Income Tax Appellate Tribunal - Mumbai
Velvet Holdings P. Ltd, Mumbai vs Assessee on 24 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'F' MUMBAI
BEFORE SHRI T.R. SOOD (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM)
ITA No.3619/Mum/2009
Assessment year-2006-07
M/s. Velvet Holdings Pvt. Ltd., The DCIT, CC 31,
32,Madhuli, Dr. A.B. Road, Mumbai
Worli,
Mumbai-400 018 Vs.
PAN-AAACV 4445R
(Appellant) (Respondent)
Appellant by: Shri Vijay Mehta
Respondent by: Dr. Daniel
ORDER
PER SMT. ASHA VIJAYARAGHAVAN (JM) This appeal preferred by the assessee is directed against the order dt. 20.3.2009 passed by the Ld. CIT(A)-C-IV, Mumbai for the assessment year 2006-07.
2. The assessee has not pressed ground Nos. 1, 2, 3 & 5. Therefore it is dismissed as not pressed.
3. Ground No. 4 raised by the assessee reads as follows:
"The Ld. CIT(A) has erred in law and in facts in confirming disallowance on account of interest expense amounting to Rs. 10,81,205/-."
4. The facts of the case are that the AO stated in his order that in the P&L account, assessee has debited Rs. 11590138/-being "provision for interest on loans". This has been bifurcated into interest on loan for investments Rs. 10508933 and interest on loan for term deposit Rs.
2 ITA No.3619 /M/091081205/- as interest on business loan. While no claim is made on interest on loan for investments, the assessee has claimed interest on loan for term deposits of Rs. 1081205, against the term deposit interest income of Rs. 5129429. Similarly, the alleged interest on loan for the business is claimed in the computation of business income. The AO rejected the assessee's claim for deduction of interest for the following reasons:
a) As per records, as on 8.6.92, when the appellant was notified under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992, the Special Auditors appointed by the Special Court in their report, categorically stated that the loans taken from Directors are interest free and there is no terms or condition to pay interest to the creditors for investment.
b) As regards the claim of the Custodian, the Hon'ble Special Court has not given its final verdict on the issue, either on the changing of interest or the rate at which it is to be charged.
5. The interest liability now claimed against the term deposit interest is, therefore a contingent liability. Further, there is no direct nexus between the term deposits and the loans taken by the appellant from the directors. In view of this, the interest claim of Rs. 1081205, against the interest on term deposit is disallowed.
6. Before the lower authorities, the Ld. AR submitted as follows:
With reference to the interest expenses, the assessee has debited interest expense of Rs. 1,05,08,933/-. Out of this, interest expenses of Rs. 10,81,205/- is apportioned to interest income on FDR. The assessee has apportioned the interest on pro rata basis. The apportioned amount of interest is claimed against the interest on term deposit by the assessee. The assessee is also entitled to claim the deduction on account of interest payable to the creditors. The assessee has been paying interest on the amounts borrowed by him to lenders. The funds have been borrowed for purchase of assets both movable and immovable. The movable assets primarily 3 ITA No.3619 /M/09 comprise of shares. The assessee has also paid for these shares either by borrowing money or has been extended credit by the three brokerage firms of M/s, Harshad S. Mehta, M/s. Aswin S. Mehta and M/s. J.H. Mehta, who have purchased shares on behalf of the assessee but the assessee has not made payment for the same. Thus the monies borrowed by the assessee are deployed completely for the purpose of acquiring the assets and therefore the assessee is entitled to the deduction of expenditure of interest. The office of the custodian has sold some shares and excess money in bank is invested in fixed deposit with various banks as per the order of the Special Court. The assessee states that recently the Custodian in its Misc. Petition No. 41 of 1999 has charged interest on the assessee at the rate of 15% and 18% per annum. The copy of the said affidavit is also available before your goodself since the Hon'ble CIT is party to the proceedings. Even in this view of the matter, the assessee is entitled to a deduction on account of interest."
7. On appeal before the Ld. CIT(A) the assessee stated that in case the Hon'ble Special Court orders payment of interest greater than 12% p.a. then the appellant would be entitled to claim it as an expense and revise the income composition statement by claiming the actual interest awarded by the Hon'ble Court.
8. The assessee further submitted that the department has allowed such interest expenditure for the earlier assessment years (A.Y. 1990-91) in M/s. Growmore Leasing & Investment Ltd. (one of the group companies) and is now therefore stopped from disallowing the same as it would be inconsistent with the stand already taken. The assessee prayed that they are entitled to the genuine expense of interest, which is within the provisions of law.
9. The Ld. CIT(A) held as follows:
"I have considered the submission of the AR. The claim for interest made is found to be unacceptable. The business assets of the appellant stands attached and therefore the appellant cannot trade therein. As such, in respect of shares 4 ITA No.3619 /M/09 attached by the court, the appellant cannot be said to have carried out any business after the date of notification. In reality also appellant has not done any business either by way of shares trading or any other activity in the last fifteen years. It is therefore manifestly clear that there is no business and hence the question of allowing business expenditure does not arise. Besides, the liability on account of interest payable is also not a quantified liability. The amount of interest payable as well as receivable by the appellant is the subject matter of dispute before the Hon'ble Special Court and the liability can be said to accrue only when the Court decides the issue. Till then the liability, if any, is a contingent liability, which is not allowable as a deduction. The ground of appeal fails."
10. Aggrieved by the order of the Ld. CIT(A), assessee preferred an appeal before us.
11. We heard both the parties.
12. In the case of M/s. Orion Travels Pvt. Ltd. in ITA Nos. 6888 & 6889/M/08, the matter has been dealt as follows:
"The factual position in this case is also identical with the case of M/s. Aatur Holdings Pvt. Ltd. (supra). Following the ratio of the decision of the co-ordinate bench in the case of M/s Aatur Holdings Pvt. Ltd. under identical circumstances, we deem it fit to remand the claim of expenditure by the Assessee by way of interest, Audit fees and depreciation in grounds 5,6,7, back to C.I.T (A) for fresh consideration."
Respectfully following the above mentioned decision in the case of M/s. Aatur Holdings Pvt. Ltd. and M/s. Orion Travels Pvt. Ltd. we remit the issue of interest back to the Ld. CIT(A) for fresh consideration.
13. Ground No. 6 raised by the assessee reads as follows:
"The Ld. CIT(A) has erred in law and in facts in confirming calculation of book profit u/s. 115JB amounting to Rs. 51,17,664/-.
14. The Ld. CIT(A) held as follows:
5 ITA No.3619 /M/09"The Ld. AR submits that the AO has incorrectly held the interest expenses to be an unascertained liability. It is therefore prayed that interest cannot be disallowed while computing the book profit in accordance with Sec. 115JB of the Act.
I have considered the facts of the case as also the arguments of the Ld. AR. It may be pointed out that for the purpose of computing book profits u/s. 115JB of the Act, an assessee is required to prepare its accounts as per part II and III of Sch. VI to the Companies Act, 1956, which is not so in the appellant's case, as is evident from the fact that it has not filed the audited accounts together with its return of income. Such a structural infirmity, at the very outset, erodes the credibility of the figures on the basis of which the appellant seeks to challenge the AO's contentions.
For reasons stated in para above, I have already held the interest, as claimed to be payable by the appellant, as not a quantified liability. There is a cloud of doubt over the appellant's claim for interest, which uncertainty has not been categorically dispelled by the Hon'ble Spl. Court. The appellant's claim for interest therefore constitutes an unascertained liability, which in other words is not an ascertained liability, as referred to in clause (c)of Explanation 1 to Sec. 115JB of the Act. The interest claim amount of Rs. 1081205, has, therefore been correctly added back to the book profits of the appellant by the AO. Audit fees too has been held as a contingent liability by me. I direct the AO to recompute the book profits of the appellant in the light of the aforesaid discussion".
15. Aggrieved by the order of the Ld. CIT(A), assessee preferred an appeal before us.
16. We heard both the parties.
17. We find this issue is covered by the decision in the case of Orion Travels Pvt. Ltd., in ITA Nos. 6888 & 6889/M/08 in which it has been held as under:
6 ITA No.3619 /M/09"As regards Ground No 8, regarding computation of Book profits u/s 115JB, we find that the Assessee has been taxed under the normal provisions of the Act and not on the Book Profits u/s 115JB. In the circumstances we are not considering this issue and dismiss the appeal on this issue as infructuous with a direction that in case the assessee at a later stage is assessed on their book profits u/s 115JB, it will be open for the assessee to raise these contentions at that time."
18. Ground No. 7 raised by the assessee reads as follows:
"The Ld. CIT(A) has erred in law and in facts in not appreciating that the interest charged u/s. 234A, 234B and 234C of the Act are incorrect."
19. With respect to this ground the Tribunal in the case of M/s. Orion Travels Pvt. Ltd., has held as follows:
As regards the last ground No 9, regarding the levy of interest under sec 234A, 234B and 234C, the Assessee is a notified person under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 and all its assets including bank accounts were attached and vested in the hands of the Custodian appointed under the said Act. From the date of functioning of the court i.e., 1.6.1992, the distribution of monies in case of notified persons will be decided by the Special Court. The Taxes do not have the priority in settlement. Even if a notified person had wanted to pay the advance tax it was not within his control to do so. He has to make an application to the custodian and only he can permit payment of advance tax after obtaining approval from the special court. The Special Court in its ruling has observed as under:
"Where a Notified Party is prevented by reason of Notification, from doing things which are required to be done by him under other Acts or contracts. In such cases, if the provision of the Special Courts Act prevents a Notified Party from doing that thing, then by reason of this legal disability, no penalty or interest can be levied on that party. Thus no penalty or interest can be imposed for non-fulfillment of an act which a Notified Party is prevented from doing by reason of the Special Court Act. In such cases even though the provisions of some other Act or contract lay down consequences for non-performance, the provisions of the Special Courts Act will prevail. This is because in such cases 7 ITA No.3619 /M/09 there would be a conflict between the provisions of the Special Courts Act and that other law and/or contract. In cases of such conflict, the provisions of the Special Court Act must prevail. To take an example, under Section 234B of the Income Tax Act, every assessee is liable to pay Advance Tax. All parties were notified between June 1992 to August 1992. All of them would be liable to Advance Taxes for the Financial Year ending March 1993 and for the subsequent years, However as seen earlier, taxes only upto assessment year 1992-93 can be paid in priority. These would have to rank as ordinary debts under Section 11(2)(c ). This therefore can only be released after the entire distribution has taken place. Even if the Notified Party were to make an Application to this Court to pay the Advance Tax, the Court would refuse it. Thus monies for payment of Advance Tax have not been released. Thus a Notified Party has been prevented from paying Advance Tax. Thus, under the Special Courts Act, there is a legal disability to pay Advance Tax. Yet under the Income Tax Act there is a compulsion to pay Advance Tax. There is a conflict between the provisions of the Special Courts Act and the Income Tax Act. The provisions of the Special Courts Act must prevail. Under the Income Tax Act if Advance Tax is not paid, for such non-payment interest can be levied. This obviously on the footing that the Assessee is in default. However a Notified party, has been prevented by law from paying Advance Tax. He is not a defaulting party. He neither has not paid Advance Tax because of legal restraint on him. The law has prevented him from paying Advance Tax. In my view, in such cases, i.e. where there is a conflict between the provisions of the Special Courts Act and some other Act/contract, the contrary provisions must necessarily give way. If there is this legal disability, then there is no the question of the Notified Party being foisted with the liability to pay interest and/or penalty."
In the backdrop of the above, it was impossible for the Assessee to have paid the advance tax even if he had wanted to. It is a well known legal dictum "LEX NON COGITAD IMOSSIBILIA"
(Law cannot compel you to do the impossible). Assessee cannot therefore be foisted with interest liability u/s 234A, 234B and 234C. Interest u/s 234B and 234C are directly related to payment of advance tax and hence is not leviable on notified persons. Even though levy of interest u/s 234A is really on the delay in filing the return which is a default committed by the Assessee, the quantification of the same depends on the advance tax paid which, in this case, is not within the control of the Assessee. Hence interest 8 ITA No.3619 /M/09 u/s 234A cannot also be levied in the case of a person a notified person under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 and all its assets including bank accounts were attached and vested in the hands of the Custodian appointed under the said Act.
. The co-ordinate bench in the case of Divine Holdings Pvt. Ltd v DCIT in ITA No180/M/2000 dt. 26.6.2001 has held that CIT(A) is right in admitting the appeal of a notified person even though the tax on the returned income has not been paid by him. In coming to this conclusion they had relied on the above passage of the Special Court.
In the circumstances, we direct that interest u/s 234A, 234B and 234C should not be levied on the Assessee for the Assessment Year under appeal.
Respectfully following the above, we direct that interest u/s. 234A, 234B and 234C should not be levied on the assessee for the assessment year under appeal.
20. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 24th day of March, 2010 Sd/- Sd/-
(T.R. SOOD) (ASHA VIJAYARAGHAVAN)
Accountant Member Judicial Member
Mumbai, Dated 24th March, 2010
Rj
Copy to :
1. The Appellant
2. The Respondent
3. The CIT-concerned
4. The CIT(A)-concerned
5. The DR 'F ' Bench
True Copy
By Order
Asstt. Registrar, I.T.A.T, Mumbai
9 ITA No.3619 /M/09
Date Initials
1 Draft dictated on: 22.3.2010 Sr. PS/PS
2. Draft placed before author: 22.3.2010 ______ Sr. PS/PS
3. Draft proposed & placed before _________ ______ JM/AM
the second member:
4. Draft discussed/approved by _________ ______ JM/AM
Second Member:
5. Approved Draft comes to the Sr. _________ ______ Sr. PS/PS
PS/PS:
6. Kept for pronouncement on: _________ ______ Sr. PS/PS
7. File sent to the Bench Clerk: _________ ______ Sr. PS/PS
8. Date on which file goes to the _________ ______
Head Clerk:
9. Date of dispatch of Order: _________ ______