Ita/140/2011 Of Commissioner Of Income Tax,Kottayam v. M/S.muthoot Properties And Investments

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN& THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY, THE 24TH DAY OF SEPTEMBER 2018 / 2ND ASWINA, 1940I.T.A.No.140 of 2011 AGAINST THE ORDER IN ITA 134/COCH/2010 OF I.T.A.TRIBUNAL,COCHIN BENCH DATED 20-10-2010 APPELLANT/S: COMMISSIONER OF INCOME TAX,KOTTAYAM. BY ADVS. SRI.P.K.R.MENON, SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR INCOME TAX. RESPONDENT/S: M/S.MUTHOOT PROPERTIES AND INVESTMENTS,MUTHOOT BUILDINGS, KOZHENCHERRY P.O, KOZHENCHERRY-689641. BY ADVS.SRI.P.BENNY THOMASSRI.JOSON MANAVALANSRI.K.JOHN MATHAISRI.KURYAN THOMASSRI.M.GOPIKRISHNAN NAMBIARSRI.P.GOPINATHSRI.RAJA KANNAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24.09.2018, ALONG WITH ITA.136/2011 & CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: 24.09.2018, ALONG WITH ITA.136/2011 & CONNECTED CASES, THE COURT I.T.A.Nos.136, 140, 142 & 147 of 2011 JUDGMENT The following questions of law arise in the aboveappeals filed from the orders of the Income Tax AppellateTribunal: "1. Whether, on the facts and in the circumstances ofthe case, the Tribunal is right in law ininterfering both with substantive and protectiveadditions?the case, the Tribunal is right in law ininterfering both with substantive and protectiveadditions? 2. Whether, on the facts and in the circumstances ofthe case-,the case-, (a) The ITAT is right in allowing the interestpaid on deposits which were not taken for thepurpose of business of the assessee, as adeduction u/s.37(1)?paid on deposits which were not taken for thepurpose of business of the assessee, as adeduction u/s.37(1)? (b)the Tribunal is right in law and fact ininterfering with the addition made onprotective basis without considering the issueon merits?interfering with the addition made onprotective basis without considering the issueon merits? (c) should not the ITAT have directed the CIT(A)to consider the protective addition on meritsin view of the reversal of the order ofCIT(A), on the substantive addition?to consider the protective addition on meritsin view of the reversal of the order ofCIT(A), on the substantive addition? 3. Whether, on the facts and in the circumstances ofthe case-,the case-, (a) The withdrawals from the firm by the partnerspartakes the character of a loan given forbusiness purposes?partakes the character of a loan given forbusiness purposes? (b) the ITAT is right in law and fact ininterfering with the protective addition?"interfering with the protective addition?" - 3 - 2. On facts, it has to be noticed that the respondent-assessee in I.T.A.Nos.136 and 147 of 2011 carrieson a Multi Speciality Hospital and the respondent-assessee inI.T.A.Nos.140 and 142 of 2011 carries on Real Estatebusiness. The Multi Speciality Hospital had a ResourcesDivision and the Real Estate firm also had such a divisionwhich accepted deposits from the public. The amounts sodeposited by the public were withdrawn by the partners andinvested in other sister concerns which were doing businessin finance. The partners, on their advances from theassessee-firms, paid 12% interest to the assessee-firms. Theassessee-firms, on deposits from the public, paid 5 to 12percent interest to such depositors. The assessee claimed setoff, of the expenditure, being the interest paid to thedepositors, under Section 37(1) of the Income Tax Act, 1961[for brevity "IT Act"] and there was only a negligible profitwhich was returned as income from the business of finance socarried on by the assessee. 3. We have to immediately notice that the assesseeswere not carrying on any business in finance. The AssessingOfficer [for brevity "AO"] issued notice to the assessee toexplain the business carried on and found that the advancereceived by the partners and investment made in other sisterconcerns is a mere camouflage. On that basis, the assessees were found to have earned interest income far in excess ofthat received by it from the partners. To compute suchinterest income received, the AO resorted to Sections 144 and145 of the IT Act. The AO, on enquiry, found the interestreceived by comparable financial institutions and computedthe income accrued in the hands of the assessee-firms at theaverage of 20%. This addition was made to the income andthere was a dis-allowance of the expenditure claimed by wayof interest payment to the public who had deposited amountswith the assessee-firms. The dis-allowance was on the countthat there was no business of finance carried on by theassessee.4. The first appellate authority sustained theaddition to the income; but, however, deleted the expenditureclaimed. The first appellate authority found that thefindings of the AO were mutually destructive. If the assesseewas engaged in the business of finance and earned interestincome far in excess of that received by the assessee-firmsfrom its partners; then necessarily the expenditure by way ofinterest paid to the public who had deposits with theassessee-firms was to be allowed under Section 37 of the ITAct was the finding; with which we agree on principle. 5. Before the Tribunal, separate appeals were filedby the assessee and the Revenue. The Tribunal in the appeal of the assessees, deleted the addition made finding thatthere could not have been a speculative computation ofinterest earned based on the investment made by the partnerswho had merely taken an advance from the assessee-firms. Theresort to best judgment assessment relying on Sections 144and 145 of the IT Act was found to be bad. The appeals of theassessee with respect to interest income was allowed,deleting the same. In the appeals filed by the Revenue, theTribunal found that the assessee-firms had been doing thebusiness of advancing loans to the partners and receivinginterest from them. On that basis, there was found to beexisting a business between the assessee and its partners andhence, the expenditure was found to be permissible.6. We agree with the Tribunal insofar as deletion ofspeculative computation of interest earned based on theinvestment made, but on different grounds. A camouflage ornot, the assessee had arranged the affairs in such a manneras no interest being earned directly by the assessee firmsthrough the investments made by its partners. The assesseehad accepted deposits from the public and also made advancesto its partners. In any event, the partners were entitled totake advances from the firm on payment of interest, whichcannot be taken to be a business carried on by theassessee-firms. We do not agree with the Tribunal to that extent. 7. The investment made by the partners in the sisterconcerns and the income derived by way of more interest, thanthat they were paying to the assessee-firms could be assessedat the hands of the sister concerns or in the hands of thepartners on which we need not give any specific opinion sincethat is not the subject matter of the present appeals. Withrespect to the present appeals and the assessments made onthe assessee-firms, we are of the definite opinion that therecould be no addition made under Section 145. We uphold theorder of the Tribunal insofar as deleting the additions made.We answer the first question of law to the extent that itspeaks of interference of substantive additions made to theinterest income received by the assessee-firms, in favour ofthe assessee and against the Revenue. We uphold the findingsof the Tribunal on that aspect. 8. The questions of law raised in addition to theinterference with the substantive additions made on bestjudgment are with respect to the dis-allowance of expenditureunder Section 37(1). There cannot be any dispute, insofar asallowance of expenditure can be allowed only in the case of abusiness carried on by the assessee. The respondent-assesseesherein are respectively a Multi Speciality Hospital and RealEstate firm, which do not have any business of financing. The advance taken by the partners also cannot be said to be abusiness, since as we have noticed, the assessee does notcarry on any business on finance and the partners by theirvery status were entitled to avail such advances from thefirm. 9. We garner support from the decision of theHon'ble Supreme Court in Madhav Prasad Jatiav. C.I.T.[(1979) 118 ITR 200].Therein the assessee carried onbusiness in money lending and had various sources of incomefrom shares, properties etc. It promised to donate Rs. 10lakhs to set up an engineering college. The assessee alsodebited its capital account and corresponding credit wasgiven to the account of the college. It then availed of anoverdraft facility of Rs.5.5 lakhs from an account maintainedfor business purposes and disbursed it to the college. Thebalance was treated as a loan availed by the assessee fromthe College. The assessee paid interest to the bank on theoverdraft and to the college for the loan, which were claimedas business expenditure. The overdraft facility was held tobe not availed for business purposes and the so called loanfrom the college was held to be the assessees' own funds.Here too there was no business in finance carried on by theFirms and the partners had merely taken advances from thefirm, the application of which was not the concern of the firm. 9. We, hence, find that the advances obtained by thepartners were not in the nature of business carried on by theassessee and, hence, there could be no claim of businessexpenditure insofar as the interest paid to the depositors,the public. We, hence, answer the other questions of lawframed against the assessee and in favour of the Revenue. Wedelete the order of the Tribunal insofar as the allowance ofinterest expenditure under Section 37. The order of the AOdisallowing the expenditure on interest paid to thedepositors is sustained on the grounds herein above mentionedas distinguished from the view taken by the AO. The appealswould stand partly allowed. Ordered accordingly. Parties are left to suffertheir respective costs. Sd/- K.VINOD CHANDRANJUDGE Sd/- ASHOK MENONJUDGE APPENDIX [IN I.T.A.NO.140 OF 2011] APPELLANT'S/S ANNEXURES: ANNEXURE AASSESSMENT ORDER U/S.143(3) DATED 30.12.2008. ANNEXURE BARGUMENT NOTE FILED BEFORE CIT(A) ANNEXURE CCIT(A)'S ORDER IN APPEAL NO.ITA NO.11/TVLA/09-10,DATED 30.12.2009. ANNEXURE DITAT'S ORDER IN APPEAL NO.ITA NO.134/COCH/2010 DATED 20.10.2010. '-RESPONDENTS ANNEXURES: NIL. Vku/-