Ita/258/2014 Of M/S.beacon Projects Pvt.ltd v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE SHAJI P.CHALY TUESDAY, THE 23RD DAY OF JUNE 2015/2ND ASHADHA, 1937 ITA.No. 258 of 2014 () ----------------------- AGAINST THE ORDER IN ITA 754/COCH/2013 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 08-08-2014 APPELLANT(S)/RESPONDENT/APPELLANT ASSESSEE: ------------------------------------------------------------------------------------ M/S.BEACON PROJECTS PVT.LTD EVRA - 450, G-4, GAAN ENCLAVE EASARAVILASAM ROAD VAZHUTHACAUD, THIRUVANANTHAPURAM - 695 014. REPRESENTED BY ITS DIRECTOR SRI.SHIYAS SHAHUL HAMEED. BY ADVS.SRI.PRATHAP PILLAI SRI.BENOJ C AUGUSTIN RESPONDENT(S)/APPELLANT/RESPONDENT/REVENUE: -------------------------------------------------------------------------------------- THE COMMISSIONER OF INCOME TAX AAYAKAR BHAVAN, KOWDIAR, THIRUVANANTHAPURAM - 695 003. R1 BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) R1 BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04-06-2015,ALONG WITH ITA. 259/2014, THE COURT ON 23-06-2015 DELIVERED THEFOLLOWING: APPENDIX IN ITA.258/14 APPELLANT'S EXHIBITS: ANNEXURE A: WRITTEN REPLY FILED BY AUTHORISED REPRESENTATIVE DATED 28.1.2013. ANNEXURE B: DEMAND NOTICE AY 2012-13. ANNEXURE C: APPEAL TO CIT ITA NO.24/TDS/CT A III 2012-2013. ANNEXURE D: ORDER DATED 7.8.2013 OF THE COMMISSIONER OF INCOME TAX.ANNEXURE E: APPEAL FORM 36 AY 2012-13. ANNEXURE F: CROSS OBJECTIONS FORM 36 A FILED BY THE APPELLANT. ANNEXURE G: ORDER DATED 8.8.2014 OF IT APPELLATE TRIBUNAL NO.754/2013.ANNEXURE H: KERALA APARTMENTS OWNERS ACT. ANNEXURE I: AGREEMENT OF CONSTRUCTION AND TRANSFER FLAT. ANNEXURE J: CUSTOMER LEDGER SHOWING INSTALLMENTS OF PAYMENTS. ANNEXURE K: TRUE COPY OF THE MODIFIED ORDER DATED 1.1.2015. ANNEXURE L: TRUE COPY OF THE DEMAND NOTICE DATED 1.1.2015. /TRUE COPY/ PS TO JUDGE. ANTONY DOMINIC & SHAJI P. CHALY, JJ.-----------------------------------I.T.A.Nos.258 & 259 of 2014 ----------------------------------- Dated this the 23[rd] day of June, 2015JUDGMENT C.R. Antony Dominic, J. 1.The issue raised in these appeals is whether thefinding of the Tribunal that the excess paymentrefund debited in the Profit & Loss Account of theappellant under the head 'indirect expenses' shouldbe treated as interest on the customers'deposits/advances, is legal or not.finding of the Tribunal that the excess paymentrefund debited in the Profit & Loss Account of theappellant under the head 'indirect expenses' shouldbe treated as interest on the customers'deposits/advances, is legal or not. 2.The appellant company is a builder which had enteredinto construction agreements with various customers.A specimen of such an agreement is produced asAnnexure I in these appeals. This agreement statesthat the purchaser of the apartment specified thereinhas already purchased the specified extent ofundivided share in the land owned by the landlord,whose power of attorney is held by the appellant.The agreement provides for construction of a flat bythe appellant for and on behalf of the purchaser.Payments are to be made by the purchaser ininstalments which are also specified in theinto construction agreements with various customers.A specimen of such an agreement is produced asAnnexure I in these appeals. This agreement statesthat the purchaser of the apartment specified thereinhas already purchased the specified extent ofundivided share in the land owned by the landlord,whose power of attorney is held by the appellant.The agreement provides for construction of a flat bythe appellant for and on behalf of the purchaser.Payments are to be made by the purchaser ininstalments which are also specified in the agreement. The agreement provides that in the eventof any failure on the part of the purchaser toperform or observe any one of his obligations, theappellant shall be entitled to re-enter upon andresume possession of the flat and that the agreementshall cease and stand terminated and that all amountsalready paid by the purchaser to the appellant shallstand absolutely forfeited to the appellant. 3.In so far as this case is concerned, after enteringinto the agreement and making certain payments, somepurchasers wrote letters to the appellant expressingtheir inability to fulfil the further obligationsunder the agreement and requesting for itscancellation. According to the appellant, on receiptof such communications, they identified prospectivepurchasers and entered into fresh agreements withthem for prices which are higher than what was agreedupon with the purchasers who opted out. It is statedthat after execution of agreements with the newpurchasers, out of the payments made by them, theamounts paid by the purchasers to the appellanttogether with a portion of the additional amount ITA.258/14 & 259/14 received from the new purchasers was refunded. Theadditional amount thus paid was shown in the P&Laccount of the appellant. 4.During the course of a survey under section 133A ofthe Income Tax Act, it was found that the appellantcompany had debited in the P&L account amounts underthe head 'indirect expenses' of an amount of`31,37,341/- for the assessment year 2012-13 and`43,21,593/- for the assessment year 2013-14 beingexcess payments refunded. In the proceedings thatcontinued, the Assessing Officer held that the saidamount has to be treated as interest paid on depositliable for TDS under section 194A of the Act and thathaving failed to do so, appellant is an assessee indefault and accordingly, assessment was completedunder section 201 of the Act. The order ofassessment was set aside by the first appellateauthority. However, the said order was reversed bythe Tribunal. It is in this background, theseappeals are filed. ITA.258/14 & 259/14 5.We heard learned counsel for the appellant Sri.PratapPillai and the learned senior standing counselSri.P.K.Ravindranatha Menon for the Revenue.Pillai and the learned senior standing counselSri.P.K.Ravindranatha Menon for the Revenue. 6.As stated earlier, the issue that arises forconsideration is whether the amount debited in theP&L account of the appellant company under the head'indirect expenses' being excess payments refunded isinterest as provided under section 2(28A) of the Act.consideration is whether the amount debited in theP&L account of the appellant company under the head'indirect expenses' being excess payments refunded isinterest as provided under section 2(28A) of the Act. 7. Section 2(28A) of the Act defines 'interest' andthis section reads thus:this section reads thus: “(28A): “interest” means interest payable in anymanner in respect of any moneys borrowed ordebt incurred (including a deposit, claim or othersimilar right or obligation) and includes anyservice fee or other charge in respect of themoneys borrowed or debt incurred or in respectof any credit facility which has not been utilised;”manner in respect of any moneys borrowed ordebt incurred (including a deposit, claim or othersimilar right or obligation) and includes anyservice fee or other charge in respect of themoneys borrowed or debt incurred or in respectof any credit facility which has not been utilised;” 8.While understanding the scope of this provision, itis important to remember the principle laid down bythe Apex Court in Polestar Electronic (Pvt.) Ltd.v.Addl. CST[(1978) 41 STC 409] that 'if there is oneis important to remember the principle laid down bythe Apex Court in Polestar Electronic (Pvt.) Ltd.v.Addl. CST[(1978) 41 STC 409] that 'if there is one 8.While understanding the scope of this provision, itis important to remember the principle laid down bythe Apex Court in Polestar Electronic (Pvt.) Ltd.v.Addl. CST[(1978) 41 STC 409] that 'if there is oneis important to remember the principle laid down bythe Apex Court in Polestar Electronic (Pvt.) Ltd.v.Addl. CST[(1978) 41 STC 409] that 'if there is one principle of interpretation more well settled thanany other, it is that statutory enactment mustordinarily be construed according to the plainnatural meaning of its language and that no wordsshould be added, altered or modified unless it isplainly necessary to do so in order to prevent aprovision from being unintelligible, absurd,unreasonable, unworkable or totally irreconcilablewith the rest of the statute' is to be considered.If this is the principle to be borne in mind, theterm 'interest' as defined in section 2(28A) of theAct has to be construed strictly. On such literalconstruction, it can be seen that before any amountpaid is construed as interest, what is required to beestablished is that the sum paid is in respect of anymoney borrowed or debt incurred and that there isdebtor-creditor relationship between the parties.These are the necessary ingredients of section 2(28A). 9.The scope of this provision came up for considerationbefore various High Courts as well as the Apex Court.In Bikram Singhv. Land Acquisition Collector[224before various High Courts as well as the Apex Court.In Bikram Singhv. Land Acquisition Collector[224 ITA.258/14 & 259/14 ITR 551(SC)], in the context of interest paid ondelayed payment of compensation due under the LandAcquisition Act, the Apex Court held that suchpayment is a revenue receipt and that section 194A ofthe Income Tax Act has no application. Commissionerof Income-taxv. Sahib Chits (Delhi) (Pvt.) Ltd.[(2010) 328 ITR 342 Delhi] is a case where thequestion considered was whether section 2(28A) wasattracted in the case of surplus on discount of chitfunds. In that judgment, the Delhi High courtreferred to the judgment of this Court in JanardhanaMallanv. Gangadharan[AIR 1983 Ker 178] which wasapproved by the Apex Court in Shriram Chits &Investments (P) Ltd.v. Union of India , where, it was held that on entering into achit agreement, a debt for the amount of futureinstalments is not incurred by the subscriber andthat in respect of such amount, there is no debtor-creditor relationship. On that basis, the Delhi HighCourt held that when the amount contributed everymonth is given back to the chit subscribersthemselves in the manner as agreed, the amountcontributed cannot be treated as deposit with the company, much less money borrowed by the company.Accordingly, the Delhi High Court held that thepayment made cannot be treated as interest asprovided under section 2(28A), attracting theprovisions of section 194A of the Act. 10. Commissioner of Income-taxv. Cargill Global Trading P. Ltd.[2011 335 ITR 94] is another judgmentof the Delhi High Court where the question consideredwas whether discounting charges can be treated asinterest and this was answered in the negative byholding that before any amount paid is construed asinterest, it has to be established that the same ispayable in respect of any money borrowed or debtincurred. Commissioner of Income-tax, Shimlav.M/s.HP Housing Board, Shimla[(2012) 340 ITR 388] isa case where the question considered was whetherinterest paid/credited by the Housing Board on theamount deposited by the allottees on account ofdelayed allotment of flats is covered by section 2(28A). This again was answered by the HimachalPradesh High Court following the Apex Court judgmentin Bikram Singh (supra). Commissioner of Income ITA.258/14 & 259/14 ITA.258/14 & 259/14 Tax, Kolkatav. M/s.MKJ Enterprises Limited[2014(12) TMI 682] is a judgment of the Division Bench ofthe Calcutta High Court which also considered thequestion whether section 2(28A) is attracted todiscounting charges of bill of exchange or factoringcharges of sale. That was also answered in thenegative, holding that interest is a term relating toa pre-existing debt which implies a debtor-creditorrelationship. 11.From the principles laid down in the decisionsreferred to above, it is obvious that section 2(28A)is not attracted to every payment made and that theprovision can be attracted only in cases where thereis debtor-creditor relationship and that payments aremade in discharge of a pre-existing obligation. referred to above, it is obvious that section 2(28A)is not attracted to every payment made and that theprovision can be attracted only in cases where thereis debtor-creditor relationship and that payments aremade in discharge of a pre-existing obligation. 12.In so far as these cases are concerned, facts statedby us itself would show that the purchaser had paidcertain amounts to the appellant. At a later pointof time, the purchaser opted out of the agreement andthe appellant entered into fresh agreements with newbuyers for prices that are higher than what wasby us itself would show that the purchaser had paidcertain amounts to the appellant. At a later pointof time, the purchaser opted out of the agreement andthe appellant entered into fresh agreements with newbuyers for prices that are higher than what was agreed with the purchasers. Out of the receipts fromthe new buyers, the appellant refunded to thepurchasers the amount paid by them and a portion ofthe excess amount received. The amount thus refundedto the purchasers represents the consideration thepurchasers paid towards the undivided shares in theproperty agreed to be purchased and also the cost ofconstruction of the apartment, which work wasentrusted to the appellant, being the builder. Sucha relationship does not spell out a debtor-creditorrelationship nor is the payment made by the appellantto the purchaser one in discharge of any pre-existingobligation to be termed as interest as defined insection 2(28A). 13. Further, there is no finding in the assessmentorder or in the order of the Tribunal that the amountpaid by the purchasers, which was refunded, wasaccounted as deposit or advance received from them orthat there is any debtor-creditor relationshipbetween the parties, obliging the appellant to paythe amount to the purchasers. There is also no casefor the revenue that the excess amount paid by the appellant was based on any agreement between them orthat it was quantified at rates that were alreadyagreed between the parties. In such circumstances,the payments made do not qualify to be interest asdefined in section 2(28A) of the Act and theappellant did not have the obligation to deduct taxat source as provided under section 194A nor can theybe proceeded against under section 201A, treatingthem as an assessee in default. For the aforesaid reasons, we are unable to sustainthe order of the Tribunal which is impugned in theseappeals. The order of the Tribunal is, therefore,set aside. Appeals are allowed. Sd/- ANTONY DOMINIC, Judge. Sd/- SHAJI P. CHALY, Judge. kkb.