W.P.No.19523 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 06.02.2020 CORAM HONOURABLE DR. JUSTICE ANITA SUMANTH Writ Petition No.19523 of 2018 and WMP. Nos.22962 to 22964 of 2018 M/s.Spaarkon Trading Chennai P. Ltd., PAN No.AANCS6476N Rep. by its Director, Mr.Srinivas Ramachandran, Plot No.5, Door No.130, 1st Cross, 4th Street, Surendra Nagar, Adambakkam, Chennai 600 088. Petitioner Vs. 1. Commissioner of Income Tax (Appeals)-15, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. 2. Assistant Commissioner of Income Tax, Non Corporate Circle 18(1), 5th floor, Room No.520, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. Respondents PRAYER: PETITION filed under Article 226 of Constitution of India praying for issuance of Writ of Certiorarified Mandamus, calling for records of 1st respondent in ITA No.132/2016-17/CIT (A)-15 dated 28.03.2018 and quash same consequently, direct 1st respondent to afford opportunity to petitioner for submitting relevant documents to substantiate their version that alleged addition to income was business expenditure etc., For Petitioner : Mr.V.Sridharan, Senior Counsel for Mr.S.Ashok Kumar For Respondents : Mr.A.P. Srivnivas, Senior Standing Counsel http://www.judis.nic.in 1/6 W.P.No.19523 of 2018 ORDER petitioner challenges order of Commissioner of Income Tax (Appeals) [in short CIT (A)] dated 28.03.2018 for Assessment Year 2013-14, passed in terms of provisions of Section 250 (6) of Income Tax Act, 1961 (in short 'Act'). 2. appellate order in challenge has made enhancement to income determined by Assessing Officer. 3. order of assessment dated 30.03.2016 had effected disallowance under Section 14A read with Rule 8D of Income Tax Rules, 1962. In course of effecting disallowance, Assessing Officer notes that petitioner has effected borrowals from Standard Chartered Bank towards 'Everonn Harayana Project'. diallowance under Section 14 had been made on ground that interest free loans has been granted in excess of borrowals. This was contested by petitioner in first appeal before CIT (A) who, noticing that petitioner had not earned any exempt income in course of year, held that provisions of Section 14A would not be applicable. disallowance under Section 14A was thus deleted. 4. While doing so, CIT (A) noted that borrowals of Rs.32 Crores from Standard Chartered Bank had resulted in payment of interest of Rs.2.87 Crores thereupon. However, borrowals had themselves been given as interest-free loans to Everonn Education Ltd, (Everonn Education Ltd and Everonn Harayana Project being one and same entity). Thus, taking http://www.judis.nic.in 2/6 W.P.No.19523 of 2018 different perspective of same transaction, CIT (A) proposed disallowance of interest paid on ground that there had been diversion of interest-free borrowed loan for reasons, other than business. 5. Notice to show-cause for enhancement appears to have been issued only orally and records of assessment that have been produced before me reveal order-sheet note as follows: 'CA.R.Thiagarajan, AR, appeared and discussed. AR was asked to show cause why assessment cannot be enhanced by disallowing interest paid to bank as borrowed business fund was diverted as interest free advance to Everon. Reposted on 08.02.2018 at 4.00 p.m. 29-12-2017 CT(A)-15' 6. notice has been evidently understood by petitioner to mean proposal for disallowance and enhancement in terms of Section 36(1) (iii) of Act as may be gleaned from reply filed by petitioner on 16.03.2018 to following effect: ' WRITTEN SUBMISSION IN MATTER OF SPAARKON TRADING (CHENNAI) PRIVATE LIMITED -ITA NO.132/2016-17-A.Y.2013-14) 1. nature of business activity of Assessee is as under: a. Assessee was in business of buying, selling and trading of computer hardware and software. b. In 2010, Assessee tied up with one of it's biggest clients Everonn Education Limited, whereby Everonn Education Limited would lease computer hardware owned by Assessee for project that Everonn Education Limited would manage for Haryana State Government. This lease would be for duration of 5 years. c. Assessee obtained loan from Standard Chartered Bank to fund purchase of equipment needed for Haryana project, which Everonn Education Limited would manage. d. lease income from Everonn Education Limited is offered as income in Income-Tax return filed by http://www.judis.nic.in 3/6 W.P.No.19523 of 2018 Assessee. interest expenditure paid on loan of Standard Chartered Bank is claimed as expenditure. 2. details of short term loans and advances of Rs.17,04,89,251/- is given in Page No.3 3. copy of sanction letter dated 12.05.2010 of Standard Chartered Bank is enclosed in Page No.4 to 8. It may be noticed, loan is sanctioned for specific purpose of purchase of equipments to be leased to Everonn Education Limited. entire amount of interest expenditure of Rs.2,87,52,372/- represent interest paid to Standard Chartered Bank on said loan. 4. As loan borrowed is for specific purpose of purchase of equipments, which is leased out as part of business of Assessee and interest paid is on such loan borrowed for specific purpose, interest paid on loan is business expenditure and is allowable. This position is notwithstanding fact, Assessee has extended certain interest free loans to two parties, as such interest free advances were made from sources other than borrowing from Standard Chartered Bank. Therefore, it is humbly submitted interest expenditure claimed by Assessee is business expenditure. In regard I rely upon following decision: a. CIT Vs. Bombay Samachar Limited -1969 ITR 723 Bom is enclosed in Page No.9 to 11 b. Deputy CIT Vs. Kamdar Constructions -ITAT, Mumbai dated 25.02.2011 Followed decision of Bombay Samachar Limited is enclosed in Page No.12 to 21 5. These Submissions are in addition to my submissions dated 29.12.2017, as to why provisions of Section 14A cannot be invoked for disallowance of interest expenditure, as being done by Assessing Officer in impugned order. 6. In view of above, Return of Income as filed by Assessee may kindly be accepted and additions made in impugned assessment order may kindly be deleted. R.Thiagarajan.' 7. Thus, petitioner was in no doubt that provision invoked for enhancement by CIT (A) was Section 36(1)(iii) that dealt with 'other deductions' and that interest paid in respect of capital borrowed was allowable as deduction, only if such capital had been borrowed for purposes of business or profession. issuance of notice orally, though inappropriate as http://www.judis.nic.in 4/6 W.P.No.19523 of 2018 matter of routine, is not fatal flaw in this case seeing as petitioner has understood issue as meant by officer and has also responded thereto. 8. On merits of matter, in my considered view, necessary facts to adjudicate upon this issue have not been placed before Authorities and it was incumbent upon petitioner to have established its case that capital borrowed was for purposes of business or profession only, perhaps by production of Memorandum containing objects of company or other supporting evidences. Memorandum, incidentally, is placed before me at this stage but has not been admitted, as it is not document available on record before respondent authorities. No doubt, petitioner has circulated Sanction letter from Bank wherein purpose of availing loan is stated to be financing of purchase of equipments to be leased at BOO/BOOT basis to Everonn Education Limited. equipments are stated to be intended for execution of contract entered into by petitioner with State of Haryana. However, copy of contract has also not been placed before any of Authorities. 9. CIT (A) thus concluded that disallowance in terms of Section 36(1) (iii), as proposed, was justified and completed proceedings in line with proposal for enhancement. 10. In light of discussion as above, I fine no warrant or justification for interfering with impugned order in terms of Article 226 of Constitution of India as facts necessary for adjudication of matter on merits have not been placed before authorities. Liberty is granted to petitioner to file statutory Appeal before Income Tax Appellate Tribunal (Tribunal) within period of two (2) weeks from today. http://www.judis.nic.in 5/6 W.P.No.19523 of 2018 Dr.ANITA SUMANTH, J. 11. Since Writ Petitions have been filed within limitation prescribed for filing statutory appeal, such appeal, if filed within timeline as stipulated aforesaid, shall be taken on file without reference to limitation and disposed within period of two (2) months from date of conclusion of personal hearing. 12. petitioner has been protected from recovery by order of this Court dated 06.08.2018, effective till date. Such protection shall continue till disposal of Appeal by Tribunal as above. If no appeal as permitted aforesaid, is filed, impugned order stands. Writ Petition is dismissed with liberty as aforesaid. No costs. Connected Miscellaneous Petitions are also dismissed. 06.02.2020 Index : Yes Speaking Order rkp To 1. Commissioner of Income Tax (Appeals)-15, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. 2. Assistant Commissioner of Income Tax, Non Corporate Circle 18(1), 5th floor, Room No.520, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. Writ Petition No.19523 of 2018 and WMP. Nos.22962 to 22964 of 2018 http://www.judis.nic.in 6/6 Spaarkon Trading Chennai P. Ltd. v. CIT (Appeals)-15, Chennai / ACIT, NCC-18(1), Chennai