part of normal business activity and therefore, the interest paid on the same must be allowed u/s 36 (1) (iii) of the Act. It is further contended that the interest cannot be said to be a capital in nature as the same have not been incurred to acquire any long term asset. In addition, the AR has argued that the money was received for the appellant’s business in investment in shares and it has further made investment in share application money in three companies from which it has earned interest income of Rs.
73,95,209/-. The AR has also relied upon a number of case laws on the issue involved. A perusal of a balance sheet shows that the appellant has received total share application money of Rs. 8.07 crores as on 31.03.2011 and the corresponding figure as on 31.03.2012 is Rs. 7.95 crores whereas the authorized share capital of the appellant is Rs. 2 crores against which the paid up capital amounts to Rs. 1, 83, 72,600/- As a result of this, the appellant can only issue fresh shares amounting to Rs. 16, 27,400/- Only. From this, it can be concluded that the appellant has received share application money not to increase its capital base but for the requirements of working capital as the amount so received has been invested in the business of shares. In view of these facts and after relying on the decision of Pune ITAT in the case of SR Thorat Milk Products Pvt. Ltd. Vs ACIT [2016] 70 TAXMAN 261, the interest paid on share application money is treated as revenue in nature and the addition made by the AO is therefore, deleted.”
Now before me, the Ld DR argued that CIT(A) has wrongly admitted share investment agreement between assessee and Conquer. Ld DR further argued that the assessee has wrongly paid interest and the same deserve to be disallowed under section 36(1)(iii) of the Act. Ld DR argued that there was no purpose for incurring these expenses and such an attempt is not permissible in view of the guidelines of SEBI.
The ld AR of the assessee argued and filed written synopsis, the same are reproduced hereunder:
“ Ld DR has argued that matter should be restored to AO since the CIT(A) has accepted the additional evidence. In this regard it is submitted that it is the appeal of the revenue and no ground has been taken by the revenue wherein it has been contended that CIT(A) has admitted additional evidence. Further the revenue has not filed any paper book, in their appeal, to establish that finding of the CIT(A) are perverse, it is submitted that burden is on revenue to establish that the finding of the CIT(A) are perverse and not of the assessee since assessee is not in appeal, it is submitted that every time poor assessee has been made sufferer for pursuing his cases and revenue is not doing anything for protecting the interest of nation. It is submitted that if the Ld CIT(A) has done anything wrong then the duty of revenue is to produce the entire record before the court and to take action against the CIT(A) under vigilance law Without prejudice to the above it is submitted that powers of the CIT(A) are coterminous as held by Hon’ble Apex Court in Kanpur Coal case 50 ITR, so what AO can do the CIT(A) can also do and if the CIT(A) is exercising his powers under section 250(4) then it is not necessary for him to call for any report from the AO. It is next submitted that the tax effect in this case is marginally high. Be that as it may be it is next submitted that the Ld DR has also alleged that the assessee has violated the provisions of Companies Act and hence strict action should be taken against the assessee as if the assessee has acted like a terrorist. However one thing Ld DR has not disputed at all that is the applicability of section 36(1) (iii). Ld DR has filed only one page of the judgment in the case of Dignity 96 ITD 296(Bom) upon which revenue wants to rely that is Dignity. It is submitted that this judgment rather supports the case of the assessee, as it is categorical observation of the Bench that there was no agreement in that case between the investor and the recipient Company, in that back drop of the matter the Bench has held that it was a shame arrangement.
It is submitted that facts of the case are that assessee and other concern had entered into an agreement in which it was categorically written that if the shares were not allotted by the cut-off date then assessee is liable to pay interest @12% to the investor. It is submitted that real nature of this transaction is that the assessee in order to conduct its business has raised certain funds and till the shares were allotted the application money has been shown as credit in the books of the assessee in fact the investor was a secured creditor. It is submitted that a businessman can raise funds either via loan or via issuing share capital or debenture it is the prerogative of the businessman and not of the revenue authority to conduct his business in his way, and this arrangement has been approved by the Apex Court in the case of S.A builder 288 ITR1. Wherein it has been held that revenue authorities cannot sit in the arm chair of a businessman.
It is next submitted that Ld DR has also contended that assessee has failed to establish the purpose of raising these funds, in this regard it is submitted that before the AO and CIT(A) assessee has pointed out that assessee is an investor and investing in various share and securities and has earned handsome income of interest by virtue of this investment, and this income has been offered as business income this income has not been taxed under the head income from other sources Page No-19 of the synopsis. However all these submissions were brushed aside by the AO. The AO has held that the expenses incurred in the field of capital and hence not allowable. It is submitted that in the case of Core Health reported in 298 ITR 195(SC), Hon’ble Apex Court has held that for the purpose of section 36(1)(iii) capital and revenue expenses are on same footing- Without prejudice to the above it is submitted that it is also settled position of law that if own funds of the assessee are sufficient then no disallowance can be made under section 36(1)(iii) of the Act. It is submitted that a perusal of Page No- 12 and 13 of the synopsis would show that assessee was having huge reserve and surplus amounting to Rs 9,97,70,323/- was there as opening balance with the assessee and out of which an amount of Rs 5,50,00,000/- had been returned to the investor company and interest of Rs 33, 64, 918 has been paid as interest. It is submitted that it is not the case of the revenue that assessee has diverted interest bearing funds as interest free advances, in as much as the assessee has earned sufficient interest income from these funds. Therefore no disallowance is permissible in such cases, when assessee has his own funds, reliance can be placed on the following judgments Reliance Utility -313 ITR 340 (Del)
G.S.Developer.- ITA No-
CIT Vs Bharati Televenture – 331 ITR 502(Del)
In view of the above it is submitted that heavy cost should be imposed on revenue for filing this frivolous appeal. It is submitted that department has very intelligent audit wing, who often recommend the reopening and revisionary action in the cases of the assessees. Therefore, the wing or the AO ought to have ascertained the position of own funds from the financials of the assessee before the filing of the present appeal.”
After hearing both sides, I am of the considered opinion that the appeal of the revenue should be dismissed for the following reasons:
a) No additional ground regarding the violation of rule 46A by the CIT(A) has either been taken in the memo of appeal by the AO. Neither the DR has moved any application for admission of additional ground nor the DR raised this legal plea at the commencement of the argument of appeal. It is pertinent to note that the DR has raised this legal plea only in rejoinder proceedings, when the AR of the assessee has already countered the main submissions of the DR. Therefore, having regard to the facts that there is no ground in memo of appeal and there is no application of admission of additional ground the plea taken by the DR particularly in the rejoinder proceedings is not tenable. It is true that when technical consideration and substantial justice pitted against each other the cause of substantial justice would prevail over the technical consideration. However, there has to be certain timings of raising a legal ground, had the Ld DR would have contended at the time of commencement of the arguments the situation would have been different. However in rejoinder proceedings, it is not permissible to raise any fresh plea. b) Even if the plea of the DR is taken for the sake of argument then also, it is settled position of law that CIT(A) can step into the shoes of the AO for examining an issue and he can use his powers under section 250(4) of the Act and there is no need of any remand report particularly when something is filed for supporting a claim and CIT(A) has no doubt on that document. Ld DR has also alleged that filing of agreement before the CIT(A) for the first time is an afterthought but the DR has failed to prove any perversity in the order of the CIT(A). Ld AR rightly contended that it is the appeal of the revenue and burden is on revenue to prove that the order of the CIT(A) is perverse and the revenue ought to have file the paper book for proving the perversity of the order of CIT(A). But without there being any material produced on record, it is not permissible to say that the order of the CIT(A) is perverse. Be that as it may, be the AR of the assessee pointed out that every document was filed before the AO and CIT(A). c) On merit,s it is observed that assessee is an investor company and making investment and receiving interest is the main business of the assessee Company. From Page No-19 and 20 of the PB, it is observed that the assessee has received total interest of Rs 1.58 Crore during the year under consideration and the same has been taxed under the head business income. And an amount of Rs 73,95,209/- is attributed to the investment received from M/s Conquer. Therefore, the purpose of receiving share application money and payment of interest is apparent from the financial and audited account of the assessee, which was very much before the AO. CIT(A) has categorically recorded that the interest has been paid on the basis of clause 4 of the agreement dated 25.05.2010, which fact is not refuted by the ld. DR. d) It is further observed that in the case of Core health reported in 298 ITR 194(SC) Hon’ble Supreme Court has categorically held that interest paid on borrowed capital is allowable under section 36(1)(iii) of the Act and it does not make any difference as to whether the expenses has been incurred in capital filed or revenue filed. It is also a settled position of law that it is prerogative of a businessman to conduct his business in his own way and the revenue authorities cannot sit in the arm chair of an assessee as held in S.A. Builder 288 ITR 1(SC). e) Further, the case of the assessee is squarely covered by the judgment of Global Capital reported in 117 ITD 251(Del) wherein the coordinate Bench observed as under:-
“On a careful consideration of the matter, we are of the view that the assessee is entitled to succeed and the disallowance of the interest is to be deleted. There is no dispute that the assessee is engaged in the business of purchase and sale of shares and securities, inter alia. In fact, during the year the assessee has purchased shares for Rs. 7,23,09,110 and sold shares for Rs. 51,47,445 as shown in the P&L a/c at p. 67 of the paper book. Similar figures for the earlier year amount to Rs. 81,51,447 and Rs. 77,00,000 respectively. In addition to these figures, the assessee has also separately credited profit of Rs. 10,15,144 on trading of shares in the P&L a/c for the year. In the course of the assessment proceedings, the assessee wrote a letter on 20th Feb., 2002 to the AO stating that the source of investment in Strong was the debenture monies received from Apollo amounting to Rs. 10 crores. The photocopy of the ledger account of Union Bank of India in the assessee’s books was also filed along with the letter and the entry made therein has already been extracted earlier. The entry constitutes contemporaneous evidence of the fact that the amount of Rs. 10 crores was invested in Strong as share application monies for purchase of 12 per cent non-cumulative redeemable preference shares. In the light of the contemporaneous entry made in the books of account maintained by the assessee in the regular course, which have not been rejected by the AO, it is not possible to hold that the advancement of the monies to Strong was not for the purpose of assessee’s business. The letter dt. 15th March, 2002 written by the assessee to the AO shows that there was a condition that if the shares were not allotted, the monies will be returned by Strong together with interest at 12 per cent. The AO has not questioned this statement of the assessee made in writing. In fact, it does appears to us reasonable to infer that since the shares were to be issued with a dividend rate of 12 per cent as shown by the entry in the assessee’s books of account, the return of the monies if the shares are not allotted would also have been agreed to by the parties to bear interest at the same rate. The assessee has actually credited the interest of Rs. 38,79,452 in its books of account. We are, therefore of the view that all the three conditions prescribed in s. 36(1)(iii) have been satisfied in the present case and, therefore, the interest paid by the assessee has to be allowed in full without any disallowance. We are unable to uphold the view taken by the Departmental authorities that the assessee and Strong had entered into a tax avoidance agreement to facilitate the assessee to reduce or avoid its tax liability by booking a notional loss. We, therefore, delete the disallowance of Rs. 3,26,027 and allow the ground. f) When the facts of the assessee’s case are read in juxtaposition with the facts of Global (Supra) then it is implicit that the issue involved in the case of the assessee squarely covered by the judgment of Global and hence no different view is permissible. Ld DR has relied on the judgment of Dignity reported in 96 ITD 296, it is observed that in that case the Mumbai Bench of the ITAT has observed that there was no agreement between the investor and the recipient Company and in this back drop the Mumbai Bench has disallowed the claim of the assessee in that case. Otherwise that case also supports the case of the assessee. g) It is next observed from Page No-12 and 13 of the Papers annexed with synopsis that the assessee was in possession of ample funds i.e. to the tune of Rs 9.97 Crore hence no disallowance of any interest can be made even if the assessee has not earned anything from this expenses as held in Reliance Utility reported in 313 ITR 340(Bom), CIT Vs Bharati Televenture reported in 331 ITR 502(DEL). It is pertinent to mention here that it is not the case of the revenue that assessee has diverted interest bearing funds without charging any interest, rather it is a case where it is an admitted position of facts that assessee has received handsome amount of interest to the tune of Rs 73,95,209/- which is not even questioned by the AO or DR, this interest has been earned as a result of the amount received from Conquer.
In view of the above finding of facts, the appeal of the revenue is dismissed without any cost as prayed for by the Ld AR of the assessee. Accordingly, the grounds raised by the Revenue stand dismissed.
In result, the appeal of the revenue in is dismissed.
The order is pronounced in the open court on 17.10.2017.
Sd [B.P. JAIN] ACCOUNTANT MEMBER