MANIPUR TEA CO. PRIVATE LIMITED,KOLKATA vs. D.C.I.T., CIRCLE-4, KOLKATA, KOLKATA

Per J. Sudhakar Reddy, AM :-

This is an appeal filed by the assessee directed against the order of the

Commissioner of Income Tax (Appeals)-IV, Kolkata, (hereinafter the ‘ld. CIT(A)’),

passed u/s 250 of the Income tax Act, 1961 (the ‘Act’), dated 28/01/2011, for the

Assessment Year 2008-09, on the following grounds:-

“1. That the DCIT has disallowed a sum of Rs. 36,00,000 as remission of interest out of interest payment of Rs.1,03,77,574 debited to the Profit

2 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd and Loss Account on the ground that borrowed funds have been advanced to its subsidiary company interest free without appreciating the fact that the funds have been advanced to its subsidiary only out of commercial expediency. Moreover the DCIT has erred in taking disallowance of remission of interest of Rs. 36,00,000 under the head of Income from Other Sources instead of Profit and Gains of Business and Profession as interest debit is under this head only. 2. That the DCIT has made an addition of Rs.56,36,381/- u/s 14A of the Income Tax Act, 191 by applying 2nd proviso of Rule 8D without recording any reasons in the assessment order so made of rejecting the claim of the appellant company that a sum of Rs.6,13,824 has been incurred towards earning exempt income by applying 1st proviso of Rule 8D.”

orders of the Authorities below, we hold as follows:-

Ground No. 1, is against the addition of Rs.36,00,000/- as notional interest

under the head “income from other sources”. The Assessing Officer, observed that

the assessee had given interest free loan of Rs.6 Crores to its subsidiary company

M/s. Derby Plantations. He was of the view that the interest free loan was

advanced from out of borrowed funds, which carried interest liability of 12 per

cent per annum. The Assessing Officer, further held that M/s. Derby Plantations

had enough liquidity as it had paid back the interest free loan during the year

except an amount of Rs.74,000/-. The Assessing Officer charged interest @ 12 per

3 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd cent on the loan given to the subsidiary concerns of Rs. 6 Crores and made an

addition of Rs.36,00,000/- under the “income from other sources”.

2.1. On appeal the ld. CIT(A), confirmed this addition on the ground that the

assesse has not produced any documentation to establish its case that there was

requirement of working capital etc. for M/s. Derby Plantation. At para 5.2. of his

order, he upheld the order of the First Appellate Authority.

2.2. In our view this addition of notional interest is not permitted under the

Income Tax Act, 1961. Admittedly, there is no contract between the parties for

levy of interest. Under these circumstances, making an addition under the head

“income from other sources” is not in accordance with law. The Hon’ble Delhi

High Court in the case of M/s. Shivnandan Buildcon Pvt. Ltd. vs. CIT held as

follows:-

“The logic that seems to have been applied by the revenue authorities is that the petitioner was a businessman and it would be imprudent for a businessman to advance a sum of Rs.1.6 crores as in the case of W.P.(C) 6265/2013 to Smart Tourist Private Limited and to not charge anything in return. The explanation sought to be given by the petitioner in both these cases was that the advances were made in the course of their business and it is not at all necessary that an advance given by a businessman at all times must have an element of interest also. There are various other considerations which come into the calculations when a businessman advances money to another. It is not at all necessary that interest must be charged. It was further submitted by the learned senior counsel appearing on behalf of the

4 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd petitioners that there is no finding in the assessment orders or in the order of the Commissioner of Income Tax that the petitioners had, in fact, received some amount by way of interest and that such amount was not shown in the accounts. It is also contended that the revenue authorities have not rejected the books of accounts of the petitioner. It was, therefore, submitted that unless and until there was a concrete finding that something was received by the petitioner from the said Smart Tourist Private Limited and other persons similarly situated, nothing can be added by way of notional income. A reference was made to the decision of the Guwahati High Court in B and A Plantations and Industries Ltd. v Commissioner of Income -Tax: 242 ITR 22. The relevant portion of that decision reads as under:- "As regards the addition of notional interest the assessee made an interest free advance of Rs. 19,58,256 to Jorhat Investments Ltd., which is a sister concern. The case of the assessee is that they did not charge interest on that advance and in consideration of the same the assessee got the premises at a very low rent of rupees two per sq. feet in a prime locality of Calcutta. 15. The Assessing Officer added a notional interest of 18 per cent. on the advance amount and added the income as the amount of interest. The said addition was approved by the Commissioner of Income Tax (Appeals) and the Tribunal. 16. In this case there is no finding when the assessee had in fact received the interest or that the Jorhat Investments Ltd., had in fact paid the interest to the assessee and the interest was not reflected in the accounts. The finding is that the assessee ought to have charged interest.

5 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd 17. The facts in the instant case are more or less identical with the case of Highways Construction Co. Pvt. Ltd. v CIT [1993] 199 ITR 702, wherein this court held (page 708) : "There is no finding of fact to the effect that actually the loan had been granted to the managing director or any other person on interest, or that interest had actually been collected and the collection of the interest was not reflected in the accounts. The finding of the Income Tax Officer is that the assessee ought to have collected interest. In other words, the view of the Income Tax Officer, which has been accepted by the Tribunal, was that the assessee, as a good business concern, should not have granted interest-free loan, or should have insisted on payment of interest. If the assessee had not bargained for interest, or had not collected interest, we fail to see how the Income Tax authorities can fix a notional interest as due, or collected by the assessee. Our attention has not been invited to any provision of the Income Tax Act empowering the Income Tax authorities to include in the income, interest which was not due or not collected. In this view, we answer question No. (ii) in the negative, that is, in favour of the assessee and against the Revenue."" 5. On going through the said decision, it can be discerned that the Guwahati High Court held that there was nothing to show that the assessee had, in fact, received interest or that the company to whom the loan was given had, in fact, paid interest to the assessee. There was also nothing on record to show that the alleged interest was not reflected in the accounts. The only finding recorded was that the assessee "ought to" have charged interest. Referring to an earlier decision of the Guwahati High Court, in Highways Construction Co. Private Limited v. CIT: [1993] 199 ITR

6 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd 702, the Court observed that their attention had not been invited to any provision of the Income-Tax Act empowering the income-tax authorities to include in the income, interest which was not due or not collected. 6. In similar vein, when we asked Mr Sahni, who is appearing for the respondent to point out some provision of the Income Tax Act, whereunder such “notional interest” could be made the subject matter of tax, the only reference he made was to Section 144 of the said Act. However, we are clear that Section 144 does not at all apply to the present proceedings because the present proceedings originate from an assessment under Section 143(3) of the said Act. 7. In the absence of any specific provision under which the so called notional income on advances, could be brought to tax, we do not see as to how the impugned orders passed by the Commissioner of Income Tax can be sustained. 8. Consequently, we allow these writ petitions. The impugned orders are set aside. The addition on account of a notional income on advances is deleted. These writ petitions have been decided only in respect of the respective assessment orders for the assessment year 2009-10 and will not have any bearing on the other assessment years, the facts of which we have not examined.

assessee is Rs.4,26,974/-. The Assessing Officer made a disallowance u/s 14A of

the Act, to the tune of Rs.56,36,381/-.

7 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd 3.1. On appeal the ld. CIT(A), confirmed the same. Aggrieved the assessee is in

appeal before us.

from tax, which is Rs.4,26,974/-, in this case. Reliance is placed on the decision of the Hon’ble Delhi High Court in the case of Joint investments Pvt. Ltd. vs. Commissioner of Income Tax in ITA 117/2015, dt. 25.02.2015, wherein it was held

as follows:- “9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing `2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is `48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., `52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”

8 I.T.A. No. 2692/Kol/2013 Assessment Year: 2008-09 Manipur Tea Co. Private Ltd

Applying the propositions laid down in the above decision of the Hon’ble

Delhi High Court to the facts of this case and keeping in view the fact that the

assessee has suo moto disallowed Rs.6,17,824/-, we direct the Assessing Officer to

restrict the disallowance to Rs.6,17,824/-. Accordingly, this ground of the

assessee is allowed.

Kolkata, the 26th day of July, 2017. Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 26 .07.2017 {SC SPS}

Copy of the order forwarded to: 1. Manipur Tea Co. Private Ltd Continental Chambers, 4th Floor 15A Hemanta Basu Sarani Kolkata - 700001 2. Deputy Commissioner of Income Tax Circle-4 Aayakar Bhavan P-7, Chowringhee Square Kolkata – 700 069 3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.