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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
PER SAKTIJIT DEY, J.M.
Aforesaid appeals at the instance of the assessee are directed against separate orders passed by the learned Commissioner (Appeals)–40, Mumbai, for the assessment years 2006–07, 2008–09 and 2010–11.
572/Mum./2013 – A.Y. 2006–07
2. In the aforesaid appeal, effective grounds raised by the assessee are as under:–
The learned Commissioner of Income-tax (Appeals) has 3 M/s. Divine Holdings Pvt. Ltd.
erred in law and in facts in passing order u/s. 143(3) of the Act, determining the income of the appellant at Rs. 42,25,580/-, which is illegal and bad in law.
2. The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in passing the order in gross violation of principles of natural justice.
3. The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in making disallowance on account of interest expense amounting to Rs. 8,09,700/-.
4. The learned Commissioner of Income-tax (Appeals) has erred in law and in calculating book profit U/s. 115JB amounting to Rs.42,23,883/-.
At the outset, the learned counsel for the assessee expressed his intention not to press grounds no.1 and 2. Accordingly, these grounds are dismissed as “not pressed”.
4. The issue raised in ground no.3, relates to disallowance of interest expenditure of ` 8,09,700.
Brief facts are, the assessee a company, as observed by the Assessing Officer, is a notified person under the Special Court (Trial and Offences Relating to Transactions in Securities) Act, 1992, and all its assets including bank account were vested in hands of custodian appointed under the said Act. For the assessment year under dispute, assessee filed its return of income on 29th November 2006, declaring loss of ` 6,89,658. Subsequently, assessee filed a revised return of income on 28th March 2007, declaring total income of ` 34,05,883. In 4 M/s. Divine Holdings Pvt. Ltd.
the course of assessment proceedings, the Assessing Officer noticed that during the relevant previous year, assessee had received interest income earned on term deposit amounting to ` 42,30,542. Assessee also claimed to have incurred interest expenditure of ` 1,18,95,460 out of which interest on loan for investment amounted to ` 1,10,85,760 and interest on loan for term deposit amounted to ` 8,09,700. As far as interest on loan for investment of ` 1,10,85,760 is concerned, assessee itself disallowed the same in the computation of income. However, he claimed deduction of interest on loan for term deposit amounting to ` 8,09,700 against the interest income of ` 42,30,542. In response to query raised by the Assessing Officer to justify the interest expenditure, assessee had submitted that it had taken loan from directors Shri Harshad S. Mehta, Shri Ashwin Mehta and Shri J.H. Mehta for investment in term deposit and has paid interest to them on such loan. Therefore, interest expenditure is to be allowed. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, as per the report of Special Auditors appointed by the Special Court when the assessee was notified under the Special Court Act, had categorically stated that the loans taken from the directors are interest free and there are no terms and conditions to pay interest to the creditors for investment. Therefore, the claim of the assessee that it had paid interest on such loans is not 5 M/s. Divine Holdings Pvt. Ltd. acceptable. The Assessing Officer further observed, had it been a fact that the loan taken by the assessee was interest bearing being a company it should have made provisions for interest right from the day the loan was take or the credit facility availed for investment. The Assessing Officer observed, the interest liability claimed against the term deposit is a contingent liability. He also observed that there is no direct nexus between the term deposit and the loans taken by the assessee from the directors. Accordingly, he disallowed the deduction claimed towards interest expenditure of ` 8,09,700. Being aggrieved of the disallowance made by the Assessing Officer, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) noticing that similar issue raised by the assessee in appeal preferred for assessment year 2007–08, was dismissed by his predecessor–in–office, followed the same and dismissed the ground raised by the assessee.
Learned Authorised Representative referring to the order passed by the first appellate authority while deciding assessee’s appeal in assessment year 2007–08 submitted that first appellate authority while deciding assessee’s appeal for assessment 2007–08 had in principle accepted that a reasonable nexus is existing between the interest liability incurred by the assessee and the interest income earned from term deposits. He, however, decided the issue against the 6 M/s. Divine Holdings Pvt. Ltd.
assessee simply for the reason that the issue relating to payment of interest to the creditors since was subjudiced before the Special Court, it cannot be said that interest liability is an ascertained liability of the assessee. Learned Authorised Representative submitted, the M.A. filed before the Special Court which was registered as M.A. no.41 of 1999, was 30th finally decided on April 2010. Further, learned Authorised Representative referring to the contents of M.A. filed before the Special Court submitted, the issue of payment of interest was not at all an issue before the Special Court. The only purpose for which the M.A. was filed before the Special Court was in relation to sale of flat. He submitted, in an y case of the matter since the learned Commissioner (Appeals) has decided the issue against the assessee relying upon the order passed for assessment year 2007–08, wherein the learned Commissioner (Appeals) had refused to entertain assessee’s claim on the ground that M.A. no.41 of 1999 was pending before the Special Court, which in fact has been disposed–off, the learned Commissioner (Appeals) may be directed to decide the issue keeping in view an order passed by the Special Court in M.A. no.41 of 1999. He submitted, since the learned Commissioner (Appeals) in the order passed for the assessment year 2007–08 in principle has accepted that a nexus exists between the interest expenditure and interest income he should decide the issue keeping in view such findings of the learned Commissioner (Appeals). Learned Authorised Representative further submitted, the fact that the loans were taken by the assessee from the persons to whom interest was paid is proved from the fact that subsequently funds have been transferred from 7 M/s. Divine Holdings Pvt. Ltd. assessee’s account to the account of Shri Harshad S. Mehta. In this context, learned Authorised Representative referred to the decision of the Hon'ble Supreme Court in L.S. Synthetics Ltd. v/s Fair Growth Financial Services & Anr., [2004] 11 SCC 456. Learned Authorised Representative submitted, if income is assessed in a particular assessment year corresponding expenditure has to be allowed.
Learned Departmental Representative on the other hand submitted, against the order passed by the learned Commissioner (Appeals) in assessee’s own case for the assessment year 2007–08, assessee had preferred an appeal before the Tribunal, however, the Tribunal has upheld the order of the learned Commissioner (Appeals) on the issue while deciding assessee’s appeal in ITA no.8199/Mum./ 2010 and ITA no.8346/Mum./2010 dated 10th March 2014. He, therefore, submitted that there is no scope for interference with the order of the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. Solitary issue arising for consideration is whether assessee’s claim of interest expenditure against the interest income earned on term deposit is allowable or not. It is the contention of the assessee that it has taken loans from certain persons for investment in term deposits, therefore, it has to pay interest on such loans. Accordingly, as the interest expenditure has a 8 M/s. Divine Holdings Pvt. Ltd.
direct nexus with interest income, the expenditure claimed is allowable. The Assessing Officer has rejected the aforesaid contention of the assessee. The learned Commissioner (Appeals) without giving any independent finding of his own on the disputed issue has simply followed the order passed by his predecessor–in–office in assessee’s own case for the assessment year 2007–08, while deciding the issue against the assessee. On a perusal of the order passed by the first appellate authority in assessee’s own case for assessment year 2007– 08, vide order dated 22nd December 2009, a copy of which is placed at Page–114 of the paper book, it is observed, he has decided the issue of claim of interest expenditure observing as under:–
“7.5 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 intention of the parties were always so, this is evident from the fact that identical claim was also made during A.Y. 1990-91 by the promoters who are also notified parties alongwith the appellant and the same was allowed to them and other concerns. The claim made in the affidavit of Custodian in MP No. 41 of 1999 also supports this claim. The oral agreement coupled with the actions and intentions of the parties has to be considered to prove the existence of the liability. 7.6 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 9 M/s. Divine Holdings Pvt. Ltd. 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. 7.7 It is noticed and also admitted by the appellant that the dispute with regard to the payment of interest to these parties is now raised before the Hon'ble Court. Hence, in my opinion, irrespective of the intentions, the decision of Hon’ble Special Court would be relevant factor for determining the liability to interest. No decision has been rendered by the Hon'ble Court in this regard so far. Since the dispute is pending with regard to very existence of the liability, in my opinion It cannot be said that the interest liability is an ascertained liability for the appellant. T he amo unt of interest payable as well as receivable by various parties is subject matter of dispute before the Hon'ble Special Court in M.P. No.41 of 1999 and the liability to pay interest would accrue only if the Court settles the issues. The liability to pay interest will not arise unless and until the Special Court decides the issues as to whether the appellant is liable to pay interest in respect of the period under consideration. I therefore hold that the appellant is not entitled to deduction in respect of the interest claimed to be payable to the brokerage firms till the Court decides the issue. In the event, the Court decides that the appellant is liable to pay interest to the creditors in relation to the year under appeal, the appellant would be entitled to claim the deduction and in such circumstances, the Assessing Officer may allow the deduction of the same during the year under appeal. Since no order is passed by the Hon'ble Special Court yet determining the appellant's interest liability, any claim in this regard is premature and therefore rejected. This ground of appeal is, therefore, dismissed.”
As could be seen from the aforesaid extract from the order of the first appellate authority, he has recorded a finding of fact in Para–7.6 of the order that funds borrowed from Shri Harshad S. Mehta, were deployed by the assessee in various assets like shares and securities, properties, etc., which generated income in the form of dividend and 10 M/s. Divine Holdings Pvt. Ltd.
interest. He also observed, after being notified, such shares and securities got converted into fixed deposit with various banks which generated interest income which were offered to tax by the assessee. He, therefore, was of the view that a reasonable nexus can be said to exist between the interest liability incurred by the assessee and the interest income earned from these assets. However, the learned Commissioner (Appeals) considering the fact that M.A. no.41 of 1999 pending before the Special Court also relates to the issue of payment of interest by the assessee to the concerned parties and the matter is subjudice before the Special Court, held that interest liability is not an ascertained liability for the assessee. Accordingly, he disallowed assessee’s claim. At the same time, he observed that in the event the Court decides that the assessee is liable to pay interest to the creditors in relation to the year under appeal, the assessee would be entitled to claim deduction and the Assessing Officer may allow the deduction for the year under consideration depending upon the decision of the Special Court on assessee’s interest liability.
It is a fact on record against the aforesaid order of the learned Commissioner (Appeals) both the assessee and the Department preferred appeal before the Tribunal. As far as the issue of payment of interest is concerned, the Tribunal in and 8346/Mum./2010 dated 10th March 2014, agreed with the view
11 M/s. Divine Holdings Pvt. Ltd. expressed by the learned Commissioner (Appeals) with certain modification as under:–
“3.2 We have given our careful consideration to the matter. The basic condition for allowance of an expense is its accrual; the assessee admittedly following mercantile method of accounting for the purpose of returning income under the Act and, thus, its determination; it being rather obliged to do so in terms of its governing Act, the Companies Act, 1956. The accrual of an expense, or income for that matter; the two being corresponding to each other, is essentially a matter of fact, to be determined on an appreciation of underlying rights and obligations. We may toward this advert to a recent decision by the apex court in CIT vs. Excel Industries [2013] 358 ITR 295, wherein its stands clarified that where the right to receive the payment or, correspondingly, the obligation to make the payment has arisen, even if for a later date, there is accrual of income or, as the case may be, expenditure. Reference in this context may also be made to its decisions in K.C.P. Ltd. vs. CIT [2000] 245 ITR 421 (SC); P. Mariappa Gounder vs. CIT [1998] 232 ITR 2 (SC); CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC); and CIT vs. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC). 3.3 In the facts of the instant case, a part of the money on which interest is being claimed is by way of borrowed capital while the balance represents the unpaid purchase price of shares. The parties making the purchases on behalf of the assessee are not in the business of financing, so that the amount could only be considered as a debt, arising in the course of trade, and payable in due course. The bifurcation of the total amount (on which interest is being claimed) between the two categories is not available on record. The amount is outstanding prior to 08.06.1992. There is however nothing on record to suggest that the interest was being paid on the said sum, wholly or partly, prior to 08.06.1992. The question then is: On what basis a liability to interest, i.e., to pay the same, can be said to have been arisen? There is nothing on record to suggest so, except, as is being claimed, of a claim in its respect having been made before the special court by the custodian representing the said parties, who are also notified parties. In fact, the order of the special court (in MP No. 41 of 1999 dated 30.04.2010) is on record (PB pgs. 30-35, containing only pages 1-3 and 137-139 of the order), which bears no mention of any interest being paid to any notified party by other such or to any outside party.
12 M/s. Divine Holdings Pvt. Ltd.
Further, even if no interest was initially contracted for or intended between the parties, there is no reason why interest could not be stipulated or provided for later, particularly considering that the amount/s remains unpaid despite lapse of several years. No interest, as it appears, stands though paid for any of the intervening years. However, the instant case/s is on a different footing, with all the assets having been attached and under the control of the custodian, also representing the three brokerage firms from whom the bulk of the capital on which the interest is being claimed, as it appears, arises. As such, firstly, the payment or not so of interest, prior to 08.06.1992, is of little consequence. Two, provision of interest cannot be made by the parties of their own free will, with their affairs being managed by the custodian, with in fact the investment in the term deposits itself having also been made only on the direction by the special court. In this view of the matter, the ld. CIT(A) in our opinion has correctly appreciated the facts and the law to hold that the matter of grant of interest being sub-judice before the Special Court, the same may be allowed where so granted for the relevant year. We confirm his direction, subject to a modification that the interest to be allowed, in-as-much as the same is to be by way of deduction against interest income, assessable as income from other sources, cannot exceed the rate at which the interest on deposit/s stands earned by the assessee, on an average, for the relevant period. We state so as only the expense incurred for the purpose of earning the interest income is to be allowed u/s. 57 of the Act. Payment of interest at a higher rate implies a gross loss, with no contractual obligation to pay interest having been established, so that the payment of interest at a higher rate cannot either conceivably, i.e., under the circumstances, or in terms, be said to be for the purpose of earning interest. We decide accordingly.
It further appears, against the aforesaid order of the Tribunal, the assessee filed a M.A. purportedly under section 254(2) seeking rectification of the order and in pursuance to such application, the Tribunal passed an order vide M.A. no.23/Mum./2015, dated 28th August 2015, modifying the appeal order to certain extent. Be that as it may, as could be seen from the impugned order of the first appellate authority instead of recording any independent opinion of his own
13 M/s. Divine Holdings Pvt. Ltd. either way on the issue raised by the assessee, he has simply followed the decision of his predecessor–in–office in assessment year 2007–08. As reiterated earlier in assessment year 2007–08, the learned Commissioner (Appeals) decided the issue against the assessee on a mistaken notion that M.A. no.41 of 1999 filed before the Special Court is still being. However, as a matter of record, Special Court had disposed off M.A. no.41 of 1999, on 30th April 2010, much prior to the disposal of assessee’s appeal for assessment year 2007–08 by the learned Commissioner (Appeals) on 10th September 2010. In other words, by the time learned Commissioner (Appeals) passed the appeal order, M.A. no.41 of 1999, already stood disposed off by the Special Court. Therefore, the very premise on the basis of which learned Commissioner (Appeals) decided the issue was incorrect. May be this was also due to a lapse on the part of the assessee in bringing the correct facts to the notice of the learned Commissioner (Appeals) while deciding the appeal for the assessment year 2007–08. Be that as it may, as far as the impugned assessment year is concerned, at the cost of repetition, it needs to be reiterated that the learned Commissioner (Appeals) has decided the issue simply following the decision of his predecessor–in–office in assessment year 2007–08, who again proceeded on a wrong footing that M.A. no.41 of 1999 was still pending before the Special Court. However, as it now emerges
14 M/s. Divine Holdings Pvt. Ltd. from the fact on record, the M.A. no.41 of 1999 was disposed off by the Special Court on 30th April 2010. That being the factual position, we are of the view that the matter needs to be restored back to the file of the learned Commissioner (Appeals) for deciding the issue afresh keeping in view the decision of the Special Court in M.A. no.41 of 1999 and all other relevant facts and circumstances including the order passed by the Tribunal in and 3846/Mum./2010 dated 10th March 2014 and M.A. no.23/Mum./2015 dated 28th August 2015. Though, the learned Authorised Representative submitted before us that the judgment of the Special Court in M.A. no.41 of 1999 has no relevance as the payment of interest was not at all an issue before the Special Court, however, in our view, the matter needs to be examined by the first appellate authority, since as it appears in the course of appellate proceedings for assessment year 2007–08, the assessee itself has contended that the issue of payment of interest was subjudice before the Special Court. Further, it was brought to our notice by the learned Authorised Representative that in case of some other group companies, dispute on identical issues have been remitted back to the learned Commissioner (Appeals) for deciding afresh. In this regard, we refer to the order of the Co–ordinate Bench of the Tribunal in Growmore Leasing and Investment Ltd., ITA no.5135/Mum./2012 dated 5th March 2015 and Rasila S. Mehta v/s
15 M/s. Divine Holdings Pvt. Ltd.
DCIT, and 3684/Mum./2011 dated 28th November 2014. In view of the aforesaid, we direct the learned Commissioner (Appeals) to decide the issue afresh keeping in view our observations herein above and only after providing due opportunity of being heard to the assessee. The assessee is at liberty to raise all his arguments in respect of his claim of deduction of ` 8,09,700 and the learned Commissioner (Appeals) must decide the issue after dealing with the submissions made by the assessee. Ground no.3, is allowed for statistical purposes.
Ground no.4, being consequential to ground no.3, is not required to be adjudicated at this stage. Hence, the same is dismissed as infructuous. However, it is open for the assessee to raise the issue, if required, before the learned Commissioner (Appeals). Ground no.4, is dismissed. ./2013 – A.Y. 2008–09 and ITA no.2803/Mum./2013 – A.Y. 2010–11
Grounds raised in the aforesaid appeals are common, which are reproduced below:–
1. The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in passing the order u/s. 250 of the Act.
The learned Commissioner of Income-Tax (Appeals) has 16 M/s. Divine Holdings Pvt. Ltd.
erred in law and in facts in passing the order without complying with the principles of natural justice.
3. The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in not appreciating that no income from attached assets can be assessed in the hands of the appellant.
The learned Commissioner of Income-Tax (Appeals) has erred in law and in facts in not granting relief of liability amounting to Rs. 8,09,700/-, towards interest expenditure claimed by the appellant.
5. 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. 67,21,614/-.
6. 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.
Grounds no.1, 2 and 3 are not pressed by the assessee. Hence, these grounds are dismissed.
Ground no.4, relates to disallowance of interest expenditure amounting to ` 8,09,700.
Before us, both the parties admitted that the facts and circumstances of the issue arising out of the aforesaid ground is identical to the issue arising out of the ground no.3, raised by the assessee in its aforesaid appeal for the assessment year 2006–07, wherein, the issue has been restored to the file of the Commissioner (Appeals) for the reasons stated therein. Consistent with the view taken in Para–11 of this order, we set aside the impugned orders passed by the learned Commissioner (Appeals) for the assessment years 2008–09 and 2010–11 also and restore the issue back to 17 M/s. Divine Holdings Pvt. Ltd.
the file of the Commissioner (Appeals) for denovo adjudication after providing reasonable opportunity of being heard to the assessee. This ground is also allowed for statistical purposes.
17. The only other ground is on chargeability of interest under section 234A, 234B and 234C of the Act. Charging of interest being consequential, the same is not required to be adjudicated.
In the result, appeals for the assessment year 2006–07, 2008– 09 and 2010–11 are partly allowed for statistical purposes. Order pronounced in the open Court on 29.06.2016