HIGH COURT OF MADRAS
Infrastructure Development Finance Co. Ltd.
Joint Commissioner of Income-tax
Tax Case (Appeal) No. 2555 of 2006
October 31, 2012
Mrs. Chitra Venkataraman, J.
The assessee is on appeal as against the order of the Income Tax Appellate Tribunal relating to the assessment year 1997-98. Following are the questions of law raised by the assessee:-
“(1) Whether the Income Tax Appellate Tribunal erred in holding that interest of Rs. 3,07,06,233/- was includible in the Appellant’s income for the Assessment Year 1997-98?
(2) Whether the Income Tax Appellate Tribunal, in any event, failed to appreciate that the assessment of the above interest of Rs.3,07,06,233/- in Assessment Year 1997-98 gave a distorted and an unrealistic picture of the Appellant’s profit for the Assessment Year 1997-98 inasmuch as:
(i) The total interest to be received by the Appellant on the three Certificates of Deposit (hereinafter referred to as “CODs”) placed by it was Rs.3,10,43,644/-;
(ii) the above said CODs (which were of 92 days duration each) matured on 1st July, 1997 (which date fell in the Assessment Year 1998-99);
(iii) the aforesaid CODs had been placed on 31st March 1997, which was the last day of the previous year relevant to the Assessment Year 1997-98 and, therefore, only one day of the entire period of the CODs fell in Assessment Year 1997-98;
(iv) 91 days out of the 92 day duration of the CODs fell in Assessment Year 1998-99.
3. Whether the Income Tax Appellate Tribunal erred and acted contrary to the record and without any evidence, in alleging that the Appellant had exercised an option to allegedly receive discounted interest for the whole period of the CODs on 31st March, 1997?
4. Whether the Income Tax Appellate Tribunal erred in not holding that the directions of the Commissioner of Income Tax (Appeals) (hereinafter referred to as the “CIT(A)”) regarding the allowability of the Appellant’s claim for a deduction of interest of Rs.49,77,552/- were illegal, contrary to the principles of natural justice, void and without jurisdiction?”
2. The assessee was incorporated on 30th January 1997 with the main object of providing financial assistance to enterprises engaged in developing, maintaining and operating an infrastructure facility. The assessee states that in the two months upto March 31, 1997, the promoters had subscribed to equity shares of Rs. 2 crores and also made advances of Rs. 264.70 crores towards the allotment of additional equity shares. Since allotment of the additional equity shares, against the subscription money, could not be completed by March 31, 1997 and the monies remained as advance, interest was agreed to be paid at six monthly average of treasury rate. Accordingly, a sum of Rs. 49,97,552/- was debited as interest expenditure for the period upto March 31, 1997. It is the admitted case of the assessee that out of the above amount received by the assessee, it purchased three certificates of deposit on 31.3.1997. The deposits were with IDBI, UTI Bank and HDFC Bank Limited. The letter written by the assessee company to the respective banks dated 31.3.1997 showed the amount of investments at Rs. 29,13,70,639/- with IDBI Limited, and a sum of Rs. 48,53,20,710/- and a sum of Rs. 29,22,64,987/- with HDFC Bank Limited. The certificates of deposits issued by the respective banks viz., IDBI, UTI Bank and HDFC Bank Limited dated 31.3.97 show the period of deposit as 92 days and the maturity value of deposits at Rs. 30 crores, Rs.50 crores and Rs.30 crores respectively. In the return filed for the assessment year 1997-98, the assessee offered a sum of Rs. 3,37,431/- as interest relatable to 31st March 1997 i.e. the date of purchase of CODs. The balance interest of Rs. 3,07,06,233/- was offered by the assessee in the next assessment year 1998-99. Accordingly, the Revenue assessed a sum of Rs. 3,07,06,233/- by an intimation passed under Section 143(1) of the Act. While considering the claim of the assessee for the assessment year 1997-98, the Assessing Officer called upon the assessee to show cause as to why the entire interest of Rs. 3,10,43,664/- on the CODs should not be assessed to tax in the assessment year 1997-98 itself, as against the sum of Rs. 3,37,431/-. After hearing the assessee, the Assessing Officer passed an order of assessment to tax the entire interest income for the year 1997-98 itself. As far as the interest payment claimed to the tune of Rs.49,77,552/- is concerned, the Assessing Officer accepted the assessee’s claim for deduction under Section 37 of the Income Tax Act and the income was thereupon computed. Thus, the only question which was the subject matter of dispute before the Commissioner of Income Tax (Appeals) was relating to the assessment of interest amount to the tune of Rs. 3,10,43,664/- as against the interest income offered by the assessee for a sum of Rs. 3,37,431/- assessable for the assessment year 1997-98. A perusal of the grounds of appeal filed before the Commissioner of Income Tax (Appeals) shows that the assessee had grievance only on this part of the assessment. Apparently, when the assessee’s claim for deduction on payment of interest was accepted, there could be no appeal on this issue. However, when the appeal was taken up for hearing, the Commissioner of Income Tax (Appeals) considered the payment of interest too as a subject matter for consideration and held that the claim on interest payment was not an admissible deduction. Referring to the letter written by the assessee on 24.1.2000, as regards its undertaking to pay interest at six monthly average at treasury rate, the Commissioner of Income (Appeals) held that the assessee was not entitled to have the deduction. As regards the one and only issue, which was the subject matter of the appeal, the Commissioner of Income Tax (Appeals) directed the Officer to make in depth enquiries to ascertain the particulars from the concerned banks viz., IDBI, UTI Bank and HDFC Bank, as regards the amount invested therein on 31.3.1997 and whether the interest amount was, in fact, received and credited to the assessee’s account on 31.3.1997. In the circumstances, the appeal was dismissed. Thus, while considering the assessee’s appeal on the one and only issue relating to interest being taxed for the assessment year 1997-98, the Commissioner of Income Tax (Appeals) suo motu took up enhancement of the assessment on the question of deduction claimed by the assessee on the interest payment allowed by the Officer concerned.
3. Aggrieved by this, the assessee went on further appeal before the Income Tax Appellate Tribunal, which dismissed the assessee’s appeal.
4. As far as the claim of the assessee on the enhancement aspect is concerned, the Tribunal viewed that there was no infirmity in the order of the Commissioner of Income Tax (Appeals) with respect to Section 251(1) of the Act and that the Commissioner of Income Tax (Appeals) directed the Assessing Officer to make in-depth enquiries and had not ordered any enhancement. In the circumstances, the Tribunal referred to the Apex Court decision in the case of Pandian Chemicals Ltd. v. CIT  262 ITR 275/129 Taxman 539 as regards the strict interpretation of the provision and held that the assessment order made based on surmises, hence, was to be set aside. Since the Commissioner of Income Tax (Appeals) had directed the Assessment Officer to make de novo enquiry, adequate opportunity was always available to the assessee to state its case and that the additional ground raised by the assessee as regards the order of the Commissioner of Income Tax (Appeals) on the enhancement of assessment by adding the expenditure, was liable to be dismissed.
5. As regards the second question relating to spread over of the interest was concerned, the Tribunal rejected the assessee’s claim by placing reliance on the decision of the Apex Court in Madras Industrial Investment Corpn. Ltd. v CIT  225 ITR 802/91 Taxman 340, Bombay High Court decision in Taparia Tools Ltd. v. Jt. CIT  260 ITR 102/126 Taxman 544 and this Court’s decision, Eid Parry (I) Ltd. v. CIT  258 ITR 404/ 126 Taxman 174 and held that as the assessee had received discounted interest in advance on 31.3.97, the assessee was not entitled to seek spreading over of the interest for two assessment years. Aggrieved by this, the assessee is before this Court.
6. Learned senior counsel appearing for the assessee attacked the order of the Tribunal on the ground that the Tribunal misdirected itself in holding that the Commissioner of Income Tax (Appeals) had remitted the matter to the Officer concerned for the purpose of de novo enquiry into the claim of expenditure and that as adequate opportunity was to be granted, there could be no grievance for the assessee. He pointed out to the assessment order wherein the Officer had considered the assessee’s claim on the expenditure incurred by way of interest payment to the subscribers who were yet to be allotted equity shares. Thus, when the claim was considered by the Assessing Officer before granting the relief and as such, when there was no grievance before the first Appellate Authority, in the event of the Commissioner of Income Tax (Appeals) considering any enhancement to be ordered on assessment, going by Section 251(2) of the Income Tax Act, the Appellate Authority should have granted a reasonable opportunity to the assessee to show cause against such enhancement. He further pointed out that the question of enhancement was never an issue before the Commissioner of Income Tax (Appeals). Thus, when the Commissioner thought it fit to suo motu consider enhancement of the assessment on a particular relief granted to the assessee, he should have observed the fundamental principles of natural justice to put the assessee on notice on such proposal. Pointing out to the order of the Commissioner of Income Tax (Appeals), holding that the assessee was not entitled to deduction for the payment of interest, he submitted that contrary to the view of the Tribunal that the assessee would be having an opportunity before the Officer on remand, practically there is nothing left for the Assessing Officer to consider the said issue on deduction.
7. Per contra, learned standing counsel appearing for the Revenue supported the order of the Tribunal and submitted that since the Officer had to pass the order based on the views of the Commissioner, necessarily the assessee would have an opportunity before the assessment was completed.
8. As far as this issue is concerned, we do not find any ground to agree with the view of the Tribunal. As has been stated in the preceding paragraph, the assessee claimed deduction for a sum of Rs. 49,97,522/- being the interest paid to the subscribers pending allotment of equity shares. On considering the claim, the Officer granted the relief to the assessee. Hence, there was no need at all to file an appeal. When, in the course of considering the assessee’s appeal on a different issue, the Commissioner of Income Tax (Appeals) thought it fit to exercise his enhancement powers with reference to one aspect of assessment, which was not the subject matter of the appeal, it is no doubt true that Section 251 of the Income Tax Act provides for such authority and jurisdiction to enhance the assessment. But, then, Sub Section (2) of Section 251 of the Act, stated that such authority could be exercised only subject to the assessee being given a reasonable opportunity to show cause against such enhancement. A reading of the order of the Commissioner of Income Tax (Appeals) as well as the Tribunal’s order shows that there was no such compliance of sub Section (2) of Section 251 of the Act. As rightly pointed out by the learned senior counsel appearing for the assessee, the Commissioner of Income Tax (Appeals) had practically concluded the issue and that nothing is left for the Officer to make further enquiry on this. A reading of the order of the Commissioner of Income Tax (Appeals) shows the confusion in the order of the Commissioner in paragraph 1.2.4, wherein, the first two lines alone dealt with the question of deductibility of expenditure on the interest payment and the rest ten lines related to the claim by the assessee on the interest income, which was the subject matter of appeal before him. In the circumstances, we do not find any good reason to uphold the order of the Tribunal confirming the order of the Commissioner of Income Tax (Appeals). As such, the Tribunal’s order on the enhancement of the assessment has to be necessarily set aside and the matter is restored to the file of the Commissioner of Income Tax (Appeals), who is hereby directed to issue notice to the assessee before considering any such enhancement. After hearing the assessee and giving him reasonable opportunity, it is open to the first Appellate Authority to pass such orders as he deems fit, in accordance with law.
9. This leaves us with the other question regarding spreading over of interest for the two assessment years. As pointed out in the preceding paragraph, the assessee made purchase of three certificates on deposits with IDBI, UTI Bank and HDFC Bank Limited. The letters enclosing the drafts for investment therein shows that what was deposited by the assessee was not the amount paid to the assessee at the time of maturity date i.e. after a period of 92 days with effect from 31.3.1997. That is, the assessee deposited with IDBI, a sum of Rs. 29,13,70,639/- on 31.3.1997. On maturity at the end of 92nd day, on 1.7.1997, the assessee would receive a sum of Rs. 30 crores, which means, on maturity, the assessee would be receiving the deposited amount with interest at 11.75% per annum. Thus, as against the deposit of Rs. 48,53,20,710/- with UTI Bank, the assessee would receive a sum of Rs. 50 crores, and as against a sum of Rs. 29,22,64,987/- with IDBI, the assessee would receive a sum of Rs.30 crores. As rightly pointed out by learned senior counsel appearing for the assesee, the fact that the assessee had stated that the deposit amount is discounted, does not mean that the assessee had, in fact, received the interest in advance from these banks. On the other hand, on the deposited discounted price, the assesee received the amount, with interest added to the deposited amount, to make the amount as Rs. 30 crores, Rs. 50 crores and Rs. 30 crores respectively. It is evident from the bank statement available before this Court, which was also produced before the Tribunal, that the amount of Rs. 30 crores, Rs. 50 crores and Rs. 30 crores were credited to the assessee’s account after the maturity date. The Revenue does not dispute this fact. It is a matter of record that what was deposited and what had matured amount as on 1.7.97 are not one and the same. In the background of the admitted facts, it is quite clear that interest, was in fact, credited on the amount deposited, that on the maturity date of the deposits, the assessee would be entitled to the amount which is the amount deposited plus interest as has been noted in the certificates of deposits. The mere narration by the assessee that what was deposited was the discounted value of the deposit, however, does not mean that the assessee had, in fact, deducted the interest in advance on the deposit amount made and the interest had to be assessed in the year 1997-98 itself. It is a matter of record that the deposited amount with interest was credited only on 1.7.97 and 3.7.97. Thus one cannot go by the mere reference to the letter referring to the deposit as the discounted value of the deposit. The Revenue does not deny that except the interest credited to the deposited amount, the assessee had not received any other sum on the deposited amount over and above the said interest. Thus, even though on principle, it is open to the assessee to offer the entire interest amount received on the principal amount credited only in the next year, yet, in the course of assessment year 1998-99, for reasons best known to the assessee, it offered a sum of Rs. 3,37,431/- as interest income relatable to 31st March 1997. As the assessee had accepted this interest income for 1997-98, the assessment was also made by the Assessing Officer by accepting the offer made by it. In the background of this factual position, the consideration of the Tribunal on merits needs to be seen.
10. In paragraph 10 of its order, the Tribunal pointed out that the case of the assessee is covered by the decision of this Court Eid Parry (I) Ltd.’s case (supra), which follows the decision of this Court CIT v. A.R. Santhanakrishnan  256 ITR 187/122 Taxman 869, wherein it was held that the interest so received could not be spread over to the following two years when the assessee had chosen to exercise option and received interest for all the three years in the year of account. The Tribunal observed that the assessee company had received the discounted interest for the whole period by exercising an option that had been given to it on 31.3.97. We do not find that such finding is supported by any material. As already pointed out, admittedly, the assessee had deposited the sum less than the amount of the maturity value. The interest which was calculated on the deposited amount was added to the deposit amount and that the deposit receipts issued by the respective banks clearly stated that on the expiry of 92 days after the date of deposit, the respective banks promised to pay to the assessee, a sum of Rs. 30 crores, Rs. 50 crores and Rs. 30 crores respectively upon presentation and surrender of certificates. Thus, the finding of the Tribunal, being one without any basis or materials is perverse, we have no hesitation in setting aside the order of the Tribunal and hold that the assessee received interest only on the maturity date and not at any time before the date of maturity.
11. Keeping this finding aside, when we look at the decisions of this Court A.R. Santhanakrishnan’s case (supra), as rightly pointed out by learned senior counsel appearing for the assessee, both the decisions are distinguishable on the facts of the case.
12. As far as the decision in A.R. Santhanakrishnan’s case (supra), is concerned, the assessee therein had opted for discounted interest and the same was paid during the year previous to the assessment year. The assessee offered for income tax, one third of the interest received, as the interest accrued. Upholding the amount deposited in the National Housing Bank Three year bond, this Court pointed out that the assessee had admitted that they adopted cash system of accounting and the entire amount of discounted interest was received on July 9, 1991. The amount already received could not be spread over to the next two years proportionately as if the interest was yet to be received.
13. As far as the second decision of this Court in Eid Parry (I) Ltd.’s case (supra), is concerned, this Court followed the earlier decision viz., A.R. Santhanakrishnan’s case (supra), and pointed out to the fact that since the assessee received the discounted interest for the whole period by exercising an option that had been given to it, the question of spreading over of interest to the following years does not arise. Both the decisions are distinguishable on facts and we hold that the Tribunal committed serious error in applying the law which are distinguishable on facts.
14. As already pointed out, when the findings of fact of the Tribunal are totally without any material and basis and contrary to records, the question of applicability of these two cases to the case on hand does not arise. Consequently, the order of the Tribunal is set aside on this aspect also.
15. If we look into the Apex Court’s decision, relied on by the assessee before this Court as well as before the Tribunal, in Madras Industrial Investment Corpn. Ltd.’s case (supra), it reveals that the assessee therein issued debentures at a discount. The Apex Court pointed out that the discounted amount of Rs. 3,00,000/- relating to the issue on debentures of Rs. 1.5 crores cannot be confined to one particular year alone and has to be necessarily spread over to the period of debentures. The amounts so obtained by the issue of debentures are used by the company for the purpose of its business. The Apex Court pointed out that ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purpose of business, must be allowed in its entirety in the year in which it is incurred. Hence, it could not be spread over to a number of years. Yet, the Apex Court pointed out that facts may justify an assessee, who had incurred expenditure in a particular year, to spread and claim it over a period of ensuing years. Taking note of the fact that the issue of debentures were redeemable after 12 years, the discount of Rs. 3 lakhs proportionately over the 12 years’ period of redemption was justifiable and the assessee was entitled to deduct a sum of Rs. 12,500/- out of the discount of Rs. 3 lakhs in the relevant assessment year and the balance could not be deducted in the assessment year. The Apex Court pointed out that as there was a continuing benefit to the business of the company over the entire period, the liability should be spread over to the period of debentures. The Apex Court pointed out that facts may justify in a given case for an assesee, who has incurred expenditure in a particular year, to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year, might give a very distorted picture of the profits of a particular year.
16. In contrast to the decided case relating to claim of deduction as expenditure, the case on hand is related to the assessment of income. Even though the parameter for considering the expenditure and income is not the same, yet, the principle to be followed is that when the instrument concerned is certain as to its period of life and specifically points out to a particular interest amount to be paid on the maturity date, the question of assessing the entire interest in the first year itself, does not arise. In the circumstances, we have no hesitation in setting aside the order of the Tribunal, holding that the question of assessing the entire interest income of Rs. 3,10,43,664/- in the assessment year 1997-98 does not arise and that the Revenue would be entitled to assess a sum of Rs. 3,37,431/- alone for the assessment year 1997-98 and the balance amount of Rs. 3,07,06,233/- has to be assessed for the assessment year 1998-99.
17. In the light of the above discussion, the first question of law is answered in favour of the assessee. Since substantial questions of law 2 and 3 are of the same effect as question No.1, there is no necessity for us to deal with them separately and they also are answered in favour of the assessee. As far as the fourth question of law is concerned, as already stated, since the Commissioner of Income Tax (Appeals) had not complied with Section 251(2) of the Income Tax Act, without going into the merits of the claim, we have no hesitation in setting aside the order of the Tribunal and restore the matter back to the file of the Commissioner of Income Tax (Appeals) for a fresh hearing.
18. The above Tax Case (Appeal) is allowed. No costs.