G.P. rate to be accepted if it is higher than average G.P. rate of last three years
Having perused the documents on record with the assistance of the learned counsel for the revenue, we notice that the Tribunal had though confirmed the view of the revenue authorities with respect to the rejection of the books of account of the assessee, did not accept the re-computation of higher rate of gross profit on the premise that the average gross profit rate of last three years immediately preceding the year under consideration came to 14.79%. On such basis, the Tribunal found that the claim of gross profit rate @ 15.27% cannot be stated to be low. On such basis, the assessee's appeal was allowed.
HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 449 of 2011
TAX APPEAL No. 449 of 2011
COMMISSIONER OF INCOME TAX
Versus
KIRAN INDUSTRIES PVT LTD
Versus
KIRAN INDUSTRIES PVT LTD
CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI and
HONOURABLE MS.JUSTICE HARSHA DEVANI
Date : 12/09/2012
ORAL ORDER
(Per : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 01.10.2010, raising the following questions for our consideration :
"[1] Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting the addition of Rs.1,50,58,882/- made by the AssessingOfficer and confirmed by the Appellate Commissioner on account of low gross profit rate?
[2] Whether on the facts and in the circumstances of the case, the order passed by theIncome Tax Appellate Tribunal is just, proper and legal as the same is passed without giving any cogent and relevant reasons to show how the findings arrived at and the conclusions reached by the Appellate Commissioner are not just, proper and legal?
[3] Whether the order passed by the Income Tax Appellate Tribunal is non-speaking and unreasoned order and hence suffering from infirmity of non-application of mind and perverse or not?"
2. The issue pertains to the gross profit rate presented by the assessee during the year under consideration relevant to assessment year 2005-06. The assessee had claimed income @ 15.27% of the turnover. The Assessing Officer re-computed the same @ 19.27% after rejecting the books. The Commissioner (Appeals) accepted such re-computation of the Assessing Officer. Thereupon, the assessee went in further appeal before the Tribunal. The Tribunal by the impugned order, reversed the orders of the revenue authorities. Hence, the present appeal.
3. Having perused the documents on record with the assistance of the learned counsel for the revenue, we notice that the Tribunal had though confirmed the view of the revenue authorities with respect to the rejection of the books of account of the assessee, did not accept the re-computation of higher rate of gross profit on the premise that the average gross profit rate of last three years immediately preceding the year under consideration came to 14.79%. On such basis, the Tribunal found that the claim of gross profit rate @ 15.27% cannot be stated to be low. On such basis, the assessee's appeal was allowed.
4. We are of the opinion that the findings of the Tribunal are based on evidence on record and are purely factual in nature. The Tribunal after taking into account relevant materials, came to the conclusion that a certain rate of gross profit presented by the assessee was acceptable.
5. In our view, therefore, no questions of law arise. The appeal is dismissed.
--
Value adopted by assessee cannot be substituted by A.O. merely on the basis of general inquiries
When the value declared by the assessee as on 01.04. 1981 is supported by valuation report of aregistered valuer and the A.O. has taken different valuation without obtaining valuation report from the DVO, such value taken by theregistered valuer cannot be substituted by the A.O. merely on the basis of general inquiries without obtaining a report from DVO.Similarly, in the case of Pramila M Desai (supra) also, it is held by the tribunal that the report of the registeredvaluer being a technical person, cannot be substituted without obtaining DVO' s report or any other report of a technical person. Hence, this issue is squarely covered in favour of the assessee by these two Tribunal decisions. Moreover, we find that while adopting the value as on 01.04.1981 @ Rs.250/- per sq. yard as against Rs.800/- per sq. yard as adopted by the registered valuer, the basis of the A.O. was this much only that as per this report of the registered valuer, various sales instances considered by him which are for smaller plots but for a larger plot like that of the assessee, the value will be much less per sq. yard. Copy of the valuation report is available on page 108-111 of the paper book. On page 111 of the paper book, the registered valuer has given various sale instances during the period form 25.03.1980 to 30.08.1982 and the lowest value as per these sales instances is Rs.211.57 per sq. yard and the highest value as per these sales instances is Rs.97 1.73 per sq. yard as per the instance noted at Sl. 6, the rate is Rs.971.73 only. Sl. No.7 it is Rs.700/-, Sl. No.8 it is Rs.773.41 and as per Sl. No.9, it is Rs.800/- per sq. yard. The stand of the A.O. that the value of larger plot has to be lesser is without any basis and it depends on many factors. In some cases, the A.O. may be right that the price of a larger plot will be lesser but in other cases, it may be different and it may be found that price of larger plot is higher and, therefore, no decision can be taken on the basis of these presumptions. Apart form this that the area of the land is smaller in the sales instances noted byregistered valuer, no defect has been pointed out by the A.O. in the valuation report of the registeredvaluer and we have already seen that this objection of the A.O. is without any basis and the correct position may be different than what is stated by the A.O. In the absence of any valid basis adopted by the A.O. to substitute the rate adopted by the assessee on the basis of a valuation report of aregistered valuer, we feel that no interference is called for in the order of Ld. CIT(A) on this issue also. This ground of the revenue is also rejected.
ITAT "D " BENCH, AHMEDABAD
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.(SS) No.137 / Ahd/2009 – (Assessment year 2007-08)
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.(SS) No.137 / Ahd/2009 – (Assessment year 2007-08)
ACIT Vs. Smt. Hiraben Govindbhai Patel
C.O. No.282/Ahd/2009 in IT(SS) No. 137/Ahd/2009
(Assessment year 2007-08)
(Assessment year 2007-08)
Smt. Hiraben Govindbhai Patel Vs. ACIT, CC-2(4),
Date of hearing: 07.03.2013
Date of pronouncement : 17.05.2013
O R D E R
PER SHRI A. K. GARODIA, AM:-
This appeal is filed by the revenue and the C.O. is filed by the assessee, which are directed against the order of Ld. CIT(A) I, Ahmedabad dated 24.08.2009 for the assessment year 2007-08.
2. First, we take up the cross objection filed by the assessee. The grounds raised by the assessee in the C.O. are as under:
"In the facts and circumstances of the case the learned CIT(A) erred in rejecting the relevant ground of appeal raised by the assessee claiming that there was no cost of acquisition in respect of the land bearing Survey No. 186 which was transferred by the deceased assessee during this year, and therefore, no income under the head "Capital Gain" was chargeable to tax."
2.1 Regarding this contention raised by the assessee in ground No.1 of the C.O. that there was no cost of acquisition and hence, there cannot be any capital gain on the sale of land in question, it was submitted by the Ld. A.R. that various decisions in support of this contention were cited before Ld. CIT(A), the details of which are available on page 112 of the paper book and on the same decisions reliance is being placed before us also. In addition to this, reliance was placed on the following judicial pronouncements:
i) 83 ITD 273 ITO Vs Uppala Venkat Rao (Hyd.)
ii) 70 TTJ 919 G N Ghorpade (HUF) Vs DCIT (ITAT Pune)
iii) Tax Appeal No.10 of 2010 dated 28.06.2011Shri Rama Multitech Ltd. (Guj.)
2.2 As against this, Ld. D.R. supported the orders of authorities below. He placed reliance on the following judicial pronouncements:
i) 281 ITR 19 (Guj.) CIT Vs. Manoharsinhji P Jadeja
ii) 222 ITR 799 (Ktk) Emrald Valley Estates Ltd. Vs CIT
iii)106 ITD 153 (Ahd.) Vijaysinh R Rathod Vs ITO, Vapi
2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. We find that the mode of purchasing the land in question by the assessee is indicated at page 3 of the sale deed and the same is reproduced in the letter of the assessee dated 19.06.2009 to CIT(A) copy of which is available on pages 1-16 of the paper book and the relevant portion is available on page 5 of the paper book. The relevant portion is reproduced below for the sake of ready reference:
"AND WHEREAS the Vendor was tenant in his separate and individual capacity, of Inami Land of inamdar, Shah Alam Roza Trust. The said Land is received by him as of Old Tenure uponcoming into force of the Devstan Inam Abolition Act, and is accordingly, held and registered in the name of the Vendor in the revenue records as per appropriate orders passed. No member of the Vendor's family has any right or interest in the said Land."
2.4 From the above para of the sale deed regarding mode of acquisition of land in question by the assessee, it is seen that the assessee was a tenant in his separate and individual capacity and thereafter, the said land is received by him as of old tenure upon coming into force of the Devstan Inam Abolition Act. Now, we reproduce the provisions of Section 55 (2)(a) of the Income tax Act, 1961:
"2) [For the purposes of sections 48 and 49, "cost of acquisition",—
[(a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business] [or a right to manufacture, produce or process any article or thing] [or right to carry on any business], tenancy rights, stage carriage permits or loom hours,—
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and
(ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil."
2.5 From the provisions of Section 55(2)(a), it is seen that in the case of tenancy rights, cost of acquisition is required to be taken as 'nil'. When the provisions of this section was confronted to Ld. A.R., it was his submission that the assessee has not sold the tenancy right but the assessee has sold the free hold right which were acquired by the assessee on Devstan Inam Abolition Act and hence, provisions of this section are not applicable in the present case. We do not find any force in this contention of the Ld. A.R. because it is admitted fact that the assessee was the tenant of the property in question and because of this fact only, the assessee became the owner of this land property upon coming into force of the Devstan Inam Abolition Act, which means the tenancy rightswere converted into ownership right and hence, the provisions of Section 55(2)(a) as per which in the case of tenancy right, the cost of acquisition is required to be take as 'nil' because only tenancy right having nil cost of acquisition was converted into ownership right, the ownership right sold by the assessee is also having nil cost of acquisition. Hence, this argument of the assessee that there will be no capital gain because there is no cost of acquisition, has no merit.
2.6 In view of the above decision, as per which the assessee's case is covered against the assessee by the provisions of Section 55(2)(a) of the Income tax Act, 1961, various decisions cited by both the sides have no application in the present case since the facts in those cases are different where the issue was not covered by the provisions of Section 55(2)(a) of the Income tax Act, 1961. Still, we feel that at least we should examine the applicability of the judgement of Hon'ble Gujarat High Court cited by both the sides. One of the judgements cited by the Ld. A.R. is the judgement of Hon'ble Gujarat High Court rendered in the case of CIT Vs Shri Rama Multitech Ltd. (supra). This judgement is with regard to assessment by way of total income declared by the assessee in the return of income and since we have held above that the assessee's income under the head capital gains is liable to be taxed in view of the provisions of Section 55(2)(a), this judgement of Hon'ble Gujarat High Court has no application in the present case.
2.7 Various decisions cited by the Ld. A.R. on page 112 of the paper book are with reference to the argument that when there is no cost of capital asset, capital gain should not be computed but we have seen in he present case that the cost of capital asset has to be considered as nil in view of the provisions of Section 55(2)(a) of the Income tax Act, 1961 and, therefore, these judgements have no relevance in the present case.
2.8 Ld. D.R. has also cited certain judgements but since the issue is being decided in favour of the revenue even without considering those judgements, we feel that those judgements are not required to be discussed in the present case.
2.9 In view of above discussion, this ground of the C.O. is rejected.
2.10 In the result, C.O. of the assessee is dismissed.
3. Now, we take up the appeal filed by the revenue. The grounds raised by the revenue are as under:
"1. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in directing the A. O. to consider the sale consideration at Rs. 7.36 crores as against the amount of Rs. 14.71 crores.
2. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in directing A. O. to accept the value of property as on 01.04.1 981 at Rs.800/- per sq. yard."
3.1 The brief facts till the assessment stage in respect of both the issues i.e. regarding the amount of sale consideration and regarding the market value as on 01.04.1981, are noted by Ld. CIT(A) in para 4-4.5 of his order and for the sake of ready reference, these paras from the order of Ld. CIT(A) are reproduced below:
"4. The Assessing Officer has observed that search proceedings were carried out u/s.132(1) in the Savvy Group of cases on 14-2- 2007 and during the course of search proceedings, documentsrelating to sale of land by the appellant were found. Accordingly, the search was also carried out at the appellant's premises on same day. At the time of search, the appellant was of the age of 82years and was earning income from rent, interest and agriculture.
4.1 The Assessing Officer has stated that at the time of search from the premises of Savvy Group of cases, following documents were found relating to sale of land by the appellant.
"1. Memorandum of Understanding dated 23.9.2006 between Shri Govindbhai Ambalal Patel and Savvy Infrastructure Ltd.
2. Banakhat (unsigned) between Shri Govindbhai Ambalal Patel and Smt. Chetnaben Mukeshbhai Patel as promoter of Savvy Homes Co. Op. Housing Society (Proposed) showing rate of Rs.9500 per sq. yd. and the total value of 15488 sq. yds. at Rs. 14,71,36,000/-.
3. Duly notarized banakhathh dated 1 7.1.2007 between Shri Govind Ambalal Patel and Smt. Chetnaben Mukeshbhai Patel as promoter of Savvy Homes Co. Op. Housing Society (Proposed). Here the rate shown is Rs.5685/- per sq. mt. and valule of 12950 sq. mts, (equivalent to 15488 sq. yds.) is shown at Rs. 7,36,20,750. 4. Sale deed dated 3.2.2007 between Shri Govind Ambalal Patel and Savvy Homes Co.op. Housing Society Ltd. with Smt. Chetnaben Mukeshbhai Patel as the confirming party."The Assessing officer has discussed the contents of the above documents which are summarized as under:
(i) The first document being MOU dated 23/09/2006 between the appellant and the Savvy Infrastructure Ltd. and it is stated that as per this document, the appellant has sold the land bearing No.186 at Vasana admeasuring 15488 sq. yds. to Savvy Infrastructure Ltd., according to which the sale price decided was of Rs.14, 71,36,000/- and token amount of Rs.21 lakh was paid to the appellant by cheque and that further payment was required to be made by Savvy Infrastructure Ltd. The Balance amount was to be paid in equal quarterly installments.
(ii) It is stated that the second document being unsigned Banakhat between the appellant and Smt. Chetnaben Mukeshbhai Patel as promoter of Savvy Home Co-op. Housing (proposed). It is stated that as per this document the sale price was typed at Rs. 14,71,36,0007- and this figure was altered by pencil and was substituted by total value of Rs. 7,36,20,750/-.
(iii) It is stated that the notarized Banakhat dated 17-1-2007 is between the assessee and Chetnaben M. Patel, as promoter of Savvy Home Co-op. Housing (proposed). In this document, the figure written is Rs. 7,36,20,750/-.
(iv) The forth document is Registered Sale Deed between the appellant and Savvy Home Co-op. Housing (proposed) being purchaser. As per the sale deed, the payment of Rs.1,46,00,000/- had already been paid and balance amount of Rs.5,90,20, 750/- was to be paid by 16th April 2008. Thus, the sale consideration was of Rs. 7,36,20,750/-.
4.2 With the above background of the documents, the Assessing Officer had issued a show cause notice to the appellant asking as to why the four documents relating to the same property werefound and that as to why the difference of Rs. 7,35,15,520/- be not treated as unaccounted receipt of the appellant on sale of the said premises. The appellant had explained before the A. O. that the land was under the green belt area declared by the concerned authority and that 50% of the land was to be surrendered to the Municipal authorities and that, therefore, the sale price was fixed at Rs. 7.36 crores which is as per the final Banakhat and sale deed executed between the parties. It was also stated before the A. O. that the appellant had not received any cash for the transaction.
However, this explanation has not been accepted by the A. O. stating that the entire land was sold to Savvy Home Co-op. Housing (proposed) and that since entire area of the land was transferred, it is established that the assessee has received the entire consideration of Rs. 14,71,36,000/- as per the MOD dated 23-9-2006. The same is treated as actual consideration received by the appellant.
4.3 The assessing officer has further stated that in the course of hearing before him, the appellant had filed written submissions claiming that no capital gain was taxable in respect of the said land as it had no cost. It was claimed that the land was received by appellant as of old tenure upon coming into force of Devastan Inam Abolition Act. The appellant had also given revised return with this claim. However, this revised return has not been accepted by the A. O. stating that the proceedings were getting time barred. It is further stated that the appellant had himself shown capital gain in the return of income. It is also stated that the asset is not self generated asset.
4.4 In the return of income, the appellant had claimed that for the purpose of deduction of cost, the fair market value as on 1-4-1 981 be . adopted and for that purpose the appellant had claimed Rs. 800/- per sq. yd as fair market value of the property as on 1-4- 1981. in support of this, the appellant had furnished a certificate from the Registered Valuer. This has not been accepted by the Assessing Officer and he has adopted the value of Rs.250/- per sq. yd. as the value of the land as on 1 -4-1 981. He has stated that the rates taken by the valuer were for smaller plot and that the appellant's plot was large and hence it has lesser value. He has further stated that the appellant's premises are away from city. It is stated that rates are between Rs.250/- and Rs. 800/-. With this discussion it is concluded that the rate of Rs.250/- per sq. yd. is to be adopted.
4.5 With the above discussion the assessing officer has computed the capital gains as under:
| Total Consideration | Rs. 14,71,36.000/- |
| Less: Cost as on 1 -4-1981 (Total value of Rs.38, 72,000/- indexed to Rs. 2,00,95,680) | Rs. 2,00,95,680/- |
| Rs. 12.70.40,320/- |
3.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) who decided both these issues in favour of the assessee and directed the A.O. to consider the sale consideration at Rs.7.36 crores as against Rs. 14.71 crores adopted by him and he also directed the A.O. to consider the market value of the property as on 01.04.1981 at Rs. 800/- per sq. yard as has been claimed by the assessee in stead of Rs.250/- sq. yard adopted by the A.O. Now, the revenue is in appeal before us.
3.3 Regarding the first aspect i.e. value of sale consideration, it was submitted by the Ld. D.R. that as per para 7.3 of the order of Ld. CIT(A), it is noted by him that it is stated by the A.O. that the first document being MOU fixes the price at Rs.14,71,36,000/-. He also submitted that the MOU dated 23.09.2006 is available on page 30-46 of the paper book and in particular, our attention was drawn to page 43 of the paper book where it is noted that there will be 50% deduction in the land area as per the TP scheme and hence, this is not correct to say that the price determined as per this MOU was for the full area of the land and what is ultimately sold afterwards is only 50% area and, therefore, price reduction is justified. He strongly supported the assessment order. He also submitted that the order of Ld. CIT(A) should be reversed and that of the A.O. should be restored.
3.4 As against this, Ld. A.R. supported the order of Ld. CIT(A). Regarding MOU available on pages 30-46 of the paper book, it was submitted that this MOU is not for sale of property but in fact, as per clause 7 of this MOU on page 41 of the paper book, it was agreed that for the purpose of developing the land in question, a new partnership firm is to be formed jointly by the parties of one part Shri Govindbhai Ambalal Patel and his other partners and on the other par i.e. Savvy Infrastructure Co. Ltd. He submitted that this agreement is not for sale of land in question but for contributing of said land to the partnership firm as the capital contribution and therefore, the same cannot be the basis for adopting the sale vale of the land in question.
3.5 He also drawn our attention to the copy of the agreement to sell of the land in question which is dated 17.01.2007 as per English version available on pages 47-78 of the paper book and it was pointed out that the price was fixed after negotiation @ Rs.5685/- per sq. mtr. for the land area of 12950 sq. mtrs and the total value was worked out at Rs.7,36,20,250/- and hence, nothing more than this can be considered as the sale value of the land in question.
3.6 He also submitted that the search was carried out on 14.02.2007 and the sale deed in question was executed on 03.02.2007 which means that the search was carried out only 11 days after the date of sale deed and still, no cash was found nor any unaccounted asset was found in the course of search and this also supports the case of the assessee that the actual sale value is as declared in the sale deed.
3.7 He also submitted that the copy of the statement recoded by the assessee on 14.02.2007 at his residence in the course of search along with English translation is available on pages 95-107 of the paper book and in particular, our attention was drawn to question 10 on page 105 of the paper book where, it is noted that only a sum of Rs. 1.50 lacs was found in cash and the same was also explained by the assessee being out of withdrawal from the bank for the purpose of expenses in respect of marriage of assessee's daughter. He also drawn our attention to question No.5 of the same statement which is available on page 101 of the paper book where a question was raised regarding sale price of the land in question sold by the assessee and in reply, it was submitted that the land measuring about 15400 sq. yards was sold for a consideration of Rs.714 lacs and it was also stated that an amount of Rs.21 lacs was received by him in Sep., 2006 by way of cheque and further amount of Rs. 125 lacs was received by way of cheque in January 2007 and the balance amount of 568 lacs was still to be received by him. Our attention was also dawn to question No.6 and its reply where, the question was as to whether any amount was received by the assessee in cash and in reply, it was submitted by the assessee that no amount is received in cash in respect of this sale of land. He also submitted that there is no addition in the hands of the buyer and for this reason also, no addition is justified in the hands of the assessee being seller.
3.8 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that the case of the A.O. is this that as per the MOU between the assessee and SMT. Chetnaben M Patel dated 23.09.2006, it is stated at various places in clause 1, 2 etc that the assessee is selling this land in question to Smt.. Chetnaben M Patel for a consideration of Rs. 1471.36 lacs. In para 7 of the same MOU, it is noted that for the purpose of developing the land in question, a new partnership firm is to be formed jointly by the assessee and his other partners Shri Rajnibhai Ambalal Patel, Mukeshbhai Keshavlal Patel and Shri Kalpeshbhai Atmaram Patel and the second part M/s. Savvy Infrastructure Co. Ltd. From this MOU, the true meaning of this MOU is not consistent as to whether it is for the purpose of sale of land in question for the given price of /Rs. 1471.36 lacs or whether it is for the purpose of transferring the land in question to a new partnership firm to be formed jointly by the assessee along with his three partners of one part and the other part M/s. Savvy Infrastructures Co. Ltd. Again on page 8 of the same MOU it is stated that a token amount given towards sale price by the party on other part to the first part is to be treated as given to the new partnership firm by the other part. This has increased the confusion as to whether this MOU is for formation of a new partnership firm or it is for sale of land simplicitor. Although only one name is given as party of one part i.e. the assessee Shri Govindbhai A Patel but on page 37 of the paper book, it is stated that "we the party of the one part is exclusively owning, holding, possessing and enjoying and this land is free from all encumbrances…." In para 2 of this MOU, it is also agreed that the tenure of this MOU will be 18 months and during this period, installment of equal amount has to be paid at every month. There is nothing brought on record by the revenue to show that any such monthly installment was paid by the party of 2nd part i.e. Shri Chetnaben M Patel to the assessee. Further, para 10 of the MOU is relevant and the same is reproduced from page 42-43 of the paper book for the sake of ready reference:
"11. The said land is falling within the green belt and hence, whatever betterment or increment contribution for the purpose of town planning scheme is to be paid, shall be borne by he party of the other part and whatever land is allotted against the 50% deduction as per the T P Scheme or whatever reimbursement is received, it will belong to the new partnership firm; which means in view of the T P scheme, whatever final plot is allotted or whatever amount is received as a benefit of the same, shall all go to the new partnership firm and whatever responsibilities that may arise, shall be borne by the party of the other part with the help of party of the one part. Further, all the benefits as well as responsibilities of the said land due to T P scheme shall rest upon the new partnership firm."
3.9 From the above para of the MOU, it is seen that even the expenditure towards land price as well as construction to be put up upon the said land is to be borne by both the parties i.e. assessee as well as the party of other part in the ratio of 50:50 each. It is also agreed that the profit will be distributed between these two parties in the ratio of 45% to the assessee and 55% to M/s. Savvy Infrastructure Co. Ltd. This clause of the agreement in the MOU to get only 45% profit although the cost to be borne in the ratio of 50% by the assessee, it is possible that the price of land agreed to by the other party was possibly at higher figure for any purpose not disclosed in the MOU but to compensate the assessee for, lesser amount of profit percentage being given to the assessee in the profits of the project. In view of these clauses of this MOU as discussed above, we find force in these contentions of the Ld. A.R. that this MOU is not a sale simplicitor of the land in question but the same is mainly towards contribution as capital to the new partnership firm by the assessee and although a high value of land was considered for this purpose, but the fact that the assessee was to bear 50% expenses of the partnership firm along with cost of land, the assessee was eligible for only 45% of the profits and therefore, the value considered in the MOU cannot be considered as the sale price of the land in question.
3.10 The basis of the revenue for adopting the amount of Rs. 1471.36 lacs as total sales consideration of the land in question was this MOU only and except this MOU, no other evidence even circumstantial evidence has been found even in the course of search carried out only 11 days after the date of sale deed to corroborate this allegation that the assessee has received sales consideration in cash of Rs.735. 15 lacs. If this much huge cash was received by the assessee, something must be found in the course of search either unaccounted cash or unaccounted investment or any other paper etc., which may have indicated such a huge cash transaction. This is also not the case of the A.O. that jantri price of this land in question at the relevant point of time was more than the value declared by the assessee in the sale deed. Hence, we find that neither the value as per jantri rates is more than the sale value declared in the sale deed nor any other evidence was found suggesting receipt of money by the assessee in cash apart from this MOU. We have already discussed that this MOU cannot be said to be a sales simiplicitor because various clauses of this MOU are suggesting that this MOU was mainly for entering into a partnership firm between the assessee along with his three partners with the other party i.e. Savvy Infrastructure Co. Ltd., in which the assessee was to bear 50% of the expenditure including land expenses but the assessee was entitled to profits of only 45% and it is also seen that along with the assessee, his three partners; Shri Rajnibhai Ambalal Patel,Mukeshbhai Keshavlal Patel, and Kalpeshbhai Atmaram Patel are also considered along with the assessee as parties of one part who will share 45% of the profits of the firm to be created and considering all these facts, in our considered opinion, this cannot be accepted in the facts of the present case that in the absence of any other corroborating evidence, the price stated in this MOU is the sale price of the land in question.
3.11 Now, we consider the decision of Ld. CIT(A) as per para 7.3 of his order and the same is reproduced below for the sake of ready reference:
"7.3 The Assessing Officer has stated that the first document being Memorandum of Understanding, fixes the price at Rs.14, 71,36,000/-and payment of Rs.21 lakh was made to the assessee by way of cheque by Savvy Infrastructure Ltd. He has further stated that the second document being unsigned banakhat between the assessee and Chetnaben Mukeshbhai Patel, promoter of Savvy Co-op. Hsg. Society is for Rs.14,71,36,000/-. This figures are changed to Rs. 7,36,20,750/-; He has therefore, presumed that the sale consideration was of Rs. 14.71 crores and not of Rs. 7.36 crores. He has considered the differential amount as payment in cash. However, on perusal of the submissions of the appellant and the details furnished, it is found that first document being MOU can not be the basis as it has not resulted into final transaction between the parties of MOU. Second document relied upon by Assessing Officer is unsigned and hence it cannot be the basis for conclusion reached by Assessing Officer. As such, based on both these documents, no presumption about passing of cash can be reached, it is also found that at the same time, appellant's premises were subjected to search and statement of appellant was recorded on 14-2 -2007, wherein he had in clear terms stated before the search officer that the sale price was around Rs. 7.14 crores and on further question, he had specifically stated that no cash was received against sale of such land. Apart from this, at the time of search, cash of only Rs.1,50,000/- was found from the appellant's premises which was also explained from the withdrawals from bank account and further no evidence about any other unaccounted assets or receipt of cash was found during the course of search from the appellant's premises. It is also noticed that no specific evidence is referred to by the A. O. that the appellant was paid any amount in excess of the prices of Rs. 7.36 crores as per the documents. The appellant has also specifically pointed out that the price as per the documents is also accepted for stamp duty purpose and it is not disputed by that authority. Considering these facts, I am of the view that the A. O. has no basis for adopting the sale value of the land at Rs. 14.71 crores as against the value of Rs. 7.36 crores as per the document in the form of sale deed dated 3-2-2007. The A. O. is, therefore, directed to consider the sale consideration at Rs. 7.36 crores as against the amount of Rs. 14.71 crores adopted by him."
3.12 From the above para of the order of Ld. CIT(A), it is seen that he has given a clear finding that the MOU and no other document can be a basis for the conclusion reached by the A.O. and on the basis of these documents, a presumption cannot be raised abut receiving the cash by the assessee. We have also seen that no specific evidence is referred to by the A.O. about the allegation that assessee has been paid any amount in excess of the price of Rs.7.36 crores as per the documents. It is also noted by us that this price has been accepted by the stamp duty authority and it is not disputed by the authority. Hence, considering all these facts of the present case as discussed above by us and also by Ld. CIT(A) in the above para as reproduced above, we find that there is no infirmity in the order of Ld. CIT(A) on this issue and hence, we decline to interfere in the order of Ld. CIT(A) on this issue. This ground is rejected.
4. Now, we decide the second issue raised as per ground No.2.
4.1 On this issue, Ld. D.R. supported the assessment order. It is also submitted that no DVO report was obtained. He also drawn our attention to sub-section (22B) of Section 2 where the term fair market value has been defined and it is stated that fair market value in relation to a capital asset means price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rule made under this Act. He submitted that because of this fair market value as on 01.04.2008, should be the price at which the capital asset in question can be sold in the open market and since the value adopted by the assessee is not on this basis, the order of Ld. CIT(A) should be reversed and that of the A.O. should be restored.
4.2 Ld. A.R. supported the order of Ld. CIT(A). He also placed reliance on a Tribunal decision rendered in the case of Pramila M Desai in I.T.A.No. 04/Ahd/2012 dated 21.09.2012 and also on another Tribunal decision rendered in the case of Rajendra H Seth in I.T.A.No. 1495/Ahd/2007 dated 11.11.2011. He submitted copies of these tribunal decisions. He also submitted that the registered valuer report is available on page 108 – 111 of the paper book.
4.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the tribunal decisions cited by the Ld. A.R. We find that in the case of Rajendra H Seth (supra), this finding is given by the Tribunal in para 10.1 of its order that when the value declared by the assessee as on 01.04. 1981 is supported by valuation report of a registered valuer and the A.O. has taken different valuation without obtaining valuation report from the DVO, such value taken by the registered valuer cannot be substituted by the A.O. merely on the basis of general inquiries without obtaining a report from DVO. Similarly, in the case of Pramila M Desai (supra) also, it is held by the tribunal that the report of the registered valuer being a technical person, cannot be substituted without obtaining DVO' s report or any other report of a technical person. Hence, this issue is squarely covered in favour of the assessee by these two Tribunal decisions. Moreover, we find that while adopting the value as on 01.04.1981 @ Rs.250/- per sq. yard as against Rs.800/- per sq. yard as adopted by the registered valuer, the basis of the A.O. was this much only that as per this report of the registered valuer, various sales instances considered by him which are for smaller plots but for a larger plot like that of the assessee, the value will be much less per sq. yard. Copy of the valuation report is available on page 108-111 of the paper book. On page 111 of the paper book, the registered valuer has given various sale instances during the period form 25.03.1980 to 30.08.1982 and the lowest value as per these sales instances is Rs.211.57 per sq. yard and the highest value as per these sales instances is Rs.97 1.73 per sq. yard as per the instance noted at Sl. 6, the rate is Rs.971.73 only. Sl. No.7 it is Rs.700/-, Sl. No.8 it is Rs.773.41 and as per Sl. No.9, it is Rs.800/- per sq. yard. The stand of the A.O. that the value of larger plot has to be lesser is without any basis and it depends on many factors. In some cases, the A.O. may be right that the price of a larger plot will be lesser but in other cases, it may be different and it may be found that price of larger plot is higher and, therefore, no decision can be taken on the basis of these presumptions. Apart form this that the area of the land is smaller in the sales instances noted by registered valuer, no defect has been pointed out by the A.O. in the valuation report of the registered valuer and we have already seen that this objection of the A.O. is without any basis and the correct position may be different than what is stated by the A.O. In the absence of any valid basis adopted by the A.O. to substitute the rate adopted by the assessee on the basis of a valuation report of a registered valuer, we feel that no interference is called for in the order of Ld. CIT(A) on this issue also. This ground of the revenue is also rejected.
5. In the result, the appeal of the revenue stands dismissed.
6. In the combined result, Cross objection of the assessee and the appeal of the revenue are dismissed.
7. Order pronounced in the open court on the date mentioned hereinabove.
IT : Where investment in inter-corporate deposits (ICDs) were part of business activities as interest accrued therefrom had been treated as business income, loss arising on such investment was allowable as business loss
IT : Club expenditure is allowable as business expenditure
IT : If unutilized MODVAT credit is added to closing stock, then similar adjustment should be made even in opening stock and purchases
IT : If assessee has own funds and non-interest bearing funds, presumption can be drawn that investments have been made from these funds
IT : Once interest income has been offered on accrual basis, which has been debited in profit and loss account as business income and same has been written off as irrecoverable in accounts in this year, same has to be allowed as bad debt
■■■
[2013] 33 taxmann.com 96 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'I'
Jindal Iron & Steel Company Ltd.
v.
Deputy Commissioner of Income-tax, Range-5(2)*
P.M. JAGTAP, ACCOUNTANT MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER
IT APPEAL NOS. 6298 (MUM.) OF 2009 AND 6677 & 7109 (MUM.) OF 2010
[ASSESSMENT YEARS 2001-02 & 2002-03]
[ASSESSMENT YEARS 2001-02 & 2002-03]
OCTOBER 31, 2012
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Club expenditure] - Assessment years 2001-02 and 2002-03 - Whether expenditure towards club expenditure are allowable as business expenditure - Held, yes [Para 7] [In favour of assessee]
II. Section 145A of the Income-tax Act, 1961 - Method of accounting - In certain cases [MODVAT Credit] - Assessment years 2001-02 and 2002-03 - Whether for purpose of valuation of purchase and sale of goods and inventories, adjustment on account of tax, duty, cess or fee actually paid or incurred by assessee has to be made - Held, yes - Whether excise duty component in form of MODVAT in raw materials has to be included while valuing purchases and sales of goods and inventories, as it has a direct bearing on valuation of stock - Held, yes - Whether, however, if unutilized MODVAT credit is added to closing stock, then similar adjustment should be made even in opening stock and purchases - Held, yes [Para 13] [Partly in favour of assessee]
III. Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Dividend] - Assessment year 2001-02 - Whether if assessee has own funds and non-interest bearing funds, presumption can be drawn that investments have been made from these funds - Held, yes - Assessee-company had earned dividend income out of investments which were made in shares and equity - Assessing Officer applying provisions of section 14A disallowed certain amount of interest - Whether, on facts, matter needed to be restored back to file of Assessing Officer to examine availability of assessee's own funds and any other interest bearing funds which could be said to be available to assessee for making investment - Held, yes [Paras 20 & 21] [Matter remanded]
IV. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts [Debt, when becomes bad] - Assessment year 2002-03 - Assessee-company had invested in optionally convertible debentures (OCDs) of some companies - Since those companies were not able to pay interest, assessee under a re-structuring proposal waived outstanding interest and same was claimed as bad debts - Claim of bad debts was disallowed on ground that approval for writing off all interest amounts was given by Board of Directors in next financial year i.e., on May 2002 - Whether even board resolution was passed in May 2002, with regard to approval of writing-off amount as irrecoverable in accounts, it will relate back to that previous year in which it was being treated as irrecoverable and written off in accounts of assessee - Held, yes - Whether further, once interest income had been offered on accrual basis, which had been debited in Profit & Loss account as business income and same had been written off as irrecoverable in accounts in this year, same had to be allowed as bad debt - Held, yes [ Paras 41 & 42] [In favour of assessee]
V. Section 28(i) of the Income-tax Act, 1961 - Business loss/deduction - Allowable as [Inter-corporate deposit] - Assessment year 2002-03 - Whether where investment in inter-corporate deposits (ICDs) were part of business activities as interest accrued therefrom had been treated as business income, loss arising on such investment was allowable as business loss - Held, yes [Para 53] [In favour of assessee]
CASE REVIEW-I
Otis Elevators Co. India Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215 (Bom.) (para 7) followed.
CASE REVIEW-II
CIT v. Mahalaxmi Glass Works (P.) Ltd. [2009] 318 ITR 116 (Bom.) (para 13) followed.
CASE REVIEW-III
CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.)(para 21) followed.
CASE REVIEW-IV
U.P. Rajkiya Nirman Nigam v. ITO [2008] 24 SOT 139 (Luck.) (para 40); CIT v. United Bank of India [1993] 69 Taxman 505 (Cal.) (para 41) and TRF Ltd. v. CIT [2010] 322 ITR 397/190 Taxman 391 (SC) (para 42) followed.
CASES REFERRED TO
Otis Elevators Co. India Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215 (Bom.) (para 4), CIT v. Indo Nippon Chemicals Ltd. [2000] 245 ITR 384/112 Taxman 555 (Bom.) (para 9), CIT v. Indo Nippon Chemicals Ltd. [2003] 261 ITR 275/130 Taxman 179 (SC) (para 10), Hawkins Cookers Ltd. v. ITO [2008] 14 DTR 206 (Mum.) (para 10), CIT v. Loknete Balasaheb Desai S.S.K. Ltd. [2011] 339 ITR 228/2011] 200 Taxman 238/12 taxmann.com 40 (Bom.) (para 11), CIT v. Dyna Vision Ltd. [2004] 139 Taxman 345 (Mad.) (para 11), CIT v. Mahalaxmi Glass Works (P.) Ltd. [2009] 318 ITR 116 (Bom.) (para 11), ITO v. Daga Capital Management Ltd. [2008] 26 SOT 603 (Mum) (SB) (para 16), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 17), CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) (para 17), Dy. CIT v. HDFC Bank Ltd. [IT Appeal No. 4529 (Mum.) of 2005] (para 17), Shopper Stop Ltd. v. Asstt. CIT [IT Appeal Nos. 1448 & 4475 (Mum.) of 2010] (para 17), Lala Ram Finance & Investment v. Dy. CIT [IT Appeal Nos. 260 & 261 (Agr.) of 2011] (para 17), Delite Enterprises (P.) Ltd. v. ITO [2008] 22 SOT 245 (Mum.) (para 18), CIT v. Delite Enterprises [IT Appeal No. 110 of 2009, dated 26-6-2012] (para 18), Avshesh Mercantile (P.) Ltd. v. Dy. CIT [2012] 54 SOT 19 (Mum.) (URO)/26 taxmann.com 43 (Mum.) (para 18), Siva Ind. & Holdings Ltd. v. Asstt. CIT [2011] 11 taxmann.com 404/46 SOT 112 (Chennai) (para 18), Shree Shyamkamal Finance & Leasing Co. (P.) Ltd.v. ITO [2008] 21 SOT 42 (Mum.) (SMC) (para 18), Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi) (SB) (para 22), TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC) (para 36), U.P. Rajkiya Nirman Nigam v. ITO [2008] 24 SOT 139 (Luck) (para 37), Topman Exports v. ITO[2009] 33 SOT 337 (Mum.) (para 37), CIT v. United Bank of India [1993] 69 Taxman 505 (Cal.) (para 38), Goetze India Ltd. v. Dy. CIT [2008] 25 SOT 171 (Delhi) (para 38), Chellapalli Sugar v. CIT [1975] 98 ITR 167 (SC) (para 57), Dy. CIT v. Core Health Care [2008] 298 ITR 194/167 Taxman 206 (SC) (para 58) and Asstt. CIT v. Arvind Polycot Ltd. [2008] 299 ITR 12 (SC) (para 61).
P.K. Shukla for the Appellant. Kanchun Kaushal, Dhanesh Bafna and Aliasger Ram Purawala for the Respondent.
ORDER
Amit Shukla, Judicial Member - The assessee has preferred aforesaid appeals for the assessment year 2001-02 and 2002-03, whereas, the Revenue has preferred appeal for the assessment year 2002-03. Since the issues arising out of these appeals are mostly common, therefore, as a matter of convenience, all these appeals were heard together and are being disposed off by way of this consolidated order.
2. We first take up assessee's appeal in ITA no.6298/Mum./2009, which is directed against the impugned order dated 30th September 2009, passed by the Commissioner (Appeals)-IX, Mumbai, for quantum of assessment under section 143(3) of the Income Tax Act, 1961 (for short "the Act") for assessment year 2001-02.
3. In ground no.1, the assessee has challenged disallowance of club expenses of sums amounting to Rs. 96,997. The Assessing Officer, in the assessment order, has observed that the club expenditure of Rs. 96,997, consist of subscription fee of Rs. 51,940, and entertainment charges of Rs. 45,057. Before the Assessing Officer, it was contended that the entire expenditure have been incurred for the purpose of business only. However, the Assessing Officer has disallowed the same on the ground that in the assessment year 1999-2000, the Commissioner (Appeals) has confirmed the said disallowance, as was made by the Assessing Officer. Accordingly, he disallowed the entire amount of Rs. 96,997.
4. Before the Commissioner (Appeals), it was explained that the said expenditure comprised of corporate membership of Bombay Gymkhana Club and Khar Gymkhana Cub, taken specifically for the directors mainly with an intention to promote business and to establish business relationship in commercial interest of the business. Voucher-wise details of expenditure incurred were also filed. In support of the allowability of Club expenditure, the assessee relied upon the judgment of Bombay High Court in the case of Otis Elevators Co. India Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215 (Bom.). Further reliance was also placed on various other decisions of the Tribunal and High Court which have been listed in Para-1.4 of the appellate order. The Commissioner (Appeals), however, disallowed the claim on the ground that the assessee was unable to file any evidence that as to how the subscription money paid to the club help the business of the assessee and that the assessee could not file any evidence that the expenditure has been incurred for the purpose of business.
5. Before us, the learned Counsel for the assessee submitted that similar issue has come up for consideration before the Tribunal in assessee's own case in the assessment year 1997-98 to 2000-01, wherein the Tribunal, after following the judgment of Bombay High Court in Otis Elevators Co. India Ltd.(supra) and other decisions, held that the expenditure towards club expenditure are allowable as business expenditure and allowed the assessee's claim.
6. On the other hand, the learned Departmental Representative relied upon the findings of the Commissioner (Appeals).
7. After hearing the rival contentions of the parties, considering the orders passed by the authorities below and the Tribunal decision cited before us, we find that the said issue had come up for consideration before the Tribunal in ITA no.4432/Mum./2003, for assessment year 1999-2000, wherein the Commissioner (Appeals) has given similar findings. The Tribunal, after considering the entire facts and the judgment of Hon'ble Jurisdictional High Court in Otis Elevators Co. India Ltd. (supra), allowed the assessee's claim of club expenditure. Consistent with the view taken by the Tribunal and the fact that there is no change in the facts and circumstances of the case, we set aside the impugned order passed by the Commissioner (Appeals) and delete the disallowance made under the head "Club Expenditure". Thus, the ground raised by the assessee is hereby allowed.
8. In ground no.2, the assessee has challenged the addition of Rs. 9,49,30,534, on account of unutilized MODVAT credit on the closing stock.
9. The Assessing Officer, on verification of the details filed, found that there were unutilized MODVAT credit as on 31st March 2001, amounting to Rs. 9,49,30,534, which was not added to the closing stock. Before the Assessing Officer, reliance was placed on the judgment of Jurisdictional High Court in the case of CIT v. Indo Nippon Chemicals Ltd. [2000] 245 ITR 384/112 Taxman 555 (Bom.). The Assessing Officer did not accept the assessee's contentions and held that in the said decision, section 145A was not considered as the same was brought in the statute w.e.f. assessment year 1999-00. Thus, following the decision given by the Commissioner (Appeals) in the assessment year 2000-01, he added the entire amount of unutilized MODVAT credit of Rs. 9,49,30,534, to the assessee's total income.
10. Before the Commissioner (Appeals), the assessee submitted that it has been following exclusive method of valuation of closing stock as prescribed by the ICAI in the guidance note on accounting of MODVAT. It has been consistently following this method in which valuation of stock is made at net method i.e., after excluding the MODVAT credit available from the gross purchase price. It was also submitted that the Hon'ble Supreme Court in case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275/130 Taxman 179 (SC), has confirmed this method of valuation. Even otherwise, it was submitted that even if the closing stock is adjusted by MODVAT credit, there will be no effect on the business profit of the assessee as the purchase stock will also include the element of MODVAT. Reliance was placed on the decision of the Tribunal in Hawkins Cookers Ltd. v. ITO [2008] 14 DTR 206 (Mum.). The Commissioner (Appeals), however, rejected the said contentions and held that similar issue has been confirmed by the Commissioner (Appeals) in the assessment year 2000-01.
11. Before us, the learned Counsel for the assessee submitted that, first of all, the excise duty cannot be added to the closing stock and in support of this contention, he relied on the judgment of Jurisdictional High Court in the case of CIT v. Loknete Balasaheb Desai S. S. K. Ltd. [2011] 339 ITR 228/[2011] 200 Taxman 238/12 taxmann.com 40 (Bom.), and unreported judgment of Hon'ble Supreme Court in the case of CIT v. Dyna Vision Ltd.[2004] 139 Taxman 345 (Mad.) Alternatively, he submitted that if unutilized MODVAT credit is added to the closing stock, then similar adjustment should be made even in the opening stock and purchases. For this, reliance was placed on the judgment of Jurisdictional High Court in the case of CIT v.Mahalaxmi Glass Works (P.) Ltd. [2009] 318 ITR 116 (Bom.)
12. Learned Departmental Representative, on the other hand, relied upon the findings given by the Commissioner (Appeals).
13. We have heard the rival contentions, perused the orders of the authorities below and the judgments relied upon by the learned Counsel for the assessee. We find that the assessee has been following the "Net method" of accounting for the MODVAT credit, wherein the closing stock is valued at the net of input duty paid on the raw materials and which does not form part of the closing stock. Before the Commissioner (Appeals), reliance was placed on the judgment of Hon'ble Supreme Court in case of Indo Nippon Chemicals Co. Ltd. (supra), which pertains to the assessment year 1989-90. The Jurisdictional High Court in the said case of Indo Nippon (supra), which has been affirmed by the Hon'ble Supreme Court, had specifically held that the provisions of section 145A, is not applicable in assessment year 1989-90, as the same has been brought in the statute w.e.f. 1st April 1999. Thus, the provisions of section 145A was not the subject matter of adjudication either by the High Court or by the Hon'ble Supreme Court. From the plain reading of the provisions of section 145A, it is evident that for the purpose of valuation of purchase and sale of goods and inventories, adjustment on account of tax, duty, cess or fee actually paid or incurred by the assessee has to be made. Excise duty component in the form of MODVAT in the raw materials has to be included while valuing the purchases and sales of goods and inventories, as it has a direct bearing on valuation of stock. Thus, we are of the considered opinion that the matter needs to be restored back to the file of the Assessing Officer to carry out necessary valuation on account of MODVAT credit on purchases and inventories in accordance with the provisions contained in section 145A. The assessee will provide necessary details and working to the Assessing Officer to this effect, who will verify the same. We also agree with the alternative submissions made by the learned Counsel for the assessee that the corresponding adjustment in the opening stock should also be made in view of the principles laid down by the Jurisdictional High Court in case of Mahalaxmi Glass Works P. Ltd. (supra). Consequently, we set aside the impugned order passed by the Commissioner (Appeals) and direct the Assessing Officer to also make corresponding adjustment in the opening stock in view of the principles laid down by the Jurisdictional High Court. We order accordingly. Thus, ground no. 2, raised by the assessee is partly allowed for statistical purposes.
14. In grounds no.3, 4 and 5, the assessee has challenged the disallowance of interest and expenses made under section 14A of the Act, for the sums amounting to Rs. 5,97,30,707.
15. During the course of assessment proceedings, the Assessing Officer noted that the assessee has earned dividend income for a sum of Rs. 6,14,300, out of the investments which were made in shares and equity. Before the Assessing Officer, it was contended by the assessee that has not incurred any expenditure on account of interest or on account of establishment expenses for earning the dividend income. The Assessing Officer rejected the said contentions of the assessee and worked out the disallowance of Rs. 5,97,30,707, on the following grounds and reasoning.
Details submitted by the assessee covering the amounts of investments, borrowed funds and own funds have been analyzed, Utilization of the borrowed funds has also been analyzed to trace the extent of such borrowed funds, which have not been spent for business purposes. After considering the fund flow into various accounts attributable to the business purposes i.e. capital assets and other fixed assets, borrowal cost, repayment of existing loans, Front- end fees, work- in- capital accounts etc, Rs.41,59,52,000/- of the total borrowed funds is left unexplained vis a vis the business purposes. During the assessment proceedings, the assessee was asked to explain how these funds are not considered spent for the purposes of investment of shares. Assessee filed a letter dated 25.3.2004 stating that the whole of the borrowed funds are used for business purposes only as required as per the terms and conditions of the Financial
Institutions set at the time of grant of loans to the assessee. The assessee flied Utilisation Certificates (UC) which were to be ruled before the Financial Institutions in support of the utilisation of borrowed funds for business purposes. The contention of the assessee has been considered and the same has been rejected for the reason that the Utilisation Certificates (UC) do not cover the whole of the borrowed funds, Rs. 41,59,52,0001/- is the uncertified borrowed funds not covered by these UCs, Assessee has no evidence to prove that these amounts are not invested in the shares.
Further, the assessee was also asked to furnish the details on the Average Rate of Borrowings (ARB) by the assessee. 14.36% Is the Average Rate of Borrowings as supplied by the assessee with out prejudice to its original contention. Applying the ARB of 14.36%, the interest relatable to the amount of Rs.4 1.60 crores is worked out and the same works out to Rs.5,97,30,7071-. Further, the assessee's request for set off of interest Income of Rs. 80 lakhs and from the investment company with the interest expenses on Rs. 41,59,52,000/- has not been allowed as the provisions of section 14A do not allow such set off. Accordingly, Rs. 5,97,30,707/- is the interest not relatable to the business of the assessee. The same is disallowed under the provisions of section 14A of the Income Tax Act. The addition on this account is Rs. 5,97,30,707."
16. Before the Commissioner (Appeals), it was contended by the assessee that the investments in shares to the various companies were made for the strategic business purposes and, therefore, the same was for the purpose of business of the assessee and hence, section 14A, cannot be invoked. Further, it was argued that no additional funds were utilized for making further investment during the year as most of the investments were made in the earlier years. The other limb of argument was that the assessee had sufficient own funds to make the investment and, therefore, no disallowance of interest or any expenses incurred can be made. The detail submissions of the assessee on these issues have been incorporated from Pages-17 to 21 of the appellate order. The Commissioner (Appeals), however, after following the decision of the Mumbai Special Bench of the Tribunal in case of ITO v.Daga Capital Management Ltd. [2008] 26 SOT 603 , held that Rule 8D, should be applied and the disallowance, in fact, will come to Rs. 8,92,63,707. In a way the disallowance was enhanced from Rs. 5,97,30,707/- to Rs. 8,92,63,707/- The relevant findings of the Commissioner (Appeals) appears from Pages-22 to 25 of the appellate order.
17. Learned Counsel for the assessee submitted before us that so far as the applicability of Rule 8D is concerned, the same is now settled by the judgment passed by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.), wherein the Court held that Rule 8D cannot be made applicable in the assessment years prior to assessment year 2008-09. He further submitted that the assessee has sufficient non-interest bearing funds and its own funds to make the investments in shares and there is no basis for assuming that the assessee has used the borrowed funds for the purpose of investment in tax free securities. In support of this contention, he has placed reliance on the following decisions:-
| ■ | CIT v. Reliance Utilities & Power Ltd., [2009] 313 ITR 340/178 Taxman 135 (Bom.); | |
| ■ | Dy. CIT v. HDFC Bank Ltd., [ITA No. 4529/Mum./2005] | |
| ■ | Shopper Stop Ltd. v. Asstt. CIT, [ITA no. 1448 & 4475/Mum/2010] and | |
| ■ | Lala Ram Finance & Inv. v. Dy. CIT, ITA no.260 & 261/Agr./2011 |
18. In support of the above contention, he has filed a statement showing availability of own funds and interest bearing funds and utilization thereof. His another plank of arguments was that when no income is earned by the assessee which does not form part of the total income, then no disallowance can be made under section 14A. He submitted that in assessee's case, the assessee has earned dividend income of Rs. 6,00,000 and odd and if cost of investment in which dividend income is earned is calculated, the disallowance under section 14A of the Act, even as per the formula of the Assessing Officer will hardly come to Rs. 3,00,000 and odd. To substantiate his claim, he has given statement showing working of cost of investment and has relied upon the following decisions:-
| ■ | Delite Enterprises P. Ltd. v. ITO [2008] 22 SOT 245 (Mum.); | |
| ■ | CIT v. Delite Enterprises, ITA no. 110 of 2009, dated 26-6-2012 Court; | |
| ■ | Avshesh Mercantile (P.) Ltd. v. Dy. CIT [2012] 54 SOT 19 (Mum.) (URO)/26 taxmann.com 43 (Mum.) | |
| ■ | Siva Ind. & Holdings Ltd. v. Asstt. CIT [2011] 11 taxmann.com 404/46 SOT 112 (Chennai) | |
| ■ | CIT v. Winsome Textile Ind. Ltd. [2009] 319 ITR 204 (Punj. & Har.) and | |
| ■ | Shree Shyamkamal Finance & Leasing Co. P. Ltd., v. ITO, [2008] 21 SOT 42 (Mum.) (SMC) |
19. On the other hand, the learned Departmental Representative submitted that the assessee has shown dividend income in its account and no expenditure has been attributable towards earning of this income and, therefore, disallowance has to be made. He finally relied upon the findings and reasoning given by the Commissioner (Appeals).
20. We have heard the rival contentions of the parties, perused the orders of the authorities below and considered the case laws cited by the learned Counsel for the assessee. Insofar as the findings given by the Commissioner (Appeals) that Rule 8D is applicable in this year, cannot be sustained in view of the judgment of Bombay High Court in the case of Godrej Boyce (supra), wherein it has been held that Rule 8D cannot be applied retrospectively i.e., prior to assessment year 2008-09. Now coming to the disallowance made under section 14A, we agree with the contentions of the learned Counsel for the assessee that if the assessee has own funds and non-interest bearing funds, the presumption can be drawn that investments have been made from these funds. This proposition has been upheld by the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd., [2009] 313 ITR 340/178 Taxman 135 which has been followed by the co-ordinate benches of the Tribunal, Mumbai. The High Court in this case has observed and held as under :-
"10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal."
21. On perusal of the statement filed by the learned Counsel for the assessee, we find that the assessee has made investment of Rs. 590.67 crores as on 31st March 2001, in the shares. The assessee's own funds as per the balance sheet are in the form of share capital of Rs. 42.80 crores and reserve and surplus of Rs. 394.50 crores which aggregates to Rs. 437.30 crores, out of which Rs. 60.36 crores have been incurred for miscellaneous expenses and balance amount of Rs. 379.94 crores were duly available for making the investment. The learned Counsel for the assessee had submitted that accumulated depreciation of Rs. 235.58 crores should also be considered as available funds as depreciation is a notional charge to the profit. However, we are unable to accept this contention that funds in the form of accumulated depreciation should be treated as available funds because the actual figure, as given in the balance sheet has to be taken into account. Looking to the entire aspect of the matter, we are of the considered opinion that the matter needs to be restore back to the file of the Assessing Officer to examine the availability of assessee's own funds and any other interest bearing funds which can be said to be available to the assessee for making the investment in view of the principles laid down by the Bombay High Court in the case ofReliance Utilities & Power Ltd. (supra).
22. Now coming to the second argument of the learned Counsel that where no income is earned by the assessee which does not form part of the total income, then no disallowance can be made. First of all, it is noticed that the assessee has earned dividend income of Rs. 6,14,300 and it cannot be said that the assessee has no exempt income forming part of the total income. Secondly, the Delhi Special Bench of the Tribunal in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318, had held that even if no income was received, expenditure incurred can be disallowed under section 14A. The other decision relied upon by the learned Counsel for the assessee is not applicable as in the present case, it is not the case where the assessee had no exempt income. Thus, this alternative plea taken by the learned Counsel for the assessee is not acceptable on the facts of the present case. Looking to the entirety of the facts and circumstances, we set aside the impugned order passed by the Commissioner (Appeals) and restore back this issue to the file of the Assessing Officer who will firstly, examine the availability of interest free funds and assessee's own funds for the purpose of making the investment and secondly, even after examining the availability of funds, it is found that borrowed funds have been utilized for the purpose of investment in shares, then disallowance can be made to the extent of interest payable on the borrowed funds which have been utilized for the purpose of acquiring the shares. The assessee will provide all the necessary information and details for adjudication of the issue. Thus, grounds no.3, 4 and 5, are treated as partly allowed for statistical purposes.
23. Grounds no.6, 7 and 8, relate to disallowance of prior period expenses for sums aggregating Rs. 5,60,55,200.
24. At the outset, the learned Counsel for the assessee submitted that the Tribunal, vide order dated 25th June 2010, for the assessment year 2000-01, in assessee's own case, has given a direction to allow these expenditure in the assessment year 2000-01.
25. In view of the fact that in the assessment year 2000-01, these prior period expenses have been directed to be allowed, hence, the same cannot be allowed in this year. Thus, disallowance made in this year cannot be allowed. Consequently, grounds No.6, 7 and 8, are treated as allowed.
26. In the result, assessee's appeal is partly allowed for statistical purposes.
We now take up assessee's appeal in ITA no.7109/Mum./2010, for assessment year 2002-03. This appeal is barred by limitation by 30 days. In petition for condonation of delay, the assessee has given detailed reasons supported by an affidavit. In view of the reasons given in the said petition, we condone the delay of 30 days. Accordingly, appeal is being decided on merits.
27. Ground no.1, relates to disallowance of club expenditure of Rs. 1,49,332.
28. At the outset, both the parties agreed before us that this is similar to the issue decided by us in assessee's appeal in ITA no.6298/Mum./2009, vide Para-7 above. Consistent with the view taken therein, we set aside the impugned order passed by the Commissioner (Appeals) and allow ground no.1, raised by the assessee.
29. In ground no.2, the assessee has challenged the addition of Rs. 6,46,47,400, on account of MODVAT credit to the closing stock.
30. Both the parties agreed before us that this issue is also identical to the ground decided by us in assessee's appeal in ITA no.6298/Mum./2009, vide Paras-14 & 15 above. Consistent with the view taken therein, which applies here also mutatis mutandis, we set aside the impugned order passed by the Commissioner (Appeals) and restore this issue back to the file of the Assessing Officer with similar directions. Thus, ground no.2, raised by the assessee is partly allowed for statistical purposes.
31. In grounds no.3, 4 and 5, the assessee has challenged disallowance of Rs. 1,34,56,840, made under section 14A of the Act.
32. Here also both the parties agreed before us that this issue is also identical to the issue decided by us in assessee's appeal in ITA no.6298/Mum./2009, vide Paras-22, 23 and 24 above. Thus, consistent with the view taken therein, we set aside the impugned order passed by the Commissioner (Appeals) and restore this issue back to the file of the Assessing Officer with similar directions. Thus, grounds no.3, 4 and 5, raised by the assessee are treated as partly allowed for statistical purposes.
33. In grounds no.6, the assessee has challenged the disallowance of Rs. 1,94,49,012, on account of interest receivable written-off.
34. The Assessing Officer, on examination of Profit & Loss account, found that the assessee has debited a sum of Rs. 1,94,49,012, as interest receivable written-off during the year under consideration. The assessee's contention before the Assessing Officer was that this interest has been accounted for on accrual basis in the Profit & Loss account in the earlier years and the same has been offered for tax also. Since the entire interest could not be received/recovered, the board decided that the same should be written-off in the books of account in the relevant previous year. The Assessing Officer further observed that the assessee company has itself admitted that principal amount against which the interest had accrued are still outstanding and the assessee is hopeful of recovery of the same. Thus, he reached to the conclusion that the stand taken by the assessee is contradictory as when the assessee is not treating the principal amount as bad debt, then how the interest can be written-off as irrecoverable. Accordingly, he disallowed the claim. In his conclusion, he has also given a remark that in the assessment year 2000-01, proceedings under section 263, have been concluded by the learned Commissioner of Income Tax, whereby it was held that the assessee has actually not shown any income relatable to the claim of the assessee in any of the previous year.
35. Before the learned Commissioner (Appeals), it was submitted by the assessee that it has invested in Optionally Convertible Debentures (OCDs) in the financial year 1994-95 of the following companies.
| (a) | Karnivasini Investment & Finance P. Ltd. | |
| (b) | Kauandaliya Investments & Finance P. Ltd. | |
| (c) | Morta Finlease & Inv. P. Ltd. | |
| (d) | Atirupa Investments P. Ltd. | |
| (e) | Zafonic Finlease & Inv. P. Ltd. | |
| (f) | Ottoman Finlease & Inv. P. Ltd. |
36. These OCDs carry interest @ 16% per annum and were redeemable at the end of seven years from the date of allotment with an option to convert the OCDs into equity shares. From the F.Y. 1994-95 to 2000-01, interest of Rs. 1,94,49,012, had accrued to the assessee. However, these parties were not in a position to pay the amount to the assessee due to financial crunch and had entered into re-structuring proposal with the assessee that interest outstanding till 31st March 2001, should be waived and further reduction of interest rate should be made from 16@ to 12%. After accepting this proposal, the accumulated interest of Rs. 1,94,49,012, was written off in the books of account. It was pleaded that all the conditions laid down in section 36(1)(vii) of the Act stands fulfilled and the same has to be allowed as bad debt. In support of this contention, reliance was placed on the judgment of Hon'ble Supreme Court in the case of TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC).
37. The learned Commissioner (Appeals), after going through the details furnished by the assessee, noticed that the approval for writing off all the interest amounts was given by the Board of Directors in the next financial year i.e., on May 2002. To counter this, the assessee relied upon the decision of the Tribunal, Lucknow Bench, in the case of U.P. Rajkiya Nirman Nigam v. ITO [2008] 24 SOT 139, wherein it was held that the assessee can write-off the amount before the books of account are closed which could be even after 31st March. The learned Commissioner (Appeals) rejected the said contentions of the assessee and held that deduction for bad debt written off can be claimed only in the year in which the amount is actually written off in the books of account of the assessee. Further, he held that the assessee is not in the business of making investment in shares on OCDs and there is no systematic and organised activity taken by the assessee for making such. Mere placing of surplus funds in OCDs could not be treated as business activity of the assessee. He, while coming to this conclusion, referred to the decision of the Tribunal, Mumbai Benches, in Topman Exports v. ITO [2009] 33 SOT 337. The final conclusion drawn by the learned Commissioner (Appeals) are reproduced herein below:-
"8.8 In the present case also, the appellant company made long term investments in OCDs to earn interest or to acquire shares. Thus purpose of the appellant was to acquire shares and to earn incidental interest income. This activity has not been carried out by the appellant as a part of its business activity or even incidental to its business activity. Therefore, the real nature of interest income earned in the earlier years is "income from other sources" and not "business income". Merely because interest was wrongly taxes as "business income", in the earlier years, claim cannot be allowed under section 36(1)(vii) of the Act. In view of these facts, the claim for deduction under section 36(1)(vii) is not allowed. This ground of appeal is not allowed."
38. The learned Counsel for the assessee, first of all, submitted that insofar as the observations of the Assessing Officer regarding 263 proceedings under Section 263 in A.Y. 2000-01 are concerned, the said order has been quashed by the Tribunal vide order dated 24th March 2008, passed in ITA no.3969/Mum./2005, wherein the Tribunal found that the Assessing Officer has treated the interest income received on advance as business receipts. He drew our attention to Paras-7 and 8 of the said order. With regard to the learned Commissioner (Appeals)'s observations that bad debt can be written-off only during the year and not after 31st March, the learned Counsel for the assessee submitted that this issue has been considered in detail by the Tribunal, Lucknow Bench, in the case of U.P. Rajkiya Nirman Nigam (supra), wherein it has been held that the law requires to write-off the bad debt in the account of the assessee for the relevant year and there is no condition in the said provision of Section 36(1)(vii) that such writing-off should be done in the previous year. If the accounts of the assessee are open and subject to correction by the auditors, then such writing off can be done in those books. He also relied upon the judgment of Calcutta High Court in the case of CIT v. United Bank of India, [1993] 69 Taxman 505, wherein it has been held that subsequent resolution by the board of directors approving the bad debt relates back to the date of finalization of accounts. Regarding other findings of the learned Commissioner (Appeals) that investment in the OCDs was not part of the business activity and, therefore, the same cannot be allowed under section 36(1)(viii), he submitted that in assessee's own case, the interest income had always been considered as business income by the Department which is evident from the findings given by the Tribunal in assessee's own case in 263 proceedings for assessment year 2000-01. He also placed reliance on the decision in Goetze India Ltd., v. Dy. CIT [2008] 25 SOT 171 (Delhi) and other decisions on this point. He further submitted that in the case of JSW Steel Ltd., a sister concern of the assessee, similar issue has been allowed by the Tribunal, Bangalore Bench. The copy of the said judgment has been placed before us.
39. On the other hand, the learned Departmental Representative, after referring to the various findings and the conclusions drawn by the learned Commissioner (Appeals), submitted that mere making of investment in OCDs cannot be treated as part of business activity and once it is found that such an investment is not part of the business carried out by the assessee, then there is no question of allowing deduction under section 36(1)(vii). He, thus, strongly relied upon the order passed by the learned Commissioner (Appeals).
40. We have carefully considered the rival contentions of the parties, perused the orders of the authorities below and the case laws cited before us. It is not disputed before us, that the amount of interest of Rs. 1,94,49,012, which had accrued to the assessee on the investment made in OCDs of the various company has been disclosed in the Profit & Loss account of the earlier years. Such an interest income has also been accepted as business income of the assessee. The assessee has written off this amount of interest in the account as irrecoverable as per the decision taken by the board of directors in resolution in May 2002. The first issue is, whether the decision to write-off the amount after the close of the financial year can be done and treated to be written off in the accounts of the assessee for the previous year. From the perusal of the decision in the case of U.P. Rajkiya Nirman Nigam (supra), as relied upon by the learned Counsel for the assessee, we find that this issue has been discussed and analyzed in the following manner:-
8. The conditions required for allowing the claim is that, firstly, any debt, or part thereof, is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. So far as the first part of ci. (vii) of s. 36(1) is concerned, there is no dispute that the debt has become bad and it was written off. The dispute relates to the interpretation of the words used subsequently. When we go through the subsequent part in the clause, we notice that requirement is to write off bad debt in the accounts of the assessee "for the previous year. This clause does not say to write off bad debt "in the previous year. It would have made a vast difference if the word "in' would have been there in place of "for". In the clause, the words "accounts of the assessee" are qualified with further words "for the previous year". It only means that the accounts in which the act of writing off is to be done by the assessee should be for the previous year. Therefore, the law requires to write off the bad debt in the accounts of the assessee for the relevant year. There is no condition in the provision that such writing off should be done in the previous year (i.e. before the end of financial year- in the present case before 31st March, 2001). In other words, if the accounts of the assessee are open and subject to collections by the auditors as per the Companies Act, then such writing off can be done in those books. There is also no condition in this clause that the decision for treating the debt as bad or irrecoverable should be taken in the previous year itself. It will amount to writing a new legislation which is not permissible. In other words, if it is possible for the assessee legally and otherwise to make entries in the books of a particular previous year then the claim of bad debt can be made in the books for that previous year. In other words, where books of account are not closed and complete, not signed by the board of directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted. In the present case, even though assessee had filed return of income with the Department but they were based on unaudited books of account and the accounts were not signed by the board of directors. Therefore, in our considered view, it is open for the assessee to write off the irrecoverable bad debts in such books of account. It is because there is no condition provided in the Act that decision for writing off the bad debt should be taken only in the relevant previous year or that such writing off of the bad debt in the books should be physically and actually done in the previous year before 31st March expires at mid night."
41. The Calcutta High Court also in the case of Union Bank of India (supra), has held that the resolution approving and accepting the recommendation relating to the treatment of certain items must relate back to the date upto which the accounts are finalised and such determination or approval must be treated as being effective from that date. By being retrospective effect, the nature and character of the entries have not been changed. From the proposition laid down by the aforesaid decisions, we hold that even the board resolution was passed in May 2002, with regard to the approval of writing-off the amount as irrecoverable in the accounts, it will relate back to that previous year in which it is being treated as irrecoverable and written off in the accounts of the assessee. There is no such condition in the said clause i.e., clause (vii) of sub-section (1) of section 36 that the decision for treating debt as bad or irrecoverable should be taken in the previous year itself. If the books of account are not closed and completed, it is permissible to make adjustments before being finally adopted. Thus, we do not find any merit in such a conclusion drawn by the learned Commissioner (Appeals).
42. Now, coming to the issue that whether such a deduction on account of writing off bad debt can be allowed by the assessee when as alleged by the CIT(A) that it was not involved in the business activity of making the investment in OCDs. From the records, it is seen that the assessee has invested in OCDs in the various companies for earning interest. This interest income is also being shown in the Profit & Loss account on accrual basis and such an interest income in the past has also been assessed as business income. There is also a categorical finding by the Tribunal in assessment year 2000-01, while dealing with the precise issue in the proceedings under section 263, that interest income has always been treated as business receipts by the Assessing Officer. As pointed out by the learned Counsel, it is seen that in the earlier years, assessee's interest income shown under the head "Business Income", has been accepted by the Department. Thus, on these facts, once the interest income has been offered on accrual basis, which has been debited in the Profit & Loss account as business income and the same has been written off as irrecoverable in the accounts in this year, the same has to be allowed as bad debt. The law on this score is fairly settled by the judgment of Hon'ble Supreme Court in the case of TRF Ltd. (supra). Thus, we do not find any reason to uphold the findings and the reasoning given by the learned Commissioner (Appeals). Consequently, the assessee's claim for bad debt on account of interest receivable written-off is hereby allowed. Thus, ground no.6, raised by the assessee is allowed.
43. Grounds no.7 and 8, relates to disallowance of prior period expenses for sums aggregating to Rs. 36,44,276.
44. At the outset, the learned Counsel for the assessee submitted that this issue had come up for consideration before the Tribunal in assessee's own case for assessment year 1997-98, wherein the matter has been restored back to the file of the Assessing Officer.
45. Learned Departmental Representative, on the other hand, fairly conceded to the said contention of the counsel.
46. After going through the findings of the learned Commissioner (Appeals) and the Assessing Officer and also the decision of the Tribunal in assessee's own case, we find that this issue has been restored back to the file of the Assessing Officer. Consequently, we also set aside this issue to the file of the Assessing Officer to be considered afresh. Ground no.7 & 8 are thus allowed for statistical purposes.
47. Ground no.9, relates to disallowance of Inter Corporate Deposit (ICD) along with the interest written-off for sums amounting to Rs. 2,51,33,956.
48. The assessee has debited an amount of Rs. 2,51,33,956 to the Profit & Loss account on account of amount in respect of ICDs written-off. The same was added back while computing the taxable income as it was doubtful about the claim. The assessee has given ICDs in the F.Y. 1994-95 to the various companies, the details of which are given in Para-12.2 of the learned Commissioner (Appeals)'s order. From the F.Y. 1994-95 to 2000-01, interest of Rs. 2,30,02,576, was accrued to the assessee which was shown in the Profit & Loss account as income, the details of which was given before the learned Commissioner (Appeals). It was claimed before the learned Commissioner (Appeals) that these parties were not in a position to pay the amount due to financial crunch and in one time settlement proposal and protracted negotiation, settlement was reached where the parties paid part of the principal amount as full and final settlement. Whatever amount was left was written-off in the books of account mostly on account of interest and partly towards the principal amount. The same was claimed as deduction under section 36(1)(vii). It was further submitted that out of the said amount, an amount of Rs. 2,19,33,956, was written-off on account of accrued interest and remaining amount of Rs. 32,00,000, was written-off against the principal amount. The principal amount was claimed as business loss.
49. The learned Commissioner (Appeals), first of all, disallowed the claim on the preliminary ground that the decision to write-off was taken after 31st March i.e., it was approved by the board of directors in May 2002. The other ground for confirming the disallowance was that the assessee has not filed any evidence that there was any contract with the companies in adjusting against the principal amount and not against the accrued interest. He rejected the claim of the assessee that all the payments received by it from these companies should have been adjusted against the interest amount first. He further held that it was not the business activity of the assessee to make such deposits on systematic and regular basis, therefore, dealing in ICDs was neither the main business of the assessee no incidental. The assessee is also not a Non-Banking Financial Company. He, thus, disallowed the claim on the similar reasoning as was given with regard to the claim of bad debt on interest receivable as discussed above.
50. The learned Counsel for the assessee, by and large, reiterated the same submissions as was made with regard to the ground no.6 i.e., disallowance of interest receivable written-off. He further submitted that this issue had come up for consideration in the case JSW Steel Ltd. v. ACIT, which is a sister concern of the assessee by the Tribunal, Bangalore Bench, wherein on similar facts, such a bad debt was allowed. He further submitted that the Department cannot thrust upon the assessee that the amount received should be first adjusted against the interest and then the principal amount. It is the assessee's decision to adjust against the principal amount or interest amount.
51. On the other hand, the learned Departmental Representative heavily relied upon the order passed by the learned Commissioner (Appeals).
52. We have carefully considered the rival contentions of the parties, perused the orders of the authorities below and the material placed on record. It is an admitted fact that the assessee had shown interest on ICDs on accrual basis in the Profit & Loss account in the earlier years. It is also an admitted fact that the amount received under one time settlement with the companies, the assessee has adjusted the same against the principal amount first. The interest portion has mostly been written-off. Insofar as the learned Commissioner (Appeals)'s finding that the amount received should have been first adjusted against the accrued interest and then towards principal, cannot be upheld as there is no such law which permits that adjustment should be first made against the interest and not towards the principal amount unless the parties have agreed to otherwise. The department cannot thrust upon the assessee that the amount received or recovery should be first adjusted against the accrued interest. It is the decision and mutual understanding of the parties as to how the adjustments should be made. Thus, the findings of the learned Commissioner (Appeals) on this issue are rejected.
53. Now coming to the issue that such a writing-off cannot be allowed as the investment in the ICDs was not part of the business activity. As noted above, it is not disputed that in all these years, the assessee had shown accrued interest on ICDs in the Profit & Loss account and has been offered for tax as business income. This has been accepted by the Department also. The corollary, therefore, is that interest was earned during the course of business. Once interest income has been taxed as business income, the learned Commissioner (Appeals) now cannot say that lending of money in the form of ICDs was not part of the business activities. Once the assessee has written off this amount as irrecoverable, the same has to be allowed as bad debt under section 36(1)(vii) r/w section 36(2) as all the conditions laid down therein stands fulfilled. The reasoning given in para 42 above also applies here also. Accordingly, the disallowance of interest amounting to Rs.2,19,33,956/- stands deleted. Regarding balance amount of Rs.32 lakhs written off against the principal amount whether can be allowed as business loss or not. In the foregoing paras, we have already held that investment in ICDs were part of the business activities as the interest accrued therefrom has been treated as business income. The loss arising on such investment is thus consequently allowable as business loss and therefore, the sum of Rs.32 lakhs is allowed as business loss. The ground raised by the assessee is thus allowed.
54. In the result, assessee's appeal is partly allowed for statistical purposes.
We now take up Revenue's appeal in ITA no.6677/Mum./2010, for assessment year 2002-03.
55. In ground no.1, the Revenue has challenged the deletion of interest expenditure for sum of Rs. 1,55,99,183, relating to borrowed funds utilised for the purchase of capital asset.
56. During the year, the assessee has capitalised interest expenditure of Rs. 1,55,99,183 in the books of account however claimed the same as deduction while computing its taxable income.
57. Before the Assessing Officer, it was claimed that it had borrowed the capital for the purpose of business and, therefore, it is entitled for deduction on account of interest payment even if the borrowed funds were utilised for acquiring capital assets. The Assessing Officer rejected the said contentions after relying on the proviso to Section 36(1)(iii) and the decision of the Hon'ble Supreme Court in the case of Chellapalli Sugar v. CIT [1975] 98 ITR 167 .
58. Before the learned Commissioner (Appeals), it was submitted that it had capitalised interest expenditure in its books of account to comply with the requirement of the AS-16, issued by the ICAI. However, the accounting entries made in the books of account are not conclusive for the treatment of tax. It was further submitted that provisions of proviso to section 36(1)(iii) will not be applicable as the said proviso came into force w.e.f. A.Y. 2004-05. Finally, reliance was placed on the judgment of Hon'ble Supreme Court in the case of Dy. CIT v. Core Health Care [2008] 298 ITR 194/167 Taxman 206. The learned Commissioner (Appeals) accepted the assessee's contentions and allowed the assessee's ground after observing and hold as under:-
"2.4 I have considered the submissions of the appellant. As per provisions of sec.36(1)(iii) of the Income Tax Act, any interest paid on borrowed capital is to be allowed as deduction if the borrowed capital is used for the purpose of business. According to the Assessing Officer, if the borrowed capital is used for the purpose of acquiring capital assets, then interest upto the date, on which the asset acquired is put to use, is to be capitalized. This issue has come before the Supreme Court in the case of M/s Core Health Care limited 298 ITR 104 wherein Hon'ble Supreme Court held that proviso inserted in section 36(1)(iii), which contains provisions for capitalization of such interest, will apply with effect from A.Y. 2005-06. It was further held that this proviso is prospective in nature and will not apply to earlier assessment proceedings. Accordingly, it was held by Supreme Court that if interest is paid on borrowed capital, which is borrowed for the purpose of business, then interest, paid is to be allowed as deduction even if the borrowed capital is used for acquiring assets for the purpose of business of the Appellant. It was further clarified by the Hon'ble Supreme Court that explanation 8 will apply only to those cases which deals with concepts like allowing depreciation and will not apply to the provisions of sec. 36(1)(iii) of the Income Tax Act. I further find that similar issue has been decided in favour of appellant in its own case for the assessment year 1994-95, assessment year 1999-00 and in assessment year 2000-01. The appellant has borrowed the capital to increase its cold rolling mill capacity which has been increased from 2,50,000 tonnes to 4,00,000 tones. Thus, the loan taken by the appellant is utilized in the existing business. All the conditions for claiming deductions under section 36(1)(iii) are met. Accordingly, it is held that appellant is entitled to deduction on account of interest payment of Rs.3,01,82,927/- even if the borrowed capital is used for acquiring new assets. This ground of appeal is allowed."
59. Learned Departmental Representative fairly conceded that this issue is now covered by the judgment of Hon'ble Supreme Court in the case of Core Health Care (supra).
60. Learned Counsel for the assessee, on the other hand, relied on the findings of the learned Commissioner (Appeals).
61. We find that the Assessing Officer has disallowed the said expenditure on the ground that proviso added to section 36(1)(iii) though brought in statute w.e.f. 1st April 2004, is clarificatory in nature. However, this issue is now covered by the judgment of Hon'ble Supreme Court in case of Core Health Care (supra) that provision for capitalization of such interest is prospective in nature and will apply w.e.f. A.Y. 2005-06. This decision has been followed by the Hon'ble Supreme Court in the case of Asstt. CIT v. Arvind Polycot Ltd., [2008] 299 ITR 12 (SC). Accordingly, we do not find any reason to deviate from the findings given by the learned Commissioner (Appeals) as above. Thus, the ground raised by the Revenue is dismissed.
62. In ground no.2, the Department has challenged the direction of the learned Commissioner (Appeals) to the Assessing Officer to alter the opening stock of the assessee by considering the unutilised MODVAT credit in contravention to Rule 46A.
63. This issue has already been decided in ground no.2 of assessee's appeal in ITA no. 6298/Mum./2009, vide Paras-14 and 15 above, wherein the matter has been restored back to the file of the Assessing Officer with certain directions and one direction is that the Assessing Officer should give corresponding credit in the opening stock also in view of the judgment of Bombay High Court in the case of Mahalaxmi Glass Works P. Ltd. (supra). Accordingly, there is no merit in the ground raised by the Department and the same is hereby dismissed.
64. In the result, Revenue's appeal is dismissed.
IT : Amendment to section 2(15) by introducing Proviso fixing monetary limit in respect of public utility services cannot be a reason to cancel registration in exercise of power under section 12AA(3)
IT : Registration under section 12AA is only to identify a charitable institution, however, mere registration per se will not confer any right on taxpayer to claim exemption of income
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[2013] 33 taxmann.com 142 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Mahatma Gandhi Charitable Society
v.
Commissioner of Income-tax, Thiruvananthapuram*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MAMBER
AND B.R. BASKARAN, ACCOUNTANT MAMBER
IT APPEAL NO. 250 (COCH.) OF 2011
[ASSESSMENT YEAR 2011-12]
[ASSESSMENT YEAR 2011-12]
NOVEMBER 16, 2012
Section 12AA, read with sections 2(15), 11 and 12, of the Income-tax Act, 1961 - Charitable or religious trust - Registration procedure [Cancellation of registration] - Assessment year 2011-12 - Whether amendment to section 2(15) by introducing proviso fixing monetary limit in respect of public utility services cannot be a reason to cancel registration - Held, yes - Whether registration under section 12AA is only to identify a charitable institution, however, mere registration per se will not confer any right on taxpayer to claim exemption of income - Held, yes - Whether, therefore, in case of a charitable trust, if contractual receipt exceeds monetary limit provided in proviso to section 2(15), Assessing Officer can reject claim of exemptions under sections 11, 12 and 13 even though, registration under section 12AA has been granted to said trust - Held, yes [Paras 6 and 6A] [In favour of assessee]
FACTS
| ■ | The assessee was a public charitable society. One of the objects of assessee-society was to provide employment to needy and deserving citizens. The assessee-society had been granted registration under section 12AA. | |
| ■ | During the relevant assessment year, the Commissioner in exercise of his power under section 12AA(3) passed an order withdrawing registration granted to assessee-society. The reason for withdrawing registration was that the assessee had participated in an auction with Indian Railway and became a successful bidder. The total receipt from the contract with Indian Railway exceeded Rs. 4 crores. Therefore, in view of the First Proviso to section 2(15), the assessee could not be considered to be a charitable institution any longer. | |
| ■ | On appeal: |
HELD
| ■ | Section 12AA(3) was introduced by Finance Act, 2004 with effect from 1-10-2004. This section empowers the Commissioner to cancel the registration granted under sections 12A and 12AA on satisfaction of two conditions, viz. (1) when the activity of the trust or institution is not genuine; (2) when the activity is not carried out in accordance with the object of the trust/institution. | |
| ■ | In other words, the registration can be cancelled only if the Commissioner is satisfied that the object of the trust is not genuine or the activity of the taxpayer society was not carried out in accordance with the object. It is not the case of the revenue that the object of the trust is not genuine. It is also not the case of the revenue that the assessee has not carried out its activity in accordance with the object of the trust. The only objection of the revenue is that the aggregate contract receipt from railway is exceeding Rs.10 lakhs; therefore, the taxpayer is not charitable institution. | |
| ■ | If the aggregate contract receipts exceed Rs.10 lakhs in any of the years, at the best, the Assessing Officer may deny exemption at the time of assessment proceedings. In view of the above, it is opined that the subsequent amendment to section 2(15) by introducing Proviso fixing the monetary limit in respect of public utility services could not be a reason to cancel the registration. [Para 6] | |
| ■ | Another question which may incidentally arise for consideration is that once the taxpayer is not a charitable institution in terms of section 2(15), since contract receipts admittedly exceed the limit prescribed by the Parliament, whether the taxpayer is entitled for exemption under sections 11 and 12. | |
| ■ | It is well settled proposition of law that registration under section 12AA is only to identify a charitable institution. Mere registration per se will not confer any right on the taxpayer to claim exemption under sections 11, 12 and 13. In other words, though the registration under section 12AA is a pre-requisite for claiming exemption, the exemption under sections 11, 12 and 13 is not automatic. The taxpayer has to satisfy the conditions prescribed in sections 11, 12 and 13 for the purpose of claiming exemption under those provisions of the Act. | |
| ■ | The taxpayer has to recognize/establish that the aggregate contract receipts do not exceed Rs.10 lakhs. Therefore, when the contract receipts from railway exceeded the monetary limit fixed by the Parliament, the taxpayer trust may not entitle for exemption under sections 11, 12 and 13. However, this issue can be examined by the Assessing Officer at the time of assessment. | |
| ■ | When the object of the public utility services is one of the charitable purpose as mentioned in section 2(15), the monetary limit provided in proviso to section 2(15) could be examined by the Assessing Officer at the time of assessment. If the monetary limit exceeded the limit provided by the Parliament, the Assessing Officer can very well reject the claim of exemptions under sections11, 12 and 13 even though, registration under section 12AA was granted. Therefore, cancellation of the registration under section 12AA(3) may not be proper. [Para 6A] | |
| ■ | In view of the above discussion, the order of the lower authority is set aside and the appeal of the assessee stands allowed. [Para 7] |
CASES REFERRED TO
Kalinga Institute of Industrial Technology v. CIT [2011] 336 ITR 389/[2012] 20 taxmann.com 829 (Orissa) (para 2) and Welham Boys' School Society v. CBDT [2006] 285 ITR 74/[2007] 158 Taxman 199 (Uttaranchal) (para 2).
K.M.V. Pandalai for the Appellant. M. Anil Kumar for the Respondent.
ORDER
N.R.S. Ganesan, Judicial Member - This appeal of the taxpayer is directed against the order of the Commissioner of Income-tax, Thiruvananthapuram dated 24-02-2011 withdrawing the registration granted u/s 12A of the Act.
2. Shri K.M.V. Pandalai, the ld.counsel for the taxpayer submitted that the Administrative Commissioner has not recorded his satisfaction and the circumstances which warranted the exercise of his powers u/s 12AA(3) of the Act. According to the ld.counsel, the powers conferred on the Commissioner u/s 12AA(3) of the Act could be invoked on recording his satisfaction and the circumstances which warrants the withdrawal of the registration. The ld.counsel placed his reliance on the judgment of the Orissa High Court in Kalinga Institute of Industrial Technology v. CIT [2011] 336 ITR 389/[2012] 20 taxmann.com 829. The ld.counsel for the taxpayer further submitted that the registration u/s 12AA of the Act was granted on 30th January, 1995 after satisfying the object and activities of the taxpayer. For all earlier assessment years exemption was granted by the assessing officer. According to the ld.counsel, the taxpayer was carrying on its activity in accordance with the object that is provided in the Memorandum of Association. When the taxpayer was granted approval u/s 12AA of the Act and carried on its activity in accordance with the object for which registration was granted, it cannot be said that the taxpayer was not carrying on its activity in accordance with its object. According to the ld.counsel, the powers of the Commissioner to cancel the registration is confined to the provisions of section 12AA(3) of the Act. The Commissioner cannot exceed the conditions provided in section 12AA(3) of the Act. According to the ld.counsel, the taxpayer has not changed or amended its object. The ld.counsel further submitted that the taxpayer was expected to carry out its activity consistent with its object of the trust. Therefore, the activity of the taxpayer trust should be tested u/s 12AA(3) of the Act and not with reference to provisions of section 2(15) of the Act. According to the ld.counsel, there is no reference about section 2(15) in section 12AA of the Act. The ld.counsel further pointed out that the Commissioner at the best may examine whether the activity of the trust was carried on in accordance with the object of the trust or not? The Commissioner, according to the ld.counsel, has no power, jurisdiction or discretion beyond the conditions mentioned in section 12AA(3) of the Act. The ld.counsel has also placed reliance on the judgment of the Uttaranchal High Court in Welham Boys' School Society v. CBDT [2006] 285 ITR 74/[2007] 158 Taxman 199. The ld. counsel submitted that even in case the taxpayer was not carrying on its activity in terms of its charitable trust, the Commissioner at the best may deny exemption u/ss 11 & 12 of the Act. The ld. counsel further submitted that providing employment to needy and deserving citizens is one of the objects mentioned in clause (5) of the Memorandum of Association. The ld. counsel further submitted that providing employment opportunity to the needy and deserving people is a charitable activity. Therefore, the Administrative Commissioner is not correct in withdrawing the registration granted u/s 12AA of the Act.
3. On the contrary, Shri Anilkumar, the ld. DR submitted that no doubt registration was granted u/s 12AA of the Act by the Commissioner. However, the provisions of section 2(15) of the Act was amended by Parliament by Finance Act 2009 with retrospective effect from 01-04-2009. According to the ld. DR, if the activity of the taxpayer involves carrying on any trade, commerce or business or activity of rendering services in relation to trade, commerce or business cannot be considered to be a charitable activity. The Parliament, however, introduced another Proviso to section 2(15) of the Act w.e.f. 01-04-2012 thereby brought down the requirement of the aggregate value of the receipt from the activities to Rs.10 lakhs or more in the previous year. In this case, according to the ld. DR, the taxpayer has participated in an auction with Indian Railway and became a successful bidder. The total receipt from the contract with Indian Railway exceeds Rs.4 crores. Therefore, in view of the First Proviso to section 2(15) of the Act, the taxpayer cannot be considered to be a charitable institution any longer. According to the ld. representative providing employment to the poor or carrying out the works on contract cannot by itself be considered as charitable activity. According to the ld. representative, since the gross receipt from the contract exceeds Rs.4 crores for the previous year relevant to the assessment year under consideration, the taxpayer cannot be considered to be a charitable institution within the meaning of section 2(15) of the Act. Therefore, the Administrative Commissioner has rightly withdrawn the registration.
4. We have considered the rival submissions and also perused the material available on record. Admittedly, the Administrative Commissioner granted registration u/s 12AA of the Act. Subsequently by the impugned order, the Administrative Commissioner withdrawn the registration on the ground that the object of the institution was not carried on in accordance with provisions of section 2(15) of the Act. We have carefully gone through the provisions of section 12AA(3) of the Act which reads as under:
"12AA(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) [or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No.2) Act, 1996 (33 of 1997)] and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard."
Section 12AA(3) was introduced by Finance Act, 2004 with effect from 01-10-2004. This section empowers the Commissioner to cancel the registration granted u/s 12A and 12AA on satisfaction of two conditions, viz. (1) when the activity of the trust or institution is not genuine; (2) when the activity is not carried out in accordance with the object of the trust / institution? The contention of the ld.counsel for the taxpayer before this Tribunal is that once registration was granted, it cannot be cancelled unless the Commissioner recorded his satisfaction about the non genuineness of the institution or that the activities are not carried out in accordance with the object of the trust. The ld.counsel further contended that once registration was granted, there cannot be any further reference to section 2(15) of the Act since there was no reference in section 12AA(3) of the Act.
5. The question arises for consideration is that when the taxpayer trust was registered u/s 12AA of the Act on the basis of the object disclosed in the Memorandum of Association and considering the provisions of section 2(15) of the Act, can such registration be cancelled or withdrawn after introduction of Proviso to section 2(15) of the Act? We have also carefully gone through the provisions of section 2(15) of the Act. The Parliament defined charitable purpose in section 2(15) of the Act. This is an inclusive definition. One of the objects of the trust is public utility which was considered to be charitable in nature. However, by First Proviso to section 2(15) of the Act, the Parliament intended to exclude the object of 'general public utility' from the definition of charitable purpose provided, if the activity involved carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. The application of First Proviso was originally intended to apply in respect of the institution whose aggregate value of the receipt from the activities referred to in First Proviso is Rs.25 lakhs and above in the previous year. Subsequently by Finance Act, 2011, the Parliament intended to apply First Proviso to section 2(15) only in respect of the institution whose aggregate value of the receipt is Rs.10 lakhs and above. Therefore, when the charitable institution carrying on activity of general public utility whose aggregate value of the receipt exceeds Rs.10 lakhs or above cannot be considered to be a charitable institution.
6. The taxpayer in the present case was established for carrying out various activities including giving employment to atleast one member in a family which is needy and deserving. By placing reliance on this clause which contained in the Memorandum of Association at clause 4(17) of the Memorandum, the ld.counsel for the taxpayer contended that giving employment opportunity to the poor is one of the objects of the taxpayer trust which would fall in the advancement of any other object of the general public utility. Therefore, the Administrative Commissioner, after considering this object found that the taxpayer is carrying on an activity in advancement of any other object of general public utility. Once it is considered and granted, subsequent amendment fixing the monetary limit cannot be a reason for withdrawing the registration u/s 12AA(3) of the Act. No doubt, section 12AA(3) provides for cancellation of registration under two conditions, viz. (1) when the activity of the trust or institution is not genuine; (2) when the activity is not being carried out in accordance with the object of the trust / institution. The aggregate value of receipt could be examined by the assessing officer at the time of assessment proceedings. The Commissioner cannot go beyond the two conditions provided in section 12AA(3) for cancelling the registration. In other words, the registration can be cancelled only if the Commissioner is satisfied that the object of the trust is not genuine or the activity of the taxpayer society was not carried out in accordance with the object. It is not the case of the revenue that the object of the trust is not genuine. It is also not the case of the revenue that the taxpayer has not carried out its activity in accordance with the object of the trust. The only objection of the revenue is that the aggregate contract receipt from railway Rs.4 crores is exceeding Rs.10 lakhs; therefore, the taxpayer is not charitable institution. If the aggregate contract receipts exceed Rs.10 lakhs in any of the years, at the best, the assessing officer may deny exemption at the time of assessment proceedings. In view of the above, this Tribunal is of the considered opinion that the subsequent amendment to section 2(15) of the Act by introducing Proviso fixing the monetary limit in respect of public utility services cannot be a reason to cancel the registration.
6A. Another question which may incidentally arise for consideration is that once the taxpayer is not a charitable institution in terms of section 2(15) of the Act, since contract receipts admittedly exceed the limit prescribed by the Parliament, whether the taxpayer is entitled for exemption u/ss 11 & 12 of the Act? It is well settled proposition of law that registration u/s 12AA of the Act is only to identify a charitable institution. Mere registration per se will not confer any right on the taxpayer to claim exemption u/ss 11, 12 & 13 of the Act. In other words, though the registration u/s 12AA is a pre-requisite for claiming exemption the exemption u/s 11, 12 & 13 are not automatic. The taxpayer has to satisfy the conditions prescribed in sections 11, 12 & 13 of the Act for the purpose of claiming exemption under those provisions of the Act. The Taxpayer has to recognize/establish that the aggregate contract receipts do not exceed Rs.10 lakhs. Therefore, when the contract receipts from railway exceeded the monetary limit fixed by the Parliament, this Tribunal is of the considered opinion that the taxpayer trust may not entitle for exemption u/ss 11, 12 & 13 of the Act. However, this issue can be examined by the assessing officer at the time of assessment. When the object of the public utility services is one of the charitable purpose as mentioned in section 2(15) of the Act, this Tribunal is of the considered opinion that the monetary limit provided in Proviso to section 2(15) could be examined by the assessing officer at the time of assessment. If the monetary limit exceeded the limit provided by the Parliament, the assessing officer can very well reject the claim of exemptions u/s 11, 12 & 13 of the Act even though, registration u/s 12AA of I.T. Act was granted. Therefore, cancellation of the registration u/s 12AA(3) of the Act may not be proper.
7. In view of the above discussion, the order of the lower authority is set aside and the appeal of the taxpayer stands allowed
IT : Where Assessing Officer, finding FDRs in names of assessee's employees to be bogus, made addition in hands of assessee under section 69, Tribunal could not delete said addition without giving any reason
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[2013] 33 taxmann.com 121 (Andhra Pradesh)
HIGH COURT OF ANDHRA PRADESH
Hastalloy India Ltd
v.
Deputy Commissioner of Income-tax*
GODA RAGHURAM AND M.S.RAMACHANDRA RAO, JJ.
IT TRIBUNAL APPEAL NOS.22 & 24 OF 2000†
AUGUST 16, 2012
Section 69 of the Income-tax Act, 1961 - Unexplained investments [Fixed deposits] - Block period 1-4-1986 to 18-11-1996 - During search at business premises of assessee-company and residence of its managing director, department found fixed deposit receipts issued by assessee's associate company HHL in names of 100 persons comprising employees of assessee-company and friends and relatives of managing director - In block assessment, Assessing Officer, on basis of statements of so called depositors, concluded that all those persons were only name lenders and FDRs found in possession of assessee actually related to assessee and, therefore, constituted undisclosed income of assessee - On appeal, Tribunal deleted substantial part of addition made by Assessing Officer, holding that creditworthiness of depositors was established and genuineness of deposits could not be doubted - Whether since no valid reasons were given by Tribunal for its conclusion and for reversing order of Assessing Officer, its order, to extent of deletion of addition, was to be set aside - Held, yes [In favour of assessee]
FACTS
Facts
| ■ | During search in the business premises of the assessee-company as well as residential premises of its managing director, the Income-tax department obtained books of account of the assessee-company as well as a number of other documents and materials evidencing transactions and activities of the assessee-company, its associate company HHL, its managing director and other firms in which the managing director or the directors of the assessee-company were substantially interested. Apart from that, the officers also found fixed deposit receipts issued by the associate company HHL in favour of various persons numbering about hundred (100) in all. | |
| ■ | The managing director of the assessee-company, when confronted with all the material seized by the department, conceded that the deposits found in the names of over hundred persons actually belonged to the assessee-company and offered Rs. 30 lakhs as undisclosed income apart from offering it to tax for the block period. | |
| ■ | However, in block assessment, the managing director, while filing the block return on behalf of the assessee, retracted the earlier admission and statements and returned an undisclosed income of Rs. 2 lakhs only, that too pertaining to the cash seized at the time of search operations. | |
| ■ | The Assessing Officer issued summons to the various persons stated to have made fixed deposits with HHL and after considering their statements concluded that the FDRs in the names of the employees of the assessee-company and the friends and relatives of the managing director and other directors of the assessee were bogus; that all those fixed deposits represented the investments made by the assessee in the names of those persons; and that all those persons were only name lenders and the FDRs found in the possession of the assessee actually related to the assessee and, therefore, constituted an undisclosed income of Rs. 29,10,000 in the hands of the assessee. He passed separate assessment orders in respect of the assessee, its associate company HHL and managing director. | |
| ■ | The Tribunal partly allowed the appeal filed by the assessee holding that only Rs. 7,50,000 could be construed as undisclosed income of the assessee and deleted Rs. 21,60,000 from out of Rs. 29,10,000 held to be the undisclosed income by the Assessing Officer. |
Assessee's arguments
| ■ | The Tribunal erred in holding that majority of investors in HHL were bogus investors, that they have no source of income and their external appearance would show that they did not have the capacity to invest in the above associate company. |
Revenue's arguments
| ■ | The Tribunal's order did not disclose reasons for deleting substantial addition made by the Assessing Officer except some general statements that the depositors were agriculturists, that they would not have ventured to appear before the Assessing Officer, much less owned up deposits of substantial value inviting risk of being proceeded against, just to accommodate the convenience of the managing director of the assessee. |
Issue involved
| ■ | Whether Tribunal was justified in deleting the addition of Rs. 21,60,000 made by the Assessing Officer? |
HELD
The order of the Assessing Officer is reasoned one
| ■ | A reading of the assessment order reveals that the Assessing Officer had elaborately considered each of the statements of the 43 employees and 35 friends and relatives of the managing director of the assessee before him in respect of the FDRs standing in their names issued by the associate company HHL and which were seized at the time of search operations and gave cogent reasons why in his opinion their statements about availability of such amounts with them, their standard of living, means of livelihood, their interest in making deposit, their saving pattern, nature of income, banking and saving habits, etc., cannot be believed and also gave reasons for his conclusion that the assessee is the owner of these FDRs. He held that the said depositors had lent their names to the assessee only to help the managing director. He, therefore, concluded that the aggregate amount of Rs. 29,10,000 covered by the FDRs standing both in the names of the workers/employees of the assessee as well as in the names of the assessee's relatives and friends has to be treated as undisclosed income in the hands of the assessee. [Para 18] |
The Tribunal had not given reasons for its conclusion
| ■ | The Tribunal in its order having observed that one is not justified in making a general presumption on the basis of a general legal ground and every item has to be considered individually on its own merit and generalization ought not to be done, proceeded to do exactly the same while reversing the findings of the Assessing Officer in regard to the FDRs amounting to Rs. 21,60,000. The Tribunal ought to have taken up the statement of each of the 35 persons who had spoken about the deposits made by them in the associate company HHL, should have considered the same and then give a finding why the conclusion of the Assessing Officer in regard to them cannot be accepted. No valid reasons have been given by the Tribunal in coming to the conclusion that the creditworthiness of the depositors is established and the genuineness of the deposits cannot be doubted. [Para 23] | |
| ■ | The Tribunal's order does not disclose the facts considered on the basis of which it arrived at the conclusion in respect of the fixed deposits made by the friends and relatives of the managing director to the tune of Rs. 21,60,000. Admittedly, reasons are the links between the materials on which certain conclusions are based and the actual conclusions. In the absence of the reasons based on consideration of facts by the Tribunal in the impugned order to support its conclusion as regards the FDRs of Rs. 21,60,000 mentioned above, its order to that extent cannot be sustained. [Para 26] |
Conclusion
| ■ | As regards the FDRs to the tune of Rs. 7,50,000 in the names of five relatives and friends of the managing director, Tribunal had given reasons for concurring with the more elaborate reasons given by the Assessing Officer. It is settled law that an appellate authority, if it affirms an order of an original authority which contains reasons, need not give separate reasons if it agrees with the reasons contained in the order of the original authority. Therefore, its decision in regard to the FDRs of Rs. 7,50,000 does not warrant any interference. [Para 27] | |
| ■ | However, the order of the Tribunal, to the extent of its finding regarding the FDRs of Rs. 21,60,000 in the name of friends and relatives of the managing director, is set aside and the matter is remanded to the Tribunal with a direction to consider afresh the evidence on record and come to a conclusion as to the computation of the above item vis-à-vis the income of the assessee. [Para 28] |
CASES REFERRED TO
Kunhayammed v. State of Kerala [2000] 245 ITR 360/113 Taxman 470 (SC) (para 12), CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78/25 Taxman 80F (SC) (para 12), Jai Singh v. Shakuntala AIR 2002 SC 1428 (para 13), Vijay Kumar Talwar v. CIT [2011] 330 ITR 1/196 Taxman 136/[2010] 8 taxmann.com 264 (SC) (para 14), CIT v. Bharat Engg. & Construction Co. [1972] 83 ITR 187 (SC) (para 15), Santosh Hazari v. Purushottam Tiwari [2001] 251 ITR 84 (SC) (para 21), H. Siddiqui v. A. Ramalingam [2011] 4 SCC 240 (para 22), Union of India v.Mohan Lal Capoor AIR 1974 SC 87 (para 24), S.N. Mukherjee v. Union of India AIR 1990 SC 1984 (para 25) and D.R. Rathana Murthy v.Ramappa [2011] 1 SCC 158 (para 26).
C. Kodandaram for the Appellant. S.R. Ashok for the Respondent.
JUDGMENT
M. S. Ramachandra Rao, J. - I.T.T.A. No. 22 of 2000 filed by the assessee, M/s. Hastalloy India Ltd. and I.T.T.A. No. 24 of 2000 filed by the Revenue are appeals under section 260A of the Income-tax Act, 1961, challenging the order dated September 21, 1999, of the Income-tax Appellate Tribunal, Hyderabad Bench-B in I.T. (SS) A. No. 48/Vizag/97 for the block period April 1, 1986, to November 28, 1996.
2. The assessee is a company engaged in the manufacture of ferrous and non-ferrous castings and forgings having its registered office at Visakhapatnam. One Sri G.V.K. Rao is the managing director of the assessee-company. He and other directors of the assessee-company promoted another company by name M/s. Hastalloy Holdings Ltd. (hereinafter referred to as "HHL") with the objective of carrying on business of finance.
3. The Income-tax Department carried out search operations under section 132 of the Income-tax Act, 1961, on November 28, 1996, in the business premises of the assessee-company as well as the residential premises of the managing director, Sri G.V.K. Rao. The office of the assessee-company and the residence of the managing director were in the same building. The office of the associate company HHL was also situated at the same office premises of the assessee-company. In the course of the search operations, the Income-tax Department obtained books of account of the assessee-company as well as a number of other documents and materials evidencing transactions and activities of the assessee-company, its associate company HHL, its managing director and other firms in which the managing director or the directors of the appellant company were substantially interested. Apart from the books of account, documents, materials, etc., the officers also found fixed deposit receipts issued by the associate company HHL in favour of various persons numbering about hundred (100) in all. These fixed deposit receipts were found discharged in advance by the respective depositors whose names appeared in the fixed deposit receipts (FDRs). Sri G.V.K. Rao, when confronted with all the material seized by the Department, conceded before the officers of the Revenue in his sworn statement that the deposits found in the names of over hundred persons represented by the certificates found at the time of search actually belonged to the assessee-company and offered Rs. 30 lakhs as undisclosed income apart from offering it to tax for the block period. In the background of the above facts and circumstances, the Assessing Officer initiated block assessment proceedings under section 158BC of the Income-tax Act, 1961, against the assessee, its associate company HHL and the managing director Sri G.V.K. Rao for the period April 1, 1986, to November 28, 1996. The managing director, while filing the block return on behalf of the assessee, retracted the earlier admission and statements made before the officers and returned an undisclosed income of Rs. 2 lakhs only, that too pertaining to the cash seized at the time of search operations. After examining the entire search material, the Assessing Officer issued summons to the various persons stated to have made fixed deposits with HHL and took the statements on oath of those persons who responded. After considering the same, he came to the conclusion in the assessment order dated November 27, 1997, that the FDRs. in the names of the employees of the assessee-company and the friends and relatives of the managing director and other directors of the assessee are bogus, that all those fixed deposits represent the investments made by the assessee in the names of those persons, that all those persons are only name lenders and the FDRs found in the possession of the assessee actually relate to the assessee and, therefore, constituted an undisclosed income of Rs. 29,10,000 in the hands of the assessee. He passed separate assessment orders in respect of the assessee, its associate company HHL and G.V.K. Rao, the managing director.
4. Challenging the assessment made in respect of the assessee, the assessee filed I.T. (S.S.) A. No. 48/Vizag/97 before the Income-tax Appellate Tribunal, Hyderabad Bench-B.
5. The Tribunal partly allowed the appeal filed by the assessee holding that only Rs. 7,50,000 can be construed as undisclosed income of the assessee and deleted Rs. 21,60,000 from out of Rs. 29,10,000 held to be the undisclosed income by the Assessing Officer in regard to the FDRs found in the search of the premises of the assessee, the associate company and the managing director on November 28, 1996.
6. Challenging the same, the assessee filed I.T.T.A. No. 22 of 2000 in so far as the Income-tax Appellate Tribunal had held that Rs. 7,50,000 constituted the undisclosed income of the assessee. The Revenue filed I.T.T.A. No. 24 of 2000 in so far as the Income-tax Appellate Tribunal had deleted Rs. 21,60,000 from the undisclosed income of Rs. 29,10,000 assessed by the Assessing Officer in regard to the FDRs.
7. I.T.T.A. No. 22 of 2000 filed by the assessee was admitted on August 14, 2000, to consider the following substantial questions of law :
| "(a) | Whether, in the face of the categorical statements made by the employees of the assessee-company, the Tribunal is correct in applying section 69 of the Income-tax Act and treat the FDRs as undisclosed income of the assessee ? | |
| (b) | Whether the Appellate Tribunal is justified in sustaining the addition without considering the entire evidence on record ?" |
8. I.T.T.A. No. 24 of 2000 was also admitted on August 14, 2000, to consider the following question of law :
"Whether the Tribunal's finding that the deposits made by those who appeared before the assessing authority cannot be considered to be the undisclosed income of the assessee and the deposits should be treated as genuine, is perverse and untenable in law ?"
9. Heard Sri C. Kodandaram, learned senior counsel on behalf of the assessee and Sri S. R. Ashok, learned senior standing counsel for the Revenue in both the appeals.
10. Sri C. Kodandaram, senior counsel for the assessee, contended that the order of the Income-tax Appellate Tribunal in so far as it had held that there was an undisclosed income of Rs. 7,50,000 with the assessee is erroneous, that the managing director, Sri G.V.K. Rao, was forced to give a statement at the time of the search that the deposits found in the names of the persons found at the time of the search belonged to the assessee on account of fear and tension, that the Tribunal should have accepted the statements of the employees about their capacity to invest the amounts covered by the FDRs, and that the Tribunal erred in holding that majority of investors in HHL are bogus investors, that they have no source of income and their external appearance would show that they did not have the capacity to invest in the above associate company.
11. Per contra, Sri S.R. Ashok, senior counsel for the Revenue, contended that the Assessing Officer had painstakingly recorded the evidence of 43 workers of HHL and 40 persons who were relatives or friends of the managing director and other directors of the assessee-company, elaborately discussed this evidence apart from other evidence and rightly held that Rs.29,10,000 (the aggregate amount of deposits standing both in the name of workers as well as in the names of the assessee's relatives and friends) is undisclosed income in the hands of the assessee, that the Tribunal, being the final court of fact, did not at all analyse the evidence as was done by the Assessing Officer and erroneously held that Rs. 21,60,000 standing in the names of 35 persons, who were relatives and friends of the managing director is to be deleted from the undisclosed income of Rs. 29,10,000 assessed by the Assessing Officer. He further contended that the Tribunal's order does not disclose reasons for its above conclusion except some general statements that the depositors are agriculturists, that they would not have ventured to appear before the Assessing Officer, much less own up deposits of substantial value inviting risks of being proceeded against, just to accommodate the convenience of the managing director of the assessee. He also contended that there was no basis for the Tribunal to hold that the creditworthiness of the depositors was established and its findings that such deposits cannot be treated as undisclosed income is erroneous and perverse.
12. Sri C. Kodanda Ram, however, contended that when the order of the assessing authority merged with that of the Tribunal, this court cannot look into the order of the assessing authority in determining the correctness of the order passed by the Tribunal. He relied on the decision reported inKunhayammed v. State of Kerala [2000] 245 ITR 360/113 Taxman 470 (SC). He also contended that the finding of the Tribunal is based on consideration of the material before it in so far as the deletion of Rs. 21,60,000 is concerned and cannot be said to be a finding on the basis of no evidence or improper rejection of material and relevant evidence and in any event, the inference drawn was only of fact and did not warrant interference under section 260A of the Act. He relied on the decision reported in CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78/25 Taxman 80F, wherein the Supreme Court held as follows (page 82) :
"This court held that when a court of fact arrives at its decision by considering material which is irrelevant to the enquiry, or acts on material, partly relevant and partly irrelevant, and it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its decision, a question of law arises, whether the finding of the court is not vitiated by reason of its having relied upon conjectures, surmises and suspicions not supported by any evidence on record or partly upon evidence and partly upon inadmissible material. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises, nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures and surmises . . .
If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises."
13. He also contended that scrutiny of evidence by this court under section. 260A of the Act can be done only in very exceptional cases and only if there is extreme perversity as held by the Supreme Court in a decision reported in Jai Singh v. Shakuntala AIR 2002 SC 1428, wherein the Supreme Court held in para. 6 as follows :
"6. Mr. Jain, the learned senior advocate appearing in support of the appeal, contended that in the event of due compliance with the four requirements as envisaged under section 16 of the Act of 1956 the question of there being any further requirement depicting acceptance thereof does not and cannot arise. The submissions undoubtedly at the first blush seem to be rather attractive and it is on this particular issue which prompted this court to have the matter argued in detail irrespective of the technicality as raised before this court pertaining to the maintainability issuevis-a-vis the appeal. While scrutiny of evidence does not stand out to be totally prohibited in the matter of exercise of jurisdiction in the second appeal and that would, in our view, be too broad a proposition and too rigid an interpretation of law not worthy of acceptance but that does not also clothe the superior courts with jurisdiction to intervene and interfere in any and every matter it is only in very exceptional cases and on extreme perversity that the authority to examine the same in extenso stands permissible-it is a rarity rather than a regularity and thus in fine it can be safely concluded that while there is no prohibition as such, but the power to scrutiny can only be bad in very exceptional circumstances and upon proper circumspection. This is, however, without expression of any opinion pertaining to section 100 of the Code of Civil Procedure."
14. He also relied on a decision reported in Vijay Kumar Talwar v. CIT [2011] 330 ITR 1/196 Taxman 136/[2010] 8 taxmann.com 264 wherein the Supreme Court observed at paras 23 as follows (page 9 of 330 ITR) :
"A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread (See Madan Lal v. Mst. Gopi [1980] 4 SCC 255, Narendra Gopal Vidyarthi v. Rajat Vidyarthi [2009] 3 SCC 287, Commissioner of Customs (Preventive) v. Vijay Dasharath Patel [2007] 4 SCC 118 ; [2007] 8 RC 407 (SC), Metroark Ltd. v. Commissioner of Central Excise, Calcutta [2004] 12 SCC 505 and West Bengal Electricity Regulatory Commission v. CESC Ltd. [2002] 8 SCC 715."
15. He also relied on the decision reported in CIT v. Bharat Engg. & Construction Co. [1972] 83 ITR 187 wherein the Supreme Court held as follows (page 189) :
"Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the Income-tax Officer may assume that cash credit entries in its book represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final."
He contended that this court should not interfere as regards the deletion of Rs. 21,60,000 as ordered by the Tribunal from the undisclosed income of the assessee.
16. We have considered the above submissions of the counsel for the assessee and the Revenue.
17. While we are in respectful agreement with the principles laid down in the decisions cited by Sri C. Kodandram, learned senior counsel for the assessee, we, however, feel that, in the facts and circumstances of the present case, the order of the Income-tax Appellate Tribunal suffers from a serious defect as explained below.
18. A reading of the assessment order passed by the Deputy Commissioner of Income-tax, Special Range-I, Visakhapatnam, in the case of the assessee reveals that he had elaborately considered each of the statements of the 43 employees and 35 friends and relatives of the managing director of the assessee before him in respect of the FDRs standing in their names issued by the associate company HHL and which were seized at the time of search operations and gave cogent reasons why in his opinion their statements about availability of such amounts with them, their standard of living, means of livelihood, their interest in making deposit, their saving pattern, nature of income, banking and saving habits, etc., cannot be believed and also gave reasons for his conclusion that the assessee is the owner of these FDRs. He held that the said depositors had lent their names to the assessee only to help the managing director. He, therefore, concluded that the aggregate amount of Rs. 29,10,000 covered by the FDRs standing both in the name of the workers/employees of the assessee as well as in the names of the assessee's relatives and friends has to be treated as undisclosed income in the hands of the assessee.
19. In the impugned order passed by the Income-tax Appellate Tribunal, it is noticed that the Appellate Tribunal agreed with the Assessing Officer in disbelieving the creditworthiness of the employees to make the deposits attributed to them and the genuineness of those deposits amounting to Rs.6,10,000 and five friends and relatives of the managing director in respect of a sum of Rs. 1,40,000 deposited by them in HHL and held that Rs. 6,10,000 + Rs. 1,40,000 = Rs. 7,50,000 was the undisclosed income of the assessee.
20. But in respect of the deposits made by the relatives and friends of the managing director in HHL amounting to Rs. 21,60,000, which was spoken to by 35 persons before the Assessing Officer, it is noticed that the Income-tax Appellate Tribunal had not considered their statements in the manner an appellate court, which is a final court of fact, is expected to consider and appreciate, before reversing the findings of the Assessing Officer and coming to a contrary conclusion. It had reversed the findings of the Assessing Officer in respect of the sum of Rs. 21,60,000 standing in the names of the friends and relatives of the managing director without specifically stating why the statements of the 35 persons in this category should be accepted as true and why the reasoning of the Assessing Officer in that regard should be considered as erroneous. It made sweeping statements such as "all these persons are by and large agriculturists . . . the identity of these persons has been established . . . as they are all outsiders and not employees of the appellant company, we cannot take the view that all these persons were under the influence of the appellant company to render the statements before the Assessing Officer to suit the convenience of the appellant company in explaining away the fixed deposits made in their names . . . unless the deposits made by them are genuine, they would not have appeared and admitted having made those deposits of huge sums, that too before the Assessing Officer in the income-tax proceedings . . . Merely because some are not income-tax assessees, deposits made by them cannot be disbelieved doubting their creditworthiness, because as admitted by the Assessing Officer, all these depositors are agriculturists, whose income from agriculture is exempt from tax . . . When the depositors have appeared before the Assessing Officer and admitted having made deposits of substantial amounts, the genuineness of the deposits cannot be doubted". We are unable to approve the manner in which the Income-tax Appellate Tribunal has considered the evidence of these 35 persons and its appreciation thereof while coming to a conclusion that the deposits made by them to the tune of Rs. 21,60,000 are genuine.
21. In Santosh Hazari v. Purushottam Tiwari [2001] 251 ITR 84, the Supreme Court at para. 15 in page 188 observed as follows (page 90 of 251 ITR) :
"The appellate court has jurisdiction to reverse or affirm the findings of the trial court. First appeal is a valuable right of the parties and unless restricted by law, the whole case is therein open for rehearing both on questions of fact and law. The judgment of the appellate court must, therefore, reflect its conscious application of mind and record findings supported by reasons, on all the issues arising along with the contentions put forth, and pressed by the parties for decision of the appellate court. The task of an appellate court affirming the findings of the trial court is an easier one. The appellate court agreeing with the view of the trial court need not restate the effect of the evidence or reiterate the reasons given by the trial court ; an expression of general agreement with reasons given by the court, the decision of which is under appeal, would ordinarily suffice (See Girijanandini Devi v. Bijendra Narain Choudhary, AIR 1967 SC 1124 . . . While reversing a finding of fact the appellate court must come into close quarters with the reasoning assigned by the trial court and then assign its own reasons for arriving at a different finding. This would satisfy the court hearing a further appeal that the first appellate court had discharged the duty expected of it."
22. In H. Siddiqui v. A. Ramalingam [2011] 4 SCC 240, the Supreme Court held :
". . . it must be evident from the judgment of the appellate court that the court has properly appreciated the facts/evidence, applied its mind and decided the case considering the material on record. . . . It is mandatory for the appellate court to independently assess the evidence of the parties and consider the relevant points which arise for adjudication and the bearing of the evidence on those points. Being the final court of fact, the first appellate court must not record mere general expression of concurrence with the trial court judgment rather it must give reasons for its decision on each point independently to that of the trial court. Thus, the entire evidence must be considered and discussed in detail."
23. The Income-tax Appellate Tribunal in its order having observed that one is not justified in making a general presumption on the basis of a general legal ground and every item has to be considered individually on its own merit and generalization ought not to be done, proceeded to do exactly the same while reversing the findings of the Assessing Officer in regard to the FDRs amounting to Rs. 21,60,000. The Income-tax Appellate Tribunal ought to have taken up the statement of each of the 35 persons who had spoken about the deposits made by them in the associate company HHL, should have considered the same and then give a finding why the conclusion of the Assessing Officer in regard to them cannot be accepted. In our opinion, no valid reasons have been given by the Income-tax Appellate Tribunal in coming to the conclusion that the creditworthiness of the depositors is established and the genuineness of the deposits cannot be doubted. In our view, the Income-tax Appellate Tribunal has not acted in the manner laid down in the above judgments of the Supreme Court.
24. In Union of India v. Mohan Lal Capoor AIR 1974 SC 87 at para. 28, the Supreme Court also observed as follows :
"Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable."
25. In S. N. Mukherjee v. Union of India AIR 1990 SC 1984, a Constitution Bench of the Supreme Court of India held at para 34 as follows :
"34. The decisions of this court referred to above indicate that with regard to the requirement to record reasons the approach of this court is more in line with that of the American courts. An important consideration which has weighed with the court for holding that an administrative authority exercising quasi-judicial functions must record the reasons for its decision, is that such a decision is subject to the appellate jurisdiction of this court under article 136 of the Constitution as well as the supervisory jurisdiction of the High Courts under article 227 of the Constitution and that the reasons, if recorded, would enable this court or the High Courts to effectively exercise the appellate or supervisory power. But this is not the sole consideration. The other considerations which have also weighed with the court in taking this view are that the requirement of recording reasons would (i) guarantee consideration by the authority ; (ii) introduce clarity in the decisions ; and (iii) minimise chances of arbitrariness in decision-making. In this regard a distinction has been drawn between ordinary courts of law and tribunals and authorities exercising judicial functions on the ground that a judge is trained to look at things objectively uninfluenced by considerations of policy or expediency whereas an executive officer generally looks at things from the standpoint of policy and expediency."
26. After looking at the order passed by the Income-tax Appellate Tribunal impugned in these appeals, we are constrained to observe that its order does not disclose the facts considered on the basis of which it arrived at the conclusion in respect of the fixed deposits made by the friends and relatives of the managing director to the tune of Rs. 21,60,000. Admittedly, reasons are the links between the materials on which certain conclusions are based and the actual conclusions. In the absence of the reasons based on consideration of facts by the Income-tax Appellate Tribunal in the impugned order to support its conclusion as regards the FDRs of Rs. 21,60,000 mentioned above, its order to that extent cannot be sustained. The conclusion of the I.T.T.A. is not based on evidence and it has to be held to be perverse. (D. R. Rathna Murthy v. Ramappa [2011] 1 SCC 158. Therefore, the substantial question of law in I.T.T.A. No. 24 of 2000 filed by the Revenue has to be answered in favour of the Revenue.
27. However, as regards the FDRs. to the tune of Rs. 7,50,000 comprising Rs.6,10,000 in the names of the employees of the assessee and Rs. 1,40,000 in the names of five relatives and friends of the managing director are concerned, we are of the opinion that the Income-tax Appellate Tribunal had given reasons for concurring with the more elaborate reasons given by the Assessing Officer. It is settled law that an appellate authority, if it affirms an order of an original authority which contains reasons, need not give separate reasons if it agrees with the reasons contained in the order of the original authority (see S.N. Mukherjee (supra) at para. 35 page 1995 of AIR). Therefore, its decision in regard to the FDRs of Rs. 7,50,000 does not warrant any interference and the substantial questions of law raised in I.T.T.A. No. 22 of 2000 filed by the assessee have to be answered against the assessee.
28. In the facts and circumstances of this case, in the interests of justice, and for the reasons set out above, we deem it appropriate to set aside the order of the Income-tax Appellate Tribunal to the extent of its finding regarding the FDRs of Rs. 21,60,000 in the name of friends and relatives of the managing director and remand the matter to the Income-tax Appellate Tribunal with a direction to consider afresh the evidence on record and come to a conclusion as to the computation of the above item vis-a-vis the income of the assessee. The Income-tax Appellate Tribunal shall consider the matter afresh in regard to the above item only uninfluenced by any observations in this order or in the order of the I.T.T.A under appeal.
29. Therefore, I.T.T.A. No. 22 of 2000 field by the assessee is dismissed and I.T.T.A. No. 24 of 2000 is allowed and remanded to the extent indicated above. No costs.
VARSHAIT : Mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA and also grant of approval for exemption under section 80G
■■■
[2013] 33 taxmann.com 113 (Lucknow - Trib.)
IN THE ITAT LUCKNOW BENCH 'B'
Kanchan Singh Bhuli Devi Shiksha Prasar Samiti
v.
Commissioner of Income-tax - I, Kanpur*
SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND S.V. MEHROTRA, ACCOUNTANT MEMBER
AND S.V. MEHROTRA, ACCOUNTANT MEMBER
IT APPEAL NOS. 706 & 707 (LUCK.) OF 2010
JUNE 26, 2012
Section 12AA, read with section 80G, of the Income-tax Act, 1961 - Charitable or religious trust - Registration procedure [Surplus earned by trust] - Whether mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA and also grant of approval for exemption under section 80G - Held, yes [Para 17] [In favour of assessee]
FACTS
| ■ | The assessee-society was engaged in providing education by running educational institution. It filed an application seeking registration under section 12A. | |
| ■ | The Commissioner finding that assessee-society had earned surplus from its activities in financial years 2006-07 to 2008-09, rejected assessee's application. | |
| ■ | On appeal: |
HELD
| ■ | Nothing has been brought on record except surplus generated during financial years 2006-07 to 2008-09 that the assessee was ever engaged in the activities other than educational activities. Since it has been repeatedly held by various High Courts and different Benches of the Tribunal that mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA and also grant of approval for exemption under section 80G, impugned order passed by the Commissioner is not proper. Therefore, the order of the Commissioner is set aside and he is directed to grant registration under section 12AA and approval under section 80G(5) to the assessee-society. [Para 17] | |
| ■ | In the result, appeals of the assessee stand allowed. [Para 18] |
CASES REFERRED TO
Municipal Corpn. of Delhi v. Children Book Trust[1992] 63 Taxman 385 (SC) (para 3), CIT v. Red Rose School [2007] 163 Taxman 19 (All.)(para 5), Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.) (para 5), City Montessori School v. Union of India [2009] 315 ITR 481/[2010] 191 Taxman 208 (All.) (para 5), Vanita Vishram Trust v. CIT [2010] 327 ITR 121/192 Taxman 389 (Bom.) (para 5), Raebareily Polytechnic Association v. CIT [2010] 48 DTR 1 (para 5), Dr. Virendra Swarup Educational Foundation v. CIT [2010] 43 DTR 267 (para 5), CIT v. Gaur Brahmin Vidya Pracharini Sabha [2011] 203 Taxman 226/15 taxmann.com 250 (Punj. & Har.) (para 5), ITO(E) v. Dharamshila Cancer Foundation and Research Centre [2010] 8 taxmann.com 285/[2011] 128 ITD 1 (Delhi)(para 5), St. Lawrence Educational Society v. CIT [2011] 197 taxman 504/9 taxmann.com 233(Delhi) (para 5), American Hotel and Lodging Association Educational Institute v. CBDT [2008] 301 ITR 86/170 Taxman 306 (SC) (para 5), Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) (para 14) and Aditanar Educational Institution v. Addl. CIT[1997] 224 ITR 310/90 Taxman 528 (SC) (para 14).
Swaran Singh for the Appellant. K.C. Meena for the Respondent.
ORDER
Sunil Kumar Yadav, Judicial Member - These appeals by the assessee are directed against the respective order of the ld. Commissioner of Income-tax refusing registration under section 12AA(1) and exemption under section 80G(5) of the Income-tax Act, 1961 (hereinafter called in short "the Act").
2. The facts in brief borne out from the record are that the assessee-society was registered with the Registrar of Societies, Kanpur on 13.12.2001. The assessee-society is engaged in providing education by running educational institution in the name of M/s Kanchan Singh Bhooli Devi P.G. College at Village Bhikhanpur, Sarwankhera, Kanpur. The assessee-society is providing education to about 2900 children by various education degrees like B.A., B.Sc., B.Ed., B.P.Ed. etc. and charging fees from the students. The assessee-society has applied for registration under section 12AA(1) of the Act and a report was called for by the ld. Commissioner of Income-tax. The ld. Commissioner of Income-tax noticed the financial position of the assessee-society for the last three years which are as under:-
| Sl. No. | F.Y. | Gross Receipt | Profit/Surplus |
| 1 | 2006-07 | 76,78,873.00 | 29,84,250.45 |
| 2 | 2007-08 | 99,16,083.54 | 45,53,345.38 |
| 3 | 2008-09 | 1,65,34,914.83 | 54,57,083.52 |
3. From the aforesaid financial position, the ld. Commissioner of Income-tax observed that the assessee-society is carrying on its activities in such a manner that it is in the nature of a commercial enterprise and not for charitable purpose. The assessee-society stated that it is engaged in the charitable activities like conducting combined marriage of poor girls and charge subsidized fees from students. From the perusal of the balance sheets, the ld. Commissioner of Income-tax observed that the assessee-society is not spending money on charitable purposes. Relying upon the judgment of the Hon'ble Apex Court in the case of Municipal Corpn. of Delhi v. Children Book Trust [1992] 63 Taxman 385, the ld. Commissioner of Income-tax denied registration to the assessee-society under section 12AA(1) of the Act.
4. Following his order refusing registration under section 12AA(1) of the Act, the ld. Commissioner of Income-tax also rejected the application for grant of exemption under section 80G of the Act.
5. Against both the orders, the assessee-society has preferred appeals before the Tribunal with the submission that the assessee-society is engaged in charitable activities by imparting education in various courses. The ld. Commissioner of Income-tax has denied registration under section 12AA and exemption under section 80G of the Act without bringing anything on record that the assessee-society was ever engaged in commercial activities. The surplus formed in a particular year cannot be the basis for denial of registration under section 12AA of the Act. What is to be seen while granting registration under section 12A of the Act and approval under section 80G of the Act is only the objects of the society/trust and its activities. If anything is found contrary to the charitable objects of the society/trust, the ld. Commissioner of Income-tax is required to examine that aspect and make out a case that the society/trust was engaged in the activities other than charitable. It was further argued by the ld. counsel for the assessee that grant of registration under section 12A of the Act does not entitle the assessee-society to claim exemption under section 11 of the Act. This exemption can only be allowed subject to fulfillment of prerequisite conditions enshrined in section 13 of the Act. Grant of registration under section 12A of the Act is a first step towards the claim of exemption under section 11 of the Act. In support of his contention, the ld. counsel for the assessee has placed reliance upon various judgments of the jurisdictional High Court and other High Courts and also of the Tribunal. The same are as under:-
| 1 | CIT v. Red Rose School | [2007] 163 Taxman 19 (All.) |
| 2 | Pinegrove International Charitable Trust v. Union of India | [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.) |
| 3 | City Montessori School v. Union of India | [2009] 315 ITR 481/[2010] 191 Taxman 208 (All.) |
| 4 | Vanita Vishram Trust v. CIT | [2010] 327 ITR 121/192 Taxman 389 (Bom.) |
| 5 | Raebareily Polytechnic Association v. CIT | [2010] 48 DTR 1 |
| 6 | Dr. Virendra Swarup Educational Foundation v. CIT | [2010] 43 DTR 267 |
| 7 | CIT v. Gaur Brahmin Vidya Pracharini Sabha | [2011] 203 Taxman 226/15 taxmann.com 250 (Punj. & Har.) |
| 8 | ITO(E) v. Dharamshila Cancer Foundation and Research Centre | [2010] 8 taxmann.com 285/[2011] 128 ITD 1 (Delhi) |
| 9 | St. Lawrence Educational Society v. CIT | [2011] 197 taxman 504/9 taxmann.com 233 (Delhi) |
| 10 | American Hotel and Lodging Association Educational Institute v. CBDT | [2008] 301 ITR 86/170 Taxman 306 (SC) |
6. The ld. D.R., on the other hand, has submitted that the assessee- society has been charging substantial fee from the students resulting into surplus profit and this fact is evident from the financial statements of the assessee-society. Therefore, the assessee-society is not engaged in charitable activities. Nothing is placed on record to show that at any point of time the assessee had imparted education at free of cost to the poor and needy. Since the assessee has been running the society for earning profit and also in the nature of commercial enterprise, the ld. Commissioner of Income-tax has rightly denied registration under section 12AA of the Act and approval for exemption under section 80G of the Act.
7. Having given a thoughtful consideration to the rival submissions and from a careful perusal of the order of the ld. Commissioner of Income- tax, we find that on the basis of financial statements furnished by the assessee-society, the ld. Commissioner of Income-tax has made out a case that in each financial year there was surplus fund/profit with the assessee-society. Besides, he has not brought anything on record to fortify his conclusion that the assessee-society is engaged in commercial activities by imparting education in various courses. Under these circumstances, the moot question arises before us is i.e. whether registration under section 12A of the Act can be denied when the assessee has substantial surplus/profit in a particular financial year. This aspect was examined at different points of time by various High Courts and also by various Benches of the Tribunal.
8. In the case of Red Rose School (supra), their Lordships of jurisdictional High Court has examined the scope of enquiry while granting registration under section 12A of the Act and held that while considering the application for registration under section 12AA of the Act, the ld. Commissioner of Income-tax was empowered only to see the genuineness of the trust or institution and its object and the scope of enquiry could not be stretched to the misuse of the funds or earning of profit. That will be taken care of by sections 11 and 12 of the Act while granting exemption under the said sections. The relevant observations of their Lordships are extracted hereunder:-
"Mere registration under section 12AA would not, in itself, be a ground, much less a conclusive proof, for excluding such income from the total income of the person/assessee or trust from income of the previous year. But the provisions of section 12A, which is under the heading (conditions as to registration of trusts etc.), disentitles any trust or institution from claiming any benefit of the provisions of section 11 and section 12, in relation to its income, unless, the person in receipt of the income, has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Commissioner before the 1-7-1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA. Rest of the provisions of section 12A. [Para 18] section 12A thus, prescribed conditions for registration of trusts and obligates the trust or the institution to seek registration under section 12AA, if such trust or institution intends to have the benefit of the provisions of section 11 and section 12. [Para 19] These provisions thus, make it clear that if the trust or the institution is not registered under section 12AA, it would not be able to claim any exemption or exclusion of its income from the total income of the previous year, even if such income is otherwise liable to be excluded under any of the clauses of section 11 or section 12. [Para 20] Thus, in a case where registration is refused, the trust or the institution would not be allowed to claim any such exemption or exclusion of its income from the total income of the previous year. [Para 21] The provision of section 12AA confers power on the CIT while considering the application for registration of a trust or institution made under clause (a) of section 12A to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution, and also to make such inquiries as he may deem necessary in this behalf and after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he shall pass an order in writing registering the trust or institution and if he is not satisfied, he would refuse the registration. [Para 23] Sub-section (3) inserted with effect from 1-10-2004, gave power of cancellation of registration to the Commissioner, if subsequently he finds and is satisfied that activities of such trust or institution are not genuine [Para 24] Power of cancellation of registration has been conferred with a view to ensure that if once a registration has been granted under section 12AA, the trust or the institution may not take liberty of misusing the provision and consequently go haywire in furthering the object of the trust or its activities do not remain genuine any further. [Para 25] On a reading of provisions of sub-clauses (a) and (b) of section 12AA, it makes clear that the Commissioner has to satisfy himself about the genuineness of the activities of the trust or institution and also about the objects of the trust or the institution. [Para 30] On being satisfied about the genuineness of the activities of the trust or the instruction and also about its objects, the Commissioner would either grant the certificate or would reject the prayer. In order to satisfy himself about the genuineness of the activities of the trust or the institution, he can call for such documents or information from the trust or the institution, as he thinks necessary and he is also empowered to make such enquiries as he may deem necessary in this behalf. [Para 31] The objects of the trust can be had from the bye-laws or the deed of trust, as the case may be and unless, of course, the objects of the trust apparently make out that they were not in consonance with the public policy or that they were not the objects of any charitable purpose, registration cannot be refused accordingly on this ground. [Para 32] In regard to the genuineness of the activities of the trust or the institution, whose objects do not run contrary to public policy and are, in fact, related to charitable purposes, the Commissioner is again empowered to make enquiries as he thinks fit. In case the activities are not genuine and they are not being carried out in accordance with the objects of the trust/society or the institution, of course, the registration can again be refused. But on mere presumptions and on surmises that income derived by the trust or the institution is being misused or that there is some apprehension that the same would not be used in the proper manner and for the purposes relating to any charitable purpose, rejection cannot be made. [Para 33] Section 12 AA, which lays down the procedure tor registration, does not speak anywhere that the Commissioner, while considering the application for registration, shall also see that the income derived by the trust or the institution is either not being spent for charitable purpose or such institution is earning profit. The language used in the section only requires that activities of the trust or the institution must be genuine, which accordingly would mean, they are in consonance with the objects of the trust/institution, and are not mere camouflage but are real, pure and sincere, nor against the proposed objects. The profit earning or misuse of the income derived by charitable institution from its charitable activities, may be a ground for refusing exemption only with respect to that part of the income but cannot be taken to be a synonym to the genuineness of the activities of the trust or the institution. [Para 34] A cumulative reading of the provisions leaves no manner of doubt that exemption under the aforesaid provisions can be claimed with respect to the income derived by the trust or the institution, which is being run for a charitable purpose and, therefore, while considering the registration under section 12AA, the scope of enquiry of the Commissioner, would be limited to the aforesaid extent. [Para 42] Since in the absence of such registration, the trust or the institution would not be entitled to claim any exemption of the income derived, though it is being run for charitable purposes, the registration has to be considered in the light of the specific provisions aforesaid and in the manner that it furthers the object of the scheme of registration and, of course, exemption of the entire income or the part of the income, as the case may be, of a charitable trust or institution has to be considered during assessment proceedings. [Para,43]. It is significant to mention that registration under section 12AA, does not necessarily entitle the assessee to get the income excluded from the income of the previous year for the purpose of determination of tax liability but it only entitles the assessee to claim such exemption, which otherwise could not be claimed in the absence of registration. The enquiry by the Commissioner shall remain restricted to the examination, as to whether the assessee, who has moved the application for registration under section 12A, is actually in the activities which are genuine. Genuineness of the activities of the trust or the institution has to be seen, keeping in mind the objects thereof, which necessarily means that the Commissioner shall satisfy himself about the fact that the activities are genuine and in consonance with the objects of the trust or the institution. In other words, if establishing and running a school is the object of the Society, as given in its bye-laws, it has to be satisfied that the Society has established the school, where education is being imparted as per rules and the factum of establishment and running school is a genuine activity. The enquiry regarding genuineness of the activities cannot be stretched beyond this. [Para 44] Sufficient safeguards having been given in sections 11, 12 and 13 for assessing the income which has not been applied to the purpose of the trust or the Institution, the intention of the law maker and the scope and purport of the provision is apparent while considering the question of registration. [Para 45] The Tribunal has rightly found that the objects show that none of the objects were against public policy and the main activity of the said Society was to provide education to children from Primary section to Degree level and to improve the mental, social and other development of the students. [Para 47] A provision has also been made with respect to under-privileged children providing for their protection and rehabilitation and also physical development through exercise and sports, besides providing library and reading room for the development of the students. The objects, therefore, cannot be said to be the objects, which run against public policy or do not fall within the category of activities, which are for charitable purposes. Education in itself is a charitable purpose and activities related thereto, which include, both physical and mental development and also instilling of a feeling of self-confidence through exercise, sports and extensive reading of good books, cannot, in any manner, be described as a non-charitable purpose or much less a non-educational activity. Education a means and includes not only knowledge of text books or prescribed educational courses but overall development of the child, which includes personality development and his physical fitness, apart from his capacity to analyse things and reach to logical conclusion on a given issue. Schools may, for the purpose, organize various cultural and educational entertainment programmes, sports meet, debates and seminars etc. and all such activities shall form part of education. [Para 48] Thus the objects of the Society were well in consonance with the scheme of the Act. [Para 49] The purchase of books worth Rs. 1 lakh in the name of NCK has been found to be shady, firstly because these books were of a very high standard, not meant for the students up to XII class and secondly they were purchased in the name of NCK, which is a separate Society. [Para 52] The Tribunal has rightly found that NCK is a Society, which has been formed for maintaining the library for the benefit of the students, being run by the assessee Society and if the books of high standard have been purchased, it cannot be presumed that no purchase was made nor it is the case of the revenue that books worth the amount were not purchased or the payments were not made. It has also not been disputed by the revenue that NCK, a Society which has been formed only for running the library for the institution, is not running the library. [Para 53] The plea of the revenue that some funds have been given to Nav Chetna Kendra, which casts doubt about the genuineness of the activities of the assessee institution, is also of no substance, as admittedly the object of the Nav Chetna Kendra Society, is not against any public policy and it has also been brought on record that the amount advanced by the assessee to the Nav Chetna Kendra was not for any other object, except that mentioned in the objects of that Society. There is nothing on record to show that money so advanced was for personal benefit of any office bearers of the assessee Society or any other person. It not being in dispute that NCK Society runs the library of the institution, an object related to charitable purpose, where the money has been advanced by the assessee society in furtherance of the said object, i.e. for running a library, which is again an educational purpose, it cannot be a ground for refusing registration of the assessee society. [Para 54] There is no finding that the aforesaid activities of the society were not genuine. The Tribunal has also considered that the balance sheet could not be reconciled as earlier the balance sheet was not audited and the audited balance sheets, which were filed before the CIT, did not show any discrepancy. [Paras 55 & 56] So far the non-deduction of provident fund from the salary paid to certain employees is concerned, that in itself again would not constitute a ground for rejection, as no such requirement stands spelt out from provisions of section 12AA nor it makes the activities of the institution as non-genuine. In case the institution has defaulted or defaults in the matter of deposing, contributions of the employees provident fund, the Act concerned shall take care of such default but in no case it can be a ground for refusal of registration. [Para 57] So far the charge of fee is concerned, it was on record that the fee was being charged, which was prevailing in other schools and tuition fee etc. ranged from Rs.225 to Rs.700, excluding conveyance allowance, which cannot be said to be arbitrary and excessive. [Para 59] The objects of the assessee Society undoubtedly are for charitable purposes and not against public policy. The genuineness of its activities is proved by the aforesaid facts, which conclusively show that the Society has established a school for the children in the year 1982 and thereafter it has opened its two more branches raising the standard of the school up to CBSE, Delhi Board and subsequently up to Class XII, with a large number of students and sufficient staff to whom salary is being paid. [Para 16] The activities aforesaid cannot be doubted nor can be said to be non-genuine within the meaning of the provisions of section 12AA. [Para 61] The scheme of section 12A and section 12AA does not allow any person/trust or institution to take benefit of the provisions of section 11, section 12, as the case may be, unless registration under section 12AA is obtained and that sub-clause (3) of section 12AA puts complete control over the activities of the trust or the institution and if it is found at any subsequent stage, that its activities are not being carried as per the objects or they do not remain genuine, action for cancellation of registration can be taken. [Para 62] For the reasons stated above, there is no illegality or infirmity in the order passed by the Tribunal. [Para 63]"
9. Similar views were expressed by Hon'ble Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust (supra). While dealing with the issue of withdrawal of exemption under section 10(22) of the Act, their Lordships have held that as long as an institution exists solely for educational purposes, it would qualify for grant of exemption under section 10(23C) (vi) of the Act. Merely because the profits have resulted from the activity of imparting education that would not change the character of the institution existing solely for educational purpose.
10. Again in the case of City Montessori School (supra), their Lordships of Hon'ble jurisdictional High Court have held that the word "education" used in section 2(15) of the Act means systematic instruction, schooling or training given to the young in preparation for the work of life. Similarly, extending financial assistance, scholarship, etc., to students for their educational purpose would fall within the connotation of "education".
11. In the case of Vanita Vishram Trust (supra), their Lordships of Hon'ble Bombay High Court have observed while dealing with the issue of rejection of approval under section 10(23C) of the Act that though the Memorandum of Association contains varied objects, so long as the record demonstrates that the assessee only conducts educational institutions, it must be regarded as existing solely for the purpose of education. No other activity is carried on. Secondly the fact that a surplus may incidentally arise from the activities of the trust after meeting the expenditure incurred for conducting educational activities would not disentitle the trust of the benefit of the provisions of section 10 (23C) of the Act.
12. An identical issue came up for consideration before the Lucknow Bench of the Appellate Tribunal in the case of Raebareily Polytechnic Association (supra) in which substantial surplus amount/profit was generated in two financial years i.e. 2004-05 and 2005-06 at Rs. 10,88,741 and Rs. 12,09,095 respectively. The registration under section 12A of the Act was denied by the ld. Commissioner of Income-tax after having observed that the assessee-society is being run on commercial line for the purpose of profit without there being any basis to hold so or there being any material or information on record that the appellant is not carrying out any charitable activity. While dealing with the issue, the Tribunal has discussed the scope of enquiry at the time of registration under section 12A of the Act and finally concluded that the presence of profit in the financial statement referred to by the ld. Commissioner of Income-tax is not a disqualification for the purpose of granting registration under section 12A of the Act. The Tribunal accordingly directed the ld. Commissioner of Income-tax to issue a formal certificate granting registration under section 12AA of the Act as requested for by the assessee. The relevant observations of the Tribunal mentioned in the Head Note are extracted hereunder:-
"Registration under section 12A. Scope of enquiry by CIT--A plain reading of section 12A goes to show that, at the time of granting registration what the CIT is required to examine is as to whether the objects of the applicant are of charitable nature or not, i.e., as to whether the objects are covered by the definition of charitable purposes as given in section 2(15) or not, and secondly that the activities being carried on or are to be carried on are genuine, i.e., are for achieving the objects, for which he can make enquiries, as are necessary. However, his discretion to make such enquiries as he may deem necessary is also limited to satisfy himself about the genuineness of the activities of the trust or institutional, as stands clarified by the phrase in this behalf appearing in the said clause itself. Presence of surplus as a result of such activities and whether exemption under section 11 can become available to such surplus, are the subject-matter of assessment, i.e., it is the AO who is required to examine at the time of making assessment such issues. The CIT, at the time of granting registration under section 12A, is not required to go into these aspects. So far as the issue relating to one having income or surplus is concerned, the provision itself envisages the availability of the income/surplus otherwise, the provisions of sections 11, 12 and 13 become redundant. The only exception is that such income/surplus must be applied, either in that very year or in subsequent year, for charitable purposes. Thus, presence of income in the case of an institution existing for charitable purposes (education included therein) is envisaged by the legislation and to grant exemption of such income from taxation, the legislature itself has provided an elaborate code as has been laid down in section 11 and rules made thereunder. In case presence of income in a particular year is treated as disqualification for the purposes of registration under section 12A, the provision of section 11 granting exemption of income shall be rendered as otiose, which is not the intention of law. Accordingly, presence of profit in the financial statements referred to by the CIT is not a disqualification for the purposes of granting registration under section 12A. The view to the contrary is liable to be rejected and, therefore, rejection of assessee's claim of registration on this ground was illegal and bad in law.
Reason which is based on fact of there being huge profit is absolutely irrelevant for the purposes of deciding the appellant's claim for registration under section 12A. A plain reading (sic-of) to section 12A goes to show that, at the time of granting registration what the CIT is required to examine is as to whether the objects of the applicant are of charitable nature or not, i.e., as to whether the objects are covered by the definition of charitable purposes as given in section 2(15) or not and secondly that the activities being carried on or are to be carried on are genuine, i.e., are for achieving the objects, for which he can make enquiries, as are necessary. However, his discretion to make such enquiries as he may deem necessary is also limited to satisfy himself about the genuineness of the activities of the trust or institution, as stands clarified by the phrase in this behalf appearing in the said clause itself. Presence of surplus as a result of such activities and whether exemption under section 11 can become available to such surplus, are the subject-matter of assessment, i.e., it is the AO who is required to examine at the time of making assessment such issues. The CIT at the time of granting registration under section 12A, is not required to go into these aspects, [Para 8.4] So far as the issue relating to one having income or surplus is concerned, the provision itself envisages the availability of the income/surplus otherwise, the provisions of sections 11,12 and 13 become redundant. The only exception is that such income/surplus must be applied, either in that very year or in subsequent year, for charitable purposes. [Para 8.7] Thus, presence of income in the case of an institution existing for charitable purposes (education included therein) is envisaged by the legislation and to grant exemption of such income from taxation, the legislature itself has provided an elaborate code as has been laid down in section 11 and rules made thereunder. [Para 8.8] If such an income can be treated as exempt under section 11, then it cannot be held to be disqualification for the purposes of registration under section 12A, which has been brought on the statute book simply for laying down a procedure for claiming such an exemption, and view expressed by the CIT and sought to be supported by the Departmental Representative, is wholly fallacious at the very face of it. In case presence of income in a particular year is treated as disqualification for the purposes of registration under section 12A, the provision of section 11 granting exemption of income shall be rendered as otiose, which is not the intention of law. Further, the ten words reading as not involving the carrying on of any activity for profit occurring at the end of section 2 (15) had been omitted by the Finance Act, 1983 with effect from 1-4-1984 and such an omission, continues to remain so omitted (as proviso below section 2(15) by the Finance Act, 2008 also does not cover education or activities connected with the education. This analysis itself goes to nullify the view taken by the CIT in the order under challenge. Accordingly, presence of profit in the financial statements referred to by the CIT is not a disqualification for the purposes of granting registration under section 12A. The view to the contrary is liable to be rejected and, therefore, rejection of assessee's claim of registration on this ground was illegal and bad in law. [Para 8.9] It is clear that there is a judicial consensus to the effect that an educational institution cannot be said to be existing for the purposes of profit if surplus earned by it from educational and other related activities has been utilised for the purposes of educational activities only. [Para 8.11] Although there was huge surplus (so to say) for the years ending on 31-3-2005 and 31-3-2006, the same has been applied in creating necessary infrastructure during the subsequent years ending on 31-3-2007 and 31-3-2008 as is clear that investment on building alone meant for educational purposes during subsequent years has been claimed to be as under: Financial year 2006-07 Rs. 2,02,46,637; Financial year 2007-08 Rs. 1,11,87,490. [Para 8.12] The CIT is directed to issue a formal certificate granting registration under section 12AA as requested for by the assessee subject, however, to that as a result of amendment made in clause (a) of subsection (1) of section 112A by the Finance Act, 2007 with effect from 1-6-2007, as a result of which the CIT,s power to condone the delay beyond the first day of the financial year in which the application has been made, has been taken away, the present assessee is entitled to registration only with effect from 1-4-2008 (application of registration is told to have been filed only on 26-12-2008). Consequently, the certificate to be issued by the CIT will have effect of registration only with effect from 1-4-2008. [Para 8.13]"
13. Similar view was again expressed by the Lucknow Bench of the Appellate Tribunal in the case of Dr. Virendra Swarup Educational Foundation(supra) while dealing with an issue of denial of approval under section 80G(5) of the Act and the Tribunal again reiterated that generation of surplus or profit on various educational activities cannot be a ground for denial of approval under section 80G(5) of the Act. The relevant observations of the Tribunal are extracted hereunder:-
"Recognition under section 80G(5) - Charitable purpose of education vis-a-vis profit motive - The assessee-society was carrying on the activity of running various educational institutions. Assessee had been granted registration under section 12A and was also granted exemption under section 80G from 1-4-2007 to 31-3-2009, for the assessment year 2010-11, CIT denied the approval under section 80G(5) to assessee for the reason that there was huge surplus available with assessee and a commercial institution. On the other hand, AO in the assessment orders for the assessment years 2005-06 to 2007-08 passed under section 143(3) clearly stated that the surplus was nil after considering the provisions of sections 11 and 11(2). It had categorically been stated in the said assessment orders that the income applied was more than 85 per cent of the gross receipts as per the provisions of the Act. As such the assessment was completed on nil income, therefore, this cannot be a ground to deny the exemption under section 80G that assessee was having surplus. Furthermore, the approval for exemption under section 80G(5) was granted to assessee upto 31-3-2009, however without bringing any material on record that there was a change in the facts for the year under consideration vis-a-vis the earlier years, the approval for the year under consideration under section 80G(5) had been denied. In the instant case nothing was brought on record that the education in the institutes run by assessee was on commercial lines. Therefore, merely on this basis that there was a surplus, which was utilized as per the provisions contained in section 11 approval under section 80G(5) cannot be denied. Considering the totality of the facts assessee was entitled to renewal of approval under section 80G.
The CIT denied the approval under section 80G(5) to the assessee for the reason that there was huge surplus available with the assessee. On the other hand, the AO in the assessment orders for the assessment years 2005-06 to 2007-08 passed under section 143(3) clearly stated that the surplus was nil after considering the provisions of section 11 and 11(2). It had categorically been stated in the said assessment orders that the income applied was more than 85 per cent of the gross receipts as per the provisions of the Act. As such the assessment was completed on nil income, therefore, this cannot be a ground to deny the exemption under section 80G that the assessee was having surplus. Furthermore, the approval for exemption under section 80G(5) was granted to the assessee up to 31-3-2009, however without bringing any material on record that there was a change in the facts for the year under consideration vis-a-vis the earlier years the approval for the year under consideration under section 80G(5) had been denied. If there is no material change in the facts in the year under consideration vis-a-vis the earlier years, then keeping in view the principle of consistency, the assessee was eligible for approval of registration under section 80G. In the instant case nothing is brought on record to substantiate that the assessee received any capitation fees from the students and donation from anyone or hefty amount was received from the students on account of fees/funds. Therefore, merely on this basis that the assessee was having surplus, the approval under section 80G cannot be denied particularly when the assessee was having similar surplus in the earlier years, i.e., prior to 31-3-2009 for which the approval for exemption under section 80G has been granted to the assessee. [Para 6] In the instant case nothing is brought on record that the education in the institutes run by the assessee was on commercial lines. Therefore, merely on this basis that there was a surplus, which was utilized as per the provisions contained in section 11 approval under section 80G(5) of the facts as discussed hereinabove, the assessee was entitled to renewal of approval under section 80G. In that view of the matter, the impugned order of the CIT is set aside and he is directed to grant the approval under section 80G (5). [Para 6.2]"
14. Hon'ble Punjab & Haryana High Court in the case of Gaur Brahmin Vidya Pracharini Sabha (supra) in Income Tax Appeal No.759 of 2010 vide its judgment dated 3.10.2011 has categorically held that mere making of profit cannot be a ground to deny registration once the objects of the society are of charitable nature and especially in the present case where five educational institutions are being run by the respondent which is registered on 29.9.1980 under the Societies Registration Act and solely because the respondent was charging fees and was getting surplus would not be the reason to deny registration in view of the judgment of this Court in the case of Pinegrove International Charitable Trust (supra). While dealing with the issue, their Lordships have also followed the judgments of Hon'ble Apex Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association[1980] 121 ITR 1 (SC) and Aditanar Educational Institution v. Addl. CIT[1997] 224 ITR 310/90 Taxman 528 (SC) and held that merely if an institution is making a profit it would not render itself ineligible for registration under the provisions of section 10(23C)(vi) of the Act. The said principle can also be fully applied to the facts and circumstances of the present case. Merely because there are some surplus with the respondent, this should not be a ground to deny the registration under section 80G(5)(vi) of the Act.
15. Similar views were expressed by the Delhi Bench of the Appellate Tribunal in the case of Dharamshila Cancer Foundation and Research Centre(supra).
16. Similar views were also expressed by Hon'ble Delhi High Court in the case of St. Lawrence Educational Society & Another (supra) in writ petition No.1254/2010 vide its order dated 4.2.2011 holding therein that the Chief Commissioner has erred in assuming that for exemption there should not be any surplus, otherwise the institution society exists for profit and not charity i.e. education in the present case.
17. Turning to the facts of the present case, nothing has been brought on record except surplus generated during financial years 2006-07 to 2008-09 that the assessee was ever engaged in the activities other than educational or the objects of the society. Since it has been repeatedly held by various High Courts and different Benches of the Tribunal that mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA of the Act and also grant of approval for exemption under section 80G of the Act, denial of registration under section 12A of the Act and refusal of grant of approval under section 80G(5) of the Act by the ld. Commissioner of Income-tax is not proper and we therefore set aside the orders of the ld. Commissioner of Income-tax and direct him to grant registration under section 12AA of the Act and approval under section 80G(5) of the Act to the assessee-society.
18. In the result, appeals of the assessee stand allowed
IT : Where assessee had sufficient funds in shape of share capital and share application money out of which it could advance loan to its sister concern, interest paid on borrowed capital would be allowed under section 36(1)(iii)
IT : Where Assessing Officer has accepted that expenditures are allowable, he cannot restrict same to extent of revenue earned by assessee in year under consideration
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[2013] 33 taxmann.com 49 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
Venus Records & Tapes (P.) Ltd.
v.
Additional Commissioner of Income-tax, Circle 11(1)*
I.P. BANSAL, JUDICIAL MEMBER
AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER
IT APPEAL NOS. 4756 & 4786 (MUM.) OF 2010
AND 3405 & 3609 (MUM.) OF 2011
[ASSESSMENT YEARS 2005-06 AND 2006-07]
AND 3405 & 3609 (MUM.) OF 2011
[ASSESSMENT YEARS 2005-06 AND 2006-07]
OCTOBER 19, 2012
I. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Interest free advances to sister concern] - Assessment years 2005-06 and 2006-07 - Assessee had borrowed funds and claimed deduction on interest paid on same - Assessing Officer disallowed claim of assessee on ground that interest bearing borrowed funds had not been utilized for purpose of business as assessee had given loan to its associate concerns out of said borrowed fund - Whether since assessee had its own funds in shape of share capital and share application money which was sufficient to meet amount advanced by it as interest free to its associate concerns, deduction claimed on interest paid on borrowed capital was to be allowed - Held, yes [Paras 6.1 & 6.3] [In favour of assessee]
II. Section 37(1) of the Income-tax Act, 1961, read with rule 9B of the Income-tax Rules, 1962 - Business expenditure - Allowability of [Quantum of expenditure] - Assessments years 2005-06 and 2006-07 - Assessee purchased video rights/other copy rights in ordinary course of its business - 100 per cent cost of such rights, if any part of such right is sold during year, are claimed as revenue expenditure as per accounting method consistently adopted by assessee - On other hand, if right purchased was not sold at all during year, such purchase cost was not claimed and was taken to closing stock of intangible assets - It was also not case of Assessing Officer that assessee deviated from method earlier adopted with respect to claiming such expenditure - Assessing Officer himself has observed that rule 9B was not applicable - Assessing Officer being of view that as assessee had not valued pendancy of rights as its closing stock, therefore, cost to extent it could be allowed should be restricted to sale receipts on partial sale of total bundle of rights - Therefore, Assessing Officer after reducing revenue received by assessee against those rights had added balance amount to income of assessee - Commissioner (Appeals) opined that without properly valuing opening as well as closing stock of assessee, Assessing Officer could not adopt such course of action - Portion of bundle of rights which were standing on 1st Day of relevant accounting year had not been taken into consideration, similarly closing stock had not been valued probably on account of difficulty to be faced in this respect - Whether consistent method adopted by assessee could not be disturbed without adequate reason - Held, yes - Whether, since expenditure was allowable, full amount of expenditure was to be allowed, and same could not be restricted to extent of revenue earned during year under consideration - Held, yes [Para 10] [In favour of assessee]
FACTS-I
| ■ | During the course of assessment proceedings the Assessing Officer noticed that assessee producer of films had claimed interest expenses to the tune of Rs. 4,59,54,419. Such interest pertained to the secured and unsecured loans taken by the assessee. | |
| ■ | The Assessing Officer disallowed the claim of the assessee on the ground that interest bearing borrowed funds had not been utilized for purpose of business. He noted that assessee had given loan to its associate concerns out of said borrowed fund and thus interest was disallowed under section 36(1)(iii) as well as section 40A(2). | |
| ■ | Before the Commissioner (Appeals) one of the contentions for allowability of the interest expenditure was that sufficient own funds were available with the assessee in the shape of shareholder capital, advance against share application money, creditors, interest free advances, advances from customers and distributors minus advance on which interest was paid were available to the tune of Rs. 51,24,17,994. It was submitted that out of these funds the loans and advances to directors, relatives, firms in which directors were interested amounting to Rs. 4,82,82,401 were advanced. It was further submitted that even after the said advance a sum of Rs. 46,41,35,593 was available which was excess than the amount advanced by the assessee being interest free. | |
| ■ | On these facts of the case the Commissioner (Appeals) found that loans and advances including interest free deposits in advances to the directors and to the firms in which directors were interest and/or to the relatives of the directors, total amount of Rs. 4,42,82,401 was given. | |
| ■ | Out of the said amount a sum of Rs. 1.55 crores pertains to the deposits given to various directors, related and the parties as advance against office premises which was utilized by the assessee for business purpose. | |
| ■ | The Commissioner (Appeals) had referred to all the details from where the figures had been arrived at and had finally concluded that interest attributable to non-business interest free advances/loans of Rs. 3,27,82,401 can only be disallowed. | |
| ■ | On cross appeal: |
HELD-I
| ■ | It is the case of the assessee that in the presence of sufficient own funds, Commissioner (Appeals) was not justified in sustaining the retained disallowance. It has been submitted by the assessee that free reserve available with it in respect of assessment years 2004-05, 2005-06 and 2006-07 was Rs. 53,78,44,099, Rs. 46,41,35,593 and Rs. 32,13,27,067 respectively against these amounts the interest free advances are only to the tune of Rs. 3,58,90,863, Rs. 4,82,82,401 and Rs. 5,17,61,226 for assessment years 2004-05, 2005-06 and 2006-07 respectively. These interest free advances, are in any case less than the share capital and share application money owned by the assessee. Here the arguments of assessee is that share capital and advance against share application money are to be considered as own funds and these are sufficient to meet the amount advanced by the assessee as interest free to its associate concerns. This contention is supported by the decision of Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) [Para 6.1] | |
| ■ | In the facts of the present case are considered in the light of the aforementioned decision of Jurisdictional High Court then for the years under consideration share capital and advance against share application money for both the years will be a sum of Rs. 9,25,64,440 which in any case exceeds much from the interest free advances made by the assessee which for these years are only a sum of Rs. 4.82 crore and Rs. 5.17 crore. According to the aforementioned decision of Bombay High Court share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds. | |
| ■ | Therefore, there is no merit in the disallowance to the extent it has been sustained by Commissioner (Appeals). The disallowance sustained by Commissioner (Appeals) for both the years is deleted and the assessee's ground in this respect of both the years is allowed. [Para 6.3] |
FACTS-II
| ■ | During the course of assessment proceedings the Assessing Officer noticed that cost of distribution/exhibition rights purchased by the assessee were amounting to Rs. 36,13,95,430 and as against that amortization was to the tune of Rs. 34,44,19,167. | |
| ■ | The assessee submitted the schedules of local sales division and export sale division, details of purchase and sale of video rights and other copy rights. It was explained that if right purchased during the year was sold fully or partly, the entire cost of purchase right was written off against the sale and no part of cost of acquisition was taken to the closing stock as long as any part of the bundle of rights is sold during the year. However, if the right purchased was not sold at all during the year, such purchase cost was not claimed and was taken to closing stock of intangible assets. It was submitted that assessee had been following such method consistently for many years and such method is also as per rule 9B. It was further explained that the depreciation was also claimed on the intangible assets: | |
| ■ | In view of the obove statement the Assessing Officer concluded that the assessee was claiming 100% of the cost of video rights/other copy rights even in a case where small portion of the total bundle of rights was sold and even when small portion of the total period of rights were sold. The Assessing Officer held that only proportionate expenditure could be claimed, but he found that it was difficult to quantify such amount; therefore, he held assessee should be allowed expenditure only to the extent the amount received by the assessee as sale during the year and balance cost of acquisition should be taken as cost of acquisition or inventory of closing stock. | |
| ■ | The Assessing Officer observed that the assessee was practicing a wrong practice which was not sanctioned by any method of accounting and thereby postponing its tax liability for few years. In this manner the Assessing Officer had restricted the cost of purchase of these rights to the sale proceeds received by the assessee during the year and addition of Rs. 1,30,73,926 was made. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the addition. | |
| ■ | On second appeal |
HELD-II
| ■ | The assessee has purchased video rights/other copy rights in the ordinary course of its business. 100 per cent cost of such rights, if any part of such right is sold during the year, are claimed as revenue expenditure as per accounting method consistently adopted by the assessee. The Commissioner (Appeals) has held that this has been done in accordance with the method adopted by the assessee in earlier years as well as in subsequent years. This finding of fact has not been disputed by the revenue by bringing any material on record to show that these findings of Commissioner (Appeals) are incorrect. It is also not the case of Assessing Officer that assessee deviated from the method earlier adopted by the assessee with respect to claiming such expenditure. The Assessing Officer himself has observed that rule 9B is not applicable. The Assessing Officer being of the view that as assessee has not valued the pendancy of rights as its closing stock, therefore, the cost to the extent it could be allowed should be restricted to the sale receipts on partial sale of total bundle of rights. Therefore, the Assessing Officer after reducing the revenue received by the assessee against those rights has added the balance amount to the income of the assessee. Against such action of Assessing Officer, Commissioner (Appeals) has observed that this action of Assessing Officer has disturbed the method of accounting adopted by the assessee in earlier years as well as subsequent years. | |
| ■ | The consistent method adopted by the assessee has been disturbed without adequate reasons and without giving any credit for adjustment to be carried out in respect of opening as well as closing stock of such rights. There is force in the observation of the Commissioner (Appeals) that without properly valuing the opening as well as closing stock of the assessee, the Assessing Officer could not adopt such course of action. The portion of bundle of rights which were standing on first day of the relevant accounting year has not been taken into consideration, similarly closing stock has not been valued probably on account of difficulty to be faced in this respect. If assessee was adopting the consistent method which has not been disturbed in past, without making a proper adjustment on account of impact of earlier years and without stating the reasons that as to why the method adopted by the assessee was wrong and contrary to the accounting principle, the expenditure could not be restricted to the amount of revenue earned by the assessee, as such action of the Assessing Officer is contrary to the aforementioned decision of Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). It has been held by the Supreme Court in the aforementioned case that the Assessing Officer has accepted that these are allowable expenditure but he has restricted the same to the extent of revenue earned by the assessee in the year under consideration. If the expenditure has been laid out or expended wholly and exclusively for the purpose of making or earning income, the allowability thereof is not dependent upon the making or earning income. [Para 10] | |
| ■ | In view of above discussion, there is no infirmity in the order passed by the Commissioner (Appeals) while holding that such addition could not be made by the Assessing Officer. [Para 10.1] |
CASE REVIEW
CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) (para 6.3) followed.
CASES REFERRED TO
CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) (para 4.2), Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219/[1981] 7 Taxman 188 (Cal.) (para 4.2), East India Pharmaceutical Work Ltd. v. CIT [1997] 224 ITR 627/91 Taxman 185 (SC) (para 4.2), Jagdamba Rollers Flour Mills Ltd. v. Asstt. CIT [2009] 117 ITD 260/(Nag.)(TM) (para 4.3), CIT v. Sridev Enterprises [1991] 192 ITR 165/59 Taxman 439 (Kar) (para 4.5), CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354/142 Taxman 681 (All.) (para 4.6), CIT v. V.I. Baby & Co.[2002] 254 ITR 248/123 Taxman 894 (Ker.) (para 5), K. Somasundaram & Bros. v. CIT [1999] 238 ITR 939 (Mad) (para 5), Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 5.1), IRB Infrastructure Ltd. v. ITO [2008] 304 ITR (AT) 76 (Mum.) (para 7.2) and CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 9).
Deepak Tralshawala and H.D. Pathak for the Appellant. Smt. Rupinder Brar for the Respondent.
ORDER
I.P. Bansal, Judicial Member - These are cross appeals and they are directed against two separate orders passed by Ld. CIT(A)3 dated 30/03/2010 and 17/02/2011 for assessment years 2005-06 and 2006-07 respectively. Both the appeals involve common issue. They were argued together, therefore, cross appeals for both the years are disposed of together by this consolidated order. The grounds of appeal raised by the assessee as well as revenue for the respective years are as under:
Assessee's Grounds for A.Y 2005-06:
| "1. | The Ld. CIT(A) seriously erred in law and on the facts and in the circumstances of the case in arbitrarily confirming the disallowance of interest expenditure attributable to non business, interest free advances/loans on a sum of Rs. 3,27,82,401/- u/s. 36(i)(ii) and u/s. 40A(2) of the Income Tax Act, 1961 for the reasons given in his/her order dated 30-3-2010. | |
| 2. | The Ld. CIT(A) had failed to appreciate the decision of the jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. which is squarely applicable in the case of the Appellant Company. | |
| 3. | The Appellant craves leave to add to, amend alter or vary the aforesaid grounds and/or adduce further evidence before at the time of hearing." |
Assessee's Grounds for A.Y 2006-07:
| "1. | The Ld. CIT(A) seriously erred in law and on the facts and in the circumstances of the case in arbitrarily confirming the disallowance of interest expenditure attributable to non business, interest free advances/loans on a sum of Rs. 3,44,61,226/- u/s. 36(i)(ii) and u/s. 40A(2) of the Income Tax Act, 1961 for the reasons given in his/her order dated 17-3-2011. | |
| 2. | The Ld. CIT(A) had failed to appreciate the decision of the jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. which is squarely applicable in the case of the Appellant Company. | |
| 3. | The Appellant craves leave to add to, amend alter or vary the aforesaid grounds and/or adduce further evidence before at the time of hearing." |
Revenue's Grounds for A.Y 2005-06:
| (1) | "On the facts and in the circumstances in the case and in law, the Ld. CIT(A) erred in partly allowing the claim of assessee on interest expenditure without appreciating the fact that the assessee company had utilized major portion of its interest bearing borrowings for non-business purposes. | |
| (2) | On the facts and in the circumstances in the case and in law, the Ld. CIT(A) erred in allowing the claim of assessee on amount of excess amortization on rights purchased ignoring the fact that the method of accounting followed by the assessee has no relevance to the issue under consideration. | |
| (3) | The appellant prays that the order of CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer restored. | |
| (4) | The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." |
Revenue's Grounds for A.Y 2000-07:
| "1. | On the facts and in the circumstances of the case and in law, the Ld. CIT(A) Mumbai has erred in partly allowing the claim of the assessee on interest expenditure without appreciating the fact that the assessee company had utilized major portion of its interest bearing borrowings for non business purposes. | |
| 2. | On the facts and in the circumstances of the case and in law, the Ld. CIT(A) Mumbai erred in allowing the claim of the assessee on account of excess amortization on rights purchased ignoring the fact that the method of accounting followed by the assessee has no relevance to the issue under consideration and the provisions of rule 9B are not attracted. | |
| 3. | The appellant prays that the order of CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer restored." |
2. As it can be seen from the grounds of appeal the main common issue involved in both the cross appeals is regarding disallowance of interest under section 36(1)(iii) and 40 A(2) of the Income Tax Act,1961 (the Act).
3. Facts for both the years are almost common and facts regarding A.Y 2005-06 are referred by both the parties. Therefore, for the sake of convenience the facts for assessment year 2005-06 will be referred and decision taken will be applicable to both the years.
3.1 During the course of assessment proceedings the AO noticed that assessee had claimed interest expenses to the tune of Rs. 4,59,54,419/-. Such interest pertained to the secured and unsecured loans taken by the assessee. The groups and pattern as on 31/3/2004 and 31/3/2005 as reflected in the balance sheet have been compiled by the AO in para 3.1 of the assessment order as under:
| Particulars | Schedule | As at 31.3.2005 (Rs.) | As at 31.3.2004 (Rs.) | ||||
| SOURCE OF FUNDS | |||||||
| Shareholders funds | A | 89,464,440 | 89,464,440 | ||||
| Share Capital | |||||||
| Advance against Share | 3,100,000 | 3,100,000 | |||||
| Application Money | |||||||
| Loan Funds | B | 86,521,931 | 140,148,484 | ||||
| Secured Loans | C | 91,959,521 | 76,796,024 | ||||
| Unsecured Loans | 271,045,892 | 309,508,948 | |||||
| Total | |||||||
| APPLICATION OF FUNDS | D | 273,101,036 | 276,272,686 | ||||
| Fixed Assets | 182,011,350 | 156,584,089 | |||||
| Gross Block | 91,089,686 | 119,688,597 | |||||
| Less : Depreciation | 2,093,573 | ||||||
| Net Block | E | 18,250 | 18,250 | ||||
| Capital Work in progress | |||||||
| Investments | |||||||
| Current Assets, Loans and advances. | F | 65,292,373 | 154,708,758 | ||||
| Inventories | G | 178,539,820 | 177,247,830 | ||||
| Debtors | H | 3,363,454 | 3,159,792 | ||||
| Cash & Bank Balances | I | 215,319,971 | 288,695,051 | ||||
| Loans & Advances | 462,515,618 | 623,811,431 | |||||
| Deferred Tax Assets | |||||||
| (refer note no.17 of schedule w) | 41,007,272 | 41,007,272 | |||||
| 503,522,890 | 664,818,703 | ||||||
| Less: | J | ||||||
| Current Liabilities & Provisions | 491,326,969 | 589,761,735 | |||||
| Net Current Assets | 12,195,921 | 75,056,968 | |||||
| K | |||||||
| Miscellaneous Expenditure | 336,948 | 421,185 | |||||
| Profit & Loss Account | 167,405,068 | 112,230,375 | |||||
| Total | 271,045,892 | 309,508,948 | |||||
3.2 From the above figures AO noted that the assessee seems to have given a loan of Rs. 21.53 crores as on 31/03/2005. The AO also noted that debtors were shown to the extent of Rs. 17.83 crores. Therefore, he asked the assessee to explain the same. It was submitted that the interest bearing borrowed funds of the assessee represented secured and unsecured loans of Rs. 17.84 crores as described in Schedule B & C. It was submitted that Schedule-B represents loans from Bank against hypothecation of stock, book debts and vehicles etc. which were used as working capital required and the said amount cannot be said to have been utilized for the purpose other than business. It was further submitted that loans from directors amounting to Rs. 50.59 lacs are interest free loans which are described in Schedule-C of the balance sheet. So far as it relates to loans of Rs. 8.69 crores as reflected in Schedule-C, the statement showing the date of receipt of such loans and utilization thereof was filed and it was submitted that the same has been used for the purpose of assessee's business.
3.3 Thus it was explained that the entire amount of Rs.17.48 crores was utilized for the purpose of business, therefore, no part of the interest claim at Rs. 4.59 crores should be disallowed. It was explained that assessee had produced and released two films namely "Halchal" and "Ailan" on 26/11/2004 and 14/01/2005 respectively. The total cost of production of those film was Rs. 13.24 crores. The said amount remained invested in those films till the date of release and even after release for the realization on account of overseas market carried the burden of interest. The assessee suffered heavy loss in the film "Ailan" which resulted in blockage of funds and more burden of interest. The assessee acquired distribution rights of Rs. 26.14 crores realizing from sale of distribution rights came after certain period of time and the funds were blocked. Thus it was pleaded that no part of the interest is disallowable. However, the AO did not accept the submission of the assessee as according to AO the assessee could not explain the allowability of the said interest despite opportunity having been given to the assessee. Referring to the inability to explain allowability and also certain specific audit observations the AO disallowed the entire interest of Rs. 4,59,54,419/- by applying the provisions of section 36(1)(iii) as well 40A(2) of the Act.
3.4 Before Ld. CIT(A) one of the contentions for allowability of the interest expenditure was that sufficient own funds were available with the assessee in the shape of shareholder capital, advance against share application money, creditors, interest free advances, advances from customers and distributors minus advance on which interest was paid were available to the tune of Rs. 51,24,17,994/-. It was submitted that out of these funds the loans and advances to directors, relatives, firms in which directors are interested amounting to Rs. 4,82,82,401/- were advanced. It was submitted that even after the said advance a sum of Rs. 46,41,35,593/- was available which was excess than the amount advanced by the assessee being interest free. On these facts of the case Ld. CIT(A) has found that loans and advances including interest free deposits in advances to the directors and to the firms in which directors were interest and/or to the relatives of the directors, total amount of Rs. 4,42,82,401/- was given. Out of the said amount a sum of Rs. 1.55 crores pertains to the deposits given to various directors and related parties as advance against office premises which was utilized by the assessee for business purpose. Ld. CIT(A) has referred to all the details from where the figures have been arrived at and has finally concluded that interest attributable to non-business interest free advances/loans of Rs. 3,27,82,401/- can only be disallowed. The assessee in its appeal is aggrieved by the decision of Ld. CIT(A) vide which it has been held that interest attributable to a sum of Rs. 3,27,82,401/- is disallowable and the revenue in its appeal is agitating the deletion made by Ld. CIT(A).
4. After narrating the facts, Ld. A.R referred to the details submitted before AO with regard to interest free advances made to associate concerns/directors. He submitted that the assessee had submitted all these details right from assessment year 1998-99 till assessment year 2006-07 and copies of these details are placed at pages 48 to 81 of the paper books. Referring to the aforementioned documents Ld. A.R submitted that the figures of these interest free loans and advances to the various sister concerns, directors and relatives etc. are as under:
| Assessment Year | Amount.(Rs.) |
| 1998-99 | 5,12,01,799/- |
| 1999-00 | 4,91,58,821/- |
| 2000-01 | 6,53,55,200…. |
| 2001-02 | 5,70,29,716…. |
| 2002-03 | 6,01,04,398/- |
| 2003-04 | 6,08,65,878/- |
| 2004-05 | 3,58,90,863/- |
| 2005-06 | 4,82,82,401/- |
| 2006-07 | 5,17,61,226/- |
4.1 He submitted that assessee has advanced these interest free amounts out of interest free funds available with the assessee. Ld. AR has enclosed copies of the assessment order from A.Y 2000-01 to assessment year 2004-05 and submitted that in none of these assessments which are framed under section 143(3) of the Act any disallowance has been made with regard to interest He submitted that funds available with the assessee almost remain same. Ld. AR has also prepared the chart regarding availability of interest free funds in respect of assessment year 2004-05, 2005-6 and 2006-07 which are reproduced below:
Statement showing the free reserves available as on 31/03/2004.
TOTAL FREE RESERVES:
| Particulars | Schedules | Amount (Rs.) | As at 31/3/2004 (Rs.) | ||||
| Share Capital | A | 89,464,440 | |||||
| Advance against Share application money | 3,100,000 | ||||||
| Creditors | J | 199,218,854 | |||||
| Advance from Customer/Distributors | J | 375,733,860 | |||||
| Less: Advances on which interest Paid | 95,300,000 | ||||||
| Interest free advances | 280,433,860 | 280,433,860 | |||||
| 572,217,154 | |||||||
| LESS: | |||||||
| LOANS AND ADVANCES TO DIRECTORS/RELATIVES/FIRMS IN WHICH DIRECTORS ARE | 34,373,055 | ||||||
| EXCESS FREE RESERVES AVAILABLE | 537,844,099 | ||||||
Statement Showing the free reserves available as on 31/3/2005:
TOTAL FREE RESERVES:
| Particulars | Schedules | Amount (Rs.) | As at 31/3/2005 (Rs.) | ||||
| Share Capital | A | 89,464,440 | |||||
| Advance against Share application money | 3,100,000 | ||||||
| Creditors | J | 168,493,335 | |||||
| Advance from Customer/Distributors | J | 309,860,219 | |||||
| Less: Advances on which interest Paid | 56,500,000 | ||||||
| Interest free advances | 253,360,219 | 253,360,219 | |||||
| 512,417,994 | |||||||
| LESS: | |||||||
| LOANS AND ADVANCES TO DIRECTORS/RELATIVES/FIRMS IN WHICH DIRECTORS ARE | 48,282,401 | ||||||
| EXCESS FREE RESERVES AVAILABLE | 464,135,593 | ||||||
Statement showing the free reserves available as on 31/3/2006:
TOTAL FREE RESERVES:
| Particulars | Schedules | Amount (Rs.) | As at 31/3/2006 (Rs.) | ||||
| Share Capital | A | 89,464,440 | |||||
| Advance against Share application money | 3,100,000 | ||||||
| Creditors | 117,092,318 | ||||||
| Advance from Customer/Distributors | J | 191,019,295 | |||||
| Less: Advances on which interest Paid | 27,587,760 | ||||||
| Interest free advances | 163,431,535 | 163,431,535 | |||||
| 373,088,293 | |||||||
| LESS: | |||||||
| LOANS AND ADVANCES TO DIRECTORS/RELATIVES/FIRMS IN WHICH DIRECTORS ARE | 51,761,226 | ||||||
| EXCESS FREE RESERVES AVAILABLE | 321,327,067 | ||||||
4.2 Referring to the aforementioned charts it was submitted by Ld. A.R that no disallowance is called for and the issue in the present case is squarely covered by the decision of Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd., [2009] 313 ITR 340/178 Taxman 135 (Bom). It was submitted that in that case interest of Rs. 4.40 cores was disallowed and it was the contention of the assessee before revenue authorities that it had interest free funds of Rs. 398.19 crores in the shape of share capital, reserve and surplus, depreciation reserve and, therefore, no disallowance would be made and this contention of the assessee was accepted by the Ld. CIT(A) and the order of Ld. CIT(A) was confirmed by the Tribunal on the ground that assessee had interest free funds in the shape of share capital reserves and surplus and depreciation reserve amounting to Rs. 398.19 cores. In the said case revenue had argued before High Court that shareholders funds were utilized for the purpose of fixed assets and this argument of the revenue was rejected and it was held that in view of the decision of Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd., v. CIT [1982] 134 ITR 219/[1981] 7 Taxman 188 and also in view of the decision of Hon'ble Supreme Court in the case of East India Pharmaceutical Work Ltd. v. CIT[1997] 224 ITR 627/91 Taxman 185 that if there are funds available, both interest free and overdraft/or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company, if interest free funds were sufficient to meet the investment. Finding that the presumption was established in that case on account of being available a sum of Rs. 398.19 lacs, therefore, CIT as well as Tribunal were right in deleting the disallowance. He submitted that the figure in the above charts will clearly show that excess free reserves available with the assessee were to the tune of Rs. 46,41,35,593/- and Rs. 32,13,27,067/- for assessment years 2005-06 and 2006-07 respectively. Therefore, Ld. A.R submitted that no disallowance, as sustained by Ld. CIT(A) is called.
4.3 Ld. A.R further submitted that though passing reference has been made by the AO to the provisions of section 40A(2) but it has not been specifically mentioned that how the said provisions are applicable to the case of the assessee. He submitted that in the absence of any specific allegation, section 40A(2) could not be applied and it has not been demonstrated that how the said section is applicable. For this purpose Ld. A.R placed reliance on the decision of Third Member case in the case of Jagdamba Rollers Flour Mills Ltd. v. Asstt. CIT [2009] 117 ITD 260 (Nag.), wherein it has been held that in absence of enquiry by the AO, to ascertain that whether the payment of remuneration by the assessee company to the director in the relevant year was excessive or unreasonable having regard to the fair market value of the services, no disallowance could be made under section 40A(2) on the basis that the remuneration paid in the relevant year was substantially more than that what was paid in the earlier years.
4.4 So far as it relates to the observation of the AO regarding note in audit report Ld. A.R referred to the notes on accounts attached to the audit report under the head "F Investment" following note was given:
"A.Y. 2005-06:
(a) Loans and Advances include certain interest free deposits and advances given to directors/relatives/firms in which directors are interested, towards use of their property by the company free of rent as well as the said properties are also Mortgaged to the bank towards loan facilities provided to the Company. The amount outstanding as on 31st March, 2005 is Rs. 48,282,401 (Previous year Rs. 4,39,30,518). The Maximum balance due from them was Rs. 49,009,941 (previous year Rs. 70,105,952)"
"A.Y. 2006-07:
(a) Loans and Advances include certain interest free deposits and advances given to directors/relatives/firms in which directors are interested, towards use of their property by the company free of rent as well as the said properties are also Mortgaged to the bank towards loan facilities provided to the Company. The amount outstanding as on 31st March, 2006 is Rs. 51,761,226 [Previous year Rs. 4,82,82,401]. The Maximum balance due from them was Rs. 51,807,309 [previous year Rs. 4,90,09,941/-]"
Ld. A.R submitted that working of the amount mentioned in these notes has already been submitted from A.Y 1998-99 to 2006-07 at pages 48 to 51 of the paper book.
4.5 Concluding the arguments it was submitted by Ld. A.R that in view of consistent stand taken by the revenue in respect of A.Y 1998-99 till 2003-04, no disallowance should have been made. For this contention Ld. A.R placed reliance on the decision of Hon'ble Karnataka High Court in the case ofCIT v. Sridev Enterprises [1991] 192 ITR 165/59 Taxman 439, wherein it has been held that in case where in the previous assessment years assessee's claim regarding interest on borrowed capital was allowed, it will not be equitable for the revenue to take different stand in respect of the amounts which were the subject matter of previous years assessment, consistency and definiteness of approach being necessary. Consequently, in view of aforementioned decision of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) no disallowance should have been made as section 40A(2) was not applicable.
4.6 Ld. A.R also relied upon the decision of Allahabad High Court in the case of CIT v. Radico Khaitan Ltd., [2005] 274 ITR 354/142 Taxman 681, wherein it has been held that in a case where assessee has sufficient funds in the capital reserve and surplus other than the borrowed funds, the assessee is entitled to full allowance of interest on borrowed money.
5. On the other hand, relying upon the assessment order it was submitted by Ld. DR that assessee had utilized interest bearing borrowed funds for advancing the same to is associate concerns and thus interest was rightly disallowed by the AO as the interest bearing borrowed funds were not utilized for the purpose of business of the assessee. He submitted that whatever funds available with the assessee were already utilized by it in its business and they were not available with the assessee for advancing the same to its sister concern. Thus, interest bearing borrowed funds cannot be said to have been utilized for the purpose of business of the assessee. Ld. DR referred to the decision of Hon'ble Kerala High Court in the case of CIT v. V.I. Baby & Co.[2002] 254 ITR 248/123 Taxman 894 to contend that proportionate interest paid by the assessee firm to the bank in respect of interest free amounts advanced by the assessee to its partners, their relatives and sister concerns was rightly disallowed. Ld. DR also referred to the decision of Hon'ble Madras High Court in the case of K. Somasundaram & Bro. v. CIT [1999] 238 ITR 939 to content that assessee is not entitled to deduction under section 36(1)(iii) in respect of interest paid on borrowings to the extent of the amount given as interest free loan to relatives of the partners even if the amount was initially used in business and was lent only at subsequent stage.
5.1 Referring to the argument of Ld. AR regarding consistency, Ld. DR submitted that in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC), it has been held that principle of res-judicata does not apply to I.T proceedings, therefore, the case of the assessee cannot be accepted on the basis of consistency. Thus it was submitted by Ld. DR that appeal of the assessee on this ground should be dismissed.
5.2 Ld. D.R further pleaded that Ld. CIT(A) has wrongly deleted the entire interest disallowed by the AO and has wrongly restricted the same pertaining to interest only on an amount of Rs. 3,27,82,401/- advanced by the assessee to its related persons as interest free advances. Thus it was pleaded by Ld. DR that grounds of appeal raised by the revenue should be allowed and grounds raised by the assessee should be dismissed.
5.3 In the rejoinder Ld. AR submitted that the decision relied upon by Ld. DR will not be applicable to the facts of the present case as in those decisions it has not been shown that the assessee was having own funds in the shape of share capital etc. He submitted that in the present case assessee had demonstrated that it had sufficient funds. He further submitted that though it has been held by Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) that principle of res-judicata is not applicable to income tax proceedings but at the same time it has been held that what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as the fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. So far as it relates to the arguments of Ld. DR that interest is wrongly deleted by Ld. CIT(A), Ld. AR submitted that each and every details was filed before AO as well as Ld. CIT(A) from which it has been ascertained that what is advanced by the assessee to its associated persons as interest free advance was only a sum of Rs. 3,27,82,401/-. He submitted that, therefore, the order of Ld. CIT(A) identifying the said amount as interest free advances cannot be said to be wrong as it is a finding of fact recorded by him. Thus Ld. AR submitted that departmental ground, in respect of disallowance deleted by Ld. CIT(A) should be dismissed and assessee's ground in view of the arguments submitted above, be allowed.
6. We have carefully considered the rival submissions in the light of the material placed before us. The AO has disallowed the total interest paid by the assessee amounting to Rs. 4,59,54,149/- without appreciating the facts of the case of the assessee. Interest free advances to associate concerns from year to year are stated in para-4 of this order. For A.Y 2005-06 these are only to the extent of Rs. 4,82,82,401/- and for assessment year 2006-07 these are Rs. 5,17,61,226/-. Therefore, in any case the disallowance made by the AO could not be to the extent it has been disallowed by the AO for these years. The facts are properly appreciated by Ld. CIT(A) and he has recorded a finding that what was given by the assessee to its associate concern was a total sum of Rs. 4,42,82,401/- for assessment year 2005-06. Out of the said amount a sum of Rs. 1.55 crore pertained to the deposits given to various directors and related parties as advance against office premises which was utilized by the assessee for the purpose of business. Thus Ld. CIT(A) has arrived at a finding that only a sum of Rs. 3,27,82,401/- can be said to have been utilized by the assessee out of interest bearing borrowed funds which can be said to be for the purpose of others business. It is in this manner Ld. CIT(A) has sustained disallowance only to the extent of interest pertaining to interest free loans and advances of Rs. 3,27,82,401/-. Therefore, the issue raised by the revenue in this regard i.e. regarding deletion made by Ld. CIT(A) has no merit and department's ground in this respect for both the years are deserve to dismissed and are dismissed.
6.1 Now the question remains only with respect to sustained disallowance against which the assessee is aggrieved . It is the case of the assessee that in the presence of sufficient own funds, Ld. CIT(A) was not justified in sustaining the retained disallowance. It has been submitted by the assessee that free reserve available with it in respect of assessment year 2004-05, 2005-06 and 2006-07 was under:
| Assessment Year | Amount.(Rs) |
| 2004-05 | 53,78,44,099/- |
| 2005-06 | 46,41,35,593/- |
| 2006-07 | 32,13,27,067/- |
Against these amounts the interest free advances are only to the tune of Rs. 3,58,90,863/-, Rs. 4,82,82,401/- and Rs. 5,17,61,226/- for assessment year 2004-05, 2005-06 and 2006-07 respectively. These interest free advances, are in any case less than the share capital and share application money owned by the assessee. Here the arguments of Ld. A.R is that share capital and advance against share application money are to be considered as own funds and these are sufficient to meet the amount advanced by the assessee as interest free to its associate concerns. This contention is supported by the decision of Hon'ble Bombay High Court in the case of Reliance Utilities Power & Power Ltd. (supra). In that case the assessee had invested Rs. 389.60 crores in Reliance Gas Ltd. and Rs. 1.01 crore in Reliance Strategic Investment Ltd. The AO recorded a finding that the sum of Rs. 213 crore was invested out of assessee's own funds and Rs. 147 crore were invested out of borrowed funds and calculating interest @12% per annum for three months from Jan.2000 to March 2000 and a sum of Rs. 4,40,00,000/- was disallowed. One of the contentions, inter alia, for contesting the disallowance was that assessee was having total interest free funds of Rs. 398.19 crore at its disposal for making investment. The said sum was stated as below:
| S. No. | Particulars | Amount (Rs. In crore) |
| 1. | Share Capital | 180.00 |
| 2. | Reserve Surpluses | 120.80 |
| 3. | Depreciation reserves | 95.39 |
| Total Interest free funds | 398.19 |
6.2 Keeping in view the aforementioned funds available with the assessee it was held by Ld. CIT(A) that assessee was having enough interest free funds at its disposal and he directed the AO to delete the disallowance. The revenue contested the said order of CIT(A) before the Tribunal and it was urged that shareholder funds of Rs.172.10 crore were utilized for the purchase of fixed assets shown in Schedule-D in the terms of balance sheet as on 31/3/1999, therefore, the assessee did not have reserve or own funds for making the investment in the sister concerns and thus the share capital cannot be said to have been available with the assessee for advancing the same to the sister concerns. Thus the plea of the revenue was rejected and order of Ld. CIT(A) upheld. The revenue again preferred an appeal before Hon'ble High Court and Hon'ble High Court has upheld the order of the Tribunal with the following observation:
"7. At the hearing of this appeal on behalf of the appellant learned counsel submits that the order of the Tribunal is perverse in as much as the Tribunal ignored the fact that the respondent assessee had no interest-free funds out its own. It is pointed out that insofar as the shareholders funds are concerned, in terms of the balance sheet as on 31st March, 1999 they were utilised for the purpose of purchase of fixed assets shown in Sch. D.
On the other hand on behalf of the assessee the learned counsel submits that the assessee company had generated sufficient interest-free fund of its own which it utilized for its business, including investment in sister concerns and consequently no fault could be found with the order of the CIT(A) and/or the Tribunal. It was further submitted that once monies are available it is for the assessee to take a business decision for application of funds. The submission is that where there are both borrowed funds as also interest-free funds, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT[1981] 23 CTR (Cal) 204 : [1982] 134 ITR 219 (Cal). It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 139 CTR (SC) 372 : [1997] 224 ITR 627 (SC).
8. We have heard learned counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31St March, 1999, is fallacious. Firstly, we are not concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the P&L a/c and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also.
9. Apart from that we have noted earlier that both in the order of the CIT(A) as also the Tribunal, a clear finding is recorded that the assessee had interest-free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by CIT(A) and Tribunal as to availability of interest-free funds really cannot be faulted.
10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal.
11. Considering the above, in our opinion, there is no merit in this appeal which is accordingly dismissed."
6.3 If the facts of the present case are considered in the light of the aforementioned decision of Hon'ble Jurisdictional High Court then for the years under consideration share capital and advance against share application money for both the years will be a sum of Rs. 9,25,64,440/- which in any case exceeds much from the interest free advances made by the assessee which for these years are only a sum of Rs. 4.82 crore and Rs. 5.17 crore. According to the aforementioned decision of Hon'ble Bombay High Court share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds. So far as it relates to decision relied upon by Ld. D.R, it can be mentioned that when decision of Jurisdictional High Court is available and that decision is subsisting, then reference cannot be made to the decision of other High Court to decide the issue. Therefore, we find no merit in the disallowance to the extent it has been sustained by Ld. CIT(A). The disallowance sustained by Ld. CIT(A) for both the years is deleted and the assessee's ground in this respect of both the years is allowed.
6.4 So far as it relates to applicability of section 40A(2), it is found that AO has made only a passing reference of section 40A(2). It has not been described as to how section 40A(2) was applicable. Ld. D.R also could not state that how section 40A(2) was applicable to make the impugned disallowance. Therefore, after considering the order passed by authorities below and the arguments of both the parties, we hold that disallowance of interest cannot be sustained even on the application of section 40A(2) of the Act.
6.5 In view of above discussion appeals of the assessee for both the years are allowed and Ground No.1 of both the appeals filed by the revenue are dismissed.
7. The other ground taken by the revenue in its appeal for both the year is deletion of addition on account of excess amortization of rights distribution/ exhibition rights purchased by the assessee. As mentioned earlier, the facts relating to both the years are similar except difference in figures. The facts for assessment year 2005-06 will be stated and decision taken thereon will be applicable to the other year.
7.1 During the course of assessment proceedings the AO noticed that cost of distribution/exhibition rights purchased by the assessee were amounting to Rs. 36,13,95,430/- and as against that amortization was to the tune of Rs. 34,44,19,167/-. The assessee was required to explain the method adopted by it. The assessee submitted the schedules of local sales division and export sale division, details of purchase and sale of video rights and other copy rights. The AO also recorded statements of director of the assessee company, who explained that if right purchased during the year is sold fully or partly, the entire cost of purchase right is written off against the sale and no part of cost of acquisition is taken to the closing stock as long as any part of the bundle of rights is sold during the year. However, if the right purchased was not sold at all during the year, such purchase cost was not claimed and was taken to closing stock of intangible assets. It was submitted that assessee has been following such method consistently for many years and such method is also as per rule 9B of the Income tax Rules, 1962. It was further explained that the depreciation was also claimed on the intangible assets. The AO being of the view that assessee was claiming 100% of the cost of video rights/other copy rights even in a case where small portion of the total bundle of rights was sold and even when small portion of the total period of rights were sold. The AO being of the view that only proportionate expenditure can be claimed, but he found that it is difficult to quantify such amount, therefore, he held assessee should be allowed expenditure only to the extent the amount received by the assessee as sale during the year and balance cost of acquisition should be taken as cost of acquisition or inventory of closing stock. The AO observed that by adopting such method the assessee is practicing a wrong practice which is not sanctioned by any method of accounting and thereby postponing its tax liability for few years. In this manner the AO has restricted the cost of purchase of these rights to the sale proceeds received by the assessee during the year and addition of Rs. 1,30,73,926/- was made. The addition was contested in the appeal filed before Ld. CIT(A).
7.2 Before Ld. CIT(A) it was submitted that AO himself has ruled out the applicability of Rule 9B and thus the observation of AO that proportionate expenditure should only be allowed is contradictory to the view adopted by him. It was submitted that the uncertainty of future realization of these rights during the relevant assessment years does not given discretion to the management to allocate any value of these underlining rights, therefore, assessee charged the entire cost of the purchase to the revenue account and in a case where rights are not exploited at all the acquisition cost is treated as value of the closing stock. It was submitted that this practice is being followed by the assessee for last so many years and assessment have also been completed under section 143(3) of the Act without making any addition on this ground. It was also submitted that no defect whatsoever has been found by the AO in the books of accounts maintained by the assessee, therefore, also disallowance was not sustainable. Reference was also made to the decision of ITAT in the case of IRB Infrastructure Ltd. v. ITO [2008] 304 ITR (AT) 76 (Mum.) to contend that the expenditure are allowable even in a case where receipts are in more than one year.
7.3 Considering all the aforementioned submissions Ld. CIT(A) has observed that AO had made disallowance without verifying the practice adopted by the assessee in earlier years as well as in subsequent years. Income has been declared by the assessee by adopting the consistent method. Therefore, method of accounting of stock purchased and sold was carried forward from earlier year to subsequent years cannot be in isolation. The AO did not take into consideration the effect on brought forward cost based on his arguments that his opening stock of such rights was brought forward from earlier years and he has also not considered the issue of allowability to carry forward such un-recouped costs to the later years which will have an impact on the income of the assessee for earlier years as well as subsequent years. He further observed that in trading account, the disturbing of opening and closing stock figures in one year are not independent of earlier and later assessment years and the impact of income of those years. The effect of change of opening and closing stock in one year would theoretically be revenue neutral as it would effect the revenues and consequently the income of earlier or later assessment years also. Taking the example he observed that the unrealized amount of rights to be taken as closing stock in assessment year 2005-06 would have to be taken as opening stock in the succeeding assessment year i.e. A.Y 2006-07. It would, therefore, go towards reducing the income already declared in that year and tax liability on that account be reduced. Consequently, the effect would be revenue neutral. He also observed that AO has not given any reason for changing the consistent method adopted by the assessee and it has not been established that the assessee by adopting such method has avoided or shifted his tax liability indefinitely or permanently. Relying upon the aforementioned decision of ITAT in the case of IRB Infrastructure Ltd. (supra) Ld. CIT(A) has deleted the addition. The revenue is aggrieved, hence, has filed the aforementioned grounds for both the years.
8. After narrating the facts, Ld. DR submitted that AO was right in restricting the expenses to the extent of revenue derived by the assessee on these rights and Ld. CIT(A) has wrongly allowed the entire claim of the assessee. Relying upon assessment order Ld. DR submitted that this ground of the revenue should be allowed and order of Ld. CIT(A) on this issue should be set aside.
9. On the other hand, Ld. AR relied upon the observation of Ld. CIT(A), which has been discussed in details in the above part of this order. In addition there to Ld. AR referred to the decision of Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 to content that where the expenditure has been laid out and expended wholly and exclusively for the purpose of making or earning such income, deduction of such expenditure is not dependent upon making or earning income. Non-earning income does not disentitle an assessee to claim those expenditure. Thus he pleaded that this ground of the revenue for both the years should be dismissed.
10. We have considered the rival submissions in the light of the material placed before us. The assessee has purchased video rights/other copy rights in the ordinary course of its business. 100% cost of such rights, if any part of such right is sold during the year, are claimed as revenue expenditure as per accounting method consistently adopted by the assessee. Ld. CIT(A) has held that this has been done in accordance with the method adopted by the assessee in earlier years as well as in subsequent years. This finding of fact has not been disputed by the revenue by bringing any material on record to show that these findings of Ld. CIT(A) are incorrect. It is also not the case of AO that assessee deviated from the method earlier adopted by the assessee with respect to claiming such expenditure. The AO himself has observed that Rule 9B is not applicable. The AO being of the view that as assessee has not valued the pendancy of rights as its closing stock, therefore, the cost to the extent it could be allowed should be restricted to the sale receipts on partial sale of total bundle of rights. Therefore, the AO after reducing the revenue received by the assessee against those rights has added the balance amount to the income of the assessee. Against such action of AO, Ld. CIT(A) has observed that this action of AO has disturbed the method of accounting adopted by the assessee in earlier years as well as subsequent years. The consistent method adopted by the assessee has been disturbed without adequate reasons and without giving any credit for adjustment to be carried out in respect of opening as well as closing stock of such rights. We find force in the observation of Ld. CIT(A) that without properly valuing the opening as well as closing stock of the assessee, the AO could not adopt such course of action. The portion of bundle of rights which were standing on 1st Day of the relevant accounting year has not been taken into consideration, similarly closing stock has not been valued probably on account of difficulty to be faced in this respect. If assessee was adopting the consistent method which has not been disturbed in past, without making a proper adjustment on account of impact of earlier years and without stating the reasons that as to why the method adopted by the assessee was wrong and contrary to the accounting principle, the expenditure could not be restricted to the amount of revenue earned by the assessee, as such action of the AO is contrary to the aforementioned decision of Hon'ble Supreme Court in the case of Rajendra Prasad Moody (supra). The AO has accepted that these are allowable expenditure but he has restricted the same to the extent of revenue earned by the assessee in the year under consideration. It has been held by Hon'ble Supreme Court in the aforementioned case that if the expenditure has been laid out or expended wholly and exclusively for the purpose of making or earning income, the allowability thereof is not dependent upon the making or earning income.
10.1 In view of above discussion, we find no infirmity in the order passed by Ld. CIT(A) while holding that such addition could not be made by the AO. This ground of the revenue for both the years is dismissed.
11. In the result, the appeals filed by the assessee are allowed and appeals filed by the revenue are dismissed.
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Regards,
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
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