Income Tax Appellate Tribunal - Patna
Abhay Kumar Shroff vs Income-Tax Officer on 20 June, 1997
Equivalent citations: [1997]63ITD144(PAT), [1999]237ITR75(PAT)
ORDER
Shri V.K. Sinha, A.M.
1. These two appeals involving a common issue are being disposed of by a common order for the sake of convenience. Both the sides agreed that essential facts were similar in the two cases. We will, therefore, discuss facts in the case of Shri Abhay Kumar Shroff (I.T.A. No. 95/Pat./1993) and the decision will be equally applicable in the case of Late Sri Hanuman Prasad Shroff through legal heirs.
2. The assessee, Shri Abhay Kumar Shroff is an individual and a member of the HUF called 'Hanuman Prasad Abhay Kumar'. The HUF purchased a property called Diamond Plaza for Rs. 7,60,000 and leased it to the assessee on 5-3-1987 on a rent of Rs. 2,185 per month for five years and Rs. 2,665 for the next five years. The assessee, thereafter, sub- let the premises to the Union Bank of India or rent on Rs. 2,28,060 per year. According to the assessment order, it was let out on 20-4- 1987 but according to the ld. counsel for the assessee, before us, the date should be 10-4-1987. However, the difference in dates is not material and what is significant is that it is after the lease deed dated 5-3-1987 between the assessee and the HUF.
3. Further, the Union Bank of India advanced a loan of Rs. 11,40,000 to the assessee on the same date of 10-4-1987. The date is being taken as submitted by the ld. counsel for the assessee before us and which is supported by the bank account copy on interest rate of 15%. The interest paid during the year was Rs. 1,54,463. Out of this rent, the assessee deposited Rs. 7,75,000 with the HUF landlord, which was interest-free.
4. In the assessment order, income from rent, received from the Union Bank of India, has been assessed under the head "Other sources". The assessee claimed various expenses against the rental income which, inter alia, included interest payment of Rs. 1,54,463 to the Union Bank of India. The Assessing Officer issued a letter to show cause why interest had not been charged by the assessee on the deposit of Rs. 7,75,000 with the HUF landlord and why interest payment on loan to the same extent to the Union Bank of India should not be disallowed. He noticed that there was no mention of such interest-free deposit in the lease-deed between the assessee and the HUF landlord dated 5-3-1987. The assessee stated that there was no reason why the HUF landlord should let out the premises to the assessee at such low rent. The consideration for granting the lease at such low rate was that the assessee would make a deposit of a sum of Rs. 7,75,000 to them free of interest, during the tenure of the lease. It was due to that consideration only that the rent was reduced, to such a low amount. The Assessing Officer had pointed out that there was no mention of such a deposit in the lease deed dated 8-3-1987. The assessee explained that he was advised to bring the deposit out of the lease deed as it would have attracted huge stamp duty. He, therefore, decided to give this amount by account payee cheque and not mention the fact in the Deed of Lease. The Assessing Officer did not find the explanation to be satisfactory and held that Rs. 7,75,000 had been diverted by the assessee for "non-business purposes". Thereafter, he disallowed interest payment to Union Bank of India @ 15% on Rs. 7,75,000 which amounted to Rs. 1,16,250. The disallowance was made under section 57(iii) of the Act.'
5. The same submissions were made before the CIT(A) and it was added that low lease rent was being given also to avoid municipal taxes. The CIT(A) did not find merit in the contention. He observed that arrangements to avoid legal requirements are colourable devices and at most, the assessee had created a voluntary charge in favour of the HUF landlord. It was only a device to divert income. The rent from Union Bank Of India was independent and had nothing to do with the lease arrangement. He, therefore, confirmed the disallowance of Rs. 1,16,250. The assessee is now in appeal before us.
6. The ld. counsel for the assessee invited our attention to the assessment order where the rent had been assessed under the head "Other sources". He reiterated the same arguments and emphasised that the interest-free deposit had been made by the assessee only because of the low rent. He argued that it was not necessary to have written agreement for the deposit and relied on the decision of the Patna High Court in the case of Jamshedpur Motor Accessories Stores v. CIT [1974] 95 ITR 664. Reliance was also placed for this proposition on a decision of the Tribunal, Ahmedabad 'B' Bench in case of ITO v. Amora Chemicals (P.) Ltd. [1987] 29 TTJ (Ahd.) 559 (TM).
7. The ld. counsel also submitted that the interest-free deposit was an indicator that the rent is the low and for this proposition relied on a decision of the Calcutta High Court in CIT v. Satya Co. Ltd. [1994] 75 Taxman 193.
8. It was further submitted that in the Wealth-tax Act, Schedule III had been introduced w.e.f. 1-4-1989 and rule 5 was concerned with determination of gross maintainable rent. There was a provision for computation of presumptive rate of interest on interest-free deposit @ 15% as an integral part of rent to be added to the ostensible rent. Thus, he submitted that such transactions were recognised by the Courts as well as the Wealth-tax Rules and, therefore, should be accepted in this case also.
9. He submitted next that the immediate purpose of payment of interest to Union Bank of India was earning of income and, therefore, deduction for the interest should be allowed under section 57(iii) of the Act as held in CIT v. Maharani Shri Kesarkunwerba Saheb of Morvi [1958] 33 ITR 349 (Bom.) and the decision of the Calcutta High Court in CIT v. Model Mfg. Co. (P.) Ltd. [1980] 122 ITR 767.
10. The ld. D. R. on the other hand, supported the order of the CIT(A). He emphasised that there was no mention in the Lease Deed dated 5-3-1987 that an interest-free deposit of Rs. 7,75,000 would be made by the assessee with the landlord HUF and the two were unconnected matters. Further, he submitted the assessee's admission that the mention was not made in the lease deed to save stamp duty and the assessee's contention that the rent was low to save municipal taxes, amounted to sub-standard morality, relying on the decision of the Madras High Court in Coimbatore Spg. & Wvg. Co. Ltd. v. CIT [1974] 95 ITR 375. He, therefore, submitted that the disallowance should be confirmed.
11. We have considered the rival submissions carefully. The significant facts to be noted are that there was a close relationship between the landlord HUF and the assessee and the Lease Deed dated 5-3-1987 did not mention any interest-free deposit. Further, the assessee sublet the same premises to the Union Bank of India on rent which was 8 to 9 times of the lease amount being paid to the landlord HUF. The Union Bank of India advanced a loan of Rs. 11,40,000 to the assessee at 15% rate of interest; out of which, the assessee deposited Rs. 7,75,000 with the landlord HUF free of interest. The income from rent has been assessed under the head "Other sources".
12. We will now go into the cases relied upon by the ld. counsel for the assessee with the above background. In the case of Jamshedpur Motor Accessories Stores (supra), the assessee had paid a certain sum as commission @ Rs. 100 per truck sold and claimed deduction of the amount, and it was disallowed on the ground that there was no written agreement for such payment. It was common ground that the claim was made for business expediency. It was held that the claim could not be disallowed merely because the assessing authority thought that the assessee could have managed by paying a lesser amount as a prudent businessman. It is, thus, seen that the considerations in that case were of commercial expediency and the facts were entirely different. The case does not help the assessee.
13. In the case of Amora Chemicals (P.) Ltd. (supra), again, it was a case of business expenditure. A multi-storied building was taken on rent by the assessee at a specified rate and it was sub-leased to a bank at a higher rent. In the facts and circumstances of the case, it was held that the rent was a business income. Further, a loan was advanced to landlord of the assessee and the assessee, as per agreement, was to pay interest @ 6% to the landlord HUF. On the other hand, the assessee received loan from the bank at 15% and advanced to the landlord HUF. It was a part of the agreement that additional floors, as and when constructed, were to be made available to the assessee at the same rate of rent. It was held that the objection of granting loan to the landlord HUF at a cheaper interest was for obtaining additional floors on rent and, therefore, it was a business interest. The facts in the present case are different. The rental income was not business income. No income in future has been shown to be receivable by the assessee by making interest-free deposit. Thus, this case also is distinguishable and does not help the assessee.
14. In the case of Satya Co. Ltd (supra), the question was computation of annual value under section 22 of the Act, i.e., income from the house property. It was held that notional interest on deposit made by the tenant with the landlord could not be added to the annual letting value of the premises under the provisions of sections 22 and 23 of the Act. The question, therefore, was totally different. It was, in that context that an observation was made that the rent was less than what it could have been, in absence of such condition for interest-free deposit. A reference was also made to Schedule III of the Wealth-tax Act, also relied upon by the ld. counsel for the assessee before us, and it was observed that there was no such provision in the Income-tax Act. This case is also distinguishable, since, the question of linking with the interest-free deposit and rent was not in dispute. But such a dispute is very much present in the case before us. The case, therefore, does not help the assessee.
15. We now come to the case relied upon by the ld. D. R. in Coimbatore Spg. & Wvg. Co. Ltd.'s case (supra). It was stated by the assessee in that case that there was inflation of stocks in the statement given to bank for obtaining overdraft and loan facilities. It was held that the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessee so as to enable them to go back on their own sworn statements given to the banks as to stocks held or hypothecated by them to the banks. A heavy burden lies on the assessee to prove that the books of account alone give a correct picture and the sworn statements given to the bank were motivated. In the present case before us, there is no sworn statement by the assessee that the interest-free deposit was being made on account of low rent, but all the same, it is claimed that there was no mention in the lease deed with the motive of saving the stamp duties and municipal tax. In our opinion, this also amounts to sub-standard morality for which judicial notice should not be taken as held in the above cases, unless the assessee discharges a heavy burden of proof. No such a proof had been led before us, apart form making a bare claim. Respectfully following the above decision, we, therefore, decline to accept the explanation.
16. In absence of the explanation, there is nothing to indicate that there was any link between the interest free loan and the rent payable by the assessee to the HUF landlord. It is significant that the date of deposit was 10-4-1987, i.e., after the lease deed and not before it. We find copies of some correspondence between the assessee and the HUF landlord in our paper book from pages 2 to 5 but the ld. counsel for the assessee has accepted that these were not filed either before the Assessing Officer or the CIT(A). No reason has been advanced before us why it should be admitted before us as evidence and we decline to consider it under rule 29 of the Appellate Tribunal Rules, 1963.
17. The principles for allowing deduction under section 57(iii) of the Act have been rightly pointed out by the ld. counsel for the assessee, as laid down in the two cases railed upon by him. Applying those tests, we are satisfied that interest of Rs. 1,54,463 paid to the Union Bank of India on a sum of Rs. 7,75,000 cannot be treated as having been laid out or expended wholly and exclusively for the purpose of earning income from rent. The disallowance is, therefore, upheld.
18. For the same reason, disallowance of interest of Rs. 1,16,250 is upheld in the case of Late Hanuman Prasad Shroff through legal heirs (ITA No. 193/Pat./1993).
19. In the case of Shri Abhay Kumar Shroff, there was further disallowance of Rs. 7,030 out of travelling, conveyance and repairs. Expenses totalling Rs. 70,308 were claimed against rental income and other income taxable under the head "Income from other sources". In absence of proper verification, the Assessing Officer disallowed 1/10th of the expenditure which was upheld by the CIT(A). The assessee is now in appeal before us.
20. After due consideration, we see no reason to interfere. This ground is also rejected.
21. A similar disallowance of Rs. 4,823 in the case of Late Sri Hanuman Pd. Shroff through legal heirs is also upheld and that ground is rejected.
22. The next ground relates to charges of interest under sections 234A, 234B and 234C. The CIT(A) observed that interest had been charged under sections 234A and 234B only and no reason had been advanced before him why it should not be charged. He, therefore, upheld the charging of interest. No reason had been advanced before us either. We, therefore, rejected this ground in both the appeals.
23. In the result, both the appeals are dismissed.
Shri Abdul Razack, Judicial Member
24. I have studied the order passed by my ld. Brother in the abovementioned two appeals. We have also discussed about few salient features of these appeals. I am in agreement with view taken by my ld. Brother in the appeal of Shri Abhay Kumar Shroff from paragraphs 18 to 21. I also agree with my ld. Brother that the case laws cited and relied on by the assessee's counsel have no effect on the dispute involved, the facts being at variance except that the ratio and the principle laid down by the Third Member (agreeing with the view of the Judicial Member) in the case of Amora Chemicals (P.) Ltd. (supra) can come to the rescue of both the assessee in respect of the main dispute regarding the disallowance of proportionate interest payable to bank. I am unable to agree with the views and the accompanying reasons given by my ld. Brother. According to me, the Assessing Officer erred in disallowing that portion of interest which was paid to the bank in relation to the sum of Rs. 7.75 lacs which amount have been paid by Shri Abhay Kumar Shroff as well as by other assessee late Shri Hanuman Pd. Shroff to the HUF, the principal landlord and owner of the premises, Diamond Plaza leased to the Union Bank of India. I am also expressing my views on the facts relating to the appeal of Shri Abhay Kumar Shroff being I. T. A. No. 95/Pat. /1993. My view expressed shall also apply equally to the appeal of late Shri Hanuman Prasad Shroff through legal heir, Shri Amarnath Shroff, being I. T. A. No. 293/Pat. /1993. The claim of the assessee and disallowance by the Assessing Officer have to be judged in the light of the provisions of section 57(iii) of the Income-tax Act and judicial pronouncement to that effect which I will be referring to in the forthcoming paragraphs. There is no dispute on the facts of the case as they have been correctly recorded by my ld. Brother.
25. Firstly, whether or not the documents placed by the assessee's counsel from pages 2 to 7 of the paper book and which is additional evidence before us is to be admitted under Rule 29 of Income-tax (Appellate Tribunal) Rules, 1963 (hereafter Rules of 1963). My ld. Brother is right that no satisfactory reasons have been advanced as to why these documents were not produced before the lower tax authorities and why the same should be admitted belatedly at this second appellate stage in terms of rule 29 of Rules of 1963. The only submission of the assessee's counsel was that the said documents which are copies of the correspondence entered into between the assessee and the HUF landlord which are from pages 2 to 5 and pages 6 to 7 is the letter by the Union Bank of India containing terms of lease and the term regarding advancing of loan of Rs. 11.40 lacs are germane and have nexus with the facts of the case and very vital and essential for a fair and just resolution of the lis involved in the second appeal. I have gone through these documents which are in the shape of additional evidence and I am of the opinion that they are required to be admitted by this Tribunal suo motu as they have a close relation and nexus with the facts of the case and I think they are very vital and essential for deciding the second appeals fairly and justly. Various Courts have opined that if additional evidence has nexus with the facts of the case and the appellate authority is of the opinion that the lis/ controversy cannot be decided without appreciating and evaluating the additional evidence then the same can be admitted in order to dispense substantial justice to the parties before it. A similar view is taken by the Ahmedabad Bench 'A' of this Tribunal, to which I have been a party, in the case of Rajmoti Industries v. ITO [1995] 52 ITD 286. In that case, Ahmedabad Bench 'A' has taken the view, after analysing the decision of the Hon'ble Supreme Court as well as other High Court on the subject, that additional evidence should be admitted if it is vital and essential for the purpose of consideration of the subject-matter of appeal and to arrive at a final and ultimate decision in a fair and just manner. The Tribunal, thus, under Rule 29 of the Rules of 1963 has power to admit additional evidence in the interest of justice or if there exists substantial cause. Following the reasons given by the Ahmedabad Bench 'A' in the case of Rajmoti Industries (supra), I am of the opinion that the cause of justice will be better served if the documents placed from pages 2 to 7 of the assessee's paper book are admitted in terms of Rule 29 of Rules of 1963 and I, therefore, admit the same, because those documents have a nexus with the facts of the case and also very vital and essential for proper appreciation, consideration and adjudication of the lis/controversy involved.
26. Now, I go straight to the merits of the case. The assessee declared rental income from the Bank (Union Bank of India, Bombay) under the head 'Other sources' along with other incomes falling under that head. In order to arrive at the net income under the head 'Income from other sources', the assessee claimed expenditure consisting of several items from the said head which expenditure has been incurred by the assessee for earning the income falling under this head. The total interest claimed as deductible expenditure was in a sum of Rs. 2,42,817, out of which a sum of Rs. 1,54,464 has been paid to the said bank which is nothing but interest paid on the loan sanctioned by the said bank amounting to Rs. 11.40 lacs upon taking the sub-lease of the premises from the assessee Shri Abhay Kumar Shroff as is evident from condition No. 5 at page 7 of the assessee's paper book, now admitted as additional evidence. The Assessing Officer disallowed Rs. 1,16,250 from out of total claim of Rs. 1,54,464 because according to him, the assessee did not charge any interest from the landlord HUF to whom it paid Rs. 7.75 lacs. At page 4 of assessment order, the Assessing Officer further stated that the sum of Rs. 7.75 lacs was diverted by the assessee for non-business purposes and calculated interest at 15% on Rs. 7.75 lacs and disallowed the same from out of the total expenditure at Rs. 3,89,343 claimed as deductible for arriving at the net income under the head 'Income from other sources'. While disallowing this amount, the Assessing Officer has observed that the disallowance has been made within the meaning of section 57(iii) of the Act which is discernible from page 4 of the assessment order filed along with the appeal papers before this Tribunal.
27. The A/C in first appeal confirmed the disallowance by observing as under at para 3, page 3 of the impugned order :-
"Further I find that the loan taken from the Union Bank of India had nothing to do with the acquiring of the lease-hold right. The loan was taken independently and a part of the loan was passed on to the HUF and no interest on the same was charged. The interest paid cannot be said to be linked with the earning of the rental income. The loan taken has no connection with the sub-letting of the property or acquisition of the right of the lease rent. Considering the facts and circumstances of the case, I uphold the order of the Assessing Officer rejecting the claim of allowance of interest against the rental income received from sub-letting."
A cursory glance at the provisions of section 57(iii) of the Act reveals that 'any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income", is allowable expenditure. The preponderance of the judicial opinion is in favour of the view that interest paid on monies borrowed for earning income falling under the head 'Income from other sources' is allowable expenditure as per the provisions of section 57(iii) of the Act.
28. The Hon'ble Supreme Court had an occasion to consider the question about the allowability of expenditure under section 57(iii) in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519. The Hon'ble Supreme Court relying on its earlier decision in Eastern Investments Ltd v. CIT [1951] 20 ITR 1 and the decision of the House of Lords in Hughes (Inspector of Taxes) v. Bank of New Zealand [1938] 6 ITR 636 took a view that what section 57(iii) requires is that the expenditure must be laid out or expended wholly or exclusively for making or earning income. It is the purpose of expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is, in fact, nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain, natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure".
29. It is indeed difficult to say how after these broad and sweeping observations of the Hon'ble Supreme Court there can be any scope for creating a controversy on the application of the provisions of section 57(iii) to the facts of the instant case and still to say that the expenditure incurred for earning income chargeable to tax under the head 'Other sources' is not an allowable expenditure.
30. The Gujarat High Court in the case of Smt. Virmati Ramkrishna. CIT [1981] 131 ITR 659 after an exhaustive review of the case law on the subject of allowability of expenditure under section 57(iii) laid down the following proposition at pages 672 and 673 of the said reports :
(i) in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined;
(ii) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee;
(iii) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning 'income from other sources';
(iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose;
(v) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in mind of the assessee in incurring the expenditure;
(vi) if the assessee has no option except to incur the expenditure in order to make the earning of the income possible such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; howsoever, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction;
(vii) it is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income;
(viii) if, therefore, it is found on application of the principles or ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deduction;
(ix) it would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on of the activity which is the source of the income; the nexus must necessarily be between the expenditure incurred and the income earned;
(x) it is not necessary to show that the expenditure was a profitable one or that in fact income was earned;
(xi) the test is not whether the assessee benefited thereby or whether it was prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income;
(xii) the question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law.
31. Applying the above tests, it is evident and clear that the sub- letting made by the assessee to the Bank was on the condition that the Bank should give a loan of Rs. 11.40 lacs at 15% interest per annum. The expenditure, viz., interest to Bank was, therefore, an expenditure incurred and laid out wholly or exclusively for the purpose of earning the rental income from the Bank and which income was offered for taxation purposes as income from other sources. The said expenditure is, therefore, covered by section 57(iii) and in my view is allowable expenditure in its entirety as claimed by the assessee. No portion of interest to Bank is disallowable on the ground that the assessee paid Rs. 7.75 lacs to the parent landlord, viz., the HUF. The assessee was obliged and compelled to pay this sum of Rs. 7.75 lacs on account of letting of the portion of premises to the assessee for a monthly rent of Rs. 2,125. An understanding and agreement was reached between the assessee and the landlord HUF for leasing the said portion in the premises, Diamond Plaza on such a low rent of Rs. 2,185 per month as is evident from the documents placed from pages 2 to 5 of the assessee's paper book. These documents which are copies of letters exchanged between the assessee and the landlord HUF go to establish that the assessee was under obligation and, therefore, compelled to pay the said sum of Rs. 7.75 lacs to the landlord HUF. I think, if the assessee committed a breach of this agreement with the landlord HUF and fail to pay the sum of Rs. 7.75 lacs, litigation would have ensued between the assessee and the landlord HUF and it would have taken several years for adjudication of the dispute in the Civil Court and the assessee in my view would have been forced to spend substantial moneys for defending the action (Civil Suit) brought against him by the HUF landlord for claiming the agreed sum of Rs. 7.75 lacs as per the contract created through exchange of various letters placed from pages 2 to 5 of the paper book. The assessee in my view had to compulsorily pay Rs. 7.75 lacs to avoid unsavoury situation upon default in payment to the landlord HUF. The ITO is, therefore, not correct in saying that the amount was diverted for non-business purposes or rather unconnected purpose. From the above facts and reasons, I am also unable to agree with the observations and finding of the A/C that the loan taken from the Union Bank of India had nothing to do with the acquiring of the lease hold right. The loan was sanctioned as one of the condition of the lease as can be seen evidently from page 7 of the paper book. Since, the assessee agreed to pay Rs. 7.75 lacs to the HUF landlord after getting a loan of Rs. 11.40 lacs from the bank the rent for assessee was fixed at a low figure of Rs. 2,185 per month. It was one of the condition with the HUF landlord that interest will be paid to the assessee by the HUF on the sum of Rs. 7.75 lacs. The case, therefore, in my view, squarely falls under the provisions of section 57(iii) read with the Judgment of Apex Court in the case of Rajendra Prasad Moody (supra) and as well satisfies the tests laid down by the Gujarat High Court in the case of Smt. Virmati Ramkrishna (supra).
32. Though the income has been declared under the head 'Income from other sources' and payment of interest to bank is also claimed as a deduction from the sub-letting rental income from the Bank the decision of the Third Member of this Tribunal, in the case of Amora Chemicals (P.) Ltd. (supra) relied upon by the assessee's counsel is not applicable yet the principle and ratio laid down therein applies to the facts of the case. In that case also the assessee took on rent few floors from the HUF landlord on low rent and also was getting interest at 6% on the amount deposited by it where as it sub-leased those floors to the Bank at a higher rate and was paying higher rate of interest, viz., 15% to the Bank on the loan sanctioned by the said Bank to that assessee. At the time of sub-letting of the floors the income in that case was not shown for taxation purpose under the head 'Income from other sources' but it was shown under the head 'Income from business' and the interest paid to the Bank was claimed as an expenditure under section 37 of the Act as an expenditure wholly laid out and incurred for the purpose of business. On difference of opinion between the Accountant Member and the Judicial Member of the Ahmedabad Bench 'B' of this Tribunal in the said case of Amora Chemicals (P.) Ltd. (supra), the matter was referred to the Hon'ble President of this Tribunal in terms of section 255(4) of the Act to a Third Member and the Third Member agreed with the view expressed by the Judicial Member that the interest to Bank was an allowable expenditure as per section 37 of the Act being wholly and exclusively laid out for earning business income offered for taxation. As submitted above, the facts are more or less identical with the facts in the case of Amora Chemicals (P.) Ltd. (supra) except the rental income of sub-letting to the Bank from the parent HUF was declared as business income and the interest payment to the Bank on the loan sanctioned to that assessee as a condition of sub-lease was claimed as business expenditure being expedient for carrying on the business. Therefore, the ratio and principle laid down therein applies to the facts of this case also and I think the assessee's appeal deserves to be allowed on the strength of the decision of this Tribunal in the case of Amora Chemicals (P.) Ltd. (supra).
33. From the foregoing discussions and analysis of the case laws on the subject, I am of the considered opinion that the Assessing Officer was not justified in disallowing the sum of Rs. 1,16,250 and the A/C equally erred in confirming the disallowance. The finding and conclusion of the A/C in this regard deserves to be reversed and the Assessing Officer is directed to delete the disallowance/addition of Rs. 1,16,250. The assessee is entitled to deduction of the entire sum of Rs. 1,54,464 being interest paid to the Bank on the loan amount of Rs. 11.40 lacs. As stated by me above, the view expressed herein should equally be applicable to the appeal of the other appellant late Shri Hanuman Prasad Shroff per the legal heir of Shri Amarnath Shroff being I. T. A. No. 193(Pat.) /1993.
34. In the result, the appeal of Abhay Kumar Shroff is allowed in part and the appeal of late Hanuman Prasad is allowed in full.
STATEMENT FOR THIRD MEMBER REFERENCE AS PER SUB-SECTION (4) OF SECTION 255 OF THE INCOME-TAX ACT, 1961.
As we have differed in our views in the above-mentioned I. T. Appeals, we refer the below given points for the consideration of Third Member as provided in sub-section (4) of section 255 of the Act and request the Hon'ble president accordingly.
Points for Reference :
(1) Whether the Judicial Member is justified in admitting additional evidence from pages 2 to 7 of the assessee's paper book in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 on the ground that such additional evidence is vital and essential for rendering justice and in deciding appeals ?
(2) If the above additional evidence should be admitted, whether it is necessary to give the Department a reasonable opportunity of rebutting it according to the Principles of Natural Justice, and for that purpose, the matter should be restored to the file of the Assessing Officer ?
(3) Whether under section 57(iii) of the Income-tax Act, 1961, interest amount of Rs. 1,16,250 is disallowable for reason that the assessee did not charge interest from the landlord HUF on the sum of Rs. 7.75 lacs paid from out of the loan amount given by the Bank to the appellants upon sub-lease of the premises ?
THIRD MEMBER ORDER
1. Under sub-section (4) of section 255 of the Income-tax. Act, 1961 (hereinafter referred to as 'the Act' for brief), I have been nominated by the Hon'ble President of the 'Appellate Tribunal' to act as a Third Member for my opinion on a dissent on the following identical points of difference by the learned Members, who heard these appeals :
"(1) Whether the Judicial Member is justified in admitting additional evidence from pages 2 to 7 of the assessee's paper book in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 on the ground that such additional evidence is vital and essential for rendering justice and in deciding appeals ?
(2) If the above additional evidence should be admitted, whether it is necessary to give the Department a reasonable opportunity of rebutting it according to the Principles of Natural Justice, and for that purpose, the matter should be restored to the file of the Assessing Officer ?
(3) Whether under section 57(iii) of the I. T. Act, 1961, interest amount of Rs. 1,16,250 is disallowable for reason that the assessee did not charge interest from the landlord HUF on to sum of Rs. 7.75 lacs paid from out of the loan amount given by the bank to the appellants upon sub-lease of the premises ?
Sd/- (ABDUL RAZACK) Sd/- (V. K. SINHA) Judicial Member Accountant Member. 2. Both sides have been heard in detail by me.
3. The appeals involve a common issue and were disposed of by the regular Division Bench by a consolidated order (dissent) : dated 3rd August, 1995.
4. The learned Accountant Member who is the originator of the order has given out the facts of the cases in the following manner about which there is no quarrel :
"... Both the sides agreed that essential facts were similar in the two cases. We will, therefore, discuss the facts in the case of Abhay Kumar Shroff(ITA No. 95/Pat/1993) and the decision will be equally applicable in the case of Late Shri Hanuman Prasad Shroff through legal heirs.
2. The assessee, Shri Abhay Kumar Shroff is an individual and a member of the HUF called 'Hanuman Prasad Abhay Kumar'. The HUF purchased a property called Diamond Plaza for Rs. 7,60,000 and leased it to the assessee on 5-3-1987 on a rent of Rs. 2,185 per month for five years and Rs. 2,665 for the next five years. The assessee, thereafter, sublet the premises to the Union Bank of India on rent on Rs. 2,28,060 per year. According to the assessment order, it was let out on 20-4-1987 but according to the learned counsel for the assessee before us, the date should be 10-4-1987. However, the difference in dates is not material and what is significant is that it is after the lease deed dated 5-3-1987 between the assessee and the HUF.
3. Further the Union Bank of India advanced a loan of Rs. 11,40,000 to the assessee on the same date of 10-4-1987. The date is being taken as submitted by the ld. counsel for the assessee before us and which is supported by the Bank Account copy on interest rate of 15%. The interest paid during the year was Rs. 1,54,463. Out of this rent, the assessee deposited Rs. 7,75,000 with the HUF landlord, which was interest-free.
4. In the assessment order income from rent, received from the Union Bank of India, has been assessed under the head Other sources'. The assessee claimed various expenses against the rental income which, inter alia, included interest payment of Rs. 1,54,463 to the Union Bank of India. The Assessing Officer issued a letter to show cause why interest had not been charged by the assessee on the deposit of Rs. 7,75,000 with the HUF landlord and why interest payment on loan to the same extent to the Union Bank of India should not be disallowed. He noticed that there was no mention of such interest-free deposit in the lease deed between the assessee and HUF landlord dated 5-3-1987. The assessee stated that there was no reason why the HUF landlord should let out the premises to the assessee at such low rate was that the assessee would make a deposit of a sum of Rs. 7,75,000 to them free of interest, during the tenure of the lease. It was due to that consideration only that the rent was reduced to such a low amount. The Assessing Officer had pointed out that there was no mention of such a deposit in the lease deed dated 8-3-1987. The assessee explained that he was advised to bring the deposit out of the lease deed as it would have attracted huge stamp duty. He, therefore, decided to give this amount by account payee cheque and not mention the fact in the Deed of Lease. The Assessing Officer did not find the explanation to be satisfactory and held that Rs. 7,75,000 had been diverted by the assessee for 'non-business purposes'. Thereafter, he disallowed interest payment to Union Bank of India @ 15% on Rs. 7,75,000 which amounted to Rs. 1,16,250. The disallowance was made under section 57(iii) of the Act.
5. The same submissions were made before the CIT(A) and it was added that low lease rent was being given also to avoid municipal taxes. The CIT(A) did not find merit in the contention. He observed that arrangements to avoid legal requirements are colourable devices and at most, the assessee had created a voluntary charge in favour of the HUF Landlord. It was only a device to divert income. The rent from Union Bank of India was independent and had nothing to do with the lease arrangement. He, therefore, confirmed the disallowance of Rs. 1,16,250. The assessee is now in appeal before us.
6. The Ld. counsel for the assessee invited our attention to the assessment order where the rent had been assessed under the head 'Other sources'. He reiterated the same arguments and emphasised that the interest-free deposit had been made by the assessee only because of the low rent. He argued that it was not necessary to have written agreement for the deposit and relied on the decision of the Patna High Court in the case of Jamshedpur Motor Accessories Stores v. CIT [1975] 95 ITR 664. Reliance was also placed for this proposition on a decision of the Tribunal, Ahmedabad 'B' Bench in case of ITO v. Amora Chemicals (P.) Ltd. [1987] 29 TTJ (Ahd.) 559 (TM).
7. The ld. counsel also submitted that the interest-free deposit was an indicator that the rent is the low and for this proposition relied on a decision of the Calcutta High Court in CIT v. Satya Co. Ltd. [1994] 75 Taxman 193.
8. It was further submitted that in the Wealth-tax Act, Schedule III had been introduced w.e.f. 1-4-1989 and rule 5 was concerned with determination of gross maintainable rent. There was a provision for computation of presumptive rate of interest on interest-free deposit @ 15% as an integral part of rent to be added to the ostensible rent. Thus, he submitted that such transactions were recognised by the Courts as well as the Wealth-tax Rules and, therefore, should be accepted in this case also.
9. He submitted next that the immediate purpose of payment of interest to Union Bank of India was earning of income and, therefore, deduction for the interest should be allowed under section 57(ii) of the Act as held in CIT v. H. H. Maharani Shri Kesarkunwerba Saheb of Morvi [1958] 33 ITR 349 (Born.), and the decision of the Calcutta High Court in CIT v. Model Mfg. Co. (P.) Ltd. [1980] 122 ITR 767.
10. The ld. D. R., on the other hand, supported the order of the CIT(A). He emphasised that there was no mention in the Lease Deed dated 5-3-1987 that an interest-free deposit of Rs. 7,75,000 would be made by the assessee with the landlord HUF and the two were un-connected matters. Further, he submitted the assessee's admission that the mention was not made in the lease deed to save stamp duty and the assessee's contention that the rent was low to save municipal taxes, amounted to sub-standard morality, relying on the decision of the Madras High Court in Coimbatore Spg. & Wvg. Co. Ltd v. CIT [1974] 95 ITR 395. He, therefore, submitted that the disallowance should be conferred....
5. While considering the existence of any link between the interest- free loan and the rent payable by the assessee to the HUF landlord, the learned Accountant Member took into consideration certain copies of the correspondence between the two parties which are available at pages 2 to 5 of the paper book. Admittedly, they were not filed either before the Assessing Officer or the learned CIT(A) and saw sun shine for the first time before the Appellate Tribunal. Further no reason was advanced before the Regular Bench hearing the appeal as to why these documents be admitted belatedly. They were eventually declined to be considered under rule 29 of the Appellate Tribunal Rules, 1963.
6. When the proposed order reached the learned Judicial Member, he took the view that the documents in question "are germane and have nexus with the facts of the case and very vital and essential for the fair and just resolution of the lis involved in the second appeal", He further observed as under :-
"... I have gone through these documents which are in the shape of additional evidence and I am of the opinion that they are required to be admitted by this Tribunal suo motu as they have a close relation and nexus with the facts of the case and I think they are very vital and essential for deciding the second appeals fairly and justly. Various Courts have opined that if additional evidence has nexus with the facts of the case and the appellate authority is of the opinion that the lis/ controversy cannot be decided without appreciating and evaluating the additional evidence then the same can be admitted in order to dispense substantial justice to the parties before it....."
7. In taking this view, he took aid of a decision in the case of Rajmoti Industries (supra) to which he was also a party observing that in this decision in the Ahmedabad Bench, the Tribunal after analysing the decision of the Apex Court as well as other High Courts on the subject held that additional evidence should be admitted if it were vital and essential for the purpose of consideration of the subject- matter of appeal and to arrive at a final and ultimate decision in a fair and just manner. Further, the Tribunal under rule 29 referred to supra, had the power to admit additional evidence in the interest of justice as also if there existed substantial cause.
8. As to whether there existing a legal justification in admitting additional evidence, as is evident, is covered by question No. 1 of the reference to the Third Member. While, the learned counsel for the assessee vehemently contended that the evidence being of essential nature and vital for the correct adjudication of the controversy was necessarily required to be admitted, its admission was opposed by the learned D. R., who supported the view taken by the learned Accountant Member.
9. I have considered the matter carefully. At the outset, I would refer to rule 29 of the Appellate Tribunal Rules, 1963 which runs as under :-
"The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by, them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced."
If one analyses the language of this rule what emerges is that although no right is vested in the parties to an appeal before the Tribunal to produce additional evidence - whether oral or documentary, if the Tribunal required any document to be produced or witnesses to be examined or affidavit to be filed, it may far reasons to be recorded do so. However, it is not as if this power vested in the Tribunal is arbitrary or unbridled. This rule itself prescribes the contingencies under which the exercise of such power is permissible. One such situation is whether the taking of additional evidence 'enables the Tribunal to pass orders' or 'for any other substantial cause. The rule also visualises a situation where income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence but this aspect need not be elaborated as the same is not relevant here. It would, thus, be noticed that where additional evidence enables the Tribunal to pass orders or for any other substantial cause it could require the parties to do so. There is no gain saying that while this power could be exercised by the Appellate Tribunal suo motu the jurisdiction vested in the Tribunal could be got invoked at the instance of one of the parties before it.
10. Before proceeding further let us examine the nature of the documents available at pages 2 to 7 which are sought to be admitted by the Tribunal.
11. While pages 2 to 5 are copies of correspondence entered between the assessee and the HUF landlord during the relevant period, copies 6 and 7 constitute a letter of almost the same period which emanated from the Asstt. General Manager, Union Bank of India, Bombay-2, containing terms of lease and the advance of loan of Rs. 11.40 lacs.
12. If we go through the grounds of appeal taken by the assessee in these two appeals which are similar, the first ground challenges the disallowance of interest paid by the assessees in a sum of Rs. 1,16,250 each to the bank which they claimed was for business purposes while held to be otherwise by the department. Similarly, the other substantial dispute in these appeals is in respect of the treatment of the amount of deposit in a sum of Rs. 7,75,000 given by the Bank to the HUF, the transaction claimed in consideration of commercial expediency to enable the bank to get the premises in question at a much lower rent than the market rent. The plea further taken by the assessees is that the rental income earned by them out of the renting of the premises was quite high even after deducting the interest paid to the bank and as such, there was no justification with the department to negate their claim. On the above facts and circumstances of the case could it be said that the documents in question briefly referred to hereinbefore are not necessary from the Tribunal's view point which under section 254 of the Income-tax Act is called upon to dispose of the appeals before it by passing such orders thereon 'as it thinks fit'. Patently, those documents would enable the Tribunal to pass orders effectively and their absence may not unfold the actual controversy and lead to miscarriage of justice. No doubt that not a whisper has been made by the assessee as to why there was lapse on their part in not bringing this vital piece of evidence before the authorities below, yet this failing or reticence on their part or even ignorance or whatever one may term in cannot be said to produce any devastating effect of the magnitude where the powers vested by rule 29 referred to supra in the Appellate Tribunal could sand set at nought. The gravamen of the charge against the assessee as to the non- production of these vital documents either before the Assessing Officer or before the learned CIT(A) would heave a different effect in law to my mind. It is that the assessee as a matter of right cannot file or filing them before the Tribunal as a matter of course. If the assessee produces some documents at the appropriate time they have to be taken into consideration subject of course to all just exceptions, such as their relevance, etc. If not done at the assessment stage, the admission documents has to be governed by rule 46A of the Income-tax Rules, 1962, if produced for the first time before the first Appellate Authority. Having missed the bus and the matter travelled to the Appellate Tribunal, the admission of documents is to be governed by rule 29 of the Appellate Tribunal Rules, 1963 discussed hereinbefore briefly. What I want to emphasise is that, if the documents sought to be admitted even at the second appellate stage are of a nature and qualitatively such that they render assistance to the Tribunal in passing orders or required to be admitted for any 'other substantial cause', it would rather be the duty of the Tribunal to admit them. Learned Judicial Member has rightly made reference to the Tribunal's decision in Rajmoti Industries' case (supra) wherein on an analysis of various decisions, it was held that is the receipt or admission of additional evidence was vital and essential for the purpose of consideration of the subject-matter of appeal and arrive at a final and ultimate decision, the Tribunal was amply empowered to admit additional evidence under rule 29 referred to supra.
13. In this connection, reference may be made much more authoritatively to a decision of the Apex Court in the case of K. Venkataramiah v. A. Seetharama Reddy AIR 1963 SC 1526, wherein their Lordships of the Supreme Court had occasion to interpret and outline the object of rule 27 of the Order 41 of the Civil Procedure Code, 1908. Interestingly, the language of Order 41 rule 27 CPC and rule 29 of the Appellate Tribunal Rules is almost the same inasmuch as with a little different wording rule 27 of Order 41 of the CPC also says that parties to an appeal shall not be entitled to produce additional evidence whether oral or documentary, in the Appellate Court. But, if, inter alia, as provided by clause (b) of clause (1) of rule 27 of Order 41 CPC the 'Appellate Court' requires any document to be produced or any witness to be examined to enable it to 'pronounce judgment' and for any 'other substantial cause', the Appellate Court may allow such evidence or document to be produced. In K. Venkataramiah's case (supra), the Hon'ble Supreme Court held as under :-
Under Rule 27(1), the Appellate Court has the power to allow additional evidence not only if it requires such evidence to enable it to pronounce judgment', but also for 'any other substantial cause'. There may well be cases where even though the Court finds that it is able to pronounce judgment on the stage of record as it is, and so it cannot strictly say that it requires additional evidence to enable it to pronounce judgment, it still considers that in the interest of justice something which remains obscure should be filled up so that it can pronounce its judgment in a more satisfactory manner. Such a case will be one for allowing additional evidence for any other substantial cause under rule 27(1)(b) of the Code.
Such requirement of the Court is not likely to arise ordinarily unless some inherent lacuna or defect becomes apparent on an examination of the evidence. It may well be that the defect may be pointed out by a party, or that a party may move the Court to supply the defect, but the requirement of the Court upon its appreciation of the evidence as it stands.
Held on facts that the High Court allowed additional evidence to be admitted as it required such evidence either to enable it to pronounce judgment or for any other substantial cause within the meaning of R. 27(1)(b) of O. 41 of the Code."
14. As is evident, the Summit Court has gone to the extent of laying down law as per which in a case even where strictly speaking a Court did not require additional evidence to enable it to pronounce judgment, if it considers that in the interest of justice something which remains obscure should be filled up so that it could pronounce its judgment in a more satisfactory manner, it should be done as it would fall within the realm of allowing additional evidence for any other substantial cause as found in rule 27(1)(b) Order 41 of the Code. Further, such a defect may be pointed out by a part but as held by the Privy Council in a decision in Parsotim Thakur v. Lal Mohar Thakur AIR 1931 PC 143, the requirement must be the requirement of the Court upon its appreciation of evidence as it stands.
15. The powers that are vested in the Appellate Tribunal in the matter of admission of additional evidence, therefore, are identical to the power vested in a Appellate Court under the Civil Procedure Code. The two provisions as has been noticed are not only similar but identical and that being so the view taken by the Hon'ble Supreme Court while interpreting the relevant CPC provision applies in law with equal force to the Appellate Tribunal while exercising powers under rule 29 of the Appellate Tribunal Rules, 1963.
16. I am, therefore, inclined to agree more with the ld. Judicial Member and answer question No. 1 accordingly.
17. Coming to question No. 2, it may be stated that once additional evidence is required to be admitted, there could be no gainsaying that the department should be afforded reasonable opportunity of rebutting it. Audi alteram Partem is a valuable right of the parties to any lis. Nobody can be or should be condemned unheard is one of the strongest edifices on which the entire administration of justice stands. I may add further that if this evidence had been produced by the addressee before the lower authorities, surely the department had a right to rebut it and that being so could it be said that although the assessee delayed the production of evidence in question whatever be the reasons which in this case incidentally are none, and brought it, for the first time at the second appellate stage, the department has to be punished and put in a disadvantageous position. The answer to this situation is an emphatic no. A stand to the contrary cannot be seconded in law. I would, therefore, also answer question No. 2 in the affirmative.
18. Insofar as question No. 3 is concerned, since, it turns on to the merits of the matter I am of the considered view that in view of the admission of the additional evidence and right granted to the department to rebut it, it would be an exercise in futility to give any opinion thereon. On the facts and in the circumstances of the case, question No. 3 does not require any answer by the Third Member.
19. The file would go back to the regular Bench for its final disposal in terms of section 255(4) of the Act.