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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMARJIT SIGH
सुनवाई की तायीख /Date of Hearing : 02.12.2016 घोषणा की तायीख /Date of Pronouncement : 16.12.2016 आदेश / O R D E R PER BENCH: There are 14 appeals under consideration. The captioned 7 appeals are filed by the Revenue and the assessee filed 7 cross objections against the said Revenue‟s appeals involving the assessment years 2001-02 to 2005-06, 2009-2010 and 2010- 11. Since, the issues involved in all these appeals are inter-connected / identical, therefore, for the sake of convenience, they are clubbed, heard combinedly and disposed off in this consolidated order. Appeal wise adjudication is given in the following paras of this order.
At the outset, Ld Counsel for the assessee brought our attention to the fact that the CIT (A) passed independent orders for all the assessment years under consideration and the tax effect for the AYs 2001-02, 2002-03 and 2003-04 in the Revenue‟s appeals (ie 7393 and 7394/M/2013) works out to Rs. 8,75,097/- (AY 2001-02); Rs. 8,63,990/- (AY 2002-03) and Rs. 9,23,553/- (AY 2003- 04). In this regard, Ld Counsel for the assessee brought our attention to the contents of the CBDT Circular No.21/2015, dated 10.12.2015 and mentioned that the order of the CIT (A) is assessment year specific and not a composite order. In such cases, despite the commonness of the issue, Revenue is not allowed to filed the appeals.
After hearing both the parties, we are of the opinion that the said three appeals for the AYs 2001-02, 2002-03 and 2003-04 (ie ITA Nos.7392, 7393 and 7394/M/2013) and the relevant Cross Objections (ie C.O. Nos.25,26 and 27/M/2015) are required to be dismissed on the ground of low tax effect. We order accordingly.
In the result, all the three appeals of the Revenue (ie ITA Nos.7392, 7393 and 7394/M/2013) and three Cross Objections of the assessee (ie C.O. Nos.25,26 and 27/M/2015) are dismissed.
That leaves, four appeals for adjudication ie ITA Nos.7395, 7396, 7397 and 7398/M/2013 for the AYs 2004-05; 2005-06; 2009-10 and 2010-11 respectively. These four appeals filed by the Revenue. The grounds raised
in all these appeals are identical. Therefore, for the sake of convenience and adjudication purpose, the grounds raised by the Revenue in its appeal for the AY 2004-05 are extracted as under:-
1. On the facts and in the circumstances of the case and in law, the Ld CIT (a) erred in deleting the addition on account of interest of Rs. 29,65,423/- accrued on outstanding debt, without appreciating that the assessee acquired the right of suit as per assignment deed and was entitled to recover the debt along with interest and cost of suit as per the deed of assignment of right.
2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in deleting the addition on account of interest of Rs. 29,65,423/- accrued on outstanding debt, without appreciating that interest on debt which was receivable by Bank of Baroda, was now receivable to the assessee and as the assessee is following the mercantile system of accounting the assessee was required to offer interest income on debts on accrual basis.
3. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in restricting the disallowance u/s 14A of the Act to the extent of the dividend (exempted) income, without appreciating that the provisions of section 14A of the Act provides for disallowance of expenditure in relation to investments generating exempt income to be worked out as per Rule 8D.”
The only issue raised in the appeal, which is common in all the four appeals, relates to recognizing the notional interest income on outstanding debts when the interest is the subject matter of a decree before the Court. In this regard, it is the argument of the Revenue that the assessee should have recognized the interest income on the outstanding debt purchased by the assessee from the Bank of Baroda by virtue of assignment deed. On the other hand, the argument of the Ld Counsel for the assessee is that the by virtue of provisions of section 34 of the CPC, the interest shall accrue only after the decree in the suit is decided. CIT (A) granted relief as per the discussion given in paras 4 and 5 and its sub-paras of his order dated 30.9.2013. In para 4.1.5, CIT (A) held „as a result the addition made on account on notional interest in all the assessment years is deleted‟. When the issue came up regarding allowing the interest expenditure on the borrowed funds, which are utilised for buying the debt from the Bank of Baroda, in harmony with the decision about non-recognizing the notional interest income, CIT (A) did not allow the said interest debits stating that the same is allowable after the interest income is accrued and recognised for taxation.
Relevant facts relating to the above findings include that during the banking business, the Bank of Baroda extended the credit facility to its customer member ie International Cotton Corporation Pvt Ltd (ICCPL) and M/s. Karnataka Traders. The Thakkar and Ashar family members stood as guarantors. When there was a default in respect of the re-payments, the bank filed Suit (No.105 of 1986) in Bombay High Court for recovery of the debts. The premises viz “Madhavkunj”, belonging to Thakkar family, was mortgaged in bank on 9.8.1983. Subsequently, by virtue of the deed of assignment dated 26.2.1999, assessee company entered into an agreement with the Bank of Baroda and the assessee acquired the rights on debts and related interest. Assessee had made the payment of Rs. 84,97,400/- as per the Deed of Assignment. Resultantly, assessee company entered into the shoes of the bank and it was substituted as plaintiff in the said suit in place of the bank. It is informed that the said suit is transferred to the City Civil Court and the same is still pending. As per the said assignment deed, assessee was to receive the interest by various specified plans and the rates of interest vary from 18% to 22%. Assessee is said to have barrowed the funds for meeting the said requirement of Rs. 84,97,400/- and incurred interest expenditure. Considering the pendency of the suit and non-receipt of any interest income from the said parties / guarantors of the loan, assessee did not recognise the interest income in the books of accounts for all the years under consideration. It is the contention of the assessee that the interest will be accrued only by virtue of decree from the said suit and as and when it is finalized. The assessee will recognise the interest income according to the said decree applying the rates decided in the decree. Pending finalization of the suit in view of the provisions of section 34 of the CPC, the interest will not be recognized in these AYs. AO did not appreciate the same and proceed to recognise the interest income and taxed the same in all the AYs under consideration. The details of interest income so recognised are given in the orders of the AO and the CIT (A). The contents of para 4.1.5 of the CIT (A)‟s order supports the same. AO allowed the set off benefit towards the said interest expenditure too. The FAA considered the above facts of the case and discussed at length the background facts in paras 4.1.1 to 4.1.4 and concluded in para 4.1.5 that the addition on account of notional interest needs to be deleted. CIT (A) is of the view that because of the pending of suit in Bombay High Court / City Civil Court, the assessee will not have any right to recover even the principal sum, let alone the interest. According to CIT (A), assessee will get the right to recover the amount from the defendants only after the court‟s decree. However, considering the non-recognition of interest income in any of the seven AYs, assessee‟s claim of debiting in the AY 2001-02 and 2009-10 is not allowable. Otherwise, AO allowed the same against the notional interest income in the assessments.
In connection with the above, before us, Ld Counsel for the assessee submitted that as per the provisions of section 34 of the CPC, the rate of interest be paid on the principal sum is depending on the outcome of the suit. Relying on various decisions, Ld Counsel for the assessee submitted that the said provisions were explained by various High Courts. Bringing our attention to the judgment of the Bombay High Court in the case of Maharashtra State Financial Corporation Ltd vs. CIT [2005] 278 ITR 654 (Bom.) Ld Counsel for the assessee submitted that the said judgment is relevant for the proposition that in view of the provisions of section 34 of the Civil Procedure Code, 1908, the interest from the date of suit till the date of decree is a matter within the discretion of the court passing the decree. Consequently, the right to receive future interest comes into the picture when the court passes the decree. The interest amount could not have been added to the total income as interest income‟. Bringing our attention to the judgment of the Hon‟ble Madhya Pradesh High Court in the case of CIT vs. M.P. Financial Corporation (227 ITR 888), Ld Counsel for the assessee submitted that the contents explaining the provisions of section 34 of the CPC and the contents of page 891 are relevant in this regard. For the sake of completeness of this order, the contents of Placitum – D to H on page 891 of ITR 227 are extracted as under:-
“Considering section 34 of the Code of Civil Procedure, the Allahabad High Court held in CIT vs. Uttar Pradesh Financial Corporation [1992] 194 ITR282 that the Tribunal was right in holding that during the relevant previous year, interest did not accrue because during the whole of this period suits filed for recovery of the loans wre pending and the awarding of interst for the period was within the discretion of the court which was yet to pronounce its judgment. In this case, the assessee was a financial corporation. It was held that interest cannot be held to have accrued during the penalty of the suit and, as such, was not includible in the total income. The aforesaid decision was followed by the Allahabad High Court in CIT vs. U.P. Financial corporation [1996 217 ITR 191. The Orissa High Court also took the same view in CIT vs. Orissa State Financial Corporation [1993] 201 ITR 595 and held that interest did not accrue during the whole of the period during which suits were filed for the recovery of loans and awarding of interest for the period was within the discretion of the court. It was thus held that the Tribunal was right that inters was not includible in the profits of the assessee because of this position. In CIT vs. Naskarapara Jute Mills Co Ld [1983] 141 ITR 384. The Calcutta High Court also took similar view and held that interest can accrue only on the date of decree.”
Further, Ld Counsel for the assessee brought our attention to the deed of assignment (supra) and copies of the affidavits filed by the defendants / guarantors and mentioned that they are raising various issues relating to limitation of the suit and calling the deed of assignment as an invalid one, thereby, the receivability of both the interest income as well as the principal amount are in danger. In such circumstances, the recognition of income is unwarranted and unsustainable in law. Ld Counsel for the assessee pleaded for confirming the order of the CIT (A) on this issue of interest recognition as well as interest expenditure decided by the CIT (A).
On the other hand, Ld DR for the Revenue submitted that the company borrowed the funds from Bank of Baroda and the guarantors ie Thakkar and Ashar family members of the present assessee-company are all related and connected financially. In that case, this is an arrangement by which the assessee-company does not want to pay tax on the interest income earned by the assessee. Further, bringing our attention to the assignment deed, Ld DR for the Revenue submitted that the said assignment deed provides for right to recover the interest as per the interest rate specified in the said deed. In that case, the provisions of section 34 of the CPC should not come on the way. Referring to the decisions cited by the Ld Counsel for the assessee, Ld DR for the Revenue mentioned that they are distinguishable. 11. We have heard both the parties and perused the orders of the Revenue Authorities as well as the paper books filed before us. On hearing both the parties and on perusal of the relevant material placed before us, we find, there is no dispute on the facts about the assessee acquiring the debts from the Bank of Baroda for a sum of Rs. 84,97,400/- with the borrowed funds, the loan creditors have not paid interest income to either bank or to the assessee, assessee has not recognised the income for all the assessment years under consideration etc. The legal issue ie to be decided on the right to recover the interest income by the assessee during the pendency of suit (No. 105 of 1986) in Bombay City Civil Court. In this regard, we have perused the provisions of the said section 34 of the CPC and the same reads as under:- “34. Interest:- (1) Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, [ with further interest at such rate
not exceeding six per cent per annum, as the Court deems reasonable on such principal sum], from the date of the decree to the date of payment, or to such earlier date as the court thinks fit. [Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions. Explanation I.- In this sub-section, “national bank” means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970). Explanation II.- For the purposes of this section, a transaction is a commercial transaction, if it is connected with the industry, trade or business of the party incurring the liability.] (2) Where such a decree is silent with respect to the payment of further interest [on such principal sum] from the date of decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefor shall not lie.”
We have also examined the interpretation of the said section and the relevant explanation is already incorporated in the above paras of this order. We have considered the cited judgment of the Hon‟ble jurisdictional High Court in the case of Maharashtra State Financial Corporation Ltd (supra). Further, we have also considered the reasoning given by the CIT (A) in paras 4.1.4 and 4.1.5 of his order. Considering the above, we are of the opinion, the conclusion drawn by the CIT (A) is fair and reasonable and it does not call for any interference. Accordingly, relevant grounds raised
by the Revenue in all the four appeals are dismissed.
13. The other common ground raised by the Revenue in all the Revenue‟s appeals relates to the CIT (A)‟s decision in restricting the disallowance u/s 14A of the Act. In this regard, we have perused the contents of para 4.2.2 of the CIT (A)‟s order and find the same is relevant in this regard. For the sake of completeness of this order, the said para 4.2.2 is extracted as under:- “4.2.2. As mentioned above, the disallowance in AY 2001-02, 2003-04 and 2004-05 have been made to the extent of 10% of the expenses ( other expenses plus finance expenses). In the case of assessee, the shares are held as stock in trade and income in trading thereof is of speculative nature and taxable, therefore, in my considered view, the disallowance need to be limited to the dividend (exempted income). The AO is accordingly directed to restrict the disallowance to the extent of dividend income in AY 2001-2002, 2002-03 and 2004-05. In AY 2009-10, the assessee itself had disallowed the amount of Rs. 65,091/- and therefore the same is upheld to that extent. In AY 2010-2011, the AO has computed the disallowance in accordance with Rule 8D and the quantum so worked out is less than the dividend and therefore, the amount so disallowed by the AO ie Rs. 16,057/- gets confirmed....”