Ita/76/2019 Of M/S. Mini Muthoottu Credit v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE DR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR. JUSTICE SYAM KUMAR V.M.MONDAY, THE 25 DAY OF MARCH 2024 / 5TH CHAITHRA, 1946 ITA NO. 76 OF 2019 AGAINST THE ORDER/JUDGMENT DATED 04.09.2018 IN ITA NO.237OF 2018 OF I.T.A.TRIBUNAL,COCHIN BENCHAPPELLANT M/S. MINI MUTHOOTTU CREDIT INDIA (P) LTD.MUTHOOT BUILDING, KOZHENCHERRY - 689 641. BY ADVS.MOHAN PULIKKALSRI.NARAYANAN POTTISMT.A.AMRUTHA VIDYADHARAN RESPONDENT THE COMMISSIONER OF INCOME TAXKOTTAYAM BY ADVS.SRI.P.K.RAVINDRANATHA MENON (SR.)SRI.JOSE JOSEPH, SC, FOR INCOME TAX SC-CHRISTOPHER ABRAHAM. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSIONON 25.03.2024, THE COURT ON THE SAME DAY DELIVERED THEFOLLOWING: JUDGMENT Dr. A.K.Jayasankaran Nambiar, J. M/s. Mini Muthoot Credit India (P) Ltd. is the appellant beforeus, aggrieved by the order dated 04.09.2018 of the Income TaxAppellate Tribunal, Cochin Bench in I.T.A.No.237/Coch/2018. 2. The brief facts necessary for disposal of this appeal are asfollows:- The appellant-assessee is engaged in the business of assetmanagement services. For the assessment year 2012-13 it haddeclared a total income of Rs.1,08,22,440/-. Its case was selected forscrutiny under Section 143(2) of the IT Act and the assessment thatfollowed, it was assessed to a total income of Rs.2,02,75,110/-. Inarriving at the total income, the assessing officer disallowed a sum ofRs.90,73,279/- being the interest that was paid by the appellant onlong-term borrowings. The disallowance by the assessing authoritywas on the ground that the loan amount in question was used by theappellant for purchasing land worth Rs.5,91,52,500/-, which was anagricultural land and on which the appellant had cultivated tapioca.The assessing authority therefore found that, in as much as the loanon which interest liability had arisen, was used for purchasing agricultural and earning agricultural income, the interest expenseincurred on the loan amount availed could not be allowed as anexpense under Section 36 of the Income Tax Act since it was not usedfor business purposes. 3. In the appeal preferred by the appellant before theCommissioner of Income Tax (Appeals), the Appellate Authority foundthat the appellant had acquired the land in question for the purposesof business and had exclusively used the same for business purposes.It is significant that in the order of the Appellate Authority, there isno specific reason/material to support the finding that the appellanthad used the land exclusively for business purposes. 4. Against the order of the First Appellate Authority that wasin favour of the appellant, the revenue preferred an appeal before theIncome Tax Appellate Tribunal. The appellate tribunal after perusingthe balance sheet, profit and loss account and the tabulated financialresults of the appellant as produced by its authorised representative,found as follows in paragraph 6 of its order. “6. We have heard the rival parties and perused therecord. The question for our consideration is whether the interestbearing funds have been utilized by the assessee-company foracquiring agricultural land which have yielded agriculturalincome and as to whether disallowance is required to be made inrespect of such interest paid. The facts noted above show thatinterest bearing loans were used undisputedly for purchase ofland for agricultural purpose which yielded agricultural income.The contention of the assessee is that the said land was shown as “6. We have heard the rival parties and perused therecord. The question for our consideration is whether the interestbearing funds have been utilized by the assessee-company foracquiring agricultural land which have yielded agriculturalincome and as to whether disallowance is required to be made inrespect of such interest paid. The facts noted above show thatinterest bearing loans were used undisputedly for purchase ofland for agricultural purpose which yielded agricultural income.The contention of the assessee is that the said land was shown as business asset in the balance sheet and the land was also usedfor the purpose of the business of the assessee. However, therewas no iota of evidence to show that the land was used for thepurpose of the business of the assessee. On the contrary, it wasused for agricultural purpose which yielded agricultural incomewhich is exempt from income tax under section 10(1) of the I.T.Act. The assessee has not placed any evidence to show that theland had been used for the purpose of business. The assesseemight have shown the agricultural land in its balance sheet asbusiness asset but nothing has been proven on record to showthat the assessee was at all using the said land for businessactivities and as such merely showing the agricultural land in thebalance sheet as business asset is not enough to prove thecontention of the assessee. The contention of the assessee wasthat it had used the agricultural land for the purpose of business.That itself shows that investment in agricultural land cannot beheld to be business asset because it should have been shown asagricultural land only. Being so, interest incurred on borrowingsused for purchase of agricultural land cannot be allowed adeduction in terms of section 36(1)(iii) of the I.T. Act as thecondition laid down under section 36(1)(iii) has not been fulfilled.In other words, interest paid in respect of loan is not borrowedfor the purpose of the business of the assessee but it has beenborrowed for the acquisition of agricultural land which yieldedexempted income not liable to tax. In our opinion, there is directnexus between the interest bearing loans taken by the assesseeand the investment made in agricultural land. The incomegenerated from such land acquired by way of borrowings isexempt from tax u/s. 10(1) of the Act. The assessee incurredexpenditure on such borrowings and therefore is not entitled fordeduction of interest u/s 36(1)(iii) of the Act which was rightlydisallowed by the Assessing Officer.” 5. The appellant has impugned the said order of the Tribunalin this appeal wherein the following substantial questions of law havebeen raised. i) Whether on the facts and in the circumstances of the case,the Income Tax Appellate Tribunal is correct in reversing the Order ofthe Commissioner of Income Tax (Appeals), and holding that theexpense incurred by way of interest paid on capital borrowed, to theextent of Rs.90,73,279/- was not eligible to be allowed under Sec.36(1)(iii) of the Income Tax Act, 1961? ii) Whether on the facts and in the circumstances of the case,has not the Tribunal misdirected itself in holding that the interestexpense incurred was for earning exempt agricultural income andhence was not an allowable deduction, purportedly under Sec.14A,instead of addressing the real issue as to whether the appellant isentitled to claim the interest expenses paid on borrowed capital as adeduction under Sec. 36(1)(iii) of the Income Tax Act, 1961? 6. We have heard Sri.Mohan Pullikkal, the learned counselfor the appellant and Sri.Christopher Abraham, the learned StandingCounsel for the Income Tax Department. ii) Whether on the facts and in the circumstances of the case,has not the Tribunal misdirected itself in holding that the interestexpense incurred was for earning exempt agricultural income andhence was not an allowable deduction, purportedly under Sec.14A,instead of addressing the real issue as to whether the appellant isentitled to claim the interest expenses paid on borrowed capital as adeduction under Sec. 36(1)(iii) of the Income Tax Act, 1961? 6. We have heard Sri.Mohan Pullikkal, the learned counselfor the appellant and Sri.Christopher Abraham, the learned StandingCounsel for the Income Tax Department. 7. On a consideration of the facts and circumstances of thecase and the submissions made across the bar, we find that there isno material produced by the appellant that would clearly suggestthat the loan amount availed by it during the assessment year inquestion had been used for purchasing an asset, which it had usedfor the purposes of its business as a provider of asset managementservices. The evidence that was available before the authoritiesbelow clearly pointed to the acquisition of agricultural land valued atRs.5,91,52,500/- and the earning of agricultural income through thesale of tapioca to the tune of Rs.1,93,540/- during the said period.Thus, notwithstanding the fact that the land in question was shownas a business asset in the balance sheet of the company, the factremains that there was no evidence to show that the land was usedfor the purposes of the business of the assessee. As rightly noticed by the Tribunal in the impugned order, the evidence on recordshowed that the land in question was used for agricultural purposes,which yielded agricultural income, which in turn was exempt fromincome tax under Section 10(1) of the Income Tax Act. Admittedly,therefore, and in view of Section 14A of the IT Act, the expensescould not have been seen as incurred for the purposes of thebusiness for the purposes of Section 36 (iii) of the IT Act. We therefore, see no reason to interfere with the wellreasoned order of the Tribunal and we dispose this IT Appeal, byanswering the substantial questions of law raised therein, against theassessee and in favour of the revenue. Sd/- DR. A.K.JAYASANKARAN NAMBIAR JUDGE Sd/- SYAM KUMAR V.M. JUDGE smm APPENDIX OF ITA 76/2019 PETITIONER ANNEXURESANNEXURE A THE TRUE OF THE ASSESSMENT ORDERDATED 10.02.2015. ANNEXURE B TRUE COPY OF THE ORDER DATED12.03.2018 OF THE COMMISSIONER OFINCOME TAX (APPEALS), KOTTAYAM.TRUE COPY OF THE ORDER DATED04.09.2018 OF THE INCOME TAXAPPELLATE TRIBUNAL, COCHIN BENCH.TRUE COPY OF THE MEMORANDUM OFASSOCIATIONOFTHEAPPELLANTCOMPANY. ANNEXURE C ANNEXURE D