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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWALShri Ajay Wadhwa
Date of Hearing – 19.01.2018 Date of Order – 17.04.2018
2 Kusegaon Realty Pvt. Ltd. O R D E R PER BENCH
Aforesaid appeals, one by the assessee and the other by the Revenue, are against two separate orders passed by the learned Commissioner (Appeals), Mumbai, for the assessment years 2010–11 and 2011–12.
Though, the aforesaid appeals are by rival parties, however, the common dispute arising in these appeals converge on the issue of allowability of assessee’s claim of interest expenditure.
Brief facts relating to the issue in dispute are, the assessee a company filed its return of income for the assessment year 2010–11 on 23rd September 2010, declaring total income of ` 11,57,690. Subsequently, on 7th September 2011, assessee filed a revised return of income offering ` 80,93,310 as the total income.
A search and seizure operation under section 132(1) of the Income Tax Act, 1961 (for short “the Act”) was conducted in case of M/s Cineyug Group on 25th November 2009. On the very same day, a survey under section 133A of the Act was also carried out in the office premises of the assessee company. In course of search and survey action, it was found that the assessee received loan of ` 177.75 crore from M/s. Dynamix Realty, a firm belonging to D.B. Realty Group of 3 Kusegaon Realty Pvt. Ltd. companies and the said sum of ` 177.75 crore received as loan by the assessee, in turn, was advanced as loan to Cineyug and out of the said amount Cineyug transferred an amount of ` 175 crore to Kalaignar TV (KTV), Chennai in financial year 2009 itself. From the seized documents, the Assessing Officer found that Cineyug has transferred an amount of ` 200 crore to KTV, Chennai in financial year 2008–09 and the source of such money originated from D.B. Realty Group companies and routed through Dynamix Realty and the assessee to reach Cineyug. The transfer of money by way of loan between the companies was also recorded in their respective books of account. From the money trail as revealed from the books of account and bank statement, it was found by the Assessing Officer that Dynamix Realty has advanced the money in different tranches to the assessee which the assessee has transferred to Cineyug and Cineyug in turn has paid to KTV, Chennai. In the statement recorded from one of the directors of the assessee Shri Rajiv Agarwal, the aforesaid transaction was also confirmed. On further verification of the material on record during the assessment proceedings, the Assessing Officer found that out of ` 206.25 crore, received by Cineyug from the assessee, ` 56 crore was received towards share application money and the balance amount of ` 150.25 crore was towards inter–corporate deposits (ICD) carrying interest rate of 8%. He found that Cineyug has paid ` 200 crore to 4 Kusegaon Realty Pvt. Ltd. KTV, Chennai comprising of ` 25 crore as share application money and ` 175 crore as ICD carrying interest rate of 10% for one year. He found that Dynamix Realty is a partnership firm engaged in the business of development and construction of buildings under the schemes framed by the slum rehabilitation authorities. Whereas, assessee was initially incorporated with the object of carrying on the business of dealing in fruits, vegetables, etc., however, subsequently, it has changed its name to Kusegaon Realty Pvt. Ltd. and diversified its objects also. From the return of income filed by the assessee the Assessing Officer noticed that the income offered by the assessee was basically represented interest received from loan advanced to Cineyug, whereas, it has claimed deduction against such income, of interest paid to Dynamix Realty on the loan received. Looking at the movement of money between different entities, the Assessing Officer was of the view that the loan transactions between the parties were beyond real normal business transactions. The Assessing Officer observed that ultimately the real beneficiary is A. Raja and KTV, Chennai involved in 2G scam. The Assessing Officer observed that the transfer of money to KTV, Chennai and returning back of money by KTV, Chennai matched with the date on which Shri A.Raja was summoned by the CBI. He also referred to the framing of charge by the trial Court and the rulings and observations of various judicial authorities while deciding the bail plea. The Assessing Officer
5 Kusegaon Realty Pvt. Ltd. observed, the nature of money trail and manner of transfer of fund through numerous entities to the ultimate destination i.e., KTV, Chennai in a totally pre–planned manner using the subterfuge of the banking system was to result in illegal gratification of KTV, Chennai. The Assessing Officer observed, the money trail starting from Dynamix Realty to KTV, Chennai revealed that it was either for illegal gratification or bribe or for some other irregular purposes or some unspecified purposes having no conceivable business connection or purpose. As far as the treatment to be given to the interest income offered by the assessee is concerned, the Assessing Officer found that the assessee has shown interest income on the loan given to Cineyug at ` 12,19,17,808 and in turn claimed to have paid interest of ` 11,38,00,114 to Dynamix Realty on the loan availed. Thus, the assessee has offered net interest of ` 81,17,694 as income from other sources. The Assessing Officer observed, the entire loan transaction between Dynamix Realty, assessee and Cineyug is not in any way connected with the regular business activity either of the assessee or any of them. Therefore, the so called interest income and interest expenditure shown by the assessee cannot be accepted as the loan taken from Dynamix Realty and passing it over to Cineyug is a colorable transaction to ultimately benefit KTV, Chennai for illegitimate or irregular purposes. The Assessing Officer observed, for successfully claiming any expenditure against income offered under the head
6 Kusegaon Realty Pvt. Ltd. income from other sources it must be proved that such expenditure has a direct and proximate nexus with the income earned. The Assessing Officer observed, the assessee in no way was able to discharge his burden of proving that the interest expenditure was having any nexus with the interest income, since, neither of them was connected with legitimate business activity, much less, the activity of giving and taking loan. Accordingly, he disallowed the interest expenditure of ` 11,38,00,114. As far as the interest income shown by the assessee is concerned, the Assessing Officer disallowing assessee’s claim of interest income held such income as income from other sources on account of unspecified / irregular / illegitimate receipt. Being aggrieved of the aforesaid decision of the Assessing Officer the assessee preferred an appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record observed that the Assessing Officer has not disputed the fact that the assessee has received an amount of ` 209.251 crore from Dynamix Realty out of which it has paid ` 206.25 crore to Cineyug who in turn has paid ` 200 crore to KTV Chennai. He also found that all these transactions were through regular Banking channel. Further in the return of income filed the assessee has offered interest income of ` 12,19,17,808, received from Cineyug on loan advanced and claimed
7 Kusegaon Realty Pvt. Ltd. interest expenditure of ` 11,38,00,114 as interest paid to Dynamix Realty on loan availed. The learned Commissioner (Appeals) observed that the Assessing Officer has disallowed assessee’s claim of interest expenditure on the view that the loan transactions in reality are not so and it is actually meant for passing over ` 200 crore from D.B. Group to KTV Chennai as illegal gratification. He found that the aforesaid view was taken by the Assessing Officer on the basis of 2G Spectrum case filed by the CBI which is pending before the Special Court CBI, New Delhi. The learned Commissioner (Appeals) opined, the issue whether it is a real loan transaction or the transactions are trail of illegal gratification to KTV by D.B. Group, since, is under the scrutiny of Special Court no finding on the nature of transactions can be given. However, he observed that there is no dispute that the interest income earned by the assessee was from the loan advanced to Cineyug the source of which is originated from the loan availed by the assessee from Dynamix Realty. He found that while the assessee has received interest from Cineyug, in turn, it has paid interest to Dynamix Realty. The assessee has also deducted TDS on the interest paid to Dynamix Realty and Dynamix Realty has also offered the interest received from assessee as income in the return of income filed. The learned Commissioner (Appeals) observed, if accepting the Assessing Officer’s view it is held that the transaction are the money trail of illegal gratification from D.B. Group to KTV, Chennai, neither there can be 8 Kusegaon Realty Pvt. Ltd. any real interest income nor real interest expenditure. Whereas, While the Assessing Officer has taxed the interest income he has refused to allow interest expenditure. The learned Commissioner (Appeals) held, that, since the source of fund from which the assessee earned interest income and also paid interest is the same the expenditure claimed has to be allowed if the interest income is assessed in the hands of the assessee. Accordingly, he directed the Assessing Officer to allow assessee’s claim of interest expenditure. Facts for the Assessment Year 2011–12 are more or less identical, except, for the fact that in the said assessment year learned Commissioner (Appeals) upheld the disallowance of interest expenditure by holding that interest income earned by the assessee has to be treated as business income and the interest expenditure cannot be allowed under section 36(1)(iii) as it is not for the purpose of business and it cannot be allowed under section 37(1) as it was connected to activities prohibited in law or for infraction of law.
The learned Departmental Representative extensively referring to the discussions made by the Assessing Officer in the assessment order submitted that lot of discrepancies were found between the books of account and the statements recorded from the directors of the assessee company. He submitted, though in the books of account as well as statement recorded it was mentioned that the money was paid
9 Kusegaon Realty Pvt. Ltd. towards inter–corporate deposits, however, no documents were found during the search to show issuance of ICDs or shares. The learned Departmental Representative submitted, the Assessing Officer on examining the material on record has also pointed out that on the dates money was transferred by the assessee to Cineyug and Cineyug to KTV there were no matching funds available in their books. He submitted, though, share application money of ` 28.50 crore were converted to equity shares no signed copy of agreement were produced. No evidences were produced to indicate that shares and debentures were offered to members thereby violating the provisions of Companies Act, 1956. The learned Departmental Representative referring to the observations of the Hon'ble High Court while disposing off the bail application submitted that the assessee’s complicity is clearly established. The learned Departmental Representative submitted, the so called interest claimed to have been earned by the assessee is nothing but facilitation fee for illegal money transferred to KTV, Chennai. He submitted that the assessee was used as a conduit to pass on illegal gratification to KTV. The learned Departmental Representative submitted, the interest expenditure having no connection with earning of interest income was not allowable. In support of such contention, he relied upon the decision of the Hon'ble Supreme Court in case of Durga prasad More, 82 ITR 640.
10 Kusegaon Realty Pvt. Ltd.
Learned Departmental Representative referring to observations of the first appellate authority while deciding assessee’s appeal for assessment year 2011–12 submitted that in the said year learned Commissioner (Appeals) has taken a correct view by holding that the transaction entered into by the assessee with Cineyug is an adventure in the nature of trade, hence, the income derived there from is assessable as business income. He submitted, as the transaction relating to advancement of loan by the assessee to Cineyug has resulted in illegal gratification to KTV, Chennai and A. Raja involved in 2–G scam, the interest expenditure relating to such unlawful transaction is neither allowable as deduction under section 36(1)(iii) of the Act as it is not related to assessee’s business nor it is allowable under section 37(1). He, therefore submitted, learned Commissioner (Appeals)’s order for assessment year 2010–11 should be reversed and his order for 2011–12 should be upheld.
The learned Authorised Representative submitted, the fact that the assessee has obtained loan of ` 200 crore from Dynamix Realty and in turn has advanced the money to Cineyug has not been disputed by the Assessing Officer. He submitted, the source of the loan credited in the books of account of the assessee is, therefore, explained. He submitted, the source of fund advanced by Dynamix Realty was never questioned by the assessing authority in case of Dynamix Realty. He
11 Kusegaon Realty Pvt. Ltd. submitted, assessee is an investment vehicle of Dynamix Realty. He submitted, the Assessing Officer has not disputed that there is a direct nexus between loan taken from Dynamix Realty and loan given to Cineyug. The learned Authorised Representative submitted, while on the loan given to Cineyug assessee has received interest, at the same time, assessee has paid interest on the loan availed from Dynamix Realty. Therefore, there is a direct nexus between the income earned and expenditure incurred. He submitted, various discrepancies pointed out by the Assessing Officer in the assessment order with regard to the treatment of loan at the hands of Cineyug are mere irregularities, hence, not fatal to the assessee’s case and has no impact on the expenditure claimed. He submitted, the claim of the assessee that part of the money advanced was towards acquiring shares is proved from the fact that shares of Cineyug were allotted to the assessee and the assessee still holds them. The learned Authorised Representative submitted, the allegation of the Assessing Officer that KTV is the ultimate beneficiary of the so called money trail transaction of ` 200 crore is without any basis as the said amount of ` 200 crore has been returned back by KTV to Cineyug in the financial year 2010–11. The learned Authorised Representative submitted, the very fact that the Assessing Officer has not made any addition either under section 68 or under section 69 of the Act proves that he has accepted the source of loan availed by the assessee and advanced to Cineyug. He submitted,
12 Kusegaon Realty Pvt. Ltd. not only the assessee has offered the interest on loan received from Cineyug as income but Dynamix Realty has also offered the interest received from the assessee on the loan advanced as income which has been accepted by the Assessing Officer. The learned Authorised Representative submitted, the observations of the Assessing Officer in the impugned assessment orders and that of the learned Commissioner (Appeals) in the appeal order for assessment year 2011–12 regarding assessee’s involvement in illegal gratification to KTV have lost their relevance as the Special Court conducting the trial against the assessee and other accused persons in cases filed under the Prevention of Corruption Act and Prevention of Money Laundering Act has acquitted the assessee and other accused persons from all charges. In this context, he drew our attention to the orders dated 21st December 2017, passed by the learned Special Judge, CBI (04), New Delhi, and read out the relevant observations of the Trial Court in this regard. Therefore, he submitted, no reliance can be placed on the allegations made in the charge sheet/complaint filed by the CBI before the Trial Court. The learned Authorised Representative submitted, even in the statement recorded from the director of the assessee he has categorically stated that the investment made is in the nature of strategic investment. He submitted, if the assessee for the purpose of its business has decided to make investment in the shares of another company, the Assessing Officer certainly cannot step into the shoes of 13 Kusegaon Realty Pvt. Ltd. the assessee and question his prudence in making such investments. In this context, he relied upon the decision of the Hon'ble Supreme Court in CIT v/s S.A. Builders, 288 ITR 001 (SC). Learned Authorised Representative submitted, when the Assessing Officer himself in assessment year 2010–11 and 2011–12 has assessed the interest income under the head income from other sources and in the appeal filed for assessment year 2010–11, the Department has not disputed that the interest income is to be assessed under the head income from other sources, the learned Commissioner (Appeals) while deciding appeal for assessment year 2011–12 cannot change the head of income as income from business only for disallowing the interest expenditure. The learned Authorized Representative submitted, the loan transaction between the Dynamix Realty and assessee on the one hand and the assessee and Cineyug on the other being proved beyond doubt by explaining the source of the money transferred from one entity to the other, the transaction cannot be treated as non–genuine. Further, he submitted, what the Department has ultimately done is to disallow the interest expenditure claimed by the assessee for earning the interest income. He submitted, when the nexus between loan obtained and loan advanced has been proved and the Department is assessing the interest income at the hands of the assessee, there is no justification or rationale in disallowing interest expenditure which is directly related to earning of interest income. Therefore, he submitted,
14 Kusegaon Realty Pvt. Ltd. the disallowance made by the Assessing Officer was correctly deleted by the first appellate authority in assessment year 2010–11 and the same view should have been taken in assessment year 2011–12 as well.
In rejoinder, the learned Departmental Representative submitted, the orders of the Special Judge, CBI, now relied upon by the assessee are not final as the Government may contemplate filing appeals against the orders of the Special Judge. He submitted, until the orders of the learned Special Judge attain finality, assessee’s involvement in the scam cannot be ignored / overlooked.
We have patiently and carefully heard rival submissions, perused the materials on record as well as decisions cited before us. Before proceeding to decide the issues raised in these appeals, it is necessary to put certain facts on record. The hearing of these appeals was concluded earlier on 26.09.2017. While drafting the order it was felt that clarification on certain issues are still required. Hence, the Bench thought it appropriate to refix the appeals for fresh hearing. Subsequently, the assessee vide letter dated 22.12.2017 requested rehearing of the appeals as it wanted to bring on record the orders of ld. Special Judge, CBI, New Delhi in the trials conducted against the assessee under the Prevention of Corruption Act and Prevention of Money Laundering Act, which according to the assessee will have 15 Kusegaon Realty Pvt. Ltd. crucial bearing on the present appeals. Thus, the appeals were refixed for hearing and finally heard on 19.01.2018. Though, the disputed issue concerning allowability of interest expenditure claimed by the assessee on the surface appears to be a simple issue, however, on deeper scrutiny of facts and materials it is not so. Through a maze of bank transactions funds worth ` 200 crore have been transferred between number of entities including the assessee. As could be seen from facts on record, while filing the original return of income for the assessment year 2010–11 assessee did not declare the interest income claimed to have been received from Cineyug. Subsequently, through a revised return of income filed on 07.09.2011 assessee offered the said interest income. Further, the assessing officer has observed that in the audited balance sheet as at 31.03.2009 which was before survey, the assessee had shown unsecured loan of `.31.50 crore from Dynamix Realty. However, in the audited balance sheet for assessment year 2010–11, which was prepared after survey, the unsecured loan has been reclassified as inter corporate deposit(ICD). Similarly, while in the audited balance sheet of assessment year 2009– 10 assessee has shown an amount of `.28.50 crore as investment in share application money with Cineyug, in the audited balance sheet of assessment year 2010–11, the nomenclature of `.28.50 has been changed to loans and advances from investments. Further, the audited balance sheet of assessee for assessment year 2010–11 shows
16 Kusegaon Realty Pvt. Ltd. investment in share application money with Cineyug at `.206.24 crores split into `.06.2475 crore as equity share application money and `.200 crore as 8% debenture application money. Similar inconsistencies were also pointed out by the assessing officer in respect of transfer of money between Cineyug and KTV. The assessing officer also alleged that in the process of advancing/investing in share application money, ICD and debenture bonds, both, the assessee and Cineyug have violated various provisions of Companies Act. Further, assessing officer has also observed, either during search or survey no proof or document was found to indicate offer of debenture by Cineyug or application made by assessee for investing in such debenture. Ultimately, though, the assessing officer assessed the amount offered by the assessee as interest income, however, he held that it is not in the nature of interest income.
On a careful reading of prargraph 19 to 19.3 of Commissioner (Appeals) order for assessment year 2010–11, against which the department is in appeal, it is evident, the Commissioner(Appeals) has totally overlooked and ignored the inconsistencies pointed out by the assessing officer with regard to the nature of transactions between the parties in purported violation of various provisions of Companies Act. Learned Commissioner(Appeals) while allowing assessee’s claim in Assessment Year 2010–11 has not at all dealt with a number of factual
17 Kusegaon Realty Pvt. Ltd. issues raised by the assessing officer. In as much as, while deciding assessee’s appeal for Assessment Year 2011–12 the Commissioner(Appeals) has upheld the disallowance of interest expenditure claimed by the assessee on a altogether different reasoning by changing the head of interest income shown by the assessee under the head ‘income from other sources’ to ‘business income’. Thus, there is inconsistency even in the stand of the department with regard to the head of income.
Moreover, the most important factor which will have crucial bearing on the disputed issue is the fate of the cases filed by the CBI against the assessee under the Prevention of Corruption Act and Prevention of Money Laundering Act. A reading of the impugned assessment orders as well as the first appellate order for assessment year 2011–12 would leave no room for doubt that the disallowance of interest expenditure stands on the fulcrum of the allegations made by the CBI against the assessee and other persons in the charge sheet/complaint filed under the Prevention of Money Laundering Act, 2002 and Prevention of Corruption Act, 1988. However, learned Special Judge, CBI (04), New Delhi, while delivering his judgment on 21st December 2017 in C.C. no.01/2011, the case filed under the Prevention of Corruption Act, 1988, has acquitted the assessee from all charges leveled against it on the following observations:–
18 Kusegaon Realty Pvt. Ltd.
“18 1 6. Thus, the genesis of the instant case lies not so much in the actions of Sh. A. Raja but in the action/inaction of others, referred to above. There is no material on record to show that Sh. A. Raja was mother lode of conspiracy in the instant case. There is also no evidence of his no-holds-barred immersion in any wrongdoing, conspiracy or corruption. 1817. There is no evidence on the record produced before the Court indicating any criminality in the acts allegedly committed by the accused persons relating to fixation of cut-off date, manipulation of first come first-served policy, allocation of spectrum to dual technology applicants, ignoring ineligibility of STPL and Unitech group companies, non-revision of entry fee and transfer of Rs. 200 crore to Kalaignar TV (P) Limited as illegal gratification. The charge sheet of the instant case is based mainly on misreading, selective reading, non-reading and out of context reading of the official record. Further, it is based on some oral statements made by the witnesses during investigation, which the witnesses have not owned up in the witness-box. Lastly, if statements were made orally by the witnesses, the same were contrary to the official record and thus, not acceptable in law. 1818. I may add that many facts recorded in the charge sheet are factually incorrect, like Finance Secretary strongly recommending revision of entry fee, deletion of a clause of draft LOl by Sh. A. Raja, Recommendations of TRAI for revision of entry fee etc. The end result of the above discussion is that, I have absolutely no hesitation in holding that the prosecution has miserably failed to prove any charge against any of the accused, made in its well choreographed charge sheet. 1819. Accordingly, all accused are entitled to be acquitted and are acquitted."
Relying upon his decision in the Complaint Case filed under the Prevention of Corruption Act, 1988, the learned Special Judge, CBI (04), New Delhi, also acquitted the assessee in the Complaint Case no.1/2014 filed under the Prevention of Money Laundering Act, 2002, with the following observations:–
19 Kusegaon Realty Pvt. Ltd. “167. Since there are no “proceeds of crime”, in my humble opinion, there is no need to discuss other issues based on evidence led by the parties, as that would amount to an exercise, not only in speculation but also in futility, as the very basic fact required for constitution of an offence of money–laundering, that is, “proceeds of crime”, is knocked out. 168. Accordingly, all accused are entitled to be acquitted and are acquitted.”
Undisputedly, these are recent developments much after completion of proceedings before the Departmental Authorities. None of the Departmental Authorities had the benefit of the aforesaid orders passed by the learned Special Judge, CBI (04), New Delhi, which were produced for the first time in course of appeal hearing before us. Rules of natural justice and fair play demand that the Departmental Authorities must be given an opportunity to analyze and examine the impact the orders passed by the learned Special Judge, CBI (04), New Delhi, may have on the disputed issue arising in the present appeals.
Therefore, regard being had to the facts discussed by us herein before and the changed scenario arising due to the orders passed by the learned Special Judge, CBI (04), New Delhi, referred to above, we are of the considered opinion that the issues raised in the present appeals are required to be restored back to the Assessing Officer for de novo adjudication after considering all incidental facts and material including the orders of the learned Special Judge, CBI (04), New Delhi.
20 Kusegaon Realty Pvt. Ltd. Needless to mention, the Assessing Officer must afford a reasonable opportunity of being heard to the assessee before deciding the issue.
In the result, both the appeals are allowed for statistical purposes.
Order pronounced in the open Court on 17.04.2018