M/S.spaarkon Trading Chennai P. Ltd v. The Commissioner Of Income Tax (Appeals)

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 06.02.2020 CORAM THE HONOURABLE DR. JUSTICE ANITA SUMANTH Writ Petition No.19523 of 2018andWMP. Nos.22962 to 22964 of 2018 M/s.Spaarkon Trading Chennai P. Ltd.,PAN No.AANCS6476NRep. by its Director, Mr.Srinivas Ramachandran,Plot No.5, Door No.130, 1[st] Cross,4[th] Street, Surendra Nagar,Adambakkam, Chennai – 600 088. ...Petitioner Vs. 1. The Commissioner of Income Tax (Appeals)-15, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 2. The Assistant Commissioner of Income Tax, Non Corporate Circle 18(1), 5[th] floor, Room No.520, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. ... Respondents PRAYER: PETITION filed under Article 226 of the Constitution ofIndia praying for the issuance of Writ of CertiorarifiedMandamus, calling for the records of the 1[st] respondent in ITANo.132/2016-17/CIT (A)-15 dated 28.03.2018 and quash the sameconsequently, direct the 1[st] respondent to afford an opportunityto the petitioner for submitting the relevant documents tosubstantiate their version that the alleged addition to incomewas business expenditure etc., : Mr.V.Sridharan, Senior Counsel for Mr.S.Ashok Kumar For Respondents: Mr.A.P. Srivnivas, Senior Standing Counsel https://hcservices.ecourts.gov.in/hcservices/ The petitioner challenges an order of the Commissioner ofIncome Tax (Appeals) [in short CIT (A)] dated 28.03.2018 forAssessment Year 2013-14, passed in terms of the provisions ofSection 250 (6) of the Income Tax Act, 1961 (in short 'Act'). 2. The appellate order in challenge has made an enhancementto the income determined by the Assessing Officer. 3. The order of assessment dated 30.03.2016 had effected adisallowance under Section 14A read with Rule 8D of the IncomeTax Rules, 1962. In course of effecting the disallowance, theAssessing Officer notes that the petitioner has effectedborrowals from Standard Chartered Bank towards 'Everonn HarayanaProject'. A diallowance under Section 14 A had been made on theground that interest free loans has been granted in excess ofthe borrowals. This was contested by the petitioner in firstappeal before the CIT (A) who, noticing that the petitioner hadnot earned any exempt income in the course of the year, heldthat the provisions of Section 14A would not be applicable. Thedisallowance under Section 14A was thus deleted. 4. While doing so, the CIT (A) noted that the borrowals ofRs.32 Crores from Standard Chartered Bank had resulted inpayment of interest of Rs.2.87 Crores thereupon. However, theborrowals had themselves been given as interest-free loans toEveronn Education Ltd, (Everonn Education Ltd and EveronnHarayana Project being one and the same entity). Thus, taking adifferent perspective of the same transaction, the CIT (A)proposed disallowance of the interest paid on the ground thatthere had been diversion of interest-free borrowed loan forreasons, other than business. 5. Notice to show-cause for enhancement appears to havebeen issued only orally and the records of assessment that havebeen produced before me reveal an order-sheet note as follows:'CA.R.Thiagarajan, AR, appeared and discussed.The AR was asked to show cause why theassessment cannot be enhanced by disallowing theinterest paid to bank as the borrowed businessfund was diverted as interest free advance toEveron. Reposted on 08.02.2018 at 4.00 p.m.29-12-2017 CT(A)-15' 6. The notice has been evidently understood by thepetitioner to mean a proposal for disallowance and enhancementin terms of Section 36(1) (iii) of the Act as may be gleanedfrom the reply filed by the petitioner on 16.03.2018 to thefollowing effect: ' WRITTEN SUBMISSION IN THE MATTER OFSPAARKON TRADING (CHENNAI) PRIVATE LIMITED -ITANO.132/2016-17-A.Y.2013-14) 1. The nature of business activity of theAssessee is as under: 6. The notice has been evidently understood by thepetitioner to mean a proposal for disallowance and enhancementin terms of Section 36(1) (iii) of the Act as may be gleanedfrom the reply filed by the petitioner on 16.03.2018 to thefollowing effect: ' WRITTEN SUBMISSION IN THE MATTER OFSPAARKON TRADING (CHENNAI) PRIVATE LIMITED -ITANO.132/2016-17-A.Y.2013-14) 1. The nature of business activity of theAssessee is as under: a. The Assessee was in the business ofbuying, selling and trading of computerhardware and software. b. In 2010, the Assessee tied up with oneof it's biggest clients Everonn EducationLimited, whereby Everonn Education Limitedwould lease the computer hardware owned by theAssessee for the project that Everonn EducationLimited would manage for the Haryana State Government. This lease would be for a durationof 5 years. c. The Assessee obtained a loan fromStandard Chartered Bank to fund the purchase ofequipment needed for the Haryana project, whichEveronn Education Limited would manage. d. The lease income from Everonn EducationLimited is offered as income in the Income-Tax return filed by the Assessee. The interestexpenditure paid on the loan of StandardChartered Bank is claimed as an expenditure. 2. The details of short term loans andadvances of Rs.17,04,89,251/- is given in PageNo.3 3. A copy of the sanction letter dated12.05.2010 of Standard Chartered Bank isenclosed in Page No.4 to 8. It may be noticed,the loan is sanctioned for the specific purposeof purchase of equipments to be leased toEveronn Education Limited. The entire amount ofinterestexpenditureofRs.2,87,52,372/-represent the interest paid to StandardChartered Bank on the said loan. 4. As the loan borrowed is for the specificpurpose of purchase of equipments, which isleased out as the part of the business of the Assessee and the interest paid is on such loanborrowed for the specific purpose, the interestpaid on the loan is a business expenditure andis allowable. This position is notwithstandingthe fact, the Assessee has extended certaininterest free loans to two parties, as suchinterest free advances were made from sourcesother than the borrowing from the StandardChartered Bank. Therefore, it is humblysubmitted the interest expenditure claimed bythe Assessee is a business expenditure. In regard I rely upon the followingdecision:a. CIT Vs. Bombay Samachar Limited -1969ITR 723 Bom is enclosed in Page No.9 to 11b. Deputy CIT Vs. Kamdar Constructions-ITAT, Mumbai dated 25.02.2011 – Followed thedecision of Bombay Samachar Limited is enclosedin Page No.12 to 215. These Submissions are in addition to mysubmissions dated 29.12.2017, as to why theprovisions of Section 14A cannot be invoked forthe disallowance of the interest expenditure, asbeing done by the Assessing Officer in theimpugned order.6. In view of the above, the Return ofIncome as filed by the Assessee may kindly beaccepted and the additions made in the impugnedassessment order may kindly be deleted.*******R.Thiagarajan.' 7. Thus, the petitioner was in no doubt that the provisioninvoked for enhancement by the CIT (A) was Section 36(1) (iii)that dealt with 'other deductions' and that interest paid inrespect of capital borrowed was allowable as a deduction, onlyif such capital had been borrowed for the purposes of businessor profession. The issuance of notice orally, thoughinappropriate as a matter of routine, is not a fatal flaw inthis case seeing as the petitioner has understood the issue asmeant by the officer and has also responded thereto. 8. On the merits of the matter, in my considered view, thenecessary facts to adjudicate upon this issue have not beenplaced before the Authorities and it was incumbent upon thepetitioner to have established its case that the capital https://hcservices.ecourts.gov.in/hcservices/ 8. On the merits of the matter, in my considered view, thenecessary facts to adjudicate upon this issue have not beenplaced before the Authorities and it was incumbent upon thepetitioner to have established its case that the capital https://hcservices.ecourts.gov.in/hcservices/ borrowed was for the purposes of business or profession only,perhaps by production of the Memorandum containing the objectsof the company or other supporting evidences. The Memorandum,incidentally, is placed before me at this stage but has not beenadmitted, as it is not a document available on record before therespondent authorities. No doubt, the petitioner has circulatedthe Sanction letter from the Bank wherein the purpose ofavailing loan is stated to be financing of purchase ofequipments to be leased at BOO/BOOT basis to Everonn EducationLimited. The equipments are stated to be intended for executionof the contract entered into by the petitioner with the State ofHaryana. However, a copy of the contract has also not beenplaced before any of the Authorities. 9. The CIT (A) thus concluded that the disallowance interms of Section 36(1) (iii), as proposed, was justified andcompleted the proceedings in line with the proposal forenhancement. 10. In the light of the discussion as above, I fine nowarrant or justification for interfering with the impugnedorder in terms of Article 226 of the Constitution of India asfacts necessary for adjudication of the matter on merits havenot been placed before the authorities. Liberty is granted tothe petitioner to file a statutory Appeal before the Income TaxAppellate Tribunal (Tribunal) within a period of two (2) weeksfrom today. 11. Since the Writ Petitions have been filed within thelimitation prescribed for filing statutory appeal, such appeal,if filed within the timeline as stipulated aforesaid, shall betaken on file without reference to limitation and disposedwithin a period of two (2) months from date of conclusion ofpersonal hearing. 12. The petitioner has been protected from recovery by anorder of this Court dated 06.08.2018, effective till date.Such protection shall continue till disposal of the Appeal bythe Tribunal as above. If no appeal as permitted aforesaid, isfiled, the impugned order stands. The Writ Petition isdismissed with liberty as aforesaid. No costs. ConnectedMiscellaneous Petitions are also dismissed. Sd/- Assistant Registrar //True Copy// rkp Sub Assistant Registrar To 1. The Commissioner of Income Tax (Appeals)-15, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. 2. The Assistant Commissioner of Income Tax, Non Corporate Circle 18(1), 5[th] floor, Room No.520, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. Non Corporate Circle 18(1), 5[th] floor, Room No.520, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. + 1 CC to Mr. A.P.Srinivas, Advocate, SR.10088+ 1 CC to Mr. Ashok Kumar, Advocate, SR 10208 Writ Petition No.19523 of 2018andWMP. Nos.22962 to 22964 of 2018 MRP 29/05/2020