Lakozy Motors P.Ltd, Mumbai vs Department Of Income Tax

ी संजय अरोड़ा, लेखा सद य एवं ी अ मत शु ला, या यक सद य के सम ।

BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM

आयकर अपील सं./I.T.A. No. 6982/Mum/2012 ( नधारण वष / Assessment Year: 2009-10) Lakozy Motors Private Limited Income Tax Officer-9(2)(2), 167, Vidyanagari Marg, Kalina, बनाम/ Aaykar Bhavan, M. K. Road, Santacruz (E), Mumbai-400 098 Vs. Mumbai-400 020

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACL 1889 K ( नधा रती/Assessee) : (राज व /Revenue) & आयकर अपील सं./I.T.A. No. 7146/Mum/2012 ( नधारण वष / Assessment Year: 2009-10) Income Tax Officer-9(2)(2), Lakozy Motors Private Limited Aaykar Bhavan, M. K. Road, बनाम/ 167, Vidyanagari Marg, Kalina, Mumbai-400 020 Vs. Santacruz (E), Mumbai-400 098 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACL 1889 K (राज व /Revenue) : ( नधा रती/Assessee)

नधा रती क ओर से / Assessee by : Shri Vipul Shah राज व क ओर से/Revenue by : Shri Sachchidanand Dube

सुनवाई क तार ख / : 25.02.2015 Date of Hearing घोषणा क तार ख / : 08.05.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

These are cross appeals, i.e., by the Assessee and the Revenue, agitating the part allowance of the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 2 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

26.09.2012 by the Commissioner of Income Tax (Appeals)-20, Mumbai ('CIT(A)' for short) vide his order dated 29.12.2011.

Assessee's Appeal (in ITA No. 6982/Mum/2012)

2. The appeal raises two grounds, which we shall take up in seriatim. The first concerns the disallowance of commission expenses in the sum of Rs.21,34,840/- on account of non-deposit of tax deducted at source (TDS) within the stipulated time period u/s. 40(a)(ia) of the Act, as amended by Finance Act, 2008 w.r.e.f 01.04.2005. The due dates of deposit of tax were 01.10.2008, 04.11.2008, 04.12.2008, 01.01.2009 and 02.02.2009, so that the same ought to have been deposited latest by 31.03.2009, while were admittedly deposited only on 22.09.2009. The deduction in its respect would, under law, thus be exigible to deduction only in the year of payment, i.e., for A.Y. 2010-11. This represents and sums up the Revenue's case, so that, aggrieved, the assessee is in second appeal, raising the following ground:

'1. On the facts and circumstances of the case and law the learned Commissioner of Income Tax - Appeal erred in confirming the disallowance of payment of Commission of Rs.21,34,840/- u/s. 40(a)(ia) of the Income Tax Act, 1961 without considering decision of ITAT and High Court.'

3. We have heard the parties, and perused the material on record.

The only decision cited by the assessee, as per the orders by the authorities below, is by the Tribunal in the case of Bansal Privahan (India) Pvt. Ltd. vs. ITO [2011] 43 SOT 619 (Mum), stating that the amendment by Finance Act, 2010 (w.e.f 01.04.2010), providing time for deposit of TDS up to the due date of filing of the return of income, which in the instant case is 30.09.2009, lest the expense be allowed in computing the income for the year of payment of TDS, as retrospective, so that it would apply for the current year as well. We are however unable to find any infirmity on that score in-as- much as the tribunal per its decision in Bharati Shipyard Ltd. vs. Dy. CIT [2011] 11 ITR(Trib) 599 (Mum) (SB), relied upon by the Assessing Officer (A.O.), held the amendment as not retrospective. So, however, the decisions by the Hon'ble High Courts, 3 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

as in the case of CIT vs. Virgin Creations (in ITA no. 302 of 2011 [G.A. No.3200 of 2011, dated 23.11.2011]) and CIT vs. Naresh Kumar [2014] 362 ITR 256 (Del) have since been delivered, holding the amendment to section 40(a)(ia) by Finance Act, 2010 as retrospective. Accordingly, the assessee succeeds. As a corollary, we may though add, where the assessee has claimed or otherwise been allowed, as the Revenue was obliged to, deduction in respect of the impugned sum for A.Y. 2010-11, i.e., following the Revenue's stand of the amendment afore-stated being not retrospective, a modification to the assessment for that year shall, in consequence, follow. We decide accordingly.

4. Ground No. 2 relates to the deduction u/s.14A, at Rs.5,83,310/-. The assessee was observed to have made an investment in shares at Rs.1,07,41,401/-, income from which does not form part of the total income. Indirect expenditure, by way of interest and administrative expenditure, had, however, been incurred, so that a disallowance in its respect, to the proportionate extent, would arise, and was accordingly made in terms of rule 8D(2)(ii) (at Rs.5,29,603/-) and rule 8D(2)(iii) (at Rs.53,707/-), and confirmed for the same reason/s. Aggrieved, the assessee is in appeal; its' ground reading as under:

2. On the facts and circumstances of the case and law the learned Commissioner of Income Tax - Appeal erred in confirming the disallowance of a sum of Rs.5,83,310/- u/s.14A of the I T Act, 1961.

5. We have heard the parties, and perused the material on record. The assessee has before the authorities below contended that of the total investment in shares that for Rs.102.50 lacs is in shares of companies for diverse business reasons, not yielding any dividend income, which also explains the low level of dividend income at Rs.2367. The claim was found, in the words of the ld. CIT(A), as vague, unverifiable and unsubstantiated, so that irrespective of the volume of dividend, disallowance of corresponding expenditure shall arise. Apart from un-substantiation of its claims, the same would be of no assistance. This is as, admittedly, the purpose of investment is not to generate income, so that the same cannot be regarded as toward a source of income, but perhaps an investment, made for strategic reasons. How, then, one may ask, could the 4 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

same be disregarded for disallowance of expenditure attributable to such investments, which have nevertheless to be managed? The income, to whatever extent, that may arise out of such investment would not form part of the total income, while expenditure, particularly indirect expenditure, is not incurred in any proportion to income, which may be paltry, or perhaps even negative, considering that income for the purposes of the Act is only one which corresponds with the common understanding of the said term, i.e., net of expenses, so that the same would only be after deducting expenses attributable thereto.

As regards the non-receipt of income there-against, it is the income from the shares, i.e., as a class of investment, that has to be considered, and not qua each share/individual investment. As such, where, as in the present case, the assessee is not able to advance its' case of having not incurred any indirect expenditure toward such investment yielding or liable to yield exempt income, with reference to its accounts, a disallowance, following the prescription of rule 8D, mandatory for the current year, shall follow. We, accordingly, do not find any infirmity in the orders by the authorities below.

So, however, the assessee has before us raised a plea, relying on the decision by the tribunal in the case of AFL P. Ltd. vs. Asst. CIT [2013] 28 ITR (Trib) 263 (Mum), stating that where the entire borrowing by way of cash credit (account) stands absorbed in the relevant class of assets, i.e., those intended to be financed thereby, no disallowance u/s. 14A shall ensue. We find merit in the said argument. Where the borrowing under the cash credit account is within the drawing power (i.e., the amount that the assessee- borrower could validly draw or avail in terms of the relevant loan agreement), the presumption, both on facts and in law, would only be of the entire sum as having been utilized toward the intended business purpose/s, financing of inventory of stock-in-trade for example. The term loans are, in any case, towards specific/defined capital assets, so that, where purchased, the borrowings can only be considered as having been applied toward the same. The matter is, accordingly, restored back for necessary verification, and toward which the assessee shall extend all assistance and cooperation, only for its own benefit. The A.O. shall adjudicate, issuing definite findings of fact, so that where the borrowings are shown to have been utilized in terms of the agreement, as indicated 5 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

above, the assessee could only be said to have complied with the terms of section 14A(2). We decide accordingly.

6. The third and final ground of the assessee's appeal is in respect of sums, aggregating to Rs.1,07,75,254/-, being ostensibly advances, treated as income as no valid ground for treating the same as such, i.e., as advance, or evidence toward the same as representing a liability, stood furnished. In fact, most of the sums had been offered as income for the immediately succeeding year, and for which no apparent reason had been advanced. Surely, the character of an amount could not be changed on the basis of journal voucher, and the same was only a deferment of income. Even in cases where sale/income was booked against the impugned sum/s in the following year, the same were not accompanied by either delivery of goods or rendering of services, so that the same was, again, without basis, and with a view to neutralize a non-existing liability. This defines the Revenue's case, which stands agitated by the assessee, raising the following ground:

'3. On the facts and circumstances of the case and law the learned Commissioner of Income Tax - Appeal erred in confirming the treatment of Advance received from Customers as unexplained Advance without appreciating the details submitted to him and also ignoring the fact that those advances were offered as income in subsequent years and the same has resulted in Double Taxation of same Income.'

7. We have heard the parties, and perused the material on record.

The impugned amounts (14 in number) have been received from customers, either during the previous year or earlier years, purportedly by way of advances against sales of goods, viz. vehicles, spare parts, etc. or services, i.e., against servicing of vehicles - the assessee being in the business of sales and services of automobiles. It is only for the assessee to, therefore, exhibit that the amount/s, though received, did not represent income, as contractual obligation/s in its respect had not been performed as at the year- end, so that no income had in fact accrued, so as to be appropriated in accounts to the income account for the year. Where and to the extent the assessee has in fact been able to do so, the A.O. has accepted the assessee's claim, as in the case of Happy Home and 6 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

School for Blind (Rs.4,34,998/-) and Municipal Corporation of Greater Mumbai (Rs.21,90,581/-). Income, it is trite law, is to be assessed in the hands of the right person and for the right year (ref: ss. 4 & 5 r/w ss. 28 and 145 of the Income-tax Act, 1961; CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC); and ITO v. Ch. Atchaiah (1996) 218 ITR 239 (SC)). However, merely for the reason that the same stands offered as 'income' for a future year would not by itself establish the assessee's case of income having not accrued for the current year. And which would decidedly be the case where no taxable event has occurred during the year for which income stands offered to tax, being the following year in most cases. Accounting entry, it needs to be appreciated, does not create income, but only recognizes it, where it has inured. The whole premise of accounts is the true and fair statement of the assessee's affairs. As such, treatment in accounts, unsubstantiated by or de hors any activity or taxable event is by itself of no consequence, and has been rightly ignored and inferred by the Revenue as a revenue deferment exercise by the assessee. Even before us the assessee's emphasized and its principal contention was in respect of a sum of Rs.96,62,322/-, received from Ryan International School, stated as an advance lease rental. No lease agreement to supplement the claim of advance, however, stood adduced before the Revenue, and which position continues before us. The receipt was, accordingly, treated as realized on account of sale/income. The assessee before us has produced challans for payments of sales tax (MVAT) on 26.04.2010 (Rs.3,25,508/-) and 21.03.2010 (Rs.63,259/-), placed at pgs. 72 and 73 respectively of the assessee's paper book (APB). We are, even assuming the said tax to be in respect of the relevant transaction, unable to see as to how the same supports the assessee's case. Lease tax, even if payable by the assessee out of the sum realized, i.e., Rs.96.62 lacs, being a statutory due, would stand to be allowed in the year of payment. Appropriating the amount in accounts as a liability would, therefore, be of little assistance to the assessee; its' case continuing to be de hors any substantiation on facts, with the amount outstanding in books prior to 31.03.2008 (APB pg. 44).

Continuing further, true, the amount/s under reference may have been brought to tax for the following (another) year/s. However, it is only the assessee who is responsible 7 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

for the same, i.e., by disclosing it as its income for that year/s. It is only where the assessee concedes to the income being subject to tax for the current year that the Revenue could be faulted for, despite the assessee having returned it as so, i.e., for the following year/s, assessing it as income for that year/s, and which is not the case. Be that as it may, there is no denying that the same cannot be subject to tax, and neither could it accrue to the assessee, i.e., as income, twice, so that the second/subsequent accrual, on which there is no finding though; the Revenue having merely accepted the assessee's return for that year/s, is invalid both on facts and in law.

We, accordingly, direct the A.O. to verify the assessee's claim/s for the said income as having been offered as income and, consequently, as having been subject to tax for the following year/s and, where so, delete the same. The A.O. shall undertake the examination, and toward which the assessee shall extend all necessary and reasonable cooperation, while passing appeal effect giving order. We decide accordingly.

Revenue's Appeal (in ITA No. 7146/Mum/2012) 8.1 Vide its two grounds, the Revenue impugns the deletion of disallowance of bank interest in the sum of Rs.32,73,421/-, representing the interest on cash credit account with it's bank, Bank of India. The basis of the disallowance by the A.O., as a reading of his order would show, is the non-payment of the said sum, which stands credited by the assessee in its accounts to the relevant bank (cash credit) account, increasing the balance in the said (loan) account to that extent in-as-much as the liability to the bank on account of interest had not been reflected separately by the assessee in its accounts. Bank interest is a sum specified u/s.43B(e) and, accordingly, allowance in its respect would follow its payment, i.e., by actual discharge of liability. Even its conversion to loan/liability account shall not, as clarified by Explanation 3D thereto, amount to its payments. The deletion by the ld. CIT(A) is on the basis that the A.O., who had been furnished with the copy of the cash credit account, had, however, considered the same as a term loan, and which was not the case; the two accounts being distinct. How would that, we wonder, alter the Revenue's case, i.e., even assuming that the A.O. has considered the bank interest as on a 8 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

term loan account with Bank of India, a scheduled bank. We say so as section 43B(e) is, w.e.f. 01.04.2004, i.e., A.Y. 2004-05 onwards, applicable equally to a term loan or to any other loan/advances by such a bank. In fact, it is the ld. CIT(A) who has committed a faux pass; the A.O. all through referring to a loan, and nowhere mentions the bank borrowing to be a term loan, which we have though found irrelevant in view of the law and the Revenue's case, as enumerated above.

8.2 We may, next, discuss the issue on merits. The provision reads as under:

'Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of--

(a) ............ (b) ............

(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

Explanation 3D.--For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid.'

8.3 A cash credit account operates both as a loan (fluctuating) or advance account as well as a current account, with all the receipts and payments of the assessee borrower being channelized through it. The bank, accordingly, also debits its interest to this account, increasing its balance immediately to that extent, and which thus becomes part of the loan/advance amount, i.e., borrowed capital, and on which therefore it is entitled to, and charges, interest. The non reflection of liability toward bank interest by the assessee in its account is, thus, not an incorrect representation of its financial position.

The question, however, remains as to how the payment of interest charged by bank is to be reckoned in such circumstance, particularly considering Explanation 3D to section 43B, which clearly states of conversion of interest into borrowing to be not construed as a 9 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

actual payment of interest. The controversy arises on account of non-appreciation of fact that the payment could well be caused by movement of funds as against per actual cash. Payments in modern business are received and made through credits and debits in the bank accounts of the payee and the payer. Where the bank borrowings at the enhanced amount, i.e., inclusive of the charge of interest, is within the drawing power, the bank is deemed to have extended advances (i.e., on principal account) to the assessee to that extent. As such, it is not a case of conversion of interest into bank borrowing but of the same being actually paid out of borrowed funds advanced by the bank. The drawing power is drawn by the bank at different intervals of the time on the basis of the financial information/statement/s furnished by the assessee, i.e., in pursuance to his obligation/s under the relevant loan agreement, only to confirm if the borrowed funds are within the prescribed limit/s, and utilised for the intended purposes. To exemplify, a cash credit account against hypothecation of inventories of stock-in-trade (say), stipulating a margin of 25% (say), would thus yield a drawing power (DP) of Rs.750/- against an inventory of Rs.1,000/- (i.e., Rs.1000 - Rs.1000 x 25%), the balance Rs.250/- being financed by the payer from his own sources.

As long as, therefore, the bank balance is within the drawing power of Rs. 750/-, the payer can only be, irrespective of the nature of the charges or debits to its account by the bank, considered as toward the intended purpose. The said charges/debits stand, in consequence, paid. It is only where the bank balance exceeds the DP of Rs.750/-, that the excess can be construed as an application by the assessee for other than inventories, or as a liability toward unpaid charges. The payment or otherwise of bank interest shall, therefore, have to be reckoned with reference to drawing power as at the year-end drawn as per the terms of the borrowing agreement. This is precisely why, and also explains reference thereto, in section 43B(e). Further still, as the payment, to qualify for allowance, could be validly made by the date of furnishing the return of income u/s.139(1), the drawing power for the future dates may also be relevant in this regard. Surely, the DP should be on the basis of normative balances and not contrived, i.e., which is brought down only to exhibit a below par balance for a brief period, before assuming its' normal, higher balance.

The matter is, accordingly, restored to the file of 10 ITA Nos. 6982/Mum/2012 & 7146/Mum/2012 (A.Y. 2009-10) Lakozy Motors Private Limited

the A.O. for necessary verification and toward which the assessee shall extend cooperation to enable proper determination of the matter by the former, i.e., in accordance with the law, keeping in view its foregoing elucidation. We decide accordingly.

9. In the result, the assessee's appeal is partly allowed and partly allowed for statistical purposes, and the Revenue's appeal is allowed for statistical purposes.

Order pronounced in the open court on May 08, 2015

Sd/- Sd/- (Amit Shukla) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; दनांक Dated : 08.05.2015 व. न.स./Roshani, Sr. PS आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकर आयु त(अपील) / The CIT(A) 4. आयकर आयु त / CIT - concerned 5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard File आदे शानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai